PUBLIC PRIVATE PARTNERSHIPS The Priority Must Be Enhancing Public Value

Enthusiastic support for Public-Private Partnerships (P3) seems to extend across the entire political spectrum. The P3 label is a huge umbrella, providing space for small-government conservatives who think business can do things better, pragmatic liberals who want to harness the resources and energy of the private sector during a time of government fiscal constraint, and innovation progressives looking for strategies to extend the public sector’s positive influence.

Many government leaders, elected or appointed, also wave the pro-P3 banner.  For good reason:  Public-Private-Partnerships can substitute for budget increases or even fill-in after budget cuts. A P3 allows public agencies to potentially tap into expertise or funding they would otherwise lack, allowing them to do mission-accomplishing things that would be otherwise unlikely or even impossible. The private partners sometimes add legitimacy to a project and can provide powerful institutional voices calling for increased public funding in their area of interest.  P3s can also leverage public assets to promote job-creating private investment, including targeted training and entry-level opportunities for underserved populations or in key growth industries.  In some areas, as in parks, the private partner’s ability to see revenue opportunities in a traditionally “passive” asset adds to the sustainability of the public resource.

Public-Private-Partnerships are relationships – structured as anything from simple gifts to informal working relationships to legally enforceable contracts around some task, service, or project – between a public (or semi-public) agency and some non-governmental non-profit or for-profit organization.   The contract can be a lease for use of a public asset by the private partner, usually with some degree of exclusivity and control over its use by others, and often combined with a promise to improve and/or maintain it for the duration.  Or even the sale of public assets either absolutely or “in-effect” through extremely long-term leases or more subtle de-facto control over a particular location or asset.

MANAGING DIVERSE MOTIVATIONS

Like market and product regulation, P3s are a way to try to align private effort and investment with public purposes while managing the inherent tension between the two.  Too often, Public Agency officials want private sector dollars and help but don’t want to either give up control or allow any return on the investment. Too often, private partners think Public Officials are just selfishly (or incompetently) making things difficult, and come across as pretentious or arrogant rather than respectful of the public agency’s own plans.  For a partnership to succeed, the public agency has to have a predictable, transparent, and timely decision-making process around partnership proposals that makes it less tempting for well-endowed proposers to make a political end run to the Governor’s office or the Legislative leadership. And the private proposer has to use its relatively less constrained freedom to innovate as a way to enhance public value rather than simply self-aggrandizement.

P3s hang off the public sector in many directions, each of which has its particular characteristics and issues.  They are becoming a standard part of Park and Open Space operations, especially around the new types of downtown mini-parks that are expensive to create and program and are often run as economic development projects by nearby Business Associations or Business Improvement Districts (BIDs) rather than the city.  In transportation, a public-private partnership is often, as stated by Mass. Secretary of Transportation Richard Davey, simply “an alternative financing strategy.”  And education-oriented partnerships can range from truly learning-helpful to insidiously channeling the next generation of consumers towards brand loyalty.  A lot of what is called Partnership is simply outsourcing – the privatization of our prison system, social services, and many other once-public activities has had as many negative as positive results.  

NOT ALL MARRIAGES ARE HEAVEN SENT

However, while Public-Private-Partnerships are an important option among every public sector leader’s strategic choices, the broad political enthusiasm for the idea, augmented by pressure from the media and private sector supporters, makes it too easy to overlook the costs that even the best P3 imposes on the public sector and the significant differences between various kinds of P3 agreements, or the complexity of ensuring that the public is really benefiting over the long run.

One problem is that the existence of a P3 can also be used as an excuse to reduce government funding for the public agency or the public asset that is the focus of the partnership.

Even more fundamentally, task-specific cost-efficiency is not the government’s only or most important goal.  No matter their particular focus, all public agencies have a larger responsibility to promote democracy, enhance widely distributed well-being, and reduce insufficiency.  Ensuring the equitable distribution of public resources, fostering civic engagement and confidence in participatory processes, providing employment, including underserved populations, maintaining working condition standards and the quality of life, improving the entire spectrum of “social determinants of health” – these and others can be ultimately more important to a sustainable society than keeping taxes low.

There is increasing discussion about how to make Public-Private-Partnerships work.  But the emphasis is usually on overcoming barriers on the public sector side.  There is less attention given to the basic fact that the goal of these partnerships is to create value and the ultimate issue is how to divide that added value between the public, the agency, and the private partner.  Especially when the partner is a for-profit business, it would be irresponsible to forget that in addition to any civic minded motivation its leaders may have, a profit-seeking partner is also legitimately looking for a return on its investment.

