One of the key themes from the Clinton Global Initiative (see my discussions on the Q&A with President Bill Clinton at the most recent CGI 2011 - Part 1, Part 2, Part 2A, Part 2B, Part 3) was the notion of leveraging public-private partnerships to drive solutions to large scale problems. For instance, in my discussion of shared value v. shareholder value in Part 3, I made some related observations [note that all of the bold text in this post is used for my own emphasis]:
A few other related observations from the above CGI panel discussions:
- Unilever CEO Paul Polman, in the discussion on redefining business as usual to drive sustainability, remarked that in today's social media environment, the people in Egypt were able to bring down their government in "17 days" and as consumers could bring Unilever down in "nanoseconds" if, as a company, they are not sensitive to their impacts on society
- Dow Chemical CEO Andrew Liveris, who has been vocal about the need for a manufacturing renaissance in the U.S., made several noteworthy comments:
- The need for "inclusive democracy" through a "golden triangle" of public (government), private (business), and non-profit (NGO) partnership
- A world view has finally arrived where we need to value the planet
- It is challenging to run long cycle investments with a focus on public good when - you are measured on a quarter-by-quarter basis, some investors don't fully understand the notion of long-term value, and there is ten times more money going around the world (from an investment standpoint) than you can deal with
- "Poor people are poor, not stupid", i.e., it takes a certain level of creativity to survive when one is poor
Liveris has previously stated that while he is a supporter of free markets, we should recognize that free markets don't naturally allow for strategic decisions at a country level and that public policy and government need to step in to address that - "I would not let free markets rule without also addressing what I want manufacturing to be 20 or 30 years from now". That is very much aligned with what I wrote about a year ago:
What I believe is sorely missing in the US today is any kind of broad strategic thinking or position on the type of manufacturing leadership that we believe the U.S. should continue to have in order to preserve our leadership and security over the next 50 years - and - a vision on how we should concomitantly engage with governments and private enterprises to make that strategy a reality. In the absence of a strategic long-term view and any substantive broad-based dialog with the U.S. business community (not in the vein of political talking points, but in the spirit of driving American leadership through enlightened policy and deep engagement), dreams of re-building US manufacturing leadership will remain out of reach.
The key motivation for public-private partnerships (PPPs or P3s) is that, often times, neither the public sector nor the private sector is able to completely shoulder the costs and responsibilities for solving serious large-scale problems - so, a PPP might therefore be a more effective solution path in those circumstances. Note that I use the term PPP to refer not just to the public and private sectors, but also non-governmental organizations (usually non-profits or NGOs) that are funded through public or private means.
PPPs are generally much more complicated to plan and execute than purely public sector or purely private sector projects. In the aftermath of the Great Recession, there has been increased skepticism in some circles about the effectiveness of PPPs in achieving their goals given that reckless private sector risk-taking on a large scale got socialized into public sector budgets. For example, Toby Sanger and Corina Crawley of the Canadian Centre for Policy Alternatives wrote:
The shifting rationales of P3s has always been highly dubious.
P3s had been used by politicians as a form of off-book accounting to make it appear as if public spending and deficits were lower than they actually were — but then public auditors forced governments to include these obligations on their books.
P3 proponents then claimed that their projects could be less expensive, more innovative, speedier, and more accountable than public service delivery — but a string of failures, delays, little transparency, and secretive deals proved these claims wrong.
Most recently, P3 advocates have acknowledged that they cost more, but they try to justify these deals by claiming that P3s transfer massive amounts of “risk” from the public sector to the private sector. By using highly questionable “value for money” accounting, they claim that the higher costs of P3s, particularly on the financing side, are offset by transferring colossal amounts of risk to the private sector.
While independent experts have criticized these deceptive rationales and faulty accounting for years, the details can be complicated. The misleading accounting practices remain, but the financial crisis has exposed the false economics of P3s in a number of different ways:
- The economic and financial crisis was caused by the same policies behind the push for public-private partnerships.
- Private financing is more costly and risky than public financing.
- The private sector is worse at managing risk than the public sector.
- Risks can never be completely transferred through P3s.
- Additional and complicated P3 requirements lengthen the process and add to delays.
