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Jennovation 1.1: Don’t Go it Alone: Why Public-Private Partnerships Make Sense

Welcome to the second posting of my featured Govloop blog series—Jennovation—coming to you every other Monday. This series contains my musings on innovation, Open Government (Open Gov) and Public-Private Partnerships (PPPs).

Let me start by saying, I was rather surprised by the comments on my first posting. While Gov 2.0, Open Gov and innovation have been hot topics recently, the majority of the comments on my first posting (both on Govloop and Phase One Consulting Group’s blog) focused on PPPs and the potential for partnerships. I am a HUGE PPP nerd/fanatic, so the fact the readers latched onto that topic and are asking for more information on that subject made me very, very excited. So, for the next few postings I’ll focus on PPPs with a pinch of Open Gov and innovation thrown in. Several comments from the community inspired this posting in particular, including the following one made by the International Consortium on Governmental Financial Management (ICGFM):

“There is a lot of concern about the impact of PPPs on government risk. (Notion that the government is on the hook for PPPs should there be failures.) It also tends to move expenditures off the balance sheet to give the illusion of fiscal discipline. And, there is the opportunity for PPPs to be used for short term budget balancing at the expense of future commitments. There have been some disappointing results in the UK. There is no question that the private sector has demonstrated certain efficiencies. These potential advantages must be weighed against risks.”

I couldn’t agree more that no partnership should be entered into without first weighing the benefits, costs, and risks. In my research [1], there are typically eight factors that drive the desire to partner or privatize:

  • Resources
  • Information
  • Productivity
  • Legitimacy
  • Cost-reduction
  • Risk-sharing
  • Introduction of competition
  • Accountability

Thus in theory, sharing of risk is one of the reasons partnerships emerge in the first place. Many services may not ever be provided if it weren’t for partnerships—since the risks would be too large for any one party to bear by themselves. In fact, one expertise of the private sector is to calculate how much risk should cost. Risks in large project or service partnerships can include completion risk, performance risk, market risk, economic risk, political risk, equity risks, and force majeure. “By partnering with the private sector, the Government is able to relieve the burden of carrying all those risks and shed some to the private sector who may be able to bear them more effectively. For example, the private sector is often more apt at bearing some forms of performance risk since their profit is directly tied to performance metrics.” [1]

The public sector and the private sector are driven by very different things. A partnership should leverage existing incentive structures to ensure that goals are uniformly pursued by all parties and that conflicting incentives don’t jeopardize results, as pointed out by the ICGFM. Fiscal discipline is often MORE of a motivator for the private sector than the government. “Whereas a private firm generally prospers by satisfying paying customers, a monopolistic public agency can prosper even if the customer remains unsatisfied. When a private company performs poorly, it tends to go out of business; when a public agency performs poorly, it often gets a bigger budget. Paradoxically, the budget can grow even as customer dissatisfaction grows; in this respect a rising crime rate is good for a police department, a housing shortage is good for a housing agency, and an epidemic is good for a health department.” [2]

Bottom line: Partnerships are complex and should not be entered into lightly. This goes for large-scale infrastructure development projects, event focused partnerships, and partnerships that focus on providing a specific service for periods of time.

Open Government and innovation focused partnerships are no different. Apps contests? Prizes to address our grand challenges? Enhanced collaboration to achieve Open Gov objectives? ANY partnership that is entered into by the federal government should be carefully considered. In addition to figuring out the motivators of each partner so the right risk sharing structure can be set up, the following questions are also crucially important for any Government agency to consider. (Beware: if you don’t have a best friend in your legal shop and you’re interested in setting up some partnerships, now’s the time to bake cookies for the 9th floor…)

  • Will the partnership require any resources (financial or human capital) to operate? If so, who’s contributing the resources? If a non-governmental organization is paying for anything at all (financial or in-kind) agencies will have to pay close attention to their gift authority. Can the agency accept gifts? Under what terms? Consult your legal counsel…
  • How does the partnership further the agencies mission? Appropriated resources (property, staff, and dollars) must further the mission of the agency.
  • How will the Government support to partnership from an advertising standpoint? There are VERY strict laws on what agencies and government employees can do with regards to endorsements and advertising. Consult your legal counsel…
  • What will be produced through the partnership? Who owns it when the partnership is completed? Negotiating intellectual property splits up front is critical to ensure each partner is getting what they expect out of the partnership. Consult your legal counsel…
  • What is the background of the potential partners? Are there any potential ethical, lobbying, or perception issues with particular partners? Consult your legal counsel…
  • Did you give other potential partners a chance to join the partnership? “Sole-sourcing” a partnership is often possible, but can jeopardize the legitimacy of the partnership, so allowing the breadth of possible partners to compete for the chance to participate is optimal. This area, in particular, is a space where new Gov 2.0 technologies have allowed partnership opportunities to become more open and have allowed more potential partners to step forward.

Partnerships have the potential to add a TON of value, but they require a decent amount of homework to do right.

Though this posting was a bit more research and background info oriented, in future postings I will highlight some of the really cool PPPs from yesterday and today (per Andrew Krzmarzick’s suggestion). As always, please feel free to reach out to me at [email protected], at any time during this series to continue to conversation.

Happy almost 4th of July!

Jenn

[1] Gustetic, Jennifer. A Framework for Understanding and Designing Partnerships in Emergency Preparedness and Response. Cambridge, MA: MIT Libraries, 2007.

[2] Savas, E.S. Privatization and Public Private Partnerships. New York, NY: Chatham House Publishers, 2000.

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Profile Photo Steve Ressler

So I was listening to a great NPR This American Life yesterday that mentioned the worry with PPP that they are often used for 1X windfalls to solve financial problems politicians can’t close.