SHAKING HANDS WITH OPEN EYES 

As proponents point out, for a P3 to work the public agency has to have or create both an internal culture and organizational processes that permit its staff to give up some degree of control over its facility operations, programming, and even its long-term investment plans.  They need to deal with proposals in a transparent, timely, and predictable manner.

But those pushing for partnerships often overlook the fact that public sector resistance doesn’t just come from job-protecting turf worries or patronage-protecting corruption.   Agency leaders have legitimate fears that entering into a P3 will open them to attacks for abandoning their Agency’s responsibilities or for benefiting one constituency over the general public, or that they’ll get blamed for the private partner’s failures. Just because a private group, non-profit or for-profit, knows how to pull political strings doesn’t make their proposal something the Agency should accept.  Agency leadership knows that partnerships require oversight and that new facilities will require on-going maintenance – neither of which the Agency will automatically have the expertise, staff, or funds to provide.

To make the partnering process more transparent and predictable to both potential private partners and the public, and to ensure that partnerships enhance both the Agency’s mission and  operational capabilities, public agencies have to create a formal P3 process.  Agencies need to create and distribute a written packet containing a succinct description of their mission and core values, their current set of programs and/or operational activities, the laws and regulations they and their potential partners need to comply with for different kinds of activity, and the agency’s long-range asset management and program development plans.  After a caveat that every project, partnership, and process is unique, the information packet should have a general description of the decision-making process and time line, including the ways that public input will be solicited to help evaluate and improve potential P3 agreements.  And any internal or inter-departmental approvals required before a partnership can begin should also be listed.

At the same time, it must be acknowledged that negotiating an agreement and then working with a private partner creates costs for the public agency – not only the staff time, resources, and money required to craft and carry out the partnership, but the “opportunity cost” i.e. all the other things the Agency’s staff are unable to do as a result of working on this P3.  Ironically, the same lack of money and staff that is driving public agencies to seek outside partners makes it increasingly difficult for them to judiciously undertake them.  To move forward on any project, even one in which a small amount of public effort triggers an amount of private investment that results in a huge increase in public value, the public agency must first be able to cover the internal cost of the effort.

Even if the arrangement is a mostly “hand-off” relationship, requiring little involvement from the public agency, it takes significant internal expertise and staff to properly monitor and supervise the relationship. In Massachusetts, the firing of all the “Dukakoids” in the state transportation department when William Weld became governor removed nearly everyone with Big Dig expertise.  The libertarian-minded new leaders didn’t think it matters; Weld joked at the time that he could shut down the government and no one would notice.  So a for-profit business was hired to run the project instead.  We are still paying for the results of that “inviting in a fox to guard the hen-house” strategy.

But even in less damaging situations, as every home owner who has gone through a major construction project knows, it is very hard to get exactly what you want from your contractor.  And while long-term contracts have many benefits, they also create the potential for many problems, particularly as the services or products involved get more complicated or as the original parties to the deal move on.  Massachusetts’ Commuter Rail contract, for example, has been the frequent topic of rider complaints and negative news stories.

COMING TO THE TABLE WITH FULL HANDS

A potential private partner needs to come to the table with funds (perhaps in the form of an application fee) or reasonable ideas for how to secure the funds, along with an offer to significantly help with the process to cover the public agency’s early-stage planning, feasibility studies, and proposal evaluation costs – with the explicit understanding that at the end of this process the Agency may legitimately decide to not go forward.  Among the criteria used for the go/no-go decision should be the level of technical expertise the partner brings (or can secure) to deliver the proposed product or program, the amount of start-up cash that it will invest, the potential partner’s clarity about where needed supplies and funds can be obtained not just for capital costs but also to cover future maintenance, operation, and oversight.

Sometimes, the best strategy is for the private partner to start small, focusing their own limited time and resources on particular tasks or projects as a way of building trust and of doing something while the ponderous public sector gets its act together.

However, money isn’t the most fundamental issue.  The proposing group should also be required to explain how the partnership will help fulfill the Agency’s mission, how the results of the P3 fits within the agency’s Asset Management or Program plans, what kind of agency or outside oversight and evaluation will occur using what criteria, and under what circumstances the Partnership can be terminated by either party. The P3 agreement must describe how disagreements among the partners will be settled short of termination, and how complaints from the public or anyone else will be handled.  It should clarify how the P3 will benefit all segments of the public, and how the initial condition and full public value of the Agency’s assets will be restored or have been improved at the partnership’s conclusion.  Good partnership agreements already incorporate most of this; too many don’t.