This economic and financial crisis has a number of deep roots, but what propelled both the later stages of the boom and the consequent crisis was a systemic cover-up of losses, mispricing, and mismanagement of risk in the private sector.
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In a thoroughly perverse twist, these free market economic policies led to the largest public bailouts in history and what Nobel-Prize winning economist Joseph Stiglitz has described as a "new form of public-private partnership, one in which the public shoulders all the risk, and the private sector gets all the profit."
Indeed, the unraveling of the thoroughly egregious recklessness of the global finance industry has been breathtaking to watch over the last several years. Andrew Haldane and Vasileios Madouros recently examined the question of what economic value the financial sector really adds with its risk-taking practices in their VoxEU post "What is the contribution of the financial sector?". Haldane is a senior executive at the Bank of England - his other related paper, "Risk Off", is also worth reading in this context.
It would be a mistake, though, to tar every private sector entity with the behavior of large banks and financial companies and make the sweeping generalization, as Sanger and Crawley did, that "the private sector is worse at managing risk than the public sector". Moreover, even if were to be true that for projects traditionally under the umbrella of the public sector, "private financing is more costly and risky than public financing", a fundamental problem in the era of shrinking public sector budgets is not whether it is cheaper for governments to do something on their own but whether they can afford the full expense of those projects (assuming that the governments are not on the hook for massive cost-overruns due to poor planning). In stating the problem in this manner, I am not advocating that governments should forcibly cut their budgets everywhere and not support 100% publicly-funded infrastructure or socio-economic projects, but merely stating the practical budgetary realities across much of the developed world today. So, the more appropriate question to ask is - what are the usual pitfalls with PPPs and what does it take to make them more successful - i.e. make them achieve their stated goals within the planned cost and schedule framework?
There are many different models for engaging the private sector in PPPs - E.S. Savas has summarized this in the paper "Privatization and Public-Private Partnerships". Dima Jamali has captured many of the facets tied to modern PPPs well in the paper "Success and failure mechanisms of public private partnerships (PPPs) in developing countries: Insights from the Lebanese context". Here are some relevant excerpts:
A PPP is an institutionalized form of cooperation of public and private actors, which, on the basis of their own indigenous objectives, work together towards a joint target (Nijkamp et al., 2002). While PPPs were originally treated as a derivative of the privatization movement, there is a growing consensus today that PPPs do not simply mean the introduction of market mechanisms or the privatization of public services. PPPs rather imply a sort of collaboration to pursue common goals, while leveraging joint resources and capitalizing on the respective competences and strengths of the public and private partners (Widdus, 2001; Pongsiri, 2002; Nijkamp et al., 2002).
Unfortunately, the term PPP has been abused and become mired in a muddle of conceptual ambiguities. The PPP concept is indeed commonly used to describe a spectrum of possible relationships between public and private actors for the cooperative provision of services (Figure 2). Admitting that there is no single PPP model and that a diversity of arrangements may be distinguished, varying with regard to legal status, governance, management, policy-setting prerogatives, contributions and operational roles, it should be emphasized that actual partnering involves collaboration in the pursuit of a common objective. A relationship qualifies as a partnership if it involves the joint definition of specific goals, and a clear assignment of responsibilities and areas of competence between the partners in the pursuit of a common endeavor. Most supposed PPPs in third world development do not seem to meet this criterion. Donor agencies often promote privatization and government subsidies to private entrepreneurs in the name of building PPPs. However, privatization and subsidies should not be confused with PPPs (Mitchell-Weaver and Manning, 1991).
Some conceive PPPs as representing a middle path between state capitalism and privatization (Leitch and Motion, 2003). General disillusionment with privatization has led to explicit attempts to engage with the private sector in a different way. Privatization indeed did not result in massive reductions in national debts, nor did the private sector demonstrate the universal superiority in running businesses that had provided the philosophical underpinnings of the privatization process (Broadbent and Laughlin, 2003; Leitch and Motion, 2003). PPPs were therefore seen as a way of involving the private sector in projects of national importance, while avoiding the problems associated with the extensive privatizations that occurred in the 1980s. In the context of developing countries, the recent proliferation of PPPs has been attributed to several explicitly stated reasons, including: the desire to improve the performance of the public sector by employing innovative operation and maintenance methods; reducing and stabilizing costs of providing services; improving environmental protection by ensuring compliance with environmental requirements; reinforcing competition; and reducing government budgetary constraints by accessing private capital for infrastructure investments (Miller, 2000; Savas, 2000). The latent reasons for contemplating a PPP lie in the inherent differences between the public and private sectors, which are outlined in Figure 3. These differences imply that PPPs can, under the right conditions, provide an effective mechanism for capitalizing on the peculiarities and strengths of each sector in the pursuit of common objectives.
