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Straight Talking, Lorcan Sirr and & Conor Skehan –

A measure that would give power back to the people, and provide a
new way to fund public infrastructure
Tax Increment Financing works in North America, but to be a success here would require
a reform of local government

Is private funding the future for regeneration projects


such as Ballymun?

The penny is beginning to drop that Ireland is


one of the most centralised countries in Europe
and the debate has begun in earnest for
democratic reform. This can be seen in
discussions surrounding the Dáil and the
number of TDs, what they do and how they do
it. The very presence of the Seanad is under
threat from the main parties. The operation of
local government is also under scrutiny. Whatever might or might not happen to the Dáil and
Seanad, reform at local government level is very likely.

Central and centralised government has arguably been responsible for much of the current
economic debacle. Hence, the role of local government will be reassessed to see if affording
greater power to the regions and local authorities – existing or newly reformed ones – could
result in more efficiencies, better democratic procedures, and more locally responsive authorities.
That's the theory anyway.

Local government control over the raising and spending of its own finances above and beyond
commercial property rates will be central to any debate about reform of governance. Reduced
public finance available for infrastructure and regeneration developments, coupled with reform
of governance, will lead to the need to explore new strategies for raising public funds.

In the UK – and particularly in Scotland – this search for new ways to fund local development
has led to an exploration of a concept known as Tax Increment Financing (TIF). TIF is not
something new. It has been bandied about in various guises for many years. Around since the
1950s in the US, and popular in places like California and Chicago, TIF is a method of raising
private finance for public infrastructure or development. Funds raised this way are repaid by
future increases in local tax revenue from the improved facilities.

We need something like this. In 2007, Ireland ranked near the bottom of a 17-country European
table in physical infrastructure. We were also near the bottom in the business-performance
category. Ireland's global infrastructure ranking has since improved, but at the same time funding
has dried up, with spending on it due to be cut by €3bn to €5bn over the next four years.

Infrastructure does produce results. In Britain, for example, it is estimated that every £1 invested
in infrastructure produces £10 worth of benefits in business support and job creation. These
projects are typically done as a joint venture between the lender and local government.
Competence, both professional and elected, at the local government level is a prerequisite for the
successful operation of TIF. They are long-term projects and can be complex to manage. For this
reason, such a scheme should only be introduced in tandem with fundamental local government
reform. A scheme of revenue raising that commits an area to repayments for many years needs to
be introduced and implemented by people who will act in an open, competent, honest and
considered way. Gombeen-ism and clientelism has no place when the long-term stakes are so
high.

There are, of course, risks attached to TIF, the principal one being that the anticipated increase in
tax returns on completion of the new infrastructure or development is over-estimated. This will
lead to a situation whereby local government is left with insufficient funds with which to make
the required repayments to the original lenders. This risk is greatest where population, and
associated future income, is low. Another danger is that businesses may simply move from one
location to another, thereby taking their commercial rates from one local authority to another.
Again this risk is greatest in smaller areas where there is likely to be over-reliance on a small
number of tax- and rate- payers.

TIF is most likely to be successful and appropriate in larger metropolitan areas. In Ireland, this
probably means it would only work in the Dublin, Cork, Limerick and Galway urban areas.
Smaller areas will have less potential to raise income post-completion, and will have even less
potential to attract lenders. Practice so far has seen the potential value of projects capped,
typically at around the equivalent of €600m.

Crucially, a proper consideration of risk sharing is key to TIF; specifically, it involves


commitment to the idea that if lenders are providing capital at a rate of interest which includes a
premium for risk, then if the project fails to deliver expected returns they must take their share of
the financial losses. Lenders will have done their research, calculated the figures and costed
accordingly. If they lose, they lose.

It can only exist as part of a new fiscal system of local revenue generation and such changes, in
turn, will require reform of Ireland's property markets. In the residential market, this will involve
production of the long-awaited register of property prices. On the commercial side, it may mean
the adoption of European-style shorter leases with more frequent rent reviews pegged to inflation
rather than the market. It may also involve a modernisation of commercial rating practice.

Transparency in transactions and valuations – or the lack thereof – has been a massive issue in
the last decade. This is particularly pertinent when it is the taxpayer who will reap the rewards,
but also foot the bill, as with TIF.

Ultimately it won't solve all our urban regeneration ills, nor provide all needed infrastructure, but
is worth considering. Central government hasn't exactly covered itself in glory in the last few
years, so perhaps it is time to return some power to the people at a local level.

Dr Lorcan Sirr and Conor Skehan lecture in the College of Engineering and the Built
Environment at Dublin Institute of Technology January 23, 2011