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DEVELOPING A METHODOLOGY TO CAPTURE LAND VALUE UPLIFT AROUND TRANSPORT FACILITIES

5. REVIEW OF ALTERNATIVE FUNDING METHODS

5.1 Introduction

5.1.1 The previous Section has outlined the process by which land value changes can be assessed, using the T-IMPROVE method. This has been tested successfully at a strategic-level at four case studies, although more detailed case study work would be needed to assess actual results. This Section therefore considers the suitability of various mechanisms by which such land value changes can be captured.

5.2 Context

5.2.1 In considering alternative funding methods for transport schemes based upon changes in land values, it is important to note the contributions made to transport funding from existing value capture mechanisms. This is important because it reflects the notion that a share of any increase in land value is already captured for the 'public good'.

5.2.2 There may be debate about the extent to which this value capture is used to support transport schemes, and the degree to which it reflects accurately value enhancements due to particular transport improvements, but it is necessary to recognise that some value increment is already captured by government. This means that any new or additional funding method based upon land value change needs to build from this base. In simplistic terms, therefore, such alternative funding methods can either be directed towards reforming existing funding methods or should be used to capture a proportion of value increase recognising the amount already captured using existing methods.

5.2.3 There are five broad areas in which funding is currently generated by government - in various forms - through property charges or taxes. These are as follows:

• Rateable value
• Stamp duty
• Capital gains tax
• Inheritance tax
• Planning agreements

5.2.4 A brief analysis of these funding methods is provided here, based upon UK level data. These findings are applicable to Scotland, although the proportions of funding may well be different between the different existing funding sources.

5.2.5 Table 5.1 provides a summary of the net receipts obtained from various existing funding methods. This is based upon 2000/01 data and covers the UK.

Table 5.1: Funding Levels from existing funding methods

5.2.6 From Table 5.1 it will be seen that a substantial level of funding is currently obtained from existing funding sources in terms of changes in property values. In fact, over 25 billion is collected by government annually from these sources. This level of funding does not cover planning gain related sources of funding, which are considered further in the rest of this Section. It should also be noted that almost 28 billion of funding is also collected from transport-related sources each year, such as petrol duty and vehicle excise duty.

5.2.7 A key issue in interpreting the above figures is the manner in which incremental increases in land or property value are captured, and indeed what element of the above figure represent transport-related factors, such as a higher capital value due to location close to a motorway junction or railway station.

5.2.8 The second part of the above issue is particularly difficult to assess with any reliability. However, as has been discussed in Section 4, studies elsewhere suggest that transport schemes can, on average, increase property values by approximately 10%. Whilst a useful indicative guide, this does not in itself provide sufficient insight to assess the value 'premium' associated with transport-related factors. In certain respects, however, this issue is less critical than understanding how incremental values in land and property are captured via existing mechanisms.

5.2.9 The process by which rateable values are assessed and collected do, in certain respects, reflect changes in the incremental value of land and property. Whilst rateable values are fixed for five years, at this point they are then revalued to reflect the new 'value contours' across the country. However, this re-valuation is linked to changes in inflation rather than a pure reflection of changes in property values. To that extent, therefore, the rating system does not collect the full changes in property values. In other words, a doubling of property values in a particular location between each five yearly review would not necessarily be fully captured through the rating re-valuation, which would be linked to inflation changes over this same period.

5.2.10 Stamp duty, capital gains tax and inheritance tax are not linked to a quasi-formula approach like the rating system. Changes in these taxes or charges are more flexible, and are generally on an annual basis. Potentially, therefore, these three existing funding methods can capture increases in value due to transport improvements.

5.2.11 In practice, however, the changes in these methods are more determined by political considerations, rather than a reflection of how property values have changed. Thus, over the five years between 2000/01 and 2003/04, for example, inheritance tax receipts increased marginally, almost in line with inflation. Capital gains tax, meanwhile, saw a substantial decline in receipts, of the order of 60%. Conversely, stamp duties -particularly those elements associated with property - saw a significant increase over this same period.

5.2.12 In summary, those funding method that are potentially more variable in terms of capturing land value changes - and hence open to capturing a better representation of the impacts of a transport scheme upon property - make up approximately a quarter of the 'property-related' taxes referred to in Table 5.1. The rating system, which is more fixed in this respect, captures the remaining 75%.

5.2.13 In simplistic terms, therefore, existing funding methods could be characterised as capturing an element of value uplifts in property and land associated with factors such as transport improvements, but this may be limited to increases slightly above inflation. However, more detailed investigation would be required to establish this, but at a minimum any new funding method would need to establish carefully the proportion of land value increase associated with a transport improvement that could safely be captured without raising significant issue of equity and accountability.

