Should Public Infrastructure Be Delivered by Private Developers?
Cities might be better off leaving the building of streets and utilities to developers
Cities have an arsenal of tools to incentivize private economic development. They can attract development with public resources — everything from tax increment financing (TIF) to general fund dollars. Or, they can negotiate down developer impact fees or traffic mitigation requirements to be less onerous to the developer.
There are obvious advantages to using these tools. While they lower the risk of private investment in certain areas and revitalize blighted or under-utilized property, they also increase the city share of the cost of public infrastructure supporting the new development. On the other hand, they leave open the question of who will deliver the public infrastructure projects needed to move people to, from and within the development and support their need to live, work, and play within it.
So, who should deliver this infrastructure that wouldn’t be needed but for the private development — the developer or the city government? And is it important enough an issue to warrant a city policy to define whether public agencies or developers will plan, design, and construct the streets, sidewalks, alleys, transit systems, water and waste water facilities, conduit, and open spaces needed for new developments?
What Happened in Baltimore …
I have a personal interest in these questions based on experiences I had in the City of Baltimore, Maryland. Five years ago, I was the Deputy Director of the Baltimore City Department of Transportation. A large amount of my time was spent interacting with developers as the de facto agency economic development lead. Developers called me when design reviews or permit approvals were delayed. They came to me to voice concerns about the development impact fee regime’s lack of flexibility, transparency and accountability. And they came to me to negotiate impact fees, traffic mitigation agreements, and the scope of city tax-financed infrastructure.
At one point in Baltimore, I was called upon to negotiate the amount of TIF-financing (that is, revenues from city bonds paid back by the increase in property taxes in and around the development) for a bridge needed to support a major development called Harbor Point. This was a major waterfront development near the Inner Harbor re-activating a former industrial site that had been capped due to the heavy metals in the soil. Exelon, the energy giant, was slated to be the anchor tenant. Traffic mitigation for the development required the design and construction of the new Central Avenue bridge for added access (the site only had one access point from a smaller road near Fells Point, a historic community).
We had to reach a settlement with the developer on the amount of TIF financing that would be dedicated to the bridge project. The city needed as much of the financing as possible dedicated to the project because it was costly. The developer couldn’t agree to dedicating that amount to the bridge project without some degree of control over its cost.
After a good amount of time, the developer came up with a proposal — he wanted me to allow him to design and construct the project. I had no response. He’d bear the risk of schedule and budget overruns, but we’d bear the risk of a structure that was not built to standards and specifications (the City’s, the State’s, and federal) and one that we could not feasibly maintain. We also had to contend with pressure from other agencies and the Mayor’s Office who wanted us to accommodate the developer.
Ultimately, we decided that we, the City DOT, would deliver the project, which is the decision that stuck. While the developer delivered all the other city tax-financed infrastructure, the DOT delivered the bridge project. Five years later, Exelon has moved into its newly-constructed building, and the bridge recently completed construction in July 2018.
From 2016 to 2017, I returned to Baltimore City as a consultant managing the DOT’s interface with another major private development with tax increment financing: Port Covington anchored by the Under Armour global headquarters. The vision there is to transform 260 acres of aging, underutilized industrial waterfront property near I-95 over the next two decades into a thriving, dynamic neighborhood featuring 1.5 million square feet of mixed use and $1.1 billion in upgrades to local, state and privately-owned infrastructure financed with $535 million in TIF financing, the largest in Baltimore’s history.
One conflict I could see coming was a disagreement over who would deliver the streets, sidewalks, and transit infrastructure projects needed to make Port Covington as accessible and multimodal as planned. At the time, environmental review for a highway access improvement project was underway. The developer was adamant that they would be using their consultants and contractors to design and construct the local roads that were a part of the bridge project, and the DOT was operating under the assumption that they would manage the procurement and delivery. The developer viewed the DOT as less competent than their contractors to deliver the improvements on time and on budget. They were also vocal that they would not pay the impact fee. The DOT, however, was skeptical of the developer’s ability to meet roadway standards and specifications in such a way that it could maintain the infrastructure, and not cut corners to save time or money. In the end, the issue was left unresolved and my work with the Baltimore City DOT ended.
These experiences made me wonder how Baltimore compares with other cities, and whether those cities have figured out if the planning, design, and construction of public infrastructure supporting economic development projects is handled better by the public or private sector. To help me figure this out, I talked to staff from economic development and transportation agencies in Baltimore, Los Angeles, and the District of Columbia.
