All eyes on Scotland

Scotland is ahead of the rest of the UK in developing plans to use tax increment finance to fund regeneration projects. Ewan Alexander looks at the latest developments.

Local authorities around the UK will be watching developments in Scotland closely after around 15 councils put forward proposals to borrow over £100m for the improvement of local infrastructure.

The Scottish Government is understood to have invited applications for six pilot regeneration projects using a funding model called "Tax Increment Finance" or "TIF".

TIF first came to prominence in Scotland after details were announced earlier this year for an £84m investment project in Leith, Edinburgh.

Announcing details of the new development, which is expected to include a new cruise liner terminal, lock gates, esplanade and link road, Scottish Government Finance Secretary John Swinney said: "Westminster cuts to the Scottish Budget have emphasised the importance of finding new funding models to deliver crucial infrastructure projects… that can unlock further economic development, whilst ensuring maximum value for the public purse."

It is a statement which is likely to resonate with any government authority currently seeking to square the circle of fixing creaking infrastructure while operating within massively constrained budgets. And if the prospect of fixing infrastructure woes alone weren't enough to grab the attention, the Scottish Government also claims that the project 'has the potential to unlock' £660m of private investment and create up to 4,900 jobs.

Under TIF schemes, local councils will be able to borrow money to fund infrastructure investment programmes. The money will be repaid as improvements attract business and commerce to the area, generating higher tax receipts for the local authorities.

Scotland has the advantage of being a little ahead of the national curve as far as TIF is concerned, primarily because the view has been that a number of pilot projects can proceed without the need for primary legislation. However, there is no doubt that the funding model is one endorsed by Westminster for use in Scotland.

Several bodies in Scotland have already expressed an early interest in the scheme. Current proposals are believed to include plans to borrow £56m to redevelop the area around Buchanan Galleries in Glasgow, £73m for the development of Ravenscraig Town Centre in North Lanarkshire and £15m to go towards the City Garden Project in Aberdeen.

Some councils have been fairly transparent in submitting proposals, however others have been reluctant to make any public comment – presumably in case their plans prove controversial or are not approved by Scottish Government.

The fact is that the success of applications is far from certain. The Scottish Government has selected TIF as one of its weapons of choice in funding infrastructure investment, so it has a lot riding on this. Officials will want to see evidence in the business case that genuinely 'new' entrants will be attracted into the region.

Displacement of businesses from neighbouring regions could be a real issue. In the USA, where TIF models originate, there has been some debate as to how successful different schemes have been in generating 'new' tax receipts, rather than simply creating a beggar-thy-neighbour regime. However, it is an issue which the Scottish Government is determined to avoid.

The Leith project is a prime example. Edinburgh has a particularly distinctive geography around which this initiative has been built: Leith is confined within the city limits and separated from commercial areas to the North by the Forth which eases concerns around displacement, ease of taxation and boundary 'creep'. The same could not be said, for instance, of Sunderland and Newcastle. Further, the redevelopment of a port would seem likely to help stimulate international, rather than domestic, inward investment.

It remains to be seen how successful the Scottish authorites have been in making sure their proposals pass muster, but one thing is for sure: local authorities will be monitoring developments – TIF could just be the future of infrastructure investment.

TIF: The runners and riders

While some local authorities have not revealed plans for TIF funded developments, several have already indicated an interest, namely:

• Aberdeen City Council: reportedly proposing to borrow £15m for the City Garden Project
• Argyll & Bute Council: reportedly proposing to borrow £20m for the development of the "Lorn Arc" in Oban, a project to improve transport links and make the area more attractive for businesses supporting offshore renewable energy
• City of Edinburgh Council: a loan of £84m has already been approved for the redevelopment of Leith Waterfront
• Falkirk Council: proposing to submit a bid to secure funds for the upgrade of the M9, A9, A801 Avon Gorge road links and development at the Falkirk Gateway, Grangemouth Docks, Earls Gate, Gilston and Helix sites started. The sum required is not known.
• Glasgow City Council: reportedly proposing to borrow £56m to redevelop the area surrounding Buchanan Galleries was mooted earlier this year
• North Lanarkshire Council: has already been allowed to borrow £73m for the redevelopment of Ravenscraig Town Centre

Ewan Alexander is a Partner in the Infrastructure practice at national law firm McGrigors.