Paying for Public Projects: public sources roundtable

As the UK continues down a politically and economically unstable path with an unclear destination, understanding funding and financing sources for public projects grows in importance. The good news is there are a wide range of options – from both public and private sources – with new sources emerging. The challenge is knowing the opportunities and risks, and having the skills to make the most of what’s available.

Throughout autumn 2019, Future of London is convening series of roundtables to review sources – public, private, and emerging – used by public sector organisations to deliver regeneration, housing, and local-scale infrastructure schemes. At the first event, kindly hosted by Lewis Silkin, senior cross-sector participants discussed the merits and implications of various public funding and financing sources.

A Chatham House summary of the event is below. A more complete briefing – compiling findings from all three roundtables planned for this project – will be published in January.

What’s being used?

The public sector itself offers myriad sources of funding and financing. Those cited in the roundtable are listed below – the list is far from exhaustive but gives an overview of commonly-used sources:

  • Section 106 (S106) and Community Infrastructure Levy (CIL): cash contributions paid by developers to local authorities, intended to be spent on local infrastructure and initiatives
  • Self-financing, cross-subsidy: local authorities borrowing from themselves (e.g. through Housing Revenue Account) and paying the loan back through sale of private and shared ownership housing
  • Mixed-income tenure strategy: using suitable empty properties as housing for people moving from temporary accommodation
  • Selling (or ‘recycling’) assets: selling or leasing publicly-owned property and reinvesting profit into new infrastructure
  • Housing Zones: GLA funding and financing packages for housebuilding throughout London, introduced under Boris Johnson’s mayorship (2014-18)
  • Affordable Housing Programme: GLA funding for registered providers to build more affordable tenure homes
  • Council Homes for Londoners: GLA funding for councils to build their own housing for social rent
  • Housing Infrastructure Fund (HIF): central government funding for housing projects, with funding allocated based on proving land value uplift to the Treasury
  • (Future) High Streets Fund: MHCLG funding to regenerate high streets; in London, projects in Harrow, Wandsworth and Greenwich have been shortlisted. Its cousin, the Towns Fund, operates similarly but on a town-wide scale, though none of the funded projects are in London.
  • Local growth funding: MHCLG funding for local economic partnership to deliver employment opportunities
  • Public Works Loan Board (PWLB): Treasury-allocated loans for local authorities
  • European Union: the EU funds projects across member states; MHCLG’s Shared Prosperity Fund is intended to replace this at the end of 2020.

On any given scheme, funding and financing comes from a mix of sources (whether public, as above, or private – to be discussed during the 16 October roundtable).

Trends

In recent years a few key trends have taken hold:

  • Although asset sale continues, many local authorities are buying assets with PWLB money, expecting to generate commercial or other income. However, whether these are good investments has come under scrutiny.[1]
  • Local authorities holding onto land and assets are in some cases also aiming to take a leadership role in development, whether as masterplanners/landowners who commission developers to deliver the scheme or through council-led housebuilding, which is seeing a surge across London.
  • Some LAs are using central government funding to ‘pump-prime’ sites for development and lay the groundwork for private investment, which aligns with MHCLG’s intentions for their funding offers.
  • Finally, CIL has steadily amassed in recent years, and is ready to be spent – provided LAs have the know-how and systems in place to dispense it appropriately.

Challenges

Politics

The funding and financing landscape can change frequently because of politics at all levels. At central government level, constant changes to planning regulations, CIL, the National Planning Policy Framework and other aspects of development can frustrate long-term financial planning at the local level.

Additionally, national funding streams will be linked to national policy objectives, which may differ from local ambitions. One participant noted the trade-offs linked to central government funding: extra money can support an overall vision in some ways (e.g. increasing social rent), but could dilute the vision in others by having to align to government ambitions at the expense of local needs. For example, HIF assessments focus on land value uplift as the basis for giving funding, even though a HIF injection could have wide-ranging social and economic benefits for local communities beyond delivering new homes. While undoubtedly helpful for delivery, ‘topical’ funding streams linked to just one aspect of the built environment (e.g. HIF for housing, High Streets fund for high streets) can undermine holistic planning.

