PRIVATIZATION. Determining the Role of P3s. By Kyle Steitz

Transcription

1 PRIVATIZATION Determining the Role of P3s By Kyle Steitz

2 Imagine that you are a child selling lemonade in your the public sector and the private sector that has the private neighborhood. During the summer months, when business is good, you have a hard time finding enough sector providing public services or public benefits. Governments that are considering a P3 need to fully staff to keep up with the demand. Your current staff is understand the risks and long-term financial implications. overworked, taking extra trips to the store to buy supplies, squeeze the extra lemons, and deal with longer When deciding to move forward with a P3 deal that is in the best interest of the public, a number of general considerations need to be evaluated. Some of these are gener- lines. As a result, the quality of your lemonade is suffering. Worse yet, several of the neighbors have filed ally applicable to all such contracts, such as the need for complaints about the customer service at your stand. If public participation, sound financial negotiations, and you hired additional staff, you would have little for them monitoring of performance and results. Others concern to do during colder months and you don t want to deal issues specific to P3s: preliminary evaluation, retaining with letting anyone go. This fluctuation makes staffing advisors or experts, economic and fiscal impact analysis, difficult and you find yourself running at a substantial service level implications, and risk assessment. financial deficit while you wait for the warmer months to return. EVALUATING THE OPTIONS Now imagine that there was an opportunity to bring in a group of neighborhood kids you could partner with to increase production capacity and help with customer service, only when you needed them or if by working with lemonade experts, they could introduce you to equipment that would make your stand more efficient. It would still be your stand, but the extra help gives you more time to focus on what your staff does best. For a kid s lemonade stand, this kind of outsourcing is pretty obviously a good idea. Other kinds of outsourcing are a bit more complex. Still, the ideology and concept behind this analogy is useful when approaching the way a jurisdiction s building department operates. DEFINING PRIVATIZATION Historically, public-private partnership (P3) agreements have been focused on economic development projects proposed by developers who are looking for financial assistance from a jurisdiction that stands to benefit from the project. But these agreements have evolved to include a wide range of potential uses, and the term P3 now implies any agreement that involves a contract between When deciding to move forward with a P3 deal that is in the best interest of the public, a number of general considerations need to be evaluated. P3s are a tool that can be effective when used well and ineffective when used incorrectly. Many communities have relied on contracted providers for services such as solid waste collection and disposal, street repairs, and utilities for years, and with the budgetary issues many local governments still face after the Great Recession, communities are evaluating whether it makes sense to privatize or use alternative delivery options for other services as well. The GFOA has recognized that the need to provide cost-effective options while maintaining expected levels of service can cause governments to search for alternative service delivery options, and that with the proper research and due diligence, it can provide numerous advantages. Benefits can include service improvements, a reduction or transfer of risk, a means of accommodating fluctuating seasonal peak demands, access to outside expertise, and new insight into innovations. Entering into a P3 can mean having the right numbers of employees, with the right expertise, when you need them. Outlining clear performance metrics in the contract allows a government to make sure that quality thresholds and expectations are met, including outstanding customer service. August 2014 Government Finance Review 41

3 if important services like health care are sold off and the private entity cuts back on them because of the cost), and opportunity cost. To ensure that P3s work in the best interest of all parties, governments need to go into any such deal with a thorough understanding of the potential cost savings, service quality improvements, and most importantly, risks. One of the most important safeguards is to effectively manage the process, continually evaluating performance to ensure that P3 deals are performed consistently, according the government s carefully considered policies, and followed by the private agent. This includes requiring a firm business case and a rigorous cost-benefit analysis for any proposed P3. Effective management and monitoring includes continued communication and reporting with interested parties throughout the privatization process. Governments need to consult best practices regarding project analysis, vendor selection, contracting, and performance monitoring and oversight. The New Jersey Privatization Task Force published a report in May 2010, concluding that through sensible planning and implementation, privatization offers a variety of benefits to governments and taxpayers, including lower costs, improvements in the quality of public services, and access to private-sector capital and professional expertise. The task force noted numerous examples of projects that were done well, but it also gave examples of failures. The issues were similar for each of these unsuccessful initiatives: poor conception, unclear goals, superficial due diligence, inexperienced and/or undercapitalized contractors, lax oversight, and, on occasion, conflicts of interest. Other significant concerns are the possibilities of creating monopolies, of situations that are counter to the public interest (for example, To ensure that P3s work in the best interest of all parties, governments need to go into any such deal with a thorough understanding of the potential cost savings, service quality improvements, and risks. P3 IN TROY, MICHIGAN One potential outcome of a well-executed P3 program, and the focal point of this case study, is cost savings. Financial savings are often realized through economies of scale, access to cutting-edge technology the government wouldn t have been able to afford or support on its own, innovations, or simply a different way of completing the job. Reduced labor costs can also help a jurisdiction better manage its financial burdens. Following is an example of a community that privatized its building department services a change more and more jurisdictions are considering. The changes saved the building inspections budget $1 million in fiscal , the first year of the P3 contract. The City of Troy, Michigan, is the largest city in Oakland County, with a population of 82,212. Before 2010, Troy s building services department was not meeting its budget; the city s comprehensive 42 Government Finance Review August 2014

