using public-private partnerships - kpmg · 2020-02-27 · globally, countries are using...

Public-Private PartnershipsUsing

to Reduce Costs and Enhance Services

Copyright 2017. Association of Government Accountants. AGA® and the Journal of Government Financial Management® are registered trademarks. Republished with permission. All rights reserved. NDPPS 635048

Government at all levels faces a dual-edge sword of long-term fiscal sustainability challenges that will not be easily remedied1 and unmet resource demands. Included is replacing decaying

roads and bridges, tackling broader infrastructure needs, and making system and operational investments.2

The United States (U.S.) is not alone. What can we learn from other countries facing similar problems? Globally, countries are using public-private partnerships (PPPs) to help address infrastructure and opera-tional needs. In the U.S., this concept dates back to 1785, when President George Washington established the Potomac Company to provide better transportation and link commerce along the river. More recently, there has been growing recognition within the U.S. of the value of PPPs.

As government more often turns to PPPs, what should financial managers know about the concepts and leading practices? This article, based on research by the University of Maryland’s Center for Public Policy and Private Enterprise,3 addresses these fundamental questions.

What Are PPPs? PPPs are contractual arrangements

between government and private-sector entities in which skills and assets of each are shared in delivering services or facilities for the public good. While by no means panaceas to long-term fiscal sustainability and short-term investment needs, PPPs can help deliver large-scale projects that might otherwise not be feasible for government to fund and execute. PPPs have enabled governments to expedite project completion, reduce costs and more rapidly introduce innovation. But they must be prop-erly conceptualized, structured and implemented for the right reasons, from both a short- and long-term lens.

PPPs share a common attribute: provision by the private sector of two or more functions related to an asset, facility or service — typically, financing, design, construction, operations, maintenance, manage-ment, logistics and/or ownership. Bundling these functions can derive efficiencies across the entire scope of work — from design to materials to long-term maintenance strategies. Efficiencies translate to cost savings, higher quality and faster project completion. Generally, as more func-tions are bundled, more project risk and responsibility is transferred to the private sector, and greater innova-tion is spawned. Given the magnitude of some projects and domains of expertise required, a PPP contract may be awarded to a consortium of companies with expertise in different fields.

Are PPPs Limited to Transportation Infrastructure?

PPPs for roads and bridges are most common, whereby investments are paid for through user tolls. However, PPPs can take many forms, including those illustrated in Figure 1.

Let’s examine federal and state case studies exemplifying PPPs meeting other critical infrastructure needs.

Military Family Housing

Military family housing was in disrepair after decades of insufficient maintenance; and, in many locations, there was inadequate affordable private housing. This negatively impacted soldier morale and retention. The Military Housing Privatization Initiative (MHPI) was established to leverage private-sector financing, expertise, and innovation to provide housing faster and more efficiently than traditional military construction processes.4 The

Department of Defense (DoD) could guarantee steady occupancy and payment through military housing allowances.

The program has been universally lauded as a critical quality-of-life program for military families. By leveraging private-market competi-tion, the MHPI expedited renovation and new construction of quality housing for military families, at affordable prices. DoD testified the first 10 MHPI projects would have cost $600 million more had it used the traditional military construction approach.5 Government Account-ability Office (GAO) life-cycle cost estimates reveal privatization has led to savings of at least 10.9 percent.6 Moreover, opening military housing construction to private-sector devel-opment stimulated local economies, provided investors long-term invest-ment returns, and accelerated avail-ability of adequate housing.7

Commonwealth of Virginia Infrastructure

Virginia broadly uses PPPs for infrastructure, such as toll roads, bridges and tunnels; and for schools, senior living facilities, geriatric treat-ment centers and correctional centers. Virginia’s Public-Private Education Facilities and Infrastructure Act of 2002 allows the state and localities to contract with the private sector to develop needed education and infrastructure projects.8

A project made possible through this legislation is the innovative Stafford County Learning Village, which resulted in construction of an elementary school, a high school, recreational facilities, a senior living facility, and a YMCA facility, on county-owned land. The county, one of the fastest-growing in the country, through a PPP, sold a small parcel of the land to build a senior living facility, recouping its initial

By: William Lucyshyn, MS; Michael C. Vitale, VADM USN (Ret), MS, MA; and Jeffrey C. Steinhoff, CGFM, CPA, CFE, CGMA

WINTER 2016–17 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT 19WINTER 2016–17 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT 2


investment. Furthermore, the cost of school construction through a PPP saved between six and 10 percent from traditional procurements. Co-location of the facilities encour-aged collaboration and provided for multi-use, such as the high school using the YMCA pool, senior living facility volunteers working in the elementary school, and high school vocational students learning nursing skills at the senior living facility.9

Are There Impediments to PPPs?

