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UK cities seek new ways
to finance capital projects

By Brian Baker, Senior Correspondent

26 November 2010: As mayors and other city leaders in the UK grapple with eye-watering budget reductions, many are looking for new ways to raise money and finance both capital schemes and programmes. Changing arrangements with the private sector is high on their wish-lists.

Like most English local government bodies, Manchester will have to reduce its annual budget by 28 per cent in real terms between 2011 and 2015 but long-time Council Leader Sir Richard Leese is buoyant and keen to do more innovation with the private sector to spur growth in the regional economy.

Manchester City Council is one of the ten unitary local authorities in the Greater Manchester sub-region and they have successfully applied to the UK government for authorisation to put their joint arrangements for economic development, business liaison and transport on to a firmer statutory basis. Sir Richard wants the city region to speak with one voice to international investors and UK companies.

He told property professionals at a conference in the city in November 2010 that the UK government’s new Regional Growth Fund, which will replace the regional development agencies from April 2011 should back “success not failure.”

The new statutory body in the city region will put forward combined proposals to the new fund.

He used the session at the British Council of Shopping Centres event to welcome the UK coalition government’s announcement in support of the use of tax increment financing as an avenue to bring forward essential capital spending projects. . But he warned “Tax Increment Financing (TIF) in the US has been a hit and miss affair. Around 50 per cent of the schemes set up there have succeeded but that means that 50 per cent of them have failed!”

The intention to introduce a form of tax increment financing was confirmed by Chancellor of Exchequer George Osborne during the announcement of the outcome of the UK Government’s Comprehensive Spending Review on October 20th 2010. The scheme proposed by the government is primarily designed to assist public bodies to borrow money to assist regeneration in advance of major private sector schemes. Local authorities would then repay the loans from the increased value of the designated areas.

As business rates are centralised in the UK the Government will introduce a variation allowing local governments to keep all the business taxes within the designated area for the first six years.

Many in the property sector assembled in Manchester are critical of the UK coalition government’s judgement. They think that more of the shelved and delayed proposed schemes would be financed quickly if the model of TIF was that which allows private investors to fund it against subsequent re-payment from business rates revenues. A straw assessment by the Estates Gazette magazine found that of eight shelved proposals only four would be likely to benefit from the extended public sector borrowing variant.

Two schemes thought likely to now move forward are the £4.5 billion re-development of the iconic South London symbol, Battersea Power Station and the land around it in the Nine Elms area for residential, retail and other commercial activities. Wandsworth Council, the pertinent local authority, would borrow from the Public Loans Work Board and get their money back from the projected increase in business rates in the area. Even in the recession this has an estimated value of £89 million a year.

Wandsworth Council gave planning approval in November 2010 for the Treasury Holdings application which includes a master-plan by Uruguayan born architect Rafael Vinoly. Most of the power station building will be converted for retail use.

The local authorities could also jointly use a TIF to borrow their share of the cost of extending the Northern Line subway to the area which would strengthen the commercial viability of starting construction of the scheme.
Treasury Holdings have pledged half of the £400 million cost.

Arena Central in Birmingham is a large scheme, though smaller than Battersea, and it too now looks more promising. The 7.6 acre site is in the core of the city. The joint venture scheme is led by Miller Developments. The mixed use proposal has been around in various forms for a decade. The City Council could borrow to upgrade the infrastructure which would add to the commercial viability of the re-development.

Amongst proposed schemes which would be more likely to proceed under the private sector borrowing style of TIF according to property professionals are Land Securities proposed development in Ebbsfleet in East Kent where the introduction of high speed commuter services on HS1 is a powerful incentive for building homes for middle class families and Hammerson plc’s Sevenstone mixed- use project in Sheffield.

The highest profile business improvement district in the UK is the New West End Company in London. Its Chair Dame Judith Mayhew Jonas told delegates that “TIF will be a great opportunity. Meantime, we are excited about a arrangement with Westminster City Council which may lead to up front payments by businesses to improve our streetscape and other public realm being offset against future contributions associated with planning approvals.”

With the long awaited major east-west London Crossrail scheme which will connect the West End retail and commercial area by fast Paris RER style trains to both Heathrow Airport and the Canary Wharf business district now confirmed she expected an increase by 30 million in annual visitor numbers after it opens in 2018. “We have to have the streetscape and public areas to accommodate them,“ she said.

Whilst TIF can be a mechanism to bring forward mutually beneficial investment Woking Council Chief Executive Ray Morgan warned the property professionals that “your scheme has to benefit the town and not just the landlords and retailers.” Woking recently bought one of the shopping centres in its town centre which gives it even more leverage over future expansions.

Across Europe most major shopping schemes stopped construction in the wake of the recession in 2008 and 2009. Now, some are back on site. The first two in the UK are due for completion in 2011. The Parkway scheme in Newbury, Berkshire by Standard Life, which will eventually also include residential units, will open in autumn 2011.

It will be preceded by Trinity Walk in Wakefield, West Yorkshire. This scheme was fairly well advanced when its developer Modus went in to administration. Investment company Sovereign Life and previous contractor Shepherd joined forces to buy it out of administration and re-commenced construction in January 2010. It will open in spring 2011. It will be anchored by Debenhams, the first modern department store in the town. The design has been altered to include a higher quality of materials to better reflect Wakefield’s existing townscape.
© 2010 Brian Baker and City Mayors

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