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DEVELOPING A METHODOLOGY TO CAPTURE LAND VALUE UPLIFT AROUND TRANSPORT FACILITIES

5. FUNDING METHODS AND POLITICAL CONTEXT

5.1 Introduction

This section of the literature review deals with funding methods. The purpose is to briefly outline the historical context within which transport funding in the UK is set, before discussing issues related to 'innovative' funding methods. This will form the basis for proposing those funding methods that this study should focus upon.

5.2 Historical Context

The funding of transport projects in most developed countries has become increasingly complex since the Second World War. In the early postwar period in the UK, transport infrastructure projects were primarily funded through national government, with contributions sought by users either directly or indirectly (e.g. fares, petrol taxes, vehicle registration duty etc). The focus of such investment was more inclined to road and airport schemes, rather than railway and non-mechanised forms of transport.

This focus has resulted in funding mechanisms that are arguably more attuned to road projects than rail schemes. In simplistic terms, road schemes can be seen as part of an on-going assessment programme, whilst rail schemes are assessed on a case-by-case basis (Kenworthy, 1993). The road network can, furthermore, be characterised as comprehensive or even saturated, whilst the rail network has reduced in extent since 1945.

Over the last 20 years there has been an increasing shift towards deregulation of public transport, allied with encouragement of private sector involvement in transport project funding, and indeed, even design, construction and operation (Vivier, 1999, Worsey, 2000). The main forms of direct private sector involvement in terms of funding transport schemes has been through PFI/PPP contracts, Design, Build, Finance and Operate (DBFO) contracts, and direct equity funding. In addition, support can be gained from government for the promoters of schemes through Section 56 grants, as well as from the European Union through Objective 1 and 2 funding sources, as well as other funding streams set up by the European Commission.

In addition, the private sector can be involved in funding transport measures through various indirect methods (Hack, 2002, Lichfield and Connellan, 2002). This includes:

• Statutory undertakers providing infrastructure (e.g. water and sewerage) and passing these costs on to the developer, who in turn may pass them on to the eventual consumer of the property or to the selling landlord.
• Environmental and public health factors can require infrastructure to be funded on the basis of the 'polluter pays' principle. In other words, developers may be required to provide new infrastructure to ameliorate adverse impacts of a development.
• Related to this is the use of condition as part of planning permission approval to seek new, but related, infrastructure, such as road improvements.

This last measure in particular, has a number of variations in a Scottish context, as discussed below.

5.3 Existing Scottish Local Authority Funding Arrangements

At the present time there are a number of provisions under various acts that allow the opportunity for public authorities to secure financial contributions from the private sector in relation to developments and related proposals. The most widely known is S75 of the Town and Country Planning (Scotland) Act but also important are provisions under the Roads (Scotland) Act and the Local Government (Scotland) Act. In addition to these there are a number of additional provisions under other legislation, although these will be less relevant to the current study. The following provides an outline of the provisions of these Acts and a brief resume of key issues relating to these.

5.3.1 Section 75 Agreements

A S75 agreement is an agreement entered into by the planning authority with any person with an interest in land in their district, for the purpose of restricting or regulating the development or use of the land, either permanently or as prescribed by the agreement. It may contain such incidental and consequential provisions (including financial ones) as appear to the planning authority to be necessary or expedient for the purposes of the agreement.

S75 agreements are, therefore, associated with the grant of planning permission for a proposed development. They cover a wide range of uses, and are normally used to supplement and strengthen legitimate planning concerns related to the proposed development. They do this by providing legally binding agreements with named parties to provide positive requirements or negative restrictions related to the operation and/or implementation of a development proposal. They can, for example, be used for securing the provision of a new bus service to link a development with a location or could restrict the range of goods sold from a retail development. They are also often used to secure financial contributions from developers to provide additional facilities, or as a contribution to enable the public sector to provide such facilities.

The key issue, as noted above, is that the purpose of a S75 agreement is limited in that it must restrict or regulate a development or use of land. For it to be valid it must be for a planning purpose. In this sense they cannot be used to secure a contribution associated with the uplift in value which occurs as a result of an unrelated development (e.g. transport improvement) undertaken on a different site or indeed for any other purpose.

