How Local Governments Came to Embrace Business Partnerships
Next summer, cities across the U.S. have a birthday to celebrate. In August 2018, the nation’s very first experiment in bikeshare turns 10 years old. While the network itself, SmartBike D.C., didn’t last that long, it led promptly to the launch of the most robust bikeshare network in the country, Capital Bikeshare. Scores of similar systems soon followed.
When bikeshare in the U.S. celebrates its anniversary next year, it will also mark an important mile-marker for public–private partnerships. Ten years ago, these vehicles for government partnerships with the private sector were virtually unheard of outside the realm of massive infrastructure projects like highways. But those early bikeshare rollouts in Minneapolis, Boston, Denver, and other cities—most of them public–private partnerships—proved that cities could be fertile ground for these collaborative enterprises.
Schools, hospitals, prisons—public entities work with the private sector to provide all kinds of services. Before President Donald Trump soured on the idea, public–private partnerships were key to rebuilding ports, bridges, and highways under his proposed $1 trillion infrastructure plan. For many Americans, “public–private partnerships” may summon to mind gloomy visions of concrete mixmasters or the social good sacrificed to corporate masters. Toll roads were the most prominent example of public–private partnerships across the country for many years. Today, though, they are more nimble and easier to find, especially at the local level.
Critics see the perils of privatization, particularly for some core government services. But for small cities in particular, the partnerships provide new opportunities to achieve goals that otherwise seem out of reach.
“The U.S. market [for public–private partnerships] developed much like the markets outside the U.S. in this area. We started with large-scale transportation infrastructure projects,” says Peter Raymond, global advisory leader for capital projects and infrastructure at PricewaterhouseCoopers. “This concept is now starting to catch on in very interesting ways at the city level in the U.S.”
Room to grow
The U.S. market was slow to cotton on to public–private partnerships (or PPPs, or P3s) made popular in Europe. Ten years ago, anything less than $200 million had little hope of connecting the public and private sectors. That’s starting to change. Today, a market that Moody’s has described as “slow and fragmented” is poised to become “one of the world’s largest.”
The amount of capital raised but not yet invested (or “dry powder”) for infrastructure is much higher than the amount of available opportunities for this investment. At the end of the first half of 2017, there was some $100 billion in dry powder for infrastructure deals, according to PwC. The value of actual deals over the same period was $22.5 billion. There’s room for growth.
In some arenas, public–private partnerships have served as the quiet engines of longstanding and popular government programs for decades. Consider housing: Most programs at the U.S. Department of Housing and Urban Development, from housing vouchers to mortgage insurance, are structured as public–private partnerships. Housing Choice (or Section 8) vouchers are a form of PPP that has served low-income households for 80 years. HUD’s Rental Assistance Demonstration program, an Obama-era federal program that is popular under the Trump administration, has given voucher property owners opportunities to find the capital to upgrade and maintain those affordable properties, mostly through tax credits. In turn, those credits—Low Income Housing Tax Credits, which are responsible for creating most of the new affordable housing in the country—are still another kind of public–private partnership.
Many officials now view these partnerships as key to unlocking change at the state and even the city level. In Los Angeles, transit officials said that public–private partnerships would mean delivering new public transit initiatives years head of schedule. In the Twin Cities, it means thinking past traditional bikeshare to dock-less bikeshare or whatever comes next.
“On a road, it’s fairly easy to see and to know there’s a lot of potholes. If you’re talking about a prison or a school, it can be harder to tell that service quality is being degraded.”
For small cities in particular, private companies can provide opportunities to adopt solutions that they could not necessarily design on their own. Contrary to popular belief, private firms aren’t necessarily more efficient than state-owned enterprises. But the private sector can marshal new technology in research and development that is intended improve and modernize cities. Consider Alphabet’s work to create a ”living laboratory” on Toronto’s waterfront or overseeing transit in Columbus, Ohio—both ventures that are still in the very early phases and fielding at least some push-back.
“You get a lot more creativity and innovation in the U.S. in many cases because of the distinct government jurisdictions and authorities developing distinct approaches to doing things,” Raymond says. “I think that’s one of the great reservoirs of strength that we see in the U.S.”
Street lamps are one example of hard infrastructure that affords an opportunity for new thinking through public–private partnerships. Here’s a straightforward example: Two years ago, the Michigan Department of Transportation entered into a 15-year contract with a private company for new and existing highway and tunnel lighting systems around the Detroit metro area—a design-build-finance-operate-maintain (or DBFOM) privatization deal to replace some 15,000 antiquated lights. The deal is predicated on the notion that Freeway Lighting Partners can deliver economies of scale that result in taxpayer savings. Again, a straightforward deal.