Megaprojects’ Exclusionary Benefits: the Case of Local Government Policy Benefiting the Privileged Few

Featuring commentary by John Macomber

By Arana Hankin, Loeb Fellow, Harvard GSD

For the last ten years I have worked at various levels of New York State government, gaining different perspectives about economic development policy and publicly supported capital projects including large-scale projects known as megaprojects. I worked for a Harlem politician who was the leader of the New York State Senate, advocating for economic growth in the Harlem community by expanding cultural institutions, developing state-owned property, and increasing zoning rights. I worked in the New York State Governor’s Office drafting economic development policy and overseeing the operations and budgets of the state’s economic development agencies, often dictating which projects were awarded funds. Most recently I worked for New York State’s economic development agency, Empire State Development, managing megaprojects, such as the Atlantic Yards Project, and overseeing the implementation of community benefits for Columbia University’s expansion in West Harlem. During this time I worked closely with the city’s economic development units within the Mayor’s Office as well as at the agency level. These experiences working within multiple levels of government have shaped my opinions about economic development policy, megaprojects, and the impacts felt in New York. This paper is dictated by those experiences.

Megaprojects Situated in New York

Megaprojects in New York are most commonly situated in low-income, disenfranchised communities. There is no doubt that these projects alter neighborhoods. Government supports these large-scale projects because they eliminate blight, create vibrant new communities, increase tax revenue, and create jobs. But, it is undeniable that these projects can have negative impacts as well. A variety of mitigation measures imposed by government on developers claim to reduce these negative impacts. Project approvals are granted based on the premise that there is a positive return on public funds invested, and that the majority of negative impacts can be mitigated. Yet, very little energy is exerted on projecting the long- term impacts on the citizens who live in the wider community surrounding megaprojects.

Economic Development Corporations Determining Value

In New York, both at the city and state levels, megaprojects are proposed, approved, and implemented by public economic development agencies, also referred to as corporations. These are quasi-private entities that have more autonomy than a typical government agency. The goal of these economic development corporations is to spur local growth. Growth typically refers to business growth, and only for those businesses savvy enough and large enough to lobby government for public support. Small, locally owned businesses without the resources to lobby government do not typically benefit from economic development policy.

The tools utilized by economic development corporations fly below the radar. They are obscure and difficult to understand and access. Most of their operating budgets are not funded by public dollars. Instead, the budgets that allow these agencies to function are supported by revenue raised from the private sector, even though public assets are often capitalized to raise these funds. These quasi-private entities function more like a private corporation in that they monitor the rate of return on their investments and they are not required to be as transparent as government agencies. Until recently, they also received much less scrutiny.

Projects are sold to the public by touting a positive return on investment, the expected increase in tax revenue, and the number of jobs that a proposal is projected to create. It is argued that government resources are needed to subsidize private enterprise in order to induce private investment in areas that are otherwise unable to attract it. Government defines these areas as blighted, but many New York City megaprojects that benefit from hundreds of millions of dollars of public subsidy are located in areas that are in the midst of gentrification. Private capital has already started to flow into these areas, and it has been contested that there is still a need for such a substantial public investment in these communities.

After the Approvals Have Been Won

The lifespan of megaprojects is long, often spanning 15 to 25 years. Their successes and failures are difficult to track, but no attempt is made to evaluate these projects. Neither tax revenue, nor job creation numbers are monitored. Moreover, megaprojects span multiple administrations. Sitting administrations often do not feel an appropriate sense of responsibility, especially if the project was approved by a previous administration. The task of monitoring job creation numbers is daunting, as is calculating the tax revenue states and localities collect from projects, and private sector parties are not pressured to provide the information needed for government to conduct an accurate assessment. The fact that government makes no attempt to value the success of megaprojects means that the policy that dictates the delivery of these projects is not being discussed or revised.