WHEN THE STARS ALIGN

The most desirable partners for a public agency are non-profits with appropriate experience whose mission is significantly aligned with the agency’s own.  The classic “Friends…” group allows a public agency to tap pools of citizen volunteers as well as new funding sources.   But even here, “getting to yes” requires trust-building exercises to establish that the missions really are meaningfully overlapping and that the private group has the capability to fulfill its promise.  The text-book case is the Central Park Conservancy in New York City which exists for the purpose of preserving and enhancing the public value of Central Park.  But it took several years of informal relationships and joint work on smaller projects for the Parks Department to feel ready to go further.  Today, the Conservancy operates much of the Parks’ programs and manages much of its maintenance, supplementing what the city pays with money it raises itself.  It is better able than the city to attract donations and volunteers from the wealthy population who live around the park – which is exactly what worries some advocates representing lower-income groups who fear that the Conservancy might favor activities and improvements more attuned to elite culture than with that of “ordinary” users.

Even when not explicit, equity is always an underlying issue around Public-Private-Partnerships.  Central Park had previously fallen into such disrepair and violence, and the improvements under the Conservancy have been so dramatic, that there is currently a general consensus in support of the current arrangement.  However, the recent gift of $100 million dollars from a billionaire hedge fund operator to benefit Central Park is not going to be replicated for some playground in the Bronx.  It may free public funds for other places and it may set a high standard that can be used as leverage to fight for public funding for those other places.  But it may not.  In the meantime, in New York as in Seattle and some other places, a City Parks Foundation has been established that might be able to raise money for use in both the upscale and more ordinary parts of the city.

(Parks have been the focus of a long history of disagreement in NYC and elsewhere among different constituencies about their ultimate purpose and value, and therefore about what kinds of activities and structures should be allowed. Should they be tranquil places for contemplation of nature or playgrounds for active sports?  Should they allow spontaneous use or require pre-registration, with all the requirements of literacy and comfort with bureaucracy that can imply?)

More often, a non-profit has a complementary but not totally aligned mission to the public agency.  A Foundation might exist to improve the environment or to enhance playgrounds in public places.  But the projects they are willing to fund, no matter how worthwhile, may not fit with the current priority needs and plans of the Public Agency or may be focused on a particular subpopulation that is not the Agency’s constituency of top concern at the current time.  Rebuilding a playground may be a great idea and a valuable improvement, but perhaps the Agency’s priority is to fix a playground adjoining a different neighborhood.  (But maybe the two locations can be “twinned”?) Setting up an environmental education program may be mission-enhancing, but it may not be as important to the Agency as repairing a drainage system under the park playing fields. (But maybe the drainage project contract could include a “green job” training component?)

Being told “no” for what seems like a worthwhile gift can be extremely frustrating.  But a public agency is acting appropriately when it requires that the proposer of a “non-compliant” project make a convincing argument that the partnership will create more mission-enhancing public value than originally intended alternative uses of the agency’s limited resources.

SOME GIFT HORSES COME FROM TROY

Most businesses, and business people, want to do good in addition to doing well.  Their civic mindedness can lead to valuable and strings-free donations of money, time, and expertise.  But the more related the gift is to the business itself, the more it has to be evaluated.  Corporations are legally forbidden from spending money on things that don’t provide some kind of profit-seeking advantage.  Business donations, partnerships, sponsorships, and other relationships are shaped by the same imperatives that broadly determine all smart business decisions. So, at a minimum, corporate giving is supposed to buy good will and positive associations about the company, at least among populations whose opinions might have an influence on purchases or the profit-enabling context.  (Does anyone think that Mobil spent so much on PBS’ Masterpiece Theater simply because the CEO loved hearing English accents?)

But it can also go beyond simple good will. A big contribution can help silence potential critics who will likely find it difficult to criticize a donor.  (This also happens within the business world.  The dependence of women’s magazines on the large number of cigarette ads put in their pages by tobacco companies probably helps explain why so many of them were so silent for so long about the hazards of smoking.)   Corporate giving can even buy supportive action, even when it is opposed to the recipients’ members/customers best interests.  There is probably a connection between contributions by soda companies to minority groups around the country and the active fight by  the NY-based Hispanic Federation and the NY chapter of the NAACP to the city’s efforts to reduce the amount of diabetes-causing sugar in our diet.  (The point is not the wisdom of the Bloomberg effort to cap soda portion sizes but the active opposition of groups representing a population that would significantly benefit from reduced sugar consumption.)  Years ago, Henry Ford, not known for his liberalism, gave regular donations to African-American churches in Detroit who subsequently joined him in aggressively fighting unions.

