PrivatizationAnd

Outsourcing

Sara hoseiniAmeneh moharerhaye esfahani

THE EVOVLING DEFINITIONS OFPRIVATIZATION

• Privatization in its most traditional form referred solely topublic sector divestiture of assets and serviceresponsibilities, allowing the private sector to take overall aspect of service and service delivery.

Time brings even more frequent examples that don’t fit thetraditional model. [1]

• “It is a tool for improving the economic activities throughstrengthening the market provided at least 50% of theestate shares are sold to the private sector” ( Bessly,1983:1).[ 2]

• “it includes methods which change the nature ofrelationships between public and private sectors, suchdenationalization, selling state properties, deregulation,contracting products and services”(Kay and Thomson,1986:18)[2 ]

Privatization[1]• Current trends in the field of

privatization denote not onlywidespread acceptance buta maturation as well.

• The definition ofprivatization has became anindicator of evolution intechniques and practices.

• It is no longer a partisan orideological issue but apragmatic and increasinglyroutine approach togoverning and to managingpublic services.

A revised categorization forprivatization[1]:

• Asset sale or Long-term lease• Contracting out ( out sourcing)• Corporatization• Franchise• Internal markets• Joint venture• Management contracts• Private infrastructure• Public- private partnerships• Self-help• Volunteer• vouchers

Asset Sale or Long -TermLease

• The government sells or enters into long-term leases forassets such as airport, gas utilities, or real estate toprivate firms, thus

Physical capital Financial capital[1]In general the government has no role in financial soppurt,

management , or oversight of a sold asset.[3]Two techniques for asset sale:[1]• Sale-leaseback: a government agency sells the asset to

a private sector entity and then lease it back• Employee buyout: existing public managers and

employee take the public unit private, typicallypurchasing the company through an Employee StockOwnership Plan (ESOP).

Corporatization[1]:

Government organizations arerecognized along businesslines. They are required topay taxes, raise capital onthe market and operateaccordingto commercial principles.

Government corporation focuson maximizing profits andachieving a favorable returnon investment.

They are freed fromgovernment procurement,pessonel and budgetsystems

Internal markets[1]

• Departments are allowed to purchase support services from in-houseprovider or outside supplier.

• In-house providers of support services are required to operate as anindependent business unit competing against outside contractors for eachdepartment’s business.

� Market forces are brought to bear within an organization� Internal customer can reject the offerings of internal service

providers if they don’t like their quality or they cost too much

• Departments are allowed to purchase support services from in-houseprovider or outside supplier.

• In-house providers of support services are required to operate as anindependent business unit competing against outside contractors foreach department’s business.

Public-private partnership&

Self-Help[1]

• Public-private partnership: The public sector works alongwith the private and nonprofit sectors and they canbenefit from each sector’s special strengths, share risk,and minimize weakness.[1]

• PPP’s can create linkages between different actors inthe supply chain to integrate smallholders to overcomemarket failures at key chain bottlenecks.

• Self-Help: Community groups and neighborhoodorganizations take over a service or government assetsuch as a local park. The new providers of service alsodirectly benefit from the service. [1]

Joint Venture[1]• Government and private sector agencies

from a joint board of directors to controlasset management and service delivery andshare responsibility for policy andmanagement decision.

• Asset maybe owned by government or by enew private firm.

• Operation and service delivery may becontracted to the private partner or jointlyprovided.

Management contracts&

Franchise[1]• The operation of a facility contracted out to

a private company. (Facilities such asairport, wastewater plants, arenas, andconvention centers.)

• Franchise: A private firm is given anexclusive right to provide a service within aspecified geographical area.

Private InfrastructureDevelopment and Operation[1]

• The private sector builds, finances, andoperates public infrastructure such asroads, airports, recovering cost throughuser charges with several techniques:

� Build-Operate-transfer (BOT): The private sectordesign, finance, builds, and operates the facilityover life of contract. At the end of this period,ownership reverts to the government.

�Build-Own-Operate (BOO):The Prive sector retainspermanent ownership and operates the facility oncontract.

Volunteers&

Vouchers[1]

• Volunteers: Volunteers are used to provide all or part ofa government service. Volunteer activities are conductedthrough a government volunteer program or through anonprofit organization.

• Vouchers: Government pays for the services. Thesepayment subsidize the consumer of the service , yetservices are provided by the private sector. In addition toproviding greater freedom of choice, voucher bringconsumer pressure to bear, creating incentive forconsumer to shop around service .for service providersto supply high-quality, low-cost services.

The reasons of privatization’s growth[1]:

• Improve efficiency• Reduce the role of government• Allow private firms to perform commercial work

that is not intrinsically governmental.• Expand the role of local, nongovernmental, and

community-based organization.reduction in people’s dependence on

government, thereby reducing public resistanceto greater reliance on market mechanisms.

