America’s governmental institutions face many more changes in the years to come. A major part of the motivation for change is economics, with governments at Federal, state, and local levels facing increasing pressure to find new efficiencies  and bring spending into line with reasonable levels of taxation.

After today’s near-term budget crises are addressed and the rhetoric levels diminish, the challenge will be that of identifying new ways of delivering government services in a more efficient way. Involvement of the private sector, from both a funding and an operations perspective, will become more and more viable as an option. Government organizations will turn to the private sector to finance infrastructure and to manage operations.

This type of involvement of the private sector and private sources of equity in activities that either are inherently government responsibilities or have been run in the past by government is by no means new. Beyond the ongoing procurement of products and services from private sector suppliers, virtually every agency of government has been involved in various forms of privatization and outsourcing, and many have also engaged in public-private partnerships. In many municipalities, such facilities as water and wastewater treatment, prison, and roads have been privatized. Debates have raged in recent years about using the concept for activities as diverse as Social Security and airport operations. Outsourcing of certain operational functions is commonplace at government sites, with the tasks outsourced ranging from routine maintenance to security to remediation of contaminated sites to operation of data centers. Public-private partnerships have been established in many areas, ranging from basic research collaboration to economic development to the highly-visible programs under the Energy Star banner.

In the past, and certainly looking forward, the primary motivation for government to involve the private sector is the reality of today’s financial environment and the attendant need for financing. Government agencies face severe budget pressures, as a result of taxpayer initiatives to constrain growth rates in government spending, as a result of pressures to lower taxes, and as a result of the continuing pressures of growth in various entitlement programs. No relief from budget pressures is likely to come in the near future, given current economic and budgetary realities. For agencies whose programs involve large capital expenditures for construction and acquisition, further pressures exist because of the nature of many government budget processes and because of the additional approval that must be obtained for such projects (in some cases, from taxpayers themselves in the form of bond referendums). The financial motivation will grow as the pressures for additional or improved government services grow, especially within the categories of public infrastructure and services linked to demographic realities. Within this “provide more with less” environment, government organizations will be strongly motivated to determine if strategies for private sector involvement can help alleviate the pressure.

While the new strategies of outsourcing, privatization, and public-private partnership are attractive from financial and philosophic perspectives, experience has shown that they are not “easy solutions” to the very difficult problems faced by government agencies. Often attempts to move in these directions have failed, some during the early phases of evaluation, others during the implementation process. Given this checkered history, the lessons of businesses in creating CoDestiny relationships in which the partners realize shared successes and participate in “win-win” outcomes are thus important for government and private sector organizations alike as they contemplate new types of collaboration and interaction . Several insights emerge from previous success stories, from both within the private sector and from the history of government collaboration with the private sector. These insights can guide future decisions towards an outcome with a much higher rate of success stories.

Successful CoDestiny relationships have a simple, straightforward foundation: they must create a “win” for each participant. In a business transaction, that is somewhat simple, requiring that each firm in the relationship deliver rewards to its shareholders. When government is introduced into the equation, the level of complexity increases. Initiatives typically impact on three different groups of involved parties: the government agency that is seeking to achieve its mission and satisfy its various constituencies; the private sector partner that is seeking to advance its business (profit) interests; and the government personnel and communities impacted by the strategy who are seeking to improve or maintain their situation. The perspectives of the three players differ considerably, and finding a basis for “wins all around” is difficult.

The initiatives that have worked have done so because a situation existed in which these differing goals could simultaneously be satisfied. Many of the failures can be traced to underlying factors which ensured that at least one participant’s goals could not be satisfied, thereby creating the later motivation for that party to exit from the relationship.

Eventually, the strategy will succeed or fail depending on whether there is a market that works for the products or services in question. For many initiatives, the government itself must be part of the market, providing a predictable and stable business base sufficient to attract private sector interest and investment. Other markets must exist as well, however, if the economic benefits from outsourcing and privatization programs, in particular, are to be realized. To the extent that other markets can be identified, the opportunity exists to spread costs, conserve resources, and diffuse innovations. A realistic and accurate evaluation of whether these goals can be met is necessary if an initiative is to be viewed retrospectively as “good” as well as being “good-intentioned”. Several disappointments with privately built roads can be traced to overly optimistic demand forecasts – the market just wasn’t there.

Most initiatives require new capital; in some cases, financial considerations are at the heart of the effort, such as when the initiative requires building or modernizing facilities or investing in research or marketing. The degree to which the strategy creates bankable assets and contracts that can be used to raise funds will determine the level of participation that will occur from private sector participants. Perhaps even more importantly, the degree to which the pro forma plan for repayment of capital was accurate in terms of levels and timing will most likely be the most significant factor determining whether the strategy proceeds smoothly or “blows up” in the faces of its architects.

There is a final consideration – although of a different nature from those associated with economics and funding – which can also drive the eventual success or failure of the strategy: the political environment. Because many candidate programs involve current governmental operations and because the individuals involved in making and implementing the decisions are either politicians or government employees, this consideration must be accepted as inevitable. Technical considerations can in fact all be managed to the point where a strategy “should” succeed, only to have it derailed because of political considerations. It is likely that the success of efforts to increase the involvement of private sector firms and financing will depend to a large degree on which initiatives can be defined that are acceptable within the context of the evolving political landscape.

Author: George F. Brown, Jr.