Leveraging Private Sector Know-How For Successful Public Projects
Governmental entities constantly struggle to address the competing demands of growing infrastructure needs, providing quality services and creating more economic growth opportunities, while dealing with the reality of increased budget constraints. In the past decade, public-private partnerships (P3s) have become a popular tool, at least in concept, to help governments balance these tensions.
P3s have been touted as the answer for infrastructure and services that governments don't have the resources to address. But any budget officer or other public official who has looked closely at the private sector solutions knows that you never get something for nothing. The private sector might be willing to carry risk the public sector doesn't want, or provide capital sooner than the public sector capacity allows, but these benefits come at a cost, and sometimes that cost is hard to measure. At the same time, there can be a real benefit for early delivery of a project the public wants to see completed, and creating synergies with private development can build economic momentum, encouraging growth and investment beyond an initial P3.
How then, does a public entity know when a P3 is good deal? The first and most important rule of thumb is that you can't measure what you don't understand. And if you can't measure it, you'll never really know if you have a good deal. This article will offer some simple ways that the public sector can leverage what the private sector knows to help better define projects, identify best practices, and develop value guidance and standards in connection with P3 opportunities.
Define Your Project - The Request for Information
We recently met with a prospective public client, a small city, with a large tract of very desirable land that the city would like to see developed by the private sector. The meeting was about how to issue procurement under the P-3 guidelines of Chapter 2267, Texas Government Code.
We asked the city manager what he envisioned coming out of the procurement – what was the goal? He said he wanted to see development on that land that would generate new tax dollars for the city. Beyond that, he really wasn't sure what the highest and best use of the land was or what the market interest might look like for the site, and there was no money in the budget for consultants or a masterplan. The city manager knew two things: (1) the city wanted the site developed; and (2) the city wasn't the right party to undertake the development. That's a good start, but it's not enough to help the city make a meaningful analysis of qualifications or proposals from the private sector.
The opportunity for this city, with a clean slate for this project, was to take a step back and, prior to issuing a procurement, to ask the private sector for ideas regarding the best use for the land with a request for information. Anything is possible within the constraints that might already be known: size of land, lack of available public resources, established entitlements, etc.
The results of a request for information might range from suggestions for a retirement community to a tourist destination to a mixed use urban-style development, or any number of other ideas, all helping to uncover the true potential of the site. From this step, the city can meet with the respondents and other potential private partners, as well as the local stakeholders, to determine what is right for the site and the community. Then, with a better defined project, a set of objectives, and the ability to outline measurements for success, the city will be better prepared to solicit for competing proposals.
Understand Best Practices – The Industry Review
Alternative delivery projects, procurement structures, value engineering, sequencing, concrete versus asphalt all have an impact on project costs and timelines. Teams of public employees assigned to a project debate the pros and cons of these elements of a project before settling on a pathway and moving forward, often with the budget folks and the public works folks agreeing to disagree.
When these questions are raised on the front end of a project, one opportunity the government can take advantage of is an industry workshop or comment period. We've worked with public entities to share project development structures in advance of procurement in order to hear from the industry about the benefits and consequences of the draft proposal. Similarly, we've shared draft procurements with industry associations to coordinate comments and suggestions in advance of publication. A robust conversation among competitors can be very enlightening!
In holding industry workshops or providing a comment period on draft documents, the governmental entity does not create any obligation to accept specific direction from the private sector. However, the opportunity to hear from the private sector can create a deeper understanding of the project and provide lessons and best practices from other communities and similar efforts. The better your team understands a project, and the more decisions that are made deliberately and not by default, the better positioned you will be to define, manage and meet expectations, all of which will help you measure success.
Weigh the Merits – Using Procurement to Create a Market
A few weeks ago, a local school district elected to proceed with but not to procure a P3 for equipment and services because, in their words, "it's money in, not money out." The district's theory was that since the contract in question is revenue sharing, not a "purchase of goods or services," there is no requirement to procure and the district's interests were best served by expediting the process, entering into a contract, and getting closer to the point of revenue sharing.
Even if a government entity can get comfortable with legally bypassing procurement requirements, it will surely miss opportunities by failing to create a market. Thinking of procurement only as a requirement is the wrong perspective. If it's true that you can't measure what you don't understand, how can you measure the success of a contract negotiation with no context as to what the rest of the market might offer?
Contracting for P3s is all about the details. Sharing revenues sounds great, but how does the contract define revenues? Are there cost caps? What is the scope of services that falls under the cost caps? How are those services guaranteed? These are simple questions that can be included in procurement so that proposals can be compared side-by-side. Even a proposal that is not selected as the best value is likely to offer insights that will help in the contract negotiations with the selected party.
Creating a better project
Working with the private sector can create very tangible benefits for governmental entities. It can also carry some very real risks. Public entities should feel comfortable when they enter this arena that there is real potential to create a good deal for the entity and its taxpayers. The best way to do that is to ensure that your team fully understands the project from the legal requirements and logistics to the goals and expectations.
Taking a little time on the front end to solicit ideas, seek out best practices and lessons learned, and create a competitive environment will ultimately not only create a better project and outcome, but will also provide the measurement tools you need to demonstrate the success of the project to your constituents.