Fast track to improvement, by Alan Gay

14 Aug 08
How can councils pay for development to their local infrastructures that will speed up economic growth? Alan Gay looks at the various funding options

15 August 2008

How can councils pay for development to their local infrastructures that will speed up economic growth? Alan Gay looks at the various funding options

Good infrastructure is vital to the success and wellbeing of communities. Well-designed roads, public transport links and environmental schemes are prerequisites for councils wishing to promote economic growth, attract inward investment and encourage new jobs and housing. Indeed, recent history demonstrates that under-investment in infrastructure has often resulted in stagnation and poor economic performance.

The core English cities of Birmingham, Bristol, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield are recognised as economic drivers for their city-regions. Each has been undergoing an urban renaissance in recent years, with major regeneration programmes, landmark building projects and public transport schemes.

They have been relatively successful in attracting inward investment and are major centres of wealth creation, with a collective economy that is bigger than London's. But the fact remains that their performance lags behind that of the capital and comparable cities elsewhere in Europe. In the light of the economic downturn on land values, capital receipts and Section 106 'planning gain' contributions, new infrastructure funding mechanisms are urgently needed.

So what can be done?

There is no shortage of rhetoric. Last December, the government and the Local Government Association signed a concordat setting out the relationship between central and local government and councils' rights and responsibilities. The recent consultation on the Treasury's sub-national review of economic development and regeneration sought views on strengthening local authorities' role in these areas. Most commentators recognise the urgent need to unlock our urban areas' economic potential, but funding remains a problem.

Most local authorities have benefited from above-inflation increases in funding over the past decade, but that has been accompanied by spiralling demand for services. The introduction of the prudential borrowing regime has helped, but affordability still severely constrains infrastructure spending. This leaves local authorities over-dependent on conventional grant funding, which is often ring-fenced for disadvantaged areas, leaving little available for genuine 'place-shaping'.

In an attempt to move the debate forward, the Core Cities Group has been working with PricewaterhouseCoopers to explore innovative ways of financing infrastructure developments. Their joint report, Interim findings on new funding schemes to unlock city growth, was published on August 1. It draws on four real-life case studies that illustrate the type of major project the group is trying to fund. Each has the potential to offer a range of economic, social and environmental benefits that could be critical to unlocking regional growth. But for each project there is a significant funding gap.

The four case studies are:

Birmingham – the regeneration of the areas of Eastside, Digbeth and Deritend to the east of the city centre, adjacent to Aston University. The site covers 170 acres and the project could create 257,000 square metres of offices, 138,000 square metres of retail, 3,248 new homes and 21,000 new jobs. The funding gap is £90m.

Sheffield – the redevelopment of the areas to the east of the city centre adjacent to the M1, with the potential to create 1,300 new homes, 114,000 square metres of offices, 34,000 square metres of industrial space, 17,000 square metres of retail space and 9,000 new jobs. The funding gap is £40m.

Leeds – the regeneration of the Aire Valley to the south of the city centre. There is the potential to create 7,000 new homes, 29,000 new jobs, 250,000 square metres of offices and 670,000 square metres of industrial space, but the funding gap is £250m.

Nottingham – the extension of the Nottingham Express Transport network to create two new lines connected through a new transport hub. This project differs from the other three in that it is much smaller in scale and shows how local stakeholders are developing innovative solutions to fund major infrastructure investment. Nottingham intends to use a workplace parking levy to bridge the £8.9m a year funding gap for the new lines.

The report examines whether two newly emerging funding mechanisms, business rate supplements and community infrastructure levies, could be used to provide additional funding.

Business rate supplements could raise significant amounts. For example, a 2p charge in Leeds could raise £10.5m a year, which could fund infrastructure developments of more than £100m. So could community infrastructure levies, which are included in the Planning Reform Bill. These would be levied on landowners who benefit from development.

However, there are shortcomings with both. The business rate supplements rely on securing the agreement of the business community and could therefore only target businesses within the 'area of benefit', producing small amounts of income for localised, rather than city-wide, schemes. And the community infrastructure levies would not be payable until after the infrastructure is provided, leaving a funding gap. Also, even in combination, these are unlikely to provide sufficient funding.

Other mechanisms, such as the Local Authority Business Growth Incentive scheme and Business Improvement Districts, are dismissed as too small scale or too short term. Instead, the report recommends a cocktail of funding methods, including accelerated development zones and national or regional infrastructure funds.

The accelerated development zone concept is based on 'tax incremental financing', which has been used widely in the US to help fund community improvements. This relies on the principle that public projects such as roads, schools or environmental improvements increase the value of the surrounding land and buildings and hence their taxable capacity. The resulting 'tax increment' is used to fund the initial infrastructure development.

Councils do not currently benefit directly from local growth. The business rates they collect are passed to central government and redistributed as part of the annual finance settlement. The report proposes that a local authority establishing an accelerated development zones would be allowed to keep the extra business rates revenue generated from new and improved premises within the zone for up to 30 years, and to use that revenue to fund large infrastructure projects.

Accelerated development zones would be complemented by funds (national or regional), specifically designed to unlock regional economic potential by providing upfront finance or finance-raising guarantees. The Core Cities Group has discussed the establishment of such funds with the regional development agencies and a number of proposals are being pursued, including initiatives by the South West Regional Development Agency and English Partnerships.

Infrastructure funds could also allow access to European funding through the Joint European Support for Sustainable Investment in City Areas programme.

So what would be the advantages of this new approach to the national economy (and to the Treasury)?

Using Leeds as an example, under the 'base case' with no additional infrastructure funding, the Treasury would receive all the business rates generated, but additional income resulting from new developments in the area would be limited to £389m over a 30-year period. In contrast, with all the enabling infrastructure in place, the additional rates generated over the same period would be £901m.

If an ADZ were in place, the council would borrow to fund the infrastructure developments and use the additional rates generated to repay the loans. The ADZ is forecast to capture enough business rates revenue to pay back the loans in just 13 years, with all the business rates income after that being retained by the Treasury.

Over the 30-year period the Treasury is forecast to benefit by £89m at today's prices from rates income alone, quite apart from the growth in other taxes that could be expected. The regional economy is forecast to benefit by up to £7.9bn over the 30-year period.

Across the case studies, the report demonstrates that being able to provide all the enabling infrastructure increases outputs for housing, economic growth and jobs by 50%–80%.

The report demonstrates that the use of innovative funding mechanisms could do much to unlock the potential of our urban areas, and that the long-term economic and social benefits are likely to be substantial. If these opportunities are ignored, there is a real risk that our urban centres will continue to lag behind our European competitors and our regional economies will not develop as they should.

Alan Gay is director of resources at Leeds City Council. The Core Cities Group report can be found at


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