1. What are the three most important takeaways/lessons from the material provided in this module? (150 words or more)
2. Discuss the different forms of privatization. Provide examples. (100 words or more)
3. Based on your own experience or research of the Victoria Gardens, what do you think this project has done right or wrong? What are the benefits or costs to the local community? What aspects of the project do you think is “entrepreneurial”? Can other cities follow the example of Rancho Cucamonga? What will be the potentials or problems of other cities in developing similar project? (150 words or more)
Government business relations
PA 315
Chapter 10
Agenda
Privatization
Entrepreneurial strategy
Public entrepreneur
Examples
Negative: redevelopment projects in San Bernardino
Positive: Victoria Gardens
Privatization
Simply stated, privatization involves reliance on the private sector, to one degree or another, in providing goods and services to citizens that otherwise might be provided directly by governments.
In California, focus on privatization due to several factors:
Budgetary problems – many governments have focused on exploring ways to provide public services more efficiently, thereby reducing their costs to taxpayers and freeing up available public funds for other needs
Maintain and improve the quality of services
Drivers of privatization
Ideology – government should be limited –
“That government is best which governs least” ~ Henry David Thoreau.
Also, Senator Rand Paul stated, “We don’t need bigger government. We need to shrink the size of government.”
Greed and Corruption – Humanity at its worst.
Temptation to transfer lucrative government services to a private business to ensure votes, personal gain, campaign contributions, etc.
Economic – officials seek to offload their responsibilities to private business who have the ability to efficiently reduce costs by lowering wages, reducing service levels, and raise revenues without public scrutiny.
History – Public utilities such as gas, water, electricity, and sanitation serves are provided to citizens nationally through a combination of public, private, and quasi-public entities. Communication services such as telephone, television, and transportation were developed by private organizations with some government assistance but they remain heavily regulated to ensure services are available to all citizens.
Effectiveness – the idea that running services as a business ensures effectiveness (Charter Schools)
Reduction in liability – The usage of private contractors can reduce the government’s liability for certain duties. Example – in 2012, there were 113,491 employees of defense contractors in Afghanistan compared to about 90,000 American soldiers. 2011 – more contractors died than soliders
Examples of government privatization
Adoption services
Animal control/shelters
Campgrounds
Daycare centers
Fire services
Garbage and waste management
Janitorial services
Medical insurance
Municipal water supply
Schools
Prisons and jails
Road maintenance
Toll roads/bridges
Utilities
Personnel management
Nursing homes
Museums
Employment training
Renewals of drivers license
Street cleaning
Telephone services
Landfills
Liability insurance
Privatization methods
Competitive bidding – government entity decides which services to transfer and oversees a process where private companies bid to provide the service.
Vouchers – citizens, which government assistance, choose between public and private providers. Examples: education, insurance (Medicare/Medical), daycare services
Asset sales – governments at all levels sell property and assets to commercial entities such local police departments auctioning off recovered and unclaimed property, to office buildings and lands no longer needed by government
Advantages
Lower Taxes. Wexford County, Michigan privatized its emergency medical service in 1994, resulting in an improvement in service, reduction in administrative services, and lower costs, saving county taxpayers more than $300,000 in the first year alone.
Increased Efficiency. North of Boston, a privately owned and operated incinerator, turns garbage into energy for 20 towns with a combined population of more than a half-million residents. The towns now pay only $22 per ton to have their garbage taken away, compared to $100 per ton that is charged by the government-operated landfill.
Improved Effectiveness. Wexford County, Michigan privatized the operation of its animal shelter, following a State of Michigan inspection where cages were found to be unsatisfactory and in need of immediate replacement.
Lack of Political Influence. According to U.S. District Attorney for the Northern District of Illinois Patrick Fitzgerald, “Illinois roads were made more dangerous when state employees issued drivers’ licenses to truck drivers in exchange for bribes, intended to finance campaign contributions to former Governor George Ryan’s political warchest.” Transferring responsibility to a private entity with adequate supervision eliminates the likelihood that officials will meddle in the provision of services.
