The Sunday Age can reveal the state government is planning to give the coveted site on the edge of the Yarra River to the company that wins the contract to fund and build the $1.5 billion precinct.

Minister for major projects David Hodgett has defended the government's development model, saying it will deliver the benefits of the project "at no cost to the taxpayer".

But Victorians could still find themselves footing some of the bill for the proposed civic hub becoming private property after the Napthine government acknowledged it may be necessary to partially pay for Federation Square East with public money.

It appears to be one of the most commercially favourable development agreements ever proposed for public property, defying a tradition in which the Victorian government has retained an ownership stake in major projects like Federation Square, CityLink and Crown Casino.

Planning experts and city politicians expressed reservations about the ownership proposal, which was not publicly aired at the official launch of the project last month.

Alan March, associate professor of urban planning at Melbourne University, said handing over ownership of a project of such public significance to the private sector was "highly problematic".

In September, the government began soliciting formal design proposals for Federation Square East with the release of an "expression of interest" document detailing its broad vision for the site, which should involve a mix of cultural, civic, residential and commercial uses.

"Federation Square East can become a new jewel in Melbourne's crown," State Development Minister Peter Ryan announced. "The possibilities for this site are limited only by the imagination."

The project needed to "contribute a significant improvement to the existing public realm" while "balancing financial returns with public outcomes", the government said.

But in a rare departure from other major civic-minded projects, the EOI states the developer who wins the contract will own – freehold – all of the land, buildings, roads and public spaces that are created at Federation Square East.

Building on the 3.3 hectare site, which stretches from Federation Square to Birrarung Marr, first requires "decking over" the 2.3 hectare Jolimont rail yard while it is in constant use by freight, Metro and V-Line trains. The government would also surrender the Federation Square carpark and a block of land amounting to 1 hectare, but retain ownership of the land used to run and service the train lines underneath the decking.

The Sunday Age understands the decision to turn over the freehold rights to the project was made after resistance from developers about participating in a traditional joint venture agreement that would be based on a long-term leasing arrangement over the public land.

Sources say developers are concerned about assuming the massive costs and risks associated with a project they would not ultimately own outright. It is estimated that decking the rail yard will cost $350 million alone.

The project is also supposed to be completed without any public funding, although the government has conceded it may consider a request for assistance as part of a "subsequent budget process".

Minister Hodgett said the conditions in the EOI document had been explained to the media and public. "The government has been clear that we want to achieve the best outcome with no cost to the public.

"Government is seeking to harness the creativity of the market and seeks outcomes from the project rather than adherence to prescriptive requirements. Naturally, the public access and civic outcomes of the proposals will inform part of the government's final decision."

Creating Federation Square East has been a dream of successive Labor and Liberal state governments but several mooted plans have never eventuated.

The proposal as described in the Napthine government's EOI has been attracting positive reactions from developers who are preparing bids for the project.

One interested party told The Sunday Age that the freehold ownership structure was "very attractive" and there was now a good chance the project could get off the ground.

But Professor March  said he did not understand  how Federation Square East could "achieve the kinds of goals that I understood it was supposed to have if it not were in some way maintained under government ownership. It seems as if it's just another project oriented towards a short-term private sector goal," he said.

Lord Mayor Robert Doyle, who has previously been an advocate of creating more public space and a vocal critic of over-development, declined to comment about the proposal.

But Greens councillor Rohan Leppert  described the proposal as "a dangerous new step for the way public lands are being treated".

"Government shouldn't be in the business of handing over the ownership of such an important potential public space to the private sector,"  he said.

The Napthine plan has also left open the possibility that Federation Square East could be dominated by one of the city's tallest skyscrapers after the government chose not to impose height restrictions on the site.

The Labor Party declined to comment.

cvedelago@theage.com.au