Murray Collins on TIF funding the Ravenscraig development

Murray Collins is physical regeneration and funding manager for North Lanarkshire Council. He is responsible for the Ravenscraig development which is one of Scotland’s Tax Increment Finance pilots. He has been with the council for two years, but working on Ravenscraig for 16 years in previous positions with Scottish Enterprise and property company Wilson Bowden. Murray spoke last week in Liverpool at the CIPFA annual conference about funding for the project so we followed up to find out more. 

Room 151: What is the Ravenscraig development?

Murray Collins: It is a former steelworks which closed in 1992. It’s over 11,000 acres, two miles across at the widest point and the equivalent of 700 football pitches or twice the size of Monaco.

Everything above ground has been demolished but there are still some issues below ground, service ducts, tunnels, basements and there will be residual pockets of contamination so it’s still very much a brownfield site.

Phase one is up and running, there are going to be 800 houses built and 100 have been completed, there will be a new Motherwell college, a new regional sports facility and an innovation park.

It’s been taken forward by Ravenscraig Ltd which is a joint venture of Wilson Bowden, Corus and Scottish Enterprise. North Lanarkshire council is in the process of looking at stepping in to replace Scottish Enterprise in the joint venture.

Back in 2007 they started looking at phase two which was always the big one because it involves a lot of the major infrastructure. There was a £13m gap between finance and the cost of the works in phase one and Scottish Enterprise filled that gap. There is a £40m gap identified by the audit for phase two. By then the strategic priorities of Scottish Enterprise had changed and the project had stalled, it was no man’s land for a year or two and in an effort to break the deadlock the council undertook a funding review. Ernst & Young were appointed to look at how the gap would be met and they concluded that Tax Increment Financing (TIF) was the most likely way of doing that.

That coincided with Scottish Futures Trust being set up and the Scottish Government in general at this time taking more of an interest in TIF. We’d looked at it back in 2005 but parked it because we thought it needed primary legislation but the Scottish Government decided it didn’t, especially not the pilot work.

So that is how it came about, with encouragement from the Scottish Futures Trust and the Scottish Government we worked on the outline business case which was approved in March last year. That business case is based on an overall TIF scheme of £73m.

Room 151: What is the TIF part for?

MC: The way we have approached it here and to a certain extent how it looks like it will be in England (this is different to how they do it in the US) is if you get approval for a TIF, the Scottish Government is giving the local authority approval to retain the rateable income within a red line area.

The council prudentially borrows the money to fund the infrastructure, the assumption being that that releases the ability to develop sites which when occupied give you rateable income which you then use to pay back the prudential borrowing. Because it is prudential borrowing, types of asset are restricted. They have to be publicly controlled assets, and here it is roads.

Part of the TIF money will be used by the council directly to upgrade an existing road to the north of the site and part of the money will be channeled into Ravenscraig Ltd in the form of a public sector contribution which they will use, along with their own resources, to undertake a package of infrastructure works which includes the road through the site and the road to the South. It’ll still be at least two years from now until we’re on site with the TIF-related expenditure.

Room 151: So over what period have you borrowed from the Public Works Loan Board?

MC: The Scottish Government and Scottish Futures Trust are looking for a pay back period of 25 years. If the local authority repays it earlier than that, so more money than anticipated comes from rateable income, or the development happens quicker, then the deal is that the local authority gets to keep 50% of the rateable income. So if you pay back your loan in year twenty then you keep 50% of the rateable income for five years, which can be quite a considerable amount. That’s the upside.

Room 151: What is the downside?

MC: The downside is the unsecured borrowing costs. You get the infrastructure in first then the development then the occupiers. Only then do you get your rateable income that you can use to repay your loan.

The secret of a good TIF is to keep that period between drawing the financing and getting rates paid as short as possible. Some of the other pilot TIFs, one in Falkirk in particular, are looking at different ways of doing it. They have spread it out across a number of sites and projects, so that is an interesting variation on the model.

Room 151: What are you doing to keep that space of time short?

MC: With Ravenscraig what the council has decided to do is to try and keep that gap as short as possible. We would spend up to £10m in advance of the TIF agreement being in place.

When you factor in the requirement for CPOs, for dealing with Network Rail, those things alone have got a two year lead-in period, you also have the developer who has to secure his anchor tenants, his pre-lets, his funding, and at some point everybody has to come together and sign back to back legal agreements linking the public sector spending on TIF with the development.

