In the June 2013 edition of Innovators in Action, we profiled Mayor Cathy Noon and City Manager John Danielson of Centennial, Colorado, a Denver-area suburb of more than 100,000 residents that incorporated in 2001 and has gained increasing recognition in public administration circles as a leader in innovative government efficiency and privatization initiatives. Since incorporation, the city has pursued a "contract city" policy of contracting with outside providers for all public services, and in 2008, Centennial launched what has become its most recognized achievement: a large-scale, full-scope public-private partnership (PPP) with national engineering firm CH2M HILL to provide all of the city's public works services.
In this second part of our focus on Centennial, we turn to the topic of its forward-thinking approach to driving innovation in government. Centennial is one of a growing number of cities that have created a formal senior administrative position—the chief innovation officer—within the city government with the primary responsibility of driving public sector innovation. This role typically sits apart from the traditional departments and divisions so that it can have an enterprise-wide scope and think outside the traditional organizational silos. The deployment of cutting-edge technologies and partnerships with external service providers and community organizations are often key focus areas.
Centennial’s Chief Innovation Officer David Zelenok has a unique perspective on both innovation and partnerships, and the intersections between them. As the city’s former public works director, he served as the city’s lead player in developing its award-winning public works contract—so successfully that he eliminated the need for his own position, which was abolished—before ultimately transitioning into his current role as the city’s innovation change agent.
In July 2013, Reason Foundation Director of Government Reform Leonard Gilroy interviewed Zelenok on the role of the chief innovation officer in government, the importance of sharing both risks and rewards in PPPs, emerging future opportunities in PPPs that mid-size cities can explore, and much more.
Leonard Gilroy, Reason Foundation: The position of chief innovation officer is a relatively new position in the world of public administration. Can you describe your role, both in terms of its position in the enterprise and how you approach it in terms of the scope and breadth of responsibilities?
David Zelenok, Chief Innovation Officer, City of Centennial, Colorado: In terms of the organization, I report to the city government’s chief executive, which here is our City Manager John Danielson. That was done deliberately, in part because my role is intentionally not a part of any of the city’s other departments, so I’m not a part of planning, public works, the court system or the clerk’s office, for example.
My role is really the chief advocate for innovation within the organization, but beyond that it’s instilling a culture of “thinking outside the box” in the organization, as well as seeking new opportunities not just for cost savings or cost avoidance, but also revenues, and that often leads us into partnerships and unique ways of structuring or restructuring the basic functions of our government.
And very often we find that the conventional approaches that have been used both here and in other cities might be outdated technologically or may have been surpassed by legislation at a variety of levels.
Gilroy: Some public administration experts have lauded the development of the chief innovation officer role, but have questioned whether cities have empowered it with sufficient authority, both in terms of direct budget controls and decision-making authority. How would you respond to this concern? How can cities maximize the value of their chief innovation officers?
Zelenok: Looking across the country, many cities that think of themselves as “leaning forward” have appointed these chief innovation officers. A lot of major cities are now doing this, and media outlets like CNNMoney and Government Technology are starting to cover it.
First and foremost, the emphasis of the job is to advocate for new, innovative and creative ways to avoid costs and to enhance revenues. At the most basic level—just in terms of covering my own costs as an employee—our city manager has given me a challenge to come back with what some places call a “benefit-cost” or “value-for-money” ratio of 20 to one, meaning benefits at least twenty times the cost. So he’s asking that I at least recapture the expenses of the job many times over. And I was pleased to report back by the end of the first month that I had already positioned the city to bring in a combination of revenues and infrastructure improvements exceeding 20 times my salary for the year.
Part of maximizing the value of the CIO role really hinges on the level of the position. If the position is buried deep within the organization, then their influence will only go as far as their peers or counterparts inside that department. So I think that organizational placement is a major part of it, having a single point of contact for innovation, both in terms of moving projects forward and then instilling that culture of innovation in the organization. These creative, innovative ideas really need an advocate in the government at a high level that can push them forward and restructure or look outside of the conventional ways of delivering services.