Summery of Before-and-afterstudies of contracting[1]

20324891State of westernaustralia, 1993-1994

2717423Wandsworth borough,London 1978-1987

314,7682,138U.S. Department ofDefense, 1978-1994

28701 (millions $)812Los Angeles county,1979-1989

Saving(percent)

Cost beforecontracting

Numberof

contracts

Contracting agency

New opportunities[1]

The major area to profit from privatization Are:• government owned enterprises• infrastructure• social insurance .The three are radically different and,

therefore, so are the ways thatprivatization is likely to evolve.

Examples ofgovernment owned enterprises[1]

(in U.S.):• Export-Import Bank of the

united states• Federal prison Industries• United states postal

service• National railroad

passenger corporation• Legal services

corporation• Rural telephone bank• Corporation for public

broadcasting

Examples of infrastructure[1]

• Water supply• Waste-Water treatment• Transportation• Prisons

Examples of social insurance[1]:

• Social security:Retirement system• Social service: child care,job training,

administering social programs undergovernment contract.

� vouchers are emerging as the preferred privatization method forsome social welfare services for two reason:

1-social services have been monopolistic, and vouchers introduce competitionwhich destroys monopolies and improve services

2-It is difficult to specify quality standards in social services contracts, butvouchers offer a solution because standards do not have to be articulated.

Impact of Privatization andManaged Competition on Public

EmployeesEmployees fear:• Loss of jobs• Reduced benefit• Lower earning• Uncertainity about future working conditions• New policies• Job requirement

Crucial issues in managing a privatizationinitiative[1]:

• Communication• Employee involvement• TrainingSome public officials believe that the

problems with government efficiency andperformance do not lie with employees butrather with government structure andsystem

Decision making process toward asystematic approach

Several pitfalls can occur without an establisheddecision making processAccurate and complete cost data for public services arenecessary for an effective competitive process.

• Indiapolis and philadelphia have developed systematicapproaches to evaluate both privatization andcompetition for services.– A commission in Indiapolis includes both public and private sector

representative and analyzes costs, competitiveness, and performanceevaluation. The Indianapolis model managed competition allows publicemployees to bid contracts

– Philadelphia includes a 19-point checklist in its competitive contactingprogram that city employees use in evaluating contracting for service.

Decision making process :toward asystematic approach[1]

Outside sources• Citizen and customer involvement for can help:

-To build a political case for privatization-Shield against potential opposition-Ensure against a charge of favoritism or corruption in

the privatization decision-making process• Well-developed privatization or competitive

initiatives involve many technical, financial, andlegal issues that require expertise from variety ofsources. They also demand citizen andemployee input to help provide accurateinformation and encourage an open process.

Managed competition andemployee transition[1]

• Evaluation:Involvement of employees in the decision making process can minimize the

potential conflict over workforce changes such as privatization.• Opposition:

Official encounter fewer obstacles to contracting initiatives overall but still faceopporsition from employees.

• Emloyee programs• Managed competition:

Allowing government departments to compete with the private sector in the biddingprocess. These managed programs empower employees

to structure bidsConduct cost comparisonsChange the service delivery paradigm.

• Growth in the use of employee strategies appears to be formalizing a rolefor employee at the policy level and making permanent changes inorganizational structures and relationship and labor-management relations.

Monitoring and performanceevaluation

• Techniques:1- monitoring citizen complaints2-analyzing data and records3-conducting field inspections4-conducting citizen survey

It is wise for cities to use a variety oftechniques. A single approach may notprovide a proper overall picture ofperformance.

Case study1[4]

Port privatizationefficiencyand competitiveness

Introduction & theoreticalconsideration

• Today, one of the most obvious phenomena inport industry is port privatization, since portsform a vital link in the overall trading chain andefficiency is an important factor for a nation toachieve internationally competitive advantages.

• Based on the principal-agent theory, privateownership should be more efficient than thepublic one (Hartley et al., 1991;Parker, 1994)..

• The transformation from public to privateownership, even without change in thecompetition, will be associated with improvedefficiency (Hartley et al., 1991;Parker, 1994).

Results of past studies:deny�confirmsubject

Coto-Millan et al.(2000)Tongzon(2001)

Martinez-Budria etal.(1999)Notteboom et al.(2000)Cullinane et al.(2002)

The effect of portsize on portefficiency

Van Den Broeck etal.(1994)Braid(2000)

Liu(1995)Coto-Millan et al.(2000)Cullinane et al.(2002)Estache et al.(2002)Cullinane et al.(2002)

Relation betweenport ownershipstructure and portoperation efficiency

Determinant of portcomptetitiveness

• Port (terminal) operation efficiency level• Port cargo handling charge• Reliability• Port selection preferences of carriers and shippers• The depth of the navigation channel• Adaptability to the changing market environment• Landside accessibility• Product differentiation

Methodology:

• This study uses stochastic Frontier productionmodel of Battese and Coelli (1995) to investigatethe relationship between port ownershipstructure, port size and technical efficiency. Thetechnical inefficiency effects are specialized as afunction of firm specefic variables, and theparameters of an inefficiency model arestimultaneously estimated with those ofstochastic frontier production model.

