Tax Increment Financing as a tool for Public Infrastructure Development : a Game Negotiation Experiment
Sander Lenferink, Datuk Ary Samsura & Erwin Van der Krabben
Problems and difficulties in public infrastructure financing arise because of the limitations on public revenue, expenditure, and borrowing as well as the increase of development and construction costs. This situation has increased the need to finance the public infrastructure development by involving the contribution from private sectors. A promising mechanism for financing Dutch public infrastructure is Tax Increment Financing (TIF). In short, with TIF, future tax income as a result of public investments is used to pre-finance these investments. Currently the instrument is considered for application in several countries, including the Netherlands. However, application requires (1) adapting the preconditions to the specific national context and (2) involves a structural reconsideration of the roles of public and private actors. In this study, we simulated the essential negotiations between local governments and private developers that are embedded in the local application of TIF in an experiment. The participants from municipalities and project developers negotiate on their contributions to the financing of public infrastructure and the content of related development project, which will be connected to the amount of TIF as well as the profitability of the project to both players. Based on the experiments we can conclude that the information availability and communication ability in TIF negotiations matter, both for the chance to reach an agreement as well as for the contents of such agreements. In order to apply TIF effectively in Dutch practice, it is recommended to carefully assess the two-fold goal of Dutch municipalities and further investigate how to open up communication and information availability in TIF negotiations in Dutch public infrastructure development.
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