It’s also important to focus on efforts where the benefits outweigh the costs. In some cases, there may be an opportunity to create a partnership with another government or quasi-governmental authorities. Right now we’re in the process of structuring a partnership with a metropolitan district—a quasi-governmental authority—to have them perform $8 million of improvements on our city streets with their money. Ultimately the money will benefit the district, but for us, if they’re committing $8 million into widening our streets and adding in new roundabouts to improve traffic flow, reduce congestion, and improve safety, then we win, the district wins, and the businesses that support that district with their own funding win because they see improvements in congestion.
The bottom line is that we think that everything that government does in this arena needs to have a quantifiable objective or subjective benefit that outweighs the cost of doing it. That’s the first rule of business that we look at—it has to be worth doing financially and economically, and it has to benefit the community.
Gilroy: You were the public works director for Centennial when it launched its widely recognized, large-scale public-private partnership to deliver the full scope of public works services. As the public sector lead on that project, can you describe the rationale for that PPP and how you approached its development in terms of ensuring that the city retained flexibility and received good value for money?
Zelenok: The city entered into an agreement with CH2M HILL in 2008, and we just renewed that contract for another five years, increasing their scope of services while not increasing the cost of the five-year agreement. We believe that the arrangement is working well, and beyond that, we also have a contract with another firm—Merrick—that has been providing quality assurance/quality control services since 2007 to verify that it’s working. Overall, we think we’ve got a great combination with the two firms performing our public works services and ensuring we’re getting our money’s worth.
We believe that Centennial is the largest city in nation to have completely outsourced all of our public works to the private sector, and we’re proud to be the largest one doing this successfully. We do know that we’re the largest city that has snow removal built-in to the contract; there are some cities that do snow removal and others that do not. But as far as street maintenance goes, there are many cities that organize their public works service activities around snow removal, so cities in the north, for example, will organize their summertime operations around their wintertime needs, and vice versa.
“Managed competition”—or public/private competition—is a term that’s been used a lot in recent years. Five years ago, “managed competition” and “value for money” were not really in vogue yet, and as it turns out what we were doing was really managed competition with an emphasis on value for money. And the essence of it was that we received three private sector bids, and we also prepared our own internal public sector bid. In other words, we fully burdened the increase in costs across all governmental departments—whether that was in human resources that has to do recruiting for hiring employees, or taking on additional risk in safety training for the employees, or for new copiers and other equipment, or for the budget person that needed to put together the department’s budget, and so on.
So we fully burdened those hidden costs into the public sector model and ran them through a net present value financial analysis. We also fully burdened our own government bid assuming that we would, like the private sector, only be doing the work for a set number of years—in our case, it was a five-year bid. So the assumption that we made and the net present value financial calculation that we did had the same five-year assumption in order to fully burden all of the costs. When we evaluated that, our internal bid to create a traditional public works department on an annual basis was about $9.9 million.
We received a total of three private sector bids, with one at $9.8 million and another at precisely $9.9 million, with another bid that was somewhat higher. The larger point there is that those bids confirmed to us that we had removed some of the risk for the private sector contractors, because when you get not just one, but rather a number of bids from private contractors that confirm our own number, then they can’t do it any cheaper than we can, but they’ve also got to make a profit, they’ve got to depreciate equipment, they’ve got to pay taxes, and cover risks in an entirely different way than we did with a traditional governmental organization. And despite that, they were able to prevail with virtually identical numbers.
When we took the issue to our city council, they recognized that even though the bids were almost identical, there was another factor that we weren’t considering, which was that with the private bids there would be a known, predictable budget into the future. The budget for the private sector would be contractually held at that $9.9 million cost with some planned escalators, and those would be guaranteed fixed points where the council knew exactly what they would get in terms of value and level of service for that amount of money.
By contrast, the public sector would see future changes that were not as predictable. So the council looked at the private sector bid as being more predictable and even less risky than the public bid, because for the long-term, they knew precisely what they’d be getting for exactly how much money. Our public sector bid was thought to be something less than that because it would always be subject to the political whims of the future, as well as the market swings in the price of materials and things that none of us could really control. We were assuming all of the risk in our bid, but the private sector was not only assuming risk in their bids but also locking in guaranteed costs for the next five years.
