Public-Private Partnerships:Terms, Concepts, Processes

Public-Private Partnerships:Terms, Concepts, Processes

Arthur C. Nelson, Ph.D., FAICPUniversity of Utah

Arthur C. Nelson, Ph.D., FAICPUniversity of Utah

Key TermsKey TermsEconomic Development

Creating jobsImproving wagesReducing unemploymentEnhancing tax baseCreating economic resilienceAdvancing family and social quality of lifeStabilizing declining/stagnating areasImproving competitivenessEstablishing economic linkages

Economic DevelopmentCreating jobsImproving wagesReducing unemploymentEnhancing tax baseCreating economic resilienceAdvancing family and social quality of lifeStabilizing declining/stagnating areasImproving competitivenessEstablishing economic linkages

Key TermsKey Terms

PublicAction based on centralized and

collective decision-making process.Collective decision on what to provide

and how to pay for it (resulting from a voting process).

Public-sector provision of a good or service, or assisting private sector in providing such.

PublicAction based on centralized and

collective decision-making process.Collective decision on what to provide

and how to pay for it (resulting from a voting process).

Public-sector provision of a good or service, or assisting private sector in providing such.

Key TermsKey Terms

PrivateThe economic decision-maker is an

individual consumer or producerMaximizing utility (satisfaction) or profitsResource allocation decisions based on

decentralized process.

PrivateThe economic decision-maker is an

individual consumer or producerMaximizing utility (satisfaction) or profitsResource allocation decisions based on

decentralized process.

Key TermsKey Terms

PartnershipFormal or informal agreement by

public and a private sector entities

To provide a good or service that both parties desire but neither can deliver on their own.

PartnershipFormal or informal agreement by

public and a private sector entities

To provide a good or service that both parties desire but neither can deliver on their own.

ConceptsConcepts

Public-Private Partnerships in Economic DevelopmentVoluntary relationship.Need for agreed-upon strategy.Long time frame.Agreement on contributions of resources.

Public-Private Partnerships in Economic DevelopmentVoluntary relationship.Need for agreed-upon strategy.Long time frame.Agreement on contributions of resources.

ConceptsConcepts

Expansion of Partnerships since 1980:Mobility of capital increases competition among

cities and metropolitan areas.Contracting economies need to be creative to

create resilience in public and private sectors.

Federal cut-backs in economic development aid.Rapidly changing economy creates surplus of

certain properties:Vacant properties just-in-time inventories &

storageBrownfields, greyfields, by-passed land

Expansion of Partnerships since 1980:Mobility of capital increases competition among

cities and metropolitan areas.Contracting economies need to be creative to

create resilience in public and private sectors.

Federal cut-backs in economic development aid.Rapidly changing economy creates surplus of

certain properties:Vacant properties just-in-time inventories &

storageBrownfields, greyfields, by-passed land

ConceptsConcepts

Incentives for new developmentFederal/state funds for new infrastructure but

little/no funds for operations and maintenance.

In Virginia, state will assume O&M of all roads (including subdivisions) built to state

standards.Under-priced utilities result in higher fees than

costs for efficient development and lower fees than costs for inefficient/low-density/fringe

development.Zoning systems rooted in past, making it easier

to by-pass urban-zoned areas in favor of ag-zoned ones.

Incentives for new developmentFederal/state funds for new infrastructure but

little/no funds for operations and maintenance.

In Virginia, state will assume O&M of all roads (including subdivisions) built to state

standards.Under-priced utilities result in higher fees than

costs for efficient development and lower fees than costs for inefficient/low-density/fringe

development.Zoning systems rooted in past, making it easier

to by-pass urban-zoned areas in favor of ag-zoned ones.

ConceptsConcepts

Private disincentives for non-traditional products and locationsSavings-and-loan bailout of 1980s/90s

reshaped lending practices.Preference for proven projects of single-use

in newly developing areas.Fiduciary responsibility to investors requires

conservative “proven” investments.Rates of return higher for non-traditional

investments pushing many beyond feasibility.

Private disincentives for non-traditional products and locationsSavings-and-loan bailout of 1980s/90s

reshaped lending practices.Preference for proven projects of single-use

in newly developing areas.Fiduciary responsibility to investors requires

conservative “proven” investments.Rates of return higher for non-traditional

investments pushing many beyond feasibility.

