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Public Management Program

 

Public Management Initiative (PMI)

Public-Private Partnerships (1998-9)

In San Francisco, an interesting experiment in government is taking place. The Presidio of San Francisco, 1,480 acres of spectacular wilderness and historic buildings is being managed by a new institution. When the Army left in 1995, the National Park Service realized that they did not have the resources to manage the Presidio, so they introduced legislation to create the Presidio Trust, a public-private partnership to oversee the transformation of the park into the crown jewel of America's urban national parks.

What do the Presidio Trust, the United Parcel Service's new workforce training program, and charter schools have in common? They are all examples of public-private partnerships, where private sector tools are being joined with public sector authority to solve intractable social problems. Uniting the force of law and the logic of the market, the Presidio Trust, the Welfare to Work Initiative and charter schools are charting a new path of collaboration between the public and private sectors. Where there had once been confrontation-particularly in environmental quality and welfare policy—is now partnership.

Exploring the Nature of Public-Private Partnerships

The goal of the 1998-99 Public Management Initiative "Public Private Partnerships" is to explore the nature of these public-private partnerships and the dynamic boundary between these two sectors. We define "public-private partnerships" as new institutions or initiatives that unite public responsibility and authority with private sector resources and capabilities. In the examples mentioned above (and others we will discuss during the year) we are interested in studying both "public-private partnerships" initiated by the public sector and those that the private sector spearheads. Whether you plan on a career in government, intend to serve on the board of a non-profit, or aspire to be the CEO of a company, the PMI will present the essence of public-private partnerships from each distinct perspective.

We have defined the term rather narrowly because public-private partnerships as a broad term would escape the scope of the PMI. "Public-private partnerships" are neither corporate philanthropy nor the wholesale privatization of public services. It is not "reinventing government," with a new emphasis on customer service within government agencies. It is also not the unilateral actions of "socially responsible" businesses trying to promote some social good. While these are noble and necessary initiatives that need to continue to happen within each sector, we are trying to look at the partnerships between sectors. These partnerships, by definition, must involve cooperative arrangements between business and either governments or non-profits.

Goals of this PMI

The 1998-99 PMI on Public-Private Partnerships seeks to do three things:

  • Promote Awareness
    Introduce examples to the GSB community of public-private partnerships in diverse issues. We have chosen to focus on long term unemployment, education, and the environment.
  • Develop Deeper Understanding and Skills
    Explore any shared characteristics of these public-private partnerships that can offer general lessons about the future of public policy and business-government relationships. We also hope to understand the business skills necessary to create these partnerships.
  • Strengthen the PMP
    Reinvigorate the Public Management Program around the concept of public-private partnerships, providing a focused role for business students interested in forging new institutions at the intersection of the public and private sectors.

Guiding Questions

Substantively, we plan to focus our attention in three areas: long term unemployment, the environment, and education. Guiding our inquiry into each issue area will be the following four questions:

  • What about the problem prevents an entirely private solution?
  • What has limited the government's ability to solve this problem?
  • In what ways could public and private sector cooperation improve the situation?
  • What formal institutional mechanisms can be developed and replicated to systematically encourage this cooperation?

Issue One: Long Term Unemployment

This section of the PMI will not look at joblessness in general because a certain level of unemployment is the inevitable result of a dynamic economy. This "structural unemployment is a short term state for individuals transferring between jobs and is considered necessary to avoid wage-rate inflation. We also are not looking at unemployment caused by down turns in the business cycle. While this unemployment may last several years, its solution is fairly obvious, namely economic recovery. In contrast, long term unemployment results when certain people are unable to get jobs for years, usually not because jobs do not exist but because other barriers prevent them from holding those jobs.

What about the problem prevents an entirely private solution?
Many of the long term unemployed are "unemployable" because the value of their skills is currently less than the cost of employing them (the minimum wage plus benefits and taxes). Over time, given training and work experience, many would improve their skills and become "employable," but companies have disincentives to investing in providing that training. Since it is the workers who capture the value of training and since workers can easily switch jobs, taking their new skills with them, companies worry about being able to recoup any investment they make in general (as opposed to company-specific) training. If all companies provided training, then there would be little risk of competitors enticing away trained workers, but this is the classic game theory situation where each competitor has the incentive to defect and free-ride off the training of others, so no company provides adequate training.

