Public-Private Partnerships: Operating in the New Reality

Public-private partnerships (agreements between government and private or nonprofit organizations to perform certain functions) have become the new reality in governing. An increasing number of cities, townships and states are using the concept to enhance government accountability while protecting their citizens from higher taxes and wasteful public spending. Entrepreneurial and result-oriented policies help government provide services successfully. Many determined public servants with vision recognize the value of outsourcing and govern through the power of contract, competition, and private partners.

Consider a few examples.

The Resource, Recovery, and Recycling Authority of southwest Oakland County used private sector expertise to build a material recovery facility agency, through competitive bidding, without public financing. Each participating community and their citizens now share in the revenues earned by the Authority from the sale of recycled materials.

To raise capital for infrastructure, the city of Franklin, Ohio, sold its wastewater treatment plant through a competitive process. In doing so, it reduced consumer rates by 14 percent. The earnings from the sale of Franklin’s treatment plant were used to pay off Franklin’s bond and for other infrastructure upgrades. Without city leaders’ foresight and recent federal reforms that ease the sale of assets like this, the people of Franklin would have been saddled with an outdated wastewater treatment plant and no money to finance improvements.

Another innovative idea used by Franklin city officials was allowing Earth Tech of Grand Rapids, Michigan, to design, build, own, and operate a five-million-gallon per day drinking water treatment plant. The entire operation will be financed by Earth Tech. Earth Tech will recoup its investment via user fees during the two-decade service agreement.

Community employees also benefit from innovative protections of public-private partnerships. For example, some city workers in Indianapolis became employees of the city’s new privately operated wastewater treatment plant. The employees’ new contract provided greater salary and incentives, while the company saved the city $12 million per year. Other communities have similarly provided assistance to their employees through mandatory employment or employee leasing arrangements with the private sector.

Governments which have used effective public-private partnerships have recognized the need to assess their own strengths and weaknesses, and those of their private partner. For instance, the Resource, Recovery, and Recycling Authority of southwest Oakland County used the strength of its stable revenue stream to obtain a new facility and provide service to its citizens. Other governments have recognized that their control of a stable revenue stream (e.g. utility rates) is looked upon favorably by banks, and can be used to finance improvements or retire debt.

Governments have also learned that private partners often have experience and expertise in negotiating public-private contracts. Therefore, most government partners hire one or more consultants to match the abilities of private partners, identify strengths and weaknesses, assess abilities, and develop and negotiate the public-private partnership. The consultants typically have technical knowledge of the project, a legal background in public-private partnerships and the abiltity to construct creative financing arrangements. Governments have also found consultants essential in analyzing competitive proposals generated by the request for proposal process.

Franklin, Ohio, leaders recognized that they lacked the expertise to appraise the value of the city’s wastewater treatment plant; the city of Indianapolis was aware that it lacked the ability to assess the operation of its wastewater treatment plant; and the Resource, Recovery, and Recycling Authority of southwest Oakland County knew that it lacked technical, legal and financial expertise to develop and negotiate the public-private partnership for its material recovery facility. Those communities hired outside experts to complete deals that improved service and saved millions of dollars for their citizens.

Public-private partnerships allow communities to control the service or the facility through the power of contractual terms and conditions.

Public-private partnerships allow communities to control the service or the facility through the power of contractual terms and conditions. Contract requirements set performance standards in measurable terms. With modern technology including computer maintenance programs, real-time reporting of data, and video monitoring, governments can make sure the private firms meet the performance standards.

For more protection some communities use a) an annual performance review of private sector operations, b) zero-sum reverter clauses (which allow a municipality to retake possession of outsourced facilities should a breach of contract occur), (c) indemnity and hold harmless provisions, and (d) performance bonds or letters of credit. To protect its citizens, governments have relied on contract provisions which restrict rate increases, reduce risk, and require a share in revenues from the public-private partnership. The public partner’s ultimate protections are contract termination clauses for convenience or "without cause." However, communities have also recognized the benefit of a harmonious partnership and have inserted mediation, arbitration, and dispute review board clauses to resolve disputes efficiently and professionally.

Governments operating through public-private partnerships have institutionalized a new way of doing business. The process includes

• a result-oriented policy,
• assessment of the strengths of the governmental unit and private partner,
• assessment of the risks,
• use of the competitive request for proposal process,
• assurances of performance through contractual terms and conditions, and
• the use of consultants to assist in the public-private partnership process.

Public-private partnerships can help government officials achieve goals, maintain control, protect capital, and provide opportunities for their employees. A successful public-private partnership can provide improved services to more people and at a lower cost than either organization working alone.