Government leadership and market know-how: a response to Jeff Sachs

In his discussion with Sense and Sustainability, Jeff Sachs notes that a successful democratic society rests on two pillars: markets that are efficient and fair and governments that are effective and stable. Societies that rely exclusively on market forces inevitably devolve into plutocracy; those that rely exclusively on the public sector result in totalitarianism. Since the early 1980s, the US has been moving away from a balanced system and towards a more market-focused system. “The government is not the solution to the problem. The government is the problem,” as Ronald Reagan famously declared. The flaws with this approach have become increasingly obvious in recent years: ballooning national debt, greatly expanded income inequality and an overall decline in national productivity.

The debate over the proper roles of the government and the private sector will largely define the upcoming American presidential race. However, the issue is constantly cast in antagonistic terms: some say that only by tightening regulation can we prevent a repeat of the 2008 financial crisis; others argue that we must cut government spending in order to unshackle the economy and get the country growing again. But are these the only choices available? Can’t we instead create societal gains by forcing these two supposedly diametrically opposed forces to cooperate? Given recent policy successes, the answer is a resounding yes.

Enter the Public Private Partnership (PPP). PPPs have already been discussed at length on this site, particularly as they pertain to infrastructure, but a quick refresher may be in order. A PPP, broadly, is an arrangement between the public and private sectors whereby part of the services and works that fall under the responsibility of the public sector are provided instead by the private, with clear agreements on shared objectives for the delivery of public information or services. Basically, the public sector contracts private actors to provide public services at a theoretically lower price to taxpayers. PPPs have been implemented around the world with varying degrees of success. For every successful PPP, however, there seems to be at least one countervailing example, such as the recent semi-spectacular failure of the London Underground PPP.

Infrastructure PPPs have already been discussed at length, but another, less-heralded model may be more promising — the Product Development Partnership, or PDP. The PDP is a partnership between the public and private sectors wherein the government provides funding or technical expertise for the development of a new technology (e.g., a new drug, a new manufacturing system, etc.), which is then commercialized by the private sector. These partnerships have proven quite popular in the pharmaceutical space (PDF), where the government provides funding and leadership, while the private sector provides intellectual property and technical expertise. The new entity is then free to focus on its mission, typically the distribution of a new drug in a poor or rural area, with less concern for the bottom line or sources of funding, as they are typically backstopped by public finances.

This approach can be applied widely — for example, a PDP could play a major role in combating climate change or re-energizing American manufacturing. The Department of Energy’s Advanced Manufacturing Office (AMO, formerly the Industrial Technologies Program, or ITP) functions as a PDP for next-generation industrial technologies in the American manufacturing sector. The AMO provides services around R&D and technology deployment, effectively providing public support for initial research on new industrial technologies, particularly those involving energy efficiency in highly energy-intensive sectors. As technologies develop past the initial, early-stage R&D and on to commercialization, the AMO continues to provide technical training and support to commercial actors as they seek to implement newly developed technologies and processes.

By focusing efforts in these two areas, the AMO is targeting the two biggest challenges confronting the development of new technologies: funding in the early, high-risk stages of development, and successful commercialization. By providing public funding and technological support to early-stage R&D, the AMO can help lower the cost of development to private actors, accelerating the development of necessary, new high-efficiency technologies. By providing technical support, training and recognition to early adopters, the AMO provides cheaper adoption as new technologies move through the well-known “Valley of Death,” from pilot demonstration to full-scale adoption.

In its first 18 years, the ITP / AMO has been extremely successful in advancing the capabilities of the US manufacturing sector. The numbers bear this out:

  • Technical assistance to 33,000+ industrial plants
  • 50 R&D 100 Awards
  • 250+ patents granted
  • 200+ technologies successfully commercialized
  • $50.55B in energy cost savings

Beyond the purely technical (PDF), the program has been estimated to have abated more than 206 million tons of CO2 and saved 9.3 quadrillion (9.3 x 10^15) BTU of energy over its lifespan — both significant savings.

The AMO has achieved its goals by leveraging the strengths of the public sector (deep pockets, concentrated technical expertise and a mission-focused approach) with those of the private sector (commercial and technical expertise and a strong profit motive). The public sector can subsidize initial R&D that benefits the entire sector, while the private sector can focus on successful commercialization. Following initial development, the public actors continue to provide technical expertise and funding, if needed, and the commercial sector begins the process of widespread adoption and application. In this way, overall costs are kept lower than a purely public or private enterprise, and the technology reaches the markets in which it is needed.

This approach marks a successful template from which future PPPs may draw, whether they are focused on pharmaceuticals, infrastructure, technology or healthcare. In so doing, perhaps another successful partnership can help change the tenor of the debate. The public and private sectors do not need to exist in a state of constant antagonism; rather, proper cooperation can be beneficial to all involved, including the general public. The 2012 presidential contenders would do well to take note of this partnership between public and private and make its extension a key component of their approach to governing.