Local models — Goodbye grant-dependency

1 — What are the big challenges facing the regeneration sector?

There is never enough money to go round – the perspectives (and all too often the politics) are too short term. The UK has a legacy of decades of disinvestment and a North-South divide that creates different problems in different places. That demands more flexibility and careful finessing of regeneration tools and incentives. The challenge is to secure the long-term funding in the enabling infrastructure, but it must be localised and adaptable.

That means trusting local partnerships to do more, getting the incentives right, and moving away from the old grant-dependency culture. It also means joining up policies and programmes on an area basis and creating the confidence and certainty that investors need. Of course, it is a moveable feast. For example, sustainability is now quite rightly a major factor, and that means capturing the externalities better and raising the quality bar on planning and design. But you still have to get the financing right. Fail that challenge and nothing happens.

2 — Financing regeneration is never easy. What needs to change to make a difference?

You look at today’s financial markets and there is plenty of money around. But capturing it and making sure we best leverage scarce public investment is what counts. That demands public and private players working together. The government understands this, but it has been a difficult task getting the mechanisms right. That said, there is a greater urgency now. You see that with all the talk about the planning gain supplement, reform of local government finance and replacing grants with equity.

The common thread is devolving more financing and empowering local players. Recent innovations such as strategic tariffs have sought to square this circle by negotiating upfront commitments and cash contributions from developers against which the public sector can invest in infrastructure. But tariffs are generally at their most effective and revenues maximised primarily on greenfield housing developments where land values are high and hence the scope for negotiating substantial contributions from developers is maximised. What we are working on are new localised funding mechanisms that we have termed regeneration investment funds.

3 — What are regeneration investment funds?

Our proposals around regeneration investment funds (RIFs) build on the tax increment financing (TIF) principles, long established in the USA. These provide cities and urban districts with the ability to capture local tax revenues, such as business rates, over long periods, and raise funds for investment on the back of these revenue streams to complement planning gain or local asset-based vehicle mechanisms. It is about using some of the wealth from future economic growth to help create the conditions for underpinning its creation.

Unlike Section 106, it also works in brownfield areas where land values are low or negative. RIFs centre on how we can use local assets and revenues more creatively and efficiently to support public policy objectives. The proposals we are working on also seek to align local policies and local ambitions to local financing. I think there is a growing appetite for this.

Recent initiatives, such as Local Authority Business Growth Incentives and Business Improvement Districts, suggest that the attitude to local financing mechanisms is changing. The ‘roof tariff’, for example, would have been unthinkable a decade ago. RIFs are another step forward and could help bridge the funding gap. We see them as a powerful tool to provide cities, towns, urban regeneration companies and other bodies with significant new funding. But, it is not about replacing one set of tools with another. We need more diversity and innovation, which in some places will mean using a combination of financial instruments.

4 — And are there any disadvantages?

Of course there are disadvantages, not least the fact that RIF or TIF-type mechanisms which permit hypothecation are not yet government policy. There will also be a need to ensure appropriate governance arrangements are put in place for a funding mechanism that could last for 20 or 30 years. The market for providing long-term finance to such vehicles is unproven in the UK, although international evidence would suggest that one would quickly develop. There has to be an evidence base for RIFs which includes value for money analysis, and we accept that. We also appreciate that hypothecation has an effect on the national finances and the systems for redistribution funds. But RIFs are not meant to be a panacea for all of our regeneration investment needs. It could be that the funds raised through RIFs release other funding streams that could then be applied to regeneration on an even more localised and micro level.

5 — Why is local the way dorward?

Localism and place-based solutions to regeneration and economic development has to be the way forward in most cases. It is difficult to see how a one-size-fits-all solution or programme developed in Whitehall can meet the myriad needs of regeneration across the country. The ideas and solutions to meet local challenges are out there, what is missing are the tools and resources to make those ideas a reality. A RIF could be one mechanism to create development capital that meets local needs. It could also help in building democratic capital and support for change, including enabling local people to invest in a RIF.

6 — What is PwC doing to help?

PwC is looking at ways of capturing value in advance of a development in order to invest those funds in the infrastructure that provides the platform for growth. We are working with our clients, both here and abroad. We are also teaming up with leading think-tanks, such as the Institute for Public Policy Research’s Centre for Cities and the New Local Government Network, with whom we are about to embark on a joint research project on local government and capital finance. It takes time to get new mechanisms right, and the UK has a history of well-intentioned propositions falling short of the mark because they were not properly scrutinised and tested. It is also essential in my view that new proposals are properly market-tested. Furthermore, the introduction of new instruments has to dovetail with new delivery vehicles, like city development companies.

7 — And what could private sector developers do?

The private sector has a key role to play, both in providing challenges on the viability and operation of RIF funds but also, crucially, in working with the public sector to confirm that such funding mechanisms would work and would be supported by their investment. A new mechanism such as a RIF will only be worthwhile if the private sector backs an initiative with investment. Improving the way regeneration is funded in the UK will not be easy and will need all sectors working together if we are to be successful.