Coast Guard Deepwater Program

In the early 1990s, the USCG was facing a daunting challenge: how to deal with its aging deepwater assets—those that operate beyond fifty miles from the US shore, including ships, aircraft, and other systems. These deteriorating assets threatened the Coast Guard’s ability to meet its vital and expanding mission requirements. USCG leadership developed two key strategies to address the needs. First, leaders planned to design and build each new deepwater asset (ships and aircraft) to function in a coordinated, interoperable system that would extend the capacity of all of the Coast Guard assets—a “system of systems.”² Second, recognizing the agency’s lack of expertise and organizational structure to engage in an acquisition of this magnitude, leaders decided to use an innovative approach, a public-private partnership, to plan and coordinate the process, a first for the agency.

By the mid-1990s, the USCG had developed its overall strategy and elected to use a private sector firm to serve as the lead systems integrator (LSI) to plan, buy, and assemble the various components for their recapitalized deepwater assets. They lacked the in-house capacity to build the Deepwater system and did not believe that they could easily acquire that capacity. Furthermore, the USCG believed that a strong private partner would provide more influence with Congress, given the magnitude (in scope and dollars) of the expected acquisition. They secured initial funding from Congress and in 2001 issued a request for proposal for a private sector LSI. After discussion with several potential partners, the USCG encouraged two competitors, Lockheed Martin and Northrop Grumman, to form a joint venture, designated the Integrated Coast Guard Systems (ICGS), and awarded it a five-year contract to coordinate Deepwater Program acquisitions. The partnership had both successes (a new search-and-rescue HC-144 aircraft) and failures (a reconfigured patrol boat), but suffered from increased criticism both from within the Coast Guard and by Congress and the General Accountability Office, leading to a decision in 2007 for the USCG to take over the LSI role.

Fairfax County Human Services Delivery

The second case is about Fairfax County’s Department of Systems Management for Human Services (DSMHS), which was given the responsibility of facilitating the coordination of human services delivery in Fairfax County, Virginia. County leadership determined a need to streamline its social services during a time of rapid population growth, demographic changes, and expanded human resource needs, which included an in-migration of refugees from other nations. While the original vision of a fully integrated client intake system was not achieved, DSMHS was able to implement a coordinated service planning system for matching the needs of county residents with services available in the county from public, private, and nonprofit agencies, creating a network of human services providers.

This effort was complex because of the number of actors involved, including county human services agencies, state and federal agencies, and both private and nonprofit providers of human services in the county. It was important to involve all key stakeholders in the planning and implementation effort. By drawing in these key actors, DSMHS was able to achieve widespread buy-in to the concept and improved overall delivery of social services to populations in need.

One or Multisector Solutions

Some problems lend themselves to one-sector solutions. For example, the national Social Security system provides uniform funding to retired and disabled individuals under rules set in legislation by Congress and interpreted and enacted by the Social Security Administration. This tax and redistributive program is clearly the responsibility of government (in this case, the federal government), and there would be little reason to involve another sector unless the policy issue becomes whether (or to what extent) we might privatize Social Security. Privatization, while advocated by experts in some parts of the world (Chile is often cited as an example), is opposed by a strong majority of Americans. Current issues regarding the long-term viability of the system need to be addressed, but Congress can play this role if it has the political will. Solutions include extending the retirement age, reducing or changing the way cost-of-living adjustments are determined, increasing the payroll tax, extending the range of income subject to the payroll tax (FICA), and increasing from 80 to 100 percent the taxation of Social Security on those who make over a certain amount of income. All of these solutions can be enacted by the federal government. There is no need to consider collaboration with another sector.

In contrast, Medicare, which is under a more serious threat of insolvency than the Social Security system, is already a collaboration with the private and nonprofit sectors. Rising health care costs are the primary driver of the US budget deficit (Congressional Budget Office 2011). Seniors sixty-five years and older are entitled to certain health care benefits (in-patient hospital care) and may opt for additional services (doctors and drug coverage) with additional payments. Although the system is financed and coordinated by the federal government, health care services are almost entirely provided by the private sector; providers are reimbursed based on rates established administratively (Centers for Medicare and Medicaid Services) and by Congress. There are some solutions that could be undertaken solely by the federal government: for example, increasing the eligibility age, reducing coverage of some services, increased fees or copayments for upper-income seniors, negotiated drug pricing, and reduced payments to providers. Other solutions will require active cooperation and involvement of the providers, both private and nonprofit. For example, the proposed Wyden-Ryan bipartisan plan would allow the private sector to compete with Medicare “in an effort to offer seniors better-quality and more-affordable health care choices” (Wyden-Ryan 2011). Regardless of whether this plan is adopted, it is clear that any long-range solution will require innovative ideas from both the private sector and nonprofit organizations. In addition to private option health insurance, innovative possibilities include shifting payments from one based on services to one based on outcomes and creating the accountable care organizations that were discussed in chapter 6.

