Public and Private Sector Roles and Interrelationships

As regeneration is a long-term undertaking entailing significant interaction between the public and private sectors, the form and content of the PPPs are crucial to ensuring that goals are achieved. Strong PPPs can help ensure that the public interest is protected. In this context, investors and developers can have greater confidence in the integrity of, and commitment to, the program over the long term. In structuring PPPs, it is important to first be clear about the basics of what the proposed regeneration program will require of both parties and how these requirements may change over time. The key elements that need to be clarified early so that there is no uncertainty as to roles, responsibilities, and obligations include a number of factors listed here.

Public land position. The control of land is a core consideration in the structure of regeneration contracts. It can be a great source of vulnerability and dispute if not skillfully negotiated. The contract needs to define clearly how the public land is being used for regeneration. There are several options for the use of public land, which have been noted. Land can be used in the form of a subsidy or it could be leased or sold to the private sector. Alternatively, the public sector can use the land as an equity contribution and recoup some form of profits at a later date when the project stabilizes. Whichever model is chosen, it is important to spell out the important details of utilizing the public land parcel. A summary of these considerations is detailed in table below.
Profit participation. In structuring contracts, it is necessary to determine whether the public sector wants to receive some amount of land value early as a payment, or whether it would participate in a profit stream if and when the project generates more value over time. Time is a critical variable in how the public sector structures the contracts. Much will depend on how patient the public sector is in receiving returns on its investments, whether in the form of land receipts, loan repayments, or equity contributions to business growth.

Table: Potential complexities in public land contracting

Contract item	Action	Potential complexities and problems
Land required and its usage	Determine the amount of land needed.	The public sector has to determine the amount of land needed as efficiently as possible because land is a nonrenewable resource.
The time frame for usage or transfer	The public sector must protect itself from land being transferred to the private sector prematurely, thereby losing control of it.	The public sector needs to guard against land banking whereby large tracts of land are transferred to the private sector before they are actually needed. This would enable the private sector to hold the land and accrue value without actually developing the land.
Phasing of land transfers and identifying parcels to be transferred in each phase	The public sector has to be very cautious in identifying the parcels it will transfer, including the timing and conditions under which they will be transferred. The disposition of land according to a clear phasing plan and clear conditions for the transfer is a core term that must be negotiated.^a	Without a phasing plan for transfers, the most valuable parcels could be transferred prematurely at discounted values before the larger regeneration program has had time to stabilize and create added value. This will result in financial loss for the public sector.
The price of land	Multiphased regeneration projects require clarity as to the base prices, price escalations, terms, and timing of land transfers between parties.	The land arrangement between the public and private sectors can be subject to arbitrary renegotiation if the contract fails to balance certainty with protection of the public interest.
"Claw-back" clause	It must be clear what the recourse is if parties do not perform, such as not initiating or completing construction, and whether land can be "clawed back."	The risk here is that a private sector party could gain control of the land but without having the necessary capacity or capital to develop it. This would result in stagnation of the regeneration project.

Note: A claw-back clause is a special contractual clause, in which the grantor of the contract reserves the right to limit compensation or other benefits in case the grantee does not deliver on promised services.
^a One example of negotiated transfers can be found in the Shanghai case study, chapter 6.