The big risk is if the council borrows the money through prudential borrowing and the development doesn’t happen as planned, there’s less of it or it happens later for example, the council still has to find a way to pay back the prudential borrowing.

Room 151: When should you start getting rates in from Ravenscraig?

MC: It depends when we draw down the first tranche of TIF money, which we haven’t yet. We are trying to delay that as long as possible. It’s about a four or five year period from the first drawdown of money to the first rateable income. That might change depending on the development programme, perhaps some development may happen sooner.

We might get some of the smaller development up and running before 2018 but 2018 is when the actual town centre should be ready.

Room 151: So who is ultimately responsible for managing the finances so that everything is in the right place at the right time?

MC: It works on a number of levels. Each TIF project has a TIF executive which is high level between the local authority, Scottish Future Trust and Scottish Government. Then sitting below that are individual project arrangements so each TIF project has a different corporate governance structure. Then beneath that again at the local authority we have our own project board but that is done with Ravenscraig Ltd which includes the private sector. Below us is the council where there is a project board of finance, legal, regeneration staff; you have to try and juggle all that.

Room 151: Has the council found the £10m from the general fund?

MC: Yes, and if the TIF goes live the council will roll the £10m in there, discussions are ongoing across Scotland in terms of the financial treatment and whether you can roll it up to the point where the project starts generating outputs, so there is an ongoing issue about at what point expenditure is incurred: when the output is achieved or when you begin the work?

Room 151: Why is it that you can do TIF in Scotland?

MC: In England you work on the assumption that it needs primary legislation but in Scotland they have taken the view that for the pilots the existing Local Government Finance Act provides the power to do it then they brought in a thing called the Non-Domestic Rating Contributions (Scotland) Amendment Regulations 2010 which allows it to be done. If they decide to extend beyond that the Scottish Government will bring in new legislation but at the moment they are satisfied that the Local Government Finance Act plus the amendment give the legal powers to undertake the TIF.

Room 151: Whereas in England the only powers given so far are the ones in the City Deals?

MC: Well that is a halfway house, I think it’s referred to as type one because it’s not a full TIF and it has got caught up with the changes to the Local Government Finance Act in England.

Room 151: What do you expect to get back from your £73m TIF?

MC: We expect it will lever in about £400m of investment.

Room 151: What would you say to local authorities considering TIF as funding model?

MC: One of the things that has worked well in Scotland is all of the TIF projects are different. It’s not an inflexible model so each one is bespoke to the project needs and the other thing I was glad about is looking at smaller projects. Initially the Scottish Government was targeting major regeneration projects, they are incredibly complicated and take a long time and if you put TIF on top it gets even more complicated. TIF is new, innovative, complicated in itself. To a certain extent the size of a project like Ravenscraig almost detracts from the piloting of the new financial mechanism.

For the second round of pilot projects here they came out and asked for some smaller ones. It has been our experience piloting different financial models like the JESSICA ones where we have developed a straightforward simple model, it’s not huge but it works. We are probably going to be the first in Scotland targeting that while some of the bigger ones are still wrestling with a lot more issues.

So I guess if you’re looking at England it seemed a bit perverse that the Treasury only allocated £150m to TIF2 while in Scotland we have £400m already, but there might be a logic that says how do you pilot a 25 year project and how do you decide when that project has been successful? Maybe you don’t necessarily need the big, high profile projects, but use something smaller to pilot it and test the mechanism then if you get that right you can move on.

So one of the messages is keep it simple. The Falkirk and Grangemouth model up here is interesting because they have packaged a number of sites and projects together. On one hand it makes calculating the baseline more difficult, it’s a bit nebulous in terms of what the TIF is actually doing, but it does spread the risk. With Ravenscraig it is easy to demonstrate why you need the public sector intervention but it is an all or nothing approach.

It is one thing to get a business case approved but another to get a TIF up and running. In the UK there have been business cases approved but nobody has actually drawn down TIF monies.

Room 151: Has it been difficult to sell the TIF concept to anyone?

MC: My finance colleagues grasped the benefits of TIF very early on, you can see that you can not only pay for public works with this money but potentially get the money back and actually make money on it. They’re very enthusiastic about it and I think it is here to stay.

I’m looking at my next TIF which is potentially using private finance rather than local authority borrowing and I suspect that in ten years time bond issues will be used to finance it. Certainly in Scotland TIF is here to stay and it will evolve as the natural way to fund a lot of infrastructure projects.