The financial crisis has led to a lack of liquidity in the funding market and increasing levels of national debt are likely to mean that local authorities will find it more and more difficult to fund large-scale infrastructure projects. In addition, there is substantial political opposition to the use of existing funding mechanisms that utilise privately procured finance such as PPP and PFI. The Scottish Government’s replacement for PFI, the Scottish Futures Trust, has also not yet been fully developed, leaving a gap in the market.
All of this has led to local authorities, and indeed private sector lenders, looking for alternative ways to fund infrastructure projects.
Taxation Increment Financing (TIF) may just be the answer that everyone is looking for. Although new to the UK, TIF is not a new concept. It has been used successfully in the US for some time – but what is it and how could it be used successfully here?
Simply put, TIF is a mechanism that allows a local authority to utilise future increases in tax revenues to finance current improvements that are expected to generate those increased revenues. One example could be an increase in the business rates received as a result of a new commercial development.
TIFs would operate within an area known as an Accelerated Development Zone (ADZ) or TIF zone. This would be a defined area in which there is a requirement for regeneration and infrastructure. Within that ADZ the authority would identify the relevant infrastructure and development required in order to regenerate that area and calculate the amount of increased taxation revenue that would be generated as a result of that development.
These increases in taxation would be retained by the local authority, rather than going to central government, and would be used to raise the initial finance for the development or infrastructure required. The retained taxation revenues generated are then in turn used to repay the funding raised over a fixed period of time.
Could this new funding tool work in Scotland?
The answer is yes; however, there are some small hurdles to overcome.
Firstly, there would need to be agreement at a central and local government level that the increase in taxation revenue attributable to the project could be retained (or ring-fenced when pooled and reallocated to the local authority in question) for a qualifying project. The criteria for a qualifying project would need to be clearly defined and open to all authorities.
Secondly, there would need to be agreement that the revenues retained or reallocated would be in addition to the existing funding provided to the council under any single outcome agreements and under the Local Government Concordat as, if this was not the case, the council may simply be trading one benefit for another.
I understand the Scottish Government and the Scottish Futures Trust have, however, indicated that they are keen to look at the possibility of utilising TIFs in Scotland to fund infrastructure projects and it is likely therefore that if there were a suitable pathfinder project, agreement on these issues (including short enabling legislation, if required) could probably be reached quite quickly.
Euan Murray is a solicitor specialising in projects law at leading UK law firm Shepherd and Wedderburn LLP.