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New financial arrangements: construction and area development

Function / Domain: Building, spatial planning
Illustration of: New financial arrangements

These are two examples of new, creative financial arrangements that help in efforts to scale up and anchor system innovations in construction or area development. The arrangements imply a new approach to one or more of the following aspects of financing: time, actors (new parties or old parties with new roles) and methods of settlement (of money or risk).

 I New financial arrangements in the construction industry

New arrangements are emerging in the construction industry in the Netherlands. They are being driven by a number of developments:

  • Complex projects nowadays call for a lot of specialist knowledge. Since companies do not possess all of that knowledge themselves they look for partnerships.
  • The government is promoting private-public partnerships. Consequently, the roles of government and private actors are changing. Private parties are now becoming involved in the entire process of design, construction, financing and management.
  • There is growing criticism that the costs of projects are spiralling out of control.

Alliances

Alliances in the construction industry are new forms of collaboration between companies and (usually) the government. Instead of their conventional roles as client and contractor, they now form equal partnerships. The partners undertake to achieve a specific goal, while respecting their separate interests.

Joint fund

These alliances employ new financial arrangements, such as agreements under which the client and the contractor create a joint fund to cover risks. Additional work is paid from the risk reserve. Whereas parties used to try to shift the risk on to each other they now have a common interest in identifying and managing the risks early on, since any money that remains is divided between both partners. On the other hand, the agreement also means that if there is not enough in the risk fund the contractor is only paid half of his costs.

II Exchangeable development space

Spatial planners in the Netherlands often have to address a number of challenges simultaneously in a single area, for example nature development, housing construction and water storage. Area development is a new approach adopted by spatial planners to meet these complex challenges. With this strategy, public and private parties search, together with residents, for good and financially feasible solutions within the frameworks laid down by the government.

Exchangeable development space

Pioneers in area development projects developed new arrangements, such as the exchangeable development space. The key to this innovative arrangement is that a private party agrees to finance the public space in exchange for space for development. This is subject to a ‘no, unless' policy of the Dutch government towards building in that area. The arrangement can be used for a straight swap, but can also in principle be used in more complex situations in which more than one private party is involved. The province of Limburg provides an example of a more complex swap involving a number of parties. There have already been quite a number of such projects in the province, which have used the Transferable Development Rights method to calculate what consideration can be demanded from the other parties.

Sources

In Dutch, on Alliances

Exchangeable development space (in Dutch as well)

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