One of the most successful surveys conducted on the efficacy of megaprojects is Flyvbjerg, Bruzelius, and Rothengatter’s survey of global megaprojects. Their research documents that governments consistently not only underestimate the cost of megaprojects, but also overestimate the benefits (Flyvbjerg et al. 2003). It is their opinion that government is unwilling to improve the methodology of designing these projects and calculating impacts because it behooves political leaders to mislead citizens to ensure public approval of their projects. In one of the most thorough analyses on megaprojects to date, Mega-projects: The Changing Politics of Urban Public Investment, Altshuler and Luberoff write, “members of Congress value such projects as means to solidify their political bases rather than as efficient economic investments” (Altshuler and Luberoff 2003). Arguably, there are alternative development plans that are better able to deliver the full range of economic benefits at a much more responsible cost, but time is not spent exploring alternative plans (Flyvbjerg et al. 2003).

Private Sector Taking the Lead

Many theorists of urban policy contend that government’s will is controlled by the interest of the private sector, but a mutually beneficial relationship needs to seek a more wholesome partnership. Elite-reputational theory assumes that the public sector is ‘servant’ to the private sector. This dynamic often exists because government does not have the expertise or manpower to develop its own transformative and iconic legacy projects.

Government is responsible for proving that these projects will deliver a meaningful amount of jobs and tax revenue, and that there is a return on public investment. The reason that government overinflates benefits and underestimates the risks of these projects is the same reason that government neglects to hold private developers accountable. Government leaders already have too much skin in the game; once these projects are approved, they have put their political reputations on the line in support of these projects and there is an inability to amend these plans once the deal is sealed. Holding developers accountable would elucidate the limits of megaprojects and name government as a responsible player in carelessly using public funds.

Altshuler and Luberoff ’s recounting of public choice theory illuminates the dynamic that exists between the coalition that real estate developers build and the public sector. “Governments greatly favor the well mobilized, who in turn differ systematically from other groups… members with the largest stakes tend to be the most highly motivated” (Altshuler and Luberoff 2003). Certainly, the developers of megaprojects put a lot on the line. They have the greatest amount of profit to gain or lose, and they fight tirelessly to ensure success.

Private developers are also astute organizers, building coalitions of influential supporters, all of whom typically donate generously to political campaigns. Private developers have multiple lobbyists on retainer at all levels of government, and they are able to shape the political tide of an issue. They have access to the press and utilize press announcements to control the momentum of an issue. The Mayor and/or Governor is not just contending with the executives from one real estate firm, they are up against an entire conglomerate of powerful private and public individuals. This dynamic leaves government powerless, except at the point before projects are approved. Prior to approval, government has the leverage to demand more of developers in exchange for public subsidies and incentives. But if government refuses to analyze their mistakes they will always remain ill equipped to negotiate the delivery of projects that offer maximum public benefit.

Community Leadership Representing the Few

Public choice theory is also helpful in understanding how megaprojects create winners and losers at the community level. The efficacy of organized community opposition is most illustrative on the Atlantic Yards Project.

The Atlantic Yards Project is a $4.9 billion development spearheaded by the state of New York. A private real estate company was designated in 2007 to develop the 22-acre site in Downtown Brooklyn. The project will include 16 residential and commercial towers, 2,250 units of affordable housing, and eight acres of public space. To date, the Barclays Center, the basketball arena of the Brooklyn Nets, is the only building to have been completed.

Currently the most well mobilized members of the local community in Brooklyn are the middle class renters and homeowners near the project site. They have an economic interest in the area and, because of their stable social class, the luxury of being able to expend a significant amount of resources on mobilizing in opposition to the project. The dynamic characterized by public choice theory is realized as the majority of issues that government and the private sector are forced to address are quality of life and environmental issues, the primary topics that are raised by this middle class population.

New York has done well mitigating the environmental impacts of megaprojects. There are a number of reputable and established firms that have the capacity and intellectual capital to monitor the environmental impacts of construction. Highly mobilized community groups that have tirelessly advocated for environmental mitigation measures have ensured that government dedicates a significant amount of time and resources resolving these issues. Middle class opposition is astutely educated about the process, and they are persistent activists. They have the political influence and media skills to be able to maintain a consistent fight to ensure that their issues remain at the forefront once project construction begins.

