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Shale gale keeps blowing

David Cameron has confirmed that the Government is ‘going all out for shale’, on a site visit in the Gainsborough Trough area of Lincolnshire, in which the BBC has announced that Total is investing around £12 million as the first oil major to commit to UK fracking.

Business Rates Boost

The Prime Minster has also confirmed that the Business Rates Retention scheme in force since April 2013 (which enables authorities to retain 50% of the uplift in business rates from development they authorise) will apply to shale projects at a full 100% rate.  The policy would implement one of the recommendations from the influential May 2013 Institute of Directors report on the economic benefits from shale development in the UK and barriers to delivering it.

shaleThe IoD report envisaged a potential £3.7bn investment in UK shale and the Government is now looking to use the Business Rates regime to channel some of this locally to overcome public resistance to fracking.

The benefits for a 12-well site could be worth up to £1.7 million to the local authority responsible for collecting rates – 140% of East Lindsey District Council’s  total Environment budget or 100% of its 2013-14 budget cuts

Critics will point to the reported cost of policing Cuadrilla’s Balcombe operations last summer and uncertainties about how (and when) rates valuations will take place.

Community Benefits Still in Doubt

The missing link in the community benefits remains the lack of a clear mechanism for getting these resources down to the level where they will deliver tangible benefits and persuade local people that development can bring worthwhile investment – see our blogs on Community Interest Companies (CICs). Business Rates Retention will not benefit the (County) Minerals Planning Authorities who will determine fracking applications.  The clouding of roles feared by some is therefore unlikely to arise in practice but the money will not be a ‘Local Finance Consideration‘ for planning approval purposes unless the local authority commits itself to spending the retained rates on something with a clear planning relationship to the fracking project.

Where decision-making is co-ordinated in this way, there are some real benefits to weigh in the planning balance. It would be possible for the Government to structure the Business Rates Retention amendments so that the extra 50% (or a part of it) must be passed to a CIC or Neighbourhood Planning body (i.e. a Parish Council or Neighbourhood Forum).

Community Funds

The UK Onshore Operators’ Group has now launched its proposals for securing community benefits, which will rely on the national charitable trust UK Community Foundations to deliver £100,000 for local benefits where planning consent is granted and exploratory drilling starts.  Local priorities will be set following consultation and a local panel will be appointed to decide how the funds are spent.  It is good to see the model for local benefits being worked up, but it remains to be seen how the 1% of profits promised by the UKOOG and Government will be calculated and paid and whether the use of a national charity structure will give the level of flexibility that CICs could offer, in using community benefits to go beyond mitigation projects to wider not-for-profit and social enterprise roles.

A stake in hearts and minds

Achieving local support for major projects is a challenge.  Financial commitments under Section 106 TCPA 1990 are little help in securing support – where they are a ‘reason for approval’, they cannot not go beyond what is necessary to make the scheme acceptable.  As such, they are rarely a benefit on their own.  Designing in benefits, then securing them by condition or S106, is an easier win. 

Community Benefits

But controversial schemes often need more to persuade local communities that they will share in  benefits as well as impacts.  The Government is committed to the idea that ‘host’ communities should share in the benefits of major development to capture their support and this is being applied in several sectors:

  • Nuclear: the Business Rate Retention (BRR) allows local authorities to retain some or all of the business rates arising from new development, with special arrangements for new nuclear power stations involving up to £1,000 per generated MW over 40 years.
  • Renewables: the renewableUK Community Benefit Protocol proposes £1,000 per MW of installed capacity, or equivalent benefits-in-kind, to be provided directly to host communities. 
  • Fracking: The UK Onshore Operators Group proposes £100,000 per fracked site and a 1% share of revenues if drilling succeeds.
  • Airports: it has been suggested that a community trust should be given part ownership of, and a share in the profits from, any third runway at Heathrow.

Finding the right vehicle

The easiest way to deal with these incentives would be a hypothecated tax collected locally and payable to eligible local bodies. For the time being, though, developers must structure their own deals. Finding representative bodies to receive funds and implement good works is often difficult. Dealing separately with numerous individuals is impracticable and unrepresentative. Existing groups may also be unsatisfactory proxies for the community as a whole (or their legal form may be such that they are not ideal recipients − even as trustees − of significant financial benefits) although this has worked successfully with regular payments being made by the operators of the London Eye being routed to the South Bank Employers Group.

We have addressed the scope for Community Interest Companies to do the job in our detailed e-bulletin.  CICs provide independent corporate governance, distinct both from individual residents and the authorities, and an “asset lock” and “community interest test” guaranteeing that resources are applied as intended.  By using a CIC in their operating arrangements, developers of contentious, revenue-generating infrastructure can make a credible argument outside the planning process about positive impacts.  They can also enhance their corporate social responsibility profile, whilst moving beyond debates with local authorities on benefits.  The use of CICs for wind farm projects  such as Fullabrook in Devon and Swinford in Leicestershire confirms their usefulness as an efficient and accountable channel for community benefit.  At Fullabrook, Devon Wind Power transferred £1 million to the CIC, and pays £100,000 each year that the wind farm generates power.

If the approach is developed on these major schemes then it may provide a better model for other development, moving the focus from addressing impacts at the start of the development process to finding ways to ensure that new development continues to contribute to the place in which it sits over the longer term.