The development of a new town in Battersea is one of London’s biggest urban projects in recent years. Principal and partner at SGS Economics and Planning Patrick Fensham reveals the controversy behind the project, such as its reduced affordable housing targets, and what lessons can be learned for similar Australian developments.

Mr Fensham visited London, New York and Buenos Aires in April 2015 supported by the company’s Partners Sabbatical program. While in London, he visited the renewal precinct being developed by the Battersea Power Station Development Company, and was given an overview of the development by Gordon Adams, the senior development planner.

In March 2015, an amended London Plan was released identifying the Vauxhall Nine Elms Battersea Opportunity Area as one of 38 “opportunity areas” that could help create 575,000 additional jobs and 303,000 additional homes.

Typically found on ex-industrial land, the OAs are sites that have considerable potential to transform the prospects of their subregions, if planned and developed in an integrated way with transport and community amenities.

The VNEBOA crosses two local government areas, the Labour-led borough of Lambeth and the Conservative-led borough of Wandsworth, and includes sites held by around 30 large landowners.

The Vauxhall Nine Elms Battersea Opportunity Area in context, from the GLA Framework Plan, March 2012

A formal governance arrangement has been established for the VNEBOA precinct. The “Nine Elms Vauxhall Partnership” is funded by the two councils and major land owners. This group plays a coordinating role only, with no statutory powers, but provides a useful arms-length perspective, thereby somewhat diluting private owner risks from more intense engagement with the political aspect of the development process.

The partnership is also meant to drive infrastructure negotiations with, for example, Transport for London and other government agencies. While perhaps less dynamic than it might be if it had “more teeth”, the partnership still plays an important mediating role.

Planning background and structure

The VNEBOA is being developed according to a planning framework, which includes the land use allocation and nominates social infrastructure sites and facilities, such as a new school, library, medical centre and “green links” through many of the sites to Vauxhall station. The facilities are generally to be provided by whomever is responsible for developing the sites on which they are identified (rather than being equally funded via collective arrangements or agreements).

For the Battersea Power Station Development Company (BPSDC, current owners of the long-closed but still-iconic power station, and a number of surrounding sites) the development of a comprehensive precinct-wide planning framework was fundamental to making the renewal of the power station a realistic development proposition.

Prior to the development of the VNEBOA Planning Framework and establishment of the Nine Elms Partnership there had been 30 years of failed development propositions for the power station site, following its 1983 decommissioning. A key reason was the lack of sufficient scale to underpin a comprehensive planning approach, including those that would justify the provision of public transport infrastructure. The cost of renewing the heritage building was also prohibitive in the absence of density and scale that could support an appropriate public transport solution.

Escalated London property sale prices have, of course, also contributed to making the proposition possible at this time.

Development plans

In total, the plans for the 205-hectare OA include the creation of up to 20,000 new dwellings and 25,000 jobs. The power station site will itself form the epicentre of the new town, and is expected to contain most of the commercial floorspace, including 300,000 square metres of offices, leisure and retail (about 100,000 square metres), and 3400 dwellings. It is intended that the focus of the office market will be on creative industries, recognising that this area is unlikely to compete with Canary Wharf and the City for financial and legal firms.

Reduced affordable housing targets

Fifteen per cent of the dwellings on the power station site will be classified as “affordable”. This is lower than aspirations on other major renewal sites in London (where targets of up to 35 per cent are typical), but the BPSDC successfully argued that, given the development yield, there was insufficient planning gain to fund a higher share of affordable housing, as well as the restoration of the power station (£100 million (AU$206 million)), new library and section 106 contributions towards public transport (£211m (AU$435m)).

The negotiations were based on the open book “viability assessments” that major developments are now required to complete when seeking to discount their affordable housing, public domain or transport contributions.

This system, based on disclosure of the development’s financial fundamentals, has been heavily criticised in a series of articles on London’s development in the Guardian newspaper. It is characterised as a “dark art” that is capable of being “fiddled” to conjure any outcome desired by the developer. Certainly the BPSDC has been assisted to reduce its affordable housing contribution through the viability assessment process, with the responsible authority (Wandsworth Council) opting for a greater balance of planning gain being allocated toward an effective public transport solution.

A new tube line, an extension of the underground’s Northern Line, and two new stations are to be provided in the OA. This significant public transport infrastructure is seen as underpinning the yield that the precinct (and power station site in particular) is to accommodate.

How the development is financed

An innovative financing and funding arrangement has also been developed. The GLA is financing the construction of the new line and stations with a £1 billion (AU$2 billion) loan. Funding is to be provided by:

  • Section 106 contributions and Community Infrastructure Levy payments, both paid by the developer
  • a Tax Increment Financing scheme, which will retain the future uplift in property rates associated with businesses in the precinct (for a period of 25 years) via a central government established Enterprise Zone (expected to take effect from April 2016).

Importantly, the central government is underwriting the GLA loan. This not only lowers the interest rate, but also the risk associated with the timing of the development roll-out, and the associated Section 106 and business rate increments to be recognised and managed.

While it may appear that the state is accepting the ultimate financial risk related to the provision of this public infrastructure, this is an appropriate risk allocation. The GLA and UK Government understand that London is the “Golden Goose” of the UK economy. As in Sydney, the property boom is underpinning a very healthy construction industry, which soaks up labour and has significant economic multipliers (that to some extent “ripple out” to the rest of the UK economy).

