Summary: In May 2016 the Government asked the National Infrastructure Commission (NIC) to make recommendations to maximise the potential of the Oxford-Milton Keynes-Cambridge corridor as a “globally recognised knowledge intensive cluster”. The November 2016 NIC interim report highlights the risk of insufficient housing. This paper looks at potential funding and governance mechanisms for housing and infrastructure in the corridor.
NIC Central Finding
The NIC’s central finding in its interim report was that “the lack of sufficient and suitable housing presents a fundamental risk to the success of the corridor”. The NIC have subsequently issued a discussion paper on Strategic Planning in the Oxford-Cambridge Corridor and have also made available some of the background documents supporting the interim report. The development of the corridor will clearly benefit from strategic planning and the integration of infrastructure with housing. Achieving such integration will involve adopting innovative and holistic approaches to funding of and investment in infrastructure and housing, particularly considering the likely high reliance on private finance. Effective corridor governance arrangements which will underpin all of this will be crucial.
Available Investment Tools
Available tools for funding housing and infrastructure in the corridor are numerous and include; (1) land value capture which can be divided into (a) planning gain (Section 106, Community Infrastructure Levy (including Mayoral CIL) and MK style roof tariff/tax) (b) betterment (business rates including UK style TIF and business rate supplement (to be extended to Mayoral Combined Authorities) and to include Mayoral Combined Authority Infrastructure Levy)) and (c) proceeds from direct development (2) government direct funding including (a) infrastructure grant funding or devolved equivalent (b) financial transaction capital (c) local authority prudential borrowing, (3) Government guarantees and (4) private finance including, development finance, long term institutional finance and registered provider funding, and (5) potential use of Development Rights Auctions Model (DRAM) currently being trialled by TfL/GLA/DCLG.
Importance of Integrated Funding and Decision Making
However, these financial tools, without integration, resemble individual pieces in a jigsaw puzzle which need refined interlinking to deliver the completed puzzle. Whilst the financial tools derive from statute, direct development and private finance the relevance of each of these tools will depend upon the size and nature of each development. How Government generated revenue is accumulated and expended on infrastructure will be shaped by the governance arrangements put in place. In terms of direct development local authorities, have a track record in delivering long term developments through forming joint ventures with private sector partners using their landholdings as an investment tool alongside private sector capital. However, direct development opportunities in the corridor will be quite specific.
Decisions on funding, phasing and timing of the delivery of the required housing and associated infrastructure for the corridor will require local authorities to take decisions collectively and in conjunction with Central Government. Whilst it is anticipated that the Government may shape the overall phasing and design of the corridor development, particularly that infrastructure which may be funded by central government, it will be expected that much of the delivery will rest with the local authorities within the corridor and their public and private sector partners (including LEPs, Highways England and HCA). This will be particularly the case with regard to improving land supply, unlocking development sites, supporting well connected communities and linking these with a strategy for employment skills and social infrastructure.
Potential Corridor Governance Arrangements
The corridor extends beyond the immediate cities of Cambridge, Milton Keynes and Oxford and comprises 17 district, borough and city councils, 5 unitary authorities, 5 county councils and 7 LEPs. As such the governance of the corridor may be difficult to fit within existing local government governance structures. For example, the corridor is likely to be much too large for one combined authority although possibly more than one combined authority could be created throughout the corridor (however, there is already one Mayoral Combined Authority operating in the corridor Cambridgeshire and Peterborough although Peterborough itself does not figure in the corridor). There are also the other statute based models for the whole or more likely parts of the corridor including the Secretary of State designating one or more Urban Development Corporation under the Local Government and Planning Act 1980 or less likely a New Town Development Corporation under the New Towns Act 1981. There is no equivalent in development of the sub-national transport body as envisaged by the Cities and Devolution Act 2016 (under which it is anticipated Transport for the North will be given statutory status).
Therefore, it is likely that ad hoc and innovative governance arrangements will be required for the corridor. In order to deliver policy objectives the governance structure will need to ensure that (a) all major stakeholders are represented fairly, including business and industry (b) it enables effective decisions to be taken within constituent bodies powers of delegation; and (c) it is capable of being held accountable for those decisions. The detail of any governance vehicle will be developed but could be a partnership board operating without statutory powers, depending instead upon the powers of its constituent statutory bodies. The partnership board will be constituted by representatives from local authorities, central government and its agencies (eg Highways England and HCA), LEPs and business and industry stakeholders. There could also be an executive agency for the partnership board (investment agency) which will identify and procure the delivery of investments probably itself responsible to an investment committee.
Housing and Infrastructure Fund
The investment agency could establish a revolving housing and infrastructure fund working alongside the DfT/Highways England, the HCA and local authorities to provide finance to unlock development deriving from new major infrastructure provision. To be workable the constituent bodies especially local authorities will need to make available and potentially aggregate revenues deriving from their financial tools and which are earmarked for housing and infrastructure within the corridor.
Land Value Capture (LVC)
LVC will be an important financial tool. LVC can derive both from growth in government revenues from infrastructure and development investment and from returns to government from direct development. However, such growth in government revenues may not truly reflect increases in land value achieved through development because either revenues are collected centrally and/or because they are not truly calculated by reference to increased values. Certain revenues will need to be maximised particularly business rates where in advance of 2020 full retention, 25 year growth retention akin to Enterprise Zone status should be negotiated. Revenues from housing generated through council tax are likely to be required to fund mainstream services. The relative certainty of revenues to fund an investment plan covering capital expenditure and to service borrowing will be critical.
In relation to returns from direct development a better balance needs to be struck in LVC between the legitimate claims of landowners and the funding of new communities. Key to this is achieving compensation for landowners which disregards the proposed use and any “hope value”. The Government via the Neighbourhood and Planning Bill is proposing to amend the Land Compensation Act to make it clear that the market value should be based on a “no scheme principle”. However it remains to be seen how effective this will be as past experience suggests that the interpretation of “market value” will continue to favour the landowner as values adjust to post scheme market values.
Private Finance Support and Viability
Private finance for housing could be supported by HM Treasury recoverable financial transaction capital (which does not count toward public sector debt) rather like that managed by the HCA within the Home Building Fund. The local authority could also support investment by using its prudential borrowing powers to acquire assets. The housing and infrastructure fund would create the “investment snowball” which, once rolling, will accumulate additional investment as it “rolls” across the corridor. However, it is important that the snowball accumulates the “right sort of snow”. The strategic financial structure should allow for more expensive short term private finance to be replaced with cheaper long term debt funding. Institutional funders will be the primary source of long term funding, refinancing equity and bank finance. One strategy would be to establish long term cash flows within the corridor to be used to fund long debt repayments.