… Doesn’t Happen in Baltimore
I first talked to staff at the City of Baltimore to confirm what I thought to be true about how Baltimore handles infrastructure-supporting development. Though there’s no formal policy governing this practice in Baltimore, generally, developers manage the delivery of infrastructure projects supporting their developments when the improvements are TIF-funded. Developers use TIF funds to finance public infrastructure projects needed to accommodate and mitigate impacts, and then turn them over to the City to operate and maintain. The exception to this practice is the TIF-funded Central Ave. bridge project for Harbor Point that I tried negotiating financing and delivery for, and is being delivered by the DOT.
An example of the private sector funding and delivering a public project is the recently-completed Pratt Street Plaza project. COPT, the private developer, designed, constructed and financed the reconstruction of public space in front of a major downtown building it manages, the Pandora Building. This is an amenity for its building tenants as well as the public, which can access it at any time.
On the other hand, the City DOT will support development with capital projects funded with public dollars that the city’s economic development agency (the Baltimore Development Corporation, or BDC) has programmed into the City’s Capital Improvement Program (CIP) for DOT to deliver.
An example is the Stadium Square project where the BDC requested funds for lighting and streetscape improvements in a key commercial corridor near the residential development in Sharp-Leadenhall, an underserved area surrounded by the City’s sports stadiums, light rail transit, and more affluent communities. Under the Developers Agreement between the City and developer, the City committed to funding and delivering the streetscape project using public funds in recognition of the fact that the developer took a risk in pioneering development in Sharp-Leadenhall. Like TIF, this tool has limited availability, intended primarily for projects that serve multiple public goals and can captivate the City’s Planning Commission.
The City also delivers private development-supporting public infrastructure that is funded with government grant programs. Examples are the North Ave Rising streetscape project that won USDOT TIGER construction funds, and the Hanover Street Bridge project, which is undergoing planning using TIGER funds.
So, in Baltimore, the question of whether the City or developers deliver public infrastructure needed for private development depends on what the funding source is and the scale of project. Developers typically deliver large TIF-funded projects and then turns them over to the City for maintenance. The City generally scopes, bids, and manages smaller CIP- and government grant-funded projects. In many cases, including all TIF-funded projects, the BDC will act as a de facto lead for the City, coordinating agencies and brokering decisions on projects between developers and the agencies.
Is this similar to what happens in other cities? I talked to city staff in Los Angeles, CA, and Washington, DC to find out.
What Happens in LA
In the City of Los Angeles, developers will deliver public infrastructure projects mitigating the impacts of larger developments triggering California Environmental Quality Act (CEQA) analysis. For private projects, CEQA is triggered when a government permit or other entitlement for use is needed. CEQA analysis is similar to the federal National Environmental Policy Act (NEPA) review in that it requires state and local agencies within California to follow a protocol of analysis and public disclosure of environmental impacts of proposed projects.
Developers deliver mitigating projects identified in the CEQA analysis due to scheduling reasons. The city would be sued if a mitigating project is approved but the development opens before the mitigation is completed.
In other cases, the City is responsible for delivering public infrastructure that mitigate impacts of private development. This includes development incentivized by State planning grants or a California version of a TIF district called an Enhanced Infrastructure Financing Districts (EIFD). The City has been successful in acquiring state grants for planned affordable housing developments and has delivered capital improvements — sidewalks, bicycle and pedestrian facilities, and street furniture — supporting those developments. It also established a pilot EIFD in downtown LA, which will provide financing for infrastructure improvements, potentially including a Streetcar project, streetscape, first/last mile projects, and safety corridor projects that the City will manage.
The City of LA also has a development impact fee scheme for funding city-delivered mitigation projects in any of its five Specific Plan areas. All Specific Plans offer in lieu credit opportunities for developers to be given credit for paying for and delivering mitigating infrastructure, which reduces up to 100 percent of their impact fee. However, for the most part, impact fees are collected and leveraged for grants, and when sufficient, pay for mitigation improvements that are managed and delivered by the City.
So, the City of LA takes a hybrid approach to delivery of public infrastructure supporting development projects. Sometimes its Department of Public Works plans, designs, and constructs infrastructure through its Bureaus (Engineering, Street Services, Street Lighting, Sanitation). Other times infrastructure is delivered by developers with new developments.