Proponents for privatization presume that government entities are always less efficient than for-profit organizations – a presumption that is simply not true. For example, Medicare’s cost of administration as a percentage of claim dollars paid is considerably less than any private insurer – less than 2% historically, according to the Congressional Budget Office.
While there is much truth to the many claims of the abuse of privatization and the problems that often accompany it, opponents fail to recognize that governments cannot provide all things to all people. Citizens have an insatiable desire for services, especially if someone else is picking up the tab. At the same time, taxpayers are increasingly reluctant to raise taxes to support even critical services. As a consequence, government officials ranging from local municipalities to the Federal Government are forced to find other sources of revenue, cut costs, and ration services.
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Disadvantages
Higher Costs for the Public. Privatization often raises costs for the public and governments.
In reviewing the proposed privatization of the Milwaukee Water Works, the nonprofit consumer group Food & Water Watch reports that the private water service would cost 59% more than public water service.
Declines in Service Quality. What steps can be taken to make sure that the desired quality of privatized services is provided and maintained?
Atlanta, Georgia canceled a 20-year contract to run its drinking water system due to tainted water and poor service.
City of Chicago sold its parking meters operation to a private firm in 2008, parking rates have jumped to $6.50 per hour with additional increases built-in for the next five years, causing a drop in downtown small business sales due to visitors refusing to pay the high rates. Mayor Rahm Emmanuel ordered an independent audit of the contract after receiving unsubstantiated charges of almost $30 million from the private contractor.
Limited Flexibility. Privatization can bind the hands of policyholders for years.
The Chicago parking meter contract sold to a Morgan Stanley group is for 75 years
Chicago Skyway Toll Bridge System was leased to a private company for 99 years.
Indianapolis also sold its parking meter operation for 50 years
The State of Indiana sold control of a toll road for 75 years.
Corruption and Fraud. Privatization opens the doors to unscrupulous behavior by politicians and businessmen.
The Washington Post reported the finding of the Inspector General that $450,000 in payments made to former Republican congresswoman Heather Wilson by four government contractors did “not meet even minimum standards” for federal payments, including an absence of any details about actual services provided. The contractor reimbursed the Energy Department for the payments.
Opponents of privatization point out that commercial entities have a primary purpose to make a profit, often targeting a goal in excess of 10% pretax. According to them, it is illogical that profits can be reached in every case of privatization by eliminating waste; it is far more likely that service levels will be reduced or costs cut by lowering manpower or salary levels. While there are reasons to justify privatization of some government services, they claim returning savings to taxpayers by privatization is unlikely.
Opponents of privatization claim that privatization is simply a scheme to divert taxpayer dollars to create long-term revenue streams and profits for corporations. The Public Interest, a resource center dedicated to “ensuring that public contracts with private entities are transparent, fair, well-managed, and effectively monitored,” as well as meeting the needs of the community, lists a number of potential drawbacks to privatization:
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The process by which governments remove, reduce, or simplify restrictions on business and individuals in order to (in theory) encourage the efficient operation of markets.
Positive example
Deregulation of the airline industry in the 1970s
Negative example
California energy crisis
https://www.pbs.org/wgbh/pages/frontline/shows/blackout/california/timeline.html
Forms of Privatization: Deregulation
One form of privatization is deregulation, which refers to the process by which governments remove, reduce, or simplify restrictions on business and individuals in order to (in theory) encourage the efficient operation of markets. Deregulation has been often pursued by government as an economic development strategy. The impact of deregulation is often mixed. There are positive examples, such as the deregulation of the airline industry in the 1970s. However there are also negative examples, such as the California energy crisis in the 1990s. Detailed descriptions of the examples can be found in your assigned reading for this class.
Privatization goes beyond economic development purpose. There are many forms of privatization not aiming at economic development, but they provide opportunities for firms to do business with government.
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California energy crisis 2001
The hiring of private-sector firms or nonprofit organizations to provide goods or services for the government.
e.g., Defense contracts
Contracting out is the predominant form of privatization in the US.