5.3 Potential Funding Mechanisms

5.3.1 There are a range of potential funding methods that could be used as the basis for capturing land value changes. Based upon recent projects carried out by the project team ⁵, 23 potential funding mechanisms of potential relevance to transport infrastructure schemes have been identified. These funding methods were identified through an international review of 'innovative' funding methods.

5.3.2 Not all of these methods are suitable as methods of capturing land value increases, as they have a much wider fiscal coverage. In fact, there are seven possible methods that could be used and which focus specifically on changes in land values. These are listed below, with further explanation in Appendix 1, and in the text box opposite and overleaf:

• Business rate levy
• Local authority business growth incentives
• Business improvement districts
• Land value taxation
• Greenfield development tax
• Freehold charges
• Planning gain
• Buy-in charges

5.3.3 An appropriate framework for examining and assessing these methods was developed and agreed as part of this current research project. This involved the following criteria for assessing the value capture mechanisms:

• Practicality of introducing the capture mechanism
• Transparency of method
• Acceptability of method to various interest groups
• Effectiveness of method in terms of policy issues
• Potential revenue the method might generate
• Operational costs of the method

5.3.4 The above are 'headline' assessment criteria. Each one of these criteria required further dis-aggregation in order to provide results open to interrogation.

5.4 Assessment of Alternative Funding Methods

5.4.1 Table 5.2, at the end of this section, provides a summary assessment of each of the potential land value funding methods. Each funding method is assessed against a set of evaluation criteria. These criteria are outlined below, including an explanation of how they have been used as a means of reviewing the funding methods.

5.4.2 The evaluation table also uses a series of colour codes to summarise results. Green symbolises a good or positive result. Red indicates a poor or negative result. Yellow suggests a more mixed result.

Revenue Generation

5.4.3 There are effectively three criteria under this heading. However, they all focus, in one form or another, on the funding opportunities offered by the funding method in question.

Revenue Potential

5.4.4 Funding methods that are likely to generate 'large' or 'medium' levels of funding are more likely to meet the funding needs of major transport projects. However, this is not an open-and-shut distinction, and so if a funding method has other advantages it may be selected.

5.4.5 The assessment categories used are: large, medium and small.

Revenue Targeting

5.4.6 Funding methods that are based on generating funds from those who directly benefit from an improvement, or those who are creating 'problems' within the transport system. In other words, funding methods based upon the polluter-pays or beneficiary-pays principles are to be preferred over tax-based methods.

5.4.7 However, this criterion has required qualitative judgement in terms of how well targeted the funding method is. In other words, a funding method may be in line with the 'polluter pays' principle, but it may only target one group of 'polluters' rather than several.

5.4.8 The assessment categories used are: good, medium and poor.

Funding Sustainability

5.4.9 The ability of a funding method to provide funding over a sustained period is an important criterion. Those funding methods that provide this ability, rather than just one-off or capital-only funding, are more suitable, and are to be selected in preference to methods that are geared more to one-off funding.

5.4.10 The assessment categories used are: high, medium and low.

Possible Controlling Agency

5.4.11 There may be several government and private sector bodies or agencies involved in managing the funds generated from the respective funding methods. These bodies may have sole responsibility for the 'management' of the funds, or need to act in co-operation with other groups.

5.4.12 The key issue, however, is that the primary control body - if there is only one - could have an important influence upon how funds are re-distributed or used. Central government, for example, may have greater potential for wider re-distribution of funds, and local agencies (public or private sector based) could develop more targeted funding methods.

5.4.13 Those bodies or agencies that may have the most prominent role in controlling funds generated by a particular funding method have been listed. It should be stressed that this is, to a large extent, an assumption of likely roles and responsibilities. Much would actually depend upon how the funding methods were implemented, and so the list provided should be seen as indicative only.

Revenue Allocation

5.4.14 This criterion identifies the main beneficiaries and disadvantaged of each funding method. In that sense, this criterion cannot be used to judge the funding methods in the same way as the other criteria, as it simply lists 'winners' and 'losers'. It will be a matter of judgement - political, economic or otherwise - as to the relative merits of these winners and losers.

5.4.15 The assessment categories used depend upon the groups affected.

5.4.16 In addition, an assessment of the potential for land use-transport interaction (LUTI) models to assess impacts upon the main beneficiary and disadvantaged groups and activities has been provided. This needs to be recognised as a relatively high-level assessment.