What has limited the government's ability to solve this problem?
The traditional solution of providing unlimited welfare benefits has several draw backs. It is arguable that over time, workers skills become even less valuable to the market for lack of experience or practice. There are also the moral hazards inherent in any social insurance system—people have decreased incentives to leave unemployment when its consequences are less costly. Government efforts to solve the lack of skills issue has met with limited success because training programs are expensive (and therefore short) and are not as effective as learning in real job situations. Government attempts to provide "workfare," or temporary public sector jobs, to teach skills also have been unsuccessful because these jobs have been difficult to provide in adequate numbers and often are not similar to private sector jobs in tasks or expectations. The fact is that most job openings and most new jobs are in the private sector, and government has little influence over where these jobs are created and who fills them.

In what ways could public and private sector cooperation improve the situation?
The private sector could employ and train vast numbers of the unemployed if the investment could be justified on economic grounds. Business will never bring more than token charitable dollars to the problem unless somehow the rules of the game or the economics of the situation are tilted to make action profitable (or at least break even). Lowering or removing the minimum wage to allow workers to be paid for their limited skills would remove one barrier, but that is almost certainly socially unacceptable. Instead, temporary wage subsidies could have the same affect by lowering the cost to firms of employing low-skill workers and giving the workers a chance to learn skills "on the job." Laws that require all firms to train workers or which allow firms to protect their investments in training through some other means would also help.

As an example, United Parcel Service works with churches, state and local government agencies, welfare support groups, and private foundations to develop qualified applicants for positions at UPS and to provide additional support services once employed. UPS benefits from two tax credits, the Work Opportunity Tax Credit and the new Welfare to Work Tax Credit, to lower the cost initialing of employing ex-welfare recipients. In addition, UPS also has experienced retention rates among these workers, further reducing costs. The combined effect makes UPS' welfare-to-work program a profitable as well as public-spirited effort.

What formal institutional mechanisms can be developed and replicated to systematically encourage this cooperation?
This is certainly an area of current discussion today. The movement of the long term unemployed into private sector work is a process of experimentation. As such, it is very important to have the flexibility to try many approaches, critically evaluate the results, and move toward best practices. This argues for local control for maximum flexibility. The role of central organizations largely should be to encourage participation and collect and spread information on promising approaches. The national Welfare-to-Work Partnership, founded in 1997 by five large corporations with the encouragement of President Clinton, has been filling that central information-sharing role. They have found that almost every success story involved the assistance of a partner organization to help corporations navigate the public system and to provide additional support to new employees.

Critical to the success of this process is for public institutions and welfare recipients to accept that profit is not evil but necessary (in at least modest amounts) for businesses to be involved. Likewise, businesses must believe (and experience) that cooperation is a more beneficial approach to dealing with the government than adversarial behavior.

Issue Two: Environmental Management and Sustainable Development

This section of the PMI will look at environmental management and sustainable development. The history of environmental protection around the world is the history of an unsteady relationship between the private and public sectors. As information about global environmental problems is gaining increasing attention and a sense of urgency pervades the debate, the partnership between the government and the private sector will be an important dimension of international policy during our business careers. Private sector—ecology and sustainable development—increasingly being viewed as necessary, not optional, to remain competitive in the global environment. (Michael Porter's 1995 article in Harvard Business Review entitled Green and Competitive is part of this growing literature).

What about the problem prevents an entirely private solution?
The source of many environmental problems can be reduced to basic collective action problems. From the national to the firm level, economic development and environmental protection have been viewed as mutually exclusive options. Nations and firms are often faced with a perceived choice of cooperate (i.e., comply with environmental treaties, improve environmental performance) or defect (i.e., ignore treaties and extract resources or pursue strategies that provide benefits at shared costs).

A second reason why the private sector is incapable of protecting environmental quality through the market is the uncertainty of the environmental risks. There is substantial debate about the real level of health and environmental risks posed by certain problems and firms (and nations) are often reluctant to pay certain costs to prevent uncertain outcomes. Even when there is growing certainty that a problem is emerging, there remains tremendous uncertainty about the most effective way to deal with it. Global warming is a case where the uncertainty is diminishing but the certainty of national and firm-specific actions remains unclear.

