|©Parliamentary copyright||Prepared 4th April 2011|
Written evidence submitted by the British Property Federation
1. This submission by the British Property Federation has been prepared in response to a request by the Communities and local Government Select Committee for views on the effectiveness of the Government’s policies on regeneration.
2. The British Property Federation (BPF) is the voice of property in the UK, representing companies owning, managing and investing in property. This includes a broad range of businesses – commercial property owners, financial institutions and pension funds, corporate landlords, local private landlords – as well as all those professions that support the industry.
3. The Select Committee has indicated that it is particularly keen to receive views on the following points:
· How effective is the Government’s approach to regeneration likely to be? What benefits is the new approach likely to bring?
· In particular: will it ensure that the progress made by past regeneration projects is not lost and can, where appropriate, be built on? Will it ensure that sufficient public funds are made available for future major town and city regeneration projects as well as for more localised projects?
· What lessons should be learnt from past and existing regeneration projects to apply to the Government’s new approach?
· What action should the Government be taking to attract money from (a) public and (b) private sources into regeneration schemes?
· How should the success of the Government’s approach be assessed in future?
The current position
4. A lot of progress has been made in recent years in reviving some of our cities although huge challenges remain. The regeneration model during those years has depended on the injection of very large amounts of public money, much of which was not spent as effectively as it could and should have been. It was also driven by:
· readily available development finance from banks and others, underpinned by rapidly increasing if unsustainable property values;
· good returns from high density housing developments, supported by rising prices and readily available mortgage finance;
· development returns of a scale that allowed development in poorer areas as well as ample contributions from developers to both physical and social infrastructure;
· The availability of both public and private finance for infrastructure.
5. Current economic circumstances mean that the regeneration template of the last fifteen years is no longer viable. Very little development of any kind is now taking place outside prime areas in Central London. As regeneration is by its nature on the margins of viability then it is affected even more severely than more standard types of development. Paradoxically, however, the need for an active regeneration agenda is more important than ever in order to:
· rekindle economic growth;
· help rebalance an economy in which dependency on public spending in many areas has grown to unsustainable proportions;
· Create places that meet the needs of communities and reinforce social cohesion.
The policy response needed
6. The key ingredients of any new policy must be to:
· ensure that regeneration is driven by a clear economic agenda that has growth and job creation at its heart;
· strike the right balance between physical regeneration and job creation / skills development;
· focus scarce resources on those areas where they can have the greatest impact, not on those areas where the scale of deprivation is greatest - that will involve taking some hard decisions;
· free up local authorities to act innovatively and proactively and allow them to take greater risks;
· enable neighbourhoods to play a greater role in remedying signs of decay.
7. The Government has announced a number of new policy initiatives intended to foster growth and regeneration. We are generally supportive of these initiatives, but a great deal more work is needed to ensure that they operate effectively in practice. We would offer the following comments:
8. Ministers have indicated that they are planning to reintroduce Enterprise Zones in some form and we gather that more is likely to be revealed of the Government’s thinking in the forthcoming Budget. The British Property Federation supports this initiative but we would like to offer some thoughts on what we believe will be needed to make the concept work.
9. The evidence from the previous round of EZs in the UK shows that, overall, they brought significant benefits. The criticisms tend to be that the cost to the public purse of creating new jobs was high, particularly when displacement effects are taken into account. Moreover, the momentum in some areas flagged when EZ status ended. Against this, however, there is no doubt that many of the EZs in the UK served to kick start a process of regeneration which would not otherwise have been possible with new factories, offices and other commercial development being delivered in some very challenging areas and times. The long term transformation of London Docklands bears testament to this. In a good number of EZs the momentum established by EZ status has continued. Moreover, whilst the cost of overcoming locational barriers is bound to be high it is also important to remember that there is also a high cost associated with not doing anything.
