Greystones, a small town on the Irish coast, is on the verge of becoming a popular tourist destination and upscale community for Dublin, Ireland's biggest city, which is only 29 kilometers (18 miles) away. There is just one problem: Greystones' local harbor, a big potential draw, is in a sorry state. It is badly in need of redevelopment, but no investment has occurred for years. The county council doesn't have anywhere near the $40 million-$50 million budget required to fund improvements in the harbor.
What the county lacks in financial assets, however, it makes up for in physical assets. It owns a swath of property overlooking the harbor-home to an old waste dump and some parkland-as well as some land in the harbor that could be reclaimed. With Dublin booming and growth spilling out into the nearby suburbs, the land is far more valuable to a private developer who could build harbor-view condominiums than it is to the county. So the county decided to convert its underutilized physical assets into a financial asset by seeking bids from the private sector to rebuild and then operate and maintain the harbor for 30 years in exchange for getting development rights to the land. To ensure that the developer completes the harbor improvements in a timely manner, it is prohibited from constructing residential units until the improvements are done.
The county will realize a host of benefits from this innovative model. The harbor will be built quickly, spurring economic development faster than would otherwise have been possible. Long-term maintenance risks are shifted to the private sector. And the county releases greater value from the land than would be possible under government ownership-all without spending any tax revenues.
This example points to an important and growing strategy for getting the biggest bang from PPP projects: unlocking value from undervalued and underutilized assets. Savvy governments increasingly are taking a close look at their full portfolio of assets and determining how to release the maximum value from such assets by exchanging them for other assets or services that might serve more pressing needs. The state of Oregon, for example, is currently working on a swap of highway maintenance facilities in exchange for construction of new facilities.
These public assets tend to be sited in prime locations and often have excess land or control of adjacent properties. The government can use these as equity to partner with the private sector to create new facilities and develop the existing assets. This not only unlocks value from these assets but also helps to meet critical infrastructure needs.38
In the UK, for example, the real estate asset base of local authorities is a huge untapped resource worth around £130 billion. While the authorities have only custodian role for 80 percent of total local government building stock (schools and social housing), they are examining ways to "monetize" the remaining 20 percent - or £26 billion of the aggregate portfolio - for new or expanded infrastructure or services.39
One challenge in using land assets to help finance infrastructure is that property values tend to change dramatically over time, increasing the risk that the public sector is not obtaining maximum public value from the asset, while also heightening uncertainty for the private sector. The UK Ministry of Defense (MoD) is using an innovative hybrid structure in a PPP military base development to address this challenge.40 The massive project, called MoDEL, involves consolidating up to 14 MoD sites into a single location in Northolt in London. The consolidation will relocate up to 3,500 military and civilian personnel into modern facilities. The £200 million project uses receipts raised from selling surplus property over seven years.
Given the level of uncertainty about future accommodation requirements and the fact that land values are subject to factors beyond MoD's control, a classic PPP approach would have been either unbankable or unacceptably expensive. A new approach was needed to deliver MoDEL.
The MoD's approach has been to appoint an integrator (termed the Prime Plus Contractor) who will take the principal risk for delivering the initial phases of the project and competitively procure subsequent work for the ministry. The integrator has been given incentives to maximize net receipts from sale of the surplus property and is responsible for ensuring that schedules and quality standards are met. The integrator will carry out specified works at a fixed price determined through competition but will be prohibited from competing for later, as yet unspecified, works.
The cash from the sale of surplus sites is paid into project-specific accounts the Ministry of Defense controls. Sales proceeds are used to pay debt, direct project costs, and the contractor's management fee for delivering the project. Any amount in excess of a guaranteed minimum payment is shared by the MoD and the contractor according to a predetermined profit-sharing mechanism, thus providing a strong incentive to the contractor to maximize revenues over time.