If the likely solution requires an innovative approach to the problem, it probably argues for multisector involvement. The private and nonprofit sectors can be more innovative than the public sector simply because they have more flexibility and are not constrained by the same level of oversight and process requirements as is the public sector. Multiple sector involvement may encourage the innovation necessary to address the problem. If the task or challenge is clear and the solution is known, it may make sense for government to either directly provide or contract out (traditional or complete contract); however, if it is murky with an unclear solution, then a collaborative contract (incomplete or relational) or a partnership, network, or IPSP may be a better option. Alternatively, the federal government could work with states, which would become “laboratories of democracy,” trying out various approaches to the problem that might then receive national application.

It also is important to match the likely longevity of the actors with the expected duration of the issue or problem being addressed. The longer the duration of the issue, the more important it is to have government participate in the solution, either as a prime actor or lead actor in a CSC, because it has the institutional memory that private and nonprofit organizations are not able to match. Short-term problems can more readily be addressed by other actors, leaving government to deal with the long-term challenges.

For example, global warming is not a problem that can be adequately addressed by a single sector, and yet governments are likely to play a lead role because of the long-term nature of the problem. However, the private and nonprofit sectors are taking their own actions to deal with the problem, and because of the need for innovative solutions, it makes sense for government to take a multisector approach.

Many public issues or problems are already being addressed by public sector agencies. However, if the issues involve ebbs and surges of activity, it may not make sense for the public sector agency to be staffed to deal with all of the potential peak needs. Contracting or partnerships with other sectors to deal with part of the problem or peak demand may make sense. This is one of the rationales for using private sector contractors to deal with security, base construction, and other ancillary activities for the military. It may not make sense for the military to maintain a continuing capacity in areas that may be needed only in times of conflict, where that capacity exists in the private sector.

In examining the options of “in-house” production versus contractors, one California local official noted the importance of maintaining a balance: “You need a tight sustainable group of in-source providers. In addition, you need good contract providers. Find a mix between the two. It is a great way to leverage productivity with fewer dollars” (Way 2012). Similarly, relying on private or nonprofit sector partners to provide some critical supplies (such as water or health services) after a natural disaster, where those partners might have logistical advantages, can leverage the aid provided by government.

Susceptibility to Private Market Business or Nonprofit Solutions

Certain problems may lend themselves to a solution in a sector outside government. Where markets can play a role in the provision of a good or service, involvement of the private sector makes sense. For example, where government has opted to increase transportation options or relieve highway congestion, one option is the development of toll roads. Government sometimes performs this function (e.g., in Virginia, the Dulles Toll Road from the Interstate 495 Beltway to Dulles Airport), usually through a quasi-governmental authority. However, where public financing is difficult, toll roads may provide an opportunity for private sector involvement through a public-private partnership (PPP), one of the fastest-growing areas of public-private cooperation. An illustration is the Greenway, a private toll road extending the Dulles Toll Road from the Dulles Airport to Leesburg, Virginia.

Public managers must recognize that business solutions are often controversial. Businesses charge fees for services in order to make a return on their investment. Fees may exclude some participants from the service unless government steps in to provide a subsidy or other mechanism to ensure access for all citizens. Where equal access is an important policy goal, public managers must ask whether a business solution is in the public interest.

Nonprofit organizations often close the gap between public and private sector actions, serving an underserved client group that often falls through the cracks and have needs that are not met by the other sectors. For example, N Street Village (NSV) in the District of Columbia, founded by Luther Place Memorial Church, has a mission of “empowering homeless and low-income women to claim their highest quality of life by offering a broad spectrum of services and advocacy in an atmosphere of dignity and respect” (N Street Village 2012). Its programs are funded through a variety of sources, including donors and foundations. Because of the nature of their clients’ needs, NSV must provide a great deal of hands-on individualized services. By using volunteers as well as paid staff, it is able to offer services at a much lower cost than could either the private or public sector. Thus, to the extent that public managers want to provide services to that particular target group, it may make more sense to funnel public dollars to effective organizations, such as NSV, through grants, contracts, or other arrangements, rather than attempt to duplicate what this nonprofit is accomplishing.

Similarly, sometimes the nature of the problem requires local knowledge. This often is the case for many social services programs. Issues and client populations might not be the same in New York City and Salt Lake City. This is why the federal government often takes an intergovernmental approach, using state governments, through grants or contracts, for many of its social programs, to provide diversity of delivery in light of different state circumstances. Even within a state, social problems in a large urban area are likely to be quite different from those in rural areas; thus, states often partner or network with local government or nonprofits on social programs.

Political Factors and Considerations

Public managers also need to be aware of the political factors that may come into play as they examine choices beyond the traditional bureaucratic option. They may be empowered or constrained by such factors. Legal constraints may influence public manager choices among cross-sector delivery models. There may be no enabling statutes that allow PPPs, or acquisition statutes may set out detailed structures on contracting that may reduce public sector flexibility to use cross-sector options. Furthermore, the managers may not be able to engage IPSPs for concerns about conflict of interest or restrictions on working with private or nonprofit partners. Often new approaches will require legislative approval.

Unconventional approaches to public policy require political champions (US General Accountability Office 1997). Public managers often do not have the political capital to venture beyond the traditional approved approaches. While proponents of New Public Management encourage entrepreneurial public management, adherents to a more traditional public administrative framework are concerned about legal accountability. By involving political leadership in decision making, public managers protect themselves from possible criticism. When developing or using a particular instrument, managers should also be aware of the fine line between political support (and accountability) and political interference (e.g., in the selection process of a contractor). While it may not be possible for the public manager to fully insulate herself, the goal should be an appropriate flow of information and oversight, not micromanagement or interference.