One would expect that local politicians, especially those representing a low-income population that could reap the most from jobs and affordable housing, would take up equity issues on megaprojects, such as ensuring that there are long-term positive economic impacts to their constituents. These elected officials raise these issues during the campaign season, but lack the manpower to comb through hundreds and thousands of pages of executed agreements to truly understand the issue or what exactly the developer committed to delivering to the local community. The limitation of time requires them to respond to the concerns of the most vocal and influential populations — those advocating for environmental mitigation.

The Complicit Role of the Community Benefit Agreement

The middle class population is not the only sector that is represented by a well mobilized consortium of activists, but, unfortunately, the advent of the Community Benefit Agreement “CBA” has quieted the community leaders whose charge is to advocate for the most needy population, both on the Atlantic Yards Project, and most every other megaproject in New York City. These community groups have been burned by government in the past, excluded from development plans, and historically have not benefited from government interventions. Their vocal opposition to megaprojects, as well as their successful efforts to organize and effectively impact government policy, has led to their involvement in the execution of CBAs. Unfortunately, these parties were ill-prepared to negotiate with private developers, and many community leaders who participated in the process were self-serving. Private developers’ use of the CBA and government’s insistence on taking a backseat role has continually marginalized low-income communities and stoked destructive infighting for limited resources. Local leaders who have signed these CBAs no longer are able to publically oppose these projects as a condition of benefit delivery, yet, because the developer has the upper hand during negotiations, these agreements are typically not legally enforceable and many of the benefits are never realized. Furthermore, the CBA has not succeeded in protecting local businesses and residents from the impacts of gentrification brought on by these megaprojects. CBAs were devised by the private sector to avoid public opposition to their projects, not to deliver community benefits (Wolf-Powers 2010).

It is essential for government to take a proactive role overseeing implementation of benefits by mandating third party advocates for local communities and by rewriting economic development policy so that it contributes to the economic growth of a locality, not just the economic growth of big business. The CBAs executed in New York will not create any long-lasting positive impact locally. Other cities have been successful in delivering meaningful benefits to local residents while New York has failed miserably. Government’s arms length approach has contributed to the further marginalization of populations who will suffer from impending economic changes in their communities.

Equitable Policy Explored

Economic development policy needs to consider equity issues, not just the environmental impacts they have succeeded in monitoring or only ensuring that there is a return on investment. These new policies should include measures that help to balance the impacts of gentrification brought on by megaprojects. The public sector can support the growth of a holistic community coalition before projects are approved so that the needs of all residents can weigh in on development plans and their concerns can truly be considered. CBA should not be executed without government oversight.Developers commit to creating thousands of jobs, but government requires that megaprojects be staffed by union labor. As a result, no new jobs are created for the local population, at least not on the construction side. Existing union members are recycled for each of the megaprojects constructed in New York City. Community leaders know how difficult it is for new workers to be admitted into the union, so they have negotiated for the creation of apprentice slots as a part of the CBA process. But new union positions are never created. Developers do not have the impetus to negotiate with the unions if creating apprentice slots is not a legal requirement.

A greater effort should also be made by government to make certain that small, minority, and locally owned firms are hired to assist in the construction of these projects. In New York City the same handful of construction firms owned by women and minorities are used on every single project. Government should break this cycle by requiring developers to partner with locally based firms that have not been awarded government contracts. Public programs already exist that can assist small businesses with bonding requirements, which is the major impediment for entry into the market. A large site could also be split amongst different developers, so that more than one firm is able to extract revenue from these projects. Public subsidy would go much further if policies were truly inclusive.

Currently there are no hiring goals for minorities or women at the state level for the operations side of a project. This needs to be amended immediately. Small and minority-owned businesses are not benefiting from these vibrant new communities. Private developers should be required to subsidize commercial rents on- or off-site, and support small business services so that local businesses are not displaced. A placemaking project should also be funded, such as a new cultural facility for a local non-profit, a market for fledgling entrepreneurs, or a business incubator to help encourage the growth of new local enterprises.