Forms of Privatization: Contracting out
The most popular form of privatization in the United States is contracting out, the hiring of private-sector firms or nonprofit organizations to provide goods or services for the government. For example, defense contracts from government have largely encouraged the development of the arms industry in the nation. In addition to military products and service, government also contracts out many services, such as waste collection, human service, social services, and so on.
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(sometimes referred to as a joint venture) a contractual arrangement formed between public- and private-sector partners that can include a variety of activities that involve the private sector in the development, financing, ownership, and operation of a public facility or service.
Public-Private PartnershipS
Public-private partnerships (PPP or P3) are contractual arrangements between public and private-sector entities. They typically involve a government agency contracting with a business or non-profit entity to renovate, construct, operate, maintain, and/or manage a facility or system, in whole or in part, that provides a public service. Such joint ownership often enables larger projects, public land assembly powers, and/or public backing. Government pays part of the expenses for its portion of large projects through a variety of the above mechanisms.
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Public Private partnerships – Pros
Better infrastructure solutions
Each participant does what it does best
Faster project completions and reduced delay
Use of time-to-completion as a measure of performance and therefore of profit
Public-private partnership’s return on investment
Innovative design and financing approaches become available when the two entities work together
Risks are fully appraised early on to determine project feasibility
The private partner can serve as a check against unrealistic government promises or expectations
Operational and project execution risks are transferred from the government to the private participant
Private has more experience in cost containment
May include early completion bonuses that further increase efficiency
Increasing the efficiency of the government’s investment
Allows government funds to be redirected to other important socioeconomic areas
P3s reduces government budgets and budget deficits
High-quality standards are better obtained and maintained throughout the life cycle of the project
Public-private partnerships that reduce costs potentially can lead to lower taxes.
https://www.thebalancesmb.com/public-private-partnership-pros-and-cons-844713
Public private partnerships – cons
Every public-private partnership involves risks for the private participant, who reasonably expects to be compensated for accepting those risks. This can increase government costs.
When there are only a limited number of private entities that have the capability to complete a project, such as with the development of a jet fighter, the limited number of private participants that are big enough to take these tasks on might limit the competitiveness required for cost-effective partnering.
Profits of the projects can vary depending on the assumed risk, the level of competition, and the complexity and scope of the project.
If the expertise in the partnership lies heavily on the private side, the government is at an inherent disadvantage. For example, it might be unable to accurately assess the proposed costs.
https://www.thebalancesmb.com/public-private-partnership-pros-and-cons-844713
Privatization of Prisons PROS
1. Privatized prisons tend to be able to be run at lower costs.
There is a greater emphasis on cost management in a private organization than there is through public service. Public servants also tend to make more money in salary in the corrections field than private workers do. Through cost-cutting and a 50% reduction in wages that a private institution can provide, it becomes easier to house the amount of inmates that need to be contained.
2. Privatized prisons tend to be run more efficiently.
Profitability is certainly an issue, but so is the overall efficiency of the prison. Better medical care and prisoner management through rehabilitation can occur because the entire process of the prison has been streamlined. When there isn’t as much red tape that must be cut through in order to get something done, everyone benefits.
3. Privatized prisons can lead to a better overall recidivism performance.
With financial incentives in place, privatized prisons have a reason to make sure that prisoners get the help that they need. This tends to lead to safer conditions, better living conditions, and more effective rehabilitation programs. Whenever financial rewards are tied to recidivism rates in a community, the privatized prison will lower the rates of crime.
CONS
1. There can be a lack of transparency.
Public institutions are required by the laws of most jurisdictions to be completely transparent in their activities. Privatized institutions, on the other hand, don’t necessarily have that same provision. When it comes to the management of prisoners, transparency is extremely important. There is no other way to determine if prisoners are being treated fairly then through a transparent system of policies.
2. There is a risk of dependency.
If just one or two companies are relied upon to provide prison needs, then those companies can begin to dictate the terms and conditions of their contracted agreements to their advantage. The public institution will have no choice but to pay those costs because they have stepped away from their role in the prison system and the result might be higher costs.