It is incumbent on Public Agency officials and their elected overseers, as well as of non-profits such as Friends groups that serve as a conduit from the business to government sectors, to be aware of and even publicly acknowledge the potential secondary impact of a contribution or partnership.  The California State Park system and the Portland, Oregon parks have set up “good citizenship” vetting requirements for potential partners.  The significant positive impact of a good P3 make it imperative that both sides avoid allowing the relationship to be attacked as an attempt to “pull a fast one” on the public.

CREATING AND DIVIDING VALUE

Beyond good will, it is not unusual and totally legitimate for for-profit partners to provide donations that create a better environment for their own business success.  New Balance contributes fund to the Massachusetts Department of Conservation and Recreation (DCR) to help cover the cost of plowing snow off the Charles River paths.  This generates goodwill but also makes it easier for people to keep running through the winter.  New Balance obviously hopes that the runners are wearing NB shoes.  However, there is a relatively arms-length distance between the partnership’s activity and the sales transaction in a local shoe store.

Sometimes the connection is more direct.  Creating a new road, improving a park, creating attractive programming, or publicizing something will bring additional people to the area – which will increase the number of people who patronize a nearby store, be interested in buying or renting space, or buy tickets to an associated performance/activity.  These are all legitimate motivations.  But the likelihood of a future media exposé is reduced if the for-profit partner’s expectations are acknowledged from the beginning.

In addition, if the private partner will measurably profit from the partnership, the public agency needs to think about pricing in a different manner than if it is a simple contribution, sponsorship, or a more arms-length connection.  If there is a more direct relationship, the price of the agreement to the for-profit business should be determined by its value to their bottom line rather than the actual cost of design, construction, and operation.  And the more valuable the partnership is to the private proposer the more they should pay for the privilege.  The partnership’s creation of public value should reduce some of the pressure on the agency to capture more of the private value.  And actually coming up with better-than-a-wild-guess estimates of the value of the partnership to the for-profit group can be difficult, occasionally impossible.  But this should not stop the public agency’s negotiators from trying to cut the best deal they can.  When Donald Trump offers to build a new subway station next to one of his buildings, the value to him isn’t the cost of the station or even the fact that it adds a needed feature to the transit system but the higher rents he will be able to charge.  And that number should be part of the negotiations!

Unfortunately, Public Agency directors seldom think in these terms.  Of course, there is a real-world limit to this – the business is always free to choose another way to spend its money in order to achieve similar results.  But it’s the responsibility of Public Officials to maximize return on all public investments and potential partners aren’t likely to offer more than they’ve been asked to give!

(All this is different from situations in which a private partner is simply paid for work.  It may be called a P3, but it’s really just a contract, or even a backdoor effort to outsource tasks.  It’s possible that the private firm can do something faster, with higher quality, and at less cost than the public agency, or perhaps do something that the public agency simply couldn’t do on its own.  But this should be based on factual analysis rather than ideological assumptions.  And it is important to remember that the public sector has broader goals than cost-efficiency.)

THE BOTTOM LINE

Public agencies need to evaluate potential partnerships according to how much they maximize long-term public value in the form of public use and/or revenue.  The partnership process should allow for meaningful public input and transparency during the periods of planning, negotiation, use, and termination of the P3 agreement.  And the whole effort should help create a broader and more powerful constituency in support of the agency’s mission.

Partnership offers from any group whose mission is not fully aligned with the Public Agency recipient should be assumed to contain a self-interested ulterior motive.  This is not bad – it just has to be acknowledged and managed.  Public agencies, and the public they serve, need to always look inside the mouths of gift horses to see how Trojan they may be.  The ultimate cost may be explicit or very subtle:  in addition to the opportunity cost, or the direct favoring of one group over another, how will acceptance of a proposed partnership also lock the Agency into a stream of future costs and actions, or create pressure to favor the giver (or the giver’s allies and values) in future decisions or actions?  The partnership or other offer may be generous and well worth pursuing, but it is seldom free.

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For ideas and/or feedback on previous drafts, thanks to Susan Alt, Matt Kiefer, Conrad Crawford, Herb Nolan, Catherine Nagel, and Kathy Blaha

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Related previous posts:

Why the Public Sector Can’t Be Run “Like A Business”

QUICK, VISIBLE, REMOVABLE: Improving City Life By Unleashing Citizen Creativity Through Government Initiative

DESIGNING EFFECTIVE PROGRAMS: Mobilizing Constituencies, Developing Expertise, Sustaining Action

When Budgets Shrink, Mission’s Must Converge

 

 

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