Marketing
The advantages and risks of private-public sector relationships
The advantages and risks of private-public sector relationships
It may feel like Public-Private Partnerships (PPPs) are a relatively new concept, with PPPs coming to the fore during Tony Blair’s Prime Ministership. Blair believed that the UK urgently needed infrastructure investment, but he did not want to alarm the financial markets with excessive government spending.
Blair’s solution was the Public Finance Initiative (PFI), which aimed to attract private sector investment and expertise to fund and manage major public projects. Under the scheme, there was an immediate surge in building new hospitals, schools and transport infrastructure. The government committed to making regular payments to the investing companies over an extended period.
Whether this was the right approach is still open to debate, but one thing is for sure, New Labour was by no means the first to mix private investment with public projects.
Go back to the construction of London Bridge, which began in 1176. The investment came from private investors and the City of London, a collaboration which helped forge the capital city’s growth.
This blog explores whether private and public partnerships are still the answer to growing the economy in 2023. Let’s begin by defining what determines a private and public relationship.
What are private and public sector relationships?
A private and public sector relationship refers to the collaborations between privately owned businesses or organisations and the public sector (government agencies and institutions, including education and the NHS).
Why are private and public relationships important?
The potential of Public-Private Partnerships is recognised by The World Bank, which states that PPPs can create social value through on-time and on-cost delivery, generating efficiency gains and offering innovation in project design, incorporation of global expertise, and accessing new sources of capital.
So, how do these potential benefits break down?
Spreading the risk. A large infrastructure project is hugely expensive and can be very complex. Pooling resources and skills can only be beneficial.
Economic development. When risk is shared, larger projects are likely to occur. The result is a boost to the national economy and growth.
Infrastructure development. Will enough hospitals or schools be built if we rely solely on government spending? Can we rely on the private sector to invest in long-term projects, such as expensive upgrades to water treatment, energy generators or the railway network? Partnerships can unlock these investments and commitments for our future.
Knowledge transfer. We can all learn from each other if we share knowledge. If we work in silos, we will trail behind ambitious developing nations.
What are the key differences between private and public sector organisations?
Defining the differences between a private and public sector organisation can inevitably lead to sweeping generalisations. But businesses are not uniform in their structure and purpose. A company can be created purely to make a difference rather than make a profit for the owner.
For this comparison, we assume that a private business intends to make a profit, as opposed to a not-for-profit organisation, a legal entity organised and operated for a collective, public or social benefit.
In general, a private sector business aims to maximise returns for its owners or shareholders. In contrast, public sector entities are effectively owned and controlled by the government and exist to provide public services or support the welfare of the public.
A key differential is how the organisation is funded
Private businesses raise initial capital through investments or loans and generate income through the sales of products or services. For the most part, public entities are funded through taxes or government borrowing.
The decision-making process can be more straightforward for private businesses, especially owner-managed companies. In larger companies, important decisions will be decided by the board and sometimes by shareholders. Stock-listed companies are required to be more transparent. In the public sector, procedures will be in place to ensure accountability, which can lead to higher levels of bureaucracy.
The differences can be summarised by the fact that businesses can choose to demonstrate their commitment to social responsibility, while public bodies are mandated to do so.
What challenges need to be addressed in public and private sector partnerships?
A public-private partnership aims to harness the combined strengths of the organisations in question. But there will inevitably be challenges along the way, many of which can be hard to predict.
Bringing in more parties can add complexity and bureaucracy. It can be hard enough to make decisions in one large organisation, so the potential for delay is increased when more organisations join the decision-making process. In addition, private businesses may be unaware of government policies and regulations that impact decisions.
If the two parties have different structures of leadership and decision-making and have different sets of procedures, the link-up is fraught with risks. For example, a private company may adhere to less strenuous accountability and transparency. Levels of compliance can vary, and private organisations are less sensitive to political considerations.
Does the public body want to achieve the same thing as the private business?
A private-public partnership’s biggest challenge is whether the parties are aligned regarding goals and objectives. Shareholders will expect a company to make a profit, whereas the stakeholders of a public body will have entirely different priorities.
