Every little extra helps

Extracting concessions from developers generates millions for local authorities but with many regeneration schemes on hold the coffers are running dry

Councils are losing billions of pounds a year in development income as big housing and regeneration schemes remain mothballed.

Before the financial crisis, extracting concessions from developers was a good source of income for local councils. Since then, this income – gained through what are known as section 106 agreements – has fallen by around £6bn a year, according to consultants EC Harris.

That fall has been a blow for councils already struggling with what many regarded as an imperfect way of benefiting from development.

Andy Johnston, of the Local Government Information Unit thinktank, says that when he served as a councillor he used to find section 106 agreements "frustrating, because they were so constrained".

Councils can use the agreements only for local infrastructure specifically linked to the development in question. That allowed "weird things", Johnston says, like a building firm putting up a cricket pitch "because that's what they could think of. There were a lot of drawbacks, and there's still a lot to play for in improving the system."

Just managing the agreements has been a headache. Councils can have up to 15 separate agreements on an individual development, according to Idox, an information management company. The firm estimates councils lose £1.4bn a year simply by not managing their agreements properly.

So what can be done to make the system work better and help councils close the income gap?

Without specifically mentioning section 106 agreements, local government secretary Eric Pickles has promised "powerful new incentives" for councils to allow more development, and before the election the Conservatives indicated they would let councils share in the proceeds of growth.

That's all very well, but some grants from central government are needed, too, says EC Harris's public sector head, Graham Kean.

"It's looking like the levels of grant are going to be reduced significantly," he says. "That's not going to help. What we need to do to stimulate the housing market."

The government could encourage public-private partnerships in which councils bring forward land that a developer matches with start-up funding. There are "hundreds" of such schemes ready and waiting to go, Kean says.

Another option would be for councils to become developers themselves, even providing mortgages, and thus controlling the income from development. Kean says councils already have the trust of their communities. "Combine that with competitive interest rates, no development cost and great service, and you have got a whole package from your council. That's a very powerful proposition."

Johnston says that might be "a step too far". He thinks the government is more likely to give councils greater freedom over what they can ask developers to build under section 106 agreements. "It shouldn't necessarily be associated with a particular development and the constraints that developer might want to put on things."

To avoid builders "buying planning permission", councils should use local development frameworks to set out firms' "expected contribution", Johnston says. "

That can go out to consultation, you can get feedback, and it can be an open and transparent process."

A lot hinges, however, on what the government's much-touted localism means.

Pickles hasn't spelled out whether he thinks power should lie with councils or individual residents. If the latter, community groups may be able to block most development, shutting off that income stream.

"You need big schemes to progress, and those are not necessarily the most popular," Kean says. "There is an incentive on councils to bring development forward, but if communities are making decisions, that seems a bit unstructured and uncontrolled to me."

Johnston agrees. "There is a risk that what developers will pay for is what a community in the short term wants to see, rather than what is really an important long-term strategic need for that community. What the community asks for many not be the best thing for them."

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