Partnership TypesPartnership Types

Type Public Sector Private Sector

O&M Owner OperatorDesign-Build Owner, operator BuilderTurnkey Finance, oversight Builder, operatorLease-purchase Lessee, then owner Builder, lessorTemporary Seller of facility Owner,

operator withPrivatization reversion later

Lease-Develop Lessor or seller Lessee, investor & operator w/ reversion

Build-Own-Operate Receives title at end of Financer, builder,

lease/franchise period operator, collects fees

Type Public Sector Private Sector

O&M Owner OperatorDesign-Build Owner, operator BuilderTurnkey Finance, oversight Builder, operatorLease-purchase Lessee, then owner Builder, lessorTemporary Seller of facility Owner,

operator withPrivatization reversion later

Lease-Develop Lessor or seller Lessee, investor & operator w/ reversion

Build-Own-Operate Receives title at end of Financer, builder,

lease/franchise period operator, collects fees

Partnership FrameworkPartnership Framework

Elements Components_________________Objectives Economic growth, job creation, income

generationIncome redistributionSocial, cultural, environmental improvement

Activity types Infrastructure development, O&MBusiness and community facilitiesWorkforce developmentSocial servicesInstitution building

Participants and Composition of participants definedRelationships Roles determined

How risks and rewards are sharedHow resources are committed

Elements Components_________________Objectives Economic growth, job creation, income

generationIncome redistributionSocial, cultural, environmental improvement

Activity types Infrastructure development, O&MBusiness and community facilitiesWorkforce developmentSocial servicesInstitution building

Participants and Composition of participants definedRelationships Roles determined

How risks and rewards are sharedHow resources are committed

Partnership FrameworkPartnership Framework

ElementsComponents_________________

Organizational Stand-alone organizationArrangement Agreement on assignment of duties

Geographic Scale Within a jurisdictionWhole jurisdictionMulti-jurisdiction

Time Scale Short-term with specific periods established for each

partnerLong-term with termination/exit/successor

provisions

ElementsComponents_________________

Organizational Stand-alone organizationArrangement Agreement on assignment of duties

Geographic Scale Within a jurisdictionWhole jurisdictionMulti-jurisdiction

Time Scale Short-term with specific periods established for each

partnerLong-term with termination/exit/successor

provisions

10 Steps to Success10 Steps to Success

1 Prepare for Public/Private Partnerships.2 Create a shared vision.3 Understand partners and key players.4 Be clear on risks & rewards for all parties.5 Establish clear, rational decision-making process

(transparency).6 Make sure parties do their homework.7 Secure consistent and coordinated leadership.8 Communicate early and often.9 Negotiate a fair deal.10. Build trust as a core value

Source: Urban Land Institute, Ten Principles for Successful Public/Private Partnerships, 2005.

1 Prepare for Public/Private Partnerships.2 Create a shared vision.3 Understand partners and key players.4 Be clear on risks & rewards for all parties.5 Establish clear, rational decision-making process

(transparency).6 Make sure parties do their homework.7 Secure consistent and coordinated leadership.8 Communicate early and often.9 Negotiate a fair deal.10. Build trust as a core value

Source: Urban Land Institute, Ten Principles for Successful Public/Private Partnerships, 2005.

1. Prepare1. Prepare

Assess capabilitiesWhat is desired; what is available?

Craft a vision (see step 2).Be prepared to revise local rules, codes,

procedures. Identify sources of funds show me the

money.Have the land/site ready.Know your partners; get the “right” team.

Assess capabilitiesWhat is desired; what is available?

Craft a vision (see step 2).Be prepared to revise local rules, codes,

procedures. Identify sources of funds show me the

money.Have the land/site ready.Know your partners; get the “right” team.

2. Create the Vision2. Create the VisionSelect the appropriate visioning process

HearingsCharrettesSurveys

Create a clear, consensus vision (to the extent possible)

Be sure the vision is sustainable over the investment horizon – or at least two

election cycles.Can the vision be a political platform?

Select the appropriate visioning processHearingsCharrettesSurveys

Create a clear, consensus vision (to the extent possible)

Be sure the vision is sustainable over the investment horizon – or at least two

election cycles.Can the vision be a political platform?

3. Know the Partners3. Know the Partners

Public partner often plays leadIdentifies vision, objectives.Has ability to marshal considerable

financial and process management tools.

Private partnerCan leverage public financing

creatively.Designs-builds efficiently.Markets-manages profitably.

Public partner often plays leadIdentifies vision, objectives.Has ability to marshal considerable

financial and process management tools.

Private partnerCan leverage public financing

creatively.Designs-builds efficiently.Markets-manages profitably.

3. Know the Partners3. Know the Partners

NonprofitsNeighborhood associations, CDCs,

foundations, etc.Assists with processes; often lead in

identifying opportunities.Source of seed, gap financing.

StakeholdersIndividuals, firms directly impacted.Selected groups in formal, informal

oversight function.

NonprofitsNeighborhood associations, CDCs,

foundations, etc.Assists with processes; often lead in

identifying opportunities.Source of seed, gap financing.

StakeholdersIndividuals, firms directly impacted.Selected groups in formal, informal

oversight function.

4. Risks & Rewards Project

4. Risks & Rewards Project

Risk Factor ConcernMarket risk Will there be demand?Construction risk Will project be on time and on

budget?Ownership risk Will lease-up, rents, and

management be profitable?Interest-rate risk Will rates increase?Performance risk Will project achieve its public

purpose(s)?