Variables of Stochastic frontiermodel:

• Variables::the production at the tth observation (t=1,2,…,N) for

ith firm

: the logarithms of input variables

: iid random errors, independently distributedof:non-negative random variables, denoting technical

inefficiency of productionit

it

it

it

U

V

x

Y

),0( 2σNitU

)exp( itititit UVxY −+= β

Stochastic frontier model:

• The second equation is the regression ofthe inefficiency effect, on the variablesthat explain this inefficiency.

itU

itWitzitU

Mitz

+=

×

×

σ

σ

σ

2varianceandmeanzeron withdistriutionominaltheofionby truncatdefinedis:it

W

estimatedbetoparametersscalarunknownofvector1)(a:

variablesexplantoryobsevarbleofvectorM)(1a:

Stochastic frontier model:• The method of maximum likelihood is proposed for simultaneous

estimation of parameters of the stochastic frontier model and the

parameters technical inefficiency effects model.

port.ithfor theindicatorkththevalueoffreeunit:indicatorkthofweightthe:

portiththeofindexenesscompetitivport:

)exp()exp()exp()exp()exp(

ik

k

i

ikKi

ititit

ititititititititit

XWPCI

XWPCI

WzuvxuvxvxyTE

∑=

−−=−=+−+=+=

σβββ

Stochastic frontier model:• Then the above port competitiveness index is used to justify the use

of total throughput as a proxy for port competitiveness and run alinear regression of the total throughput on the determinants of portcompetitiveness :

The determinants of port competitiveness are entered in the model asthe independent variable.

The coefficient on these independent variables represent the effect ofdeterminants on the port competitiveness.

i.portoftthroughputotaltherepresent:PC),(

i

αiki XfPC =

• The estimates are based on the maximum likelihood method relyingon the FRONTIER package, version 4.1. The stochastic frontierproduction function to be tested is;

variables

• The test on functional forms can be carried out by the generalizedlikelihood-ratio method, which works as follows:

Where and are the value of the likelihood function under thenull hypothesis and the alternative .

In this case if is true, the generalized

likelihood –ratio stochastic, LR, has asymptotic distribution which is amixture of chi-square distributions.

[ ] [ ]{ })()(2 10 HLLnHLLnLR −−=)( 0HL )( 1HL

)( 1H)0( 9876540 ======= ββββββH

0)(: 22

2

0 =+≡p

H σσσγ

• The model for the investigation on port competitivenessare as follows:

iiiiiiiiii

iiiiiiiii

XXXXXXXXPC

XWXWXWXWXWXWXWXWPCI

εααααααααα +++++++++=

+++++++=

88776655443322110

8877665544332211

-0.639 :Ports with larger size are more efficient than port with smaller ones.-0.666: Positive relationship between technical efficiency and privatization in port industry+0.415 : An inverted U-shape relationship between technical efficiency and privatization

Burchardkai(German) Felixstow (UK) PSA(singapore)

PRIN1=0.53 EFF+0.25 DEP+0.52 NDC+0.58 LAN+0.24 ADA

Efficiencyport selection preferences of carriers and shippers

lanside accessiblity

Conclusions:1- Private sector participation in the port industry is useful for improving

port operation efficiency.2-This study shows that the best extent of private participation in

container ports/terminal is between the private public and the privatemode.

3- It is better for port authorities to limit the private sector participationwithin the “landowner and operator” function and take over theregulatory function.

4-port authorities should introduce private finance, operational &management instead of state funds and administration while theyremain in place as regulators.

5-implying partial privatization is as a quite effective way to help portauthorities to win in the competition.

6-Another most important factor is adaptability to the customer’sdemand.

Case study2[5]

Institutional and structure changesin air navigation service-providing

organizations

Major changes in ways in whichANSs are provided:

• Single Europe skies• Financial factors• Technology• Ownership and economic regulation

The air transportation value chain

• ATC is one element in a longer value chain thatultimately provides air transpotation services tocustomers.

• One reason to recent pressures to review thenature of ANSs is that many airlines marketshave been found to be financially unstable,whereas the overall air transportation industry,including navigation services has enjoyedrelatively high returns.

the underlying problem with the airlines is their inability to recover thefixed costs of providing scheduled services in what are now oftencompetitive markets.