Involving the private and nonprofit sectors in solutions brings an important interested party to the table, and this may prove to be a double-edged sword. On the one hand, the involvement may provide a significant voice in support of the program, as it did in the case of the USCG Deepwater Program. On the other hand, their political support may make it difficult for a public manager to terminate or amend the program, and such pressure may lead to suboptimal decisions.

Stakeholder analysis is a first step for any public manager in thinking through the political interests. Managers must reflect on the likely intensity of prospective stakeholder concerns in considering a network or partnership and the diversity of their perspectives. This recognition should lead to the structures and processes necessary to create a communication network to engage stakeholders throughout the process in order to create the trust necessary for effective collaboration (Kee and Newcomer 2008).

A choice to contract out an activity, engage in a partnership or network, or use an IPSP to address a public problem might have an impact on the rest of the public sector. Public managers need to consider what spillover effects might occur from their choice of options. Will it adversely affect agency morale? Will it create an incentive or disincentive to improve the public sector, consistent with developing high-performing systems? Will it conflict with human resource practices designed to attract, retain, and reward high-performing government workers?

Case Analysis

Of our two case studies, the Fairfax County example is more obviously a multisector problem. Government seldom (even across all three levels of government) meets the full needs of those who require a variety of human services, such as housing, health care, and job training. The nonprofit sector is a major provider to that clientele, and thus involving it in a broad solution made a great deal of sense. However, the county was looking at a long-range, holistic solution that argued for government involvement and leadership. In this case, county agencies actually strengthened their own capability. Social service workers, while first somewhat resistant to sharing information, were proud of the new approach because it allowed them to meet a greater percentage of the needs of the population they served.

In the Deepwater Program, the USCG could have stayed “in-house” or used other federal resources (such as the Department of Defense), but decided that it was in its strategic interest to engage a private partner. The USCG was used to replacing assets on an incremental basis with patchwork funding from Congress. It had neither the political support nor the in-house skills to undertake the massive upgrades needed. Its leaders felt that the private sector, already a provider of complex defense systems, would afford an edge in the innovation that was needed to create a system of systems and would assist in developing political champions in Congress. Thus, the USCG initiated a public-private partnership with Lockheed Martin and Northrop Grumman in an Integrated Coast Guard Systems (ICGS) approach. The corporate partners successfully lobbied Congress for the necessary funds, but there were other problems, including resistance among officers within the USCG, that ultimately led to the termination of the partnership.

Resource Needs: Assessment and Planning

Public leaders and managers have a responsibility to accurately assess the strengths and weaknesses of their organization in relation to the tasks at hand. If there is a mismatch between available resources and the issue or problem that needs to be addressed, they must determine if they can secure the resources within government or need to go outside government through a contract or by partnering with a private or nonprofit organization. In this context, expertise and ideas may be as important as funding.

Governments generally have an advantage over other sectors in raising the funds necessary to address public problems. They have the power to tax and can borrow funds at interest rates lower than either the private or nonprofit sectors can (state and local bonds are generally exempt from federal taxes). However, government may lack the political support to raise the necessary funds because of public disenchantment with government, particularly at the federal level, and because many states are near their borrowing capacity as a result of constitutional limitations, rating agency concerns, or public unease over additional debt.

If a public sector organization is not likely to receive the funding necessary to fully address a public problem, then public managers and leaders need to determine where and in which sector the resources lie. There may be organizations, such as IPSPs, already addressing the problem. If that is the case, the public sector role might be more muted, perhaps as a cheerleader, integrator, or monitor of the efforts of the IPSPs—concepts we explore in chapter 9. Alternatively, it may be appropriate to partner or network with other organizations in the private or nonprofit sectors that can add value to potential solutions. Nonprofit organizations can bring a perspective and local knowledge that the public sector does not have.

Organizational Capacity

Organizations need the capacity to accomplish their missions, whether through traditional governmental structures or by involving another sector, through a contract, public-private partnership, network, or IPSP. Organizational capacity involves three aspects: (1) the ability to provide the public good or service (discussed above), (2) the capacity to examine and develop alternative strategies and to manage those choices, and (3) the capacity to learn and grow from those experiences.

The type of capacity and capacity issues or concerns vary depending on the choice of instruments to fulfill their mission. Table 7.1 provides an overview of capacity needs for each type of instrument and some issues and concerns that have to be addressed by the public manager or leader when considering instrumentalities for a major or complex project or program. We briefly describe capacity needs in this chapter and later, in chapter 11, discuss strategies on how organizations can best develop their organizational capacity to address today’s challenging environment and work effectively in cross-sector collaborations.

Since this book is about cross-sector collaborations, this chapter spends less time on the first two categories—government provision and traditional contracting out—except to provide a contrast to the newer choices of public managers: collaborative contracting, networks, partnerships, and IPSPs. We argue that government leaders and managers must address a number of key capacity issues.

