Birmingham’s Enterprise Zone: An Innovative Financing Experiment

Over many years there has been much debate about greater freedoms and flexibilities around cities financing of major urban regeneration projects. This is a current debate with the work of the City Growth Commission in its recent publication ‘Connected Cities: The Link to Growth ‘ which calls for wide ranging empowerment of English cities. One of its suggestions is the proposal for the introduction of  Tax Incremental Funding (TIF) and other such schemes to be implemented in England.

TIF, as it is known for short, is the ability of City government’s to invest in infrastructure and in one way or another recoup the costs of that investment through increased income flows caused by an uplift in prosperity arising from the investment. Under the previous Labour Government this was investigated and Core Cities amongst others pushed for it seriously. More recently the London Finance Commission in its report called ‘Raising the Capital‘ pushed for an extension to powers to enable local TIFs to be established.

Enterprise Zone Investment PlanSo the clarion calls are there but wait a minute; Birmingham is doing this in the here and now. Birmingham is using its Enterprise Zone designation in a highly innovative way. In short Birmingham City Council is borrowing to invest and is using the Enterprise Zone mechanism to repay this investment. It is so confident about the scheme it has just doubled the potential investment it envisages in the period upto 2022/23.

The Enterprise Zone scheme when set up allowed for some financial benefits for businesses growing or locating in them; promoted a simplified planning regime  and allowed the LEP to gain any uplift in business rates in a 25 year period. This latter aspect is what Birmingham is using.

The Government’s Approach

The broad details of the generic approach outlined by the Government can be found on its website here

The UK Government in establishing these mechanisms didn’t seem to envisage this TIF type of approach. It says

All business rates growth generated by the  Enterprise Zone is kept by the relevant local enterprise partnership and local authorities in the areas for 25 years to reinvest in local economic growth.’

In essence it envisaged reinvestment after the revenue had come into the LEP; not necessarily borrowing against the promise of such future income.

Birmingham’s Approach

Birmingham took the view that rather than solely focussing on the benefits to business which are quite short term and potentially marginal for the business  it would use this ability to recoup as the key focus.

  •  It chose city centre sites; sites much more likely to be developed than others put forward internally; sites which may have been developed without EZ intervention.
  • This supported the long term strategic focus of the city of  expanding the city centre
  • It then chose to use the potential income flow to borrow against; to invest in projects not solely for the benefit of the EZ but the whole city centre.
  • The implicit argument is that businesses will be much more interested in a city centre location if they can see investment in public transport etc is taking place; it is more of a pull than minor financial enticements.

It announced an initial EZ Investment plan of £128m in June 2012 which I briefly looked at in a previous post.  Two years have passed and the Council and the LEP have now decided to more than double the potential value of the investment plan up to a sum of £275m. This plan (download here) launched in July 2014 shows a step up in commitment.  This represents both a greater confidence in the scheme but also investment over a longer time period and is responding more clearly to the increasing likelihood of HS2. Significant investments in transport and infrastructure are envisaged around the Curzon Street HS2 station. This post won’t look at the details of these investments but if you are interested it is worth looking at the plan plus the Curzon HS2 Masterplan launched in February 2014.

In the Investment plan  it details some of the financial calculations that have been made. Initial progress on the ground has been slow as is to be expected as developments do have a two to three year minimum lead in time. This graph below (page 8) shows the current position.

EZ progressNevertheless  the new floorspace created is already significant and the prospects for the future  looks encouraging. (The report details progress on key EZ sites).

What is however really interesting is the future and how the finances stack up. It quite properly has a section on the Financial Strategy behind the plan.  The graph below (page 23) shows current estimates of business rate income, financing costs and other revenue costs.

EZ finances

The estimate is by 2023 the scheme will be in an annual surplus of £20m and will have created an overall surplus of £50m.

The LEP and Birmingham City Council are investing with caution – decisions on the extra £148m allowed under this plan will proceed when business rate resources are seen to be increasing. They have also undertaken sensitivity analysis and are putting in place other safeguards.

Conclusions

So this scheme is a significant TIF scheme in all but name. Birmingham City Council and partner Councils could borrow up to £275m.

I think it is worthwhile briefly thinking how this scheme might be improved.  The Enterprise Zone was designated solely on vacant sites in the city centre, at the direction of central government. Just imagine if any uplift in the business rates of the total city centre was accessible by the LEP/Council. This would capture a host of other schemes under way and planned and would really make a significant difference to the financing ability of such a scheme. This could make the difference between the short metro/light rail schemes that are currently planned and conurbation wide investments that are really needed.

What is neat as well is the Council is using this mechanism in effect to pay for staff to help the delivery of the EZ; and as such the EZ  is providing a buffer against the savage cuts imposed on the local authority; economic development is a non statutory area and as such would be in the frontline for cuts otherwise.

So to summarise. Birmingham is running its Enterprise Zone as a Tax Incremental Financing scheme. It is a significant experiment with risks and rewards. Its hoped for success will point the way for even larger schemes and more flexibility in the future.

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