Supply models and ownership• The ownership really did not matter when it came to efficiency (Anglo-

Saxon 1970)-It is the market structure within which suppliers operate that is the

determinant of behavior.-Public ownership may be desirable when there are public good elements

in supply and other alternatives, such as subsidies, are difficult , forreason leakage and transaction costs, to apply (but in these cases itwas a matter of practical expediency rather than a firm criteria)

-in other instances, where there are serious externalities, that cannot, fortechnical reasons, by easily internalized by properties right allocation,again public ownership can be justified.

-when the output is a merit good again there may be a rational for publicownership.

But in these cases, once provided is not ownership per se thatdetermines efficiency but rather the incentive structures thatinfluence the behavior of management.

• “ownership deosn’t matter”.• new forms of regulation, most notably

price capping• Outsourcing• “For” market & “In” market• Commercialization• Flexiblity of privatization in investment

financing

Privatization and some relatedmatters:

Commercialization?• In practic, commercialization includes:

1- the creation of public-private partnerships2-corporations3- not-for-profit corporations

4- the use of user charges5-access to private financial markets,6-tendering-out services(commercialization doesn’t not, however, always mean

privatization in its full sense; it can entail changing theways in which a government-owned enterprise isfinanced, regulated, and managed.)

Variants available of the formation of public/privatepartnership with both parties having a share in the

ownership of the enterprise

What did the table say?

• There has been a demonstrable shift away fromstate ownership but with a variety of institutionalstructures emerging.

• The different approach to corporatization can beseen to reflect wider national attitudes to thetopic with some countries having a tradition ofpreferring particular types of corporate entitiesand experiences of there workings.

Rate regulation• Rate-of- return: rate of return conditions-notably non-profitability-

built into the terms under which the corporation is established. (USindustrial policy, Canada, Netherlands, South Africa, andSwitzerland)

• Price capping: the setting of maximum average price across abundle of output that is related to changes in general price levels,was initially developed in the UK by Littlechild (1983) for theprivatized telecommunications sector.

It was advocated because of its low informational needs and it isdirectly aimed at minimizing X-inefficiency, both static and dynamic.

• Commission: some countries have commissions that monitor therates that are levied; the ministry fulfills this role in a number ofcases.(Canada, Australia, South Africa,..)

(X-inefficiency: arises largely because of the ability of the regulated agency to capture thesystem and to enjoy significant inert areas without the pressure of full cost efficiency)

How was done assessment?• The quantitative assessment with trend analysis• Using trend assessment for the dynamic response of a

ANSP• The time frame= 8 years• Economic regulatory analysis form, examines the ties

between the structure of an organization and it economicperformance through the way it conducts itself in themarket.

Fig .Annual capital exepditures of larger ANSPs (in 2004 prices)

• “ Commercialization has allowed the ANSPs to implement modernizationprojects more effectively”

• Any discernable pattern for smaller ANSPs because their investment tend tobe discrete and irregular.

38%2004

1997

FAA

24%2004

1997

Other five(average)

What the data don’t show…• The nature of the investment• Commercialization and access to private finance market pushes

their organizations towoard the maximum production possibilityfrontier but there are clear problemsof self-interest involved in theseinsight.

• Investment program are dependent on the capital base.• Effect of event such as 11 September 2001.• Government guarantees help, but moral hazard problems abound.

$ 170 million operation and maitenance reserve$ 125 million debt-service reserve$520 million as unallocated credit facility balance

NAV Canada

$ 38.6 million liquidity reserve$4 million debt-service reserve for 6 month

NATS UK

$ 70 million in standby/money market facilities$4 million in overdraft arrangement

Airservice Australia

Labors: Air traffic controllers• 60-70% of a typical ANSPs’ operation cost are labor costs and

ANSPs heavily reliant on their air traffic controllers.• Increase strikes and other form of disruption• NAV Canada employees have received higher wage than their

counterparts in the public sectors.(37%>22%)

Staff savings

FAA &NATS UK&NAVCanada

An increaseSwitzerlandSout Africa

Aftercommercialization

1100

700

Airways NZ

With reductionin the numberof controlareas from 5 to2Adopting newtechnology

4000

2000

AirserviceAustralia

Qualitative considerations:• The Interaction with customer (“good will”)

This can be important for minimizing the economictransactions costs of delivering a service.

• In many cases there requirements for consultation withcustomer concerning service charges (South Africa, NAVCanada).

• NATS UK has developed an operational partnershipagreement with customer to share knowledge on sectorgrowth and delays; this has had some successesincluding major reductions in delays at Manchesterairport through implementation of new procedures.

Air navigation and militaryunder commercialization

• Most of countries that were studied in thiscase, had separate departments andcontrollers but they had agreements withANSPs about services and exchangingdata and information.

