Part 4. PPPs Contrasted with Outsourcing and Privatization

PPPs are often associated with other government reforms or functions involving the private sector. For example, the outsourcing of government functions (transferring them to the private or nonprofit sector) is an effort to achieve greater fiscal control and more efficient service delivery. Government outsourcings is an application of the classic make or buy decision to government operations, even functions that have been the traditional domain of governments. The presumption is that private vendors can provide some public services more cheaply than government agencies. However, there is nothing intrinsic to outsourcing that requires a partnership.

Privatization of traditional state-owned or state-run enterprises is another popular reform strategy. Privatization involves the transfer of some activity and its assets that in the past was operated by the public sector to the private sector, through a sale, concession, or some other mechanism. In privatization, either a government eliminates direct control and ownership of the function and the delivery of services (full privatization), or it retains some influence by holding stock in the privatized firm. The intention in all such arrangements is that the day-to-day production and delivery of these goods and services will be left to private operators, and thus the market, and that the government’s involvement will be primarily regulatory. Again, there is nothing intrinsic to privatization that requires a partnership.

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Part 3.What Public–Private Partnerships Are

Even with their ubiquity, there remains some ambiguity as to what exactly constitutes a PPP. For this article, however, we focus on a more specific, emerging form of PPP that gives the private sector a greater role in decision making and assumption of risk in the joint venture.

The private sector has long been involved in infrastructure projects, under arrangements by which the private sector, under contract, designs and builds facilities (or roads) and then turns them over to the government to operate and maintain. Our specific focus is on long-term partnerships involving the private delivery of public infrastructure services. Thus, Public–private partnerships are ongoing agreements between government and private sector organizations in which the private organization participates in the decision-making and production  of a public good or service that has traditionally been provided by the public sector and in which  the private sector shares the risk of that production.

Three critical conditions characterize this conception of these emerging PPPs:

  1. The relationship between the public and the private sector organization is long term, rather than a one-time relationship, such as might occur in a conventional contract for a good or service (such as office products or secretarial assistance).
  2. The private sector cooperates in both the decision making as to how best to provide a public good or service and the production and delivery of that good or service, which normally have been the domain of the public sector.
  3. The relationship involves a negotiated allocation of risk with the private sector instead of government bearing most of the risk.

These emerging forms of PPPs take a variety of forms that reflect varying degrees of private involvement, including design, build, and operate; build, own, operate, and transfer; and design, build, finance, and operate.

Next time we will explore important elements of successful conventional contracting including arm’s-length negotiations, transparency, clear specifications of the good or service being bought, and specific evaluation criteria.

Part 2. What Public–Private Partnerships Are and What They Are Not

What Public–Private Partnerships Are and What They Are Not

After years of underfinancing much-needed repairs and maintenance to America’s infrastructure—by as much as $2.2 trillion, according to some estimates—digging out of the current deficit will be costly. And with state and local governments facing tight budgets, it may be decades before the work will be affordable. The lack of resources for infrastructure improvement and maintenance extends beyond highways and affects a range of public capital investments, from levees to wastewater treatment and from transportation to schools. The dismal state of the nation’s current infrastructure could hamper future growth.

The ways that governments allocate new funding for infrastructure projects and the ways they build, operate, and maintain those projects has contributed to the problem. New spending often flows to less valuable new construction at the expense of funding maintenance on existing infrastructure.  Further hindering efficiency, the traditional process for building infrastructure decouples the initial investment—the actual building of a highway, for example—from the ongoing costs of maintaining that highway. As a result, the contractor building the highway often has little incentive to take steps to lower future operations and maintenance costs. Such inefficiencies likely contribute to falling rates of return on public capital investments. PPPs can be used for solid waste, transport (airports, bridges, ports, rail, roads, tunnels, and urban railways), tourism, and water.

The United States is a relative newcomer to PPPs. Public–private partnerships have existed worldwide at least since the time of the Roman Empire (e.g., the use of private tax and toll road collectors) and in the United States since its founding. During the Revolutionary War, the Continental Congress authorized the use of privateers to harass the British navy. Later, much of the West was developed through a variety of PPPs, including the cross-continental railway. The production of transportation infrastructure often has been undertaken with PPPs, from the development of private toll roads and canals during the nation’s early history up to the recent Dulles Greenway—a privately financed, built, and operated toll road in northern Virginia.

Even though there is an old nineteenth-century tradition of privately provided public infrastructure and even of private tolled roads and bridges,  the United States still depends almost exclusively on the government for its public transport infrastructure (with the important exception of railroads).The two-decade trend toward PPPs that has revitalized the ways that many countries provide infrastructure has gained only little traction  in the United States. Whereas the United Kingdom financed $50 billion in transportation infrastructure via PPPs between 1990 and 2006, the United States, an economy more than six times as large as that of the United Kingdom, financed only approximately $10 billion during the same period.

