Public-private partnerships are ready for takeoff
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Negative perceptions still exist
Still, there has been resistance to using PPPs in some areas. The resistance comes in part because of a misunderstanding of how much control the public sector has over the partnerships, a focus on a few poorly structured PPPs, as well as an attitude by public officials that “this is not the way we do it,” which can lead to unnecessary process delays and even the failure to reach an appropriate deal.
Despite negative perceptions, both the public and private sectors are learning how to work with each other to address many of government’s looming problems. In the last three years, there has been a 50 percent increase in the number of states that have enacted a legislative framework for PPPs, according to the National Conference of State Legislatures. Just months ago, Texas adopted legislation for the use of PPPs for the construction of all types of social infrastructure (schools, municipal buildings, water/wastewater systems). In 2009, California adopted an even broader statute that also includes a wide range of transportation projects.
Innovative financing tools are among the new options that are emerging to push PPPs forward. For example, state and local governments are monetizing their underused assets, such as land or buildings that have potential commercial uses. Shelby County, Ala., sold its wastewater facility to SouthWest Water, the same company that operated it successfully for almost a decade, and used the money to partially fund the construction of a much-needed new water treatment plant, which also will be operated by SouthWest Water. “We are pleased with our public-private partnership, because it has helped us tackle serious needs in our county,” says Shelby County Manager Alex Dudchock.
Public officials also have improved their skills to develop partnerships. For example, there is more use of Public Sector Comparators (PSCs), where a local government evaluates the full lifecycle costs for the public to execute a project or service using only public resources. That figure is then used as a means to evaluate a private sector proposal to perform the same service or project.
The key in developing a valid PSC, says Acting City Manager Dave Zelenok of Centennial, Colo., is “capturing all the indirect costs related to that service or project.” That means even accounting for the cost of human resources department work to manage the contractor.
“It’s important to fully burden both the public and private sector proposals with all the costs when evaluating them for best value to the agency,” Zelenok says. “Some costs may be obvious, like increasing or decreasing the employee, equipment and facility costs of running a human resources department supporting an in-house department. Other expenses, such as ‘legacy’ costs to support future retirement programs and even the future salvage values of surplus vehicles may be less obvious.”
He says that the public and private sector proposals should be evaluated through a “net present value analysis” (a calculation of all the full lifecycle costs expressed in current dollars). “While this can be a demanding process, the resulting understanding can have phenomenal benefits in negotiating a successful PPP,” Zelenok says.
Trillions on the sidelines
A surprising amount of money is available for properly organized partnerships. Estimates of the amount of money “on the sidelines” are between $2 trillion and $4 trillion. Besides the traditional banks and investors as a source of both debt and equity for projects, the new investors include public employees’ pension funds.
“Many public pension funds, along with other financial institutions, are increasing their allocations to infrastructure,” says Sasha Page, vice president of finance for the Infrastructure Management Group in Bethesda, Md. He says those groups have invested more than $10 billion into infrastructure funds in 2011 and more than $100 billion in the previous four years. “For U.S. public-private partnerships, the challenge is that these investors have a number of global infrastructure options, including investing in listed companies, the established European market, or emerging markets in Asia and Africa,” he says.
State and local governments enter into PPPs for a wide variety of reasons. One is the experience with faster, more cost-effective delivery, with the appropriate risks transferred to the private sector. However, other partnerships can yield some surprising benefits. Fayetteville, Ark., home to the University of Arkansas (UA), has a major sustainability objective in all of its community programs. While its partnership with Denver-based CH2M HILL for operation of the wastewater facilities initially seems like a traditional operation and maintenance contract, both the public and private sector partners have taken the objective of sustainability well beyond the contract terms.
Numerous UA-directed pilot projects are conducted at the wastewater facilities, including using biomass for fuel, preserving and managing wildlife reserves and recycling biosolids for environmentally friendly agricultural applications. John Coleman, Fayetteville’s director for sustainability and strategic planning, says that the contractor aggressively pursues sustainable solutions.