Public-Private Partnerships & Their Tolerance for Risk and Failure

In the private sector, 6 out of 10 new venture capital investments end in failure; some investors say the rate is even higher.

In the public sector, new ventures never fail; they simply get more money.

A flood of ink has been spilled in the past year or two regarding the need for and the virtues of Public-Private partnerships. Not much thought seems to go into what that actually means, however.

There is a drive to engage the public sector in many new business ventures, especially in the renewable energy and clean tech sectors, but little understanding of the risks, and almost no comprehension of the penalty for failure. In large part this is due to the point of view that risk of failure does not exist for the public sector projects.

At first, this would seem to be an argument of Libertarians and Conservatives to rally around the goal of smaller government, but it is not - far from it, in fact. The objective instead is to put in place standardized metrics and include processes in public-private partnerships with respect to goals, stakeholder interests, and pre-project risk assessment. Then, with eyes wide open, proceed with projects when the risk assessment is outweighed by the potential rewards.

The public sector already takes on the riskiest projects, in space exploration, research, and a multitude of other projects; it is, in fact, taking on many more risks than the private sector, because it needs to and can afford to, both points based in the public interest.

What is missing, however, is a non-partisan approach to analyzing project performance, (benchmarking) and determining a sensible course of action when public sector projects fail. The current position in the public sector is to use money to paper over a project failure. The project gets completed, and the public sector managers keep their positions, in spite of the failure. In many cases, the failure is not recognized or studied, and the failure is forgotten.

This amnesia in the public sector is unfortunate; many critical lessons learned are available in failed projects, and our collective project performance could be vastly improved by studying them. Engineers routinely study every failure, and failure analysis, 'test to failure' and a host of other disciplines are standard tools of engineers in their Best Practices. Why doesn’t the public sector do the same?

In the public sector the most telling risk management question you can ask is, ‘what rate of failure is acceptable to you?’. When the manager does not look at you like you have just grown another head, their response is generally, "we don't have any failures". We know they do, and they know they do. The standard solution, however, of ‘spend more money’ has obscured the real issue, project failure, and led to a superficial debate over the cost of the government sector.

(Don’t believe it? Look at the DIA baggage claim project)

Regulated utilities may represent the best example of a public private enterprise; the utility is granted a monopoly and all rates and charges are reviewed and approved by the regulating authority. A second example is quasi-private enterprises which involves establishing and government sponsored entity that then functions like a private company. Here in Colorado, Pinnacol Assurance is the most public example, but there are others. Tennessee Valley Authority (TVA) comes to mind, as do many of the Rural Electric Associations.

For new and risky tech sectors, the utility approach, and the quasi-private approach, will generally not work. If we are going to try to foster small business growth and technical innovation, the public sector will need to adopt a mature understanding of risk and failure, and adjust it's tools and metrics accordingly. We can invest public funds in the new business and risky ventures, but it needs to occur with some good sense regarding benchmarking, process management and best practices.

Just as it should in the private sector.