A PRIMER FOR GOING INTO BUSINESS WITH THE GOVERNMENT By Ruth Ann Chao Businesses and non-profit organizations are going into business with the government more frequently every day. As federal, state, county and municipal governments continue to seek ways to maintain their levels of services while reducing their expenses, the use of public/private partnerships is becoming increasingly popular. There are many forms of public/private partnerships used. The form of the partnership is generally chosen based on the level of control the governmental entity wants to retain, the source of any capital investment required, and the general nature of the joint venture sought. Privatization through public/private partnerships have been used in a wide variety of areas: highways/bridges, airports, railways, water supply and wastewater treatment, solid waste collection and disposal, recycling, energy production and distribution, administrative services, correctional facilities, business loan programs, and social services. Some of the more common forms of joint venture agreements dealing with development or use of facilities and services are: Private Contract A public agency retains control over a physical plant but contracts with a private organization for staffing and managing the facility. Its been estimated that there is an increase in efficiency of 10 to 30 percent. Unfortunately, this type of arrangement is often subject to labor disputes because the government workers are not kept on. To alleviate this problem another type of privatization has been developed called managed competition. Turnkey A public agency contracts with a private organization to build a facility for a fixed price. The private partner agrees to take the risk of cost over-runs and retains the right to savings generated by private sector procurement and construction efficiencies. Specific criteria for the facility are set out in advance of the project build out. Financing and ownership can fall to either the public or private partner. If the initial financing capital is provided by the private partner then, generally, a long term services contract is also awarded in order to enable the private partner to recoup its initial investment. Ownership of the facility remains with the government. The public agency must take care in how it begins the process. When a turnkey contract is announced to the public at the conclusion of the negotiations, it appears biased. However, when general proposals are requested from the public and then a single private organization is selected for negotiation based on overall qualifications with no guarantee until a final agreement is reached, this obstacle is overcome. Build-Operate-Transfer/Build-Transfer-Operate This is a Turnkey joint venture with a twist. The private partner will build the facility to the specifications set by the public agency but rather than the government retaining ownership of the facility, the ownership is initially held by the private partner and then transferred to the public agency either upon completion of the facility or at the end of a set franchise period during which the private partner has an exclusive contract to provide the user services required. When the transfer takes place depends on tax, liability, initial capitalization and other issues. This has become a common means for a public agency to obtain facilities and services through leveraging private capital to serve public needs and policy. There are even more variations on this theme with the use of tax exempt leases, the purchase and renovation of existing facilities, and sale and leaseback to shift risk into the private sector. Public/Private Partnerships are one aspect of the general move toward privatization of government services. Privatization also includes: – Asset sales – The sale of buildings or equipment to private organizations Contracting – The purchase of defined services but the responsibility for policy and management of the services is retained by the public agency and the public agency continues to pay for the services. – Divestiture – The sale of commercial type functions to private parties. The government retains no control or responsibility for the function once sold. – Internal Franchising – A specific department within one public agency sells its services (usually administrative) to other public agencies rather than duplicating efforts – External Franchising – Private vendors are given contracts to provide services to specific users and the users pay the private vendors directly. – Managed Competition – The public workers in an area of government service are assisted in organizing to put together a bid to compete with private providers of the same service. If the public workers obtain the contract they are held to the same standards for quality, cost, and efficiency as the private providers. Sometimes, special arrangements are made for contract renewal in the case of public workers, e.g., three contract renewals in the competitive process is rewarded with a longer term contract than would be awarded to the private provider. – Outsourcing – The public agency contracts with an outside provider for the performance of services but maintains complete control over the management decisions. Any fees paid, continue to be paid to the public agency. The private sector is becoming more aggressive in pursuing partnership opportunities, often instigating the project by approaching public agencies with proposals. Given the necessarily conservative approach public agencies take in evaluating these proposals, successful private organizations usually demonstrate special expertise and prior success in the field. However, there is a push from the federal level down to encourage public agencies to identify potential opportunities for privatization through public/private partnerships to obtain the efficiency of the private sector in the provision of traditionally government provided services. This push is resulting in smaller projects that are less technically demanding being considered on more local levels. Where the private partners in these joint ventures were almost exclusively long established firms in specialized technical fields, the spectrum of opportunity continues to broaden. -30- Ruth Ann Chao is a partner in the law firm of McLain-Hill, Cornwell, Chao & Schropp.