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DEVELOPING A METHODOLOGY TO CAPTURE LAND VALUE UPLIFT AROUND TRANSPORT FACILITIES

6. FUNDING METHOD CASE STUDY APPLICATION

6.1 Introduction

6.1.1 The main purpose behind using case studies as part of the overall research programme, was to assess the robustness of the methodology developed to measure changes in land value. Details on this have been discussed in Section 4.5 and 4.6.

6.1.2 As the project developed, however, it was felt useful to examine if a case study assessment could be undertaken of the funding methods that might be used to capture land value uplift. This analysis would identify the scale of funding that might be generated from different funding methods. Whilst this went beyond the terms of reference of the original study, it was considered to be a good way of demonstrating the use of alternative funding methods in a practical manner.

6.1.3 The case study application was to be based upon individual transport schemes, which would help reinforce the assessment of alternative funding methods discussed in the previous Section. However, it proved impractical to carry out this type of case study work. This was partially due to the limited number of appropriate case studies, but also the wishes of certain project sponsors not to participate in the exercise at this stage.

6.1.4 A different approach to testing the various funding methods via case study was therefore developed. This focussed on testing the funding methods at an area-wide level, rather than at a scheme specific level. Thus, the potential funding levels generated by, say, a LABGI or greenfield development tax to a local authority area (or other measurable geographical unit), can be indicated. This will help in demonstrating the financial potential of the various methods, which can then be compared with the wider-ranging assessment presented in the previous Section.

6.1.5 After discussion with the Steering Group, the local authority areas of the City of Aberdeen and Clackmannanshire were selected as suitable case study locations. This was primarily on the basis that they illustrated the different types of land use characteristics in Scotland (e.g. built-up, urban area and more rural, mixed town size area). These two local authorities areas also have on-going transport developments and proposals that make the assessment potentially more practical.

6.1.6 The results on the case study applications are discussed below, but it should be re-iterated that the assessment is at a relatively high-level and is intended more as to a guide on the relative differences between funding methods than as a precise measure of funding potential.

6.2 Case Study Results

6.2.1 Table 6.1 summarises the results of testing the eight alternative funding methods at the City of Aberdeen and Clackmannanshire. The assessment of funding potential was carried out at a relative high level, and so the funding figures produced should be seen as indicative. Even so, the figures do help to illustrate the variation that exists between funding methods in terms of the scale of revenue they can generate.

6.2.2 It should also be noted that a number of methodologies were used to determine potential levels of funding. This also required various assumptions to be used, which have been as cautious as possible. Despite this, it is important to stress that changing some of the input assumptions can have a material impact upon the funding levels generated by certain funding methods. This needs to be kept in mind in using the results.

6.2.3 In fact, given differing assumptions used for certain funding methods and sensitivity tests carried out, over 20 scenarios were tested in total. (Further detail is contained in Appendix 5). Whilst this has helped to produce more robust results, it does highlight the importance of a careful, detailed and considered evaluation of funding methods against specific transport schemes in order to arrive at 'agreed' potential funding levels. This would need to be done in combination with a method such as T-IMPROVE in order to incorporate the impacts upon land values of the transport scheme itself.

Table 6.1: Potential funding levels from alternative funding methods

* One-off level of funding, rather than an annual funding level, but has been translated into an annual figure for analysis purposes.

6.2.4 There are obvious differences between the City of Aberdeen and Clackmannanshire over potential funding levels associated with the various funding methods. However, this is more a reflection of the differences of these two locations than differences in the funding methods themselves.

6.2.5 The key points arising from the analysis contained in Table 6.1 on each funding method can be summarised as follows:

• Business Rate Levy: this could be viewed as a super-BID, in that it is an additional business rate levy, only at a local authority-wide level. However, it would not necessarily be voted on by businesses in the area like BIDs are, and legislative powers do not exist to use such an approach.

  At a local level this approach might be acceptable to businesses if funds were directed towards a specific project. However, the degree of 'control' a local authority would have over such funds is uncertain. This is important given the levels of funding level that could be generated, which range from 0.2 million at Clackmannanshire and 2.5 million at the City of Aberdeen per annum.

• Local Authority Business Growth Incentive: this could generate between 600,000 to 1.3 million per annum at the City of Aberdeen and 60,000 to 100,000 per annum at Clackmannanshire. The scale of difference is due to the uncertainty as to how extensive a LABGI could be in any one area, and the level of retention a local authority could receive.

• BIDs: this may be a potential source of funding for local schemes, although funding levels are likely to be fairly small-scale (under 0.5 million per annum). Any transport schemes subject to funding would need to be directly related to the BID area. There is greater local 'control' of funding under this method, but it needs to be counter-balanced by the relatively small level of funding generated by this approach.