Even with their ubiquity, there remains some ambiguity as to what exactly constitutes a PPP. . . For future articles . . . we shall focus on a . . . form of PPP that involves a greater role by the private sector in decision making and assumption of risk in the joint venture.

Public–Private Partnerships: Public Accountability

Public–private partnerships (PPPs or P3) are growing in popularity as a governing model for delivery of public goods and services. In recent years, the state of California for instance has partnered with the private sector to finance, design, construct, operate, and maintain two state infrastructure projects—the Presidio Parkway transportation project in San Francisco and the new courthouse in Long Beach. Both the California Department of Transportation (Caltrans) and the Administrative Office of the Courts (AOC) entered into P3s for these projects in order to achieve benefits that they might not have obtained under a more traditional procurement approach (such as design-bid-build).  PPPS potential benefits include greater price and schedule certainty and the transfer of various project risks to a private partner.

PPPs have existed since the Roman Empire, but their expansion into traditional public projects today raises serious questions about public accountability. In a series of articles we plan on examining public accountability and its application to government and private firms involved in PPPs.

Part One-The Model:

Public–private partnerships (PPPs) increasingly have become the default solution to government problems and needs, most recently for infrastructure, and they are embraced by a wide range of constituencies, across political parties, and throughout the world. This trend may accelerate as governments experience fiscal deficits and look for alternative ways to finance and deliver government services. The rationale for creating such arrangements includes both ideological and pragmatic perspectives.

Ideologically, proponents argue that the private sector is superior to the public sector in producing and delivering many goods and services.

Pragmatically, government leaders see PPPs as a way of bringing in the special technical expertise, funding, innovation, or management know-how from the private sector to address complex public policy problems. The expanding domain of goods and services provided by PPPs includes private toll roads; schools, hospitals, security services, wastewater treatment, and emergency response.

There are many challenging technical and structural aspects to creating successful PPPs that have been addressed by other authors (see, e.g., Grimsey and Lewis 2004; Hodge and Greve 2005; Yescombe 2007). However, with the increased use of PPPs, the issue of public accountability has become one of the more important of policy questions raised (see, e.g., Guttman 2000; Sclar 2000). The purpose of upcoming articles is to provide a framework to assist public managers in effectively exercising accountability with PPPs. We will begin with a discussion of the nature of PPPs and the traditional concept of public accountability. Second, we focus on the unique characteristics of inter-organizational relationships that are pertinent to the exercise of accountability in PPPs. Finally, we shall offer a framework to analyze PPP accountability issues along several important dimensions that shape the relationships forged in public–private partnerships.

Next Time: What Public–Private Partnerships Are and What They Are Not

 

Revisions to Federal Transportation Project Grant Program Encourages Use of P3s

The federal grant program that provides funding for freight and highway projects throughout the country has been revised to support projects that use funding from the private sector or other nonfederal sources.

The Fostering Advancements in Shipping and Transportation for the Long-Term Achievement of National Efficiencies (FASTLANE) program has been renamed the Infrastructure for Rebuilding American (INFRA) program, the U.S. Department of Transportation’s Build America Bureau announced recently. Congress authorized FASTLANE to receive $4.5 billion over five years under the Fixing America’s Surface Transportation (FAST) Act of 2015 to provide competitive grants or credit assistance to nationally and regionally significant freight and railway projects beginning in 2016.

The INFRA program will provide approximately $710 million in FY 2017 and up to $855 million in FY 2018, according to a July 5 Federal Register notice. The INFRA program will evaluate projects using updated criteria to ensure that they meet national and regional economic vitality goals and encourage the use of nonfederal funding and innovation in the project delivery and permitting processes, including P3s. The program’s revisions could provide some insight into the approach President Trump could take in proposing a $1 trillion infrastructure funding package later this year, reported The Hill.

Each large project that is selected for funding will receive at least $25 million; each small project will receive a minimum of $5 million, and 10 percent of available funds will be reserved for small projects for each fiscal year of funding. The INFRA program preserves the FAST Act’s statutory requirement that at least 25 percent of funding be reserved for rural projects.

Projects eligible for funding include reconstruction, rehabilitation, property acquisition, environmental mitigation, equipment acquisition and operational improvements that affect system performance.

Applicants can resubmit previously submitted FASTLANE applications but must explain how these projects competitively address the INFRA grant criteria. Applications are due Nov. 2.

