15 July 2014

How might an infrastructure project, like Cross Rail II be funded other than by public purse?

Answer: There are a number of mechanisms that have considered by Carter Jonas and more widely across the industry. These include, for instance, the use of pooling funds from developers’ contributions to community infrastructure levy (CIL).

At the moment however we understand that the Mayor is forecast  only to receive around £300m if targets are achieved by  2019 from CIL contributions. That leaves a significant funding gap for an infrastructure project of this scale which could cost around £15bn.

So how to bridge the funding gap?

Other funding mechanisms could include, for instance, reviewing how Section 106 contributions are dealt with and whether or not there can be contributions allocated to fund major infrastructure programmes.

There is of course also the capital value rise of existing residential and commercial sectors, as a result of the improved transport improvement. The critical question here is: how could any capital value rise as a result of transport improvements be captured?

Traditionally, residents and businesses have to pay tax through their business rates or council tax contributions. With respect to business rates, these are linked to the rent, which of course is market adjusted so, where price inflation occurs on rent, that can be captured back through business rates.  However, forecasts for 2031, the date which Crossrail 2 could become operational, are for up to around £32bn capital value rise in real terms for residential estate and only around £6bn for commercial, along the line of the route proposed. That suggests there is a far more capital value rise in the residential sector which is currently not available to fund major infrastructure improvements.

In order to capture some of that capital value rise, which may be necessary to fund a major infrastructure programme such as this, there would need to be a full review of the way council tax is allocated for spending. In particular whether it is possible to share a percentage of the uplift in council tax, which will have occurred as a result of capital value increases, to help fund major infrastructure improvements.

Then there are other mechanisms such as direct developer contributions toward major infrastructure improvements.

With regard to the fiscal system in general, the London First Report published in February made some initial assessments as to whether a scheme of this magnitude could be funded 'privately'. It pointed to a number of areas where the Mayor’s office could improve its ability to capture money from the private sector. For example, it highlights the differences between London and New York; London is a net contributor to the UK economy of around £5b per year, however, only around 7% of that figure is retained and put toward infrastructure improvements for the residents and businesses of London. In New York that figure is around 50% which, put in context, could amount to some £2.5bn per annum if London were to move toward a similar structure of capturing and spending its money.

I have worked on a number of joint ventures recently with London Boroughs and private sector developers and investors, most recently setting up the joint venture between Westminster and Developer PMB Holdings to redevelop Berwick Street, in Soho. I also helped set up the residential joint venture to develop out Hammersmith & Fulham's major residential sites with Stanhope Plc which was signed in February this year.

The public-private JV with Stanhope is one of the first of its kind in Central London and is a model we hope will enable previously unviable development opportunities sites to be developed. The onus is on the private sector developer and investor to obtain a good planning consent and then manage development or redevelopment of land assets for the public land owner. This mechanism is flexible with regards to land value, which will move with the market. The structure overcomes some of the weaknesses of the Local Asset-Backed Vehicle (LABV) structures which were widely promoted in the 'noughties' as being a good fix to develop public land using private sector resources, but which have struggled to deliver full regeneration.