TIF of the iceberg

In the wake of a Budget that provided little detail for boosting regional growth across the sector, it’s worth taking a moment to reflect on the state of infrastructure finance across the UK. If we accept that there is a range of financing options open to central and local government then we need to consider how, on a practical level, they can work in the best interests of the country.

As the Battersea Nine Elms development stakes its claim to be London’s hot new ticket, tax-increment financing (TIF) – funding a development through borrowing against future growth in local business rates arising from it – has come roaring back into view after a long absence. Now that the Greater London Authority has given its approval to fund the project using TIF, it appears that the mechanism itself is being taken seriously once again. But in a sector that lacks clarity from the government, it’s not all plain sailing, and confusion continues on how best to unlock investment in construction. So what’s the current state of play across the sector, and, what can be done to make the most of the various funding options on offer?

Will the final regional funding pot be anywhere near Heseltine’s demand for up to £70bn, or could it be substantially less?

While past attempts to fuel regional growth have met with mixed success, there is a healthy precedent for government-led intervention in the regions in a bid to serve the national interest. Development corporations, the legacy of the eighties Thatcher/Heseltine drive to boost investment in deprived areas, were a notable example of the pivotal role the government can play in providing the tools to jump-start local economies. In more recent years, Local Enterprise Partnerships (LEP) were launched with much fanfare in June 2010, intended to act as a touchstone for investment – 39 LEPs are operational to date.

So far, the economic impact of this approach has been difficult to assess. Few accurate metrics are available to gauge their effectiveness in attracting investment, or to assess whether LEP areas have been successful in steering funding to those areas that are most in need of it.

Baron Heseltine’s “No Stone Unturned in Pursuit of Growth” report, published in October 2012, calling for the transfer of funds from departmental budgets into a single source for regional funding is welcome, but the issue of allocation remains unclear. Will the final pot be anywhere near Heseltine’s demand for up to £70bn or could it be substantially less? Whatever the answer, if LEPs are to live up to their potential, greater transparency about the government’s intentions will be needed.

Regional Growth Funds are another example of where great strides could be taken to stimulate growth and unlock investment for those projects that, due to their small or medium scale, are often overlooked. Equipped with up to £2.6bn to spend between 2011 and 2016, of which £2.4bn has now been allocated, it is still difficult to judge how focused their effect has been on boosting local prosperity.

But for me the most interesting development in recent months has been that re-emergence of TIF on the funding agenda. With a short history of use on the New York subway system and a limited track record in underpinning UK infrastructure projects, until recently TIF appeared to have gone missing without trace. However, with the rise of the Nine Elms Enterprise Zone, the potential to use it more widely has opened up. Its chief advantage is that it can act as a targeted driver for localised growth, and Nine Elms is a great example of where local regeneration needs are being addressed through a combination of innovative thinking around funding and brave decisions by City Hall.

Outside the capital, as the High Speed 2 rail network development continues to rumble on, the new station hubs along the proposed route represent a rare opportunity to stimulate regional growth. “TIF zones” - areas that allow local authorities to finance essential infrastructure projects on generous terms – could be the way forward. By allowing local authorities to commission projects along the route, the government can tick off two key aims from its list of objectives: renewing the UK’s ailing infrastructure and boosting a still-faltering construction sector. With plans for how best to achieve the UK’s future prosperity being laid over the next decade, it’s essential that the Treasury is bold and grasps the nettle now to ensure that opportunities like this are not missed.

Some suggest that the best way to overcome the funding logjam is to end these schemes and start over, but for me it’s more a question of refocusing existing priorities on what is already available. A plan that is strategic, focused on outcomes and ensures funding goes where it is most needed is a prerequisite for future investment. By taking the right decisions now the Treasury can lay the groundwork for future prosperity, avoid widening the North/South divide and guarantee that the economy is reformed so that each of the UK’s regions benefits. Action must be taken now.

Stephen Beechey is group investment director and head of education for Wates