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Public-Private Ventures

Putting Federal Public-Private Partnering on Track

Federal privatization initiatives continue to occur on an ad hoc basis in different agencies to deal with specific budgetary or operational problems. While there have been several successes, there also have been programs that have sputtered along. Lessons learned have important transferability but are not, by themselves, sufficient to form a basis for a coherent program to incorporate private providers into the performance of the Federal Government's obligations.

The new Administration has the opportunity to re-address that issue from a government-wide, programmatic standpoint. With this possibility in mind, The National Council for Public-Private Partnerships, which I have served as Chairman, issued advisory issue papers on the three most important crosscutting issues: the Federal decision to turn to private sourcing (OMB Circular A-76); the Federal determination on how to treat public-private financing for budgetary purposes (OMB Circular A-11); and Federal policies to encourage or discourage public-private partnerships at the state and local levels. The National Council for Public-Private Partnerships is a non-profit organization of public- and private-sector practitioners of techniques for using partnering effectively to meet public needs.

Summarized below are some of the key recommendations of the National Council. If these views are implemented, we could see a spurt of new public-private partnerships in the new Administration. Sustained progress in assuring that the Federal Government uses its best technology and techniques in serving citizens as consumers will suffer if not given practical application.

Currently, Federal "privatization" is characterized by programmatic efforts to determine which Federal activities might be performed by the private sector more efficiently. The so-called FAIR Act represented a Congressional effort to accelerate this process by mandating agency identification of potential target activities. The A-76 managed competition process has not been viewed as a notably effective program. It has produced much paperwork, only some restructuring, several situations where key Federal capacity necessary in the event of an emergency has been depleted, and a residue of Government employee bitterness. How can it be improved?

OMB Circular A-76 provides a time-tested, generally objective methodology for achieving government savings through public-private competition. GAO, OMB, and other parties have documented significant savings from Circular A-76, however, there have been several limitations to program effectiveness including:

• Federal agency reluctance to initiate A-76 studies; and

• A perceived lack of objectivity to the governmental study process, which inhibits the private sector participation necessary to stimulate innovation.

Improving the process requires the creation of both positive and administrative incentives to Federal agency participation in the A-76 process. A key incentive to producing savings is to reward agencies for doing so. The DoD currently has the ability to retain savings generated through the A-76 process and apply them to infrastructure and equipment modernization. No similar incentive exists for most civilian agencies. As a recent GAO study pointed out, those few that do enjoy such incentivization - such as the VA - have been characterized by significant innovation in the creative use of existing assets. With an incentive structure comparable to DoD, if civilian agencies could apply A-76-generated savings to offset capital investment and other requirements, they likely would be more vigorous in applying A-76.

Key administrative incentives for any agency are policies affecting the defense of its budget and staffing. As conceived by a decade-old executive order and reinforced by the FAIR Act, the A-76 process was meant to be linked to the budgetary process. At the least, if OMB utilized the budgetary process to encourage agencies to meet desired A-76 study level goals by penalizing failure to do so with financial or FTE allocation consequences, the likelihood of A-76 process acceleration would be increased.

However, it is insufficient to simply increase the volume of A-76 studies processed if the quality of these studies, which has been subject to frequent criticism, is not increased. It is necessary to strengthen the A-76 "Independent Review" process to improve study objectivity. Prior to comparison of public and private sector costs, OMB Circular A-76 requires that an Independent Review (audit) of the study documents be conducted to ensure that they are properly prepared. A-76 should be modified to strengthen the Independent Reviewer’s role to include:

• Validation of decisions that activities meet the standard of being "governmental in nature." This is a key regulatory standard and one too readily susceptible to subjective determination.

• Verification that decisions made within agencies concerning study products do not create unfair advantages for public (or private) sector bidders. In this context, attention to comparability in the accounting treatment of items in the private and public sectors should be focused.

• Validation of performance-based service specifications to assure an objective comparison of public and private providers.

Overall, the operating speed of operation of the recommended system needs to be picked up, so that the numbing and system-debilitating pace that it follows today is improved. It will be important for the new Administration to emphasize completion of A-76 studies in a reasonable timeframe. To do this, agencies should be requested to establish standard internal milestones for major steps of the A-76 process and report to OMB on the percent of studies being completed in compliance with study milestones. While simple completion of studies does not prove that the A-76 system is working better or more fairly, the absence of such completion assures that it simply is not working well at all.

While A-76 provides a sharper focus on when the private sector can more effectively perform activities currently being performed by Federal Government personnel, it provides no support for mobilization of private capital to erect capital improvements that otherwise will have to be financed with Federal dollars. In this context, ironically, the desire for budgetary savings - frequently a result of private developments that have been procured effectively - has emerged as being at cross purposes with the policy of seeking to control "hidden" Government spending through public-private arrangements, which entail deferral (but not elimination) of obligations to pay private providers.

OMB Circular A-11, Appendix B, contains basic instructions to Federal agencies on how to conduct the overall budget process. It provides instructions on ". . . scoring consistent with the scorekeeping rule . . . in connection with the Budget Enforcement Act of 1990 (BEA), as revised pursuant to the Balanced Budget Act of 1997." The scorekeeping requirements apply to all lease-purchase arrangements and capital leases, including those arrangements that agencies may enter into under existing general legal authorities and arrangements that are financed through the Federal Financing Bank. The general thrust of these rules is that the Federal Government will score "budget authority" for a lease-purchase or capital lease even in the year in which authority is first made available to a Federal agency in the amount of the net present value of the Federal Government’s total estimated legal obligation over the life of the contract. Broadly speaking, these arrangements represent transactions in which, through a series of installment payments over time (that carry interest at the lower Federal rate, rather than the higher private rate), the Government acquires assets initially constructed for its beneficial use by a private person. State and local governments use these techniques quite commonly. Scoring effectively inhibits much of their use by Federal agencies.

