The City of Edinburgh Council has given backing to use tax increment financing (TIF) to support investment worth £84m on the Scottish capital’s waterfront.

Yesterday, Scottish Government finance secretary John Swinney said the government backed the plan to use TIF funding to support the development of a cruise liner terminal, lock gates and a link road in Edinburgh. The Scottish government estimates the investment could lead to private investment in the area worth £660m and create up to 4,900 jobs.

This is the first TIF scheme to be approved in the UK, although this method of funding is used widely in the US.

TIF allows a local authority to borrow money to fund improvements to local infrastructure. These improvements to local infrastructure are used to enable more development in an area, and increase the amount of business rates that the council gets. The amount the council borrowed under TIF is then paid back from the increased amount of income it makes from these higher rates.

Swinney said in a speech to the Scottish Futures Trust conference in Edinburgh that the government had provisionally approved the business case for the scheme.

Swinney said: “Westminster cuts to the Scottish budget have emphasises the importance of finding new funding models to deliver crucial infrastructure projects such as the Edinburgh Waterfront, that can unlock further economic development, whilst ensuring maximum value for the public purse.”

Jenny Dawe, leader of the City of Edinburgh Council, said the scheme would bring wider benefits to Scotland.

“As well as being an innovative step, this shows we are being proactive and looking out for Edinburgh’s long-term success. This is crucial for the country as a whole, because when the capital performs well it benefits all of Scotland,” she said.

Earlier this month, deputy prime minister Nick Clegg said the government would reveal more details about how TIF funding could work in the UK at the comprehensive spending review on 20 October.

Michael Chambers, associate director (special projects), said Scotland was leading the way on TIFs.

“At a time when few regeneration projects are viable, TIF offers one of the best prospects for providing the upfront funding of essential infrastructure that is needed to attract vital new investment from the private sector.

“We hope the legislation will be sufficiently flexible to permit different funding models  for TIF to go ahead, thereby allowing TIF schemes to be tailored to the needs of particular schemes and enabling a range of projects – a number of  which are ready to go – to get rapidly under way.”

• Scotland leads way in tax increment finance
• Scotland consults over planning reforms
• Call for Scotland to centralise property management
• Public sector tenants prop up Edinburgh
• Sue Bruce to become Edinburgh Council chief exec