Case Analysis

The USCG in the 1990s recognized that it did not have the in-house knowledge or the capital budget to replace its aging fleet of ships and planes. In assessing resources and capacity, its leaders might have chosen a more incremental strategy—more consistent with past Coast Guard operations—but instead decided to engage private sector partners with the capability and political capital to push large-scale capital projects through Congress. They received the appropriations they needed, but also became dependent on their private sector partners for detailed decisions about the nature of the recapitalization. Complicating matters was the increased role given to the Coast Guard after the September 11, 2001, terrorist attacks, which enhanced the role of the service and gave it additional responsibilities to handle. Thus, they were involved in a major restructuring (both capital and systems) at the same time as their role and priorities were changing, a very difficult change environment (see Kee and Newcomer 2008).

In the Coast Guard Deepwater Program, Coast Guard leaders were heavily involved in the design of the partnership and the project’s expectations. However, while convincing Congress of the programmatic needs and approach, they failed to fully engage their internal stakeholders in the design phase and experienced some resistance among the managers below the top leadership. In addition, the Coast Guard case illustrates that it is not enough to find partners that can bring in the resources and expertise necessary to address a problem or concern. Organizations also must build a capacity to effectively use outside actors. While the system-of-systems concept received strong support among the top echelon of the Coast Guard, the second level of leadership was more skeptical and felt they had not been fully included in the planning and decision making. The Coast Guard did create an office to provide liaison with the public-private partnership but may have lacked the capacity to use and monitor private partners effectively. Only after some highly publicized failures did they recognize the need to beef up their internal acquisition forces. Eventually they took over the leadership role, dissolving the partnership.

In contrast, the Fairfax County case involved developing a network of nonprofit providers that were already active participants in providing services for years to disadvantaged populations in the county, supplementing what government was providing and assisting populations that often fall through the gaps in terms of federal and state programs. Thus, in the effort to develop a more coordinated human services plan, engaging nonprofit service providers in the planning and implementation of a network of service was critical. Had the county ignored those participants rather than worked actively to include them in a collaboration, the county goal of creating a more integrated human services delivery system would not have occurred. On the other side, had nonprofits resisted the county’s efforts, the county would not have been able to achieve its objectives.

Recognizing that the county could not address all of the needs of its population, it partnered with local nonprofit social services organizations in designing and implementing a new client information system. The state’s Department of Systems Management and Human Services (DSMHS) engaged in extensive communications and information sharing with other nonprofits to assist it in creating a multiservice, multisector access point for citizens with social services needs. By creating a network and using its own strengths in data collection, intake, and analysis, the county developed its own capabilities as well as benefited the nonprofits active in the county. The network strengthened the capacities of all actors.

Identification and Types of Risks

The first step in this analysis is to identify, to the extent possible, the types of risks inherent in the proposed program or project. Risks might fall into a number of categories, including these:

• Political risks include potential changes in legislation, appropriations, or policy that might affect the project or program; the potential backlash from stakeholders or citizens affected by the project or program; and the possibility that the involvement of the private or nonprofit sectors will create a blurring of roles that will confuse (or even anger) those constituents.
• Financial risks include the ability to fully finance the project at the expected rate of interest.
• Economic risks include the ability to accurately project use, inflation, and other such indicators that are affected by the general economy.
• Complexity risks include the magnitude and scope of the challenge (overall size and necessity for widespread change) and the fluidity of the socioeconomic environment.
• Construction and operation risks include site acquisition and planning, construction of the project or facility, operations according to plan, and results according to expectations.
• Spillover risks are impacts on third parties (or other areas of government) that were not initially part of the expectations of the partners. For example, project construction might result in adverse environmental impacts that one of the partners would have to address.
• Modification and termination risks include potential problems that might occur if modifications to the program need to be made and potential cost (financial and political) if the program or project needs to be terminated.
• Uncontrollable risks (often referred to as force majeure) are those which no participants can influence, such as war or a natural disaster.
• Risks of failure refer to the possibility that the network, partnership, or IPSP fails in its efforts and considers the consequences of such failure to the public sector. For example, if the public sector loses its capability to deliver a good or service and other sectors fail to accomplish it as well, there may be substantial costs for government to restart the provision.

In general, the larger the magnitude and scope of the project, the greater the uncertainty in the socioeconomic and political environment, and the more diverse the interests of the stakeholders, the greater the risk (Kee and Newcomer 2008). There are, of course, methods to ameliorate risks, but after identification of risks, the first consideration should be to determine which sector or which prospective partner can best manage that risk.

Allocation of Risk

Public managers should consider whether and to what extent risks can be shared with, or allocated to, other partners in a network, partnership, or IPSP. It may be that some risks cannot be shared with other sectors and need to be borne by government regardless of any partnership arrangement.

In general, risk should be allocated to the party that is best able to bear the risk. For example, in a PPP for a transportation project, financial risk might be borne by the private sector, while political risk (change of policy) should be borne by the public sector. Table 7.2 provides an illustrative set of risk factors in a PPP involving infrastructure and a possible allocation of those risks.

As illustrated in the table, most political risks, such as changes in law or policy, should be borne by the public sector. However, engagements with citizens and other stakeholders might be something that would be shared by both the public and private sector partners depending on the strategy of the partners to deal with specific stakeholder communications and citizen involvement. Most risks in the financing, construction, and operations phases are appropriately borne by the private sector because they are in the best position to manage those risks. However, a change in financing interest costs, which may be outside either government’s or the private sector’s control, might be something that is negotiated, with both interest savings (if there is a decline in interest rates) and interest cost overruns shared by the partners.