Practicality

5.4.17 Funding methods that are relatively easy to apply in practice are to be selected as a priority. This criterion combines a number of factors - such as costs of implementing and operating, flexibility and user complexity - and so is not easy to condense into a single score. Even so, the emphasis provided by the criterion can be used to assess the appropriateness of a funding method bearing in mind all other factors.

The assessment categories used are as follows:

• Ease of administration: simple, variable, complex
• User complexity: simple, variable, complex
• Flexibility: high, medium, low
• Enforceability: good, mixed, poor
• Costs: low, mixed, high

Transparency

5.4.18 This criterion considers how clear the funding method is, particularly in terms of issues such as who would pay and how they might do so. In general, the clearer or more transparent the funding method the better.

5.4.19 Transparency: clear, mixed, unclear

Transferability

Legislation Availability

5.4.20 A distinction between funding methods that are currently available and those that require legislation in some form to implement them is significant. This will clearly have an influence in terms of the timing of any financial support. Although this is not a direct selection criterion, it is relevant in judging the appropriateness of a funding method for a given scheme.

5.4.21 The assessment categories used are: available (legislation not needed), (legislation) needed.

Institutional Changes

5.4.22 Whilst no legislation may be required for a particular funding method, there may be significant institutional changes required. This includes, for example, new ways of collecting finance, additional activities or procedures that users or operators need to carry out, or new information requirements. Equally, however, funding methods that do require legislation may not actually require much in the way of new institutional arrangements, but can build upon existing procedures.

5.4.23 This criterion assesses the extent to which each of the funding methods may or may not require institutional changes. There will be some overlap with the Practicality criterion, at least in terms of costs. However, this particular criterion is considering changes in practices as much as physical or financial issues. This involves qualitative judgement, and so should be seen as an indicator rather than a precise measure.

5.4.24 The assessment categories used are: minor, mixed, major.

Acceptability

5.4.25 This criterion considers how acceptable the funding method may be from the perspective of various interest groups. In particular, public, business and political acceptability are assessed. Inevitably, this is a qualitative judgement, and could change noticeably if other factors are changed, such as user complexity or up-front costs of the scheme.

5.4.26 The assessment categories used are: high, medium and low.

Policy Support

5.4.27 The extent to which a funding method is supportive of general government policy on transport, particularly integrated transport and sustainability, is relevant. A funding method that is broadly supportive of transport-related policy is to be preferred over one that has poor support for such policies.

5.4.28 In practice, the way a funding method is designed and implemented will determine the extent to which it does support policy aspirations. The assessment provided here therefore considers matters in principle, on the assumption that the funding method is applied in a straight-forward manner.

5.4.29 The assessment categories used are: high, medium and low.

Geographical Extent

5.4.30 Each funding method has been assessed in terms of how appropriate or feasible it is to apply at different geographical levels. This is relevant as transport schemes may differ in their geographical extent: urban, rural, regional or even national. It is therefore important to establish the extent to which each of the funding methods can be modified to different geographical levels.

5.4.31 The implication of the above approach is that those funding methods which offer greatest geographical flexibility are to be preferred to other funding methods. However, this assumption should not be applied too rigorously, as their may be particular situations in which, for example, more localised funding methods suit a particular transport scheme.

5.4.32 Three geographical levels have been considered. These relate to the potential applicability of the funding method at national, regional and/or local level. It should also be recognised that the geographical level that a funding method is applied at may well impact upon other criteria, such as acceptability to the public or business.

5.4.33 The assessment categories used are: yes, no and uncertain.

5.5 Results

Business Rate Levy

5.5.1 The business rate levy performs well in terms of revenue generation, although this will depend, in part, upon what the levy rate is. However, the targeting of the method is relatively poor, as it applies to all property units rather than those that may directly benefit from a transport scheme or improvement.

5.5.2 This method is relatively practical, although the transparency of the current rating system is best termed opaque, and this feature would not change using this funding approach. Legislation would be needed to introduce this measure, however, even if the institutional framework is already in place.

5.5.3 The acceptability of this funding method in Scotland is variable, and much would depend upon the precise nature of the levy, such as the scale, purpose to which it would be put and duration. The business community is likely to be least receptive to this funding method, although if the funds were used to fund a particularly significant or necessary project, then opposition may be less.

5.5.4 The direct link of this funding method to transport and related policy is relatively low. This is due primarily to the broad-brush nature of the funding approach; it is an increase for all, irrespective of benefits or demands upon the transport system. However, this funding method has the potential to be applied at almost any geographical scale.