• Land Value Taxation/Site Value Rating: the funding levels associated with this method could range from 100,000 to 200,000 per annum at Clackmannanshire and 0.75 to 2 million per annum at the City of Aberdeen . However, this particular funding method can be significantly affected by the precise form in which it is implemented. This can range from being a replacement tax - and hence not generating addition funds, but acting as a more equitable source of generating funds - or being used as a means of capturing a share of increases in land value as an additional source of funding for projects. The assessment carried out here is on the basis of this method providing additional funds.

• Greenfield Development Tax: there are two version of this funding method - the tax on all development in greenfield locations, and the recent Barker Report ⁶ variation which is a tax on the increase in land value associated with the grant of all planning permission. The funding levels associated with these in the City of Aberdeen range from 0.6 to 0.7 million per annum, and 20,000 to 60,000 per annum at Clackmannanshire, depending upon assumptions used.

• The 'pure' greenfield development tax would be likely to raise important policy issues for urban locations. This is because such urban authorities could, relative to other locations, have little potential for greenfield development. Surrounding local authorities could, potentially, encourage development at the border in greenfield locations and thus raise additional funds without necessarily supporting transport schemes in the neighbouring authority which make the greenfield development more attractive.

• Freehold Charge: the funds generated from this funding method could be of the order of 1 to 1.6 million per annum at the City of Aberdeen and 100,000 to 200,000 per annum at Clackmannanshire, depending upon the rate at which the charge is set, and the way it is applied. It is worth noting, however, that it would normally be a one-off charge. This in itself raises issues over how best to collect the charge without creating financial problems for landowners and other potential payees.

• Planning Gain: unlike the other funding methods this approach is based upon an existing available mechanism. However, the assessment of this funding method has also included an estimation of potential funding levels from the application of a planning tariff, as proposed by the Government for England and Wales. On the basis of these two funding methods approaches - a standard planning obligation approach and a planning tariff approach - approximately 20,000 to 70,000 per annum could be generated at Clackmannanshire and 0.5 to 0.75 million per annum at the City of Aberdeen.

• Buy-in charges: for local transport schemes in particular this could be a useful funding mechanism. If applied currently it would need to be on a voluntary basis in most cases, as legislation would be needed for the more radical options available under this route, such as 'density bonusing'. The funds that could be generated by this method - which also include estimated funding from planning gain - are approximately 80,000 per annum in Clackmannanshire and 0.8 million per annum in the City of Aberdeen.

6.3 Discussion

6.3.1 The case study testing of the alternative funding methods has revealed or highlighted a number of points of relevance in considering their potential application. These have been summarised below.

Level of funding

6.3.2 The Business Rate Levy and Land Value Taxation are likely to generate the largest levels of funding on an on-going basis. However, as a one-off source of funding the Freehold Charge is likely to generate significant funds, although there are real issues of how 'accessible' 'such funding would be in practice.

6.3.3 The LABGI, Greenfield Development Tax, Planning Gain and Buy-in Charge funding methods can be viewed as providing broadly similar levels of funding, although there are variations dependent upon the assumptions used. Modifying the input assumptions to these 'middle value' funding methods could increase levels of funding, but this is only likely to be marginal. The key to determining the level of funding of these methods, more so than Business Rate Levy, Land Value Taxation and Freehold Charge, is the amount of property activity.

6.3.4 It does need to be stressed that the levels of funding estimated under each funding method can only be viewed as indicative. Changes in key assumptions could significantly alter the figures generated, although we have taken as cautious an assessment as possible to reduce this possibility.

6.3.5 In practice, the application of a funding method to an actual transport project would be required in order to assess the levels of funding that could be realistically generated. However, this should only be done once the overall merits and drawbacks of potential funding methods had been fully considered.

Certainty of funding

6.3.6 Some of the alternative funding methods have greater certainty over their ability to generate funding than other methods. In simplistic terms, a distinction can be made between 'certain' and 'variable' funding methods. Those that are reasonable 'certain' in terms of their ability to generate funds, and the level of those funds, include the Business Rate Levy, BIDs, Land Value Taxation and a Freehold Charge.

6.3.7 Those methods that are more variable and depend upon the level of activity in an agreed area to determine funding levels, include LABGIs, Greenfield Development Tax, Planning Gain and Buy-in Charges. In simplistic terms, if there is a reduction in the amount of development then there is a reduction in the amount of funding generated using these funding methods.

