The Importance of Oversight in P3 Arrangements

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In my recent interview with Allentown, Pennsylvania, Mayor Ed Pawlowski, the Mayor described the oversight mechanism that the parties built into the P3 agreement (a 50-year lease) for Allentown’s water and sewer utilities. I wanted to explore this issue because oversight presents a challenging issue for the government party in many P3 arrangements.

The Mayor described a compliance department within Allentown that oversees contract compliance. That’s a great first step. But Allentown went further. I pressed the Mayor on whether the City oversaw capital improvements through its own engineers reviewing improvements. After all, the contracting party is a lessee, and the City stands to regain functional control of the assets once the lease term expires. With the life of water infrastructure, a strong possibility exists that the infrastructure put into service during the term of the lease will survive until the City takes back control of the assets.

Mayor Pawlowski responded to my question indicating that Allentown actively reviews the plans for improving Allentown’s water works through its engineering staff. Allentown gets another positive check in the oversight category.

Oversight maintains an important role in the P3 arrangement. Oversight acts as a check and balance on the activities of the P3 contractor. Through oversight, the government party ensures that the work contracted for is being performed to the levels outlined in the contract. The government party also protects itself against accelerated asset deterioration through overuse or below-standard maintenance and against overbilling for expenses payable by the government party that were built into the P3 agreement.

So if oversight is so important, why do government parties fail to properly oversee the P3 agreement? My suspicion is that the reasons vary, but I’ll list out several reasons why.

  1. Washing Their Hands of It. The government party may have entered into a P3 in order to avoid a problem with the utility involved, whether it was a rate issue, an infrastructure issue, or more likely, a combination of both. By entering into the P3 agreement, the government party then wipes its brow and is thankful someone else is dealing with their problem. They are done with it and don’t want to be involved. These folks probably ought to have considered an outright sale if the problem rises to these levels.
  1. Too Trusting of Their “Partner”. Yes, you need to trust the party you’re entering into a P3 agreement with the same as you need to trust the counter-party to any agreement you enter into. Assuming that the P3 contractor will be looking out for the government party’s interest is a recipe for disaster. I’m aware of instances where a utility’s governing members simply trust that the “partner” is doing everything at an acceptable level, when it’s clear that is not the case. Government parties need to engage in oversight – healthy oversight – that will help establish trust and a good working relationship. If the P3 contractor understands that it is being watched, it will be more likely to make the right choices. Without oversight, the relationship lacks that direct incentive.
  1. The Wrong Overseers. As alluded to in the “too trusting” reason above for lack of oversight, it’s also possible that the utility has selected the wrong people to oversee the utility. The overseers need technical and managerial competence for operating a utility. Without that baseline of knowledge, the overseer will have a much more difficult time figuring out whether the P3 contractor is living up to its obligations or not. This seems like a simple one, but there exist instances out there where the wrong people are overseeing a P3 agreement.

To wrap up, when a government party enters into a P3 concerning one of its utilities, oversight is a mission critical function. It protects the government party from receiving its assets back in poor condition, from overpaying for services and from embarrassment in the press over the issue. Based on my conversation with Mayor Pawlowski, it appears Allentown has established an appropriate oversight mechanism in its P3 arrangement. For their sake, I hope they remain diligent in their oversight duties.

Do you have stories or anecdotes about oversight of a P3 agreement? Please share in the comments, or if too shy to leave a comment, email me with them. I would love to hear about your experiences.

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