This is not to say that a private business is necessarily just chasing the money. Businesses also have mission and value statements, and there may be a commitment to an active CSR programme. It would be unwise for a company in a PPP to focus purely on profit. If it does not pay due diligence to the requirements of its public partner, further contracts may be at stake. However, even with these caveats, a misalignment of goals is a real risk.
It is advisable to discuss any potential ethical misalignment. Do all parties sing from the same hymn sheet on sustainability and diversity? If one party is complacent about its ethical impact, whilst it is a priority for the other, tensions can creep in.
Another consideration is the avoidance of costly legal battles. Contracts need to be watertight at the outset. All parties should bring in legal advice to ensure there are no disputes down the line related to the ownership and use of intellectual property developed during the partnership. Both parties need to be aware of regulatory compliance and data privacy rules.
Overcoming obstacles
How can these challenges be solved? The solution is to tackle possible areas of conflict at the start and set clear guidelines. The following considerations should be firmly on the agenda:
Set up clear channels of communication
Define and agree on the project’s goals and objectives
Decide who the stakeholders are and how to engage with them
Establish a Joint Governance Structure
Craft inclusivity policies
Do a full risk assessment of the project
How can private-public partnerships drive growth and innovation?
A public and private relationship can unlock projects of enormous scale and ambition, such as the centuries-old challenge of traversing vast stretches of water. In the 20th century, the public and private sectors came together for huge feats of engineering, such as Dartford Crossing (opened in 1963) and the Channel Tunnel (1994).
Ultimately, the effectiveness of public-private partnerships can be addressed by asking the simple question: will growth and innovation increase more if the sectors work independently or in cooperation?
The question can be answered by examining how each sector helps the other.
The public sector benefits from the input of private businesses in the following ways:
Risk expertise. Recent analysis from McKinsey & Company sees the main advantage of involving private-sector stakeholders is their ability to assess, price, and manage certain types of risk. The authors stress the importance of drawing on the private sector’s risk management capabilities.
Access to industry expertise. The public sector cannot expect to achieve technical knowledge in every discipline. The private sector encourages specialism as entrepreneurs and innovators are always looking for a niche where they can excel. A PPP offers the opportunity to include businesses with deep knowledge and experience.
An innovative culture. PPPs help governments become more inventive by creating a space outside the government structure that allows innovation to flourish. PPPs help inject a broader set of skills and talents, a more diligent and responsive work culture into the government machinery, and a solid foundation for innovative thinking and creativity.
Encouraging investment. PPPs become particularly powerful when the financial resources available to the private sector are unlocked. With the security of government backing, a project can garner significant investments from the business world, which allows for larger-scale developments.
Private businesses benefit from public sector partnerships as follows:
There are multiple reasons why a relationship with the public sector helps a business, but how does this boost growth and innovation?
Go bigger. PPPs allow private companies to engage in large-scale projects beyond their traditional capacities.
Access to infrastructure projects. When it comes to a significant upheaval in the nation’s infrastructure, it is the government that makes decisions. A private company cannot decide whether to build a new underground line. The public sector commissions the big projects, and the private sector helps make the plans come to life.
Research and Development. For the UK to remain competitive, we must be at the forefront of research and development. R&D is expensive and takes bright minds away from active projects. It is risky for a company to devote resources when the eventual benefit is unclear. In an environment where public-private partnerships are the norm, the business will be more assured that there is an eventual market for its research.
Summary
In any organisation, there is a constant battle to avoid ‘silos’, where departments work in isolation, duplicate work, eschew integration, and generally work inefficiently. Organisations are always exploring ways to unite people, with the idea that the whole is more effective than its components.
A country operates on the same principle. The more joined-up the thinking is, and the more engagement there is, the more the nation thrives. If public and private bodies do not work together, everyone is poorer. Combining resources allows the pooling of ideas, skills and experiences. It will enable civil servants to be more innovative and private businesses to be more socially minded.
Together we are stronger.
If you are a business that would like to build a relationship with the public sector or find out about procurement, learn more in our extensive guide to marketing and selling to the public sector. To make the all-important connections, read our blog on the best ways to meet public sector decision-makers.