John Handley: Don't rush into a Tif without figuring out how much it might hurt

Private-sector investment has virtually disappeared, and pressures on the public purse have meant that all but the most critical schemes have been mothballed.

Developers are keen to begin building again, and there seems to be the demand for space. The only thing holding them back is the lack of available finance.

It is therefore not surprising that there has been a great deal of interest surrounding novel sources of financing and the model of the moment is Tax Increment Financing (Tif).

Tif is a financing model pioneered and widely used in the United States over the past 50 years. Tif allows a local authority to borrow significant amounts of money for specific infrastructure development, with the loan secured against increases in tax revenue expected from the development. It enables a local authority to trade anticipated tax income for a present benefit.

The argument is that building new infrastructure will lead to more businesses being attracted to the area, which in turn leads to higher tax revenues from those businesses, and the loan is repaid typically over ten to 20 years.

The Tif model has has not yet been used in the UK, mainly as a result of high property prices and the ready availability of finance. The recession has seen this all change.

Tif has caused quite a stir in Scotland, with the SNP government sending encouraging messages and three local authorities apparently racing to set up such a scheme.

In January, Edinburgh city council put forward an 84 million proposal to redevelop Leith Port. Glasgow City Council announced an 80m proposal to expand the Buchanan Galleries shopping centre. A third scheme would see North Lanarkshire Council borrow 70m to plug the funding gap in the regeneration of Ravenscraig.

But borrowing against unknown tax revenues has its risks. Take the Forth Ports-owned Leith Port. The best-case scenario put forward by Edinburgh city council would see 540,000sq ft of new office/business space and 270,000sq ft of new retail space which, among other things, would see an additional 206m of extra income for the area, which would easily meet the 80m loan.

However, the worst-case scenario would see just 175,500sq ft of new office/business space and 94,770sq ft of new retail space, resulting in approximately 72m in extra income – not enough to meet the initial loan, leaving taxpayers to foot the bill.

Edinburgh and other local authorities will need to think hard before then enter such a long-term risky funding arrangement. If business growth in a Tif area is not as great as first predicted, it will leave the local authority liable for any shortfall. This would inevitably lead to increases in council taxes or business rates, and could set a city like Edinburgh back many years.

Local authorities are, however, unlikely to enter into such agreements on they own, choosing to partner with a commercial developer and sharing the risk, as with the proposals being put forward by Forth Ports and the redevelopment of Edinburgh's Waterfront.

One other criticism of the Tif model is that it does not generate additional tax revenues; it just moves the tax revenue from one region to another.

In the US, neighbouring regions and districts within cities have created competing Tif schemes. Chicago has, for example, some 900 Tif schemes. Cities and regions are finding it hard to attract the businesses without offering significant tax breaks, leaving less tax revenue to service the loan.

The three schemes proposed in Scotland are unlikely to lead to such intense competition, but future schemes will need to be considered carefully.

Local authorities will also need to pay attention to areas that sit close to or adjoin the Tif scheme if they are to avoid jobs and businesses migrating to the new, redeveloped area.

There is no doubt that if large development schemes are to be kicked back into life, new ideas and ways to fund development are needed. Tif is a tried and tested model and can work well, but like many novel funding models it is complex and not without problems. If managed badly, it will set cities such as Edinburgh back decades.

John Handley is a partner in the Edinburgh office of planning consultants DPP.