Crossing the divide: suggesting a new model for developing better public-private partnerships by addressing the differences in development appoaches between public and private sectors

It is proposed that there be a mechanism to allow government to operate more closely toward a business model by simulating a business's operations. This "simulated bridge" would be the creation of an entirely new entity inserted between the public and private enterprise. It would act as a mediator, or facilitator, between the two. Such an entity could be called a "facilitation entity" (or FE), operating as a non-profit.

CROSSING THE DIVIDE: SUGGESTING A NEW MODEL FOR DEVELOPING BETTER PUBLIC-PRIVATE PARTNERSHIPS BY ADDRESSING THE DIFFERENCES IN DEVELOPMENT APPROACHES BETWEEN PUBLIC AND PRIVATE SECTORS PROBLEM HOW FE PROVIDES SOLUTION STRUCTURAL THE POWER OF PUBLIC-PRIVATE PARTNERSHIPS "We need public-private partnerships… Nothing less than the future of America's economy is at stake." - Arthur C. Nelson Foundations of Real Estate Development Financing: A Guide to Public-Private Partnerships In city planning, making the plan and implementing the plan are two separate and sometimes incongruent challenges. Often the planner is idealistic and stifled by practical limitations that are not seen by private development. Yet, if left to its own devices, the private sector cannot fully respond to the needs of the urban area and the goals of city governments. Both entities are necessary to develop projects that improve the quality of life for those who live in and around cities. There are broad differences in the structure and workflows of public and private entities that do not create equivalences in a relationship between the two types. Create a planning vision The purpose of FE is to act as a proxy to the government while functioning with a businesslike structure. This serves to resolve all listed asymmetric structural differences. Asymmetrical accountability Business thrives with self-interest Upgrade and expand infrastructure Acquiring property/ clearing title Environmental Remediation The primary responsibility of business is to make and increase revenue. In many cases, business is independent of public perception and can be more aggressive to pursue its own ends. VS Government thrives with public interest Asymmetrical success metrics P3s are becoming increasingly common in land use development as the benefits are becoming more apparent. Among these benefits include: Business success is measured simply by the impact on the boom line. If money is made and cash flow remains posive, that is considered a success. With the FE's posion in the middle of the partnership, it can provide proper outlook to each party and ensure equal accountability to each other as well as their own dependencies. VS • Providing lower costing and better quality projects than one party can provide • Risks are mitigated by splitting liability between two parties Success in a government venture is largely based on constuent sasfacon, which is an unforgivably subjecve measurement. • Taking advantage of multiple areas of expertise Asymmetrical breadth of focus • Projects often move more quickly under these arrangements. Businesses generally have a much more linear and streamlined focus since their primary goal is to gain revenue Project Proposal Design/Build PUBLIC SECTOR PRIVATE SECTOR PUBLIC SECTOR Design/Build/Operate PUBLIC SECTOR PRIVATE SECTOR PUBLIC SECTOR Project Design In attempting to develop P3s, many weaknesses are encountered; aside from the obvious, inherit difference between a bottom-line focus of a private entity, and a constituent focus of a public one, a few common shortcomings include: VS Create a planning vision Upgrade and Acquiring expand property/ clearing infrastructure title PUBLIC SECTOR Environmental Remediation Market Analysis Bidding/ Contract Negotiation Project Proposal Project Design FE PUBLIC/PRIVATE PUBLIC SECTOR Project Construction Design/Build PUBLIC SECTOR FE/PRIVATE FE Design/Build/Operate PUBLIC SECTOR FE/PRIVATE FE PRIVATE SECTOR TIMELINE OF WORKFLOW Similarly to accountability, as the FE is in the middle of the partnership, it can provide proper outlook to each party and ensure they share the same vision for the project. PUBLIC SECTOR Project Financing Operation/ Management/ Maintenance/ Ownership PUBLIC/PRIVATE FE/PUBLIC PUBLIC SECTOR PUBLIC/PRIVATE FE/PUBLIC PUBLIC SECTOR FE/PRIVATE PUBLIC SECTOR Under the new system, the FE would fulfill the roles in the middle tier of project development. While site preparation and ownership would remain with the municipality, and actual execution would still be at the hands of private development firms, the FE would manage the space where these two parties overlap and interact. It will handle the project outline and design and draft and sell a contract to meet it. As can be seen in the diagram above, the FE removes much of the responsibility from the two parties when compared to the traditional model. It simplifies the roles of the parties involved which will, ostensibly, create more robust partnerships. FE is a professional consultant, to provide experse where a party may be lacking it. VS • Asymmetrical decision-making processes and bureaucratic bottlenecks • Unbalanced risk-sharing and asymmetrical partnerships Asymmetrical partnerships • Limited resources to enforce contracts A P3 is not a symmetrical fiduciary relaonship, unlike a normal business partnership. Municipalies, with more burdens and oen fewer resources, can and oen do, end up as the inferior party. • Unrealistic assumptions • Planning barriers e.g. inflexible zoning codes It would act as consultant to the municipality to create and draft a contract that it would then sell to investors. Once a final contract is in place and a partnership is incorporated, an FE would oversee the efficacy of the partnership and play an advising role to all parties. It would ensure that the terms of the agreement are being met, that the partnership remains viable, and that the project is successful in terms of constituent and stakeholder benefit. PUBLIC SECTOR PRIVATE SECTOR PRIVATE SECTOR Bid/Build Leadership and management posions in business are almost