Paul L. Posner

George Mason University

Business oriented approach to government

Performance goals and contracting

Shift from traditional bureaucracies to quasi-autonomous units

Shifting accountability from inputs to results

Replacing monopolies with competitive suppliers

Greater reliance on market institutions

Hollow state Disarticulated state Third Way Third party governance Privatization Hiving off, boarding out, outsourcing Devolution Governance, not government Network management Not your father’s public administration

Traditional Direct Government

Fully Private

Internal Managerial

Reforms

Quasi- Governmental organizations

Contracting for specific

Services/ products

Market based regulatory approaches

Public-Private Partnerships

Devolution

Tax credits and vouchers

Divestiture

From program/agency to tools and actors

From hierarchies to networks

From public vs. private to partnerships

From command/control to negotiation

From management skills to “enablement”

From internal controls to design

Shift in Public Management

Tools

Spend

Revenue

Regulate

Direct Services Grant-in-Aid Leases Procurement & Contracts Transfer Payments to Individuals Government Credit & Insurance

Corrective Taxes & Fees Tax Expenditures User Fees & Charges Vouchers

Social & Economic Regulation Permit Trading Information Training & Advise

Government Non-Government

Expands reach of government

Access skills and technology

Leverage additional financing

Promote efficiency

Access to clients

Reflect diverse local values and interests

Gain legitimacy

Advantages of

Indirect Government

Expanding the range of providers to decentralize service delivery

Relying on private partners to provide resources and deliver services

Shifting accountability from inputs to results

Supplant monopolies with competition

Increase financing for public initiatives

Improve technical capacity

Promote greater flexibility

Privatization Pressures

Public Finance Private Finance

Public Delivery

Direct Government

User Fees

Private Delivery

Contract Vouchers

PPP’s

Finance

Delivery

Public-Private Roles and Tools

Support services – non critical to mission and easily measured. Examples including building cleaning, guard services

Information technology and other back-office functions – economies of scale,

Traditional core government activities – prisons, food inspection, audit office, welfare administration, education, health care.

Infrastructure assets – public private partnerships

Types of services outsourced

Savings considerable. 33 percent savings in U.S. federal government from 2000 outsourcing initiatives.

UK – 20 percent savings, 15 percent in Australia

US - $6 billion savings achieved over four years

Economies of scale through shared services

Enhanced capacity and access to technology

Improved public sector productivity when they compete with private firms

Benefits gained from

private provision

Lack of competition reduces rationale for private over public Exclusivity at outset- sole source Overdependence over time – indispensable From competition to monopoly – entropy

Capacity of government to oversee contracts Exodus of government employees to contractors

General Privatization Concerns

(1/2)

Cost shifting and cherry picking

Inherently governmental functions Public ensures we get right things done Private ensures we do them right

Transparency – assigning credit and blame Private contractors’ information not publicly accessible Laws on public accountability and redress may not apply

General Privatization Concerns

(2/2)

Information asymmetries

Monopolies over production

Adverse selection

True capacities and incentives of agents unknown

Moral hazard

Inobservable behavior by agents

QUESTIONS:

The Painter and the Home Owner: Principal Agent

Homeowner needs information:

• What work is needed?

• How much should I pay?

• Which painter can be trusted?

• How much should I pay?

• How do I know if he is doing a good job?

B = Build

D = Design

F = Finance

L = Lease

M = Maintain

O = Operate

P = Purchase

T = Transfer

DB – contracts with public for design and construction

FDBOM – private role in all phases

BOT – private transfer to public

PMO – sale from public to private

LDO – private lease of public facilities

LO/LPO – public lease/public lease-purchase

Public Private Partnerships

For Assets

Classic PPP – Design, build, finance, maintain and operate over many years

Different from traditional outsourcing Private financing of up front capital costs

Private responsibility for multiple phases of project

Long term nature of contract

Relationship between public and private collaborative rather than arms length

Competition limited due to high capital financing and long term nature of commitment

Budgetary treatment tends to annualize costs, rather than recognize up front

Public Private Partnerships

Private Sector Brings Capabilities

Financing Capitalize underutilized assets Technical expertise Market efficiencies Integrated management across all phases of projects including

maintenance

Benefits include greater efficiency and savings UK – 90% on-time completion, compared with 30% for public projects UK – 75 percent of projects meet or exceed performance expectations

Public Private Partnerships:

Rewards

Risks from Private Participation

Higher costs of capital

Public values and support – concern over fees and control

Budgetary control

Contingent Liabilities – how much risk is government responsible for?

Oversight and Accountability

Truncated Competition

Public Private Partnerships:

Concerns

Construction risk: delays and cost overruns.

Financial risk: increases in financing costs.

Availability risk: threats to the continuous supply of capital services.

Demand risk: potential shortfalls in use of the asset by the public.

Force majeure: risks from natural or man-made disasters and war

26

Between 1993 and 2001 Chile awarded 21 road concession worth US$ 5 billion on a competitive basis

Bidding started with smaller projects, in order to test the market and reduce the risk to the private sector

The bidding attracted 27 consortia and more than 40 Chilean and foreign companies, from 10 countries

PPP program is viewed as transparent and competitive, with only one minimum revenue guarantee called

Surveys of users, consultations with local and national leaders, and focus groups graded Concessions System at 6 on scale from 1 to 7

Source: Cuttaree, World Bank, 2008

27

Between 1987 and 1995, 52 projects (25 competitively tendered) was awarded (largest PPP toll road program)

By the end of 1995, 34 projects had reached financial close for US$ 9.9 billion in private investment committed

Shortest concession period would win (max 15 years), led to very high tolls

Concessioned roads obligated to have a parallel toll free road Construction cost overruns averaged 25% and average actual

revenues were about 30% below forecasts (only 5 projects met or exceeded targets)

Average toll road fee increased from US$ 0.02/km to US$ 0.17 after concessioning

Government took over 23 projects and paid outstanding debt to Mexican Banks (about US$ 5 billion) and construction companies (about US$ 2.6 billion)

Source: Cuttaree, World Bank, 2008

Chile

Procurement process was transparent

Focus on creating public awareness (tolling culture)

Government learned as program developed and made adjustments

Attracting international firms brought finance, credibility, know-how etc…

Mexico

Combination of small contract duration and low traffic resulted in high tolls

Existence of free roads contributed to financial distress of concessionaires

Situation aggravated by Tequila crisis

Program resulted in massive Government bail-out

Source: Cuttaree, World Bank, 2008

Source? Wqold Bank

•Rate structures were immediately modified,

which resulted in increases of up to $20 in water

bills for local families, many of whom often earn

as little as $100/month

• In October 1998, groups gathered in protests,

which led to an outbreak of violence, when the

Bolivian army killed as many as nine, injured

hundreds and arrested several local leaders

•In 1999, the Bolivian government privatized the

water system in Cochabamba by granting a 40-

year concession to an international consortium

called Aguas del Tunari

•Finally, Aguas del Tunari announced that the

consortium was withdrawing from the project

Political leadership support

Legal frameworks to ensure enforcement of contracts

Effective governmental analysis and monitoring

Competitive procurement

Performance based contracts

Explicit risk allocations

Guaranteed revenue stream

Support from stakeholders including unions, public clients, other interests

PPP Success Factors