Unique deal will transform Glasgow city centre

Buchanan Galleries are at the centre of the quarter which will be transformed. Picture: John Devlin

Tax incremental financing has long been popular elsewhere and Glasgow has chosen TIF to transform Buchanan Quarter, says Michael McAuley

An innovative deal to transform Glasgow city centre – the UK’s first ever tax incremental financing (TIF) scheme – was signed on Friday, 28 March 2014, by Glasgow City Council, the Scottish Government and the owners of Buchanan Galleries shopping centre (Lands Securities and Henderson Global Investors).

This planned development calls for the expansion of Buchanan Galleries shopping centre and regeneration of the city north of George Square, known as the Buchanan Quarter.

Over three years, the Royal Concert Hall and Buchanan Street will be upgraded, the Cathedral Street bridge strengthened and access to Queen Street station improved.

The existing car park in Buchanan Galleries will be demolished and a new car park added to allow for the extension of Buchanan Galleries.

In the short term, George Square and Upper Dundas Street will be upgraded before the Commonwealth Games start in July.

The city centre will be transformed by the innovative use of TIF.

But what exactly is tax incremental financing?

Under TIF, councils fund infrastructure by borrowing against future additional business rate income generated by the resulting regeneration and development.

It’s a simple concept, but a very difficult one to put into practice. Local authorities are not companies. They are not free to borrow money from anyone for any amount. There are very tight controls in place.

Because of these difficulties, TIF has been slow to take off in the UK. In England, as result of the requirement for primary legislation implementation, TIF has become embroiled in a broader programme for reform of business rates.

Not so in Scotland where the more flexible primary legislation that existed assisted the early introduction of TIF.

In the United States, TIF has been hugely popular since the 1950s with US cities as a means to tackle urban blight. It has been used to raise money to fund critical infrastructure needed to get major regeneration schemes off the ground. TIF was seen widely seen as a “win win” for business and local authorities – particularly when sources of private sector finance are scarce.

And a typical TIF scheme would see cities borrow money against the future uplift in business rates predicted to arise.

In Scotland, The Scottish Futures Trust, set up by the Scottish Government to deliver value for money across public sector infrastructure, has spearheaded the development of the TIF model for use in Scotland.

The Glasgow Buchanan Quarter was one of the first projects to receive approval in principle from the Scottish Futures Trust in 2012. Scottish Government approval followed on 25 October, 2012, with the historic signing by all parties less than two months ago.

As local authorities’ borrowing powers are restricted, the process for agreeing the TIF scheme has been complex.

The use of TIF is based on a “but for” test: as in “but for” TIF the proposed regeneration would not occur or not occur in the timeframes which TIF would enable.

This “but for” test means a TIF scheme must demonstrate that the infrastructure proposed will unlock regeneration and sustainable economic growth. This growth will generate additional tax revenues to repay the money borrowed for the enabling infrastructure.

To pass the “but for” test, a Business Case is prepared by the local authority. This sets out the reasons for using the TIF, including the financial and economic cases, along with the infrastructure proposed and how that infrastructure will deliver the growth predicted. The Business Case also examines risks the project may face and how those risks will be managed.

Although the Buchanan Quarter is the first TIF scheme to sign in the UK it is unlikely to be the last.

In 2011, the Scottish Futures Trust, in conjunction with Scottish Government, invited local authorities to apply for the next phase of TIF. Sixteen proposals were received from 15 local authorities with Scottish ministers choosing applications from Argyll & Bute, Falkirk and Fife councils to progress to full Business Case.

In the meantime, with the TIF signed, Glasgow can look forward to further regeneration of a large part of the city centre and will help the city centre retain its position as the biggest shopping destination in the UK outside of London.

• Michael McAuley is a partner and head of the government and public sector group at CMS* in Scotland and advised Buchanan Partnership (a joint venture between Land Securities and Henderson Global Investors) on the Buchanan Quarter TIF scheme. www.cms-cmck.com

• Dundas & Wilson combined with CMS on 1 May, 2014