Delays:• Delays are very costly to

airlines and theirpassengers and freightcustomer.

• The FAA is the mainexeption, where delayswere rising before theattack on the US andbegan to rise againrelatively soon after theevent.

• Predictability of delays isas important as theamount of delay.

Safety:• Major incidents are

extremely rare in airtransportation and hencethere is a tedency tomake use of proxies.

• The airprox trendsindicate a generaldecrease in seriouspotential safety incidentsfor some commerciallydriven ANSPs in UK,Canada but an increasein others

Consolidation as a way to costreduction:

Has consolidated fourradar centers into two

?New Zealand:

With consolidationtwo operations intonew Swanwick Center

$13(2002-2003)

UK:

savingcountry

Transition Project

Privatization/Contracting PROGRESS• Improvements Have Been Made to the Legislative Framework

Governing Procurement, Acquisition, Contracting and OutsourcingProcesses

• Increased Simplification of Procurement and Contracting Processesand Expanded Use of Business-Oriented Acquisition Models andInformation Technology

• Expansion of Performance-Based Contracting and Other Results-Oriented Procurement Vehicles

• Agency Efforts to Pro-Actively Manage Contract Disputes Have Ledto a Substantial Decrease in the Number of formal Bid ProtestCases Taken to the GAO

• Where Applied Effectively, the A-76 Process has StimulatedGovernment to be More Competitive and Strategically Rethink itsProcesses

Transition Project

Privatization/ContractingCHALLENGES

• Additional Efforts are Needed Within Each Agency to Simplify andStreamline Procurement and Contracting in Government

• Agencies Continue to Struggle to Implement Performance-basedContracting and Effective Contract Monitoring Systems

• Implementation of A-76 is Uneven Across Government, With TheProcess Not Used Effectively by Most Agencies

• The Quality of Cost Data and Financial Information used in theProcurement and Outsourcing Processes Needs to Improve

• Significant Problems Surround the Implementation of the FederalActivities Inventory Reform (FAIR) Act

• Greater Efforts are Needed to Involve and Protect FederalEmployees During the Outsourcing Process

Transition Project

Privatization/ContractingCHALLENGES

• Tension Between Program Staff and Contract Staff Exists, witha Need for Greater Collaboration between the Two Communitieson Improving the Procurement and Contracting Processes

• Some Contract Officers and Program Managers Lack the SkillsThat will be Needed as Government Increasingly Turns TowardsContracted Services and Outsourcing

Transition Project

Privatization/ContractingRECOMMENDATIONS

• #1 Develop an Aggressive Champion to Lead Efforts to ImproveContracting, Procurement and Outsourcing in the FederalGovernment

• #2 Aggressively Implement Performance-based Contracting andProvide Incentives to Contractors for Improved Results

• #3 Launch a Process to Re-Engineer the A-76 ProcessGovernment-Wide

• #4 Continue the Trend Towards Simplification, Flexibility andStreamlining in Government Procurement

• #5 Develop Specific Proposals to Remedy the ShortcomingsIdentified in the A-76 Process

Transition Project

Privatization/ContractingRECOMMENDATIONS

• #6 Examine Alternatives to the A-76 Process• #7 Invest in Training Federal Contract Officers and Line

Managers for Managing Government Programs in a HighlyContracted and Outsourced Environment

• #8 Fully Implement the FAIR Act, Emphasizing Its Use as a Toolfor Creating a Data Base Rather than Merely a PrivatizationVehicle

• #9 Collaborate with Employees and their Unions DuringOutsourcing Initiatives and Develop Pension and BenefitPortability Solutions

Opportunities for partnership exist

Partnerships can improve access to– New technologies, and tools– New research expertise and infrastructure– Private equity markets; donor funding– New product markets and new customers– New marketing and distribution networks

� Synergies through knowledge sharing, jointlearning, scale economies, resource pooling,and cost sharing

The role of partnerships in supply-chainmanagement

• The Policy Dialogue highlighted the roles that partnerships can playin maximizing the efficiency and effectiveness of sustainabledevelopment orientated supply-chain management strategies.Examples discussed at the dialogue included:– • Partnerships between groups of companies working with the

same suppliers, enabling partners to develop common standardsand share the costs of monitoring and verification (e.g. the workdone by the Hudson Bay Company with other department storechains internationally).

– • Partnerships which build private sector capacity in developingcountries, enabling companies to start sourcing products andservices from local suppliers, thereby increasing their economiccontribution to host countries and reducing operating costs (e.g.the work done by Chevron Texaco and UNDP in Kazakhstanand Angola).

