Examination of Witnesses (Questions 260
- 279)
WEDNESDAY 15 MARCH 2000
MR C BROWN
AND MR
K MURRAY
260. What do you think the Government could
do now to try to hold or stabilise the situation, otherwise people
you need will be somewhere else?
(Mr Brown) Yes. They have to move very quickly. First
of all, they have to be very clear that there will be an effective
replacement for gap funding. Secondly, as an interim measure,
they need to inject money into the RDAs to allow the RDAs to undertake
direct development for an interim period before a private sector—
261. What kind of money? What kind of interim
period?
(Mr Brown) We are probably talking of a couple of
years and we are probably talking of anywhere between £500
and £700 million over that two-year period to replace the
private finance which will not be able to be injected into those
areas.
262. You are saying Government could do something.
Do you have any particular proposals which you would like to mention,
irrespective of my previous question because we are talking about
an emergency operation in a crisis. If you were able to stand
back a bit, what would you say would be the best design?
(Mr Brown) There are two issues: there is a medium-term
approach and a long-term approach. The long-term approach is that
we try to renegotiate the Treaty of Rome and get back to gap funding.
Chairman
263. Do think that is easy?
(Mr Brown) I said the long-term approach. Countries
all over Europe were coming here to understand our system and
saying it was a really good system and now Europe has got rid
of it. That is for the long term. In the medium term there are
several things we could do, none of which is as good as gap funding.
The public sector could, for example, and I believe this would
be acceptable to the Commission, the RDAs offer sites to the private
sector on a competitive basis, advertised in the European Journal,
seeking regeneration outcomes and asking for bids. Those bids
would almost invariably be for the RDA to give money to the private
sector to allow those schemes to be brought forward. That would
be one example. Another example might be the public sector packaging
a valuable site with a difficult urban regeneration site as a
package to the private sector and saying they have to produce
the regeneration but they will be given this site as well.
264. What about the private finance initiative
schemes? How successfully do you think they might be able to be
used?
(Mr Brown) Some interesting models are coming forward
in housing at the moment; one of which I am particularly aware
is Plymouth Grove in Manchester which is primarily a public sector
housing PFI but it is very much a regeneration scheme. There are
several pilots there. At the moment I would be suggesting we look
at some pilots. There is another area we need to pilot which is
area regeneration, similar sorts of projects to ones which have
been getting single regeneration budget awards. If you think about
the characteristics of PFI, it tends to be long term, about provision
of services and it is using private finance to replace public
finance and also transferring risk to the private sector. Those
are all characteristics of urban regeneration projects.
265. They are not taking too much risk, are
they? They still want all the white-collar work done beforehand.
It is not totally a risk to them, is it? They would not accept
that. Do you think we could get improvements?
(Mr Brown) The private sector will always be weighing
up risk and reward. At the moment in regeneration, I would be
going for a pilot to see whether it works because I am not totally
confident that it will work and PFI has a bad reputation in other
areas at the moment because it takes so long and the private sector
is starting to say they cannot afford this process which takes
two years before they start.
Christine Butler: How can we make it happen
in a year?
Mr Blunt
266. You say the solution is an amendment to
the Treaty. There is an intergovernmental conference going on
now which gives you the opportunity. Has the Royal Institution
identified exactly what Treaty amendment they want and have they
asked the Government to negotiate it?
(Mr Brown) We have certainly had discussions with
DETR officials about the possibility of changing the Treaty of
Rome. I do not believe they see that as an issue for this intergovernmental
conference. Their view is that it will take a period of time—two
years was the estimate I was given.
267. You have been told that the Foreign Office
are not even going to try.
(Mr Brown) No, this was a DETR discussion, not a discussion
with the Foreign Office. I have not had any other discussions.
Chairman
268. What you are really saying is that one
way and another we are not going to get change in this for at
least two years, so we are going to have this hole—if you
can have a hole in gap funding—for at least two years, are
we not?
(Mr Brown) Yes. I believe that will be disastrous
for urban regeneration in this country.
Mrs Dunwoody
269. Are you saying that the civil servants
agreed with you but said there is no point in doing it now? Or
are you saying they held up their hands in horror and said, "Please
go away, we have enough problems without this"?
(Mr Brown) No, they agreed with us and they felt that
the timescale to get Treaty amendments through Europe was two
years not two months.
270. They may be talking 20 years but they agreed
with you in principle.
(Mr Brown) Yes.
Mr Blunt
271. The next possibility might be in five or
ten years' time.
(Mr Brown) I am not familiar with the workings of
changes to the Treaty of Rome.
Mr Gray
272. You talked about political incentives to
encourage regeneration, one of which, if we are to believe what
Lord Rogers says, may require equal renegotiation of the Treaty
of Rome, namely the equalisation of VAT on new build and on conversions
at zero, according to Lord Rogers, or, if you are to believe the
Sunday newspapers, at five per cent if you are John Prescott.
