COMMENT Matchmaking is no easy task. To some it is nothing short of meddling in the natural order of things; to others it is an exacting science.
Spend time in almost any sprawling urban area and you will undoubtedly agree that cities have been responsible for countless couples. Just as this is true for millions of individuals in metropolitan centres, it is also the case for the multitude of stakeholders now responsible for tackling urban emissions through ambitious decarbonising projects. Whether these are public procurement bodies, real estate developers, town planners, investors or technology providers, vast numbers of people find themselves in a new ecosystem built on an array of convergent and contrasting interests – and all want to create that perfect, idyllic partnership.
Unfortunately, just because there are many potential matches, it doesn’t mean that finding the right partner is straightforward. There are a number of red flags to be on the lookout for in addition to the opportunities which may arise.
The matchmakers
Unsurprisingly, getting developers, funds, technology providers and public authorities working together on projects of scale involves significant push and pull factors. First, there is the stark reality: climate change poses a serious threat to cities. As major emitters, urban centres contribute to the problem; they will, of course, also suffer the consequences through extreme weather events should the status quo be allowed to continue. You could say that existential risk has a way of focusing attention and forging unlikely partnerships.
There are also other considerations: political pressure; developers looking to generate power; technology providers looking to facilitate this through batteries or more efficient renewables; and the fossil fuel companies helping to drive energy transition and ensure they’re part of the process rather than closing themselves down.
It means that any developer coming into a project needs to analyse the legal and regulatory framework, and the different standards of protection offered by the law and regulation respectively. Once that baseline is understood, it is possible to establish at a contractual level how risk is being allocated between parties. Cities may be evolving, but the underlying principle remains constant: understand your legal and regulatory regime and don’t go in blind.
Of course, ESG concerns are driving new relationships, with lenders increasingly refusing to fund projects which do not meet emissions criteria, for example. This puts sectors in a difficult position. From a development angle, low-carbon buildings are more complicated and expensive than their conventional counterparts – particularly following recent dramatic increases in construction costs and pricing of raw materials. As a result, businesses may wonder whether consumer and investor demand is sufficiently deep-rooted to justify investment in the most advanced clean urban projects in the absence of mandatory regulation compelling action.
Red flags
Regrettably, even laudable ambitions can have unforeseen consequences. While the ESG agenda is serving its function by pushing stakeholders together in novel and innovative ways, there is sometimes a disconnect. When a party comes up with a solution, the question for financial investors is “how does this generate bankable cashflows?”. The challenge is to create a climate in which private businesses are encouraged to offer city solutions that both deliver environmental objectives and generate robust long-term returns.
There is an understandable disparity in risk appetite between public and private sector players, with public authorities typically the more risk averse – but neither the investor nor the operating company can be expected to take the entire risk for a project.
All the relevant stakeholders – whether public or private – should also be sensitive to scale. If a city is running a procurement process for a wide-scale decarbonising effort, such as Bristol’s City Leap programme, it is important that the component parts of the project get up and running on time. Failure here could result in operating companies and public bodies being unable to service the interest payments on the financing facility that funded the project.
It’s meant to be
Despite the risks, the reason these players have found themselves growing closer is that the pay-offs – both financially and environmentally – are significant. Businesses from various sectors have found meaningful relationships, with companies such as Marubeni, Engie, Patrizia, Aviva and IFM Investors having found partners in the space.
Yet there’s still room to grow. The direction of travel needs to be towards public and private sector bodies getting to know each other better, to close the wide gap between investors and cities and find common ground to deliver urban environmental objectives.
Clearly, there is the potential for missteps: in many cases public bodies are used to managing budgets, not projects, and are instinctively risk averse; developers, technology providers and investors see an opportunity to make money but are better insulated against the political fallout if a risk materialises. Slowly these stakeholders are figuring each other out. It is imperative they do – the future of urban living depends on their relationships flourishing.
Matthew White is a partner and head of planning at Herbert Smith Freehills