What has limited the government's ability to solve this problem?
On top of this private sector "tragedy of the commons," environmental regulations at the international, national and state level have been written to protect the environment and public health from the harmful practices of governments and industries. The resulting regulatory regime relies primarily on command and control strategies to set targets that industries have to achieve. Environmental policy makers are beginning to agree that, despite the real progress of existing environmental regulations, there is "a growing mismatch between environmental challenges and the strategies used to develop solutions for these challenges" (Long and Arnold, The Power of Environmental Partnerships). Environmental problems have now exceeded the capacity of government agencies to manage the complexity of the problems. But government authority is not irrelevant. Shifts in policies—example a tax on natural resources and not labor—create powerful incentives to redirect the market in support of environmental protection.

In what ways could public and private sector cooperation improve the situation?
The public and private sectors each have resources that are needed to develop effective environmental management strategies. The private sector has resources, management tools and feedback mechanisms that the government lacks. In the latter part of the 20th century, particularly with the fall of economies that relied on centralized planning, the market has become a more legitimate institution than government. The thrust to "reinvent government," by remaking public institutions in the image of customer driven companies, hints at the government's need for both the resources and the legitimacy of the private sector. The public sector still enjoys the legal authority to create and enforce legislation, set standards, and adjudicate legal challenges. The combination of private sector management and public sector authority offer complementary resources that may be ideally suited to address certain environmental management challenges.

What formal institutional mechanisms can be developed and replicated to systematically encourage this cooperation?
This is the central question of the PMI. At this point, we have no answer, but we do know where we plan to look. The book The Power of Environmental Partnerships, published by the Management Institute for Environment Business, is an excellent place to start. It outlines some of the features of voluntary partnerships between non-profits and the private sector, and among different government agencies.

The PMI is also a co-sponsor of the European Sustainable Development Study Trip, which will visit the Netherlands to study environmental management in the private sector (industrial ecology) and the public sector. The National Environmental Policy Plan in the Netherlands, a public-private initiative of the Ministry of the Environment, has been called "the best job of technical environmental planning by any nation to date" and will be the focus of the trip. We will also look closer to home at the Presidio Trust and at Joint Venture Silicon Valley's environmental programs. Each of these examples will try to isolate the institutional mechanisms necessary to develop effective public-private partnerships that move from confrontation to collaboration.

Issue Three: Education

In this segment of the PMI one question we want to explore is how public-private partnerships might be able to effectively address problems facing education. K-12 education in the United States is in a state of crisis. Decentralized control of standards and funding creates fundamental inequities in educational quality and access. The variability in school readiness, academic curriculum and assessment is high. The structure of funding impacts variability. In 1994-1995 $303 billion was spent on public and private education ($260 billion on public, $43 billion on private). Federal, state and local public school spending comprised 7%, 45.2%, 45.1%, respectively. Private donations represented approximately 2.1%. In addition, there are wide disparities in per-pupil spending across states ranging from under $3,000 to over $10,000 per student. Neither local governments nor private institutions have been able to adequately solve these issues in a broad base. We are exploring the following questions.

What about the problem prevents an entirely private solution?
A strictly private solution would require a mechanism for achieving profits. If profits are achieved through tuition, certain individuals will be excluded by their inability to pay. If we believe that all students should have an opportunity to receive a quality education, a solution that excludes students who can not afford to pay tuition is not viable. Equity in education is a substantial consideration when attempting to solve education problems. Additionally, an entirely private solution limits the impact that state and federal government can have on content, curriculum and standards. Currently models of privatization involve the transfer of existing public funds (from taxes) to private instead of public institutions.

What has limited the government's ability to solve this problem?
Public school education is not controlled at the national level. With only 7% of school's funding coming from the federal government, there is little muscle behind rhetoric for change at the national level. State governments determine both school funding and academic standards. Currently, state and local funds each comprise about half of the schools budgets. The decentralized nature of the system can create barriers to achieve equity in educational opportunity and educational quality. Traditionally education has been the responsibility of the states. At this time, the Federal government has not challenged this responsibility structure. Perhaps it makes sense to ask if there is a role that the federal government could take that would significantly impact educational quality. What would be the cost/benefits of this type of intervention.

The following are questions we will explore during the course of the 1998/1999 PMI:

  • In what ways could public and private sector cooperation improve the situation? In what form(s) and quantity do public/private partnerships exists in education?
  • How have they impacted the problems facing education in regard to both school readiness and academic learning?
  • What are some of the significant factors that remove or contribute to the barriers of public/private partnership in education?
  • What are the key elements or indicators that lead to success or failures of education focused public/private partnerships?
  • What is the realistic scope of effective impact that public/private partnerships can have on education?