10. Drawing on the experience of previous EZs and other area based initiatives the BPF believes that the following issues should be taken into account in drawing up proposals for a new set of Enterprise Zones:
Focusing on the right areas
· The focus should be on stimulating new businesses, business growth and job creation. Areas for EZs should not, therefore, be identified purely on the basis of social or economic deprivation but rather on the basis that the locations and resulting development will be capable of becoming and remaining higher quality locations beyond the duration of zone designation. Where a deprived area has little potential to develop sustainably a better option may be to help those access employment opportunities elsewhere through, for instance, improved transport infrastructure.
· Infrastructure provision and accessibility are critical to the success of an EZ, particularly in terms of transport, its capacity and the timing of its provision, but also in terms of access to the technology infrastructure needed to serve businesses, and the linkages (including transport/ IT/ networks) with already established commercial areas and markets to be served.
· In some areas, where there has already been substantial economic development but where its completion has been stymied by the recession (e.g. in parts of London Docklands such as the Silvertown area), there may be the opportunity to build on past investment in, and public sector funding particularly of, transport infrastructure, by more directly enabling the development of land/sites adjacent to this underused transport infrastructure (e.g. by funding site decontamination and it might therefore be appropriate to reform land remediation relief in EZs).
· If businesses are to operate as efficiently and productively as possible (for example, taking advantage of agglomeration benefits) they need to be located in the most appropriate places rather than be diverted into inappropriate places as a result of misconceived incentives. It will be important to ensure that EZs do not have this effect.
· To ensure that the new Enterprise Zones are located in the areas where they could offer the greatest benefits we see a lot of merit in a competitive application process.
· There is a need to avoid the wasted years that usually follow when a new organisation is set up. The structure/organisation of an EZ is, therefore, critical. In theory, Local Enterprise Partnerships could have a significant role in setting up Enterprise Zones as they bring together both business and local authority interests and should be able to look at the broader impact that an EZ might have. As LEPs are unlikely to be fully functional for some time, however, the only real alternative may be to bolt these onto local authorities - perhaps requiring them to work out how to secure local business organisation.
· We also see a case for the nature of incentives on offer being adjusted to take account of the requirements and characteristics of different areas. This would also make sense in the context of the move towards allowing greater local discretion. It would also help ensure that there was compatibility with other Government schemes such as tax increment financing. We therefore see merit in the concept of Local Growth Zones put forward by the Centre for Cities under which urban locations could choose from a menu of policy options.
· Whatever incentives are offered within EZs current issues surrounding the availability of bank finance for property development and investment will remain a major (and largely negative) influence on the pace, scale and type of development proceeding. The availability of finance, therefore, must continue to be an issue high on the Government’s agenda.
· Tax incentives were integral to the success of previous EZs. We realize, however, that the Government may not be in a position to offer lavish fiscal incentives and so what is available will need to be carefully targeted. Nonetheless, the fact remains that the availability of first year capital allowances for the construction of new industrial and commercial buildings was the single most important element of previous EZs. Without something similar, property developers are unlikely to put up buildings ahead of occupier demand.
· Given that the industrial buildings allowances will end completely on 6 April, there may be room for a more bespoke and targeted regime. Thought could be given, for example, to the rates of relief and circumscribing when relief is available.
· Current conditions, particularly the lack of bank lending, means that there may now be a need for some shift of focus towards ‘front end’ taxes (e.g. reduced rate of employer NIC to encourage jobs) in order to kick-start the process rather than sticking solely with ‘back-end’ taxes such as capital allowances which can take years to secure and do not benefit all investors).
· A key difficulty will lie in striking the balance between short and longer term measures. Short term measures, which will probably require simple fixes, could adopt the existing tax infrastructure and look at the scope for exemption or lower rates. Possible measures could include: exemption from the Community Infrastructure Levy, business rates and other sticking taxes, a reduced rate or longer payment period for VAT / SDLT relief to enable efficient pooling of land interests/reduced rates of SDLT on granting leases.