6.3.8 In practice, such a neat distinction is not possible, as there can be overlap between funding methods on this issue. Thus, LABGIs can be viewed as reasonably 'certain', once the formula for allocating additional rating venues has been agreed between the parties involved. However, it does require these additional rating revenues to be achieved.

6.3.9 It should also be noted that it has been assumed that all of the alternative funding methods (with the exception of the Freehold Charge) will only operate for a set period in terms of funding a particular transport project or set of projects. A ten-year period has been assumed. This highlights the significance, in both policy and financial terms, of the operational period of alternative funding methods.

6.3.10 In the case of the Freehold Charge, whilst this would normally be a one-off charge, it has been assumed that the funds from this source would be set aside into a development trust or similar. This could provide funding over whatever period the fund - and underlying capital - was run over. In this sense it could be classed as a more certain funding source. However, this does not deal with the issue of how feasible it would be to collect such funding up-front, or over a phased period. This could be challenging.

Availability

6.3.11 In general, it is going to be easier to introduce a modified version of an existing funding method, rather than an entirely new funding method. Thus, modifications to planning gain are being pursued in England and Wales, rather than a radical over-haul of the system, although even this approach has been difficult.

6.3.12 In practical terms, however, in developing a transport scheme first recourse will be to funding methods that already exist, rather than developing new funding approaches. It is therefore beneficial that the issue of developing an alternative funding approach is considered well in advance of any new transport scheme, and arguably such a consideration should occur in isolation of a particular transport scheme in order to fully evaluate a funding method.

6.3.13 The above point touches upon the debate about reform of the existing central and local government funding arrangements, as well as more radical changes to funding approaches. In other words, reforming the existing system, or introducing new approaches, could be of wider benefit than simply generating funds for a transport scheme.

6.3.14 It also needs to be recognised, as discussed in Section 5.2, that there is already a considerable amount of funding indirectly generated from changes in land value that are captured by central and local government. The contribution that this can - and could - make to transport investment should not be over-looked in assessing the potential to support new transport schemes.

Type of transport scheme

6.3.15 The nature of a transport scheme can influence the type of funding method that is appropriate. Generally new schemes are likely to be more suitable for a wider range of funding methods than improvement schemes. This is particularly due to their ability to encourage new development. This needs to be recognised in selecting a funding method to help support a transport scheme.

6.3.16 A related point is the potential use of such funds, and whether they are directed towards the capital costs of a transport scheme or the revenue (i.e. maintenance) costs. The significance of this should not be under-estimated. It is essential that future transport schemes and improvements are adequately supported - both in terms of the initial costs to build or upgrade them, and in keeping them in good condition once completed.

Evaluation process

6.3.17 Alongside the funding potential of the various alternative funding methods, are considerations of their wider benefits and dis-benefits. A summary evaluation of the various land value funding methods identified as part of this research was presented in Section 5, and summarised in Table 5.2. This evaluated the eight funding methods according to a number of key criteria.

6.3.18 In addition, however, a set of selection or threshold criteria can be used in determining the suitability of a particular funding method. This should follow the principles laid out in the PACE pyramid we have developed and set out in the Figure below. Each criterion is briefly described below. Whilst there is some overlap with the details contained in Table 5.2, the PACE pyramid provides a more proactive or 'minimum requirement' process to selecting funding methods.

Figure 6.1: The PACE Funding Method Selection Pyramid

Practical - Can the funding method be used without major training and explanation, and is it straightforward to use without major changes?

Acceptable politically - will it be acceptable across all political spectrums, and do certain issues need to be addressed in order to achieve political buy-in?

Acceptable to payer - will those who have to pay under the method accept this new burden?

Certain - how well-established and secure is the revenue base that is to be used by the funding method?

Clear - are the methods and assumptions used in the funding method clear to all parties? This includes matters such as who pays, the amount to pay, when, how and for how long.

Compatible with other measures - are the principles of the funding method compatible with existing institutional, financial and organisational arrangements?

Effective - will the funding method be effective at raising finance?

Equitable - will the funding method raise finance in an equitable manner?

Easy to use - will the funding method be easy to use, both by those paying, collecting and administering the system?

Existing method - is the funding method an entirely new approach (with possible new requirements), or is it a modification of an existing method (and hence possibly easier to introduce)?

Sustainable - can funding be sustained, and sustained without detriment to other activities, and how long should it be in place for?

6.3.19 The above criteria ought to be applied when considering the introduction of a new funding method, and should run alongside the consideration of the financial potential of the funding method in question. The precise nature of such an evaluation will depend upon particular circumstances, but the principles outlined under the PACE pyramid, and the criteria described in Table 5.2, should provide a structured approach for so doing.

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