Risk Factor ConcernMarket risk Will there be demand?Construction risk Will project be on time and on

budget?Ownership risk Will lease-up, rents, and

management be profitable?Interest-rate risk Will rates increase?Performance risk Will project achieve its public

purpose(s)?

4. Risks4. Risks

Public Private________________Real, perceived conflict of interest Excessive costs, lost profitsReal, perceived mismanagement Time-consuming processesControversial impacts Failure to create long-term

valueLand use conflicts Accused of unfair profits at publicCondemnation dislocation expenseRelocation costs, procedures Change in key leadershipDisagreement on market value Market short-fall, failure

Developer fails to perform Loss of equityPublic opposition, NIMBYism Untimely airing of key financialLiability impacts details

Liability impacts

Public Private________________Real, perceived conflict of interest Excessive costs, lost profitsReal, perceived mismanagement Time-consuming processesControversial impacts Failure to create long-term

valueLand use conflicts Accused of unfair profits at publicCondemnation dislocation expenseRelocation costs, procedures Change in key leadershipDisagreement on market value Market short-fall, failure

Developer fails to perform Loss of equityPublic opposition, NIMBYism Untimely airing of key financialLiability impacts details

Liability impacts

4. Rewards4. Rewards

Public Private________________Increase community wealth Achieves necessary rate-of-

returntax base, public infrastructure Resources to sustain firm

Increased taxes, other revenue Value, wealth creationPromote, advance image Enhanced reputationJob creation, higher wages Experience to get next jobCommunity betterment Develop market nicheRe-election of officials Enhanced quality of

life for firmand employees

Public Private________________Increase community wealth Achieves necessary rate-of-

returntax base, public infrastructure Resources to sustain firm

Increased taxes, other revenue Value, wealth creationPromote, advance image Enhanced reputationJob creation, higher wages Experience to get next jobCommunity betterment Develop market nicheRe-election of officials Enhanced quality of

life for firmand employees

5. Clear, Rational Decision Process

5. Clear, Rational Decision Process

TransparencyCreate road mapDefine roles and responsibilities

Memorandum of understandingCreate checks and balances

Multiple oversightPeriodic reports, benchmark

assessmentsWillingness to adapt to changes

TransparencyCreate road mapDefine roles and responsibilities

Memorandum of understandingCreate checks and balances

Multiple oversightPeriodic reports, benchmark

assessmentsWillingness to adapt to changes

6. Do Your Homework6. Do Your Homework

Due diligence (market, environ., political, etc.)

Share informationAdopt scenario planningPursue creative public/private finance plansAssess all options

Financing instruments: bonds, “soft second’s”, long-term leases, bond insurance, etc.

Maximizing use of publicly-owned landTechniques to reduce development costTechniques to enhance project cash flow

Due diligence (market, environ., political, etc.)

Share informationAdopt scenario planningPursue creative public/private finance plansAssess all options

Financing instruments: bonds, “soft second’s”, long-term leases, bond insurance, etc.

Maximizing use of publicly-owned landTechniques to reduce development costTechniques to enhance project cash flow

7. Consistent Leadership

7. Consistent Leadership

Political will this project survive re-elections?Administrative will public talent be available

through the project phase and some time after?

Community are key community leaders behind the project and are they likely to remain active?

Media will there be sustained media support or at least reasoned reporting?

Developer will the developer have staying power?

Political will this project survive re-elections?Administrative will public talent be available

through the project phase and some time after?

Community are key community leaders behind the project and are they likely to remain active?

Media will there be sustained media support or at least reasoned reporting?

Developer will the developer have staying power?

8. Communicate8. Communicate

Internal communicationsScheduled updatesPeriodic meetings/status reports

External communicationsMedia coverage of benchmarksWeb page management

Internal communicationsScheduled updatesPeriodic meetings/status reports

External communicationsMedia coverage of benchmarksWeb page management

9. Negotiate Fair Deal9. Negotiate Fair Deal

What is Fair?Private

Reasonable rate-of-return relative to risk.Clear public concessions based on

benchmarks.Public

Improved infrastructure assurances.Tax revenue enhancements reasonably

assured by private sector.

What is Fair?Private

Reasonable rate-of-return relative to risk.Clear public concessions based on

benchmarks.Public

Improved infrastructure assurances.Tax revenue enhancements reasonably

assured by private sector.

10. Trust as Core Value10. Trust as Core Value

Request for Qualifications (RFQ) first, check out references

Request for Proposals (RFP) from qualified RFQ responders

Clear status report processUnderstand perspective of all stakeholders

MOUs useful to put these in writingHumility without finger-pointing usually best

approach for handling bumps-in-the-night.

Request for Qualifications (RFQ) first, check out references

Request for Proposals (RFP) from qualified RFQ responders

Clear status report processUnderstand perspective of all stakeholders

MOUs useful to put these in writingHumility without finger-pointing usually best

approach for handling bumps-in-the-night.