Competitive process. It is critical that a competitive process be instituted and rigorously followed for negotiating contracts, selecting development partners, and disposing of land. In this way, the credibility of the regeneration project can be assured, and the best value achieved. The public sector itself must be assured that the process is fair, transparent, and open to competition. It is best if the process is not a closed one favoring “insiders” or a preselected (or politically selected) favored group. However, in some cases like the Xintiandi redevelopment in Shanghai, a tendering process was not initiated due to very special circumstances and the relationship that the government already had established with one developer. To ensure that the competition is successful, there must be clear criteria for selection with objective standards, a selection process that is managed by objective persons with subject matter expertise, and broad advertisement of the contract process to assure the widest net for participants.
Infrastructure commitments and funding responsibility. Urban regeneration is usually paired with development of a major piece of infrastructure. Funding infrastructure costs is a big determinant in structuring regeneration contracts. It is critical to have clarity as to who is responsible for funding and delivering infrastructure. Whether the public sector has the funding required for the significant up-front investment will determine how financing is structured and whether it will take a more traditional form of direct capital investment or government-backed bonds. If such funding is not readily available, private financing will be necessary. Although private financing of infrastructure may entail higher capital costs, it can supply the resources needed to jumpstart the project. In such cases, contracts should be structured in a way to oblige the private sector to build with maximum quality, best value, and on-time delivery. In order to achieve this, there must be a vigorous and transparent competitive process. Finally, the schedule, obligations, and penalties for not meeting the schedule must also be clear and agreed to in the contract. In the case of the development of the Navy Yard area of the Anacostia Waterfront Initiative in Washington, DC, the private developer selected for the project was tasked with the adaptive reuse of historical industrial buildings and the construction of new buildings for residential, office, and retail use. The Navy Yard project is worth about US$1.5 billion, and the city’s contribution amounted to about US$42 million. City officials justified the subsidy as a way to ensure that the site was redeveloped as a mixed-use project.
Transparency and protecting the public interest. When public-private contracts are developed and negotiated, transparency is vital so that all interests are clear. The contracts should not be subject to allegations of corruption or “soft deals.” It is also important for the public sector, which has a fiduciary responsibility regarding the use of public funds or assets, to ensure transparency regarding the financial proposals, funding capacity, and company financial status (accounting reports on its status). In doing so, the public sector will help to guarantee that proper and forensic due diligence is conducted to ensure the soundness of the proposed terms of private sector participation.
But what if the public goals are not achieved and regeneration stalls and is not delivered? It is very important to think through all of the ways in which the project might not succeed. The public sector cannot regulate for all these outcomes, as it would create a legal barrier to executing the contract and may preclude private sector participation. However, it is important that key protections are in place, such as phasing and performance conditions for the transfer of public land ownership and protecting against land-banking; claw-backs of funding if not expended; clear definition of profits and when and how the public will participate; adherence to loan terms or financial arrangements; and so on.
Regulatory process and certainty. The time and cost of regulatory uncertainty creates a barrier to investment and can be an impediment to private investment. The contract must clearly specify the timeline, milestones, and incentives to achieve approvals. In London, which is a strong market, many local boroughs enter into Planning Performance Agreements whereby the developer pays a specified amount to fund staff to work on the processing of approvals. In other situations in which the public sector is understaffed or lacks expertise, the government may have to create special regulations or zones with simplified approval processes or delegate the process to a special entity. This was the case in Ahmedabad, India, where the local government delegated the implementation of the Sabarmati riverfront to a local planning consultancy (see box).

Implementation strategy for the Sabarmati riverfront development in Ahmedabad, India

In redeveloping the Sabarmati riverfront in Ahmedabad, the board of the Sabarmati River Front Development Corporation Limited (SRFDCL) was tasked with developing a project implementation strategy. Initially, there were three broad options for managing the implementation:

Implement the project by building capacity in-house
Partner with a private real estate development firm
Hire private sector consultants for development management services

In their discussions, the SRFDCL considered the merits of all three options. Regarding the first option, it would have been difficult to hire the requisite expertise in-house, and the newly hired staff would have been a liability for the company once the project was completed (which at the time was estimated to be within five years). There was an option to use some of the municipal staff from the Ahmedabad Municipal Corporation on deputation to the company. Deputed municipal staff members would have followed bureaucratic processes, which would have slowed the functioning of the company. Importantly, it would have taken away one of the key advantages of having a special purpose vehicle, that is, the ability to make quick decisions. The second option of partnering with a private real estate developer was rejected for two reasons. The primary reason was that selecting and appointing a developer partner would have entailed significant political risk. This approach would have left the decision makers vulnerable to criticism that the valuable riverfront land was being sold off to private interests. Secondly, entering into partnership with a private real estate developer may have required an increase in the percentage of land to be set aside for sale. This in turn would have reduced the available land for public amenities and might have negatively affected the public perception of the project. Instead, the SRFDCL board chose the third option, that is, to outsource the development management services. In 1999, a local planning consultancy was selected as development manager to administer the initial stages of project planning and implementation of the Sabarmati Riverfront Development. The government had worked with this consultancy before and had a positive relationship with them. This allowed the company to leverage its private-sector expertise in managing the project while, at the same time, maintaining full project ownership and decision-making authority.

Source: Authors’ elaboration based on the Ahmedabad case study in chapter 7.