Bridging the gap
Cambridge, Mass., officials decided in 1999 to take an aggressive stance against climate change. But, after eight years of struggling to reduce energy consumption, they were not even close to meeting their goals. With the assistance of local foundations, the city in 2007 created the Cambridge Energy Alliance (CEA), a nonprofit that has drawn on expertise from the private and public sectors to reduce the city’s environmental impact. Through CEA, thousands of Cambridge residents and businesses are receiving favorable financing and assistance for environmental projects.
Now, the city has set a goal of saving more than $100 million through environmental efficiencies by bringing together small business, energy service companies, industry, community groups and residents into a public-private partnership, says Robert Pratt, CEA president. “They wanted to do something big,” Pratt says. “They created CEA to find ways to get everybody on board.”
At a time when financial resources are scarce, governments are looking more closely at public-private partnerships as a means of tapping the expertise and economic power of the private sector to make possible large projects that might otherwise fall flat. “There’s a need for work to catch up on repair and improvement of our infrastructure. Federal and state funding is not giving nearly enough,” says Fort Bend County, Texas, Judge Robert Hebert, who is effectively the county executive. “There are fewer options and more interest in public-private partnerships.”
While government officials who have experience in the relationships tout their benefits when designed effectively, they also warn that they can be very complicated and even financially disastrous without proper planning. “These are not the answer to all problems,” says Richard Norment, executive director of Arlington, Va.-based National Council for Public-Private Partnerships (NCPPP). “But they are the answer to some of them. They are definitely an option that needs to be examined.”
Take careful steps
NCPPP has seen increasing interest in its programs not only from governments around the country, but also from foreign nations, which have traditionally relied on private partners to finance and build projects, with the public paying the cost back over 20 or 30 years, Norment says. What distinguishes public-private partnerships in the United States from private financial initiatives in Europe is the continuous and lasting participation of the government in the project. Where foreign governments often turn projects entirely over to their private partners and then buy them back over 20 or 30 years, U.S. partnerships bring in private firms to add expertise and sometimes financing, but retain ultimate control. How the relationship is ultimately structured depends on what works best for both the public and private partners, Norment says. “I like to say that if you’ve seen one public-private partnership, you’ve seen one public-private partnership,” he says. “No two are identical.”
Critical to the success of any public-private partnership is a comprehensive review of all of the implications of the agreement, Norment says. NCPPP has identified six keys to success, which include strong support from public leadership and an education process that informs the public about how the relationship will work. Also important, he notes, are picking the right partner, continuing public participation, a detailed contract, and a guaranteed revenue stream.
The landscape is littered with projects that did not have sufficient public support, did not look at all areas of possible conflict or were not based on good public policy or good business economics, Norment says. “Three years ago, there was a lot of money sloshing around,” he says about naïve business investors. “They got into a lot of trouble.”
In addition, stakeholders sometimes misunderstand the impact of the project. He cites a situation in California where, once fully informed, unions moved from opposition to full support for public-private partnerships, including investing their pension funds. “There was a misconception that it would lead to a loss of public sector jobs,” he says. “Once they learned about the project, they understood it would actually expand their job base.”
Gene Schiller, who has been on NCPPP’s executive committee for 10 years, believes that the current environment is friendly to these types of joint projects. “These times lend themselves to a great deal of creativity,” he says. “You’re only limited by the imagination of the people involved.”
The Southwest Florida Water Management District (SFWMD), where Schiller is deputy executive director, has engaged in a number of public-private partnerships. In particular, he points to the water desalination plant that SFWMD built with the Tampa Bay Water District, which is operated by a joint venture of Voorhees, N.J.-based American Water and Madrid, Spain-based Acciona Agua. He says that the complex project required a tremendous level of skill involving a number of different organizations. “Getting players for these projects is easy,” he says. “Getting them to play together is the hard part.”
In addition to the organization issues, a good project has to anticipate through its contracts a range of issues that are foreseen as well as the unexpected. “Everybody has to protect their interest,” Schiller says. “Contracts have to clearly understand who gets the risk and who gets the rewards. A private sector company that doesn’t make a profit will not stay in a project. It has to be fair to everybody.”
Moreover, while the government may need to bring in private partners to handle areas of work that are beyond its capabilities, it still must find people who can manage the process, he says. For example, the government needs management engineers with sophisticated skills to work with the private partners on complex design issues as well as specialized attorneys who can write contracts with the flexibility the project requires. “It’s a process of getting the right people to the table,” he says.