Another key area is economic risks such as projected use of the infrastructure. Normally the financing of an infrastructure project would be secured by the expectations of payments (either directly through tolling, or indirectly through government payments for accessibility or shadow tolls).³ If payments are based on use, someone (either the private sector or public sector) must project actual use. If those projections are wrong, who should bear the risk? This is certainly a negotiable area and may depend on the reasons for the failed projections. Are they a result of actions by government, or is the failure because the private sector has not accurately assessed demand at a given toll charge? If the former, government likely should bear that risk, but if the latter, arguably the private sector should bear that responsibility. Generally government bears uncontrollable risks such as force majeure (e.g., war, flooding, or other environmental disaster) as the public sector (with its larger financial capacity) is thought to better bear that risk.

While government would like to pass off as much risk as possible to the private sector, in the long run that may not reduce its costs. If, for example, the risk of interest rate fluctuations is borne by the private sector, that sector would have to engage in hedging or other risk-mitigation strategies and would have to build those costs into bids for the project.

An early infrastructure public-private partnership in the United Kingdom was the Dunford Bridge construction and tunnel reconstruction, the first use of private finance in the nation since 1945. In allocating risk, the private partnership agreed to assume the financing, construction, and operating risk. This was a private sector design-build-finance-operate project. The project was delivered on time and within the expected budget. It provided a reasonable return to the private partners with the expectation that all of the debt would be retired within the twenty-year time frame after the bridge opening (Parker 2009).

Case Analysis

The Coast Guard faced a number of significant challenges in developing its public-private partnership. Perhaps most important was the complexity of the overall proposal. The Coast Guard was trying to simultaneously alter its culture to create a system of systems and to recapitalize its entire deepwater assets (ships, aircraft, and systems). Thus, the scope and magnitude of the project was quite large. There was a great deal of uncertainty over whether interoperability standards could be met, and they were in a changing sociopolitical environment where the Coast Guard was taking on new antiterrorism responsibilities because of the September 11 terrorist attacks. This necessitated some modifications of the original designs, increasing the overall costs to the project. The USCG enjoys strong support on Capitol Hill, and its private sector partners provided additional clout when seeking major increases in appropriations—all very positive; however, changing vessel requirements over time and internal stakeholder reactions led to additional modifications.

Although the partnership had some successes—the HC-144A Ocean Sentry Medium Range Surveillance Maritime Patrol Aircraft—there was a major failure. The conversion, reconfiguration, and lengthening of the 110-foot Island Class patrol boats to become 123-foot boats failed to meet basic seaworthy and safety requirements, resulting in the scrapping of all eight modified ships, at a great deal of financial cost (approximately $100 million) and great embarrassment for the Coast Guard. In retrospect, one program manager suggested that the scope might have been too large given the Coast Guard’s lack of an experienced acquisition staff for major projects.

In Fairfax County, the risks were largely political. The original goal was to create a central intake center for all human services. However, difficulties in matching various legal requirements (such as confidentiality), state agency concerns, and even discord among key internal players led to a modification of the strategy. While the original vision of full integration of client intake was not achieved, DSMHS implemented a coordinated service planning system to receive inquiries from prospective human services clients, prioritize the urgency of those requests, and direct clients to a network of governmental and nongovernmental agencies that could deliver the services needed.

Government Cost Data

Generally, comparing alternatives starts with the current cost of government’s providing the public good or service or with an estimate of that cost based on previous costs of delivering a similar program. The United Kingdom’s PPP program, the Private Finance Initiative, introduced the concept of the public sector comparator to use as a baseline for analysis of PPP options. This approach has been widely followed by other nations and the World Bank in examining options to government delivery of goods and services, especially infrastructure projects.

A government uses a public sector comparator (PSC) to make decisions by testing whether a private investment proposal offers value for the money in comparison with the most efficient form of public procurement (Kerali 2012). The PSC estimates the hypothetical risk-adjusted cost if a project were to be financed, owned, and implemented by government. Thus, it provides a benchmark for estimating value for money from alternatives.

When evaluating options, cost must be examined wherever and to whomever they might fall. Thus, if a certain action saves government funds but raises the cost of those outside government, such as an affected clientele, those costs must also be considered. Developing or interfacing with one of these options also is not without costs to government. The transaction costs include developing contracts or networks and managing those new relationships. Transaction costs may be substantial, and therefore it seldom makes sense to examine alternative options to public delivery unless the gain in public value is significant.

Part of the cost analysis is to determine if going with a private or nonprofit provider will lead to competition in the provision of that good or service. Competition should drive down costs, spur innovation, and lead to better value for the taxpayers. When the United Kingdom began its Private Finance Initiative (now labeled PPP), its analysts found that it was necessary to help develop a competitive market in order to achieve the savings anticipated from the partnerships (Kee and Forrer 2008). Economies of scale also are an aspect of the analysis. Where the private (or nonprofit) sector already has substantial capacity for a particular function, economies of scale may argue for the public sector to outsource that function.