There are inherent challenges to new ways of doing business, thereby risking the comfort of traditional operational structures viewed as providing control and predictability. There are also legal and regulatory limitations.

Whereas at least 33 states have enacted laws enabling PPPs for transportation infrastructure, the remaining have not.10 Also, few

states extend PPP use beyond transportation.

At the federal level, absent specific legislation (such as MPHI), use of PPPs is limited under the Budget Enforcement Act of 1990,11 which mandates upfront scoring of leases. Office of Management and Budget (OMB) Circular No. A-11, Preparation, Submission, and Execution of the Budget, requires agencies fully fund long-term (over 5 years) capital leases and lease-purchases in the year of initia-tion, identical to outright purchases.12 The logic is that (1) financing through third parties, which PPPs entail, is always more expensive than direct asset purchase, given the federal government’s preferred borrowing rates; and (2) capital leases, lease-purchases and infrastructure PPPs obscure long-term commitment of funds and lead to less robust decision-making and budget transparency.

However, unrelenting budget pressure largely prevents govern-ment from funding major capital

purchases in a single year, even when this leads to higher long-term costs and lost opportunities to innovate and modernize. As discussed in its 2015 High-Risk report,13 one of GAO’s continuing concerns has been heavy reliance on property leasing where ownership, such as lease-purchases, would be more cost efficient.

What Are Considerations and Leading Practices in Adopting PPPs?

Our research of PPPs in the U.S. and globally (where PPPs are much more prevalent) identified consider-ations in assessing the appropriate use and structure of PPPs.14 The following questions, anchored in leading practices, help determine if conditions may limit applicability of PPPs as procurement solutions.

• Is the project conceived to provide a direct benefit to the public? Funda-mental is whether government

Transportation Social TechnologyDefense &Aerospace

Energy &Utilities

■ Roads

■ Bridges/tunnels

■ Parking

■ Airports

■ Rail

■ Transit

■ Traf�c operations centers

■ Schools

■ Corrections

■ Court houses

■ University accommodations

■ Mental health centers

■ VA hospitals

■ Social housing

■ Public/administrative buildings

■ Lotteries

■ Urban regeneration

■ HQs

■ Military housing/ accommodations

■ Training/colleges

■ Synthetic training

■ Data centers/IT

■ Utilities

■ Military equipment

■ Warehousing and logistics

■ Commercial space �ight

■ Data centers/IT

■ Telecom towers

■ Broadband

■ Shared services

■ Mining rights

■ Carbon capture

■ Renewables

■ Water/wastewater

■ Electricity transmission and distribution

■ Nuclear

■ Levees

Source: University of Maryland, February 2016 (cpppe.umd.edu/publications/public-private-partnerships-leveraging-private-resources-public-good)

Figure 1. PPPs Have Been Used in Many Sectors

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has the capacity do it better, faster and cheaper, which drove DoD’s MHPI for which the private sector provided the best alternative.

• Can the public sector providenecessary oversight? While theprivate sector provides day-to-day project management,government must have sufficienttechnical expertise to provideoversight to ensure the projectis effectively and efficientlymanaged.

• Are project requirements amenableto a diverse array of solutions? Tomaximize PPP benefits, providethe private sector flexibility tomeet project requirements increative, innovative ways, avoid-ing detailed specifications. Beadaptable and embrace innova-tive solutions when concretebenefits can be demonstrated.

• Can outcome-based metrics beused to measure performance?With private-sector flexibilitycan come more limited visibility.

Therefore, establish and moni-tor objective outcomes tied to expected results, such as lower costs and faster delivery times.

• Will private-sector efficiencies indesign, management, construction,and other domains offset highercosts associated with private-sectorfinancing and risk transfer? Trans-ferring risk and financing burdento the private sector comes ata cost. Lower borrowing costsby government are a primaryreason for requirements to fullyfund long-term leases upfront.Government must be convincedprivate-sector efficiencies inproject delivery sufficiently offsetthese costs. Also, overestimatingthe level of risk transferred mayresult in overpaying for private-sector delivery. The quality ofthe data underlying these con-siderations becomes paramount,which clearly falls in the CFO’swheelhouse.

The next series of questionsaddress project attributes. Affirmative

responses suggest consideration of a PPP, with numerous affirma-tive responses suggesting greater consideration.

• Does the project entail multipledomains of expertise? The private-sector partner is often betterpositioned to leverage expertisefrom numerous sources. PPPs areoften a consortium of firms withdifferent expertise.

