In this post, we propose novel ways for public and private sectors to cooperate and get your views on the feasibility of new models that break the traditional Manichaean divide between public and private.
Currently literature about scaling is still at its infancy except for the growth and development of a private company. Scaling up a company or deploying a new product using market forces is what is currently visible: Look up “scaling up” on the web and you will find primarily links about this (such as the book by Verle Harnish). The Stanford Social Innovation Review is one of the exceptions to this and is looking at scaling approaches for social businesses. Several contributors to this website differentiate growth and scaling. Growth is what a company does to expand its business. And as stated by Kevin Starr and Laura Hattendorf “Growth is a fine thing, but scale is what solves problems, and so scale is what we look for”.
Scaling is not only about growth, it is about ensuring the large deployment of new solutions, of new models through replication or new connections. It is in general not only about developing the business of one company, it requires a broader approach. The Global Innovation Fund provides such a broader vision and distinguishes private, public and hybrid public-private approaches to scaling. Their definitions are:
- “Private sector scaling through self-generated revenues and growth via injections of market-based capital
- Public sector scaling through support from governments or non-profits/donor organizations
- Hybrid scaling through a combination of support from both the private and public sectors”
While this categorisation remains rather simplistic focusing purely on the origin of growth capital, our take in this post is that in most of the cases, a hybrid public and private approach is required for successful scaling. This is especially the case for disruptive innovation as explained by Mariana Mazzucato. As seen with the examples of Internet, of Google or Apple, innovation was in these cases triggered by inventions in the public sector. It took nevertheless smart and patient entrepreneurs to combine a series of inventions into new & successful products. By contrast, the established private sector, due to profitability constraints set by shareholders and adversity to risk, is generally only ready to invest in incremental invention and innovation.
Today, to address the challenges of our planetary boundaries, we need disruptive sociotechnical and systemic innovation in order to reinvent production methods, transport and mobility solutions, consumption patterns and to reduce the pressure on limited resources.
Public sector action is key to this: it can be free of short time constraints, can think in terms of public good and can mobilize many talents. But although it can create and develop new inventions, it generally fails to package them to meet the demand of customers and to deploy them at scale (which of course is not its primary role). Such deployment requires most of the time the involvement -or at least the mechanisms and some strengths- of private entrepreneurs.
There are several reasons why cooperation between public and private sectors does not function well. The most important one is related to the notion of “conflict of interest”. By definition, the public sector is working for the public good while the private sector has vested interest in its own success, which means that there is always (and often justified) suspicion that it does not work for the public good. Moreover many large and successful multinationals (see M Mazzucato’s book for this) pay none or insufficient royalties to the public sector to maintain its role of provider of disruptive innovation tools thus privatising profits from public investments. They also tend to control or avoid the emergence of new radical innovations.
Hence the model that tends to become predominant (as shown in the picture) is the model “public risk – private profits”. This model needs to change because (i) it slows down the development and deployment at scale of radical innovation, (ii) there is a great urgency to accelerate the pace of transformation of our economic and societal models, (iii) privatising profits from public investment does not hold for a sustainable societal model.
There are several examples of this need to reinvent the public-private cooperation:
- The results of many R&D projects end up on the shelf and do not express their potential to generate innovation: they have simply not been designed to involve entrepreneurs from the beginning and leave to serendipity the possible take-up of the results by the market/ producers.
- Many projects financed by public bodies generate interesting initiatives that cannot scale because they rely too much on grants and terminate when the grant is consumed. Their actors remain in a rent seeking behaviour, simply waiting for opportunities to mobilize other grants.
There is a need for change and developing synergies that ensure a smoother transition between public funding and private scaling: one or several types of hybrid models need to be developed.
There are different options for this and here are a few examples:
- A mixed public-private structure could be created using a not-for-profit model: the return on investment is not distributed to shareholders but is retained in the venture in order to accelerate the deployment of the products or services developed. In case of an exit, profits are shared between private and public shareholders
- Project funding from the public sector comprise a mix of grants and loans, or the public grants are (partly) convertible into loans in case of success. In this way the returns can be used to initiate the replication of similar projects in other regions for instance.
- The public sector can also act as a platform where different actors (social entrepreneurs in particular) can propose solutions that contribute to public good services. This solution (see Nicolas Colin Henri Verdier, in French) seem relevant in particular for the scaling of innovative services that benefit both the public good and private actors (e.g. mechanisms that reinforce ecosystems services, social innovation…).
There are probably many other hybrid and innovative models and some experiments might already be in place . We welcome case studies and initial lessons learnt from such models, especially if they have addressed the scaling issue.
To conclude, we need to remember that an important difficulty of possible new models rests with the conflict of interest issue, that translates here also into market distortion issue. When the public sector gets involved in a public-private venture, it still needs to play its role of providing a neutral playground where the most suitable and cost-efficient solutions can compete. It should therefore not engage when such competitive distortion is at risk (which is not the case for disruptive innovation in general) and it should exit as soon as such distortion could occur.
Further reading
Mariana Mazzucato: The Entrepreneurial State; debugging public versus private sector myths. Anthem Press 2014
Nicolas Colin, Henri Verdier: L’âge de la Multitude, Entreprendre et gouverner après la révolution numérique, Armand Colin 2014