3. Money becomes a priority.
If the prison starts losing money, what is going to happen to the prisoners? There’s a good chance that the quality of food for the living conditions will be reduced in order for profitability to be achieved once again.
Prison privatization
Question
Should all government services be privatized? Should any? If so, which ones?
What are the potential advantages and disadvantages of privatizing correction services (prisons)?
What are the social implications of privatizing correction services.
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Entrepreneurial Strategy
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Economic Development Strategies
Entrepreneurial strategies:
Adoption of policies that promise to increase public revenue, focusing on new firm and technology development – creative and innovate ways to increase revenue
A “demand-side” approach – advocates use of government spending and growth in the money supply to stimulate the demand for goods and services
Typical tools:
business and innovation assistance centers,
technology and business parks,
venture financing companies,
one-stop business information centers,
technology transfer programs,
workforce development programs,
export promotion programs, etc.
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ES seeks to improve the capacity of local firms and/or specifically targets entrepreneurs and growth-producing economic sectors.
Offer to all firms alike
Demand Side – economic theory that advocates use of government spending and growth in the money supply to stimulate the demand for goods and services and therefore expand economic activity
What are the key characteristics of a public entrepreneur?
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• Collaborating and networking. Collaboration is fundamental to the public entrepreneur – they seek to build partnerships for change across government, business, and society.
Working across systems – public entrepreneurs see themselves as part of a system rather than just an organization or public department.
Building narratives for change – Entrepreneurs persuade, influence, and sell. They influence behavior, social innovation and persuade colleagues – administrators, politicians, and citizens. Even though public servants are risk averse they are willing to take chances.
Leveraging new resources – finding new ways of financing public service and development. Example – pooling budgets, looking for public-private partnerships
Focusing on Outcomes – Public entrepreneurship is about doing whatever it takes to get the right outcome, even if it means abandoning traditional public servant mindsets
Adapting and learning – What do most entrepreneurs have in common? They are all willing to take risks. A motto for entrepreneurs – Fail quickly, Fail Fast, and Fail Cheaply!
Public entrepreneurs are not dealing with their own money though – So, they must take into consideration not only the human factor but the financial cost as well.
Disadvantages related to public entrepreneurship.
Entrepreneurial economic development projects entail high risk; a project failure would lead to huge financial public loss
City of San Bernardino joined the private sector via a baseball team and real estate development firm to build a stadium. Idea was to generate activity in the city.
Public-private partnerships in economic development blur the lines between public and private goals.
Partnerships do not always bring together the best of both the public and private sectors – can lead to confusing roles
Public sector selects projects based on profitability and is not always concerned with social worthy but unprofitable projects
Socially beneficial such as affordable housing, community center, libraries, and public parks
Entrepreneurial City
Features of Entrepreneurial City
React to globalization
Cities pursue innovative strategies to maintain or enhance the city’s economic competitiveness in global economy
Operationalize entrepreneurialism
Cities use explicit formulated, real and reflexive strategies to pursue active entrepreneurialism
Establish an entrepreneurial business climate
Cities market themselves as entrepreneurial and adopt entrepreneurial discourse
Partner with private sector
actively partnering with the private sector in launching “homegrown” economic development projects
Entrepreneurial city:
Acting like private co.
Undertake high risk project
Using innovative financing mechanisms (TIF, facility naming rights, lottery games, special license plates)
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Critique of Economic Development Implementation: San Bernardino
Baseball Stadium
Background
The need of a new stadium
Fierce competition among jurisdictions for sports team
Previous loss of a team to a new stadium in Rancho Cucamonga
Chamber of Commerce aggressively promoting a new stadium
The project:
$18m funded by tax allocation bonds
Lease agreement: profit to team owner and expense to public
None of the original predicted economic impacts materialized
Vacant lots
High maintenance cost
The problems:
Original expenses were manipulated so little profit was available to the city – 18 million funded through tax allocation bonds and was much higher than the projected 13 million
None of the original predicted economic impacts materialized.