And with that our city council—and I think rightfully so—decided to look to the private sector to operate the entire organization. In fact, one of the bittersweet ending points was that we have such a high-performing partner in CH2M HILL that I was able to completely transition my job to the private sector; I was serving as the public works director at the time. Right now the city does not have the standalone position of director of public works, which is how I came to become the city’s chief innovation officer.
So we think we’ve figured this out, and we’ve negotiated another five-year contract for the same set of services, so we think it’s working very well and we’re proud of the results to date.
Gilroy: One important aspect of well-constructed public-private partnerships is in “risk sharing,” via the ability to better allocate important project or service delivery risks to the party best suited for handling them. And you’ve described PPPs as also involving “reward sharing.” Can you explain what you mean by that? Can you point to some examples in your public works contract, or perhaps in your snowplowing innovations?
Zelenok: There are a wide variety of contracting mechanisms between public and private sector entities. Oftentimes, many of these terms—such as “outsourcing” and “privatization”—are used loosely and synonymously, when in, fact, they refer to very specific and different arrangements. Many agencies believe they are engaging in a partnership to, for example, privatize their services, when in reality they aren’t “conveying” any assets to the private sector; rather, they are simply sourcing the work from a different provider, often in the private sector.
Likewise, many agencies claim they’ve executed a partnership agreement, when in fact they’ve simply executed a traditional contract for services with a set schedule of fees and expectations. In such an example, there’s definitely not pure privatization going on, and there’s probably not much partnering there, either.
There are two crucial elements to a public-private partnership. To be considered a true partnership, I believe there needs to be sharing of risks on both sides, or else you don’t have a partnership. For example, both parties need to have a common purpose, which, among other things, is to help ensure the success of the other partner and to promote an enduring relationship. In fact, sharing risks is one commonly-held tenet of nearly all PPP advocates.
But I would offer that equally important is sharing both risks and rewards. Rewards are often easy to define by the private sector and are usually related to short-term or long-term revenues. In the public sector, rewards can be defined in many ways, including cost savings, revenues generated, cost avoidance, reductions in future cost increases, or perhaps even more subjective but important concerns like the stability of the government or public support for actions and programs. Clearly, some of the most effective, long-term relationships are built on these two, and arguably equally important, pillars, and a well-defined and transparent system for sharing in both directions—risks and rewards.
In the case of Centennial’s first contract for public works services, these tenets were outlined in a base contract document of only 39 pages. Throughout the document are the themes elaborating on the details of how both parties would share—and limit—risks and rewards. The result has been nothing short of stunning. The contract has been a resounding success, and the city council has just authorized an additional five years, with expanded services and costs contained well into the foreseeable future.
Just to illustrate one of those areas where we share the risks, we know for a fact that no one in the public sector nor the private sector knows how much it will snow next year, yet cities tend to insist on having a fixed budget to rely on for snow removal. Here in Centennial, we’ve included in the contract that we will share the risks with the private provider, and since they do not know how much it will snow next year, we agreed that the city would purchase all of the very expensive de-icing chemical materials. And so when a dump truck leaves the barn, if it’s a 10-ton dump truck at $100 per ton, that’s $1,000 worth of material going out on that snowplow. The most expensive aspect is really in the materials.
What we found in our research is that governments that have outsourced snow removal who don’t have risk sharing in their contracts tend to get very high private bids back that make them seem uncompetitive. But the reality is that all they’ve done is shift 100 percent of the risk from the public sector to the private sector, and the private sector builds that risk into their bid, and it often makes them uncompetitive. Here, with a true partnership we share that risk.
We also do the same thing in fuel prices. Since the contractor has no control over fuel prices—or asphalt prices or a lot of other materials prices—in all of those cases we buy 100 percent of those materials. But since we do that, it’s also incumbent upon us to ensure that the contractor is not abusing it, that they calibrate their equipment and put down precisely and only the actual amount of material they need to have. So we watch them, and they have to then watch themselves.