I really like the analogy to Open Government. My hope though when agencies tackle these issues is they way the potential value and risks. For example, the value of citizen engagement at a grand scale is so important that agencies have overcome the fear of endorsement to actually supporting the use of Facebook and Twitter on gov’t home pages (vs Bebo, MySpace, etc) with links. I think that’s a valuable trade-off.

Profile Photo Nichole Henley

This was a great article. I often receive inquiries about PPP regarding professional development opportunities– in particular with our Presidential Management Fellows program. Our PMFs would like to do rotations at private companies and we (fed employers) struggle with how can we accomplish this without taking a loss/risk and doing so legally? Thanks for sharing!!

Profile Photo Jenn Gustetic

@Nichole–that’s a REALLY great idea. What do you find are the specific hurdles you face in getting the PMF’s private sector details? Cultural (is there a fear of losing them to other companies?), financial (paying for them while they’ll working for the private sector–could the company backfill their salary through an MOU?), legal (are there endorsement issues with sending PMF’s to one company and not another?), partnership (are there not many private sector companies willing to step up?), etc…

I’d like to hear more about what the hurdles to the partnership are… it might allow us to figure out how to get it moving forward. Great idea!

Profile Photo Nichole Henley

Our hurdles are exactly the ones you mentioned. How or do we backfill while they are on detail, risk of losing them definitely after putting much investment into them, legalities of sending them to one company over the other or the perceptions it may give, citing the value or proving the value of “lending” them to a private company, etc. At this time we are not approving the requests but I think with more thoughtful approach this may become a consideration.

Profile Photo Andrew Krzmarzick

Another great post, Jenn!

It seems to me that many of these questions are/should be asked in the procurement process. In fact, what partnerships are in place between government and private sector that DON’T go through a procurement process? If there are partnerships that exist outside of the normal procurement process – especially when money is involved – then I’d be really concerned as a taxpayer…too much room for under the table deals with friends, family, former colleagues, etc. And even when financial risk sharing is not involved, there should be a clear process that walks an agency through some steps using questions like the ones you’ve raised above…I’d be surprised if there isn’t clear guidance somewhere…

Profile Photo Sarah Giles

Thanks for continuing on this topic, Jenn. Your set of questions (particularly #1) for Government agencies to consider before embarking on a PPP provide the basis for why we use DOCs (Declarations of Cooperation) in our collaborative implementation projects – the document (while not legally binding), clearly spells out what each partner (government, business, non-profit, even private citizen) will contribute for resources. This may be a DOC for a one time project (one of those projects that government can’t do alone) or for an on-going collaborative system. It is up to each partner to determine what their part of the DOC states and what resources they are committing, but the DOC outlines that and is a public document, posted online. It’s been a fantastic tool for accountability in the partnership and for clarity on each partner’s role.

Here are a couple of examples that are very specific about what role each of the partners plays in the partnership. These projects include at least one federal agency, one non-profit sector organization, one for-profit partner, and one state / local agency:

http://www.orsolutions.org/docs/clatsop_doc071003.pdf
http://www.orsolutions.org/docs/WFLocks_FinalDoC.pdf

It takes a lot of work to get to the point of finalizing a DOC – usually at least 6 months, sometimes a year or even two – before the actual on-the-ground work starts to happen, before the first load of brush is cleared for the trail. And even before the partners get together in person for their first meeting, we put in quite a bit of work with the different partners in conducting an assessment to see if the time is right, if all the partners are included – essentially if there’s a willingness to work on creating the partnership. We’ve found that it’s often in the assessment that a collaborative project is either made or broken – and it’s just as important for the partners themselves to think long and hard about their readiness and willingness as it is for us (as the third party designing and supporting the process) to ask those questions.

Profile Photo Jenn Gustetic

All–thank you for the great comments and continuing the discussion about this! @Sarah, I couldn’t agree more about the importance of a DOC (or whatever term you chose to use for a partnership agreement). That document in particular is one of the most important reasons to have lawyers at the table regularly during partnership brainstorming.

@Andrew and @Harlan–What’s really cool, and also kinda scary, about PPPs is that they DON’T go through a formal procurement process in many cases. Contracts are one example of on the spectrum from purely private sector provision of a service to purely public sector provision. Other types of arrangements (starting from the most government involvement to the least) are:

1. Government Service
2. InterGovernmental Agreements
3. Corporatization
4. Government Vending
5. Management Contract
6. Contracting Out
7. Managed Competition
8. Grant
9. User Fees/Concession
10. PPP/Collaborative Governance
11. Voucher
12. Franchise
13. Volunteer Service
14. Free Market
15. Self-Service

You can read more detailed descriptions of each of these types of partnership on pages 27-31 of my graduate thesis: http://dspace.mit.edu/bitstream/handle/1721.1/40299/191092130.pdf?sequence=1. I may devote a future posting to running through some of these vehicles if there’s enough interest.

I would also argue that since I published my thesis in 2007, another type of partnership should be added to this list: prizes and competitions. The White House sees the importance of this vehicle so much that they directed OMB to issue guidance on their use: http://www.whitehouse.gov/omb/assets/memoranda_2010/m10-11.pdf Interestingly enough though guidance in many of the other, less common, partnership arrangements, isn’t as clear.

The most common partnership arrangement are contracts and grants, but there are several other partnership “vehicles” that government’s have that might just not be on their radar. Since some of these options aren’t on their radar, guidance around their use it largely non-existent. Some Agencies do have GREAT partnership guidance (for example, the Department of Education has put together great guidance for their people) but many folks haven’t developed it since it hasn’t been demanded.

One of my goals is the elevate the discussions around these “alternative” partnership options enough that people start DEMANDING guidance to use them.

Keep the conversation going guys! This is great!

Jenn