August 1, 2012
The Global Financial Crisis has created a new sense of urgency for finding innovative ways to leverage public and private sector resources.
In the current economic climate, one characterised by less readily available public finance, value capture finance (VCF) and tax increment financing (TIF) may offer a solution for generating investment in city development, without overdependence on the public sector.
With no one model for attracting private investment universally applicable to all world cities, the next decade will see an increased emphasis on innovation. With a growing number of cities competing for funds from a finite private investment pool, those cities which succeed will be those which offer private investors the best possible return. In this regard, VCF and TIF may offer a way forward which allows for the simultaneous growth of both the inward and external rates of returns of investments.
While these mechanisms offer a potentially viable solution to attracting increased private sector investment in city development, VCF and TIF still remain ill-understood and under-utilised concepts throughout contemporary Europe.
Value Capture Finance defined
In a 2009 report, the Urban Land Institute defined VCF as, “the appropriation of value, generated by public sector intervention and private sector investment in relation to an underused asset (land and/or structure), for local re-investment to produce public good and potential private benefit.”
VCF essentially represents an innovative means of maximising a city’s assets. It is a mechanism which creates a win-win situation for both the public and private sector. By sharing the risks and costs of urban development, the public and private sector are both able to benefit from the associated rewards.
Although the intricacies of individual VCF transactions can be confusing, owing to their financial and contractual complexities, they all involve a financial positive feedback loop with four components:
- Value creation: The unlocking of potential value in under-used assets through public sector intervention as a means of stimulating demand from the private sector.
- Value realisation: Investment and development from the private sector ensures that potential asset value increase is realised.
- Value capture: A proportion of the returns realised by the private sector are acquired by the public sector and earmarked for reinvestment.
- Local value recycling: The acquired funds are reinvested within the same development site or scheme.
Tax Increment Financing defined
The Urban Land Institute defines TIF as, “a mechanism for using anticipated future increases in tax revenues to finance the current improvements (such as new or improved infrastructure) that are expected to generate those increased revenues.”
If these increased tax revenues are reinvested locally, then TIF can also be considered a form of value capture finance.
Value Capture Finance in action
VCF is being used by cities around the globe as a means of unlocking investment potential. It is being used in city centres, waterfronts, business districts and well-connected localities. Cities such as Cape Town, Hong Kong, London, Istanbul, Barcelona and Bogotá are some of the most pertinent examples and offer opportunities for learning and best practice sharing.
The Global Financial Crisis has created a new sense of urgency for finding innovative ways to leverage public and private sector resources, expertise and experience to find a sustainable solution to closing the investment gaps in Europe’s cities. VCF could be one of a suite of possible solutions to bridging these gaps and creating new models for urban success in Europe’s cities.
Image: Flickr-Derek Keats