Harnessing the power of public-private partnerships

Public and private sector partnerships can transform the UK’s built environment, providing a tool to deliver large-scale regeneration in our towns and cities. This type of partnership working is more important than ever, with real estate facing one of the most challenging operating environments on record. Inflation remains significantly above target, with the bank rate now at 4% and expected to peak later this year. While the UK narrowly avoided recession in the final quarter of 2022, it is clear the economic downturn is beginning to bite. For developers, rising costs and interest rates are making funding and building schemes difficult. They are also dragging real estate values down, with commercial and residential property affected and likely to fall further as the UK continues its fight with inflation. The public sector is experiencing similar challenges.  Analysis from the Institute for Public Policy Research shows that at the time of the Autumn Statement, more than £500m had been lost from various levelling up funds because of inflation and cost increases. It is no surprise that local authorities, which are already under pressure, are now putting projects on hold as questions arise over their financial viability. This is having direct consequences on communities across the UK – stalling much-needed regeneration projects, and endangering the aim of levelling up. All the while the demand for new development and infrastructure is growing, as well as the economic and social benefits that can be derived through residential and commercial real estate. Joining together and entering into partnerships can enable the private and public sector to manage some of these challenges and still bring projects forward.  But how do these partnerships work in practice and what are the main considerations developers and local authorities need to be aware of before entering into an agreement? 1) Structure One of the most common public-private partnership models is a corporate joint venture. This type of arrangement provides opportunities for the private sector developer and local authority, which uses its land or powers to attract long-term investment from the developer. Typically, a local authority will transfer land assets to a jv vehicle, in exchange for a loan note, with the private sector partner providing funding of equivalent value to the land. This is alongside bringing its development expertise, skills and access to finance. Corporate jvs can be structured through a company limited by shares or a limited liability partnership. Both structures allow parties to ring-fence liability and create bespoke corporate governance arrangements. This is key to ensuring the developer and local authority maintain equal control over the development, while also sharing the risk and rewards of the jv. The different jv structures have varying tax implications and may also be effected by local authority procurement rules, which can be complex. The main objective of corporate jvs is to complete a project and generate a revenue receipt that can be used to fund future phases or other developments. 2) Shared benefits Successful jvs are more than just a legal agreement. They become almost a symbiotic relationship, based on shared ambitions, trust and communication. On the ground, these partnerships can also be effective in unlocking sites and kickstarting development.  A developer may have plans for a site that is bordered by council-owned land. By forming a jv, a developer can work with the local authority to access this land, sometimes helping build the critical mass required to make a scheme viable. Local authorities can also support land assembly by utilising compulsory purchase orders. While the use of CPO powers should always be a matter of last resort, it can aid jvs by allowing access to other sites and broadening a development. These benefits can often be the difference when it comes to project viability, but also accelerating the large-scale regeneration that is required to transform an area. Take Manchester’s Spinningfields for example. PPPs have helped to breathe new life into the 22 acres of land between Deansgate and the River Irwell, now considered the city’s main commercial hub, and also home to Shoosmiths’ Manchester office. January also saw plans revealed for the £1.9bn regeneration of Birmingham’s Smithfield. The proposals feature more than 3,500 new homes and 1.3m sq ft of commercial space. While subject to approval, the development is being made possible by a jv between landowner Birmingham City Council and developer Lendlease. The aim of any jv will be to ensure that a development is completed successfully and both parties secure a division of the profits. In the long-term, however, these partnerships have the potential to leave a lasting positive legacy that is felt economically and socially – creating new homes, jobs and places to be proud of.  3) Pitfalls Joint ventures are not without their risks. Each partnership has its own commercial challenges, and there have been a number of high-profile ventures that have failed. It is therefore critical that careful consideration and advice is sought before any agreement is entered into. Developers and local authorities must communicate clearly and ensure they are balancing their individual interests and setting out objectives at the outset of a project. This must be underpinned by an appropriate governance structure that allows both parties to maintain control while also balancing, and sharing, risks and rewards.  To assist this process, both parties should look to appoint experienced advisers that understand the commercial drivers and issues involved with jvs.  In particular, local authorities must prioritise ensuring that any potential private sector partner has a proven track record, backed up by in-depth financial due diligence. Developers must also take similar steps to mitigate the risk of these relationships. This could include establishing legal provisions in the jv agreement to protect them should it be terminated – ensuring they are reimbursed for any work completed. It is impossible to eliminate all the risks of a jv, as it is with any development but by seeking the appropriate advice and entering into an agreement with a partner that is willing to work collaboratively and openly, local authorities and developers can put themselves in the best position possible to harness the power of a jv and successfully deliver projects that are capable of revitalising the UK’s towns and cities. Patrick Duffy is a real estate partner at Shoosmiths Image © Claudio Schwarz/Unsplash