If public- and private-sector values are not aligned, the PPP will fail to deliver on its objectives. Successful partnerships are those in which partners are incentivized to work towards aligned goals in aligned ways.
Imagine, for example, a public-private partnership designed to reduce the impact of cardiovascular disease. A private-sector partner might support a massive rollout of treatment options-expanding demand for its products while expanding access to people who need them. A government, on the other hand, might conclude that its money is better spent on preventative care-encouraging its citizens to eat better and exercise more. In this case, the private-sector partner and the government are in agreement about a final goal-reducing the impact of cardiovascular conditions-but in disagreement about the methods they would use to achieve it. A PPP designed on such a foundation must reconcile this misalignment. Counterintuitively, in many cases, it is more important that partners agree on their methods than on their ultimate goals-we will discuss this more in Chapter Two.
Harvard Business School professors Christensen, Marx, and Stevenson have dubbed this multi-axis approach to understanding alignment of values the "Agreement Matrix."10 By separating agreement into the two axes of "goals" and "methods," we are better able to describe agreement, and better able to find the locus of disagreements when they arise.
It is important to recognize that, in most cases, misaligned values are not fatal flaws. While misaligned values do present a serious hazard to a successful PPP, with well-structured incentives, often seemingly divergent values can be moved further into alignment. We'll discuss how in Chapter Three.
Because values can be so divergent across sectors, many public-sector institutions have strict conflict-of-interest laws which prohibit or heavily circumscribe engagement with potentially conflicted private-sector partners. However, conflicts of interest are not a binary proposition. Companies, or even divisions within companies, can be more or less conflicted than others. It is essential to take a nuanced approach in determining which kinds of conflicts are fatal to a partnership and which are manageable.
| NOTE Conflicts of Interest Total compatibility between partners may be difficult to achieve. Large multinational corporations and governments have many divisions and ministries working towards numerous different goals. In many cases, some of those goals will be in direct conflict with the goals of the partnership. This can create a conflict of interest. The presence of conflicts of interest, however, doesn't necessarily mean that a partnership is unviable. Though many government agencies look at conflicts of interests as an excuse to disengage from PPPs entirely, the reality is far more nuanced. While it is essential to manage conflicts of interest, it is not essential to avoid them altogether. Many a potential partnership has been abandoned at the first sight of an apparent conflict. But in fact, many conflicts can be mitigated by allocating incentives thoughtfully. A structure that incentivizes partners to act in the best interests of the partnership can help to overcome an apparent conflict of interest. Thus, in seeking out potential partners, conflicts of interest should be seen as a "yellow light" rather than a "red light." For example, in the realm of diabetes prevention, a large soft drink company-let's call it "BigSodaCo"-might be acting against the public interest, selling high-sugar beverages that contribute to diabetes.11 But, if a government had plans to build a water system, BigSodaCo might make an excellent partner, as they have a financial stake in access to safe, clean water systems with which to manufacture their products closer to market. While BigSodaCo's interest in pursuing a water system might be motivated by a desire to manufacture soft drinks on a more sustainable basis in that location, this doesn't mean that BigSodaCo should be summarily prohibited from partnership. It simply means that a government might want to weigh the benefits (clean water) and hazards (more soft-drink products) of this conflict. Let's say BigSodaCo is willing to commit $250 million to a waterworks project. The Minister of Water (or whichever ministry manages water management in a given country) might be receptive to partnering with BigSodaCo to raise much-needed capital and leverage necessary expertise. Both the Ministry and BigSodaCo are committed to improving the quantity and quality of water. Would this be a good plan for the government? While the plan might be viable and attractive to the Ministry of Water, it is certainly less attractive for the Ministry of Health. Soft drinks are a major contributor to NCDs, particularly diabetes. It's true that decreased costs could lead to increased profits for BigSodaCo. But decreased costs could also enable price reductions, increased market penetration, and ultimately higher levels of soft drink consumption. Higher soft drink consumption could lead to higher rates of diabetes, and the $250 million in funding for the water project could end up costing the Ministry of Health $250 million in treatment. Perhaps-as demonstrated in the University of Victoria study we discussed on page 12-it would cost the Ministry of Finance another $250 million in lost tax revenue due to decreased worker productivity from diabetes and related diseases.12 In this case, BigSodaCo's conflict of interest would render the partnership unattractive to the government. BigSodaCo's participation in one public-health goal-clean water-is at odds with another-reduced rates of diabetes-and is even worse financially, costing the government $500 million against a $250 million investment. Under this arrangement, the government would be better off securing funding from elsewhere. Does this mean that the government should walk away? Not necessarily. The partners should first attempt to mitigate the conflict of interest through effective incentive design. For example, senior government representatives might ask BigSodaCo to, as a condition of the partnership, commit to an aggressive program of reformulation, reducing the amount of sugar in their drinks. Reformulation would mitigate the public health consequences of soft drink consumption, reducing the expected increase in diabetes incidence. BigSodaCo would still be incentivized to sell its products in large volumes, but with a less dangerous version of those products, the deal might once again be beneficial to both parties. As you will see, in some cases, conflicts of interest can prove fatal to a partnership. But, as with most PPP challenges, an effective deal design can make all the difference. We will discuss deal design more in Chapter Four. |
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10Christensen, C., Marx, M., & Stevenson, H. "The Tools of Cooperation and Change." Harvard Business Review, Oct 2006, https://hbr.org/
11This is a hypothetical example; any similarity to existing corporations or initiatives is purely coincidental.
12Of course, the real-world calculations that determine how a conflict of interest affects large governmental systems can be far more complex. A ministry of health might also see some benefit in a BigSodaCo-backed water project, which could promise to reduce the incidence of water-borne illnesses. For the purposes of this thought experiment, however, we will keep it simple.