Despite the apparent complexity of a project, it must make sense to the ratepayers who must support it. “You have to keep it simple,” Schiller says. “The planning group has to take a look at the best way to get the job done.”
Hebert believes there are three situations that lend themselves best to the public-private partnership concept: first, if there is an inability to use traditional finance or construction techniques; second, if the private sector partner has a particular set of skills unavailable to the public sector; and third, if there are multiple government entities that need to be tied together.
For example, Fort Bend County manages all of its road projects because the county has an excellent bond rating and has access to low-cost dollars for its projects, Hebert says. However, the 1,300-bed expansion of the county jail is a different story. Rather than acting as the contractor on the project, the county hired a manager, which agreed to deliver the facility at a guaranteed price and absorbed all of the risk with the hiring of the subcontractors. “We’re undertaking a modification of the traditional low-bid project,” he says. “We have a private company between the county and all of its contractors.”
The project was originally forecast to cost $85 million, and the county told its manager that it could only afford $75 million, Herbert says. Four years after the original bids, the project is scheduled to open in July at a cost of $69 million. “They’ve done magic,” he says, while acknowledging that the recession has forced many companies to reduce their costs.
Hebert is a strong proponent of the public-private partnership model where it can be effective. “As more become comfortable with what these partnerships can do, it becomes another tool in the toolbox,” he says.
With that hurdle cleared, Hebert believes the next obstacles are the federal limits on the kinds of bonds that can be used for some so-called “private activities.” “The caps on private-activity bonds should be removed,” he says. “There is just a relatively small pool of dollars that can be used for this purpose.”
The power of collaboration
In the Atlanta area, the Metropolitan Atlanta Rapid Transit Authority (MARTA) is participating in several major projects involving public-private partnerships that are near the implementation stage, says Beverly Scott, MARTA’s general manager and chief executive officer. “There’s no question that the area of public-private partnerships is a tremendous opportunity in the overall area of public infrastructure,” Scott says. “But, there shouldn’t be a belief that this is a way for the private sector to naïvely fund public sector projects.”
Organizations must have a clear understanding that such projects can be very complicated and must be evaluated on a set of costs and benefits, she says. In addition, organizations will find that they will need expertise and capabilities not normally needed for traditional projects.
Furthest along among MARTA’s public-private partnerships is the Peachtree Streetcar project, which has drawn participation from the city and business organizations. The $300 million, 16.5-mile project, which would bring mass transit along the main corridor of the city, has drawn commitments from business for capital and operating expenses. “No one would have thought five or six years ago that the parties at the table would actually be making long-term commitments to capital and operating costs,” Scott says. “This public-private partnership is advancing the project, getting it off the ground faster.”
A second public-private project is the BeltLine, which is a $2 billion, 20-year, 22-mile proposal to use existing right-of-way to encircle the central portion of Atlanta with transit, trails and parks. It is being spearheaded by Atlanta BeltLine, Inc., an affiliate of the Atlanta Development Authority, and the Atlanta BeltLine Partnership. The partnership is a non-profit organization that is raising funds from private and philanthropic sources to support the BeltLine and working with community groups, businesses and others to increase general awareness of the project. “There’s a lot of new thinking,” Scott says. “More innovation to get projects up and running, collaboration, and people working together as partners.”
Pratt believes that Cambridge’s collaborative effort will give confidence to the community to take action, where there previously was reluctance. “The challenge is how to get not just the target public sector, but to include schools, the water department and industrial companies on board,” he says.
In some ways, energy conservation is a low priority for businesses, because landlords often share the cost of the utilities. CEA is trying to use a carrot-and-stick approach, through increased enforcement and stronger building codes, along with rebates from state authorities. “This was initiated by the public sector, which said, ‘Let’s make this happen,'” he says. “But, we need the private sector to bring out the maximum energy implementation.”
That is really the value of the public-private collaboration, he says. “You could do something small without big institutions,” he says. “But, if you’re going to do something big, it has to be a public-private partnership. It brings all the decision makers together. It’s not going to happen without a concerted effort.”
- Read the “6 keys to public-private partnerships” sidebar to learn what the National Council on Public-Private Partnerships identifies as the critical components to any successful public-private partnership.
Robert Barkin is a Bethesda, Md.-based freelance writer.