Local Authority Business Grant Incentive (Tax Incremental Financing)

5.5.5 This funding method is well targeted in a policy sense, and can provide a sustainable stream of funding. However, this depends upon the study or incentive area attracting development, and hence generating rating revenue. This is part of the reason why this funding method may not generate funds to the same scale as the business rate levy.

5.5.6 , it does have the advantage of not requiring existing or new businesses or developers/landowners to provide funding 'up front'. Instead, the funding method estimates the level of development that will occur as a result of the transport improvement, and uses this funding stream as the basis for securing a bond (or similar) to help fund the transport scheme in the first place. This mechanism is part of the reason why this funding method is likely to have a generally high level of acceptability.

5.5.7 The funding method is relatively practical, particularly as it is simply an extension of the existing rating system. The logic behind it is also clear, helping to make it transparent to users, and it links well to policy, particularly regeneration initiatives. It also has recently been enabled by parliament for England and Wales. Whilst it could be applied at a regional or sub-regional scale in principle, to be effective it needs to be applied at a more localised level.

Business Improvement Districts (BIDs)

5.5.8 This is also a new funding method recently introduced in England and Wales. Whilst revenue targeting and sustainability is relatively good, because BIDS are designed as small-scale organisations, the level of funding they generate is equally likely to be relatively small-scale. This means they may only be appropriate for local or relatively small transport schemes.

5.5.9 BIDs are considered relatively practical, although the extent to which they are enforceable and the scale of their actual running costs depends upon careful set-up arrangements. They are generally seen as having relatively high acceptability, although there are concerns in the way they have been set-up in the UK which means land-owners are not fully involved as financial contributors.

Land Value Taxation (LVT)/Site Value Rating (SVR)

5.5.10 Significant levels of funding can potentially be generated from this funding method, although much depends upon what particular approach is used. The sustainability is likely to be good, and the targeting of the revenue generation can be viewed as good, although again much depends upon the purpose for which LVT or SVT is set-up and how it is structured.

5.5.11 This funding method benefits from being applicable at almost all geographical levels and has a strong link to transport and regeneration policy.

5.5.12 The main area of uncertainty comes in respect of the practicality of the approach, and the fact that legislation would be needed to implement it. These issues are part of the reason why it is likely to have a mixed level of acceptability.

5.5.13 In terms of practicality, a concern is over the possible level of complexity of LVT/SVR in terms of administration and user perspective. In addition, costs, at least initially, may be relatively high due to the need for a comprehensive valuation database and potential appeals on valuation decision.

5.5.14 However, much of the uncertainty may be associated with the fact that a single clear-cut illustration of how this method would operate is lacking. This reflects the diverse ways in which this method could be implemented - which could be seen as an advantage, but may actually be a source of confusion.

Greenfield Development Tax

5.5.15 This funding approach may have limited revenue-generating potential, although the targeting of revenue is considered good. However, the sustainability of funding levels is likely to diminish in direct relationship to how successful it is in policy terms. In other words, the less greenfield development that occurs, the less generation of funding there will be.

5.5.16 The Greenfield Development Tax (GDT) may be mixed in terms of how practical it would be in operation. Whilst enforceability is likely to be good, along with general administration, the complexity and flexibility of the approach is less clear. In consequence, the transparency of this approach is also unclear. However, the Barker Review proposal for a planning permission supplement can be seen as a variation on the GDT, which could be more practical. This would involve applying a set charge to the granting of planning permission.

5.5.17 Legislation would be needed for this funding method, but it would also be likely to require certain institutional changes. This applies to the planning permission supplement as well as the GDT approach.

5.5.18 Acceptability is variable, with the business community probably considering it most unacceptable. However, GDT does have a good link to policy objectives.

5.5.19 It would need to be applied nationally in order for it to operate equitably. It is possible that it could be applied to particular cities in which there was greenfield development pressure. However, this would need to be considered carefully in order not to damage the attractiveness of the city relative to other business locations.

Freehold Charge

5.5.20 A freehold charge or levy could generate potentially significant levels of funding. This does need to be set against the fact that it may be less sustainable generally than other funding methods, as it would be a one-off charge. However, the fact that the funding levels could be significant could produce an on-going income stream to support projects. This could be achieved by allocating the funds from the freehold charge into some form of development trust or restricted fund.

5.5.21 This funding route is classed as medium in terms of sustainability.

5.5.22 The targeting of this funding method may be too general if it is applied to all properties. However, if directed to those deemed to have benefited from a transport improvement, then the targeting of the method could be classed as 'good'. A related issue concerns the timing of payments. If the charge was applied at a set date, with payment 'up-front' (i.e. in advance of the impacts of a transport scheme), then this could generate significant financial problems for property owners, as well as accounting issues for owners on how to treat this charge. Equally, if the charge was spread out over time, then there could be collection problems, such as when ownership changes.

