Nick Clegg was quite right yesterday when he said his announcement of new borrowing powers for councils would hardly make “the pulses race”. Lacking sex appeal, Tax Increment Financing (TIF), as the new freedom is called, is not the stuff of mainstream media. But as the Deputy Prime Minister pointed out, that doesn’t mean it isn’t important.
Under existing legislation, councils can borrow against their overall revenue stream, but this does not include business rates. TIF, which is widely used in the US, will enable councils to borrow against future additional uplift within their business rates base, with the finance used to fund key infrastructure and other capital projects.
Mr Clegg’s announcement is one of the biggest wins for local government in years. And it has taken years to get there. As Chris Murray, director of Core Cities testifies, the lobbying for TIF has been long and arduous, but with Clegg’s announcement he says he’s “over the moon”.
So what is Tif then? And what exactly makes it so, erm, Tif-tastic?
TIF was devised in the US, where it has been hugely popular with cities as a tool that has enabled them to tackle urban blight. The key benefit of the scheme is that it enables local authorities to raise finance to fund the critical infrastructure needed to get major regeneration schemes of the ground.
“We‘ve heard it will be 2013 or 2014 [before TIF is implemented]. And it will probably be targeted on particular areas and come with its own list of conditions. But it’s a great step towards giving cities the powers they need to generate economic growth and jobs.” Alexandra Jones, Centre for Cities chief executive
By borrowing against the future uplift in business rates predicted to arise from the scheme for which the infrastructure is needed, TIF is seen widely seen as a win win for business and councils – particularly when sources of private sector finance are scarce.
But it is not without its pitfalls, hence Treasury’s stubborn reluctance, only now overcome. Ray Mills, a partner at PricewaterhouseCoopers, and an expert on TIF, says Treasury has had a long-held resistance to tax mechanisms that involve moving taxation from one pocket to another.
But as revealed by LGC in July, Treasury had become convinced by arguments for TIF, with a Treasury source telling LGC that James Stewart, chief executive of Infrastructure UK, was “signed up” to TIF in principle, “so long as Treasury gets final approval on each project”.
Mr Mills says one of the key tests for any future TIF scheme will be to convince Treasury that the uplift in business rates predicted to be achieved through a development are “additional” – ie: that it is not simply businesses leaving one area to move into the new scheme and thereby taking their business rates out of one council’s coffers and into another’s.
In Treasury’s eyes this would quite rightly be seen as transference of tax, rather than a net uplift in the overall business rates pot, Mr Mills says. “Actually, to be honest there’s no such thing as pure additionality - but it has to be additional enough,” he says.
This will form an important part of the assessment of any scheme, Mr Mills says, along with a rigorous assessment of the return on investment. “They will look at how much private sector investment is involved; how much additional investment can be leveraged as well as the wider economic and social impact of the scheme, such as jobs and regeneration benefits,” he says.
Sharing the risk
The other critical issue will be the share of risk, with Treasury likely to favour schemes that transfer more risk onto the private sector. But Mr Murray says TIF should not be regarded as unusually risky and ministers should resist political pressure to impose restrictive limits on the scheme, such as a cap on the amount councils can borrow, which would only deaden its impact.
Instead he said Treasury should put in place a “sensible process that works for everyone” and base decisions on schemes on their merits. “It’s cities and businesses taking on the risk – they assess that risk and borrow what they are certain can be paid back. This is not borrowing to prop up failure but borrowing for investment and is the same kind of borrowing business does all the time,” he says.
But Mr Mills says it’s likely that in the first instance Treasury will place a cap on the borrowing limit, possibly around £500m. “They’re not going to go for a big kick off with public borrowing figures they way they are now. More likely it will be a gradual introduction, with a cap in place that is regularly reviewed and gradually extended as the public finances get on a firmer footing,” he says.
Last year, in a response to call for expressions of interest from the government, 82 local authorities submitted 124 proposals to pilot TIF schemes, including large scale schemes in Birmingham, Leeds and Sheffield, as well as in London, where the Mayor wants to use TIF to help catalyse a £600m extension of the Northern Line.
A £500m cap would of course hugely circumscribe the number of these schemes that could get the green light, but would still enable a small number of high profile schemes to go ahead.
For example, Leeds’ wants a TIF to focus on the Aire Valley regeneration scheme, a 400ha brownfield site earmarked for 8,000 homes and employment space. Leeds says the development needs around £250 million in infrastructure investment, but could raise an extra £900 million in business rates over 30 years, through which the initial £250m borrowing would be paid back.
