What is the difference between Private Finance Initiative, Scottish Futures Trust and and Tax Increment Financing?

At the time of writing, I don’t know, but whichever political party in Scotland can answer the above question the clearest and most persuasively may well end up reaping considerable rewards at the next Holyrood elections.

At a high level (or a helicopter view if you’ll forgive the business lingo), the differences are as follows:

Private Finance Initiative – A procurement method which secures private funding for public institutions in return for part-privatisation. PFI is also an operational framework which transfers responsibility, but not accountability, for the delivery of public services to private companies.

Scottish Futures Trust – Tricky one this, best to take it from the horse’s mouth. The Scottish Futures Trust is the independent company responsible for improving value for money in public infrastructure investment projects such as schools, transport, health and regeneration. The main functions of SFT are to improve the value for money of the billions of pounds spent each year by public sector bodies and finding new ways to raise affordable finance in today’s tight financial environment.

Tax Increment Financing – A new funding option for the UK, given the go-ahead by Nick Clegg and being used to fund Edinburgh’s Waterfront, including a cruise liner terminal. TIF is a method to use future gains in taxes to finance current improvements (which theoretically will create the conditions for those future gains). When a development or public project is carried out, there is often an increase in the value of surrounding real estate, and perhaps new investment.

So great news then; while thousands are losing their jobs, RBS continues to hang on a shoogly peg and the Capital’s finances are being brought to their knees by the troubled Tram project, Edinburgh can still afford a new bay for cruise liners by plucking new money out of thin air. Not too shabby hey?

So how does this work? Well, it’s simple really – Edinburgh is spending tomorrow’s money today. A finished, fully-functioning waterfront would create extra tax receipts so let’s take out a loan on those future cashflows in order to build the waterfront in the first place. I know what you’re thinking, it all sounds a little too circular, hollow and bit ‘sub-prime mortgage’, doesn’t it? In Dragon’s Den parlane it’s a bit like giving away the business in order to get a business.

Barry White, the SFT’s chief executive has said: “Tax Incremental Financing is an innovative way to fund growth from growth which supports jobs and aids economic recovery.” I’m sorry, is it just me or does the phrase ‘funding growth from (future) growth’ not send shivers down your spine? Funnily enough, this week marks the first week that banks have started reselling those subprime mortgages in the UK since the credit crunch. Investec is bundling up some ‘non standard mortgages’ and putting it out to the (still just about AAA) British market. Are we just reinflating the bubble again? Have we learned anything at all?

The approach by Edinburgh Council with TIF is also ‘non-standard’ and one can’t help but think that Council Leader Jenny Dawe is risking a mini credit crunch by trying to be a jammy dodger. Furthermore, it is surprising that a political party that swept to power on a wave of anti-PFI is now turning to a remarkably similar approach to financing as the next election draws nearer. John Swinney, according to the Telegraph article at least, appears to have given his backing.

I shouldn’t be too negative and sceptical, there may be a logical reason for this approach after all. The coalition in Westminster is cutting fast and deep, certainly faster and deeper than Labour, the Greens or the SNP would like it to. This leaves Scotland in a particularly difficult position as it cannot stimulate the economy in the way that the Scottish Government would like as it can only spend what George Osborne sends north via the Barnet Formula. With this clever Tax Increment Financing, Scottish local authorities (and even theoretically the Scottish Government itself) can circumvent Westminster’s largesse and raise money from the private sector itself in order to stimulate the economy directly, in contrast to the Con-Lib approach for the best way ahead.

It is risky but radical, keen but Keynsian, gallus and, most certainly, a gamble. After all, Homecoming Scotland could feasibly have been funded with TIF and, well, the future inflows never did materialise as forecast, did they?

And is it necessary? Scottish Futures Trust as a consultancy body for conventional funding methods is working. Slowly, admittedly, but it is working. We can’t push too hard too soon and build up liabilities for Scotland that may end up becoming black holes. We have too many such liabilities from the old PFI days.

At the end of the day, I always go for that old comparison with the family finances. And, well, if you are feeling the strain, if you are tightening the belt, if you are living hand to mouth, then it’s probably not a great idea to get the credit card out, effectively spending double in the short term, in the hope that vague, future income will ride to the rescue.

In spending tomorrow’s money today, Edinburgh is taking a massive gamble, too big a gamble for my money.

Trams, bridges and cruise liners = too much money being spent in too small an area at precisely the wrong time. It will end badly I’m afraid.