Gilroy: Centennial’s public works PPP is large-scale and comprehensive, covering the breadth and variety of public works services. However, in a recent conference sponsored by the National Council of Public-Private Partnerships, you discussed some potential mid-size PPP opportunities that cities like Centennial could explore. One of these involved streetlights. What emerging PPP opportunities do you see in streetlight operations and maintenance?
Zelenok: There are many millions of streetlights across the nation. What we’ve learned is that every situation is unique in terms of who owns them, how cities pay for them, and how they are maintained. In some cases, for example, cities don’t pay for them, but rather a homeowners association or a private sector entity pays for them.
We have roughly 3,000 streetlights owned by Xcel Energy and roughly another 1,200 owned by the Intermountain Rural Electric Association (IREA). The city and its predecessors originally purchased and installed many of those streetlights and turned them over to Xcel and IREA as required by existing agreements or the public utility commission (PUC) arrangements in place at the time. We also pay for major replacements, upgrades and knock-downs, like those caused by errant or drunk drivers.
For the hundreds of thousands of streetlights that are operated for the public, by the public, in Colorado, there’s PUC rate, for example, for a 100-watt streetlight in terms of dollars per streetlight per month—approximately $18 is the current monthly fee per streetlight that we pay to the local power companies. Only about $2 of the $18 monthly rate is for power, and the other $16 goes to the power company for a variety of things, so under Colorado’s PUC ruling roughly 90 percent of the monthly cost to operate a streetlight goes to things other than power. So if you have a 40 year old streetlight that cost $200 decades ago, that streetlight has been paid off many times over, and a high-pressure sodium light—which is a 50-year old technology bulb—costs about $10 per bulb and will last a couple of years, so you’re doing perhaps $50 worth of maintenance on that streetlight every couple of years. But you’re paying roughly 5–10 times that in recurring monthly charges to operate that streetlight.
So what we’re trying to do is look at possibly recapitalizing or restructuring the ownership of those streetlights to where we would be able to pay what’s called an “energy-only” rate, and we’re hoping to capture perhaps not a 90 percent cost savings, but at least a significant cost savings in the millions of dollars by assuming ownership and maintenance, and then changing the rate structure. And in addition to that, we certainly hope that we can divert from the 50-year old technology of high-pressure sodium lights towards more of the efficient technologies such as LEDs or induction lighting.
In addition to recapitalizing the system, where we can save about $16 of the $18 per month to bring us a $2 monthly power bill per streetlight, we can cut that $2 power bill in half again by using new technology lighting as well as looking at creative ways for renewable energy and buying that power through the grid—sometimes called “retail wheeling.” We haven’t figured out all the details there, but certainly by changing the technology of the bulb and recapitalizing the system, there are significant savings to be gained, at least 50 percent if not more. We’re pretty confident that we can do that right now.
So technically this would not be a pure partnership, where you’re sharing risks and rewards. If we purchase the streetlight system, then we are assuming all of the risk of the system, and then we would probably look to the private sector to provide all of the operations and maintenance on the entire streetlight system. So we’re more likely looking at a traditional contract arrangement for the system’s operations and maintenance. I suppose that we could buy our own bucket truck and we could hire a government employee to work the night shift and then do the re-lamping ourselves, but we would probably find that it’s more to our benefit not to buy the equipment and not to have a full-time employee, but rather to contract with the private sector on either a performance-based contract—which is more of a traditional contract with no risk sharing—or look again to explore a PPP. We are just now exploring our options.
But every city is unique. Some cities in Colorado have done a re-lamping, but the rate structures are totally different. The $18 per streetlight per month is unique to the largest power companies in the Denver area. What people don’t realize is that in terms of the efficiencies to be gained from a conversion to LED lights or other new technologies, you really have to consider the benefit-to-cost ratio or return on investment (ROI). If you’re paying 10 cents per kilowatt-hour, you’re going to spend about $2 per month on power for each light. Perhaps a conversion to LED can reduce that bill in half, dropping from $2 per month to $1 per month, but if it’s costing you $500 to do the change-out and you’re only saving $1 per month, that’s a 500-month ROI, which is essentially decades. In fact, the LED fixture will probably have to be changed out again before you ever hit the ROI on the initial installation. In other cities where you’re paying a very high amount for power—such as in Honolulu or in the Northeast, where you’re paying 20 cents or 30 cents per kilowatt-hour in some places—there the ROI comes much faster, maybe in seven to ten years.
