Lack of skill and capacity in councils, and transparency from developers, undermining system
The government should consider enforcing open-book costing for financial viability assessments during the planning process to even the playing field between developers and local planning authorities, according to the National Audit Office.
the independent public spending watchdog set out its review of the Ministry of Housing, Communities and Local Government鈥檚 oversight of the developer contributions system in England.
It found that councils are currently at a disadvantage when negotiating developer contributions, due to a lack of transparency and a massive disparity in the skilled staff they have available compared with large developers.
A profit margin of between 15% and 20% of gross development value is usually considered suitable in viability assessments, although a lower figure might be appropriate for affordable delivery where sales are guaranteed at a known price.
Local planning authorities (LPAs) can also decide to reduce the amount of developer contributions they require if they want the scheme to proceed but profit levels are deemed too low.
However, the National Audit Office (NAO) noted a lack of transparency in the viability assessment process, as well as a mismatch in capacity and capability between the negotiating parties.
鈥淭here is an imbalance in capacity and capability between the public and private sector, and larger developers generally have access to specialist negotiating skills,鈥� it said.
A 2019 review had previously found that developers were able to use viability arguments to negotiate lower contributions, after which the Conservative government drew up plans for an infrastructure levy to replace the existing system.
>> Also read: Industry worries over infrastructure levy as Gove pushes ahead with planning reform
The controversial proposals were consulted on and legislated, but when Labour came into power it scrapped the planned reform.
The NAO鈥檚 report set out recommendations for changes that could be made to improve the effectiveness of the existing system, including recommending that the department 鈥渞eview viability assessments and how they are used, including evaluating whether removing them would make the system work better, or whether there are other ways of improving outcomes (such as open book costing)鈥�.
How do developers contribute towards essential local infrastructure?
Developers contribute to the provision of local infrastructure through Section 106 agreements and the Community Infrastructure Levy (CIL).
Section 106 agreements are bespoke arrangements negotiated between developers and the local planning authorities, whereas CIL is a discretionary charge fixed at a set rate.
Only 52% of local planning authorities operated a CIL as of November 2024, with lower take up in areas with low land values, where planning authorities do not want to dissuade potential investment.
The estimated value of developer contributions in published Infrastructure Funding Statements covering 2022/23 was 拢5.5bn, including an estimated 拢4.2bn for 鈥榠n-kind鈥� affordable housing units agreed through Section 106.
Gareth Davies, head of the NAO, said: 鈥淭o ensure the developer contributions system delivers value for money, important issues must be addressed, including reducing the imbalance in skills and experience between local planning authorities and large developers; the complexity of financial viability assessments; and the lack of coordinated central government support.鈥�
The report also highlighted a lack of coherent data on developer contributions at the national level, which had resulted from the previous government choosing to pause a plan to create a database of Infrastructure Funding Statements (IFS), which all local authorities are required to produce, in order to focus on the now-scrapped infrastructure levy proposal.
In addition, MHCLG does not prescribe how IFS should be presented and in how much detail.
鈥淢HCLG therefore lacks a comprehensive picture of how much LPAs collect, and more importantly, how they are spending the monies,鈥� the report said.
It recommended that the government standardise templates for section 106 documentation and agreements and introduce standard requirements for how an IFS should be presented.
The watchdog also examined claims made by the development industry that vast amounts of money from developer contributions are sitting idle in council bank accounts.
>> Maintenance backlog on government buildings hits 拢49bn with true figure likely to be higher
In 2024, the HBF estimated that LPAs in England and Wales had more than 拢8bn unspent developer contributions in 2024, including 拢6.3bn from section 106 and 拢1.8bn from CIL.
The claim was based on an extrapolation from data sourced from 61% of all authorities through Freedom of Information requests.
Most LPAs and stakeholders that the NAO spoke to believed the situation was 鈥渘ot as stark鈥� as was presented by the HBF and argued that there were legitimate reasons for contributions to remain unspent.
For instance, money can sometimes not be spent until additional funding has been sourced, or will not be spent until a multi-year project reaches certain trigger points.
The report also examined the decline in housing associations purchasing homes through section 106 agreements and the number of councils that had yet to adopt CIL, praising Homes England鈥檚 new clearing system in the former case and urging the government to work to remove obstacles in the latter case.
Responding to the report, Sir Geoffrey Clifton-Brown, chair of the Public Accounts Committee, said an effective and efficient developer contribution system was 鈥渆ssential鈥� and that the NAO鈥檚 report highlighted how 鈥漷oo often the developers are favoured at the expense of local communities鈥�.
鈥淎t the same time, government does not know if the current system is delivering the intended benefits as it lacks accurate and consistent data on contributions,鈥� he said.
Cllr Adam Hug, housing and planning spokesperson for the Local Government Association, added: 鈥淒eveloper contributions play a vital part in delivering the infrastructure and affordable housing that communities need. Councils work hard to secure these contributions, but the current system is not delivering the full benefits it should.
鈥淚t鈥檚 right that the National Audit Office recognises the challenges councils face, and the need for further capacity and capability support for council planning departments.
鈥淐ouncils need a developer contribution system that is transparent, efficient and effective. There also needs to be urgent changes made to the viability system 鈥� for example, removing the requirement to factor in an assumed developer or landowner return or removal of viability assessments as a material planning consideration entirely.鈥�
David O鈥橪eary, executive director at HBF said: 鈥淭hrough these agreements with local authorities developers contribute billions of pounds to community infrastructure and amenities every year.
鈥漈he process of negotiation is important to ensure a fair balance is struck between securing contributions to benefit local communities and ensuring development is viable and able come forward.
鈥滳ouncils resourcing the process effectively would reduce the timescales involved with executing Section 106 agreements which now takes more than a year on average.
鈥漈he process is inevitably complicated by an ever-increasing array of policy costs and new taxes imposed by government which makes assessing viability for new sites increasingly difficult for builders and councils.鈥�
No comments yet