always based on professional and qualificaons and experience. Ulmate accountability and leadership to direct, oversee, and manage the skills of the professional officials rest in the hands of the elected, which may cause a disconnect since they may not possess the professional skills to do so. The main objective for using an FE structure would be to give the government a tool to use that levels the playing field between them and the private market - especially for smaller municipalities that lack the resources. PUBLIC/PRIVATE PRIVATE SECTOR Asymmetrical leadership styles Different institutional structures Having an additional entity within the project workflow is not a new idea. Organizations like redevelopment authorities (RDAs) and community development associations (CDAs) also exist in the same general position in the pipeline. However, in contrast to these type of organizations, an FE would be focused on contract management rather than project management. PRIVATE SECTOR Ownership THE DIVISION OF ROLES • It is proposed that there be a mechanism to allow government to operate more closely toward a business model by simulating a business's operations. This "simulated bridge" would be the creation of an entirely new entity inserted between the public and private enterprise. It would act as a mediator, or facilitator, between the two. Such an entity could be called a "facilitation entity" (or FE), operating as a non-profit. Project Financing PRIVATE SECTOR Government may oen be working toward several ends simultaneously, some of them conflicng, because a government has many different services to fill for many kinds of people. INTRODUCING THE FACILITATION ENTITY Operation/ Management/ Maintenance/ Project Construction DIVISION OF ROLES (PROPOSED) Government is answerable to its enre populaon; government is politics and must be cauous. An FE can ensure that contract agreements equally speak to both pares' metrics. In draing a provisional contract, an FE will have in-house experse in both the planning and real estate fields to spulate terms of a successful project. Market Analysis Bidding/ Contract Negotiation PUBLIC SECTOR Bid/Build A great city needs both the innovativeness, social awareness, and vision of planners combined with the practicality and focus of real estate professionals to develop those plans. To this end, public-private-partnerships, or P3s, are commonly used to acquire these benefits. A P3 is an agreement between a government entity and a private corporation to cooperate and provide a service or project that neither would be able to do on its own without difficulty. • Ensuring that the project is within the bounds of market-driven competition and likewise supported by market viability DIVISION OF ROLES (TRADITIONAL) Performs a rudimentary market analysis to determine feasible project proposals In the timeline viewed to the left, the roles played by each entity are further elaborated in the context of project pipeline. Despite the defined roles, it is seen that the FE has some involvement, either directly or indirectly, in almost every stage of the project. With the municipality as its primary client, the FE can serve to equalize the partnership. Designs appropriate contract framework for the agreed project type (e.g. design-build) Approves design concept and, if necessary, grants entitlements COMMUNICATION Where the FE is not or cannot be actively involved, it acts as mediator over the partnership as a whole, providing oversight insomuch that the parties are upholding the terms of the contract fully, properly, and fairly. This includes ensuring full communication, accountability, and focus to the agreement. Formulates project concept and, if applicable, project design Private and public entities often speak different languages and have different communicative responsi bilities. Efforts must be made to bridge the two if the partnership is to be productive and cohesive. Flawed calculaons and/or unrealisc assumpons Oen these esmates are provided by third-party consulng firms that have a vested interest in padding the numbers to sell their business. Limitaons to transparency Complex contracts require a certain amount of ecumenical understanding to fully comprehend, to the detriment of the public interest. Differing financial metrics and goals Perhaps this is the most obvious difference, but since private and public have vastly different financial ends, they therefore rely on different tools to gauge project viability. Collaboraon to hit all financial targets is necessary. Develops provisional contract The FE can mediate disputes in market analytics or it can perform it on its own while drawing up provisional contracts. As an independent third-party, it has no vested interest in statistical bias, as its only interest is maintaining a successful partnership. Solicits provisional contract Having another entity lessens the likelihood that transactions would be obscured, accidentally or otherwise. Bids on provisional contract Bid is selected As a mediator, the FE's primary responsibility and goal would be to help develop a contract that speaks to language and expectations of both the public sector and the private sector. Approves final contract PROBLEMS and SOLUTIONS MARKET These are obstructions to the market that must be understood by the government in order to maintain the P3 relationship effectively. Barriers to entry Oen government requires substanal up-front capital investment to present a bid; this leaves only well-connected incumbents or large corporaons capable of this cost. This reduces compeon for accepng bids. The FE is primarily responsible for drafting and selling provisional contracts, leaving government out of the bidding process until final negotiations. This will increase competitiveness and ensure fairness. Industry tendencies The relationship weaknesses can be divided into four main categories: STRUCTURAL ASYMMETRY, COMMUNICATION BARRIERS, MARKET OBSTACLES, and BUREAUCRATIC OBSTACLES. The real estate industry does not focus on the same type of projects that city planners find opmal. There may be lender resistance and investor hesitaon despite extant market demand. Overvalued land price expectations. Communicaon