Each situation will be different, but what each city definitely needs to do is to take the total streetlight bill, divide by the total number of streetlights, and then see what that monthly bill is per streetlight and how that bill is structured. It makes sense to look at recapitalization and to look at possibly purchasing energy from alternate sources, as well as re-lamping and moving to the newer technologies. All of these apply to virtually every city.
Gilroy: Another midsize municipal PPP opportunity you mentioned was in traffic signals. What PPP opportunities do you see there?
Zelenok: With traffic signals, we’re looking at a blend of PPPs as well as looking at the benefits and costs of embracing new technologies. On the technological side, traffic engineers call these lights indications—these are the incandescent light bulbs 12-inches in diameter that give you the red, yellow and green lights. Typically a yellow light will burn at about 70 watts, while red and green lights burn up to about 130 watts of incandescent power.
We found that by re-lamping and changing those out, we can change the power consumption down to between 6 and 12 watts, and the return on investment on just the change-out from incandescent to LED is about two years to pay back the entire conversion cost. And we’d reduce the power consumption in those traffic signals by about 90 percent.
We think the PPP part of the traffic signals may lie in improving the communications to every single one of our traffic signals. Five years ago when the city started looking at its traffic signal system, we used a very solid and reliable 1980s technology that coordinated some of the 84 intersections throughout town that were signal-controlled, and their thousands of indications. Of the 84 signal-controlled intersections in town, only about one-third of them were coordinated in the area and very few of those had any communication links at all. We’ve done public-public partnerships and PPPs for extending communication lines, primarily via conduits for fiber optics to either every single signal or to node points where we can communicate to groups of signals wirelessly.
In some cases, we’re extending through public-public partnerships with the Colorado Department of Transportation, because we can piggyback on them and use state highway conduit and our own fiber optics within them to reach out to our signals at the other end of state highways—in other words using state highways as a backbone for that. In fact, what we found is that much of the state’s fiber optic conduit—which is 2-inch conduit—only had 24-fiber bundles in the conduit. We made an offer to the state to pull out the 24-fiber bundles and then we installed two 96-fiber bundles back into the same 2-inch conduit. And so the state upgraded from 24 fibers up to 96 fibers, getting four times the amount of throughput that they had before, and we were able to work in a second 96-fiber bundle for city use in the same conduit.
In other cases, by installing fiber optic conduit at the same time the private sector is installing fiber optic conduit, it turns out that the cost for the private sector to pull through, say, 1,000 feet of conduit is about $15 per foot for the first conduit, but then $1 per foot for the second conduit. And so we fully expect to pay 100 percent of the upcharge for a second conduit, but in exchange we have a conduit that we can then use to communicate with our traffic signals for a very small fraction of the true cost of installation.
So over time, we’re looking to phase in an entire fiber optic network throughout the community at a fraction of the full price and by doing so, be able to communicate with every single traffic signal in town. Once we can do that, we can have real-time coordination of our signals and have what some have called “demand-responsive signal control.” For example, if there’s a large event or a traffic incident on the freeway, we’re able to re-coordinate the traffic signals and accommodate these constantly changing volumes in traffic in real time, and thus reduce congestion, reduce delays and improve safety for our citizens—all because we’re using either a public-public or a public-private partnership.
Gilroy: You’ve described some potential midsize PPP opportunities in fiber optics and telecom. What opportunities do you see there?
Zelenok: In many parts of the country there may currently only be a single provider of high-speed internet, and that’s usually the cable TV company. They often have essentially a monopoly on high-speed internet to every home in town that they currently have wired for coaxial cable, which has a high bandwidth that’s suitable for most home applications.
