Scottish look to LVC to assist post GFC re-birthing
Britain looks westward for tips on tarting up its towns
As published in The Economist
ACRES of flourishing weeds adorn derelict docks and warehouses on Edinburgh’s northern shoreline by the river Forth. Two years ago city planners were busily drawing up 30-year projects to build 30,000 houses, as well as hotels, offices, shops and parks on the waterfront. Then the credit crunch hit. Now plastic sheeting shrouds a bankrupt developer’s half-built luxury flats. Forth Ports, the docks company, has written down the value of much of its extensive landholding to zero.
City bosses, however, think they can get things going again. Their immediate problem is finding the £484m ($799m) they reckon is needed to build roads, schools and other public facilities. In the boom years, local authorities routinely demanded and got a big slice of that money upfront from property developers. These “developer contributions” have now disappeared, and recession means that Edinburgh, like most councils, cannot sell surplus land and property to fill the hole.
The city’s solution is to copy a 50-year old American approach: the unlovely sounding tax-increment financing (TIF). The idea is to draw a boundary round an area, borrow to pay for basic infrastructure and repay the loan from the increase in property-tax revenues inside the redeveloped zone as private firms start building.
Edinburgh hopes to test out TIFs on a square kilometre in the suburb of Leith, borrowing £50m to build roads, a dock for mooted cross-river ferries and a new pier for the former royal yacht Britannia, now a tourist attraction moored behind a modest shopping centre. Dave Anderson, the city’s development director, hopes that 2,200 houses, plus shops and offices, will follow. PricewaterhouseCoopers, an accounting firm, reckons all this will pull in an extra £280m in business rates (property taxes) over the next 30 years, more than enough to repay the loan.
Scotland’s devolved government is keenly interested in these TIF plans and so is Alistair Darling, Britain’s chancellor of the exchequer. After he intimated in April that he would entertain the notion of TIFs (business rates are collected nationally and handed back to local governments, so the law would need amending), lots of city councils have come up with ideas for them. Newcastle wants one to build a “science city” geared towards commercialising university research. Leeds hopes a TIF will accelerate growth as it tries to create 20,000 jobs in its Aire Valley business park. Birmingham, thinking big as usual, plans to raise £1 billion for seven road and rail schemes across the West Midlands.
The bravura of this last vision suggests how TIFs can get out of hand. Chicago now has 158 such zones, covering 29% of its land and 13% of its property by value. Mike Jasso of the city’s community-development department says that businesses were leaving Chicago’s Loop before it became a TIF district in the 1980s; now the zone is thriving. Others are much more sceptical, contending that many successful TIF schemes are in areas that would have attracted investment anyway. Rachel Weber, of the University of Illinois at Chicago, thinks TIFs make Chicago’s “dysfunctional system of quid-pro-quo politics more dysfunctional”. Every local politician wants a TIF in his district, and developers are eager to contribute to campaigns in the hope of securing support for their projects. In April the city council passed a measure that will, at the very least, increase transparency.
Mr Darling, whose officials will be discussing TIFs with developers and councillors before long, is likely to worry that TIFs are just another way to increase ballooning public debt. Most preliminary studies assume that, because banks and investors are leery of investing in property these days, the loans will have to come from the government. Having bailed out HBOS, an overextended property lender, just last year, Mr Darling may hesitate to plunge further into that line of business. Recession itself could also prove too big a hurdle: in Chicago, TIF-district tax revenues are slowing, and so is building work. Tempting though it is, borrowing against future revenues may not be the magic wand that Britain’s city bosses are hoping for.
Comment: Chicago’s example shows why a blanket Land Value Capture reform is better across the whole community. Projects then develop in areas with the highest need, rather than those with biggest brown paper bags. Reduce Payroll and Stamp Duties, increase holding charges on land, whatever they are called – Site Rental, Land Value Capture, Land Tax, Council Rates or TIF’s.