· Another key plank of EZs was the encouragement of occupier demand by offering business rate relief. However, under the old enterprise zones regime, business rate relief was only available to UK corporation tax payers. We believe that relief should be extended to all UK tax-paying business rate payers, regardless of whether they pay corporation tax or income tax.
· We would also emphasise that unless rate relief is available in EZs for empty commercial premises then construction of new development in anticipation of demand – especially from SMEs, which cannot always commit to pre-lets years in advance - will be severely undermined.
· However, business rate relief is not without its disadvantages. It can push rents up. More importantly, its advantages for local authorities may be offset by the associated loss of revenue in a world with greater local retention of rates.
· It is important to remember, too, that many firms in EZs benefitted not just from the specific EZ incentives but also from more generally available grants and other benefits. It is therefore important to consider the whole package of both EZ and non EZ benefits that may be available within an area.
· Simplified planning regimes were not as important as fiscal incentives in getting development underway in EZs. Nonetheless, the scope for development to proceed without going through the usual planning application process (but within locally defined, general guidelines) would be an important part of any package of measures aimed at encouraging developers to supply buildings ahead of market demand. Allowing an EZ to do an SPZ / Neighbourhood Order, therefore, might be helpful.
· The constraints of the current EIA regime (and sustainability targets) which are now in place need to be addressed – consideration needs to be given to whether these requirements could be reviewed/ relaxed to ease the burden.
· There will be a need to consider how the Enterprise Zone concept would sit with today’s far more demanding planning obligation system, and CIL. It would seem odd to be providing capital allowances and other incentives for developers to produce new buildings, only for them to be hit by other taxes, planning obligation requirements and charges.
· Given the focus within Government on land availability there is an opportunity to use EZs to pilot simplified compulsory purchase order processes. It might also be feasible to allow compensation to be paid in the form of shares in the eventual development – a sort of compulsory land pooling exercise.
· The availability of labour (and of the public transport needed to deliver that labour to the EZs) should be a major consideration in the designation process. Equally, skills development and training must be an important part of the EZ package if the local population is to benefit.
Tax Increment Financing
11. With few projects stacking up in conventional development appraisals, there needs to be a more creative approach to attracting new investment from the private sector. We are delighted that the Government has indicated its commitment to take forward tax increment financing (TIF) in order to facilitate the upfront funding of the infrastructure that is so often crucial to project viability. It is disappointing however, that TIF is already a reality in Scotland whilst its introduction in England still looks a long way off. It is significant that all of the leading law firms that we have consulted believe that TIF could be introduced in England (as it has been in Scotland) without the need for primary legislation. They believe that the necessary powers already exist and that the Government is unnecessarily opting for a belt and braces approach. We have yet to see a convincing explanation from Government as to why primary legislation must be introduced before TIF can be used in England.
12. Given its potential to unlock a significant number of stalled schemes, TIF should be introduced at the best possible time i.e. when the economy is emerging from a downturn. It would also make sense to take maximum advantage of the current interest in and enthusiasm for TIF.
13. We look to Government to publish the key ingredients of its TIF proposals within the next few weeks, and at the same time initiate a process for setting up the first tranche of TIFs so that the necessary preparatory work could run in parallel with the passage of the enabling legislation (which we gather is likely to run from summer 2011 to spring 2012). Such a twin track approach would mean that when the legislation was enacted a range of ‘vanguard’ schemes would be ready to go. If this is not done, then it could be 2014 or 2015 before we see the first English TIF emerge, hardly an indication of dynamic government, and a terrible waste of the work done by a number of councils with developments or schemes that could go ahead now.
