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Monday, August 13, 2012

Protecting the "Public" in Public-Private Partnerships

The term "public-private parternship" has received a lot of recent press with news that officials in San Francisco and Chicago are considering the use of eminent domain on "underwater" mortgages.  Whether either or both cities (or other municipalities) will move forward with these plans remains to be seen, but this news has brought to the forefront the concept that public and private entities frequently work together on projects and programs intended to benefit the public. 

There are hundreds of examples of public-private partnerships (PPP) across the country.  On the grandest of scales include major league ball parks, the LA zoo, the Chicago Skyway, and the Chicago and other municipal parking meter systems.  On a smaller scale, municipal halls and police stations, park swimming facilities, and infrastructure improvements such as bridges, roads, and utility facilities are often financed and constructed through a PPP.  Regardless of the size or scope of the project, it is important for the public entity to negotiate an agreement that protects the public entity and provides long-term public benefits.

There are a handful of issues that a public entity should consider and guard against when negotiating a public-private partnership. 

1.   Understaffed and Outbargained.  Many small municipalities have minimal staff that does not have either the experience or the expertise to negotiate a contract of the nature and scope of a PPP.   In fact, it is not unlikely to encounter a situation where municipal staff and officials have never negotiated a PPP, where the private entity has negotiated dozens or even hundreds of these deals.  If the municipality does not have the staff on hand to negotiate the deal, it should consider retaining outside consultants with engineering, legal, and financial experience to negotiate on the public sector's behalf. 

2.  Complex.  A PPP can have multiple stages, and multiple players are usually involved, both on the public and private side.  It is crucial to make sure the organizational structure of the team is established from the outset detailing the "players" on each team and their responsibilities.  A schedule setting forth the timeline for completion of the major stages of the development or project is also important.

3.  Time-consuming.  A PPP is a long-term contract, and will involve a lengthy negotiation and approval process.  The parties are likely to encounter regulatory delays, legislative approvals, and permitting and other requirements that extend the time for approval of the project.  These issues should be, wherever possible, identified up-front and incorporated into the timeline and scheduling so all players are aware of these potential timing issues.  If zoning approval is necessary, it should be scheduled as early in the process as necessary; same for legislative approval, if required. 

4.  Public Opposition.  A PPP can generate public opposition, which can delay (and sometimes derail) a project.  The public may have concerns about rate or tax increases, conflicts of interest, land use conflicts, and loss of public resources or other programs.  Transparency early in the process can help to alleviate some of these concerns, as can open and frequent communication to update residents and other stakeholders as to the progress and scope of the project and negotiations. 

5.  Private Motivations.  It is important to remember that the private entity enters into a PPP to make a profit.  Period.  Thus, the private entity's motivations will not be the same as the public entity.  The public entity must ensure that the private sector's motivation of profits does not result in the loss of quality, service, or standards for the municipal project or program.  That may require the public entity to negotiate restrictions to control cost increases and to require high standards.

6.  The Wrong Option.  A PPP can be a very attractive method of financing public infrastructure or projects.  That does not mean it is the only option, and a public entity should explore all available options, including costs, timing, and scope of project, to determine which option (PPP, privatization, public sector financing and construction, etc) is the best for this particular project.

7.  Financial Risks.  The biggest financial risk in a PPP is that the public entity undervalues its asset and receives inadequate compensation (or pays too much) for the project.  The use of experienced consultants by the public sector will help guard against this risk.  The second financial risk is that the municipality spends the proceeds on short-term needs rather than investing in programs with long-term benefits.  This can be solved with early planning and discussion of use of proceeds, particularly in a situation where the public sector is selling an asset (i.e., parking meter system). 

Post Authored by Julie Tappendorf, Ancel Glink.


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