TAXPAYERS will now have to fork out £35m for a scaled-down development of Walthamstow’s Arcade site after a private firm pulled out of the project, it has emerged.

St Modwen PLC, which was due to build a tower, homes, shops and community facilties on the controversial site, has withdrawn from funding the scheme because it is not profitable in the current economic climate.

The council has warned the site will remain empty ‘for years’ unless public money is used to get the project off the ground.

The new scheme, due to be rubber-stamped at a cabinet meeting on Tuesday, will see the financial risk of the investment is transferred to Waltham Forest council taxpayers.

In a cabinet report prepared ahead of Tuesday's meeting, cabinet member for enterprise Cllr Terry Wheeler said: "It is reasonable to conclude that the private sector is unlikely to fund this type of scheme in the current finanical climate."

"Unless the council is prepared to intervene it is likely that the development of the Arcade site could be delayed by several years by the current recession."

Ownership of the site, on the corner of Hoe Street and High Street, was due to transfer to St Modwen following the submission of a planning application later in the year.

But the council has said it will now borrow £35m to fund the development, which it says it will recoup by selling off the Waltham Forest Pool & Track site, in Chingford Road, Walthamstow, and houses on the Arcade site itself.

The news comes weeks after Cllr Wheeler told the Guardian that he considered St Modwen's finances to be "sound", despite the company announcing a £50m loss.

The Arcade site has been vacant for nine years, and many question why development did not take place during the housing boom of the early to mid 2000s.

St Modwen are the second private firm to pull out of developing the eyesore, after Henry Boot withdrew from a scheme in 2005.

The empty site had cost Waltham Forest taxpayers over £5 million by 2006, which had been spent on managing the site, security, lawyers and advisors. The current figure is not yet known.

Cllr Matt Davis, Conservative group leader, described the latest news as a "disaster which is about to become a scandal".

He said: "This is exactly what we feared was going to happen.

"For at least a year we have been assured that St Modwen would fund the project, and lo and behold, it has fallen on the taxpayer.

"The Labour group is prepared to waste £35m simply to save it further embrassment."

The planned development has also been altered substantially. It will no longer have as many shops, and will consist of 65 housing units, including family homes, a cinema and a new pool.

The council estimates it will be three months before a planning application can be submitted.

St Modwen will still have some involvement in the project. The company will be paid £500,000 to continue designing the plans, "to maintain current momentum".

St Modwen PLC declined to comment.