14. A key advantage of TIF is that it is a highly flexible mechanism. In particular, it allows the upfront funding that is needed to be derived from a range of sources and the risk to be allocated in the most efficient and appropriate way. Such flexibility is essential to ensure that funding approaches can be tailored to meet the particular needs of different schemes. This is particularly the case as certain funding models might be more attractive than others according to the prevailing economic conditions. Under current economic conditions, for instance, issuing bonds into the capital markets for a new vehicle such as TIF might not be immediately attractive (unless perhaps some form of government guarantee is provided). However, that could change when economic conditions improve and TIF becomes a more established and investable proposition. It is also important to remember that the capital markets may offer an appropriate mechanism for refinancing TIF-backed borrowings initially raised from other sources (including the Public Works Loan Board). Any new TIF regime, consequently, should seek to provide the flexibility that will be needed to make TIF operate effectively over the longer term.
It is important, therefore, that provision is made to allow for the following funding models:
· Public sector funding: a local authority should be able to borrow the money needed to pay for the infrastructure from central government (probably the Public Works Loan Board), based on a business case and financial modelling to demonstrate the tax increment underpinning the authority’s ability to service and repay that borrowing. The project could be structured to put the risk of tax increment not materialising on the public sector or the developer, or to share it between them.
· Capital markets / bonds: the most common way of funding a TIF in the USA is by the issue of municipal bonds based on anticipated incremental tax revenue streams and benefiting from a tax exemption for interest paid to bondholders. The pricing of the bonds (and even the willingness of capital markets investors to buy them at all) will inevitably be a function of their risk profile. The greater the risk that interest or principal on the bonds may not be paid in full, the greater the likelihood that the market will impose a higher interest rate on the bonds, or that it will be willing to lend only a smaller sum or only for a longer period (so that annual debt service represents a smaller fraction of the anticipated tax increment that year). In any event, the UK does not have the large and varied municipal bond market of the United States, of which TIF bonds represent only a small proportion. Partly for that reason, and partly because UK TIF is a new concept, the costs of using a bond issue in the UK today are likely to be significantly higher than those arising from the other TIF financing models. The appetite of the capital markets for such bonds is likely to be limited in the short term unless they benefit from a public sector guarantee of some kind.
· Developer funded TIF schemes: the basic principle behind the concept of developer funded TIF schemes is that instead of a local authority borrowing to fund TIF eligible expenditure, that expenditure is effectively financed by the owner/developer of a TIF site using his own resources. The developer is then repaid out of tax increment when it arises. With this kind of structure, the local authority can entirely lay off both construction risk and the risk that the tax increment will fall short of expectations on the developer. A clear advantage of this approach is that developers understand how to assess development cost, estimate development value, manage development risk and secure development capital.
15. The Government has also announced various proposals designed to incentivise local authorities to take a more positive approach to development proposals.
16. We back the proposed New Homes Bonus scheme and also welcome the fact that the Government is moving towards allowing much greater local retention of business rate revenue. Breaking the link between local authorities and rating income has been deeply damaging, giving local authorities no financial reward for fostering beneficial development. Greater retention of rate income would provide a much stronger motivation for local authorities to back new development that generates economic activity and creates new jobs.
17. The promised introduction of a presumption in favour of sustainable development is another important element that will re-enforce the pro-growth agenda. However, there needs to be clarity about the status that this will have. It is essential that it is not hedged around with so many caveats as to be meaningless in practice.
18. We welcome government assurances that new Neighbourhood Plans are intended to be engines of growth, giving neighbourhoods the opportunity to increase but not to reduce the totality of development envisaged for particular neighbourhoods in the Local Plan. We have strongly argued the case for businesses and landowners to be able to take the lead in putting together Neighbourhood Plans in predominantly commercial districts and we are encouraged by strong indications that the Government is supportive of this view.