City Should Consider Using P3s to Bolster Pension Plan and Water System, Observer Says

Last week we wrote that Municipalities’ should Consider Using P3s to Bolster Pension Plans and Water Systems. Lewis Solomon, a professor emeritus at George Washington University Law School in an Aug. 8 Herald Tribune op-ed. says P3s can produce revenues that could keep municipal pension plans solvent.

A solid pension plan should be 80 percent to 90 percent funded but Sarasota Florida’s general plan is only 71 percent funded and is projected to incur a $54 million unfunded liability in the years ahead, wrote Solomon.

To keep its underfunded pension plan afloat, the city is reducing cost-of-living adjustments and other plan benefits and limiting the number of workers who can enroll. The city should instead consider investing the plan’s funds in a P3 project that can serve the dual purpose of producing good returns for the plan while rehabilitating Sarasota’s struggling water and wastewater system, Solomon suggested.

“Rather than these palliatives, Sarasota could monetize its water and sewer system by entering into a public-private partnership for these assets. By providing access to private capital, this approach would quickly help the municipality achieve the general plan’s 80 percent funding target and substantially lessen the millions in current, annual contributions to pay down the plan’s unfunded liabilities,” he wrote.

Robert Poole of the Reason Foundation recently made a similar suggestion, pointing out that pension funds looking for relatively safe investments would do well to consider buying into existing or “brownfield” infrastructure P3 projects than in new “greenfield” ones.

By leasing its water system — representing more than $100 million in water and sewer projects — to a private developer for 20 to 30 years, Sarasota could obtain private financing for and rehabilitation of 175 miles of water pipes and its deteriorating lift stations, Solomon estimated.

More than 2,000 communities use P3s to fund and conduct vital water-related infrastructure projects, Michael Deane, executive director of the National Association of Water Companies has noted.

One example is the Bayonne (N.J.) Municipal Utilities Authority, which leased its ailing water and wastewater system to Kohlberg Kravis Roberts and United Water in 2012 for 40 years, Solomon pointed out. Through the deal, the authority received $150 million from the developer, which also agreed to invest $107 million in the city’s water system and provide technical expertise to rehabilitate it.

“This infusion of capital was critically important to the city because it eliminated $130 million of existing debt and improved both the authority’s finances and Bayonne’s credit rating,” according to a June 10, 2015, article on two successful municipal water P3s published by the Wharton School at the University of Pennsylvania.

Although it is not yet common for pension plans in this country to invest in public infrastructure projects, interest is growing. For instance, the California Public Employees Retirement System announced recently its purchase of a 10 percent share — at least $330 million — of the company that operates and maintains the Indiana Toll Road.

Pension fund managers in Canada have figured this out. Several are invested in such projects internationally and the Trudeau government is encouraging them to do so domestically.

Educating the public on P3s.

We have talk previously about the benefits and problems of Public Private Partnerships

But, the efficacy of P3 projects’; effects and promotion of project benefits to the people they would serve before such projects are awarded is essential to addressing stakeholders’ concerns and forestalling attempts to delay, change or even cancel the projects. Failure to anticipate negative public reactions has hindered the progress of major infrastructure projects in three states, making them difficult or even impossible to pursue.

In North Carolina, for example, although the House of Representatives failed to cancel the Interstate 77 managed lanes project, protests over the project caused the governor to recommend changes in an attempt to appease opponents.

Meanwhile, progress on the Maryland Purple Line light rail project is hindered by fallout from another area rail line’s poor performance.

A judge decided Aug. 3 to delay the start of construction to update a ridership analysis in light of declining ridership and safety issues plaguing the metropolitan Washington Metrorail system.

The Court noted “serious questions” about the “future viability” of the Purple Line. (See: The Washington Post). More than one-quarter of the new system’s passengers are expected to use both rail systems during their daily commutes, reported radio station WTOP-FM. The delay could complicate the project’s logistics and financing enough to jeopardize the entire project, some experts have warned, according to the Washington Business Journal. The state plans to appeal the judge’s ruling.

Maryland canceled plans to hold an Aug. 8 signing of a $900 million dollar federal funding agreement with the Federal Transit Administration because a Court stayed federal funding until the Purple Line ridership issue is settled.  This federal contribution would have covered nearly half of the $2 billion dollar project’s construction funding.

In New York, Gov. Andrew Cuomo changed the scope of the LaGuardia Airport redevelopment project after bids had been solicited, opting for a more ambitious and far-reaching design for the airport’s main terminal, adding to its expense, reported The Wall Street Journal. The change was motivated, in part, by community complaints about the project’s design.

The terminal’s redesign contributed to a hike in the project’s cost from $3.25 billion to up to $5 billion.

The importance of early, persistent and strong grassroots efforts to educate the public on the efficacy of Public Private Partnership projects therefore cannot be prevaricated.