Circular 12/1996 requires Agreements to be sought only 'where they are required to make a proposal acceptable in land use planning terms' (para. 4). The Scottish Executive identifies a number of criteria which planning agreements should meet:

(a) Planning purpose (i.e. the agreement should relate to the use and development of the land);

(b) Relationship to proposed development (i.e. the agreement should relate to the consequences of the proposed development); and

(c) Scale and kind (i.e. the requirements of the agreement should be appropriate to the consequences of the proposed development and not include requirements the need for which does not wholly and substantially arise from the proposed development);

(d) Reasonableness (i.e. is the agreement reasonable in the circumstances).

Normal practice is that there is a direct relationship between the agreement and the future provision/control of the agreed development/facility. However it is also evident from case law in England that, provided certain conditions are met, retrospective contributions can also provided through the use of S75s. The key case in this regard relates to Towcester bypass where housing development was enabled by the construction of the bypass and that developers contributed towards the cost of the bypass after it had been developed.

Remedies for breach of S75s are the same as contractural remedies (e.g. interdicts, damages etc). Agreements required to be registered with the title of the land to which they relate and can only be discharged by agreement of the signatory parties (i.e. the Lands Tribunal has no jurisdiction to discharge the agreement).

Considerable debate and case law relates to the operation, structure and implementation of S75 agreements and to the related S106 obligations provided under the English Town Planning Act. These will not be addressed in this section. The key points that limit their role for securing land value uplift are:

• They need to be related directly to the control over the development and use of land - and are linked to the grant of planning permission.
• They must have a planning purpose.

5.3.2 Various Sections Roads (Scotland) Act 1984

Sections 1 and 2 of the R(S)A 1984 detail the general powers and duties of the roads authority. There are many different circumstances in which agreements may be entered into under the Roads (Scotland) Act 1984; for example:

• A s.48 Agreement is an agreement entered into by the Roads Authority and any party willing to contribute to the costs of construction or improvement of any road. The aim of such agreement is to obtain joint funding infrastructure for some mutual benefit.
• A s.53 Agreement is an agreement between the Roads Authority and any person having an interest in land adjoining or in the vicinity of roads to regulate the use of the land and mitigate the effect of the road. Such agreements may contain financial provisions and may be Sasine recorded/Land registered and thereby binding on successors in title.
• A s.72 Agreement is an agreement between the Roads Authority and certain parties for stopping up private means of access from public roads. (There is provision for compensation.) Such agreements may be Sasine recorded/Land registered and thereby binding on successors in title.

The key issue arising from the above is that the agreements and financial provisions related to these are for specific purposes that are defined in the Act. Their ability to be used for broad purposes is, therefore, limited.

5.3.3 Local Government (Scotland) Act 1973

Section 69 LG(S)A 1973 gives local authorities the power to do 'anything (whether or not involving expenditure, borrowing or lending of money, or the acquisition or disposal of any property or rights), which is calculated to facilitate or is conducive or incidental to the discharge of any of their functions'.

Thus, local authorities may enter into contracts under this general power for the purposes specified. It should be noted, however, that in the past the courts have interpreted the section narrowly so that it will not justify an authority engaging in activities that the court considers were not contemplated by the legislature. In other words it is doubtful that the courts would uphold the use of this section to achieve a form of tax on betterment. There needs to be a link between the contribution and the legitimate functions and activities of the local authority.

There is a tendency for a number of planning authorities to use s.69 in place of conventional planning agreements - particularly where there is a financial contribution and/or where there is a degree of doubt as to whether the purpose of the agreement is strictly related to planning purposes. Since the whole Agreement can then be recorded/Land Registered, a successor in title may find it difficult to resist being bound by the terms of the Agreement, which is on the public record and they, therefore, cannot be said to be unaware of its terms. In any event where an agreement is not of a long-term nature but concerns, for example, a one-off payment or benefit to be provided, a s.69 Agreement may be all that is required.

It is evident, therefore, that the provisions of s69 are wide reaching and could be used for a wide manner of purposes. The key point that arises in these circumstances is the ability of the local authority to encourage a land owner or developer to freely enter into a S69 agreement. In the case of specific development proposals the key imperative is the desire of the land owner or developer to secure planning permission either quickly or at all, and it is for this reason that agreements are secured (whether or not this is a legitimate, or indeed, legal basis for the establishment of any agreement).

5.3.4 Other Agreements

There are a range of additional agreements between the public and private sectors related to development that are provided for in existing legislation that can involve financial contributions and/or works being provided by the private sector. These include agreements under:

• Countryside (Scotland) Act 1967
• Sewerage (Scotland) Act 1968

However these relate to the provision of very specific works and have limited relevance to the current issue.