In most parts of the country, the telephone companies realize that they would like to get into the same market as well, and they are now in the process of installing millions of miles of fiber optics nationally. If there’s someone pulling fiber optics through a community, then there may be a chance for cities to piggyback and have those companies bring through conduit for use by city governments, if they pay the upcharge.
We can use that not simply for communicating with our own traffic signals, as we discussed, but also for a variety of other public purposes. And so what we’re trying to do is look ahead and work in the future cooperatively as we see the next wave coming through our community. It will be a blend of the telephone companies bringing a competitive high-speed internet to each city, and we can look then at combining that with our street lighting. One technique is being called “adaptable streetlighting”, where streetlights dim themselves at, say, midnight and then brighten themselves back up again at an hour before dawn, which allows you to save energy. So if you have that fiber optic communication network, you can communicate with your traffic signals, streetlights, weather stations, and all sorts of other things to advance a public purpose through innovative technological applications.
Gilroy: What lessons have you learned along the way in terms of implementing PPPs that you could share with others who may be contemplating similar moves elsewhere? What can other cities learn from Centennial?
Zelenok: I’m convinced that Centennial is a model for almost any city in the country in terms of public-public and public-private partnerships. More than any other large city in the nation, we’ve really broken the code, so to speak, in terms of demonstrating that a city of 100,000 people can truly operate with less than 50 governmental employees. We are completely debt-free as a city; in fact, we have a growing fund balance. We have infrastructure that I think is second-to-none that’s being maintained to some of the highest standards possible. And beyond that, we really think that there are always opportunities for partnerships, and that holds for any city our size.
We definitely had the benefit of being a newly incorporated city. In some of the more traditional cities, union contracts, for example, can be limiting in so many ways, based on the local circumstances and the specific terms of the contract. In some cases it may be impossible to outsource public sector jobs to the private sector. Sometimes legislation can be very limiting when it comes to a city’s ability to outsource or privatize any of what are now thought to be “inherently governmental” functions. But what’s often thought of as “inherently governmental” are often not so inherently governmental, just what’s been “traditionally” governmental.
Every situation will be different. If there are no legal barriers to outsourcing either at the state legislative level or internal to city charters, then there’s a world of opportunity out there for creating these new and innovative partnerships.
Also, the leadership and governing body—like the city council and senior administrative staff—needs to embrace and understand the value and importance of thinking outside the box, being creative and innovative, and applying these new approaches to managing cities in combination with new technologies. If you can find these opportunities and technologies and you’re open to this innovative way of thinking, then I think that many cities can benefit in terms of saving money, enhancing revenues and avoiding costs in ways they’ve not even begun to think about.
David Zelenok is the Chief Innovation Officer for the City of Centennial, Colorado. Zelenok has thirty years of senior transportation-related management experience at the municipal, state department of transportation and federal levels as well as having managed the “full spectrum” of transportation and public works operations, including Aviation, Mass Transit, Traffic Engineering, Toll Highway, Street Maintenance, Engineering Design and Construction Services as a consulting engineer.
Prior to his position with Centennial, he was Director of Engineering for Merrick and Company, one of the largest consulting engineering firms in Colorado, overseeing civil infrastructure design and business development in their Colorado Springs office. He also served fourteen years as Director of Public Works and Director of Transportation for the City of Colorado Springs.
Earlier in his career, he held a number of senior engineering management positions with the Pennsylvania Department of Transportation and on active duty in the United States Air Force. In 2003, he took a leave of absence from his position to serve on active duty in a number of assignments supporting United States military’s efforts in the Middle East as an Air Force Reservist. As Deputy Director of Planning and more recently, as Deputy Director of Operations for Air Force Space Command (both authorized Brigadier General positions), he was heavily involved in planning and operating much of the nation’s $11 billion annual military space program.
He holds a Bachelor's Degree in Civil Engineering from the United States Air Force Academy and a Masters Degree in Engineering from the University of Texas at Austin, and is registered as a Professional Engineer in the State of Colorado and the Commonwealth of Pennsylvania.
Other articles in Reason Foundation's Innovators in Action 2013 series are available online here.