More significantly, new housing and commercial buildings in central London – on sites such as the VNEBOA – fuel the agglomeration economies and human capital development that yield higher per-unit productivity than anywhere else in the UK. The taxation revenues that flow as a consequence will be more than adequate to cover any risk the government accepts by underwriting the GLA’s loan.

Lessons for Australia

So, how does this renewal approach for the VNEBOA differ from recent experience in Australia? What lessons, if any, does this approach have for major renewal projects in Sydney and Melbourne, for example?

The first positive of this approach is the commitment to comprehensive and inclusive planmaking. The starting point was the existing plans of the two councils. The framework plan evolved from these, incorporating the perspectives of key stakeholders, including the transport and heritage agencies. The plan identifies appropriate locations within the OA for a library, primary school, health and police facilities, and is accompanied by a detailed and costed infrastructure program, with priorities agreed by the borough councils.

The councils and agencies contribute to the framework plan, thereby minimising the potential for downstream friction and providing clear directions. In Australia, councils have sometimes been “dealt out” of renewal precinct plan-making, and plans have been developed hastily with insufficient analysis and research, and without wider agency buy-in and commitments to amenities and services.

The second positive is the partnership approach to governance and implementation with the establishment of the Nine Elms Vauxhall Partnership. In the words of its website, the partnership is:

“co-chaired by the leaders of Wandsworth and Lambeth Council, it includes the area’s main developers and landowners, the Mayor of London, Transport for London and the Greater London Authority. It is responsible for setting and delivering the strategic vision for the area, including the £1 billion [AU$2 billion] infrastructure investment package”.

The partnership conducts an ongoing series of events and forums for community involvement, including exhibitions of development plans for particular sites. It also promotes the initiatives of the individual councils related to the development. Further, it provides a focus for mediation of potentially competing interests, notwithstanding its apparent modest “real” powers.

There is significant scope to make more use of these combined public and private “soft” governance arrangements in the Australian urban context to generate confidence in major renewal initiatives.

A third positive is the commitment to major public transport investment. The underground’s Northern line is to be extended to the site and will make the precinct on the Thames’ South Bank one of the most accessible parts of London. The transport will integrate the intense development precinct into Central London’s major concentrations of economic activity, thereby bestowing a major productivity advantage.

A fourth positive is the provision of affordable housing. As mentioned above the 35 per cent affordable housing target is unlikely to be achieved, at least on the Battersea Power Station site, and the Guardian criticises such outcomes, suggesting that on this and other London developments, foreign investment-driven “inflated land deals, with foreign buyers ready to pay over the odds, are spawning a new form of equally oversized and exclusive developments”. Another criticism – in this case directed at Lendlease’s Elephant and Castle project – is that the affordable housing may not end up being particularly affordable, at least compared to social housing rents and taking into account average incomes.

Clearly these criticisms should influence continual improvements in the London model, but Australian renewal projects are typically not at first base by comparison. A universal commitment to affordable housing in major Australian renewal projects must be established, and London’s approach offers valuable lessons.

A fifth positive is the early provision of public transport infrastructure and commitment to community facilities. The loan for the Northern Line extension (underwritten by the UK Government), and the commitment to infrastructure, locks in the transport solution and services ahead of development. The uplift generated by the plan and infrastructure creates the funding stream, in this case via the Section 106 contributions and CIL. This is a feature of the best renewal schemes: early public investment in infrastructure which underwrites future amenity and accessibility, “paid back” through explicit “value capture” or betterment mechanisms.

The recent experience in Australia, for example at Barangaroo, is for somewhat opaque infrastructure provision arrangements, with much of the responsibility for infrastructure left to the developer. This results in friction over ever-increasing yields, as the developer seeks an acceptable internal return on both the infrastructure and development costs.

The emerging weakness in the London funding model, utilised at the VNEBOA and elsewhere, is laid bare in the Guardian’s series of articles. While the Section 106 contributions and CIL provide a funding stream for infrastructure, there is insufficient clarity about the role of each mechanism, and there is too much discretion and negotiation in determining the level of contributions (particularly Section 106 obligations).

Oliver Wainwright’s article, which may have some journalistic license in the language, effectively highlights the general point relating to the weaknesses of a negotiated system of development contributions. Australia has at least some lessons for London and Britain in this regard. Most Australian jurisdictions have established statutory development-contribution arrangements that are particularly focused on “user pays” infrastructure required to enable development to proceed (for example, section 94 contributions in NSW, Infrastructure Charges in Queensland and Development Contributions in Victoria).

While subject to continual review and refinement, these systems are well established, and reflect an accepted understanding of the nexus between development and necessary precinct infrastructure. The contributions are explicit and pre-nominated in plans that identify the infrastructure to be funded.

Explicit contributions for infrastructure with wider public benefits are also emerging in Australian cities. Special Infrastructure Contributions in NSW and Growth Area Infrastructure Contributions in Victoria, part fund state infrastructure (such as major road and public transport infrastructure and sites for schools and health facilities), and now apply to greenfield development.

It would appear that London (and Britain) might profitably establish more transparent infrastructure funding arrangements along these lines. However, Australian cities would do well to “take the next step” – as London has – with appropriate value capture arrangements to, for example, provide a funding stream to at least partly cover the cost of major public transport infrastructure servicing renewal precincts where relevant.

State governments, and even the federal government if necessary, should support innovative funding approaches, for example via loan guarantees, as part of accelerating urban infrastructure provision in support of world class urban renewal.