Local Enterprise Partnerships
19. The introduction of Local Enterprise Partnerships has been an unnecessarily rushed process. Insufficient thought was given to their role and resourcing. However, with most LEPs now in place, the key now is to see what they can achieve in practice. We would make the following points:
· Clearly, no one wants to see LEPs develop into mini-RDAs with bureaucracies to match. Instead the emphasis should be on greater sharing of skills and resources between local authorities (for instance in areas such as land assembly, decentralised energy, regeneration and conservation), possibly with each participating local authority taking a lead role in a specific area. However, LEPs are unlikely to function effectively without a small but high quality and highly motivated core secretariat.
· We understand that the Government wants to see them focusing more on delivery than on strategy. Their focus has got to be on combating barriers to growth including issues relating to planning, infrastructure provision, skills and business access to finance.
· LEPs have the opportunity to play a valuable role in delivering the strategic planning that will continue to be needed in areas such as infrastructure, housing supply and waste. Whether they are able to rise to this challenge will be an early test of their credibility.
What other measures are needed?
20. Building on initiatives that the Government is putting in place we feel that the following measures could also make a big difference.
21. The labyrinthine process of public procurement associated with major regeneration projects presents one of the greatest barriers to private sector involvement in such projects. Many of these projects are on the margin of viability at the best of times and even more so in current circumstances. There is a need to ease the path of potential investors rather than impose often absurdly over-engineered procurement requirements and ever increasing demands for greater information. As a priority, the Government should overhaul the procurement process with the avowed objectives of making it more proportionate and less wasteful.
Support innovative infrastructure funding solutions
22. There is a need for imaginative thinking about other ways of unlocking potentially viable schemes. Given the paucity of finance and funding within both the public and private sectors progress is likely to depend on the emergence of new types of joint ventures between the two sectors. TIF is one way forward but will only be suitable in the right circumstances. A major Government priority should be to explore the scope for new types of joint ventures which LEPs could play a part in taking forward. The BPF would be happy to offer assistance in this process.
Use Government resources more efficiently
23. There are numerous examples of public funding being pumped into areas over many years in an incoherent and uncoordinated way with little understanding of what additional benefits could be leveraged off each individual investment and no proper evaluation of the impact on economic growth or jobs. Our key messages here are:
· Don’t waste resources on schemes that have little prospect of viability. Focus resources instead on schemes which can make a difference. In many cases, this will involve bringing back competitive bidding approaches to encourage innovation and reward those with the best ideas whilst helping disadvantaged areas that may be less well equipped to put together successful bids. We note that competitive bidding will be a central feature of the Regional Growth Fund.
· Fully embrace the concept of Total Place/Total Capital that seeks to achieve a more joined up approach to all funding destined for a particular area, creating shared facilities where feasible. There has been a lot of rhetoric about this but the reality on the ground is often very different.
· Sort out some issues which are currently constraining the take-up Local Asset-backed vehicles. Including, in particular, fears about state aid.
Make better use of public sector powers and assets
24. Local authorities should be encouraged to use their role as enablers and their new general power of competence in order to facilitate and, where feasible, ‘de-risk’ regeneration schemes.
For instance they might:
· seek to use their land assets more constructively than they have in the past to achieve longer term regeneration objectives;
· do more to expedite land assembly, an integral part of most regeneration schemes which often involves significant time, cost and associated risk;
· Along with other public bodies, use their role as of the largest occupiers of space in the country to promote regeneration.
Use planning to drive economic growth
Delivering economic growth requires an efficient and suitably resourced planning system. The current review of the planning system provides an opportunity to put more supportive structures in place. We would like to see:
· The creation of a National Planning Policy Framework that has the achievement of sustainable growth as its core objective and which reduces the volume of guidance to a more manageable level. As we have mentioned above, the introduction of a meaningful presumption in favour of sustainable development will be a crucial part of this framework.
· Full implementation of the Killian Pretty Review recommendations aimed at improving the planning application process. The Government has committed to doing this and we hope that it will carry through the necessary changes as soon as possible.
· An overhaul of the cumbersome and often over-the-top Environmental Impact Assessment procedures.
|©Parliamentary copyright||Prepared 4th April 2011|