4 annual financial report from June 30, 2010, reported a cumulative shortfall of $6.6 million, caused by years of increases in employee costs, pensions, and related operational costs. Troy had grown quite a bit in previous years, and that expansion had required additional full-time staff, all union positions. When the economy and construction slowed, staffing could not be adjusted in the same timely manner, so the city was now overstaffed. The situation was not sustainable for the long term. Recognizing that there were areas where improvements could be made, city officials hired a consulting service that specializes in the areas of municipal organization, management, and process analysis to evaluate all departments and make recommendations. The consulting company suggested a number of options for the building services department, and city officials decided to hire a private firm to run the building inspections department. The private firm manages the daily operations of the building department, performs inspections, plan reviews, staffs the front counter, archives city records, and works with city officials on departmental budget. The firm also works with the economic development department to encourage growth and promote business opportunities within the community. In return, the firm receives a percentage of the city s permit fees. An important concern for any government entering into a P3 agreement is making sure the contract contains performance measures to ensure the jurisdiction remains in control. In this case, the primary measure for gauging the effectiveness of the private firm s systems and the efficiency of its staff is review and inspection of turn-around times, which are tracked and reported on monthly in a format agreed to by the city s staff. Additional techniques include customer satisfaction An important safeguard is to effectively manage the process, continually evaluating performance to ensure that P3 deals are performed consistently, according the government s carefully considered policies. surveys and community meetings/educational seminars. Staff members provided by the firm are an extension of the city s staff, so the contract includes a clause allowing the jurisdiction to terminate the agreement with cause. The firm is responsible for fixing the situation if Troy is unhappy with the performance or general personality of any individual. The private firm also introduced process improvements, creating efficiencies a benefit that could be achieved without the private firm s involvement with the city. For example, reconfiguring the department s office space within city hall has improved its workflow to the point that it is now using half the square footage to accomplish the same amount of work. Thousands of paper August 2014 Government Finance Review 43

5 records were scanned for more efficient archiving and retrieval. Inspectors were equipped with wireless laptops so they could access and enter information in the field. CONCLUSIONS While the lemonade stand run by the neighborhood children may not actually be turning to privatization, jurisdictions across the country are finding P3s an effective and efficient way of dealing with financial challenges. P3s are certainly not for everyone, but many organizations could potentially benefit from asking Financial savings are often realized through economies of scale, access to cutting-edge technology the government wouldn t have been able to afford on its own, innovations, or simply a different way of completing the job. themselves if there is a better way to operate. When done correctly, P3s can be a tool for improving service levels, realizing cost savings, and dealing with fluctuating activity levels and demands. y KYLE STEITZ is communications manager for SAFEbuilt, a firm that creates partnerships with communities across the country to create privatized development projects, including building department services, community planning and zoning, and code enforcement. Steitz can be reached at or ksteitz@safebuilt.com. Concise I How To I Practical The GFOA launched its most popular publication series, the Elected Official s Guides, twenty-seven years ago. The series now contains more than twenty titles that cover individual financial management topics using easy-to-understand language in a question-and-answer format. All series volumes are affordably priced with quantity discounts, making them ideal for distribution to newly elected officials, government employees, citizen and taxpayer groups, the media, and others interested in local government finance. To learn more about the books in the Elected Official s Guides, visit Questions? publications@gfoa.org. Order online at 44 Government Finance Review August 2014