• Is the project subject to significantdesign risk? Government(especially local government)may have difficulty absorbingadditional costs from unforeseencircumstances. A private-sectorfirm routinely managing higher-risk projects may be better ableto do so.

• Is government funding/financinglimited? If government cannotafford to fund an essential projectgiven other priorities, it maychoose to turn to a PPP to reduceupfront investment.

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Public-Private PartnershipsUsing

to Reduce Costs and Enhance Services

WINTER 2016–17 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT 4


• Are asset usage requirements unknown, sporadic or variable? Government can rely on lease-based PPPs to avoid significant outlays for assets of indeterminate use.

• Does the project need to be delivered quickly? Given market forces, the private sector is often better posi-tioned to deliver projects quickly.

• Can a PPP facilitate other objectives? Government may want to both modernize and consolidate, such as moving data centers into a single or fewer locations in a cloud-computing environment.

How Do You Structure PPPs?PPPs range from traditional design-

bid-build agreements, where govern-ment retains risk and responsibility, to full concession, where risk and responsibility is transferred to the private sector, as depicted in Figure 2.

Leading organizations adopt the following framework in structuring PPPs.

Build Business Cases

• Highlight both quantitative and qualitative rationale. While on paper, PPPs may cost more at inception, initial cost estimates for traditional projects often bear little resemblance to final costs. Under PPPs, the private sector is impelled to better estimate costs and completion time as it is assuming risk. The United Kingdom (UK) and Australia provide valuable perspective. UK’s National Audit Office (NAO)15 reported 70 percent of traditional design-bid-build construction contracts were delivered late and 73 percent were over budget, compared with 24 percent and 22 percent respectively for PPPs. NAO concluded PPPs were delivering price certainty, with construction cost increases borne mainly by the private sector with no increased government spending.16 Another UK study showed average delivery delays were 17 percent, with 47 percent

cost escalation for traditional construction contracts; whereas PPPs on average were delivered one percent ahead of scheduled delivery, with one-percent cost escalation.17 In benchmarking PPPs against traditional procurements, Australia reported significant cost efficiency from PPPs, ranging from 30.8 percent when measured from project inception to 11.4 percent when measured from contractual commitment to final outcome.18

• Define public benefits. PPPs should represent a means of providing a direct public benefit. For example, long-term lease agreements should not be used primarily to mask chronic operating budget short-falls. Concession agreements, in particular, can encourage poor planning and overspending by government officials who might look to PPPs to provide one-time cash infusions to address short-term concerns, eliminating long-term control of public assets and future revenue streams.

PaymentMechanismD Mileston Payment Availability Payment Shadow User Fees User Fees (Tolls)

FinancialStructureE Public Funds TIFIA Bank Debt Private EquityPrivate Activity

Bonds

DeliveryModelA Design-Bid-

Build Design-BuildDesign-Build-

Operate-Maintain

Design-Build-Finance

Design-Build-Finance-Operate-Maintain

Full Concession/ Development

Rights

Contractural StructureC Consultancy

ContractsService

ContractsManagement

ContractsDBF

ContractsDBFO

Contracts

Full Concession/ Development

Rights

Lease

RiskAllocationB Public Responsibility Private Responsibility

Source: University of Maryland, February 2016 (cpppe.umd.edu/publications/public-private-partnerships-leveraging-private-resources-public-good)

Figure 2. PPP Structure Continuum

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Select a Source

• Bundle functions. Bundling finance, design, construction, operations, maintenance, management, logistics and/or ownership can derive efficiencies. Longer-term design-build-finance-maintain PPPs, such as toll roads, incentivize contractors to make significant investments in the asset at multiple stages throughout the project, which can result in government savings. Such contracts lead to forward-thinking designs that minimize maintenance and operations costs over the asset life.

• Rely on competition to determine best value. Competition is not limited to traditional contracting. An example is construction of the Indiana portion of the Ohio River Bridges where a consortium aggressively bid, relying on its ability to reduce costs over the 35-year PPP duration.19

• Develop an education and commu-nications strategy. Rationale and expected outcomes should be communicated to stakeholders, including the public. It’s important to set expectations and address questions upfront, with continued communications throughout the initiative. For example, affected residents were made aware of the Ohio River Bridges PPP structure at the outset. Annually, Indiana publishes an update, including changes in cost and schedule.

