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Infrastructure funding devolution for London: a must in view of Brexit?


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Summary: The Mayor of London has announced his intention to reconvene the London Finance Commission to develop enhanced devolution plans for London following the Brexit vote. What is or was the London Finance Commission (LFC) and what were its original principal recommendations? What is the potential focus of the reconvened LFC?

The LFC was established by the previous Mayor of London in May 2012.  The LFC was chaired by Professor Tony Travers of the LSE and members were drawn from different political parties, the private sector and relevant professions from across and outside of London.  The terms of reference of the LFC was to examine the potential for the greater devolution of both taxation and the control of resources in London to improve London’s tax and spending arrangements and to finance additional infrastructure.

The general conclusion which the LFC reached was that London Government should have the freedom to make appropriate investments in its own infrastructure to cater for both current forecast economic growth and also future potential economic growth. 

The LFC recommendations can be grouped into four broad areas:

  1. greater control and certainty over capital investment decisions where the relevant specific recommendations included, the Mayor should champion infrastructure planning and  seek to delegate commissioning of infrastructure to London Boroughs;
  2. greater incentivisation for economic growth should be built into government funding where the relevant specific recommendations included, (a) the Government and London should explore incentives in local tax system similar for example, to the so-called Manchester “earn back” and (b) the Mayor should work with London Boroughs to create City deal type initiatives within London (a London wide City deal was not thought appropriate due to scale) and (c) in the context of prudential borrowing and borrowing caps Government should distinguish between borrowing that will be used to promote growth and thus be repaid and other types of debt;
  3. restrictions on borrowing should be reduced or abolished altogether where the relevant specific recommendations included (a) Greater London Authority group borrowing ceilings should be removed and (b) the housing revenue account borrowing limits for London Boroughs should be relaxed or removed; and
  4. a ring fenced pool of devolved funding sources should be created where the relevant specific recommendations included, (a) 100% business rates should be devolved to London and London should set the multiplier (subject to appropriate safeguards) (b) a full suite of property taxes (Council tax, business rates, SDLT, annual tax on enveloped dwellings and capital gains property development tax) should be devolved to London Government which should also assume responsibility for setting tax rates, revaluation, banding and discounts and (c) London Government should be able to introduce smaller new taxes and once property taxes have been devolved then devolving or  assigning income tax to London should be considered.

Although few advances have been made generally on most of the recommendations since the LFC report there have been advances in specific areas covered by the LFC particularly in business rates with the Government’s proposals for 100% business rates retention in return for the phasing out of government Revenue Support Grant. However, this is very much a national initiative and does not address the London specific issues raised in the LFC report (although London has been singled out as a pilot for an increased share of business rate retention although short of 100%). In particular, the Government consultation paper on 100% business rate retention, “Self Sufficient Local Government: 100% Business Rate Retention: July 2016” seems to suggest that any new regime will necessarily still retain the current features, to achieve equalisation across local government (the so called tariffs and top ups) and to insulate against “shocks” (the 7.5% safety net payments and parallel material growth levy). The suggestion also seems to be that the 25 year business rate retention in Enterprise Zones will also be retained.

Within London we also have some excellent recent examples of leveraging on business rate retention. The £1bn in funding for the Northern Line Extension (NLE) will be serviced from incremental business rates generated and retained within a new Enterprise Zone and developer contributions under section 106 Agreement and Community Infrastructure Levy (CIL) regimes. So far the Greater London Authority has raised a £480m loan from the European Investment Bank and a further £200m will be raised from indexed linked bonds through the same funding vehicle as that used to raise bond finance for Crossrail. The Treasury have also agreed to make available a £750m stand by facility for the NLE which acts as a quasi-guarantee.

A further example is the Croydon growth Zone, a funding mechanism for infrastructure to service the Croydon Opportunity Area. Initially conceived on the back of a concept which involved the devolution of property taxes the Growth Zone has evolved into a model based on ring fencing 50% of growth in business rates over 25 years. In addition a £7m revenue grant has been agreed with Government to cover interest costs associated with borrowing in relation to the Growth Zone prior to any business rate uplift. All this will enable circa £300m in infrastructure investment.

What can the reconvened LFC take forward from all of this? First there needs to be a more meaningful investigation into the devolution of property taxes, how can devolution be achieved? What would be the mechanics? What would such a system look like? What would be the issues to overcome? Should it be piloted in defined London Growth Zones? What would be the funding model for infrastructure? Secondly, there needs to be work on part London City deals. What should be the right incentives? Although individual deals would focus on discreet areas of the capital what should be the strategic approach across London? How should potentially damaging competition and displacement be addressed? Thirdly, the relationship in terms of devolved funding between the national system and London and between the Mayor and the London Boroughs needs to be resolved. Fourthly, and perhaps most importantly how should all of this be brought together as a financial tool for infrastructure?

One such financial tool could be a London Infrastructure Fund (LIF). The LIF would be separate from the existing infrastructure funding mechanisms for example the Large Sites Infrastructure Fund whose operation in London is currently delegated by the Mayor to the HCA. The LIF would be a growth model funded from devolved business rates and property taxes. It could be initially focussed on pilot growth areas benefitting from ring fenced property taxes and devolved business rates for a period of time which would enable the amortisation of borrowing. The LIF would invest or lend on a commercial basis within State Aid guidelines. The LIF may require some initial prime pumping through a separate stand by facility or guarantee to cover interest costs until business rates and property taxes flow. The fund would grow as surplus tax payments increase. There could also be future possibilities for refinancing the fund once income streams are stabilised through the securitisation of the revenues to financial institutions.

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