on expectaons should exist in the zoning phase to reflect on speculave plans and market feasibility. All pares should have the same expectaons and valuaons. The industry is focused on the short-term. Investors rely on discounted cash flow, which is hinged on sell-off. Thus, investors prefer to invest in "getin, get-out" projects. Projects may be in emergent areas that do not have enough comparable properties. If a government is seeking community development projects, these areas may not have yet achieved the crical mass needed for viability. This drives developers away because investors hesitate to lend on "if you build it, they will come" principle. As the primary responsibility of the FE is to develop contracts that appeal to the private sector in order to sell them, the FE will translate the municipalities' needs into something marketable. In providing exploratory market analysis, the FE can provide realistic, unbiased assumptions. Consulting with the municipality, it can advise the municipality to respond to and anticipate market changes and adopt redevelopment plans to correspond to it. Projects are more complex. Many P3s undertake complex sites and problems, but it is oen in the interest of the developer to look to "easier" sites, as these sites involve less overhead preparaon and market research costs. This also leaves many properes overlooked since: Land and hard costs are more expensive. Regulaons and approvals are more difficult to receive. These projects are customized and not commodized. These are obstructions specific to a bureaucratic organization such as a government that must be understood by the private entity in order to maintain the P3 relationship effectively. Asymmetrical decision-making processes and bureaucrac bolenecks VS STRUCTURAL ASYMMETRY arises from an unbalanced partnership. Public and private entities have inherently different institutional structures that prevent alignment between the two parties. COMMUNICATION BARRIERS speak to the disconnect between public and private partners when it comes to meeting expectations and achieving goals. Public and private sectors speak different languages pertaining to their disparate goals and roles. This inarguably affects the success of any given partnership, since proper communication is a fundamental component of any relationship. Remediation, if necessary Improves infrastructure Clears title and encumbrances Grants additional entitlements, if needed Designs project, if stipulated Oversees contract compliance and communication Procures financing MARKET OBSTACLES primarily impact the private developer when entering a partnership and may prevent them from optimally achieving the goals desired by the municipality. There are various industry barriers that may prevent a robust partnership from being formed naturally if these issues are ignored. BUREAUCRATIC Business can usually work together internally to make decisions as the business operates as a cohesive unit. A comprehensive list of essential disconnects between the public and private sector, gleaned from several academic, journalistic, and anecdotal sources. The diagram explains how the FE model will help to resolve the issues so commonly seen in the relationship between the public sector and private sector. As the FE oversees the partnership, it will serve to enforce project timelines drawn up in the contract and can collect penalties for delays by any party. This will incentivize an efficient project pipeline. Constructs project BUREAUCRATIC OBSTACLES are obstructions within the policy-making and decision-making mechanisms within the government that may prevent a planning goal from being conducive to the market. Flexibility is important. In addition, some municipal governments may be LEGALLY limited in their ability to form P3s. Including an FE as a consultant contractor may allow a municipality to get around this if an FE is given fiduciary agency to negotiate and hold the contract with the developer on the government's behalf. Assumes ownership of project, if not held Manages project, if applicable Oversees project management and performance Government efficiency is oen hampered by departmentalized bureaucracy. Even when iniaves are progressing, government decisions oen need to go through an extensive approval process, somemes from other governments, that can make this progress appear very slow. Lack of government resources (to enforce contract performance) Governments do not always have the resources necessary and, when this is the case, are neither capable of negoang good contracts nor enforcing its provisions. Ligaon is an extremely expensive maneuver. The FE can fulfill the role of ‘accountability agency' since, through its mediation role, it will essentially oversee the partnership and how well it is functioning. This includes project performance through the life of the contract. Planning barriers and inflexible planning codes Planning laws oen include provisions that prevent the highest and best use of the land, which obviously limits appropriate real estate development and cooperaon. Oversupply of a single use. Too much supply drives down land values and keeps the land use from reaching its opmum. Density maximums/minimums that do not reflect market viability. An example: Placing a light rail staon with the intent to develop TOD, but the market does not follow suit with development because the land is sll at its old pre-transit density maximums or, on the flipside, density minimums are too high for the market at the me and the land remains vacant for years. As part of streamlining the project pipeline, this requires the municipality to ensure that bureaucratic obstructions related to project approval be addressed, including planning and zoning changes. Ideally, the municipality will modify the codes (or prepare a mechanism to do so) in the first stage of project development, in the discovery phase, before the provisional contract even gets marketed. Parking minimums too high. Perhaps the most misused policy in planning. It is a waste of land use, a waste of money, and does not promote the walkability necessary to create viability. Kyle Beswick Faculty Advisor: Brenda Scheer Fall 2018