Counting the infrastructure costs for county councils

Demand for greater housing means increased pressure on county councils to deliver the associated infrastructure, such as roads and schools. Now Brexit, Covid and the war in Ukraine are also adding significant risks, warns the president of the Society of County Treasurers.

Treasurers increasingly feel like property developers, and this is especially true for county treasurers in fast-growing parts of the country. Many counties are experiencing significant housing growth with associated expansion of industrial and commercial premises. In Leicestershire, we are expecting a 17% increase in population along with 190,000 new houses over a 40-year period.

Whilst this is clearly a great opportunity for new, well-designed green communities to be established in the coming years, given the scale of development it also brings huge financial risk to councils.

The obvious risk from more houses and more people is the need for appropriate infrastructure, in particular roads and schools. But you could add to that list a whole host of other services including accommodation for an ageing population as well as health and blue-light services. Councils are clearly responsible for most of these services, many of which are statutory such as ensuring there are the right number of school places.

Infrastructure requirements for a reasonable-sized development of say a couple of thousand houses can be significant; in Leicestershire, the cost of just roads and schools for one development of circa 3,000 homes is expected to be £160m.

All councils rely on developer contributions to fund these capital projects and for some developments this can be sufficient. However, for many it is not, and other funding sources are required. Developments increasingly seem to require up-front investment funded at risk by local authorities. The forward funding is in theory repaid from future developer contributions at certain trigger points linked to housing numbers.

This is clearly a risk as a whole host of external factors can and do impact how quickly houses are built and sold. And for the many counties with multiple districts, such as Leicestershire, the challenge is even greater.

The world around us is clearly more than capable of derailing a development that in turn impacts on the repayment of this forward funding. The impact of Brexit, Covid and the war in Ukraine are clearly major factors that have added significant risk and pressure to infrastructure budgets. As is the shortage of civil engineering expertise given other high-profile national projects.

Developments increasingly require up-front investment funded at risk by local authorities. Forward funding is in theory repaid from future developer contributions at trigger points linked to housing numbers. This is clearly a risk as a whole host of external factors can impact how quickly houses are built and sold.

Squeeze on Section 106 funding

I expect many of us have looked at viability assessments to determine how much Section 106 funding we can squeeze out of a development. It seems inevitable that these assessments will show there is less and less available as housing developers are all hit by the double whammy of higher construction costs in a market where the cost-of-living crisis will impact on the ability of people to purchase homes. Added to this is our social responsibility to ensure that developers deliver the correct proportion of affordable homes in their schemes, avoiding this being eaten away as issues of viability start to bite.

This expected squeeze on developer funding at a time when the public sector costs of building infrastructure are also increasing at an alarming rate is clearly a major risk for the sector. The cost of capital projects has escalated alarmingly over recent years and that is before we factor in the impact the war in Ukraine will have on commodity prices.

I mentioned that counties have a particular issue. This is a result of both the fact that there is more land to build on, so more houses, and the two-tier nature of local government. Concentrating on the latter, whilst district councils are responsible for planning, the bill for major infrastructure falls at the door of the county council. That is because counties are responsible for roads, transport and schools. That disconnect between planning and funding responsibility can be a real issue.

As well as being responsible for local plans and the delivery of housing numbers, districts also have responsibility for s106 agreements and as such determining (albeit with consultation) funding. This is not a sensible split of responsibilities. It is good practice for organisations that take decisions that give rise to an expenditure commitment to also be responsible for the expenditure. We need to find a better way to address this issue.

Whilst district councils are responsible for planning, the bill for major infrastructure falls at the door of the county council. That disconnect between planning and funding responsibility can be a real issue.

Potential brake on growth

The impact of previous funding reforms, such as the new homes bonus and business rate retention, where funding was allocated 80:20 in favour of districts as it was deemed they could encourage development, has also not helped. There is a real lack of alignment between service responsibility, decision-making and funding, which has the potential to be a brake on growth and/or make it very hard to ensure we have great new communities with good local facilities.

The final risk to mention is the inherent riskiness of property development (it is one of those sectors where there are often major failures). I suspect that none of us have adopted the right approach to development. Equally, what is required in Surrey will be quite different to what is needed in Cumbria. All I can say is that it is an area to keep a keen eye on with major risks that are growing. It is also one of those areas where liabilities will generally store up quietly on the balance sheet with the potential to have major consequences if they cannot be repaid.

In Leicestershire, we have invested in staff to manage the s106 process and established a “Growth Service” to try to reduce our financial risk and ensure we do end up with great new communities. The service seeks to co-ordinate our response at an early stage to district local plans, with a keen eye for financial risk and how we can ensure we have adequate funding for local infrastructure.

I will end by saying this is a complex area, and I have not covered all aspects such as Homes England and the Department for Transport, which also play a key role. And then there’s the long-awaited planning reform. Watch this space.

Chris Tambini is president of the Society of County Treasurers and director of corporate resources at Leicestershire County Council.

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