Surrounding vacant lots
Spillover effects never materialized
High maintenance cost; the facility cost the city over $30,000 a year
Eventually signed over to private sector owners at a large loss; today, moderately successful as an island of activity.
Turned over to Arrowhead (Arrowhead Credit Union Park); turned over to San Manuel Tribe and renamed San Manuel Stadium in 2012
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–We will use SB for our examples: tough row to hoe because it has not had natural dynamics leading to redevelopment (as we saw in coastal cities)
stadium: poor deal but at least functioning, discuss how much spillover there has been (little); originally expenses were manipulated so that there was little profit to share; renegotiated in 2002 with the renaming but still financially weak:
–Chamber member: expectation: annual attendance of over 200,000; spillover effect (restaurant, downtown)
–$18m funded by tax allocation bonds (1996), higher than projection $13m
Lease agreement: profit to team owner and expense to public, Initial 10 year lease gave team owners parking fees, 2/3 of net profits from all concessions including non-sporting events, City received certain percentage of net profits from ticket sales, stadium cost controlled by team owners who charge very high adm. Cost. Little net profitEDA
–None of the original predicted economic impacts materialized
Surrounded by Vacant lots
High maintenance cost: simply maintaining the facility costs the EDA $30,000 per year.
–Turned over to Arrowhead (Arrowhead Credit Union Park)
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Spillover effects?
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Positive Examples in San Bernardino
Norton Air Force Base
The former Norton Air Force Base, now known as San Bernardino International Airport, has been transformed into a flourishing business complex where huge modern buildings have replaced military structures. Selected to close in 1988 and finally closed in 1995
In 1990, a joint powers authority called the Inland Valley Development Agency (IVDA) was formed to oversee redevelopment of the non-aviation portion of the former Norton Air Force Base.
10,700 full time jobs restored in the region as a result of the economic development efforts at the former Norton Air Force Base
An additional 5,000 indirect jobs culminating in nearly $1.9 billion of economic output
After years of revitalization and infrastructure improvements in and around the former base, it has now surpassed the direct jobs lost by the base’s closure in 1994
The base reuse area includes the San Bernardino International Airport and the adjacent land designated as Alliance California, which is home to Fortune 100 and 500 firms, as well as international and local businesses that have invested and continued to invest in growing their operations.
SBIA is a Foreign Trade Zone – offering federal tax incentives to businesses locating there and allows for California tax credits to qualifying businesses operating there.
Major projects
Stater Bros’ distribution center
Pep Boys’ facility
Mattel
Kohl’s
Amazon
Commercial airport – to Mexico
US Customs and Border Protection
US Forest Service
Foreign-Trade Zones (FTZ) are secure areas under U.S. Customs and Border Protection (CBP) supervision that are generally considered outside CBP territory upon activation. Located in or near CBP ports of entry, they are the United States’ version of what are known internationally as free-trade zones.
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City of Rancho Cucamonga
Incorp. Nov. 1977
38.3 square miles
Population is
approximately 176,000
Top 10 fastest growing cities with a population of 100,000 or more in the U.S.
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RC home to Empire Lakes golf course that annually hosts the PGA Nationwide Golf Tour. In addition, the city also has a 6,500 seat stadium, home to the Quakes, the Class “A” baseball team affiliate of the Calif. Angels. Other shopping/entertainment venues nearby include the Calif. Speedway and the Ont. Mills Mall. Low crime rate, excellent schools. Median House Price – 415,000
Rancho Cucamonga Family
Median Income – $79,973
Median Age – 32.2 years
Education – High School graduate or higher 91.1% –B.A. or graduate degrees 33.2 %.
Over 45% of new residents have worked in management or the professions.
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Last bullet point – since 1990, over 45% of the city’s new residents have worked in management or the professions. (Source Census: 1990 & 2000)
Victoria Gardens
A Rancho Cucamonga Success Story
210 Fwy.
15 Fwy.
Day Creek Blvd.
Victoria Gardens
Base Line Rd.
Foothill Blvd.
