P3s Can Be Bad for Racial Equity -- But They Don't Have to Be
Governments can structure arrangements with private contractors that consider impacts on low-income individuals and people of color.
Searching for the words “P3” and “equity” online will yield many results, but most won’t discuss fairness or social justice. In the P3 context, equity usually means financial equity, as in the direct capital investment made by private companies in long-term concession arrangements. In these transactions, social and racial equity is often an afterthought, at best.
Yet P3 advocates would say that the private sector is only responding to the performance goals established by the public sector in these agreements.
In other words, if the public sector wants to see performance on social equity, it has the power to demand it in a public-private partnership – just like it can mandate safe and environmentally responsible construction techniques.
The challenge is coming up with performance-based measures that can hold up under legal challenge and that consider long-term impact on low-income individuals and people of color.
When P3s are structured to favor larger multistate – or even multinational – contractors, they can put smaller local businesses at a disadvantage. And that can make it harder for minority-owned firms to compete.
P3 arrangements can even have certain dynamics that can lead to greater inequity than publicly managed projects. Here are four potential problems governments might encounter—and four solutions.
Problem 1: The Bad Side of Bundling
Sometimes P3s involve bundling smaller projects into a large procurement that will draw greater competition from out of state. This kind of bundling can have lots of advantages for governments. By putting multiple small and similar projects together, as with the Missouri Safe and Sound Program, for example, or the Pennsylvania Rapid Bridge replacement project, governments can reduce costs with economies of scale, significantly accelerate completion and attract more bidders, including those with international and specialized technical expertise.
But economies of scale that attract out-of-state bidders can sometimes mean cutting down profits for the small contractors. A state or local government that saves some money by finding the lowest bidder won’t get as much economic development if most of the profits accrue to non-local firms.
Solution: Divide and Conquer
Governments can address this by dividing the procurement appropriately. The economies of scale from a large project may accrue from certain parts of that project – such as savings on technology purchases, or on large-scale construction equipment.
It’s absolutely possible for governments to maintain those economies of scale while dividing up other parts of a project.
Prior to a P3, procurement staff can review all of the work associated with a large project and determine if some of it is less likely to generate economies of scale or other advantages if included in a P3 arrangement. Procurement staff may be able to procure that part of the work separately in a bid intended for smaller contractors.
In some cases, bundling many projects and beginning them all at once can also have the downside of temporarily increasing construction inflation, which may offset some or all of the benefits of economies of scale. To avoid this, procurement staff can work to “rightsize” the projects and timing based on the pipeline of projects anticipated by the agency, as well as other area agencies and private companies. With better notice of the pipeline, and greater predictability, contractors can be more prepared for work, and agencies can avoid paying for an inflationary spiral they created.
Problem 2: The Subcontractor Shuffle
Small firms often partner with larger contractors from out of state or even out of the country to win these kinds of larger bids. But in some cases, after winning bids, the larger “prime” contractor changes the terms of the deal, requiring subcontractors to cut prices for the subcontracted work after it was won or be replaced.
That puts those smaller local firms at a distinct disadvantage.
Solution: Teaming Rules
Predatory behavior by prime contractors can be avoided by requiring prime contractors to get permission before changing subs or the division of the work. Many, but not all, state and local governments require successful bidders to do this, as well as pay subcontractors promptly.
Problem 3: Accelerated Construction Requires Accelerated Capital
Some governments turn to P3s for their expanded financial capacity, allowing more work to be completed in a shorter time frame, and with greater speed and certainty.
Yet for local contractors, a steady stream of annual work may be preferable to a “feast or famine” pattern, when a lot of work is available in a short period and then nothing until the government again has funds to undertake a large project.
When governments bundle projects and get aggressive about timeframes for completion, everything needs to scale up. Small businesses may be less able to double their workforce in a short period or assemble the capital needed to do the work on an accelerated basis. Surety bond mandates (which require contractors to get a performance bond, often for the full amount of the work) can also be a barrier for small contractors. In some states, P3 projects can involve lower or no surety bonds, because of the other performance-related aspects of the contract are thought to provide sufficient protection without the bond.
Solution: Manage the Money – and the Workflow
New tools, such as mobilization funds, may assist with this, and contracts can be written to require prime contractors to assist their subs in mobilization. Governments can also balance the tradeoffs between bundling work to attract out-of-state contractors and keeping a steady flow of work, so that local sources are readily available when needed.
Problem 4: Lack of Local Contacts
Non-local firms may not have the contacts to facilitate recruiting a diverse workforce and subcontractor pool. International firms may not be familiar with the complexities of hiring goals and equal employment practices in the U.S., which may delay or hinder companies reaching those goals. As infrastructure agencies increase community outreach and engagement, non-local firms may not be as able to “hit the ground running” and quickly identify groups that should be engaged.
Solution: Make Local Engagement and Equity Part of the Process
In Prince George’s County, Md., an innovative public-private partnership is engaging local, small and minority county businesses and residents and providing environmental and economic benefit for the community. In 2014, the county was under a consent decree to meet its EPA-mandated MS4 water quality permit requirements, but lacked a strategy to retrofit 15,000 acres of impervious surfaces (nearly 5 percent of its land area) to stormwater management features in time for regulatory deadlines.
The county chose to use a 30-year, Community-Based Public-Private Partnership (CBP3) to design, build, operate, and maintain 4,000 impervious acres with an additional 30-year maintenance program. The CBP3, known as the Clean Water Partnership, is led by Corvias, a company committed to using local, small and minority-owned businesses for 35 percent of the work, and to having local residents perform the work. To accomplish this, the CBP3 created a contractor development program and Mentor Protégée Program to support small businesses and local residents. As of March 2018 the Clean Water Partnership has met or exceeded the socio-economic and local utilization performance goals for small, local and minority businesses at 87 percent vs. a requirement of 40 percent and has also positioned the county as both a national and regional leader in P3s and Stormwater Management. The Clean Water Partnership has reduced the total development costs of stormwater retrofits in the county by over 30 percent.
Like any other procurement method, public-private partnerships can be a helpful tool to deliver on public sector goals – including economic and social justice. Private equity capital can help build social equity – as long as the public sector makes sure to address it throughout the process.