Stephen Phillips

Partner at Burness Paull & Williamsons Scottish Law Firm.

The announcement of a further three Urban Regeneration Companies (URCs) in March of this year brings to six the number of regeneration initiatives which have been accorded URC status to date. The URC model is clearly now an established feature of the urban regeneration scene in Scotland.

URCs are companies set up by the key public sector partners involved in a given regeneration project – usually the council and the local enterprise company – but with directors also being drawn from the private sector. In some cases there is also an element of community representation at board level. Initially driven by public sector funding, URCs are geared towards facilitating partnerships with the private sector; and, crucially, private sector financial investment.

THEMES

Burness is now directly involved in relation to five out of the six Scottish URCs. While the nature of the regeneration projects, and the features of the URC vehicles themselves, are far from uniform, it is possible to identify a number of themes which are present in most if not all of the current URC projects:

• building private sector confidence

There are a number of strands to this:

1 – setting a structure which demonstrates that the key public sector bodies are working in partnership to a common aim

2 – creating an element of distance from local authorities and other public sector bodies, so that progress with the project will be less vulnerable to political changes and/or altered priorities

3 – an agreed overall plan, with a realistic business plan, for delivery of the project

4 – significant private sector representation at board level

5 – ……the URC badge!

6 – a commitment to align the project with other processes and structures associated with regeneration and social inclusion

One aspect of this is a strong emphasis on community consultation; there is probably a greater focus on this element in a Scottish context, as compared with English URCs. In addition, it is an accepted principle that a URC must align its activities with strategies emerging from the community planning process.

• transfer of public sector assets (and grant funding) into the URC vehicle

One of the key principles associated with setting up a URC is that it should be given the wherewithal (cash and/or land assets) to drive forward the regeneration project. Partly that recognizes that the overall project plan will generally involve some frontloading of works on public realm and public infrastructure so as to stimulate interest from private sector developers (with a consequent need for cash to fund that expenditure); but to some extent the contribution of cash and land assets to the URC forms part of the process of giving the URC credibility (demonstrating confidence on the part of the public sector in its ability to deliver the vision) and (in some cases) a negotiating position vis-à-vis private sector landowners. A further consideration in certain cases may be the need to offer an asset base by way of security for commercial borrowings.

• the principle of sharing risk with the private sector

The scale of the URC projects announced to date is such that there is no realistic possibility of delivering the agreed outcomes without very substantial private sector investment. The emphasis, therefore, so far as the public sector intervention is concerned, is on creating the conditions under which the private sector will be willing to invest. To some extent the public sector, via the URC, is taking on risk through front-loading elements of the infrastructure – but the intention, broadly speaking, is to reach a point where the level of risk for a private sector player is at a level where a decision to invest can reasonably be made, rather than to cushion the private sector entirely in relation to issues of risk. At a more concrete level, this concept of sharing of risk may manifest itself in spin-off joint venture companies, where investment by the URC (often in the form of land assets) will be balanced by cash investment from the private sector

• the desirability of giving the URC board an appropriate level of autonomy

It is accepted that one of the strengths of the URC model is that it enables a more entrepreneurial and flexible approach to be taken to new opportunities that may arise, as compared with a model whereby the project is steered by an in-house public sector team. That is further enhanced by having a significant number of directors drawn from the private sector within the overall composition of the board. These advantages will be lost if the board of the URC is not given sufficient autonomy. One key factor here is (or should be) the principle of company law which requires every director to take decisions in what he/she considers will be in the best interests of the company; that should mean that the individual agendas of the public sector partner bodies are subordinated to the overriding question of how the board can best direct progress towards the overall vision (as reflected in the objects clause within the company’s memorandum of association).

CHALLENGES

Each of the themes set out above raises challenges in developing the legal framework for a given URC project. There is often an understandable reluctance on the part of public sector agencies to “let go” – whether in relation to release of land assets into the URC or, more generally, in relation to the nature and scope of decisions that can be made by the URC board without their express sanction. There are also issues round the proper safeguarding of public assets, concerns centred on principles of accountability in relation to public funds, queries over how best to ensure that the public sector objectives are not subordinated to the drive to maximise financial returns….and so on. In each case, there is a range of technical legal mechanisms that can be used – and the focus of the work in developing the legal framework should be directed towards ensuring that informed decisions are taken, recognising that the preferred balance in relation to potentially conflicting objectives will vary from project to project.

There will be a need to look closely at funding structures, mechanisms for the recycling of surpluses, and the use of offshoot bodies (whether wholly-owned subsidiaries or joint ventures) as delivery vehicles for individual development projects. It is also important to take account of technical issues of EU procurement and state aids; and to consider all the various tools that are available, recognizing that beyond the legal checks and balances within a corporate structure, there are other means by which controls and other safeguards can be imposed through the overall legal framework – via s75 Agreements, development agreements, profit-sharing/clawback arrangements, and/or a tailored structure of property interests (eg use of lease and/or option mechanisms). Similarly, review of the corporate structures should not be limited to conventional company forms; there are various possible advantages associated with new models such as the community interest company (CIC) and limited liability partnership (LLP). The essential point in all of this is to analyse the available options in a comprehensive and systematic way, rather than proceeding straight to the production of detailed legal documentation.

A NEW FOCUS

In my view, the introduction of URCs into the Scottish regeneration scene is undoubtedly something to be welcomed – they bring a new focus and energy to the regeneration of areas in Scotland which are suffering serious economic disadvantage and the multiple social problems which come with that. There remain queries among regeneration practitioners about how far URCs will deliver on all four essential requirements of true regeneration – the social, economic and environmental dimensions as well as the physical dimension – but my personal view is that, properly structured, URCs can and will make a significant contribution.

 

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34 - Spring - Summer 2006

Aberdeen City Council
Creative Scotland
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Glasgow City Council
GQ
Highlands and Islands Enterprise
Museums Galleries Scotland
Scottish Enterprise
Scottish Federation of Housing Associations
Scottish Gad
Scottish Government
Skills Development Scotland
Wheatley Group