Meanwhile, some observers and ministers are concerned about LAs using the PWLB to finance seemingly non-essential purchases.[2] But MHCLG is keen to promote the idea that LAs shouldn’t have borrowing stymied if projects will have positive value for money and lead to local regeneration, economic growth and service delivery improvements.

Skills & capacity

Recurring throughout the discussion, both public and private participants highlighted a pressing skills gap within the public sector which means public options for funding and financing aren’t maximised. For example, MHCLG funding – which would ideally be used for pump-priming – has in some cases gone towards infrastructure that would have been better delivered by the private sector. MHCLG is aware that some boroughs lack capacity to pull in private money but expects some of their funding to go towards long-term upskilling within teams. Confusingly, it’s the Department of Culture, Media and Sport which has a ‘social investing’ team to help boroughs map capacity deficits and understand what’s needed for effective partnerships and to successfully attract funding.

The skills gap is especially apparent when it comes to CIL. Many boroughs lack the governance structures to determine suitable projects for CIL; they want to spend the money, but don’t know how.

Building skills is possible with time and investment. Public-private ‘career swaps’ are an option, as are longer-term in-house capacity building initiatives. A joint GLA/NHS scheme to fund a small unit of planners to build the NHS’s capacity to engage with planning was one example given, along with projects like FoL’s Council-Led Housing Forum.

Where next?

Participants identified emerging trends and possible directions of travel for public funding:

  • Changes to HRA have led to organisations reviewing overall financial health, with many looking to take a cautious approach to borrowing.
  • Less than one week after this roundtable, the Treasury increased PWLB rates from 1.81% to 2.82%, which could dampen LA financing efforts.
  • Inner London is no longer the key focus for development and investment in the capital as development in outer London picks up pace.[3] However, the ‘self-financing, cross-subsidy’ model which inner boroughs have used doesn’t work as well for outer London, where land values are lower. One participant was aware of outer London joint ventures which attempted to use the model but only achieved 20% affordable housing; the LA had to get GLA funding to increase the percentage. In another outer London case, the LA is using cross-subsidy to replace council stock, but on large sites requires strategic partnerships for delivery. Outer London boroughs will need to develop suitable funding and partnership strategies.
  • Maintaining viability is increasingly difficult; one participant anticipated having to increasingly use grant funding to achieve viability at the expense of affordable housing.
  • MHCLG is interested in streamlining its funding pots.
  • More devolution could come, but LAs will need the skills and capacity to make the most of it.
  • Squaring the climate crisis with economic growth is a critical issue. The last London Plan avoided it, but serious conversations about how long growth can continue, and how big London gets, need to happen.

Participants

Thank you to our participants:

Karen Barke, Head of Estate Regeneration, LB Hackney
Charles Butters, Head of Investment, Poly UK
Sarah Cary, Executive Director, Place, LB Enfield
Matt Hemsley, Head of Local Government Capital, Accounting and Sustainability, MHCLG
Nicola Mathers, Chief Executive, Future of London
Oliver Maury, Partner, Montagu Evans
Catherine Max, Health/Social Sustainability Consultant, Catherine Max Consulting
Chris Paddock, Director, Hatch Regeneris
Jeremy Skinner, Interim Assistant Director, City Intelligence Unit, Greater London Authority
Javin Solanki, Assistant Finance Director, Poplar HARCA
Adam Swersky, Councillor, LB Harrow & Advisor, Social Finance
Lisa Taylor, Executive Director, Future of London (moderator)
Anthony van Hoffen, Partner, Lewis Silkin
Josephine Vos, Policy Manager, London Plan & Planning Obligations, Transport for London
Michelle Warbis, Regeneration Policy Team Leader, MHCLG
Justin Zhang, Head of Finance, Poly UK

Notes

[1] See this brief post from the Office of Budget Responsibility or longer articles from the Economist and Financial Times
[2] One (failed) private member’s bill proposed that no LA should be able to use PWLB money for ‘purposes beyond the scope of the statutory duties of that local authority’.
[3] Molior London’s April 2019 sales report found that construction starts in Zone 2 fell 97% compared to 2015, with decline continuing (though not as dramatically) in Zone 1.