Structure the Agreement

• Hold contractors accountable for outcomes, not detailed specifications. To facilitate cost-effective innovation, define asset and service requirements in terms of required performance capability. By limiting detailed specifications, government affords contractors more flexibility on design, materials and sourcing, while incentivizing creativity, innovation and potential cost savings. Leading organizations shift risk to private-sector providers by

tying payment to completion of project milestones, delivery of specified outcomes, and/or asset availability or “readiness” rates.

• Incentivize provider investment by developing longer-term agree-ments. This provides greater opportunity for the private sector to invest and innovate to find the best long-term value. Well-developed business cases and understanding of private-sector incentives come into play. PPPs should be win-win. For a toll road PPP that includes maintenance over 30 years, contractors are more apt to use longer-lasting materials.

• Establish agency PPP units. PPPs are not just financing mechanisms, but tools to manage risk and expand innovation, with a goal of cost control and enhanced mission achievement. It’s imperative to fully protect the public interest when using this tool. PPPs can be complicated, as their application varies widely. Dedicated PPP units help ensure a more transparent and outcome-based contract selection process, results-oriented oversight, and

broader transformational change and procurement oversight, serving as a technical resource and sounding board.

How Can CFOs Help?High-performing CFOs provide

input on investment decisions to help ensure fact-based decisions, supported by high-quality financial data and analysis of options.20 They fully understand:

• what drives investment decisions;

• how to optimize results;

• how to influence sound, fact-based decisions through finan-cial information; and

• how to deliver information at the right time, in relevant ways , with the highest level of reliability.

Reliable, timely, and relevant financial information is paramount to decisions involving PPP feasibility and structure. Do PPPs make good business sense, consistent with public policy? Are business cases compelling? Are stakeholders, such as Congress, confident that quality information is available and being used in assessing trade-offs? Is the CFO overseeing investment execution in terms of budget and performance metrics?

High-performing CFOs are business advisors. They have skills to make difficult financial analyses and a place in the “boardroom” to make a difference in investment decisions. They actively support top management to:

• integrate organizational goals into investment decisions;

• assess different options, includ-ing PPPs, through structured investment approaches;

• balance budgetary control and managerial flexibility;

• use project management techniques that optimize project success; and

• analyze results and incor-porate lessons learned into decision-making.

PPPs are not just financing

mechanisms, but tools to

manage risk and expand

innovation, with a goal of

cost control and enhanced

mission achievement.

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Final ThoughtsPPPs are neither “silver bullets”

to solve long-term fiscal challenges nor viable solutions for all investment decisions. A concept with growing acceptance in the U.S., but much greater usage globally, expanded use of PPPs requires:

• policy changes and different budget scoring rules, with policy makers coalescing around how to remove impediments to smartly moving forward;

• broad acceptance as a way of doing business when justified by solid business cases;

• appropriate application of invest-ment partnership concepts not yet fully understood to demon-strate public value; and

• willingness to challenge the status quo in finding new ways to meet public needs through transformative change.

As Albert Einstein said, “We can’t solve problems by using the same kind of thinking we used when we created them.”

Endnotes1. “Fiscal Outlook & the Debt,” (gao.gov/

fiscal_outlook/overview).2. According to the American Society of

Civil Engineers, cumulative infrastructure investment needs will total $3.3 trillion by 2025, rising to $10.8 trillion by 2040. Anticipated funding will cover only 57 percent of these needs through 2025, dropping to 52 percent by 2040. Corresponding investment gaps are estimated to total $1.4 trillion by 2025, growing to $5.1 trillion by 2040. See Failure to Act: Closing the Infrastructure Investment Gap for America’s Economic Future, 2016 (www.infrastructurereportcard.org/wp-content/uploads/2016/05/2016-FTA-Report-Close-the-Gap.pdf).

3. “Public-Private Partnerships: Leveraging Private Resources for the Public Good,” by Dr. Jacques S. Gansler and William Lucyshyn, Center for Public Policy and Private Enterprise, School of Public Policy, University of Maryland, February 2016 (cpppe.umd.edu/publications/public-private-partnerships-leveraging-private-resources-public-good).

4. National Defense Authorization Act for Fiscal Year 1996, Public Law 104-106, sections 2801 to 2841, codified as amended at 10 U.S.C. sections 2871 to 2885.

5. Statement of Mr. William Dubois, Jr., Deputy Under Secretary of Defense (Installations and Environment), before the Subcommittee on Readiness and Management Support of the Senate Armed Services Committee (www.globalsecurity.org/military/library/congress/2002_hr/DuBois.pdf).

6. “Military Housing: Management Issues Require Attention as the Privatization Program Matures,” GAO-06-438, April 28, 2006 (gao.gov/products/GAO-06-438).