Analytical Approaches

Public managers have available a number of analytical approaches to examine various alternative instruments. The three most common approaches to analysis of options for governmental programs are cost-benefit analysis (CBA), cost-effectiveness analysis (CEA), and value-for-money (VfM) analysis. The choice of which approach to use (and sometimes more than one) depends on the exact nature of the options being examined and the public goal.

The three approaches have many uses but are frequently used to analyze capital or other large-scale investments and major programs and are useful when considering partnerships or networks. They help to answer a number of questions, for example:

• Does the gain to society justify the cost to society? The economic justification argues that only those projects or activities where benefits exceed costs should be undertaken.
• Will this project pay for itself? The budgetary or fiscal question addresses whether the costs exceed the available budget or expected revenue from the project or program.

None of the three approaches gives “the answer,” but may permit reasonable comparisons of alternative means of accomplishing objectives.

Value for Money Analysis

Value for money analysis examines the economy, efficiency, and effectiveness with which government has used its resources in discharging its functions (Her Majesty’s Treasury 2006). It can be used as part of a prospective analysis to determine, for example, whether a public-private partnership is a preferred alternative to government delivery of a public good or service. VfM focuses on three critical components of value:

• Economy: minimizing the cost of resources used while having regard for the appropriate quality.
• Efficiency: the relationship between outputs in terms of goods, services, and results and the inputs (resources) used to produce them.
• Effectiveness: the extent to which objectives have been achieved and to which the outcomes achieved are those expected.

VfM is arguably different because of its multidimensional approach. It values qualitative as well as quantitative aspects of value. It approaches the issue from a variety of philosophical perspectives. Some believe it is more outcome oriented, as both CBA and CEA tend to focus on outputs that can be measured in units or dollars. Its weakness, however, is that it provides no bottom line to judge whether a project or program creates net value to society. Table 7.3 provides a comparison of the three analytical approaches.

Other Value or Public Interest Considerations

Despite the usefulness of the three analytical approaches, there is still the question as to whether it is possible to measure all of the values that are important for the public interest. There may be some issues other than a bottom line of efficiency or effectiveness. Government must always be concerned about equity issues. The “hot lanes” proposed for some interstate highways involve pay-per-access highway lanes on major roadways where some travelers are willing to pay more in tolls to escape traffic. Their fee-based structures have been labeled “Lexus lanes” because pricing is based on congestion and could lead to very high costs to maintain an expected sixty miles per hour performance, which only the very wealthy could afford. At the same time, these lanes often provide discounts for carpooling, achieving another public policy objective. In social services networks or partnerships, government will have to ensure that all of its partners maintain the same notion of fairness in treating those with needs.

Government is expected to provide services equitably and with due process, providing avenues for appeal if a person feels he or she is not receiving what is due based on legislation and existing policy. Private or nonprofit sector partners may not pay the same attention to process details.

Even if it may be more cost-effective for government to deliver a good or service, if government lacks the resources, it may have to appeal to potential partners to fill the resource gaps. Using an existing nonprofit or IPSP that is already active in a policy area may provide government with the additional resources needed to address a particular problem.

Case Analysis

Neither Fairfax County nor the Coast Guard conducted a cost-value analysis before deciding on the approach to deal with the issues they faced. In the case of Fairfax County, the influx of new immigrants and fiscal constraints necessitated changes in the ways of operating. The strategy was designed both to leverage limited county dollars more efficiently and better coordinate the response of all agencies (public and nonprofit) to better serve the human resource needs of their growing population.

The Coast Guard did use a traditional best-value analysis in developing the contract for partnering with the private sector on the recapitalization of their deepwater assets. Unfortunately, there were limited bids, and the complicated nature of the task made comparative analysis problematic. The USCG eventually urged two private rivals, Lockheed Martin and Northrop Grumman, to form a private partnership, which would then partner with the Coast Guard.

Uses and Types of Performance Measures

Performance data have both internal and external use. Internally they can inform stakeholders (in the partnership, network, or IPSP) about levels of performance and areas needing improvement, provide trend data, motivate participants, and perhaps assist in making resource allocation decisions. Externally measures can be shared with funders and citizens, showcase successes, and provide illustrations of best practices. Appropriate performance measures depend on the solution and instrumental option chosen. However, certain approaches or rationales for performance measurements may be more salient than others.

Waste, fraud, and abuse are a trifecta of concerns that are common to all programs funded with government money. Public managers have vertical accountability for the funds entrusted to them, whether those funds are spent in a traditional government program, provided in return for a contract or partnership agreement, funneled into a network of service providers, or used to support an IPSP. Thus, some performance measures will need to ensure that funds are spent under appropriate controls and checks to avoid fraudulent spending or other spending not meeting public purposes.

Developing KPIs is a useful exercise to identify the critical indicators of success and hold the collaborators accountable. For example, in a road PPP, a key indicator might be the “percentage of time the road is fully available for traffic.” By looking only at the key indicators that matter, partners can focus their efforts and government can use those results to reward success or punish failures (e.g., through withholding of payments or levying fines).

