By Maggie Morse, Associate Director, University of Virginia Darden School of Business Institute for Business in Society and Mary Margaret Frank, Associate Professor of Business Administration, University of Virginia Darden School of Business
The global societal issues that we face today are often too challenging and risk-laden for one organization to address alone. Public-private partnerships and other multi-sector collaborations have emerged as agents of innovative solutions that bring together and leverage the expertise of stakeholders to address societal challenges in ways that could not be achieved by any one of these sectors alone.
However, with innovation and collaboration comes risk. So recognizing and mitigating the risks involved in these partnerships is critical in influencing how successful they are.
People use a common financial concept known as the risk-return tradeoff to make everyday decisions. How fast should I drive to reach my destination? How should I allocate my money to provide for retirement? Typically, people will weigh their options and choose the one with the lowest possible risk for the highest possible return. While people want a higher return for the risk taken, every person has different incentives and preferences that influence the risk they are willing to take.
This risk-return tradeoff also applies to public-private partnerships. For example, the benefits of having partners to provide essential expertise and resources must be weighed against the risk of bringing together multiple stakeholders from different sectors that do not typically work with each other. Conducting sufficient due diligence to understand the benefits and risks introduced by each partner allows the parties to structure the partnership to mitigate risks or allocate them to those most capable and willing to bear them. The partnership structure can be an important determining factor of the success, or failure, of the project. If the allocation of risk and return is misaligned, a lack of commitment and trust among the partners could result.
One model of a well-structured partnership is Project Nurture, the winner of the 2016 P3 Impact Award, an award created by the University of Virginia Darden School of Business Institute for Business in Society, Concordia, and the U.S. Department of State’s Secretary’s Office of Global Partnerships to recognize public-private partnerships that are improving our world in the most impactful of ways.
The Project Nurture partnership brought together three organizations with unique objectives to achieve a mutual goal: to create new, sustainable market opportunities for local small-scale fruit farmers in East Africa. The Coca Cola Company needed a reliable source of locally-grown fruit to satisfy a growing demand for fruit juice in Africa; the Bill and Melinda Gates Foundation sought to increase the income of small scale farmers to overcome poverty and hunger; and TechnoServe, a nonprofit organization, wanted to support small-scale farmers in developing countries by connecting them with capital and markets.
The partnership was structured so the risks and returns of the project were properly aligned with each partner’s objectives, as well as the end goal. For example, Coca-Cola faced greater risk by investing in a new project with uncertain financial returns; however, if the project succeeded, there would be financial and social returns for all of the partners. Recognizing that Coca-Cola, as the buyer of fruit, was critical to success, the partnership was structured to compensate for the greater risk by properly allocating the financial returns to align with Coca Cola’s incentives. Ultimately, the partnership achieved its goal of creating new market opportunities for local farmers whose fruit was used for Coca-Cola’s locally-produced and sold fruit juices.
The ideal public-private partnership creates a win-win situation for all partners, but that does not mean it is without risk. By recognizing all individual and collective risks, and allocating them appropriately trust is earned, benefits are shared, objectives are met, and as a result, the partners, the partnership and society all win.