TIF is about more than just bonds
You provided further coverage of tax increment finance schemes, with the usual contention that these require local councils to raise infrastructure capital by issuing some form of municipal bond, which would be serviced by future business rate revenue (11 July, p88).
However, this isn’t the only way to raise TIF capital.
Equally common is the “pay-as-you-go developer fund” model, in which the developer provides the capital and gets the benefit of increment business rate revenue when the development is complete.
There are many who seriously doubt, in the current climate, the prospect of any local council prudently and successfully issuing TIF municipal bonds. The first major challenge is servicing upfront capital infrastructure expenditure with future business rate revenue from speculative development taken by uncertain occupiers.
The obvious answer is for authorities initially to guarantee the revenue. But the expectation that we will be readily able to add further to the public sector borrowing account seems unrealistic – particularly with the new international financial reporting standards that appear to rule out the previous “off balance sheet” vehicles.
Even with a public sector guarantee, the bonds (effectively being development finance) would be costly, complex and cumbersome. This is why one questions the purpose of the bond if it does lie on the public sector balance sheet. It would be cheaper, quicker and simpler to use the current borrowing resource for councils: the Public Loan Works Board – the very vehicle that killed off the UK municipal bond market 30 years ago.
But even setting aside these issues, liquidity in the large US municipal bond markets has substantially diminished, with questions over the monoline insurers which guaranteed the bonds. US authorities are now facing challenges in rolling over existing bonds as they mature.
In short, debt capital is both expensive and in short supply. Investment equity, on the other hand, is demonstrably available at the right pricing.
It seems obvious that real progress with TIF pilot projects will only come with “shovel-ready” schemes capable of securing equity investment capital for the entire development cost.
Hence, for example, Grosvenor is not, as you report (11 July, p79), looking for a “US TIF-style funding model that would allow local authorities to sell bonds” at Crawley.
Crawley council, with Grosvenor’s strong support, made a pilot TIF submission based on the pay-as-you-go developer fund model.
Alistair Parker, development partner, Cushman & Wakefield, 43-45 Portman Square, W1A 3BG