Elsewhere, Greater Birmingham has three proposals: a tram scheme between Wednesbury, Brierley Hill and Stourbridge; a public transport interchange in Wolverhampton; and the regeneration of the site of the former MG Rover car factory in Longbridge.
The council has identified a £318 million funding gap across the three projects, which could be filled through TIF borrowing. The council says that infrastructure investment could “unlock significant commercial and residential development … sufficient to repay the debt”.
Birmingham Council leader Mike Whitby was understandably delighted with Mr Clegg’s announcement. He said Birmingham’s TIF proposals “demonstrate that there could be a huge impact in terms of job creation and economic output – unleashing our capacity to become true drivers of the UK Growth Agenda.”
“We urge the government to allow Birmingham to use its expertise, influence and proven track record for innovation to put the theory into practice as a pilot scheme for the rest of the country,” he said.
But Mr Murray and Mr Mills are urging the government to now go beyond pilots and implement a full programme. Mr Mills says the commitment to introduce legislation is a step beyond the previous government’s offer of a £120m TIF pilot programme. “That was a bit of a fudge really,” Mr Mill says. “What we hope we now have is a full implementation.”
Alexandra Jones, chief executive of Centre for Cities, a think tank is more cautious, but no less enthusaistic. She says TIF “won’t come in immediately” as tackling the deficit is the first priority, but nonethless it is an important annoucement. “We‘ve heard it will be 2013 or 2014 [before its implemented]. And it will probably be targeted on particular areas and come with its own list of conditions. But it’s a great step towards giving cities the powers they need to generate economic growth and jobs,” she says.
But for now we will have to wait for further details on the government’s thinking on TIF to be published alongside the Comprehensive Spending Review in October.
TIF-tastic! Reaction from around the sector
Mr Clegg’s announcement to legislate for Tax Increment Financing comes after a long campaign by a wide range of business and industry groups, think tanks and local authorities, for the introduction of TIF in the UK. Here is some of the reaction across the sector:
Baroness Margaret Eaton, chairman of the LGA, said: “It is good news the Government has listened to the calls from local government for the power to turn local tax revenue into investment that will keep our roads free from potholes, fund better public transport and make sure schools and community centres do not crumble. This is a recognition that local investment creates economic growth, and it recreates long-abolished incentives for councils to invest in projects to promote local jobs and businesses.”
Alexandra Jones, chief executive Centre for Cities, said: “We’ve been arguing that, without devolving funding and powers as well as responsibilities to cities, they cannot fulfil their potential to drive economic growth. That is precisely what tax increment financing will allow: English councils to finance their own essential infrastructure, based on the needs and potential of their local economy.”
Liz Peace, chief executive of British Property Federation, said: “We are delighted that government has taken such a far-sighted step to ensure that new infrastructure – which will be vital to rebuild the UK economy – can be delivered, even at a time when public funding is scarce.”
Sarah Whitney, head of government and infrastructure at CB Richard Ellis, said: “The property industry and local government representatives have been campaigning on Tifs for some time, so it is such welcome news that the Government has chosen to back this valuable mechanism for bringing forward major new development.”
Matthew Farrow, CBI head of energy, transport and planning policy, said: “We welcome the Government’s announcement … As we highlighted in our submission ahead of the Government’s spending review, Tif should be considered as a way of encouraging private-sector investment in infrastructure, especially at a time of constrained public sector funds.”
John Beresford, development director at property firm Grainger, welcomed the announcement but warned that without planning reform TIF way have a limited impact: “While we very much welcome TIF as a new vehicle to stimulate regeneration and investment, we urge the coalition to focus the same effort on fixing the planning system, which is currently in a chaotic state. Without a working planning system, TIFs will have a very difficult time supporting economic growth.”
Tom Foulkes, Institution of Civil Engineers director general, said: “Government estimates that £40-50bn per annum will need to be channeled into UK infrastructure so the need to unlock a multiplicity of funding sources to raise sufficient capital is becoming ever more pressing. [TIF] is to be welcomed - it rightly recognises infrastructure as a longer term driver of economic growth and could prove a success in the UK as it has in a number of US cities. But it is unclear at this stage just how closely the treasury will control the local authority’s ability to use the funds.
“The greatest beneficiaries may be areas that are already prosperous as the increase in business rates is more likely to materialise. Less prosperous areas will present a higher risk yet it is often these areas that are most in need of new infrastructure to boost the local economy and create new jobs. If we are to rebalance the economy, funds need to be available for schemes that can help regenerate the areas that need it most.”