Tim Shaw & Victoria Thourgood

1. Tim Shaw & Victoria Thourgood Nabarro LLP Spring Conference, Barnsley 2012

2. Driving Regeneration with InnovationACES Spring Conference: 2012 Tim Shaw and Victoria Thourgood Nabarro LLP 11 May 2012

3. What we will cover • The current economic landscape • Local government capital expenditure – a brief history • Role of local authorities • Traditional Sources of Funding • New approaches to funding • Structures and models • Going forward – what are the opportunities

4. The current economic landscape • World slump Autumn 2007 • Euro zone crisis • Double Dip Recession in the UK • Unprecedented cuts in public spending • Restricted lending • Growth nil or negligible • Asset values decline • Reliance on rising property values to underpin many regeneration schemes collapse • Loss of investor confidence

5. The current economic landscape (cont’d) • Sources of public infrastructure funding disappear • Complexities around lawfully renegotiating or restructuring deals • Projects generally grinding to a halt • A fracturing of the trust between public/private sector and a reduction in appetite for types of PPP working • Greek and French voters! Democracy!

6. Local government capital expenditure – a brief historyTimeline

7. Local government capital expenditure – a brief history (cont’d)Timeline

8. Role of Local Authorities • Recession or no recession - the pressures on Local Authorities’ budgets and ever increasing challenges in services continue, e.g.: • Worklessness amongst young • Aging population and care of the elderly – responsibility for public health • Shortage of homes/affordability of housing • Economic decline • Revenue v Capital spending • Local Authorities have a key role in regeneration and economic recovery

9. Role of Local Authorities (cont’d) • Localism Act – powers – general power of competence • Devolution of powers and decisions from the regions – abolition of RDAs • New “bottom up” LEPs • More powers?

10. Role of local authorities in regeneration • Catalyst for change • Political will locally exercised • Powers: • Planning • Compulsory purchase • Land owners • Economic change • Housing

11. Funding • Local Authorities need to invest in infrastructure and regeneration: • Stimulate growth – employment • Infrastructure needed • How will schemes be financed in these challenging times?

12. Traditional sources of funding

13. Capital Receipts • What is it? • This is income received by a local authority through a disposal of a tangible fixed asset • How does it work? • Straight forward - sale of land

14. Revenue Financing • What is it? • Funding of capital projects from the revenue budget • How Does it Work? • Some capital expenditure can be financed through the general fund (CERA), housing revenue account and major repairs reserve. These accounts are funded by central government grants, council tax and non-domestic rates payments

15. Grants from UK Bodies • What are they? • Grants from non departmental public bodies, Arts Council, Sport England, National Lottery • How do they work? • Each body has different criteria and processes for allocation

16. S106 • What is it? • Agreement between a developer and local authority pursuant to statute • How does it work? • The developer is required to agree to make a contribution for the benefit of the locality, as a pre-condition of getting permission

17. ERDF • What is it? • European Regional Development Fund created in 1975, it is now in its 2007-2013 period. How does it work? • It is a fund allocated by the EU to promote regional development • Aimed at economic regeneration projects • Primarily those promoted by the public sector • Private sector not excluded, generally not for profit making private enterprises but can be used to help SME’s • Private sector encouraged to get public sector partner • LEPs can apply

18. Borrowing • What is it? • Prudential borrowing • How does it work? • Supported capital expenditure (when central government provides revenue to support interest payments on loans or other forms of credit) • Unsupported borrowing (local authority finances this itself)

19. Government Grants • What is it? • Grants from a variety of Central Government Departments, mainly from Department for Employment, Department for Transport and Department for Communities and Local Government • How does it work? • Some grants arering fenced for a specific project, others have more flexibility

20. New approaches to funding

21. Growing Places Fund • What is it? • A £500m central Government fund to kick start development of local funds to deal with: • infrastructure issues (e.g. strategic new roads, congestion solutions) • economic growth • job delivery • more houses • How does it work? • LEPs can apply. They decide on priorities to achieve the above, and get returns to reinvest locally

22. New Homes Bonus • What is it? • Started last year, an incentive for Local Authorities to build new houses and reuse vacant existing stock • How does it work? • It is a match funding initiative, match funding the additional tax raised for the ensuing six years

23. Housing Revenue Account Reforms • What is it? • Reforms to give local authorities complete financial control over their housing stock • How does it work? • Local Authorities will be able to build new affordable housing and improve existing stock. It is estimated that over time this could give local authorities more than £50bn in rental income

24. Tax Increment Financing (TIFS) • What is it? • An ability for local authorities to raise finance to service debt payments for an infrastructure investment, by pledging non-domestic rates and other income resulting from the investment • How does it work? • It seeks to gather non-domestic rates in a specific area that would not have arisen had the infrastructure investment not been made. It thereby enables local authorities to "unlock" development projects that are stalled due the need for public funding of infrastructure, without which the schemes would be unviable