Institutional Design

PRINCIPAL

AGENT

Regional SpecificContext

Techno-economicCharacteristics

Constraints• Information• Transaction• Administrative andpolitical

Performance ofinstitutions

�Efficiency�Equity�Imputability�EconomicDevelopment(regional)

PublicMonopoly

Public-corporatemanagement Delegated Mgt. Concession Privatization

Options

ExtensionSmallholder

Retailer

Processor

Public

Private

Private +

+

+

+

+Chainlevel

PPP

PPP

PPP’s must also inducepositive chain effects. PPP’smust create positive effects forprocessors, retailers, etc., thathave positive feedback andbenefit the whole supply chain.

+

+

+

+

Thus, PPP’s mustintervene at multiple chain-level bottlenecks; targetingone may not benefit thewhole supply chain

• DesigningDesigningDesigningDesigning contractscontractscontractscontracts for for for for publicpublicpublicpublic----privateprivateprivateprivatepartnershipspartnershipspartnershipspartnerships::::

• DifferentDifferentDifferentDifferent clauses clauses clauses clauses ���� differentdifferentdifferentdifferentcompensationcompensationcompensationcompensation

– liabilityliabilityliabilityliability & control & control & control & control sharingsharingsharingsharing– riskriskriskrisk management management management management andandandand sharingsharingsharingsharing– costcostcostcost sharingsharingsharingsharing– conflictconflictconflictconflict resolutionresolutionresolutionresolution

Designing contracts for public-private partneship:

Risk management (integrated)

* Choosing a risk-return combination

risk management

ressource management

* Sharing risk- risk aversion / tolerance- risk pricing

risk

return

Designing contracts for public-private partnerships:

Liability and control / Information

����

strict liability

strict, joint and several liability

extended liability

����

capital structure

limited liability

����

incentives for care and diligence

Delegated Management and Cost Sharing

Multiple public - one private partnerships•Principles - fairness / equity

- coherence

- efficiency

- cross-subsidies

•The Shapley-Shubik approach

(incremental costs)

•The sequential cost sharing approach

(heterogenous needs and demands)

Designing contracts for public-private partnership:

Conflict resolution

• Inserting the process in the contract

• Exchanging information / arguments

• Third party arbitrage

• Residual rights owner

- value and pricing

Role of the public partner (municipal)

•Core competencies

- identifying public needs

(broker of citizens interests)

- arbitrage between needs

- managing contracts for maximal socialvalue creation

•Time horizon and incentives

The role of the private partner

• Core competencies

- technology use and development

- economies of scale and scope

- development and export of know-how (humancapital)

• Reputation building: Dynamic incentives and opportunism

Case Study3: Retail Supply Chains inThailand[

• Key issues in supply chain: Retailer TOPS unable to ensurequality control and traceability in purchases and handling,poor logistics, faced numerous intermediaries.

• Main market failures: information asymmetries, hightransactions costs, poor organization.

• Supply chain efficiency improved through creation of acentralized distribution center, private sector partnerships,and a series of PPP’s targeted at specific parts of the supplychain

• Partnerships developed by TOPS (Private-only and PPP’s):– Syngenta: input distribution and training– TNT: improvement of logistics– SGS-Dept. of Ag. (PPP): product certification program– Dutch research institutes-Thai Universities (PPP): market

analysis, research, training

Case Study: Retail Supply Chains inThailand

• Effects on the supply chain were quite positive: logistics werestreamlined, certification and traceability initiated, post-harvest losses reduced

• Market failures on information and transactions costsreduced.

• Smallholders were not the target of these PPPs (number ofsuppliers reduced from 250 to 60). The chain benefited, butnot through direct interventions to small farmers.

• Market failures regarding organization of smallholders neededto be developed to include them in HVA supply chains.

Case Study: Retail Supply Chains inThailand

Traditional Channel

Farmers

Wholesalers

Brokers

DistributionCenters

Supermarkets

Customers

Input Supplier

Farmers

Wholesaler

DistributionCenter

Supermarket

Private Sector:Input Provision

to Farmers

PPP:Certification of

Farmers

PPP: MarketResearch

Private Sector:Establish

DistributionCenter

New Channel with PPP’s

Input Suppliers

Transporters

Customers

Private Sector:ImproveLogistics

Market Failure:Transactions Costs

with MultipleSuppliers

Market Failure: PoorCoordination of Quality

Information

(Chain-wide)

Retail Supply Chains in Thailand

What is outsourcing?

Outsourcing is defined as the contracting of one ormore of a company’s business processes to anoutside service provider to help increase value, byprimarily reducing operating cost and focusing on corecompetencies.CIO defines outsourcing as arrangement in which onecompany provides services for another company thatalso could be or usually have been provided in-house.

What Are Outsourcing andPrivatization?

Economist Calvin A. Kent explains with a still timely definitionin Entrepreneurship and the Privatizing of Government(1987)that privatization “refers to the transfer of functions previouslyperformed exclusively by government, usually at zero or belowfull-cost prices, to the private sector at prices that clear the

market and reflect the full costs of production.”

