Public/private partnerships (PPPs) are the vehicle of choice to plan and execute many development projects that neither private nor public sector participants could perform on their own. Despite the popularity of PPPs, also known by the emerging moniker “P3s,” research and practice have shown that few professionals have mastered the art of designing them, and many business and government leaders are mystified by the complexities of implementing them. Consequently, myths about these partnerships abound and critical community needs remain unmet.

We acknowledge our bias to favor PPPs, which is built on three personal beliefs: that business is the main engine for growth and wealth creation in a market economy; that government has an essential role in ensuring legitimacy, individual opportunity, and fairness; and that the partnerships are potent vehicles for bringing the best of both sectors —public and private—to bear on the most challenging problems.

 

What are PPPs—And What Aren’t They?

 

PPPs are ventures formed jointly by a government or quasi-governmental organization with one or more privately owned and operated organizations. Their aim is to meet public needs that either partner has identified but neither can meet by acting alone because of insufficient funds or inadequate capabilities. Successful partnerships have four defining characteristics: the partners share responsibility for policy making but the private partner manages implementation; the partnership uses property that is or will be owned by the government; the partners share in the risks and rewards of the project; and the public agency bases its selection of private partners mainly on qualifications rather than price.

PPPs are about relationships: they prosper from long-term, enduring cooperation. They fail when an adversarial, contract-oriented management style overtakes the spirit of stewardship and common purpose. Contractors are clever in finding loopholes; partners, however, apply their creativity to improving shared results. While the partnerships must be established on paper, the purpose, terms, and quality of collaboration are far more important than contract provisions to accomplishing the best outcomes. Any partnership that relies on its contract more than its leaders to solve policy and operational problems is doomed.

The spirit of partnership is delivered through continuing negotiation, not only for establishing the initial structure and organization, but also for ongoing operations. Successful leaders are skillful in crystallizing principles to guide the negotiating process, defining issues to be negotiated, executing decisions efficiently, reviewing progress and problems, and redefining the objectives as conditions change.

The U.S. Army’s Residential Communities Initiative

Public Agency: U.S. Army.
Private Partners: Actus Lend Lease, Balfour Beatty, Clark Realty, Equity Residential, Hunt, Lincoln, Michaels, Picerne, and Pinnacle.

Program Purpose/Outcomes: The Residential Communities Initiative (RCI), established in 1998, cleared a $7 billion maintenance backlog, produced high-quality new and upgraded family housing on Army installations in the United States, and established long-term operations and maintenance responsibility.

Partnership Process/Structure:

  • Selection of private real estate development partners through requests for qualifications, with choice based on past performance, capabilities, and shared vision.
  • Preparation of collaborative community development and management plans.
  • Creation of special-purpose entities (for one or more sites) managed by private sector and Army executives, that lease Army land and build, finance, operate, and maintain on-post housing and ancillary facilities for 50 years.
  • Financing with private equity and debt, secured by the leasehold and housing.
    Cash flow from basic allowance for housing payments authorized for military members living in private housing.

Size: 1

  • 85,000 family housing units.
  • $15 billion in development value, including renovation plus new construction.
  • 34 projects on 44 sites in 20 states. (In some instances, more than one site was involved in the same partnership.)
    Public Benefit:
  • Six-to-one “budget multiplier” of private to public capital (versus Department of Defense threshold of three to one).
  • Up to 200 percent faster delivery of new and renovated homes compared with conventional government processes.
  • Up to 30 percent lower construction and life-cycle costs compared with conventional government processes.
  • 100 percent of housing deficit will be met by 2017.
  • High-quality products and services.
  • High resident satisfaction.

Data source: U.S. Army Public/Private Initiatives Division.

(The Army’s Residential Communities Initiative was profiled in an Urban Land interview with Sandy Apgar [“The Promise of Privatization: Lessons from Military Housing,” July 2008.])

These partnerships are not privatization. That misnomer bedevils potential sponsors as they strive to implement PPPs because it implies wholesale transfers of public assets for private gain and eclipses the partnership principle. Public/private partnerships, by contrast, require partners to engage in active, continuing relationships with shared objectives regarding ownership and operations. PPPs are not designed solely for asset sales, typical sale-leasebacks, design/build contracts, or outsourcing facilities and services. These well-established methods meet particular needs in both the public and private sectors, but they involve different objectives, financing, procurement methods, and working relationships. They may be better solutions than PPPs in many situations and should be considered.

 

Why Should PPPs Be Established?

