Transcript Document

Centre for Market and
Public Organisation
Public services:
What can private and partnership approaches
deliver?
Paul A. Grout
Mexico, November 2008
Outline
• Background
• Definitions and taxonomy
• Some basic questions
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Why should sector matter?
The role of profit and competition
Public service motivation – is this a concern?
Can a long term partnership help?
What is the relevant benchmark?
How much does risk matter?
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Background
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• Private involvement in its various forms of
delivery of public services is now vast.
• $3.24 trillion of assets had been transferred
to the private from the public sector in the
preceding 20 years (significant proportion
of which consists of public services).
• 18 % of the global stock market value
• 39% of the non-U.S. total value
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• Trend to more private involvement in public
services has not happened in isolation- roots
lie in the broader privatisation strategy
pursued by conservative governments in the
1980s.
• The word privatisation is now met with
more scepticism - it carries a tarnished feel
which the word partnership nimbly
sidesteps since it suggests more of a close
balanced relationship than is really present.
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• Public services, Public sector, Public
Organisation
• Models:
– full privatisation (state’s role is ‘arms-length’)
– outsourcing type relationships (services are
provided on short/medium term contracts)
– public-private partnerships
– not for profit .
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• Cost overruns:
– 9 out of 10 infrastructure projects fall victim to cost
overruns
– average cost escalation is 45%
– for fixed links (bridges and tunnels) is 34%
– for all roads 20%.
– examples exist across five continents
– cost escalation has not decreased over the past 70 years
– average cost escalation for private fixed link roads is
34% compared to 110% for public
– NAO (UK) found on average cost overruns of around
28% road construction projects.
• So what?
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Why should sector matter?
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• contractual incompleteness is a significant issue if
cost reduction reduces quality
• if a profit maximising private company owns
assets then the company may to reduce costs
regardless of the consequences
• In contrast, the public sector will care about
quality as well as cost and any effect of quality
reduction should be taken into account
• But the public agent is harder to motivate
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• Net effect is that the private sector should provide
lower costs but lower quality.
• Where the social cost of non-contractible quality
reduction is large relative to potential cost savings
(e.g., brain surgery) then public provision may be
optimal.
• Where the social cost of non-contractible quality
reduction relative to potential cost savings is less
of a problem (e.g., telecommunications) then
private provision is likely to bring benefits
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The role of profit and
competition
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• An alternative view is what really makes the
public sector expensive is the absence of
competition
• private sector then plays indirect role
• private sector matters because it is the enabler of
competition (but it may not really matter which
sector does the delivery)
• for competition to be real there has to be a genuine
fear of termination of contract for the incumbent.
• evidence suggests competition matters
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Public service motivation:
is this a concern?
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• Public service motivation/pro-social
behaviour/donated labour
• Organisational models
• Mission matching models
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PUBLIC/PRIVATE
Gross
Income
Worked
Hours
Pay
Rate
Overtime
Paid
Unpaid
Overtime Overtime
Construction
0.95
0.91
1.07
0.62
0.66
0.60
Civil engineering
0.97
0.88
1.09
0.61
0.58
0.70
Prof & Techn
Services
1.05
1.05
0.96
0.48
0.23
0.64
Cleaning
1.03
1.01
1.02
0.73
0.88
0.00
Education
1.16
0.85
1.33
2.31
0.34
2.85
Hospitals
1.46
1.05
1.38
0.76
0.66
0.96
Medical Practices
1.15
0.80
1.33
2.27
2.90
1.71
Social Welfare
1.64
1.02
1.65
1.19
0.86
2.67
Source: British Household Panel Survey (averaged over eleven waves: 1991-2001) Variables used are Usual gross pay per month: current job, number of hours normally
worked per week, No. of overtime hours in normal week, No. of hours worked as paid overtime. Standard Industrial Classification 1980: 500 general construction &
demolition work, 502 civil engineering, 837 professional & technical services nec, 923 cleaning services, 932 school education (nursery, primary & secondary), 951
hospitals, nursing homes etc, 953 medical practices, 961 social welfare, charitable & community services
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NFP/PRIVATE
Gross
Income
Worked
Hours
Pay
Rate
Overtime
Paid
Overtime
Unpaid
Overtime
Construction
1.20
2.43
0.74
0.12
0.00
0.44
Business
Services
0.72
0.87
0.92
0.66
0.65
0.67
Education
1.18
1.13
1.02
1.34
0.55
1.57
Health
1.47
1.35
1.07
0.87
0.56
1.39
British Household Panel Survey (averaged over eleven waves: 1991-2001) SIC 1980: 50 Construction, 83 Business services, 93 Education, Health is a
combination of all 95X categories, i.e., 951 hospitals, nursing homes etc, 952 other medical care institutions, 953 medical practices, 954 dental practices, 955
agency & private midwives, nurses etc, and 956 veterinary practices & animal hospitals
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• BHPS data set: after including a robust set of
individual and job-specific controls, individuals in
the non-profit sector are 12 percentage points (or
more than 40 per cent) more likely to do unpaid
overtime than individuals in the for-profit sector.
