P3’s: Trick or Treat?

Krista S. Ferrell, CPPO, CPPB

P3’s: Trick or Treat?
Krista S. Ferrell, CPPO, CPPB
NASPO Director of Strategic Programs

While watching television the other night, I ran across a political ad talking about P3 legislation.  Instantly, my ears perked up.  While I refrain from political judgements based on negative campaigns ads, I did make a judgement that like it or not, procurement related issues like P3’s could be used as a platform in this and future elections as governments continue the look for ways to do more with less.  These political issues will further impact how procurement responds to the changing landscape of needs and funding to sustain government.  As I sat there listening, the commercial evoked thoughts of risks, benefits, and how innovative practices can carry a myriad of tricks and treats for procurement staff when implemented.

P3’s (Public Private Partnerships) are not a new concept.  European countries have used P3’s to support government projects for decades.  “The United States is a relative newcomer to PPPs. Even though there is an old nineteenth-century tradition of privately provided public infrastructure and even of private tolled roads and bridges, the United States still depends almost exclusively on the government for its public transport infrastructure (with the important exception of railroads).” (Engel, Fischer, & Galetovic, 2011) P3’s have also had some use in the United States both in the private sector and in the public arena in building, infrastructure, and road construction and this is trickling down into other areas.  States are beginning to see this influence and are now exploring use of P3’s as a delivery method for meeting state needs, but facilitating a P3 can still be a scary process.

Here are a few things to consider in warding off ghosts of contracts failed:

Legislation
Legislation that serves as a good skeletal framework for innovation allows procurement to examine the use of methods like P3’s to meet the changing needs of the state. When considering the use of a P3, consideration of current legislation allows states to both enable and support their use. As these long term agreements can have budgetary impact for many years and commit future legislative funding, finance, budget, and procurement laws reviewed and carefully may need to be considered as an initial step.  Areas such as legal, construction, risk management may also need to be incorporated.  Having the proper statutory framework before beginning can prevent protest and legal action later in the process.

Executive Support
Either to enact new legislation or utilize existing legislation to engage in a P3, executive leader support can be key when planning a P3 contract.  The idea for a P3 may even come down to procurement from an executive level so information and early engagement in the process will increase the probability of developing a successful strategy.  Both executive leadership and procurement may wish to explore the full range of impact both current and future that utilizing a P3 will have on the state.  “Well informed champions can play a critical role in minimizing misperceptions about the value to the public of an effectively developed P3”. (NCPPP, 2015) Knowing the true risks and cost both now and later to the taxpayers, will assist executive leaders to address concerns and minimize negative public perception.

Additionally, buy in from impacted state agency leadership is a good initial strategy as collaboration between multiple offices will be necessary at all stages of the P3.    Bringing together all parties early in the process allows options to be explored and risks to be mitigated.  Examination of impacts to government employees, union issues, and operational concerns will also help to thoroughly to make decisions based on the best interest of the state.  Customer service impacts and customer expectations are also areas of consideration. Some entities conducting P3’s have developed comprehensive messaging strategies developed to keep the process transparent to the public.

It may be necessary to contract for an expert in P3’s to help guide the process as many states do not have dedicated P3 resources and in house expertise to guide this process.  “Virginia is one of a just a sliver of states—including California and Michigan—that has a dedicated P3 unit…The National Conference of State Legislatures (NCSL) warned of a “knowledge and experience gap” in the U. S. Citing a 2009 McGraw-Hill survey that found that 61 percent of state and local officials had no experience dealing with P3’s and did not fully understand them.” (Holeywell, Why Isn’t the U.S. Better at Public-Private Partnerships, 2013)  Having an expert in these complex transactions can provide guidance and support and alert states to potential pitfalls.

Feasibility
It is also important when beginning a P3 initiative that states not to be tricked that a P3 is automatically the “right” solution.  While P3’s can offer a wide array of benefits, they are also a huge commitment for the state.  While P3’s can be a viable solution, it may not be the only solution.  Traditional models for acquiring the same services may in fact be a better fit. P3’s provide state governments with a long term arrangement which will impact the state for many years so it is important to get the best return on investment for the taxpayers’ money by carefully selecting the right procurement and funding method to support the need.  As such, it may be wise that the state provide a feasibility study prior to the onset of the project.  The feasibility study should examine the return on investment and demonstrate that the use of a P3 is far above what a traditional method can provide. This type of information will be key in educating the public about the project and the benefits.