 

For this discussion, PPPs are collaborations between public agencies and private businesses to finance, plan, build, manage, and/or operate real estate projects. Even the broadest applications, such as mixed-use town centers and major transport hubs, are rooted in real estate strategy and economics and reflect ULI’s credo of responsible land use. While PPPs are designed to provide private capital for public projects, their most important contributions often lie in the ingenuity and entrepreneurship of the private partners. One needs only study the U.S. Army’s Residential Communities Initiative (RCI), a program to plan, build, and renovate Army family housing, to learn how private partners bring innovation, in addition to capital, to the task of producing public benefits.

Public/private partnerships usually are triggered by problems that, especially with media attention, become political and practical concerns. Broken bridges and potholes are symptoms of more fundamental issues that most people do not see and which normal management processes do not address. For example, when the Army faced a $7 billion backlog of unfunded housing maintenance in the 1990s, it was clear that Congress would not appropriate the required funds through the Defense Department budget despite dire predictions and back-channel pleading. Even if it had done so, the government’s traditional approach to military housing was more costly and time consuming than the private sector’s more holistic and efficient approach.

The agility of PPP leaders in collaborative problem solving and compromise throughout a project’s life is a counterweight to slow, cumbersome, bureaucratic processes and hasty, insensitive commercial solutions. Both experienced private developers and enlightened public officials embody such problem-solving skills, but the partners must be at the same table on a continuing basis to drive the partnership or it will not work. At times, the lofty goal to “preserve the public interest” and the management skill to “cut through the crap” are complementary parts of their collaboration.

A profoundly important, though rarely planned, outcome of a successful partnership process is the sense of public purpose that emerges among the private partners. As the chief executive of an Army PPP developer told one of us, “Our team members, most of whom were not in the military, have developed the soldiers’ ethic of selfless service through this relationship. They believe in our mission of community building as much as our clients believe in their service, which produces excellent results.” Imagine the extraordinary potential for PPPs to innovate in meeting public needs by engendering this spirit among their teams.

As government at all levels faces growing needs and massive budget pressures, public/private partnerships may be the best, if not the only, vehicle for government to meet many of its obligations. When public needs outstrip government resources, elected leaders often lack mandates for taxation that, in theory, would enable them to execute solutions. But even if such public consensus existed, inherent inefficiencies in many government processes favor business solutions. The public authority that is responsive and proactive recognizes that partnerships can originate from anyone, anywhere, anytime and establishes a streamlined structure and process to enable their formation and execution. The authority also provides for transparency and accountability, with metrics to ensure that the private partners’ returns do not exceed market norms.

 

Features of Successful PPPs

 

From professional experience and a review of more than 50 projects in the United States and abroad, we have culled five distinct features shared by successful PPPs:

  • Clear definitions and roles—careful delineation of the public properties that the partnership will control, develop, and operate; explicit description of the public needs the project is designed to meet, the desired outcomes, and the measures to assess the partnership’s performance in addressing those needs; and top-down leadership by the partnership’s executives, with bottom-up support from users and taxpayers who are most directly affected by the PPP’s economics and operations.
  • Robust, mutually beneficial business relationships—strong, reliable business partners with the management and financial strength to plan, drive, and deliver a complex, long-term project; open-book relationships to ensure that transaction, status, and performance data are available to all partners and to overseers appointed to ensure the public trust; and rewards to the private sector partners that are commensurate with the risks they assume, based on business models that incorporate direct revenue streams to ensure continuing viability.
  • Holistic, flexible planning and financing for the project’s full life cycle—an objective, fact-based rationale for the partnership’s governance and financial structure, with continuous innovations in policy and operations throughout the partnership’s life; and engagement of all the major stakeholders—customers, regulators, constituents, suppliers—in the decision-making process, from initial visioning through final disposition.
  • An integrated internal and external communication plan—professional community outreach and public relations; frequent, managed conversations among all stakeholders throughout each stage of the project; active promotion of early wins in the project’s life cycle to demonstrate its potential; periodic progress reports at key milestones; and deeper outcome-based reports on the long-term value for money that can be realized by all stakeholders.
  • A pervasive spirit of stewardship in partnership actions—the business philosophy that reduces the need for thoughtful, creative leaders to rely mainly on contracts as their primary method of governance. The passive disclosure required by regulations is not synonymous with mutual open-book reporting to provide strong checks on individual behavior in partnership spending and actions. Yet, enduring PPPs also encourage proactive enterprise and adaptation to change over each project’s life, which can range from 30 to 99 years.

The art of PPPs requires tailoring these interrelated features to each particular project. One of the PPP proponent’s prime responsibilities is to ensure that each project incorporates the full menu of features but weights them to reflect the specific needs driving its strategy and structure. Wise judgment, infused with common sense, ultimately must prevail. An inflexible, mechanistic approach that appears to yield quantitative results but produces the wrong outcome will quickly lose public and political support.