'Urban Renaissance' Held Back By Funding Obstacles

London Assembly has called upon the UK Government to show more determination in assisting public and private sector organisations to find new ways of funding large-scale regeneration projects.

As CIOB International said in its October edition last year, London is in search of new funding sources to build its expanding transport infrastructure of which Crossrail is only one though a major element.

The question has become so urgent that the London Assembly has called upon the UK Government to show more determination in assisting public and private sector organisations to find new ways of funding large-scale regeneration projects in the capital.

The London Assembly is an elected body of 25 members whose function is defined as holding the Mayor of London to account.

It is a group of politicians experienced in the ways of local and central government, led by Baroness Hamwee of the Liberal Democrats, who speaks for her party in the House of Lords on issues such as planning, local government and the environment, shadowing the Office of the Deputy Prime Minister John Prescott.

After hearing evidence from expert opinion in the fields of transport and the urban environment, the Assembly's Economic and Social Development Committee came to the conclusion that there is a failure of will at government level to approve innovative funding mechanisms such as tax increment finance which is being used successfully in a number of American cities.

Chicago is one of these.

According to the city's Neighbourhood Capital Budget Group, tax increment financing has become Mayor Daley's favourite economic development tool.

It seems it will be some time before it will be regarded likewise by the Mayor of London.

TIF allows Chicago to reinvest property tax dollars generated from designated districts over a 23-year period.

There are 130 TIF districts in Chicago, comprising nearly 30 per cent of the city's land area.

It is not as though tax increment finance, the case for which has been ably argued by London's Transport Commissioner, Robert Kiley, has been produced as it were out of the hat.

Transport for London is understood to have developed its own version of TIF adapted to working alongside the Uniform Business Rate used in the U.K.

to raise revenue from business premises.

The Urban Task Force set up by the Deputy Prime Minister in 1998 and led by Lord Rogers of Riverside was on its visit to the United States impressed by what it described in its report as revenue retention schemes operating in a number of American cities in partnership with the Federal Government.

Five years ago the task force spoke of TIF as a possible method for encouraging reinvestment in the built environment and one of the financial tools that might be used to boost the urban renaissance.

Business rate growth capped by inflation index.

Revenue retention by local authorities in the United Kingdom has not however had much appeal for Her Majesty's Treasury.

In his contribution to the London Assembly's scrutiny of investment in regeneration, Shashi Verma, corporate finance principal with Transport for London, pointed out that tax increment finance allows city authorities to earmark tax revenues for repaying debt issued to fund development activity.

As he said, the most critical factor influencing the funding and financing of regeneration or development projects in the United Kingdom relates to the peculiarities of the system of business rates which supply part of local government revenue.

These peculiarities make it difficult and unattractive to have any form of innovative funding mechanisms.

Unlike almost any other tax, he said, business rates are subject to capping related to the rise in the retail price index.

This means that the revenue collected from this source all over England is allowed to increase year on year only by the percentage increase in inflation.

There is no scope here for anything as innovative as incremental financing.

In fact, any increment in income from the business rate above the rate of inflation is effectively ruled out.

Thus the uplift in property values generated by infrastructure improvements makes no direct contribution to the revenues derived by the cities promoting them.

That of course runs counter to the principle of tax increment finance.

The American cities do not pretend that TIF is somehow a cure-all for all economic development problems.

But through its agency Chicago has since 1992 been able to invest over $7 billion in neighbourhood improvements as well as public facilities like branch libraries which in London are being closed as the borough councils cut back expenditure against threats of council tax capping.

Revenue potential from captured value gains The London Development Agency's submission to the Assembly on financing urban regeneration gave a clear outline of the important principle underlying tax increment finance, which it appears is blocked by the existing rating system in the United Kingdom.

"TIF works by capturing part of the gain generated by rising land values in the immediate vicinity of a major infrastructure development.

"A levy of this kind would potentially produce a revenue stream of millions of pounds a year from, say, a major railway development.

One estimate of the existing capital value of properties that would be likely to benefit from Crossrail has been put at ?70 billion, inferred from existing rateable values of £5.4 billion.

Hillier Parker estimated that the overall full yield (at today's prices) from a relatively modest levy might - over time - be £1.4 billion.

"Despite some limitations, there is a clear case for a TIF mechanism as a way of allowing London to undertake projects that would allow it to develop.

Regeneration proposals involving infrastructure within the Thames Gateway would, in a number of cases, be easier to justify if the beneficiaries from redevelopment were to contribute to capital costs." LDA also pointed out that it would be possible for the Agency and the London boroughs to create joint ventures with developers, offering participants the opportunity to benefit from the rising values of land, against which it would be possible to borrow.

"In this way, value can be captured to facilitate new infrastructure within or near a development.

The bigger the venture, the greater the possible value capture." That certainly suggests great potential for megaprojects like Crossrail.

On the basis that the maximum the Treasury would consider as a contribution to funding Crossrail is in the region of £2.5 billion - of similar order to the grant made towards building the Channel Tunnel Rail Link - that would leave at least £7.5 billion to find.

The current pressure for rail transport funding is such that the Government would surely welcome proposals which suggest innovative sources of funding which relate more closely to the benefits that business and industry derive from these important developments.

'Getting government round obstacles of its own making'.

The current stagnation in policies for financing the infrastructure is not for want of sound advice.

As LDA said, the Corporation of London, the RICS, Transport for London and many others have published research arguing new forms of revenue stream and new lines of borrowing.

"Virtually all these reports boil down to creative efforts to help central government find ways to get round obstacles it has put in its own way." Last October, commenting on the findings of the RICS Policy Unit on funding the infrastructure, CIOB International observed that neither from the Office of the Deputy Prime Minister nor from the Department for Transport has there come a word so far on the practical issues raised by these innovative concepts.

Indeed, most if not all of these concepts were comprehensively covered in the Government's own Urban Renaissance report of 1999.

The situation today is no different from what it was last October - still not a word.

It might be a bit much to expect movement from any government over a period as short as five months - but five years?.

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