Another approach is the balanced scorecard, a strategic performance management tool managers use to keep track of the execution of activities and monitor the consequences arising from these actions. It focuses on both financial and nonfinancial measures such as customer service, internal processes, and organizational learning. The balanced scorecard framework has been widely adopted in English-speaking Western countries and Scandinavia since the early 1990s. Since 2000, the use of the scorecard, its derivatives (e.g., the performance prism; Neely, Adams, and Kennerley 2002), and other similar tools (such as results-based management) has also become common in the Middle East, Asia, and Spanish-speaking countries. Public, private, and nonprofit organizations worldwide extensively use the scorecard to align their activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals to give managers and executives a more balanced view of organizational performance (Balanced Scorecard Institute 2012).

Evaluating performance may use numerous measurements. Several are suggested and described in table 7.4.

Ensuring Accountability

Developing good performance measures is only the first step in ensuring appropriate accountability. Those measures need to be part of an overall strategy of accountability that we discuss in more detail in chapter 10. However, there are a few general comments that we think are important. Measures need to be developed in advance of any negotiated partnership or network and in conjunction with all key partners. This collaborative up-front agreement on accountability is essential but often neglected in the rush to develop the collaboration. Broad consensus on the measures will assist in using them to correct problems before they become critical. Measures may need to be adjusted in the course of a program’s implementation, but knowing where you are going and having broad agreement on key measures is a good first step.

A decision also has to be made as to who will collect the data and how often. Measures need to be routinely collected and shared in a transparent fashion with all partners. “Bad numbers” should be used to hold partners accountable, not in a vindictive manner but as a process of encouraging continuous improvement in the program or project. Measurement results can be shared with key stakeholder groups, funders, and citizens generally.

Case Analysis

The key to a successful partnership or network is the development of KPIs before the consummation of the partnership or network. In the Fairfax County case, the DSMHS involved nonprofit social services organizations as well as their own staff in the design and implementation of a performance measurement system. They hired a process coordinator to retrieve and manage the data, which was made available to all key partners on a routine basis. As a result, everyone agreed to the metrics and used the information in their own efforts.

In the Coast Guard case, the PPP was awarded to ICGS without the prior development of performance metrics. This became a priority during the implementation phase and resulted in a balanced scorecard approach, which was widely praised. However, the key measures were not written into the contract with the private partner, and the effective use of the measures was still largely unresolved when the partnership was dissolved.

Collaborative Contracts

Collaborative contracts are becoming more common as issues become more complex and government may not know how to specify exactly what it wants or the best way to deliver a public good or service, at least in terms of the typical specifications in traditional contracts:

• Strengths. Public managers should consider collaborative contracts when governments can take advantage of the strengths of the private and nonprofit sectors by approaching contracting from a collaborative rather than a directive approach. The private and nonprofit sectors may have access to expertise or clients that the public sector lacks. They may be in a better position to determine how best to use that expertise, local knowledge, or relationships with the population targeted by government. Even a collaborative contract, however, has to have clear and measurable objectives or results by which to measure the success of the contract.
• Weaknesses. Collaborative contracts involve a leap of faith because important details and specifications that might be included in a traditional contract are not in a collaborative contract. Rather, public managers must rely on developing trust with the contractors. Public managers should not opt for this alternative when trust does not exist or the development of trust is problematic. In the final analysis, the only requirements that are enforceable are those in the contract. The ability of public managers to design these contracts with specific output or results measures is critical.

Partnerships and PPPs

Partnerships are collaborations where both parties have equal (or nearly equal) stakes in the outcome. Each partner has something significant to lose if the partnership fails. Thus, there should be strong incentives for sharing of information and close working relationships to jointly address the public problem or issue at hand:

• Strengths. A partnership option is attractive under numerous circumstances: government does not possess the resources and solutions to address the problem; the private sector has a potential market or business solution, or the nonprofit has special local knowledge; it is possible and desirable to share risks; the costs of the partnership do not outweigh the value to the public; government has or can develop the capacity to manage the partnership; and government can establish KPIs to assess partnership success and hold partners accountable for results.
• Weaknesses. A partnership option should not be considered when the politics are difficult (no authorizing legislation, no champion, potential for interference); the potential private or nonprofit sector does not bring much to the table in the way of expertise or resources; there are strong accountability issues (difficulty of measurement, inability to hold partners accountable); sharing risks is difficult or inappropriate; and the costs of creating and managing the partnership may exceed the additional public value created.

The DC Capital area I-495 Beltway Hot Lanes represents an effective use of a PPP in many respects. Private financing of $1.2 billion was committed (matching state and federal government financing) and was seen as essential for adding new lanes. The private sector partner (a Transurban-led consortium) took on the risk that the fees and tolls they collected from managing the road would be sufficient to provide an attractive return-on-investment. Transurban has experience managing other highway projects and brought that expertise to this project. The expansion of that portion of the beltway meant the repair and replacement of numerous overpasses along that stretch, a significant and pressing capital improvement cost that the State of Virginia shifted in part to other partners.

The political acceptability of this PPP remains to be seen. The congestion fares took many drivers by surprise despite public relations efforts to inform the public. Paying a fee for what some may consider a decent commute time may seem a burden to many drivers—one they are likely to feel they have already paid for through their taxes. However, even for those who do not use the Hot Lanes, the expansion should reduce overall commuting time, taking some travelers off the existing lanes and on to the Hot Lanes. This PPP structure is similar to many under consideration nationally and internationally; tolls are critical to cover the interest and principal on the borrowed funds, whether publicly or privately financed, that paid for the expanded highway.

