City Deals and the associated Tax Increment Financing have faced criticism since their launch, but a bigger risk would be to do nothing. With little else stimulating growth, they could be just the spark needed for local economies
Announced in early July, City Deals are agreements between Whitehall and eight core cities outside London. They provide the cities with significantly increased powers to drive local economic growth, in return for their commitment to develop stronger local accountability and cross-authority cooperation.
For many, the most interesting aspect of the deals is the power to raise capital based on future returns that the cities are soon to be provided with.
In a nutshell, the eight cities will be allowed to retain the business rates raised in designated ‘Accelerated Development Zones’, and to invest in these areas using money borrowed on the back of expected growth in revenues as these areas are developed. This is a type of public sector funding known as Tax Increment Financing (Tif).
Tif projects have been a popular form of public sector investment in the US for almost 50 years. Unfortunately, an analysis of US examples does not paint the funding method in the best light, with many schemes taking over 10 years to be delivered, and projects frequently being dogged by politics and in-fighting.
However, Tif in the US tends to differ from the funding model proposed by the City Deals. In the US, Tif has predominately been used as a last resort to fill funding gaps for projects that would not otherwise go ahead. The City Deals, on the other hand, will see Tif mainly used to fund infrastructure projects that will then stimulate private sector development in key projects in each city.
For other reasons, too, Tif projects initiated under the City Deal should avoid many of the difficulties that have been encountered in the US. Stateside schemes have often suffered from a lack of clear accountability as well as from complications caused by competing interests for the funding. With clear leadership from elected officials, and a funding relationship involving just central and local government, the City Deal model should avoid these problems.
However, there are some issues with Tif that are universal. It is a financing method that, fundamentally, creates public sector debt. While the theory suggests that the income generated from investment will more than service that debt, no project is certain of meeting projected revenue streams, especially in a recession.
What’s more, successful Tif projects rely on ongoing political support. We are not in a position to know what the next government will think about the City Deals, never mind what the next five governments over the course of the 25-year lifetime of the City Deals will feel about them. So Tif in the UK could yet get caught up in future political cross-fire, much in the way that Private Finance Initiative schemes are at the moment.
The City Deals themselves have also been criticised for focusing on particular areas within each city. There is a fear that jobs may simply be displaced from one place to another. While these are not new arguments – they have also been made against Enterprise Zones – they do nevertheless remain valid.
That said, the biggest risk is to do nothing. With little else stimulating growth at the moment, the City Deals could be just the spark that is needed for local economies. Indeed, the British Property Federation has stated that now is the time to act, as we begin to come out of the downturn.
City Deals are no panacea in themselves, however, and much will depend on the eventual levels of private sector buy-in. While the economy may be beginning to perk up, large-scale private sector take-up of any new public sector-led developments will only happen once liquidity increases and there is less uncertainty in the economy.
The devil will be in the detail for the City Deals; TIF is a complex funding model, and we will have to monitor progress carefully over the next five years before declaring the City Deal as a success.
Paul Earnshaw is Real Estate Partner at the law firm DWF