Stakeholder Buy In
Committing to a P3 is scary not only for the government but also for the public.  P3’s that are dressed up to look like something else or hidden behind a mask of secrecy have the potential to be very damaging to the public’s trust of their state government.  As such, providing education and information resources early in the process that are understandable to the public can go a long way in creating support for P3s.  States may choose to bring in all affected stakeholders early in the process and develop clear a clear communication and marketing strategy which addresses stakeholder concerns. Some states have elected to hold town meetings, provided regular information updates, and even opened transparency portals to assure stakeholders are adequately informed as the P3 is planned, bid, awarded, and managed.

Criteria
Another tricky area is the establishment clear criteria which considers the entire life of the contract. Some P3 contract can span across decades and the criteria developed today must be sustainable.  The contract should be detailed and outline responsibilities, risks, and benefits to both parties and contain defined methods for dispute resolution.  The contract should also be flexible and provide a mechanism for change as new technologies and practices evolve during that period.  States should beware of non-compete clauses that could affect later projects and compensation/stabilization clauses that require the state to pay should the agreed upon revenue stream be impacted by unforeseen events.

As many times facilitators of the P3 will not still be in their present role when the P3 contract expires, it is important that states consider the long range effects that the established criteria can have.  A poorly executed contract has the potential to haunt the state for many years to come. Market value both on completion and end of contract life should be clearly defined and considered as a part of the contracting process.  As many times, the state takes ownership of the project when the contract expires, the state doesn’t want to find out that all the candy is missing at the end of the night because there was a hole in the candy bag.  While the incorporation of maintenance agreements or other provisions may help to stabilize value over the life of the contract, contract provisions clearly addressing depreciation and ownership can help in assuring that all the states needs are met.

Long Term Effects
Probably the biggest fear around P3’s is that of the unknown.  Long term ramifications of P3’s use in state government have yet to be assessed.  Some argue that P3’s simply shift the financial responsibility to the state into the future and that it limits financial resources of future governments.  “It is now considered by many to be fiscally imprudent to sacrifice stable, long-term revenue for a one –time payment used to fund short-term needs.” (Holeywell, Public-Private Partnerships are Popular, But Are They Practical, 2013)  Other arguments suggest that P3’s limit competition through the use of multi-year and sometimes multi-decade contracts.  Also, additional arguments suggest that small vendors are hit hardest by not being able to carry such a large financial burden over the life of the contract. Concerns like these may also need to be taken into consideration as long term research around P3’s is very limited as to long range impact.

Benefits
Even though P3’s can be scary, they can also can produce a number of treats for the state. These benefits include:  the ability to address immediate needs that could not be otherwise funded, stimulation or rejuvenation of local economy through economic development, potential cost savings, and reduction of state resources.  Like other performance based initiatives, P3’s focus on outcomes and shifts the risks and liabilities from the government to the private sector. While a monstrous undertaking, successes in P3 contracting have been recognized in foreign governments.  The U.S. federal government, county, and city governments are also exploring P3 use.

In short, it is up to each state to weigh the balance of tricks and treats to make an informed decision about what is the best solution for their citizens now and later.  Several states have begun exploring P3’s and a few are in the process of bidding and awarding P3 contracts.  Both Virginia and South Carolina have utilized P3’s to undertake major highways initiatives and the State of Kentucky is in the process using a P3 for an IT Infrastructure project just to name a few.

The NASPO Emerging Issues Committee is continuing to monitor this trend and hope to produce more on this topic later in the year.  For more information, please contact the NASPO at 859-514-9159.

References
Engel, E., Fischer, R., & Galetovic, A. (2011). Private-Public Partnerships to Revamp U.S. Infrastructure. Washington DC: The Hamilton Project.
Holeywell, R. (2013, November). Public-Private Partnerships are Popular, But Are They Practical. Governing, p. 4.
Holeywell, R. (2013, February). Why Isn’t the U.S. Better at Public-Private Partnerships. Governing, p. 2.
NCPPP. (2015, September 22). 7 Keys to Success. Retrieved from National Council for Private Public Partnerships: http://www.ncppp.org/ppp-basics/7-keys/



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