Lastly and most importantly, government should be conducting on-going economic analyses of megaprojects so that they can be better informed to handle equity issues going forward. More needs to be done to ensure that economic development policy not only benefits the economies of the affluent, but the economies of all citizens. Policies that have dictated megaprojects have contributed to the widening economic gap in New York, speeding up the impacts of gentrification, displacing residents and local businesses, and supporting the growth of big business. Development in New York has a multitude of complexities. To be truly successful, policies will require a more holistic perspective that includes all of its citizens. New Yorkers should demand more of their government.

Commentary by John Macomber

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John Macomber is a Senior Lecturer in the Finance unit at Harvard Business School. His professional background includes leadership of real estate, construction, construction services, and information technology businesses. At HBS, Mr. Macomber is engaged in the Business and Environment Initiative and Social Enterprise Initiative. He teaches Finance, Real Estate, Urbanization, and Entrepreneurship courses in the elective curriculum and in Executive Education. He is the former Chairman and CEO of the George B H Macomber Company, a large regional general contractor; and remains a principal in several real estate partnerships. John serves or has served on the boards of Young Presidents Organization International (YPO), Boston Private Bank, Mount Auburn Hospital, and Vela Systems. Mr. Macomber is a graduate of Dartmouth College (Mathematics in the Social Sciences) and Harvard Business School.

Megaprojects create value to society by making possible very large scale changes to the built environment, very quickly, while mobilizing large amounts of cash and a wide array of skills. The changes and the means can be viewed from many angles.

My research in megaprojects around the world, notably in infrastructure development and in slum rehabilitation, indicates that it is useful to separate the analysis into four different analytical buckets:

1. What are the other choices for government and the people? Meaning, in the absence of xyz megaproject, what else will happen in the neighborhood or for the road or for the water project? Often, the answer is “nothing.” So, despite the sometimes distasteful aspects of megaprojects, something is often better than nothing.
2. What is the source of capital? Megaprojects often are able to attract both private capital and public capital (from bond issues or NGO investment or multilateral organizations like the World Bank) that would not be mobilized otherwise in either status quo or “serial mini-projects” or “local government writes a check” scenarios. Thus, it is important in my view to consider “compared to what other funding choice?” as part of an analysis.
3. The creation of value can be separated from the capture or allocation of value. This is to say that a megaproject might create a large amount of economic value from real estate, from jobs and payrolls, or from new economic activity. Value capture and allocation can be done in numerous ways, many of which explicitly benefit displaced residents, lead to clear improvements in public services like transit, water, schools, or fire and police, or contribute to the coffers of the city or state in ways that can be spent for the public good. The creation of value is to be embraced; the mechanism for allocation of value can be improved.
4. There can always be bad actors, rogues, and crooks. It is more effective in the long run to think carefully about how to control the players and their actions with respect to megaprojects than it is to not do the project at all — and therefore sacrifice the benefits — out of fear of bad guys.

“Megaprojects’ Exclusionary Benefits: The Case of Local Government Policy Benefitting the Privileged Few” is a passionate start in the study of these questions. Further fruitful avenues for research could include some or all of the following:

• Catalog a large set of megaprojects in urban areas to compare basic statistics like original budget, final cost, housing units created, jobs created, risk-adjusted and time-weighted proceeds to “the privileged few”, and changes in adjacent real estate prices.
• Look at the financing more explicitly from a pro-forma point of view: what were the sources and uses of funds, how did revenues, costs, and profits/losses flow, and what were the values at exit?
• Research the literature about successful and unsuccessful megaprojects, from urban renewal to ports to mines to water systems (like the three massive water tunnels feeding New York City) and catalog what makes a success and what does not.
• Any of these approaches could expand the scholarly aspect of “Megaprojects’ Exclusionary Benefits” and start developing the work into a document that could benefit future planners, leaders, and communities involved in megaprojects.