Legal Report - Careful plans needed on infrastructure tax deal

To the surprise of many, but the delight of most, the coalition government has announced its clear intention to introduce tax increment financing (TIF) to the UK.

Interest in TIF peaked at the time of Alistair Darling's April 2009 budget, when he promised that the government would work with interested local authorities and city-regions to assess the scope for accelerating development by allowing investment in infrastructure to be financed from the increased property tax base enabled by the existence of improved infrastructure.

And then, quick as a flash, not much happened. This latest announcement, however, has signalled to the market that the long wait for news on the fate of TIF is over.

The understated and cautious announcements of the former administration have been pushed aside by the unequivocal statement that TIF will go ahead and that legislation will be introduced to implement it here.

Historically, our model of paying for enabling infrastructure has been to use planning uplift. This has worked reasonably well until now.

Some cynics suggest that the policy announcement on TIF is a tool to mask the depth and severity of forthcoming cuts. It seems unlikely that this move, momentous as it is, could realistically offer much succour.

Recession reveals failures

The sharp fall in outturn valuations across the country, both for commercial and residential space, has weighed heavily on the financial viability of schemes. Indeed, financing of enabling infrastructure was an issue even before the current recession began to take its toll on delivery of major regeneration and housing projects.

The recession merely brought into sharp relief the reality that traditional methods of funding regeneration were simply not working as well as they might.

A number of other mechanisms beyond section 106 agreements are either in use or being trailed, including the community infrastructure levy, wider use of EU funding under the JESSICA programme and gap funding from other public sources.

These mechanisms are unlikely to be sufficient to deliver the level of infrastructure we require as we claw our way up the steeps sides of recession. Neither should they be seen as a method of using public sector funds to support schemes that are inherently unworkable.

As a concept, TIF is relatively straightforward. It involves capturing projected incremental tax revenues to forward fund the delivery of enabling infrastructure to unlock an otherwise stalled development.

It is attractive because the initial tax base is frozen and the rise in tax revenues is incremental rather than new. Hence the mantra "no new tax and no lost tax". Local authorities will eventually benefit from the incremental tax in addition to the frozen tax base, once the upfront cost of the infrastructure has been repaid.

Adjusting balance of power

By itself, TIF cannot fund the entirety of large-scale infrastructure projects, but it can help to bridge funding gaps. Nor can it or should it be used to turn an inherently unworkable sow's ear into a silk purse of a development.

However, the commitment to introduce TIF is radical because it involves a degree of devolution by central government to allow local authorities to borrow on the public sector balance sheet.

Many thought that a Conservative-led government, even with its commitment to localism, would be unwilling to allow the prospect of further public debt in this age of austerity.

If, as seems likely, the shape of TIF to come is some form of prudential borrowing, it is likely that government will expect funds to be recycled through the capital markets refinancing the debt. If so, we need well-structured projects to begin with to facilitate this later.

New legislation is to be introduced but no timing was given in the government's announcement. If we are ambitious, we might see legislation introduced this winter, active next summer and in force early in 2012. Perhaps a slightly slower timetable is more likely, seeing the provisions in force in 2013. This isn't quick, but there is plenty to do.

The property industry was not mentioned in the announcement, which referred only to local authorities. Clearly, any consultation must look to the property world and also to lenders for their views on what flexibility they require. Well-advised local authorities will be looking to twin-track their proposals sooner rather than later.

Cecily Davis is an engineering and construction partner at DLA Piper


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