Money does possibly grow on TIFs

Tax increment finance schemes could be a way of kickstarting infrastructure builds. Ewan MacLeod explains what they involve ? Tax increment finance schemes (TIFs) could be piloted in the UK under plans by the chancellor of the exchequer ? TIFs have been widely used in the US and are a form of local tax reinvestment ? The government needs to legislate swiftly in order to enable TIFs to operate effectively in the UK The lack of liquidity in funding markets has had a profound effect on the delivery of private sector development. While the effects of the financial crisis have, to date, been felt less acutely in the public sector, it is unlikely that the level of funding available to local authorities will be sustained over the next few years. Increases to the national debt and cuts announced in the Budget will mean that local authorities will find it more difficult to fund large-scale infrastructure. Funding options Although new funding mechanisms, such as the community infrastructure levy and the business rate supplement, are being introduced, it is not anticipated that these will be sufficient to fund infrastructure in areas where it is most needed. Reports have indicated that as private sector developments slow down, local planning authority revenues from planning applications and planning gain contributions have fallen in the past year by up to £700m in Scotland alone. The UK figure will be even higher. Delivery of infrastructure remains critical to economic development. As conventional sources of funding dry up, the government needs to look at alternative ways of generating resources for projects. Alistair Darling hinted in the Budget at the introduction of tax increment financing (TIF) pilot schemes in the UK. The model has been used in the US for some time. In the UK developers have begun talks aimed at using TIFs, and local government minister John Healey has invited local authorities to submit nominations for a TIF pilot scheme to fund regeneration projects. Grosvenor and Hammerson are seeking to use TIFs to progress shopping centre developments in Sussex and South Yorkshire while TfL and the Treasury are considering the viability of TIFs to fund the extension of the Northern Line to Battersea Power Station. Interest in the introduction of TIFs is growing. A recent All Party Urban Development Group report called on the government to introduce them as a new model of development funding, and the British Property Federation supports TIFs as a model to maximise resources. TIFs are a form of local tax reinvestment. Under the scheme, anticipated future increases in tax revenues are used to finance the creation of infrastructure to serve the development that will generate those tax revenues. Local authorities will issue development bonds – essentially borrowing to invest in infrastructure to enable development within a specified area. Those borrowings are serviced by greater tax revenues arising from increases in the level of development and rising property values, resulting from the benefits that the new infrastructure brings to the area. Following the designation of accelerated development zones (ADZs), property taxes within those areas are divided into two categories; one based on the original value of the property before the infrastructure or TIF development provision, and the other on the increase in value associated with the development. The former tax stream is allocated in the usual way. The latter is paid to the local authority, where those funds are hypothecated to finance the bonds. As with any forward-funding model, the principal question to be addressed is the allocation of risk. If development bonds are issued and funds obtained on the basis of projected development rates that prove to be overly optimistic, a clear structure must be in place for allocating the risk of that income deficit between the local authority and fund provider. That risk structure must balance the cost of public borrowing (both in political and financial terms) against maintenance of the value of bonds to be issued in future TIF schemes. Legislation conferring tax-raising powers on local authorities will be required to operate TIFs. It will need to prescribe the circumstances in which TIFs could be used and representing a real opportunity for the development industry to shape the model to meet the demands of the UK market. Swift action At present, confidence levels in both the public and private sector are low. There is a danger that the current pessimism concerning public sector borrowing could lead local authorities to put this initiative at the bottom of the pile. The reality, however, is that without innovative thinking and bold decisions many important schemes across the country will sit mothballed for years to come because the private sector is unable to provide funding. Swift action from the government is now needed to put in place the legislation necessary to ensure that talking stops and buildings starts. Ewan MacLeod is a partner in the planning and environment group at Shepherd & Wedderburn