London suited to tax incremental financing funding model, says expert

Michael Watson of Pinsent Masons, the law firm behind Out-Law.com, was speaking as it emerged that the Nine Elms redevelopment of the so-called 'Battersea Corridor', on the south bank of the River Thames, could be the first in England to be funded using the tax incremental financing (TIF) model.

Implemented by last year's Local Government Finance Act, TIF allows councils to borrow against their predicted future increase in business rates over a 25-year period. The borrowing could then be used to fund development projects. The TIF model is already in use in Scotland, while the United States has been using similar financing arrangements for over a decade.

"In Scotland, TIF models have been promulgated for a couple of years with some success although it has been easier to implement them in economically vibrant locations, rather than those where the immediate opportunity for the infrastructure development to generate increased rates is less obvious," Watson said. "The rest of the UK could learn valuable lessons from Scotland when implementing TIF in their region."

"There's no doubt that TIF can play its part in funding new London developments such as Nine Elms - if the deal is structured well then the increased local rates/taxes generated by the successful project will repay the funding provided by the Council and Greater London Authority (GLA)," he said.

The Nine Elms regeneration project covers 195 hectares of south London, between Lambeth Bridge and Chelsea Bridge, and incorporates Vauxhall town centre and the old Battersea Power Station. It will see more than £12 billion of new investment into the area, and aims to create 25,000 new jobs and in excess of 16,000 new homes. The project includes a £1bn transport improvement package, including an extension to the London Underground's Northern line and two new stations.

The partnership behind the project announced last week that the Dutch Embassy planned to relocate from Hyde Park Gate to Nine Elms in 2017. It will be situated next to the new US Embassy, which is currently under construction and will also open in 2017.

In February, Wandsworth Council announced that the London Underground extension would be partly funded through business rates, retained under Enterprise Zone legislation. The GLA is due to borrow £1bn to fund the project, which will be guaranteed by the Government under its UK Guarantees scheme. Repayments will be made partly from developer contributions under section 106 agreements or community infrastructure levies, and partly from revenue collected from business rates within the Nine Elms Enterprise Zone.

The use of TIF could help guard against the risks to the development of setting developer contributions too high, Michael Watson said.

"A variety of key funding instruments can be used such as TIF, Community Infrastructure Levies and Section 106 by government and local authorities to pay for infrastructure but if contributions are set too high, then new development is unlikely to be viable in today's economic climate," he said.