Outsourcing, according to Coopers & Lybrand’s Breakpoint:Business Process Redesign, (1992) is “the practice of

contracting out for services once run by an organization’semployees and managers.”

Types of Outsourcing

• There are two types of outsourcing activities. Oneinvolves entrusting external firms with the company'scomparatively less important activities, in order toconcentrate resources on core competencies. Thesecond is the reliance on an external firm to handlesome tasks when the company is facing difficulties inachieving core competencies by itself. As shown inTable 1 , these two types can be thought of as theoutsourcing of core competencies and the outsourcing offunctions other than core competencies, like costreduction efforts, and the establishment of subsidiariesand networks.

Why do companies outsource?

• Alleviate administrative burdens and focus on strategicareas.

• Change of the profile of the time spent by the executiveson various activities.

Strategic 10% Admin.Tactical 30% Tactical

Admin. 60% Strategic

Without Outsourcing With Outsourcing

• Reduce costs• Focus on core function• Acquire new skills• Acquire better management• Assist a fast growth situation• Avoid labour problems• Focus on strategy• Avoid major investments

• Handle overflow situations• Improve flexibility• Improve ratios• Jump on to the bandwagon• Enhance credibility• Maintain old functions• Improve performance• Begin a strategic initiative

Outsourcing: Types of Relationships

• Traditional (commodity-for-cash transaction)• Teaming partners (project oriented - e.g.,

ERP implementation)• Long-term alliance (multi-year service)• Networked companies

(pool efforts to achieve common goals)

Outsourcing Risks• These can range from pricing issues to nonperformance by a

supplier of a key functions. The person making the outsourcingdecision must be aware of risks before making the decision tohand over a function to a supplier.

• These risks can be classified into short-term and long-terms risks.Short-term risks can include among others operational issues atsupplier’s end, while long-term risks can be nonalignment ofcompany’s goals with supplier’s goals in the long term.

• Supplier’s situation may change in the future, causing problems inthe outsourcing relationship such as supplier’s financial difficultiesor change of needed technology.

• Supplier’s inability to grow in the same proportion as thecompany, can be another big risk.

Outsourcing Process• Understanding company goals and objectives• A strategic vision and plan• Selecting the right vendor• Management of the relationships• A properly structured contract• Open communication• Senior executive support• Use of outside expertise

Outsourcing In SCM• Outsourcing logistics has been a favorites with companies

since several years. It is only recently that companies havestarted thinking about outsourcing other aspects of SCM.

• Lean companies are new opportunities in SCM outsourcing.This new avatar can ensure a faster response, agility andbetter ability to handle pressure:

� In this case, outsourcing SCM can ensure that the entirenecessary infrastructure is in place, without actually having tospend on any infrastructure.

� This can save a lot of working capital from getting locked.� Companies can focus on core activity of getting the customers

and servicing them efficiently.� Enterprises can avoid all or some of the costs associated with

physical plant, specialized IT systems-and best of all- nodistractions from the carrying out of their core competencies.

Seven Myths of Supply Chain Outsourcing

• My outsourced partners are all supply chain experts.• My partners have state-of-the-art information technology

infrastructure.• By outsourcing production and fulfillment, I will not have to worry

about execution.• My outsourced partners will provide expert project

management.• Outsourcing automatically gives a time-to-market advantage.• Outsourcing is the key to making my operations highly scalable.• Fulfillment is easier to outsource than manufacturing.

EXAMPLES OF SUCCESSFULOUTSOURCING

• Information Technology (IT)outsourcing;

• Software Development;• Software Support;• Business Process Outsourcing

(BPO);Customer Support Outsourcing

• Accounting;• Human resources;• Benefits:• Payroll;• Finance functions and

activities;

• Marketing;• Knowledge Process

outsourcing (KPO)• Legal Services Outsourcing;• Legal Documentation

Outsourcing• Paralegal Outsourcing;• Engineering Services

Outsourcing• Mechanical Drawings• Conversion Services - 3d

Models• Architectural Drafting

Outsourcing: Criticisms

• Inability to improve on cost / time in newapplication development

• Inability to quantify/measure value-added• Risks of losing core IT infrastructure (what

happens if we decide to move in-house)• Cultural barriers in mixing vendor with customer

personnel• Vendor’s lack of customer’s business

knowledge

Some of the most significant factors ofOutsourcing FIASCOS

When companies start to consider the setting up of anoutsourcing strategy they often run into a string of problems,they either failed to consider such as:

• The Changeover• Need for effective understanding of core competencies• Need to manage• Complexity• What’s at the core• Measurement

Drafting an outsourcing contract

1. Start all contracts with the companies’ business objectives.Why is this process being outsourced? What are thecomponents of the process to be outsourced?