What Happens in DC
The government of Washington, DC also takes a hybrid approach to delivery of public infrastructure supporting development projects. There is no formal policy governing who will deliver the infrastructure for which kinds of development. On the one hand, there are several recent large development projects where the District government delivered infrastructure. This includes Hill East, St. Elizabeth’s, and the DC United Soccer Stadium where the District Department of Transportation (DDOT) and Department of General Services (DGS) are designing and constructing infrastructure needed to support the developments.
This differs from: (a) the Walter Reed redevelopment where the developer is constructing what will be public roads in coordination with DC government; and (b) Capital Crossing, which is completely privately funded and delivered, but has involved significant DC government review and partnering.
Because DC is a desirable market for private development, it does not need to incentivize private economic development with public financing of mitigating infrastructure. TIFs and monetary incentives are rare, but the government will sometimes fund and deliver public infrastructure in lieu of them.
Decisions as to whether the government will fund and deliver such public infrastructure are made at the Deputy Mayor level. The Deputy Mayor for Planning and Economic Development (DMPED) has an office that acts as the economic development arm for the District, and has authority over implementing agencies, including DDOT and DGS.
At the outset of DMPED’s Land Development Agreement process, the government and a developer may agree that the developer is entitled to land rights, and the District is obligated to provide roads, signs, signals, and other supporting infrastructure. On these occasions, implementing agencies such as DDOT and DGS are on the receiving end of decisions made by DMPED to deliver the infrastructure. DMPED provides coordination support and manages the overall process for DDOT and DGS’ delivery of projects that support economic development.
Conversely, when developers undertake these projects, they are turned over to public agencies for maintenance and operations after the agencies have reviewed to make sure their standards have been met. For example, with street dedications, developers construct streets knowing they will become public roads and DDOT reviews to make sure standards are met.
This presents a challenge to those agencies, which must negotiate with developers to ensure that the infrastructure meets standards (e.g., approved designs and materials) and can be operated and maintained using the agency’s existing resources. Sometimes, the decision to turn over infrastructure to the agencies to operate and maintain is made not at the start of the development approval process, but later after designs and materials have been selected by the developer. When this decision is made late and developers turn over infrastructure for the government agencies to operate and maintain, the improvements are not likely to meet standards and be easily operated and maintained.
What Happens in Other U.S. Cities
So what conclusions can be drawn from this brief scan? There is no clear answer as to whether capital projects are better delivered by the public versus private sectors. However, there are advantages and disadvantages to public and private sector delivery of development-supporting infrastructure.
Though Baltimore, LA, and DC are a small sample size to draw any conclusions from, the variation in infrastructure-delivery approach to development between the three cities shows the lack of formal municipal policies as to whether the public (City) or private (developer) sector delivers public infrastructure needed for private development.
The infrastructure-delivery approach to development in these three cities is very likely representative of many cities across the U.S. in the way decisions as to who will deliver development-supporting infrastructure projects are made. In most cases, these decisions are not made by implementing agencies that may have to build and maintain them, but by other agencies — typically, economic development agencies or Mayor’s Offices — early in the development approval process. When implementing agencies are disconnected from this decision-making, the decisions are often made in an ad hoc manner. They then run the risk of agency resistance or the construction of infrastructure that doesn’t meet standards and can’t be maintained.
This observation is among others I made in interviewing Baltimore, LA, and DC, revealing advantages and disadvantages of public and private sector project delivery. Here are some of the disadvantages of public delivery of development-supporting infrastructure I saw:
- Public delivery takes months, often years, longer than privately-delivered infrastructure due to rigid laws and regulations that govern design and procurement. Due to these statutes and rules, public agencies take longer to hire staff and procure consultants and contractors, and must undergo extensive planning, design, and contracting processes to ensure public buy-in, transparency, and other policy goals. Another reason for delay is the lack of funding or other resources needed to deliver a given project because of economic conditions, tight city budgets, and the rising cost of construction.
- Public agencies will sometimes look to deliver infrastructure as cheaply as possible so as to ensure that the infrastructure meets existing standards and can be easily maintained.
- Implementing agencies often do not view capital projects as serving economic development and warranting non-standard designs and materials.