• Using a fixed effects regression model can show
that there is no evidence that individuals change
their ‘donated labour’ when they switch sector.
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Can a long term partnership help?
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Why can partnership help?
• Bundling long-term service delivery with build is
potentially beneficial
• Particularly if cost of improving build is small
relative to information rent
• Bundling gives an incentive to build well since
this keeps delivery cost low and hence increases
the return (through information rent).
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Some key ‘modelling’ elements
• Moral hazard problem at build stage
• Consequences of build stage emerge slowly
• Information rent at service stage
• ‘Positive externality’ between build cost and
service delivery
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Problems
• Contract is based on service hence incentivisation
has to be done through service – this may be too
expensive
• Hold up problem - lose residual rights with PPPs.
• Note potential for ‘hold-up’ may not be all bad
news
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• A mechanism to modernise infrastructure
without having to find or borrow money today
• In terms of commitment a legal duty to pay in
the future may not be different from borrowing
today (this may depend on the risk that the
private sector is bearing).
• signing a PPP may be different from borrowing
if the final destination of borrowed funds is
more obscure and fungible than signing a PPP.
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When to choose PPP?
• The traditional approach to choice of technique
has been CBA based – compares benefits minus
costs of the alternatives
• Now simple tests are often used (e.g., VfM tests
used in many countries).
• The simple tests are unusual - they compare
‘costs’ of alternatives from the Treasury point of
view but this is not a comparison of costs in an
economic sense.
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When do CBA and simple tests give
same answer?
• No excess profit for the consortium
• Equal benefits across sectors
• ‘Identical’ discount rates for identical cash
flows between sectors
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Investment against Bureaucracy Quality
(PW database)
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Investment against Corruption
(PW database)
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• More likely to deliver on time
• More likely to deliver on budget
• More expensive but not once public overruns
taken into account
• Private management without build also
advantageous
• Procurement
• Renegotiation
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What is the relevant benchmark?
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• criticisms of payment delay justification assume that
public sector could borrow and do the project.
• not the relevant test – need realistic not hypothetical
alternative.
• politicians are usually deemed to be too short term
• the poor state of public sector infrastructure (hospitals,
schools, etc.) in many countries (including the UK) is
well documented
• So a mechanism that allows politicians to improve the
infrastructure of the country while passing on the cost to
those future generations as they benefit from it seems a
plausible way of correcting the distortion.
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There have always been political
economy influences from the start
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How much does risk matter?
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• There are some obvious incorrect views on
risk
• Risk necessary for incentivisation
• So risk transfer is essential
• However, some differences in discount rates
are purely financial measurement issues
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• An economic project has a cost stream and a
revenue/benefit stream.
• ‘Cost’ to Treasury of public delivery is the PV of
the cost stream of public delivery, i.e., a true cost
stream
• Cost to the Treasury of private delivery is the PV
of the revenues paid to the consortium, i.e., a
revenue stream based on benefits.
• Risk profile of costs and revenues can differ
substantially
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• Therefore public and private sector discount rates
may be the same for identical cash flows but there
may be significant differences between public and
private discount rates.
• Risk differs because
– Low marginal cost
– Incentivisation of private sector through
payment systems
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• In specific, but plausible circumstances
 Revenue
price

 Cost
marginalcost
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Figure 1. Regulated and control portfolios' beta coefficients
estimated for sub-periods
1.4
1.2
beta
1
0.8
0.6
0.4
0.2
regulated
7-Nov-00
7-May-00
7-Nov-99
7-May-99
7-Nov-98
7-May-98
7-Nov-97
7-May-97
7-Nov-96
7-May-96
7-Nov-95
7-May-95
7-Nov-94
7-May-94
7-Nov-93
7-May-93
0
control
Grout & Zalewska, Journal of Financial Economics, 2006
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beta
-0.2
-0.4
-0.6
-0.8
-1
07-Nov-00
07-May-00
07-Nov-99
07-May-99
07-Nov-98
07-May-98
07-Nov-97
07-May-97
07-Nov-96
07-May-96
07-Nov-95
07-May-95
07-Nov-94
07-May-94
07-Nov-93
07-May-93
Beta coefficient for the difference in returns between the regulated
and the control portfolios
0.4
0.2
0
What can we conclude?
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