5.5.23 The practical issues of the freehold charge produce a mixed message. The flexibility of the measure is likely to be relatively low, although it is relatively transparent. The administration and user complexity of this funding method depends upon the nature of the scheme introduced, which also means the costs of the scheme are uncertain. In general terms the charge is likely to be relatively straightforward to enforce.

5.5.24 Legislation would be needed to introduce this measure, although the funding method could be introduced at most geographic levels. Whilst public and political acceptability is potentially high, the views of the business community may be more mixed. If the charge is not passed on directly to occupiers, then the general business community may be in favour off it. Landowners may also support it if it can be demonstrated that values have increased as a result of a transport scheme, but would equally be dependant upon the mechanism and timing of introduction of such a charge.

Planning Gain

5.5.25 This funding method is a well-established revenue generating instrument, which, as it is directly related to a development, can be classed as being well targeted. Although it is likely to be a sustainable revenue source, this may be very variable. Furthermore, funding levels are likely to be relatively modest.

5.5.26 Given many years experience of this funding method, it can be generally classed as a relatively practical measure to apply. However, a note of caution needs to be mentioned in relation to the cost of this approach on users (both local authorities and developers) and how transparent the process is.

5.5.27 The method is relatively acceptable to various interest groups, although there are calls for improving the system. This has led to proposed revisions to the planning obligations system in England and Wales, including the use of standard charges for development activities. Indicative analysis has suggested that standard charges used in England for transport-related funding can range between 2,000 to 7,000 per dwelling unit developed, although these need to be recognised as broad guidelines only. Rates for commercial development are much more variable, and dependant upon local circumstances, but can be up to 5% to 10% of the residual value of a development.

5.5.28 The link to policy is generally good, but it is essentially a mechanism that is only appropriate at a local level. In addition, this method, strictly speaking, can only be collected in relation to development activity, rather than an uplift in values per se.

Buy-in Charge

5.5.29 The buy-in charge approach, whilst useful, is only likely to generate relatively small levels of funding, and over short timeframes, hence also being less sustainable than many of the other method. However, it is generally relatively straightforward to apply, although flexibility and enforceability can be uncertain.

5.5.30 The acceptability of the method is generally good, although there can be a mixed response from the business community. This particularly applies to developers and owner-occupiers. By its nature, this funding method is usually only applicable at a local level.

5.5.31 The legislative position on this funding approach is unclear as much depends upon the particular form of buy-in charge used. Generally, however, legislative mechanisms would be needed for more radical approaches - such as density bonusing - but not for other approaches, such as the use of joint land-assembly options using CPO powers.

Table 5.2: Summary Evaluation of Land Value Funding Methods

1. Legislation recently enabled in England and Wales

5.6 Conclusions

5.6.1 There are a number of key points to arise from the review of alternative funding methods. These can be summarised as follows:

• In considering the use of alternative funding methods, it is important to recognise the scale and nature of funding currently raised from land value mechanisms or transport operations. Land value methods currently raise over 25 billion per annum across the UK, whilst taxes and other methods raise 28 billion per annum. The connection of these funds with transport may not always be obvious, but it is important to understand their contribution in order to avoid a double-taxation effect
• Eight alternative funding methods were examined as a basis of potentially generating funds for transport infrastructure. These eight methods, based on land value capture methods, were as follows:
  • Business rate levy
  • Local authority business growth incentives
  • Business improvement districts
  • Land value taxation
  • Greenfield development tax
  • Freehold charges
  • Planning gain
  • Buy-in charges
• Each of the above funding methods has advantages and dis-advantages, and it is difficult to select methods in abstract. However, Table 5.2 is considered to provide a useful basis for guidance on examining and selecting between methods. Even so, much will depend upon individual schemes or policy issues. Ultimately, however, a decision of the pursuit of a funding method is likely to be a political choice, although it is possible that different funding approaches would be needed for different transport schemes.
• In practice, it would be very beneficial to test the various alternative funding methods on specific transport schemes. Ideally, this should be carried out in combination with the T-IMPROVE value measurement method discussed in Section 4. This would need to be at a detailed level of analysis, but would provide firm evidence upon which to make comparisons.
• In the absence of a scheme specific application, however, we have carried out broad assessment at a wider geographical level. Two areas have been examined (City of Aberdeen and Clackmannanshire), and the results of this are discussed in the next section.

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