Vivid Thoughts: Cities’ Road to Recovery: Rethinking Partnerships for Development
Cities around the globe – from Bogota to London – are cancelling and delaying capital investments as COVID-19 takes a toll on municipal finances. In the US, over 800 municipalities are making fiscal adjustments in response to the projected US$360 billion revenue loss that will take place over the next three years. In the UK, local authorities are asking central government for financial support to avoid a collapse in services. Cash strapped cities are, more than ever, in dire need of tapping additional resources to support businesses, housing, transport and other services. However, the road to recovery will require more than government transfers. Private sector participation will be critical to fill in the funding gap, which is why we believe it is time to push for more innovative Public-Private Partnerships (PPP) for the built environment.
In the context of real estate, a PPP is a strategic alliance between a public sector authority, usually a municipal or local government, and a private developer to achieve a common purpose, such as repurposing an industrial building. Partnerships in this sector are also about monetising publicly owned assets, such as vacant land or surplus buildings. Too often the arrangements between the public and private are mainly focused on financial aspects and risk sharing. In so far, PPPs have been a successful in improving the health of cities’ finances, generating additional income streams in the form of property taxes or busines rates that public authorities can use to deliver infrastructure services. However, for cities to bounce back they will need to move beyond traditional PPP arrangements.
Time to think about new PPP arrangements
The pandemic has exposed the inequality in our cities and has raised concerns around other pressing problems such as climate change. The current crisis presents an opportunity to bring new PPP arrangements into real estate development to ensure that projects create long-lasting value for communities.
For instance, the pandemic has raised awareness on the importance of public space for health, wellbeing, and economic development. Being outdoors in parks and plazas has helped people cope with COVID-19 restrictions. As cities start to lift restrictions, local authorities are reimagining public space, allowing local shops and restaurants to open on streets temporarily. Future PPP deals should learn from this experience. As cities seek to monetise and transform their real estate assets, they should set criteria and requirements on PPP provisions for the delivery of public space that can help local economies.
Climate change presents an additional potential opportunity. The building and construction sectors are responsible for 39% of global carbon emissions. Municipalities could include ‘carbon neutral’ standards into project deals for the delivery of residential, commercial, and public buildings as part of PPP schemes. This could be done by negotiating with developers the installation of energy-efficient systems, which have demonstrated financial returns. There are already signs that real estate firms are finding ways of cutting carbon emissions in major projects. Public sector initiatives should build on this success to achieve net-zero targets.
The path forward
PPPs offer a viable option for monetising real estate assets, creating additional fiscal space for local governments without compromising their financial health. But delivering lasting impact requires that cities widen the scope of PPP arrangements to address issues such as access to public space and climate change.
Innovative partnership structures should strike a balance between a project’s financial feasibility, a developer’s risk appetite, and the ability of a project to deliver benefits to society. The process is complex, but if carried out correctly, there is great potential for cities to use their assets to generate additional revenue and create economic value.