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The respective roles of the private and the public partner are therefore neither antagonistic nor identical, but complementary. The public sector controls several key legal and regulatory assets to implement a project within the context of an overall development program. The private sector brings outside capital, technical expertise and an incentive structure. The essence is the cooperative and mutually supporting nature of the relationship.
Jamali goes on to identify in some detail some key success factors for PPPs to work as envisaged. It's worth reading his paper in full, but here are some salient points:
To start with, the government needs to maintain its involvement, whether in its capacity as partner or regulator. This is especially true where accountability is critical, cost-shifting presents problems, the timeframe is long, or societal normative choices are more important than costs (Spackman, 2002)....In particular, the public sector should continue to set standards and monitor product safety, efficacy and quality and establish systems whereby citizens have adequate access to the products and services they need. In other words, PPPs do not imply “less government” but a different governmental role. Because of the stronger position of the private partner, more skilled government participation is often needed (Scharle, 2002).
Pongsiri (2002) emphasizes the establishment of a transparent and sound regulatory framework as a necessary precursor to private sector participation in a PPP. Regulation provides assurance to the private partner that the regulatory system includes protection from expropriation, arbitration of commercial disputes, respect for contract agreements, and legitimate recovery of costs and profit proportional to the risks undertaken. A sound regulatory framework can also increase benefits to the government by ensuring that essential partnerships operate efficiently and optimizing the resources available to them in line with broader policy objectives (Di Lodovico, 1998; Zouggari, 2003). Baker (2003) similarly demonstrates that the nature of regulation and control are crucial in decisions about PPPs, outlining that PPPs generally necessitate a more direct control relationship between the public and private sector than would be achieved by a simple (legally-protected) market-based and arms-length purchase.
Samii et al. (2002) highlight the key formation requirements of effective PPPs, including resource dependency, commitment symmetry, common goal symmetry, intensive communication, alignment of cooperation learning capability, and converging working cultures while Kanter (1994) emphasizes individual excellence, importance, interdependence, investment, information, integration, institutionalization, and integrity as the key ingredients of effective collaboration (Table I).
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Alliance research similarly suggests that the failure of many alliances can be traced to the partner selection and planning stages and identifies the four Cs of compatibility, capability, commitment and control as critical for successful pre-selection of alliance...
Anne-Marie Slaughter, who was until recently Director of Policy Planning at the U.S. State Department, recently wrote that "The future of foreign policy is public-private partnerships". In her article, she cited this interesting report "Seizing the Opportunity in Public-Private Partnerships: Strengthening Capacity at the State Department, USAID, and MCC" authored by Daniel Runde, Holly Wise, Anna Saito Carson and Eleanor Coates of the Center for Strategic and International Studies (CSIS). The report examines in some detail some of the challenges with PPPs and what can be done, especially by leaders in the government, to ensure their success. Some of their key takeaways are shown in this excerpted portion below:
My key takeaway: If I were to somewhat over-simplify many of the observations discussed in this post, I would argue that the success of PPPs calls for a very solid, cross-functional and cross-geographic project management framework, with clear leaders identified and robust planning and execution under a knowledgeable and influential project manager. Various elements of the project (expected scope/outcomes and assumptions, schedules and dependencies, financials and resources, risk management framework, how one would measure success, etc.) need to be well defined and agreed-to up front, along with the detailed plans, interdependencies and owners mapped, in order to ensure high probability of success. Without this, PPPs will inevitably suffer from the kind of problems that most projects without a proper project management framework end up facing - schedule delays, cost overruns, resource crunches, poor ROI, and so on. PPPs are likely to be subject to higher likelihood of failure in the absence of a robust management framework simply because there are many more players involved with potentially mismatched goals or incentives as well as the likelihood of bureaucratic challenges.
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