Despite these limitations, public delivery of development-supporting infrastructure is a better option if the city and developer want to take advantage of funded, existing on-call contracts (where consultants and contractors are on standby to deliver certain services or goods) and build infrastructure that city agencies can operate and maintain with existing resources. This is especially the case if all parties want to avoid the disadvantages of private delivery that came to light through my interviews:
- Developers often want to install “innovative” improvements that do not meet standards and cannot be easily maintained.
- Developers’ decisions are often made based on providing a return for investors, and not often for the public good. So, the infrastructure they deliver may be self-serving and not view public spaces for the public good. For example, they may exclude items such as publicly-accessible plazas and open spaces.
- The city is often at the mercy of developers. When developers are collaborative, everyone wins. When they’re not collaborative, the city often loses.
On the other hand, there are advantages to having development-supporting infrastructure delivered by private developers:
- Developers can deliver higher-quality projects that push the envelope of standardized materials and designs at lower costs than publicly-delivered infrastructure.
- When developers deliver mitigating infrastructure, cities can transfer cost and schedule risks to the private sector.
- Privately-delivered infrastructure is often delivered at less cost and within shorter timeframes than projects delivered by public agencies. Without design and public procurement rules to slow them down, the private sector can bring on staff, consultants, and contractors easier and quicker. They also are more incentivized to deliver public improvements in tandem with occupancy of their developments. They can use the same contractor to deliver both the vertical and horizontal (private and public) elements of the development.
Cities need private developers to invest in them. They can’t revitalize communities on their own. Developers can attract private financing for redevelopment, which, in turn, attracts families and businesses. So, cities want economic development, throwing public financing and other assistance into deals with developers that often include design and construction of public infrastructure.
The infrastructure could be new utilities and streets where none existed before, which are needed to mitigate traffic and other impacts. Or, it could be streetscapes that create a sense of place around the development.
There’s a tension, though, between a city’s desire for economic development and a city agency’s desire and ability to realize the city and developer’s vision. I know because I’ve experienced this tension firsthand. Some of the reluctance of city agencies to accommodate developers’ infrastructure needs comes from the uncertainty of whether the agency or developer will design and construct the infrastructure.
To build a less dysfunctional and more collaborative city government when it comes to economic development, I have 4 suggestions for city leaders to consider:
- Determine Who: Cities should know from the beginning of the development approval process who’s going to build infrastructure and whether it will be handed over after construction to be publicly-owned and maintained. Formal policies determining who delivers and maintains public infrastructure projects supporting economic development could help provide predictability and clarity for cities and developers, and define roles and responsibilities from the start of project development.
- Structure Collaboration: Coordinating bodies that include representation from both economic development and implementing agencies could facilitate cooperation between the agencies, as well as between developers and implementing agencies. Implementing agencies should be involved in early decision-making as willing partners with economic development agencies. They should have a say in the developers’ agreement process and decision-making regarding public financing of infrastructure supporting development. Their planning and engineering arms can provide needed expertise to inform master planning and delivery decisions in the early stages so that public infrastructure that is turned over to the agencies to maintain and operate can easily do so.
- Empower Implementing Agencies: City agencies should be empowered to deliver smaller, publicly-funded development-supporting infrastructure projects that meet their standards and can be maintained by city forces. They should also be empowered to oversee developers’ engineers and contractors at the outset as they deliver larger projects if savings of time and money and the introduction of innovative designs and materials are key objectives.
- Equip Implementing Agencies: City implementing agencies should be given reserve capacity within their annual budgets and work programs to deliver development-supporting infrastructure projects. They should also be allowed to have sufficient contract authority for on-call planning/design/construction and project management support to handle unanticipated requests in support of the city’s economic development agenda. Finally, to accommodate innovations that developers will seek to deliver and turn over for public use and operation, city implementing agencies should update design and materials standards regularly.
Thanks for reading! I am a consultant based in Los Angeles, after having spent a dozen years working in city and state government. I can be contacted at email@example.com. The contents of this article were originally composed for a panel discussion on the “Interaction of Financing and Planning at Local, Regional, and National Levels” at the 2018 International Transportation and Economic Development Conference (I-TED) Conference in Washington, D.C. The presentation, entitled “Deliver Us from Evil: Public v. Private Delivery of Public Infrastructure Projects Supporting Private Development”, was created from an abstract accepted by the I-TED organizers who focused the conference on policy, infrastructure, and technology issues impacting the relationship between multimodal transportation and economic development.