The only exception to the Federal rule is that the scoring may be spread out over several years under two A-11 exceptions: first, for multi-year procurements, outlays may be spread over the time it takes for a contractor to construct, manufacture, or purchase an asset; and second, where the private sector retains "substantial risk," out-lays may be spread across the lease term when payments are being made. However, decision-makers that control the A-11 process historically have not been sympathetic to public-private partnership transactions. They have not worked to find ways to advance utilization of this apparent basis in A-11 for the exercise of administrative discretion in a manner favorable to lease-purchase financing that can serve to meet public needs. In many cases, the scoring rules that are applied need to be better publicized and clarified. Some interpretations are, in themselves, not "rules" in the context of the Administrative Procedure Act (APA), but are merely articulation of OMB "policy"; therefore, in effect, they require private sector discovery and are subject to informal change. As the rules are now applied, they appear to be administered unevenly and in a process not open to full public scrutiny.

It will take a new initiative on the part of the Administration to modify this situation. When a particular program calls for substantial capital contribution from the private sector, the OMB should work with all parties – public as well as private – to inform them of what rules may affect the way the program will be conducted. Moreover, if there are potential exercises of discretion in the administration of OMB policy that would be beneficial to the capital program’s overall success, there should be a process available to all parties to resolve scoring issues early enough in the process so that the project’s financeability can be properly considered and, where appropriate, its overall outcome can be realized.

Achieving this result will require administrative innovation. The OMB should designate an official to work with interested private-sector groups to examine the existing rules, how those rules are now being applied, how to publicize them to the private sector, and how to structure a process for airing issues relative to scoring. The national budgetary climate has changed; the policy of promotion of public-private partnerships should change with it, in the manner suggested.

Solving issues at the Federal level is of less importance than it once was, given the ongoing trend to devolve both administrative responsibility and Federal tax dollars to the state and local levels. However, Federal policies directly or indirectly influencing state financing and budgetary policy still can have a significant impact on state and local behavior with respect to public-private partnerships. Specifically, Federal tax, labor and grant/loan policies have placed significant obstacles to development of public-private partnerships. Their modification would promote the use of private-sector resources to meet public needs. These include the following:

• The current tax law limits the extent to which non-tax backed state and local debt issuances that meet certain technical tests for private involvement – "private activity bonds" – may be used to foster public-private partnerships. Subjecting private activity bonds for public-purpose projects to state "volume caps" prevents cities from developing the most efficient systems possible for services such as water supply and wastewater treatment. The appropriate solution is to amend the Internal Revenue Code to remove currently statutorily-imposed state "volume caps" on private activity bonds for projects that are serving substantially the same public purpose as would a publicly-financed facility. The result would be to allow innovative and more cost-effective projects.

• Along similar lines, Federal grant and loan assistance programs for municipal drinking water and wastewater capital investment by their terms typically severely restrict or prohibit significant private-sector participation in these projects. Federal assistance programs, such as State Revolving Funds (SRFs) currently severely restrict private participation in projects. Certainly, at a minimum in the future, any new grant programs should be based not on public ownership of facilities, but rather the dedication of facilities and their actual application to public purposes.

• Much of the resistance to broad gauge Federal introduction of public-private partnerships has arisen from labor union concerns with the impact on Government employees. Up until now, there has been relatively little attention paid to how labor law reform might alleviate the antagonisms that organized labor has expressed against privatization.

Two areas stand out:

One key area is public pension fund flexibility and portability. Prohibiting public-sector employees from maintaining their position in public employee pension funds, if they transfer to a private-sector firm under a public-private partnership that continues to perform in the public interest, creates unnecessary opposition to such partnerships. The solution is to change restrictive of tax and labor law provision and/ or regulations to permit such employees to remain in public pension funds, even if their positions have been privatized, and for their new private employers to make pension contributions to these funds.

• Conversely, barriers erected because of labor that would effectively undermine privatization policies should be changed. For example, Section 13C of the Federal Transit Act provides that if a member of a bargaining unit of a transit authority loses his/her job due to the provision of a federal grant (such as a requirement for contracting out of service), that individual is entitled to up to six years of full salary. This places an impediment to contracting out, or even considering contracting out, such services. Equally problematic the fact that both U.S. DOT and DOL review applications for Federal Transit Administration grants, with national labor unions (through a "review" policy) having the ability to effectively stop the approval process. Clearly, this has a (intended) chilling effect on public-private partnerships, and should be modified.

Conclusion

Review of the proposed solutions to the slowdown of the momentum of public-private partnerships at the Federal level shows that they are roosted as much in the impact of cross-cutting public policies as in the inexperience in administering new partnering concepts at the agency level. By drawing these conflicts into full public view and making recommendations for their resolution, the National Council for Public-Private Partnerships believes that it has served an important role in furthering the role of Government as an effective service provider, thereby making the public more satisfied customers. These are sure to be goals of this Administration.

Roger D. Feldman is Chairman of The National Council for Public-Private Partnerships. He is Chair of the Project/Structured Finance Group of the law firm of Bingham Dana LLP, based in its Washington, D.C. office.