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Reasons Why Area Lacked Development
Lack of Infrastructure – streets, storm drains, utilities – $45 million estimated cost
Multiple property owners – no one could afford to develop ahead of others
Market demand was low
Lack of interest from high end retailers
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Victoria Gardens
The 175-acre project – shops, restaurants, a movie theater, office space, and a variety of civic uses on a street grid
Idea was to transform the city’s civic identity and create a new focal point in Rancho Cucamonga
It was to appear as if the project had evolved over time from a small grouping of agricultural buildings to a lively, small town main street – mix of buildings
Public and Private Investment
Public/private partnership among Forest City Commercial Development, the Lewis Group of Companies, and the Rancho Cucamonga Redevelopment Agency
Agency owned land valued at $27 million
Agency built parking structures – $12 million
Contributed $2 million for public street to serve Cultural Center
Agency wanted a “placemaking” development
Total development cost was approximately $234 million, including $188 million direct private costs,
Developer participated in public financing for infrastructure –130 million construction loan
Placemaking is a multi-faceted approach to planning, designing, and managing public spaces. Rancho wanted to not only focus on economic development programs and attract and retain businesses but they wanted to create a sense of community. They were looking to attrazct talented residents by offering a center of innovation and creativity.
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Return on Public Investment
Promissory Note from Developer to Agency for $13 million
Participation in profits in 4th year
Estimated rate of return on the Agency’s investment exceeds 16.5% = $167 million in revenues over a 30 year period.
Sales tax annually at $3 million and growing
Property tax annually at $2.5 million and growing
Public Safety facility on site at no cost to City
Additional Benefits
Upscale shopping & restaurant choices
for two-county region
Over 3,000 new full and part time jobs were created with a payroll exceeding $50 million a year
PLACEMAKING– first pedestrian friendly, open air mixed use design configuration in the Inland Empire
Catalyst for additional
development: 1,350 new homes; 800,000 square feet of additional retail and additional sales tax
Catalyst For Retail Development
Victoria Gardens
Foothill Blvd.
Base Line Rd.
Arrow Rt.
Rochester Blvd.
I-15
I-210
Victoria Gateway Center 113,000 s.f.
Foothill Crossing 300,000 s.f.
Day Creek Blvd.
Bass Pro Shops
Tourist Destination
First Store in CA.
2-3 Million Visits Annually
Foothill Crossing
Sears Grand 180,000 s.f.
Foothill Blvd.
Arrow Rt.
I-15 Fwy.
Day Creek Blvd.
Victoria Gateway Center By Regency Development
Foothill Blvd.
Base Line Rd.
Rochester Blvd.
I-15
Day Creek Blvd.
REI 23,500 s.f.
Circuit City 34,000 s.f.
Look at Me Now
Experience Gained
From the city’s perspective, the project has been very successful, generating in excess of $5 million in sales and property taxes annually. The estimated internal rate of return on the Rancho Cucamonga Redevelopment Agency’s
Furthermore, the project has spurred the development of 500,000 square feet of other retail space on adjacent parcels.
The town center approach as well as the tenant mix required for Victoria Gardens’ success was risky given the retail forms that persisted in the Inland Empire. In the end, the novelty of the project’s configuration translated into a competitive advantage.
Leasing was initially challenging, but after a critical mass of tenants was obtained, leasing additional tenants became much easier.
The vast majority of Victoria Gardens’ retail space is single story; in retrospect, Forest City might have considered incorporating residential units over the retail uses.
Only time will tell how the project’s seemingly incremental design ages. One major benefit is that the site consists of many individual buildings, which means that they may be replaced one by one, allowing the project to look more like a historic downtown that has evolved over time.
The Victoria Gardens
Weekly Writing Assignment Question:
Based on your own experience of the Victoria Gardens, what do you think this project has done right or wrong? What are the benefits or costs to the local community? What aspects of the project do you think is “entrepreneurial”?
Can other cities follow the example of Rancho Cucamonga? What will be the potentials or problems of other cities in developing similar project?
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copyright stan gorman 2001, all rights reserved
copyright stan gorman 2001, all rights reserved