Business Model Choices for Government

IIIT-H

How do Governments govern ?

• GOI - Ministries and Departments are organized on the basis of the Allocation of Business Rules. Schedule I of the Business Rules lists out 80+ Ministries and Departments.

• [Council of ministers in 1947 – 16 members]– http://cabsec.nic.in/allocation_firstschedule.php

USA – 15, UK - 23

Advantages of focusing attention and resources vs inability to adopt

integrated approach• Transport

– Ministry of civil aviation– Ministry of Railways– Ministry of Shipping – Ministry of road transport, highways– Ministry of urban development

• Energy– Power, coal, Petroleum, Atomic energy

Should Governments be involved in, say, civil aviation at all?

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Deciding whether or not a service should be delivered by the Govt

Three core questions:

1. which part or parts of the proposed service should government itself deliver to its citizens? (the ‘core services’ question)

2. for all aspects of the service and supporting physical infrastructure, which model delivers the best value for money? (the ‘value for money’ question)

3. does that model satisfy the public interest criteria?

• Three kinds of efficiency – [efficiency is the ability of economy to convert lower-valued inputs into the greatest amount of higher-valued outputs]

• Allocative efficiency– Competitive markets drive prices toward cost levels and

then using those prices separate buyers from non-buyers

• Productive efficiency– Competitive markets reward more efficient firms with higher

profits and encourage the exit of less efficient producers

• Dynamic efficiency– demands optimal investment in new product / service

developments and process improvements

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• Allocative efficiency– Driving prices toward cost levels– separate buyers from non-buyers

• Productive efficiency• reward more efficient firms with

higher profits

Dynamic efficiency– optimal investment in new developments

What if the Costs are VERY

high?

Govt. Intervention

[railways]

What about

Not-ABLE buyers ?

PDS

What if higher profits

derivedfrom citizens are not socially desirable?

Subsidies

Aakash?

A form of a tool A fo

rm o

f a to

ol

A form

of a to

ol

9

Choices of Tools of Government

•Goods and Services•Direct Loans•Income Support•Contracting•Grants•Loans , Loan Guarantees•Tax expenditures•Guarantees•Insurance

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Tools…

•Goods and Services•Direct Loans•Income Support…

Direct Government

•Contracting•Grants•Loan Guarantees•Insurance…

Indirect Government

Growth in the Third-party government

• Transformation in the scale and scope of Government action and in its form

• Third Parties – Commercial banks, insurance agencies, Hospitals, educational institutions etc play a role in delivering public services

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An example from Maharashtra

Tools…

•Goods and Services•Direct Loans•Income Support…

Direct Government

•Contracting•Grants•Loan Guarantees•Insurance…

Indirect Government

PPP

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14

Public Private Partnership

• long-term arrangements in which the governments purchases services under a contract either directly or by subsidizing supplies to consumers …the government bears substantial risks - for example, by guaranteeing revenue or returns - on projects that sell directly to consumers

World Bank

15

Various Models for Private Sector Participation

Risk Transferred to the Private Sector

Govern

men

t C

on

trol

Privatise

Conventional

PPP

Outsource

Source NISG

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Common PPP Structures:

Type of Contract

Duration

(years)

What the Private Contractor Receives

Nature of Private Contractor

PerformanceExamples

Service Contract (outsourcing)

1-3Fee from government for performing a non-core service

Definitive, often technical type of service

Website design and management, ICT Capacity Building

Management Contract

3-8

Fee from government for the service and a performance-based incentive

Manage the operation of a government service

Call center staffing; Seat Management, Parking enforcement, regional water supply management

Lease 8-15

All revenues, fees or charges from consumers for the provision of the service; the service provider rents the facility from government

Manage, operate, repair, and maintain (and maybe invest in) a service to specified standards and outputs

Land for ICT Infrastructure Development, Existing airport or port facilities

BOO & BOOT 15-25The government mostly pays the service provider on a unit basis

Construct and operate, to specified standards, the facilities necessary for service provision

ICT Infrastructure; e-procurement systems; e-business portals; Network of Kiosks

Concession 15-30

All revenues from consumers service provision; the service provider pays a concession fee to the government and may assume existing debt

Manage, operate, repair, maintain and invest in public service infrastructure to specified standards

Telecom operations and expansion, New airport or seaport facilities, toll road or bridge

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Behaviour of Actors

• Pluriformity - Govt engage diverse range of organisations many of which have limited experience in cooperating with each other and limited knowledge of each other’s operating styles

• Self-referentiality– each actor has own interests and frame of reference and hence incentives

• Asymmetric interdependencies–govt and 3rd parties are dependent but rarely in a fully symmetrical form

• Interest in Allocative efficiency

–Government Vs Private

• Interest in Productive efficiency

–Government Vs Private

• Interest in Dynamic efficiency

– Government Vs Private

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Tools and “actors” give rise to risks…

• Risk of a project is unpredictable variation in the total value of the project, taking into account value accruing to project owners / sponsors, customers, the government, and other stakeholders.

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Risks

• Who will bear the costs of land and buildings for State Data Centers?– Who is responsible for allotment/ procurement

of land?

• Who is responsible for design, delivery and maintenance issues relating to eGov solutions?

• What is the guarantee that CSCs will have a minimum “volume” of business?

• What if the prices rise – due to inflation etc?

Typical Risks– Land acquisition,

planning and permissions

– Design

– Construction

– Commissioning

– Latent defects

– Operating performance

– Operating and maintenance costs

• Demand (volume)

• Policy

• Residual value

• Inflation

• Regulatory

• Taxation

• Force Majeure

• Changes in requirement

Risk effects• Increase in costs

• Delays

• Resource constraints

• Loss of revenue

• Political consequences