Networks

Networks are common in state and local governments in delivering a variety of social services. They also are increasingly being used in such areas as emergency management and homeland security:

• Strengths. A network option is viable under numerous circumstances when multiple actors and sectors have resources that they can employ to address the issue; government does not need to control every detail; innovation is highly regarded or expertise to solve the problem is widely dispersed; the costs of creating and managing the network do not exceed the public value created; network partners agree to manage the risks in their area of expertise; and network partners agree to a mechanism to measure performance and ensure accountability.
• Weaknesses. A network option is likely not viable when vertical accountability is an issue; the transaction costs of creating the network exceed the public value of the network; government cannot share the risk or the risks inherent in the network are substantial; measurement of results is problematic; or blurring the distinctions between governmental and nongovernmental actors will create problems for the public.

Hurricane Katrina is a clear illustration of both the promise and pitfalls of networks. The network was used in the effort to coordinate government (multiple levels), business, and nonprofits in the post-Katrina recovery. No one government agency was in a position to control the entire response to Katrina, and the resources that needed to be directed to the region and its victims were dispersed locally, regionally, nationally, and even internationally. As different organizations sought to mobilize resources and respond, there was a shared recognition that managers needed to manage the operations and risks within their immediate control in their own organization while seeking to integrate their efforts into a broader scope of activity and priorities. The challenge was to do so with limited communications and awareness of others’ actions and decisions. Although the specific response activities encompassed high levels of complexity, there was a fundamental understanding among those operating within the network of the mission to provide safety, food and water, power, and shelter to the affected population. The shared understanding of what actions were required fits well with the network model.

Despite the best (and sometime heroic) efforts of many, analysis of the effectiveness of the post-Katrina response found substantial evidence of extensive miscommunication and delays in deployment of materials and goods (Koliba, Meek, and Zia 2011). Lack of awareness of the actions across sectors resulted in some turf wars that hindered efficient operations. Business offers to help were underused. All of these experiences reflect a potential downside to the network approach. Better upfront planning and scenario exercises, with an understanding of the roles and responsibilities of the various potential actors in an emergency and greater communication capability, would improve a network governance approach when responding to natural disasters. The use of such planning by District of Columbia metropolitan emergency organizations resulted in an improved response to the attack on the Pentagon on September 11, 2001, a positive example of intergovernmental and cross-sector collaboration.

Independent Public-Services Providers

Independent public-services providers are a bit different as an option because they may exist entirely outside government. A public manager’s role may be one of deciding whether and to what extent the public sector should interface with the IPSP, as a funder, cheerleader, provider of information, or even a regulator to protect the public interest:

• Strengths. The greatest strength of an IPSP is its ability to act outside a government framework so it can be innovative and flexible, where government often is more rigid and process driven. Public managers should attempt to make use of IPSPs whenever their mission and goals align with the public sector or the outcomes sought are the same as (or similar to) those sought by the public sector.
• Weaknesses. The strength of an IPSP also is its greatest potential weakness from a public manager’s viewpoint. Because of their independence, IPSPs are difficult to hold accountable in the same sense as other options. Public managers must first determine how the IPSP itself is measuring its results and determine if there is some legitimate accountability structure (such as a board of directors). Public managers also may have to find a mechanism for citizen input.

The self-direction and financial independence of the Global Network for Neglected Tropical Diseases (GNNTD), discussed in chapter 6, is a reflection of the benefits offered by IPSPs. The GNNTD established its own mission and goals consistent with its members’ view that the diseases they wanted to investigate had not received enough attention from global health care funders. Federal programs directed at global diseases and pandemics had settled on the priorities of HIV/AIDs, malaria, and tuberculosis. The GNNTD has received funding support from the Gates Foundation and is implementing in-country programs that will lead to curing these diseases. The program efforts are consistent with the global health community’s recognition of the importance of neglected tropical diseases (NTDs), but GNNTD supports programs well beyond those that the US government supports. For those who advocate greater attention to NTDs, an IPSP approach fits very well.

However, GNNTD’s relative independence also means its efforts may be seen as separate from a larger global policy context. Would the funding generated by GNNTD have been better spent on priorities already recognized by the United States and the global health community? The GNNTD also strives to be the strongest advocate for NTD support, but other organizations (such as the UK Coalition against NTDs) remain active, and it is not clear how to resolve mission overlap among the different groups.

In considering the choices for public managers, a number of important questions arise that we will address more fully in part 2 of this book, “Managing Cross-Sector Collaboration”:

• Is the current model of bureaucratic public administration adequate in this new age of partnerships, networks, and IPSPs?
• How can public managers lead in this new heterarchical environment?
• Can we maintain appropriate accountability in the public interest?
• What is the best approach to developing capacity in public agencies to prepare public managers to engage these new options?

For public leaders and managers, collaborative arrangements such as collaborative contracts, partnerships, networks, and IPSPs offer alternatives to public production that may provide value to the public. However, good analysis should precede any decision about whether such alternatives should be pursued.