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Public Private Partnerships: A Reality Check
When Westminster, a community of 18,000 in rural Maryland, found itself with poor Internet access that incumbents refused to improve, it decided to join the ranks of a growing trend: public-private-partnerships between local governments and private companies to invest in next-generation Internet access. They are now working with Ting - one of a growing number of private sector firms seeking partnerships with cities – though how partnerships are structured varies significantly across communities.
In building an infrastructure intended to serve the community for decades, city leaders knew Westminster should retain ownership of the network to ensure it would remain locally accountable. Ting is leasing fiber on the network and providing Internet services to the community with plans to offer some type of video in the near future. The public-private-partnership (or “P3”) includes a temporary exclusivity arrangement for two years or when a minimum number of subscriptions are activated. Westminster will then have the ability to open up its network to other providers in an open access arrangement.
Communities are realizing that if they want better connectivity, they need to take matters into their own hands. As local leaders wade through the complex process of planning, financing, and deploying Internet network infrastructure, P3s are becoming more common. Communities with little or no experience in managing fiber optic networks may assume that P3s are safer or easier. That may be true or not depending on the specific P3 approach; the data is only starting to come in. P3s have been relatively rare compared to the hundreds of local governments that have chosen to build their own networks in recent decades.
Partnerships will continue playing a larger role when improving local connectivity but this area is still maturing – there are already a few examples of successful P3s though many will also recall the failed Gigabit Squared P3 approach.
P3s are more established in municipal public works projects involving other areas of infrastructure. A November 2013 Governing article by Ryan Holeywell examined the pros and cons of transportation P3s. Many of the lessons apply to other areas of the economy, including efforts to improve Internet access.
Different incentives motivate public and private entities, creating potential challenges implementing P3 projects. Maximizing public benefits is not necessarily counter to ensuring a profit for a partner, but the two goals can be in conflict. An observation from Joshua Schank of the Eno Center in the Governing article hit the mark regarding the incentive imbalance:
The problem, he says, is that the private sector comes to the negotiating table with less to lose than the government, and it is also more willing to walk away.
Often private partners hold a significant advantage and a willingness to walk away simply because local communities have a critical need with few options. They may feel compelled to make unnecessary sacrifices to expedite the project. For example, Princeton, Massachusetts, had entered into a Memorandum of Understanding with partner Matrix Design to deploy a fiber network. Matrix would have retained control of the network for 20 years if the plan had proceeded. The P3 fell apart when the town discovered relinquishing ownership of the infrastructure jeopardized their grant eligibility.
The P3 between UC2B and iTV3 in Illinois’ Urbana-Champaign region explicitly considers current and future control of the network. UC2B received stimulus funds as part of the American Recovery and Reinvestment Act to deploy fiber infrastructure. In 2014, it entered in to an agreement with the Illinois ISP to provide last-mile services over the network. As part of their agreement, UC2B will have the option to purchase any equipment and infrastructure deployed by iTV3 if the two agree to part ways in the future. This provision helps ensure a smooth transition if there is a new provider and gives UC2B the opportunity to control that transition or step back into the role of provider. In short, they have a say in the future of their network whereas other P3s may give sole discretion to the private partner over how the network is managed or who operates it in the future.
Risks in All Directions
Perhaps the greatest attraction for P3s, whether in transportation or broadband, is the desire for elected officials to avoid paying for a project or at least transfer some risk.
“Politicians are at the point where people are crying out for enhancements to infrastructure, but they don’t want to hear any proposals for new public revenues,” says Phineas Baxandall, a senior budget policy analyst at the nonprofit U.S. PIRG. “So anything that makes it sound like the money’s coming out of thin air is a win-win.”
“It’s perceived as free money,” says [Robert] Puentes of the Brookings Institution. “That perception has to be dealt with,” largely because, Puentes and others say, the capital often comes at a cost that can exceed the expense of typical municipal borrowing.
As Robert Heinlein was fond of writing, there ain't no such thing as a free lunch. These projects require a lot of capital and the private sector will not incur risk without charging for it. A project that seems to good to be true probably is.
Traditionally, the public sector designs and engineers a project that private sector firms then bid to complete parts of the project. (This is a needed reminder that even purely “public” projects have strong private sector involvement.) P3s come in a variety of flavors, including those in which a private partner handles all phases with little or no competitive bidding. Often that private entity contributes financially to the project as part of the agreement. This transfer of responsibility and potential transfer of risk seems attractive but:
Julie Roin, a University of Chicago law professor, also questions whether the “risk transfer” argument carries any weight. Ostensibly, for the private sector to turn a profit, a deal only makes sense if the government overestimates its risk and underestimates the project’s revenue potential. “It’s not as if any investor is going to accept risk without demanding compensation,” Roin says. “You’re just paying for the risk in a different way.”
The Congressional Budget Office, has determined that, when there is an improvement in cost or speed associated with a transportation project from a P3, the improvements are negligible [PDF of the 2012 report]. In short, some of the widely touted benefits from P3 approaches appear to be overstated or a manifestation of a preference for hiding risk rather than dealing honestly with it.
