Why social value matters in long-term regeneration

COMMENT: As a country we need regeneration projects because they help our cities become denser and better connected, increasing national productivity, and revitalising our smaller urban centres, bringing new life to tired town centres. But in our experience there simply aren’t enough of them being brought forward to satisfy the considerable demand that we and other long-term investors have, as we seek the secure cash flows to back the pensions of our policyholders over future decades. PIC is already a major investor in these types of projects, with more than £13bn invested in UK infrastructure. But we want to invest considerably more. Our industry is expected to have up to £200bn to invest in UK infrastructure over the next decade. In short, there is no shortage of domestic capital, backing UK pensions, to support viable projects. There just aren’t enough viable projects to invest in. There are long-term structural reasons and short-term market-specific reasons this is the case. One of the key structural reasons is that local authorities don’t have the capacity in their planning teams to manage development applications for significant projects. This has led to a much-reduced quantum of projects and by association, investment opportunities being brought forward and available to invest in. This is compounded by the shorter-term impact of overpriced asset prices, which will inevitably unwind over time. We have spent quite a lot of time thinking about how we can help local authorities bring forward more investible projects, including through the work of the Purposeful Finance Commission, which is chaired by PIC’s chief executive. Zero-sum game The PFC found two other areas where things could be improved, alongside increasing the capacity of local authority planning and regeneration teams. These are improving the grant bidding processes, so that councils don’t have to compete against each other in a zero-sum game and reforming the planning regime to make it smoother and more cohesive. The decline in the number of regeneration projects has been marked over the past decade. Only 21% of major planning applications are decided today within the statutory 13-week period, compared to 57% 10 years ago. This is in large part due to the pressures on local authority budgets, where they have been obliged by circumstance to focus their resources, and budgets, on children’s services and adult social care, which account for around two-thirds of local authority spend. Developers and investors are therefore focusing on those local authorities which are better resourced to deal with planning applications, which has created a situation where some local authorities have a virtuous circle of attracting investment and development, both reaping the benefits of the social value these developments create and allowing them to deepen their reputations as centres of planning excellence. This in turn attracts more investors and developers who know they have a fighting chance of having their plans reviewed in a reasonable timescale. However, many local authorities have a very different reality of a vicious cycle. Given they have limited resources to manage planning applications, investors and developers go elsewhere, deepening the crisis for them. Vicious cycle While the term “social value infrastructure” is increasingly used within the industry, there is no clear definition and there is a danger that it becomes a catch-all phrase used to market developments. In our view, this makes documenting and defining social value creation as a result of these projects a priority, and one that we have started to think about. The first part of the definition is social value produced as an outcome of the core business model. In PIC’s case this might mean funding social housing to provide the long-term cash flows we need to fulfil our purpose. When an investor like PIC assesses a potential investment, one of the key factors we look at is the sustainability characteristics of the project over the very long-term, as we seek to both make the development as attractive as possible to potential residents and manage potential political and regulatory challenges over future years. Were that development not to produce social value we might potentially suffer financial loss. There is clear evidence that where investments produce negative social outcomes for stakeholders, they are very likely to face challenge by socially minded politicians in future years, as can be seen with the whole ground rent debate. This sort of challenge would very likely impact the cashflows received off the back of these investments. By thinking about social value over the lifetime of a development, long-term investors are, as an outcome of their core business, aligning their interests with those of the local community, benefitting everyone. The second part, what we call cultural social value, might include things like links to local charities. Absolutely a good thing to do, but not essential from a core business perspective. Breaking down barriers Better documenting and defining social value creation through infrastructure and regeneration project investments will have practical applications. Helping local authorities break down the barriers to these projects coming forward is the real prize and that will, in part, require the arguments for them to be made in ways that non-specialists can easily grasp, such as the social value generated, rather than quoting broad economic measures. Some long-term investors, including in the public sector, and developers, are already starting to make these arguments. But if we are to help local authorities help themselves, we need to draw out and document more precisely the social value created by regeneration projects. This will help local authorities better understand that they can also help ease budgetary pressure in other areas, like education and healthcare. We all gain from this effort. Hayley Rees is managing director at PIC Capital