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Familiar Mechanisms:

1. private markets (most goods)

2. (pure) public provision (e.g. primary

and secondary education, defense)

3. regulated private provision (e.g. local

telephone service)

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External effects and public goods

Social justice (to assure adequate

consumption for everyone)

To control monopoly

Other reasons (e.g. poor information)

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High and rising costs

Weaker on-time performance

Less innovative

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Ability to control costs

Ability to bear risk

Complementarities Flexibility

Innovativeness

Key knowledge

Economies of scale/scope

Ability to borrow (Can the gov. borrow more

cheaply?)

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Contracting-out (C-O)

(e.g. refuse collection, IT services)

Public-Private Partnerships (PPP)

(e.g. roads, water, schools, prisons)

Privatization

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contractual arrangements between

government and a private party for the

provision of assets and the delivery of

services that have traditionally beenprovided by the public sector

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a cooperative venture between the public

and private sectors, built on the expertise of

each partner, that best meets clearly defined

public needs through the appropriateallocation of resources, risks and rewards.

(Canadian Council on Public-Private

Partnerships)

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The term public-private partnershipshas taken on a very broad meaning. Thekey element, however, is the existence of

a partnership style approach to theprovision of infrastructure as opposed toan arms-length supplier relationship aPPP involves a sharing of risk,responsibility and reward, and isundertaken in those circumstances whenthere is value for money benefit to thetaxpayers.

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Sharing of risk and reward between public

and private partners

Sharing of authority for decision-making

On-going relationships, not spot-market

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Private sector involvement in provision of

public services is not new e.g. the private

sector has frequently provided:

Basic supplies (e.g. paper, pens, desks) Equipment (computers, medical, automobiles)

Construction services

Consulting services

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The increased scope of the private sectors

participation particularly in:

1. provision of financing

2. provision of operation services

3. ownership of assets

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They can be:

Private, for-profit firms

Consortia of private, for-profit firms

Private, not-for-profit firms

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Private sector involvement can range from

zero (pure public) to total (pure private)

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Pure Public Pure Private

Contracting-out PPP

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Britain pioneered new wave with Private

Finance Initiatives (PFIs) beginning in early

1990s

Now popular in many countries Promoted by World Bank in developing

countries

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Roads

Schools

Hospitals Prisons

Bridges

Railways

Airports Sewerage

Water treatment

Property

managementRecreational

facilities

Information tech.

Social services Electricity

gen/trans/dist

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DESCRIBE THEM TO YOUR NEIGHBOUR.

YOURREIGHBOURREPORTS IN PLENARY

10 MINUTES

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Incinerator

Biosolids

processingRecycling

programs

Water treatment

BridgeBuilding

revitalization

Harbourrevitalization

Electric utilityParking

management

Public transit

Recreation centresBusiness park

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1. Define and design the project

2. Finance the project

3. Construction (build the project)

4. Operation & maintenance of the project

5. Pay for the service

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1. Are there complementarities betweenthe tasks such that some should becombined?

2. Who is most efficient at the task?

Special knowledge economies of scale or scope?

3. Can the right incentives be put in placeto get optimum performance? (contractdesign issues)

4. How should risks be allocated?5. Can there be strong competition

between potential private sectorpartners?

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1. More powerful incentives

2. Competition3. Expertise/Specialization

4. Complementarities

5. Facilitating user-pay

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High-powered incentives to control costs

due to profit motive

Ability to manage risk

Flexibility

Innovativeness

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Managing risk is really about managing

incentives the point is to assign the risks in

such a way as to minimize those risks.

This is done by subjecting the party most

able to control a risk to the costs associated

with that risk.

