Biggart Baillie Solicitors

Resolving the Infrastructure Funding Crisis

Wednesday, May 12, 2010

by Martin Gallaher

The Scottish Government has outlined its vision for Scotland’s future development by identifying key strategic infrastructure projects in the National Planning Framework (NPF2). Fourteen major projects have been designated as national developments, and while consideration must be given to planning law implications for each, perhaps the more important consideration is how each can be funded given the economic slowdown has had a significant negative impact on the delivery of major UK public and private infrastructure projects.

A private and public crisis

The private sector has most acutely felt the effects of the economic crisis, due to the unwillingness of banks to lend in the current market. This has significantly curtailed the delivery of new private sector development and prevented potential spin-off public projects. The downturn has also affected the extent to which the private sector can help fund public projects by agreeing planning gain and developer contributions with local authorities through section 75 agreements. Local authorities also look set to face difficulties in funding large-scale infrastructure projects as a result of the increasing national debt and subsequent budget cuts.

Investment in infrastructure is, however, vital to ensure continued economic growth and development, and the need for public investment in new infrastructure has never been greater. With conventional sources of funding becoming less available, and the PPP/PFI model having fallen out of favour politically, government must look at alternative ways of generating funding. Issuing public bonds to local authorities, through the Scottish Futures Trust, is a potential option, but this has yet to materialise due to fiscal constraints on the Scottish Government.

Tax incremental funding

One potential alternative that is becoming increasingly viable for both central and local government is the US tax concept known as tax incremental funding (TIF). Essentially, TIF captures tax revenues resulting from investment in enabling infrastructure within a particular area. The tax receipts, which would not have come about but for the infrastructure investment, are then used to meet repayments on the original investment. The major attraction of this financing tool is that the benefits of regeneration projects are reinvested without increasing taxes or diverting public spending away from other projects.

The City of Edinburgh Council looks set to pilot the first TIF project in Scotland to develop Edinburgh’s Waterfront, and is set to prepare a detailed business case for the project, endorsed by the Scottish Futures Trust. The private sector has also shown support for TIF, with the British Property Foundation identifying its “potential to be a powerful tool for achieving regeneration”.

Not the complete answer

While on the face of it TIF may appear to be the solution to the current public sector funding crisis, it will not be the answer in all cases. It may not be a suitable means of financing certain types of infrastructure projects, including many of NPF2’s national developments which are simply too large to be funded through it; although discreet elements of them could be.  Further, due to the strategic nature of such developments, it may also not be possible to actively identify the tax increment attributable to each. 

Whilst there is no quick fix to the current funding deficit facing local authorities, TIF offers an innovative solution for some of the problems faced by the UK’s construction and regeneration industry; particularly in relation to commercial developments for which authorities will receive significant increases in business rates. By putting the necessary legislation in place to allow TIF schemes to progress, confidence in both the public and private sector is likely to improve.  The availability of an innovative funding instrument to help realise schemes across the county will also go some way to achieving the Scottish Futures Trust’s original vision of issuing public bonds to deliver such infrastructure.

For more information, please contact Martin Gallaher on 0141 228 8000 or email mgallaher@biggartbaillie.co.uk