If it were at five per cent or ten per cent or 15 per cent, what
effect would that have on regeneration and on new build?
(Mr Brown) The first issue is about the phasing over
which you bring this in. Most house builders have three-year land
banks and it would be appropriate to bring something like that
in over a period of say three years. I see no particular reason
for directly penalising house builders, which is what would happen
if they were sitting holding the land. Longer term, having brought
it in, in greenfield situations the impact would be primarily
on reduction in land value to the original owner. What happens
at the moment is that agricultural land is at £5,000 per
acre, let us say, housing land is, let us say, at £500,000
per acre. The gap is so great that the increase in VAT would simply
reduce the size of that gap. The more difficult issue is in urban
regeneration where the baseline values tend to be rather higher
and the development land values tend to be lower, so the gap between
the two is much smaller. I probably favour introducing the equalisation
at a rather higher rate of tax but only on the basis that the
extra revenue raised was put back into urban regeneration as part
of a wider package of regeneration initiatives.
273. If it were put back into urban regeneration,
that would not be helping the people the price of whose houses
may well be going up by five or ten per cent as a result of VAT.
People buying a house in a suburban development, paying 10 per
cent more because of VAT, would not necessarily be all that cheerful
about the fact that an industry somewhere else was being regenerated
as a result.
(Mr Brown) I do not think the people would be paying
five or ten per cent more. It is highly unlikely that the increase
in VAT would just transfer into house prices. I would be surprised
if it were much more than about five or ten per cent of that increase;
it would not be noticeable. It would be gone in three months in
the present housing market.
274. I am surprised you say that because surely,
at least in the first three years, from the point of view of the
land bank, presumably you paid X to the land bank and therefore
you cannot add VAT to it without taking it out of your profitability.
Therefore surely, certainly in the first three years, there is
a strong likelihood that the VAT would be added to the price of
the newly built house. I cannot see you going to the Annual General
Meeting and saying, "Sorry shareholders, there's no dividend
this year because we are paying VAT which we did not pass onto
the purchasers".
(Mr Brown) That is why I am suggesting a phasing in.
275. You accept point one of the case. Then
point two, surely, because the house prices are rising so fast,
is that buyers will accept VAT?
(Mr Brown) You say the buyers will accept VAT. At
the same time I believe the landowners will accept VAT as well.
The question is the balance between the two. If the housing market
is rising at ten per cent and you put ten per cent on the cost
of the house, does that mean the difference is going to the landowner
or does that mean the purchaser will pay 20 per cent more? My
view is that the house market will just go up ten per cent or
a little bit more and the landowner will take the pain.
276. What do you think about two other possible
fiscal measures? One would be a tax on greenfield development.
Would that not lead simply to an incentive to build large and
more expensive houses on greenfield because the cost of the tax
would be lost in the higher price of the house? Item one. Item
two would be a vacant land tax which would be quite different
because it would apply obviously to brownfield sites more than
to greenfield sites.
(Mr Brown) On the greenfield land tax, I should certainly
be extremely nervous of any tax which a local authority was levying
because I do think there is the danger of a local authority saying
they will get more revenue if they get more greenfield planning
permissions. On the brownfield side, one of my colleagues at the
RICS, Nigel Smith, has come up with what I think is quite a nice
idea for brownfield tax. The idea is that the owner of the land
assesses its value for taxation purposes and the tax rate will
be set at, say, ten per cent of whatever the capital value of
the land is. You may say that sounds crazy, because he will just
make it as low as possible, but the other side of that is that
the public sector would have the right to buy that piece of land
at whatever level it has been assessed at. That seems to be rather
a nice balance.
277. Would that valuation be made public?
(Mr Brown) Yes; it could be like a rating list.
Chairman
278. Is this phasing not going to distort the
market as it phases in? Is it not much better for the Chancellor
to say, "Tomorrow it's going up" or next week, rather
than to say it is either going to go up in stages or come down
in stages? That will tend to distort the market, will it not?
(Mr Brown) There is a danger of market distortion.
My own view would be that if you were setting the rate at six
per cent, if you added that at two per cent per annum, the distortion
effect would be relatively modest, lost in the general house inflation.
Mr Bill Olner
279. You say in your written evidence, and you
lay great stress on it, that tighter constraints should be placed
on greenfield and out-of-town development. Do you think this will
stimulate private sector development in towns or cities or will
the investment simply move into non-property sectors?
(Mr Brown) It is part of the wider package. We have
overdone out-of-town greenfield development over the last 20 years
or so. Looking into the future, even if we were to stop all new
greenfield planning permissions today, we would actually only
have quite a marginal effect on development over the next 30 years.
The statistic is 90 per cent of buildings in 30 years' time are
already with us. It is part of a wider package. The approach we
are seeing coming through in planning guidance at the moment,
of starting at the centre of urban areas, whether it is small
towns or big cities, seems to me quite a sensible way of doing
things. Let us use up what we have to start with before we get
onto the green fields.
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