In many cases, powerful corporations lobby heavily in their own narrow interest against public projects whereas few have a strong direct interest in defending government. From the Governing article:
There’s a growing cadre of academics, activists, and state and federal auditors who question these public-private deals, but their voices aren’t always heard. At that Senate hearing, for instance, none of those dissenting views was represented on the panel. Nor did the hearing highlight what the governments’ own accountants say about P3s—namely that they are unlikely to solve the country’s infrastructure funding gap and, in some cases, may carry risks for state and local governments. “Whenever I see advocacy [for P3s], I look for real economic analysis that justifies privatization,” Cate Long, a municipal finance blogger for Reuters, recently wrote. “It’s never there.”
In Anoka County, Minnesota, a P3 arrangement limits the county's use of its own fibers on the network to only noncommercial uses. As a result, the County does not have the ability to fully use its own network, built largely with a broadband stimulus award, for economic development. It expected its partner to do more to encourage economic development, but the County apparently did not realize that its partner did not have expertise in that field. A company may be great at operating an advanced network but may not have any interest in the work of luring a potential future client to the county. A lesson from Anoka is that a P3 may require doing even more due diligence than building a municipal network. Read more about Anoka County's project in our 2014 report on 12 local government-led approaches in Minnesota.
Governing touched on a similar, albeit more extreme, situation in its reporting of a P3 transportation project in California:
When the government wanted to expand parts of the roadway to alleviate congestion, it was blocked by a “non-compete” clause in the 35-year contract. Following litigation, the government ultimately bought out the private partner. Just seven years after the express lanes opened, the county’s transportation authority paid $207.5 million for the $130 million project. That’s a worst-case scenario, of course. Those who study P3s say governments have learned their lesson about non-compete clauses. But “compensation” or “stabilization” clauses—in which governments owe the contractor money for taking actions that could reduce toll revenue—continue.
None of these criticisms are meant to suggest that P3s are unwarranted or inherently bad. Rather, we remain concerned that P3s are sometimes elevated as the ideal solution to all investment needs merely because the term public-private-partnership suggests that everyone is working together in harmony. Harmony isn’t easy. However, we firmly believe we will continue learning from previous efforts and improving on the P3 model. In the meantime, no one should assume that P3s are easier or less risky than a municipal network.
P3s and Opposition
Even though the FCC has begun to chip away at state barriers in Tennessee and North Carolina, these barriers persist in many states. Some of those restrictions prevent a local government from working with a private partner or at the very least, restrict the type of partnership available.
Unlike roads, community broadband projects are often the target of threatened incumbents or their lobbyist organizations. If a local community and a private firm work together, they may soften the ire of the mega corporate providers who cry foul at the prospect of a municipal broadband network. Communities working with a private sector firm may be more resistant to claims that the investment plan is somehow anti-business or anti-private-sector.
Some communities are too intimidated to take on the challenge of offering a service directly in competition with big providers like Comcast. They would greatly prefer to focus on the infrastructure side of the equation while a trusted partner focused on advertising and provisioning the services (which tend to evolve more rapidly). If P3s allow local governments to achieve their goals without directly competing against a big cable company (as Westminster – Ting seems to), we will see many more of these approaches. However, that also depends on having a trusted partner working with the community.
When Internet access is poor in a town of 7,500, it is not easy to get the attention of AT&T or Mediacom. It is also not easy to fund an estimated $5 million fiber project in a fiscally conservative community, even when the majority of residents need better connectivity. In Carl Junction, Missouri, local leaders are partnering with a local private ISP to offer high capacity LTE wireless Internet access for residents and businesses if enough people pre-subscribe. The town will purchase the equipment and provide locations for installation. In exchange, their partner will perform all installation and management of the network; the town will also share in revenue beyond a 10 percent take rate and will also receive free public Wi-Fi. Carl Junction’s partnership is one of many approaches that show how these partnerships have varying levels of risk and reward.
P3s may be the best solution for some communities, but they are not a guaranteed superior approach to a project owned and operated by local governments. Some of the most celebrated networks in this country, including Wilson, Lafayette, and Chattanooga, are not structured as P3s. The Governing article ends on this reminder:
“It’s a tool that can be valuable but needs to be used very carefully and with a complete understanding,” says Bob Ward, New York’s deputy comptroller for budget and policy analysis. He notes that public-private partnerships aren’t the only way to do big projects. “We went to the moon without a P3.”
P3s will continue to evolve and improve. We truly hope to see more ISPs emerging as viable and trusted partners for cities that want to focus only on infrastructure without having to get involved in service provision. Not as a replacement for other municipal approaches but as yet another group of models that communities can evaluate for their unique situation.
Update: A June 3rd Governing article on Virginia's P3 environment caught our attention. Faced with a number of setbacks in P3 projects and the negative publicity associated with them, the state is starting to initiate more transparency on public-private partnership projects with legislation. In the past, Virginia had enthusiastically embraced P3s, but several poor outcomes in transportation are encouraging reassessment:
“The state is obviously taking a hard look at this P3 model,” [said Jonathan Gifford, director of a George Mason University program studying P3 transportation projects]. “That’s what states are supposed to do. This is not designed to be a giveaway to private concessionaires. The only time you want to go forward with these is when they are going to add value to what the state would be able to do on its own.”
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Annual Digital Infrastructure Investment Event in Washington DC
Joined by an array of leading broadband experts, infrastructure investment fund managers, institutional investors, private equity, and venture capitalists will gather in the nation’s capital next week for a day-long in-person conference to discuss and explore the digital infrastructure and investment asset profile required to support a 21st century information economy.