In summary, the principal provisions for securing some form of financial contributions from the private sector to the public sector in relation to general development are under s75 of the TCP(S)A and s69 of the LG(S)A. S75 is the most common form of agreement in practice but is limited in that any contribution must be for a legitimate planning purpose. S69 is significantly more flexible but the key issue in being able to apply this is that it needs to link with the legitimate actions of the local authority, and, secondly, there needs to be a mechanism by which the private sector would freely enter into this form of agreement. To date the key means by which this has been achieved has been the desire for a grant of planning permission for development.

5.4 Historical and Current Funding Context: Summary

However, a key difference between the UK and other developed countries can be identified in terms of the broad approach taken to funding. Mainland Europe and the US, for instance, have looked to various 'non traditional' sources of funding to supplement government financing for transport, or even replace it (Berry and Sims, 1999; Godier, 2002; Simon, 1999; Ubbels and Nijkamp, 2002). In the UK this has been much less prevalent, with the focus being, as noted above, upon the use of a limited range of methods to put financing off the governments 'balance sheet'.

This difference, it has been argued (European Commission DG TREN, 2000; Travers, 2003), is a result of the nature of political control and the taxation system in the UK compared with many other developed countries. In essence, the argument is that the UK has a highly centralised tax control system and decision making process. It could be further argued that this has led to the reported under investment in transport in the UK since the Second World War relevant to other western European countries.

In simplistic terms, mainland Europe and North America can be characterised as having introduced a range of 'innovative' funding methods for promoting transport schemes, whilst the UK has tended to rely on state support and/or approval in various guises, with a limited range of 'alternative' funding sources being available.

A possible exception to this in the UK, was the introduction of the Land Commission Act of 1967 and Development Land Tax Act of 1976. These measures were, however, broad fiscal approaches, which did not link funds generated with particular topics, such as transport infrastructure. They were, in fact, developed for broader reasons than simply funding of transport, being more associated with the tax reform and capturing betterment. In addition, because of how they were set up they proved to be generally unsuccessful, and were repealed by subsequent governments. Nevertheless, they demonstrate that innovation in funding approaches - which could be related to transport infrastructure - has been tried in the UK, and could be pursued in the future.

It is in relation to the above context that the review of 'innovative' funding methods is set. Thus, in general, there has been no direct attempt in Scotland, or the rest of the UK, to develop or use funding methods for transport infrastructure that are explicitly linked to changes in land or property values. Approaches for doing this are considered briefly below.

5.5 Innovative Funding Methods

As part the RICS study Funding London's Transport Needs (RICS, 2003) a range of 'innovative' funding methods were identified and reviewed. These are summarised in Table 6 below, which provides a summary name for each funding method, identifies the primary source from which funding is generated, and the principles upon which the funding method operates, such as whether it is based upon general taxation.

Table 6: Innovative Funding Methods for Transport Infrastructure

The detail on each of the above funding methods is not reviewed at this stage, although further detail is provided in the RICS study. However, what is relevant for this study is that of the 18 funding methods listed in Table 6, only 8 could be linked directly or reasonably to land/property value changes. These are:

• Business Rate Levy
• Tax Incremental Financing (termed Local Authority Business Growth Incentive in the UK)
• Business Improvement Districts
• Land Value Taxation/Site Value Rating
• Greenfield Development Tax
• Freeholder charge
• Planning gain/tariffs
• Buy-in charge

A summary explanation of each of the above funding methods is provided in Annex C.

It is proposed that these funding methods should be the focus of examination as part of this study. The other funding methods are, by their very nature, not designed to focus on capturing land value uplift in a defined geographical area. As such, they are not an appropriate area of focus as part of this current study.

A further issue to note in relation to the above funding method is their current 'application status'. Whilst they have been classified as 'innovative', that is simply on the basis that they have either not been used in the UK before - or not for a considerable time - or are subject to potential modification to improve or refocus them. This, in fact, masks the fact that a number of these funding methods are currently available for use, or are soon to receive powers enabling their use. This includes the following property-related funding methods:

It is important to recognise this point, as it is likely to have implications as to the potential for using a funding method for a particular project. Thus, a transport project for which supplementary funding was sought, but which was to be implemented over the short term, would need to consider 'existing' funding methods rather than those which might require legislation.

The next stage of the research will be to develop an appropriate evaluation framework for testing the application of the eight funding methods identified.

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