25. JESSICA (Joint European Support for Sustainable Investment in City Areas) • What is it? • EU scheme • How does it work? • Enables the authority to use some structural fund allocation for urban development funds to speed up development

26. Regional Growth Fund • What is it? • £2.4bn fund that businesses across England can apply to for loans or grants. It supports projects and programmes that lever private sector investment to create economic growth and sustainable investment • How does it work? • Bids submitted to BIS • Private sector bids, but public sector can be part of a consortia bid • Bid has to have a value of £1m or more • Independent advisory panel recommendation to Ministerial panel. Deputy Prime Minister makes final decision

27. Local Asset Backed Vehicles • What is it? • Public/private partnerships (PPPs) • Often 10-15 yrs partnership • Commonly used for mixed use regeneration schemes • How does it work? • Local authority (or other public sector body) invests its assets into a joint venture formed with a private sector partner • Private sector partner borrows against the assets to fund the development

28. CIL • What is it? • The Community Infrastructure Levy has been with us for just over one year and is a levy that can be imposed on landowners benefiting from new development • How does it work? • Local Planning Authority has to have adopted Charging Regime and Charging Schedule as part of Local Development Framework • Calculated by a formula relating to nature and size of development • The levy is used to fund infrastructure necessary to support the new development

29. Green Deal • What is it? • Department of Energy and Climate Change launched energy saving plan to make homes/businesses warmer and cheaper to run • How does it work? • Applicants apply for up to £10k to pay for energy efficiency works • Repaid through energy bill savings • Private sector access funds and manage scheme

30. Local Business Rates • What is it? • Retention of a percentage of non-domestic business rates by local authority • How does it work? • Local authorities collect non-domestic business rates for central government who then redistribute through grants. Instead the local authority will be able to hold on to a proportion, reflecting percentage increase they generate

31. Enterprise Zone • What is it? • Just over year ago, March 2011, government announced 21 new Enterprise Zones would be established in LEP areas. They are aimed at regions neglected for last decade, with potential for growth. Scheme aims to create 30,000 new jobs by 2015 • How does it work? • Features – simplified planning zones, superfast broadband and business rates discounts • LEP's significant role deciding on incentives. Localised solutions to local needs

32. PFI • What is it? • A form of PPP • How does it work? • LA pays for use of new capital assets as opposed to buying and developing itself

33. Capital investment – a new era

34. NLGN report – “Capital Futures” (December 2011)

35. Retail Bonds – a new source of funding • Previously not competitive • Now with PWLB rates increasing they are more of a reality • Formal process to go through – credit rating needed Issues: • Is there power to issue bonds? • Localism Act – general power of competence • CIPFA – prudential code update • Will the lending market be convinced? • Only applicable for large amounts (local authorities may group together to share the costs and receipts of a bond) • High up-front costs

36. Structures and models - Old v New

37. Disposal Local authority Capital receipt Land transfer Developer Building Contract Contractor • Pros • Simplicity and familiarity • Up front capital receipt • Low risk to the public sector • No need for public procurement • Cons • Potential land banking • Lower capital receipt to reflect higher risk to private sector • No control over the development other than through planning

38. Direct development Income once development completed Local authority Building Contracts Contractor Contractor • Cons • Capacity and resources required • Development risk sits with the public sector • Need ability to finance • Political and legal risk of failure • Pros • Control over quality and programme • Overcomes market reticence to development

39. Partnership – contractual Local authority Development Agreement (exclusivity) Overage? Developer Building Contract Contractor • Cons • Higher set up/procurement costs • Lack of flexibility for market changes • Reliance on single developer • Pros • Flexibility for phased development • Longer term view • Share in profits through land value and/or overage

40. Partnership – corporate Developer Local authority Share of profits Development Agreement Joint venture vehicle Building Contract Contractor • Cons • Higher set up/procurement costs • Reliance on single developer • Harder to exit • Pros • Longer term view • Share in profits through investment in JV • More formal governance arrangements

41. Local asset backed vehicle Share of profits Private sector partner Local authority Investment Land LABV DevCo DevCo DevCo • Features • Corporate partnership • Multiple or complex sites • Long term relationship • More complex and relatively untested

42. Going forward – what are the opportunities? • New opportunities to push the boundaries in looking to leverage new private sector funding – whether: • Bonds • LABV’s • Attracting new investors – pension funds – to invest in infrastructure • Local Authorities more empowered • New structures and deals to be explored

43. Tim Shaw & Victoria Thourgood Nabarro LLP Spring Conference, Barnsley 2012