7. See Endnote 3. Also, see “Duplication, Overlap and Fragmentation: Three Adversaries to Establishing Long-Term Fiscal Sustainability,” by William R. Phillips and Jeffrey C. Steinhoff, Journal of Government Financial Management, fall 2014.

8. The Public-Private Education Facilities and Infrastructure Act of 2002, as amended, Va. Code sections 56-575.1 through 56-575.17 (www.dgs.virginia.gov/LinkClick.aspx?fileticket=H9WdcbwMscY%3d&tabid=62).

9. National Council for Public Private Partnerships, 2015 (www.ncppp.org/ppp).

10. Social Infrastructure Public-Private Partnerships Update, subsection of the Reason Foundation “Annual Privatization Report 2013: State Government,” by Leonard Gilroy, April 22, 2013 (reason.org/news/show/apr-2013-social-infrastructure-ppp).

11. Budget Enforcement Act of 1990, Public Law 101-508, title XIII; 104 Stat. 1388-573, November 5, 1990.

12. See www.whitehouse.gov/omb/circulars_a11_current_year_a11_toc

13. “High-Risk Series: An Update,” GAO-15-290, February 11, 2015 (gao.gov/products/GAO-15-290).

14. See Endnote 3.15. The NAO is the UK’s equivalent

to GAO.16. “PFI Construction Performance,” UK

NAO, February 5, 2003 (www.nao.org.uk/report/pfi-construction-performance/).

17. “Review of Large Public Procurement in the UK,” Mott MacDonald, July 2002 (www.parliament.vic.gov.au/images/stories/committees/paec/2010-11_Budget_Estimates/Extra_bits/Mott_McDonald_Flyvberg_Blake_Dawson_Waldron_studies.pdf).

18. “Performance of PPPs and Traditional Procurement in Australia,” Allen Consulting Group, 2007 (www.infrastructure.org.au/Content/PPP.aspx).

19. See Endnote 3.20. “Taking the Next Steps to High

Performance in Federal Financial Management,” by Jeffrey C. Steinhoff and Laura Price, Journal of Government Financial Management, spring 2009; “From the Back Room to the Board Room: Federal CFO Role in Managing the Cost of Government,” by Jeffrey C. Steinhoff and Laura A. Price, The Public Manager, spring 2011; and “The KPMG Executive Guide to High Performance in Federal Financial Management,” authors Laura A. Price and Jeffrey C. Steinhoff, KPMG Government Institute, June 2009 (www.kpmg-institutes.com/content/dam/kpmg/governmentinstitute/pdf/archive/ffm-executive-guide-final.pdf).

William Lucyshyn, MS, is the director of research and senior research scholar, at the Center for Public Policy and Private Enterprise, in the School of Public

Policy, at the University of Maryland.

Michael C. Vitale, VADM USN (Ret), MS, MA, a member of AGA’s Northern Virginia Chapter, is a director in KPMG’s Federal Advisory Practice supporting the

Department of Defense in asset and financial management and public-private partnerships. He is a retired Vice Admiral, who served as Commander of the Navy Installations Command during a distinguished 34-year U.S. Navy career.

Jeffrey C. Steinhoff, CGFM, CPA, CFE, CGMA, an AGA Past National President and member of AGA’s Northern Virginia and Washington DC chapters, is

managing director of the KPMG Government Institute. During a 40-year federal career, he was assistant comptroller general of the U.S. for Accounting and Information Management, led GAO’s largest audit unit, had responsibility for developing Government Auditing and Internal Control Standards, and was a principal architect of the CFO Act. He founded AGA’s CGFM program and received the Robert W. King Memorial Award, AGA’s highest honor. He is an elected NAPA fellow and, in 2006, was recognized as the outstanding CPA in the federal government by AICPA.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. This article represents the views of the authors only, and not necessarily the views or professional advice of KPMP LLP.

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About the KPMG Government InstituteThe KPMG Government Institute was established to serve as a strategic resource for government at all levels, and also for higher education and not-for-profit entities seeking to achieve high standards for accountability, transparency, and performance. The Institute is a forum for ideas, a place to share leading practices, and a source of thought leadership to help governments address difficult challenges such as performance management, regulatory compliance, and fully leveraging technology.

http://www.kpmg.com/us/governmentinstitute

For more information, contact:

Jeffrey SteinhoffManaging Director KPMG Government Institute T: 703-286-8710 E: [email protected]

Michael C. VitaleDirector Management Consulting, Federal Advisory T: 703-286-8663 E: [email protected]

kpmg.com

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using public-private partnerships - kpmg · 2020-02-27 · globally, countries are using...

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