Incentives, bribes, fracking and housing

The prospect of local communities gaining an estimated ‘£10 million per wellhead’ if they approve plans for fracking in their area got me thinking about the role that incentives (or bribes) can or should play in countering opposition to controversial development.

As far as fracking goes, local authorities will be able to keep all of the business rates they collect from shale gas schemes rather than having to give half back to central government. The government estimates that the concession could be worth up to £1.7 million a year for each fracking site approved.

On top of that, energy companies have pledged to give local communities £100,000 for test drilling and a further 1 per cent of revenues if shale is discovered. The double payment seems calculated to forestall opposition to an industry that could potentially affect every county in England except Cornwall but which ministers believe is vital to the future of the economy.

However, that seems not to be enough for many councils and MPs and an all-party group in the North West is demanding that the Treasury give up a share of its tax revenue so that even more of the profits go local.

I’m interested here not so much in the pros and cons of fracking (and I do live in Cornwall) as in the wider relevance of these sort of incentives.

My attention was caught by this piece by Paul Goodman of Conservative Home arguing that the same principles could be applied to housebuilding. He points out that Alex Morton suggested something very similar in his work for Policy Exchange. Planning would automatically be granted for a scheme unless local homeowners ‘directly impacted’ by it voted against in a ballot. However, developers would be free to offer incentives to those balloted either through community amenities or direct cash transfers. With safeguards for protected undeveloped land, he argued that this would ‘change the antagonistic planning system into one that favours win-win solutions and should mean more new homes, more stable house prices, and greater ownership over time.’ Policy Exchange is already highly influential but Alex Morton has just become special adviser on housing and planning at 10 Downing Street.

Powerful new incentive

And that means some of the arguments against are similar too. First, look what has happened with the New Homes Bonus so far. Billed as a ‘powerful new incentive’ for councils to approve new homes, it’s been heavily criticised by both the National Audit Office (NAO) and the Public Accounts Committee (PAC) The NAO found embarrassing errors and inadequate monitoring while the PAC said it was delivering the most money to areas where housing need is lowest. Because of the way the bonus interacts with the local government finance system, it is widely seen as a mechanism for transferring funding from deprived areas of the north to affluent areas of the south for homes that would have been built anyway. Some £7.5 billion is due to be distributed to councils by 2018/19 but there seems to be little evidence so far that it is working as an incentive for additional new homes.

Back with fracking, local authorities complain that the business rates incentive is inadequate and it’s not hard to see that councils that gain now could lose out on future funding in other areas given the complexities of local government finance.

Second, consider the wider arguments. New sources of energy and new homes are national priorities that have to be weighed against local wishes. The political concern from nervous MPs in affected areas seems to be that by the time the money has been distributed between the country, district and parish councils, too little will be left to appease the people most directly affected or to influence the votes of the councillors who represent them. That’s why local authorities and Conservative backbenchers are pressing for a much higher share of the fracking revenues (the LGA claims that the international norm is 5-10 per cent, not the 1 per cent on offer).

However, if financial incentives do have an impact, then logically it will be highest in the most deprived communities and lowest in the most affluent ones. House prices may effectively determine planning outcomes. Is that an acceptable outcome for public policy (though it could be argued this is what already happens under a planning system that can give undue weight to the views of well-heeled objectors)? Who should have a say in these decisions and on what basis? Is the main impact social and environmental or financial, and does that make a difference to whose views should count? And what say should go to the potential beneficiaries of the development who may not live nearby (the badly housed, the fuel poor and people looking for a job)?

Property rights

For Alex Morton, the answer seems clear. Under his proposal: ‘Those who lose views should be compensated. It is simply not fair or respectful of property rights to do anything else,’ he said in October. Yet if the property rights of homeowners extend to views where does this leave tenants? And if the view outside the home is sacrosanct, why does the opposite seem to apply when it comes to fracking and the rights to what lies underneath the home. Landowners have rushed to register their feudal mineral rights while the government has changed the law so that shale companies no longer have to inform owners directly if they want to frack the shale beneath your home. In the United States, these two strands have even come together, with buyers of new homes discovering that developers have held on to the rights to everything underneath them.

In the case of fracking, why should so much of the money go to local communities when most of the country will be affected? As the SNP never ceases to remind us, the benefits of North Sea Oil went to the UK Treasury rather than to Scotland (though the people of the Shetlands did benefit directly from Sullom Voe). As Aditya Chakrabortty recalls in The Guardian this week, North Sea Oil provides an unhappy precedent for the UK squandering a national asset. The Norwegians set up a sovereign wealth fund instead that is now worth £100,000 per citizen. Should we be looking at that sort of model for fracking and would support for it rise or fall as a result?

Crowding out

That brings me to a third area of debate: the evidence that financial incentives actually work. This is certainly the assumption that underpins their use in this context and the widespread adoption of markets and quasi-markets across swathes of social policy. Create the right incentives, the argument goes, and customers will maximise their utility and society will get the most efficient solution.

The philosophical and moral questions here (posed most recently by Michael Sandel in What Money Can’t Buy: the Moral Limits of Markets) are whether market solutions can corrupt or crowd out other non-market social norms. Arguably they are what lie behind the concern about ‘bribes’ and whether communities will be able to trust local authorities to take planning decisions and enforce regulations impartially when they also stand to gain so much financially. As for central government, financial considerations already seem to have influenced its stance on a new European directive.

In a famous study in Switzerland, researchers asked people if they would support a nuclear waste site in their area if parliament said that it was the best place for it: 51 per cent said yes and 44 per cent no. They then asked the same question but told them that parliament had decided on substantial compensation for the host community. Support fell to just 25 per cent when the compensation was offered. The amount of compensation had no significant effect on acceptance and about a quarter of respondents seemed to reject the facility simply because financial compensation was attached.

Many other examples of these crowding effects have been found, including volunteers who worked less hard when offered financial compensation and parents who became more likely to drop their kids off late for day care when fines were imposed. At issue here is whether people are motivated by external factors such as money (as in traditional economics) or by other factors that come from within. Financial incentives may work in some circumstances but in others monetary incentives or punishments designed as extrinsic motivation can crowd out intrinsic motivation such as a sense of civic duty or volunteering or care for the environment. Equally, it may be possible to design policies to crowd in these motivations: for example, revenue from fracking could be used to fund energy efficiency measures.

This evidence from behavioural economics also begs the question of whether the fracking plans have been referred to the Cabinet Office’s Behavioural Insights Team or Nudge Unit (we know from the NAO report that the New Homes Bonus was not). Are these issues being sufficiently considered in what looks like a movement towards the greater use of financial incentives as a way of smoothing the path for controversial development? The precise considerations that arise may well depend on the form that the incentives take and whether they go directly to local people or indirectly via local authorities. With payments for fracking, the concern may be the impact on local democracy and environmental protection, with the proposal on ballots on housing developments it may be more about who has the vote and who should benefit.

However, just at the point when polling evidence suggests (tentatively) that concern about the housing crisis is slowly turning public opinion against the nimbys, is this the time to be paying them off instead?