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1. Technical risk (engineering or design failures)

2. Construction risk (higher than expected costs)

3. Operating risk (higher operating costs thanexpected)

4. Revenue risk (lower demand than anticipated)

5. Financial risk (inappropriate debtmanagement)

6. Force majeure risk (war, natural disaster)

7. Regulatory/political risk (changes in laws)

8. Environmental risk (environmental damage)

9. Project default risk (failure through acombination of these risks)

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Can lower prices taxpayers or users pay

(allocative efficiency)

Provides further incentives for cost

minimization (productive efficiency) Provides further incentives for innovation

(dynamic efficiency)

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May have key knowledge not available in

public sector (esp. in developing countries)

Economies of scale/scope with related

projectsComplementarities with other parts of the

given project

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Benefits from coordinated decision-making

with respect to:

Design & Construction

Construction & Operation

Financing & Construction

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Most often government (taxpayer) pays Direct pay (e.g. lease payments)

Shadow tolls (govt pays but payments based onactual usage)

In some cases there is user-pay (e.g. tolls,but usually with regulation of tolls)

User-pay may be more acceptable in a PPPthan in public provision

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Most commonly expressed:

1. Loss of public control of public services

2. Higher cost of private sector borrowing?

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What if changing circumstances demand a

change in level or type of services?

What if renegotiation is difficult, time-

consuming and costly (note: there is nocompetition at this point)

What if it is difficult to measure and verify

quality?

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Not necessarily we must consider:

(i) Private partner can raise capital at a

low cost for a safe project(ii) Govt marginal cost of borrowing might

be higher than average cost

(iii) There is a value to the put option

(government pays lower rate onlybecause it will repay with nearcertainty)

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1. Typically a significant specific investment

involved creates significant switching

costs.2. Specific investments protected by

contracts but contracts always incomplete.

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PROSPROS CONSCONS

Competitive processCompetitive process

Increased transparencyIncreased transparency

Well designed risk allocationWell designed risk allocation

Balance sheet considerationBalance sheet consideration

Private sector efficiencies andPrivate sector efficiencies andinnovationinnovation

Commercial risk sharingCommercial risk sharing

ComplexityComplexity

High transaction costsHigh transaction costs

Higher borrowing costs thanHigher borrowing costs thanpublic financingpublic financing

Skill deficit for AdministrationSkill deficit for Administration

Structuring risksStructuring risks

Public perception and politicalPublic perception and politicalreactionsreactions

Reference EBRD 2004

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Both trade partners will act opportunistically

and bargain over the surplus

This is costly!

Public provision avoids/mitigates this costOne disadvantage/cost of a PPP relative to

public provision: inefficient bargaining

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Three main possibilities:

1. Good contracts (can be costly to negotiate)2. Good reputations private partner wants future

business and public partner does not want to

scare away potential partners for other ventures

3. Public provision

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Uncertainty over a long horizon

Changing government objectives

Lack of commitment for both:

Private sector (bankruptcy/exit)

Government (break contract, renegotiate)

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Control and risk allocation become very

important

Characteristic of PPPs: transfer of control

and risk from public to private sector Cost: loss of control

Benefit: increase in size of surplus, as long as

private sector more efficient

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We see that spot markets work well to supply

goods and services governments and their

citizens need when:

There is lots of competition and supply

No significant specialized investments are involved

(e.g. pencils for schools)

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PPPs become an attractive option when

Significant specific investment

Low cost of contracting

Most important uncertainty can be anticipated and

considered in the contract

Outputs measurable and verifiable

The private sector brings efficiency improvements especially with competition

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Pure public provision looks good when

Significant specific investment

Complex or uncertain environment

Significant need for public sector flexibility/control

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1. Exante competition important

2. Private sector might have scarce skills

3. Private sector may benefit from economies

of scale4. Labour relations important

5. Observability and measurability of quality

a key issue

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1. Constraints on public borrowing favours

PPPs

2. Professional PPP shop may be a good

idea (but beware regulatory capture!)3. Risk goes to party most able to

manage it

4.

If the project requires innovativethinking this favours private sector

5. Complementarities will be important in

allocating tasks.

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THEEND

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