2. Determine and align clear business objectives with thesupplier’s capabilities.

3. Employ internal and external benchmarking to determinecurrent capabilities and costs.

4. Develop performance and cost targets to develop initiative.5. Create and build initiative-based targets into the contract.6. Fulfill the initiatives.7. Review performance regularly and mete out rewards or

penalties to the supplier.8. Decide whether to expand or shrink the relationship with the

outsourcer.

How to Draft an Outsourcing Agreement,BPO Agreement, KPO Agreement ?

• A good outsourcing agreement is one which provides acomprehensive road map of the duties and obligations of both theparties - outsourcer and service provider. It minimizes complicationswhen a dispute arise. However, many a times people neglect to payattention while drafting an outsourcing agreement.

• Success in outsourcing can be expected when OutsourcingAgreements, Service Level Agreements & Contracts are set up rightand the parties know their duties well.

• Before finalizing an outsourcing agreement, the terms should bethoroughly discussed and negotiated to avoid any misunderstandingat a later stage. Lawyers from all applicable jurisdictions mustbe consulted before finalizing any outsourcing agreement.

Before signing an Outsourcing Agreementthe following must be properly addressed

• Duties and obligations ofOutsourcer

• Duties and obligations ofservice provider

• Applicable law to outsourcingagreement

• Term of the Agreement• Events of Defaults and

Addressing• Dispute Resolution Mechanism

them• Time limits

• Location of Arbitration• Number of Arbitrators• Interim measures/Provisional

Remedies• Privacy Agreement• Non-compete Agreement• Confidentiality Agreement• Rules Applicable• Appeal & Enforcement• Be aware of local peculiarities• Survival after Termination of

the main agreement.

Outsourcing, Contracting, Privatizing andPartnering…

WON’T WORK…unless we focus on one key

issue…PERFORMANCESuccessful outsourcing projects had thefollowing motivators:• Flexibility and speed

• Cost containment/certainty• Improved quality• Access to personnel or skills• Innovation• Enhancing focus on core mission

What makes a contract “Performance-Based?”

• Soliciting bids on the basis of what RESULTS you wantachieved rather than what ACTIVITIES you wantconducted

• Defining clear performance expectations and measures(baseline vs. expected results)

• Clearly defines due dates and milestones• Providing incentives for performance• Granting flexibility in exchange for accountability for

results• Monitored to ensure performance is being achieved

aManagingCritical Success Factors forPerformance-Based Contract

• Monitor Performance with regular reporting• Adjust! Adjust! Adjust!

– Identify changes in external factors that will impactperformance

– Devise corrective action plans for deviations– Benchmark and compare! Analyze for next steps!– Revise performance targets to continue the push for gains

• Provide comparative performance data to contractors: createa “race to the top” culture

• Communicate and reward success!

Agency Strategy and Outsourcing

The Results Act

Mission

Outcome Goals

Strategy

Program Alignment

Budget Alignment Privatization

Performance-basedContracting

InformationTechnology

Devolution

Deregulation, in favorof partnerships withindustry

Partnerships withreligious/civicinstitutions

Other GovernmentAgencies

case study 4:Bank Privatization in Argentina :

A model of political constraints and differentialoutcomes

George R. G. Clarke, Robert CullJournal of Development Economics 78 (2005) 133– 155

• This paper presents a simple model of the tradeoffsgovernments and buyers face during these transactions.In addition to price, the buyer is concerned aboutsolvency and profitability following privatization.

• Similarly, politicians are concerned about layoffs andservice coverage.

• They apply the framework to provincial bankprivatizations in Argentina, finding that provinces withfiscal problems were willing to accept more layoffs andguarantee more of the privatized bank’s portfolio inreturn for a higher price.

• They study the provincial bank privatizations of the1990s in Argentina, an episode that resolves many ofthese problems. Privatization decisions were made bythe provincial governments, providing them with variationalong several important dimensions, including fiscalperformance of the province, bank performance and thepolitical incentives facing important players, whilekeeping other institutional details similar.

• This is the first attempt to theoretically model howpolitical incentives affect the features of bankprivatization contracts and to test whether the outcomesadhere to the model’s predictions.

Provincial Banking In Argentina

• At the beginning of the 1990s, all Argentine provinces ownedat least one bank.

• The publicly owned provincial banks performed poorly interms of portfolio quality, the efficiency with which theygenerated income, and their return on assets.

• The provincial governments could borrow from the publicprovincial banks, which would then discount the loans to theCentral Bank of Argentina.6 Further, if the provincial banksfound themselves insolvent, they could rely upon the CentralBank to bail them out.

• This meant that provincial governments had little incentive tomonitor management closely and could use the banks tofinance favored programs at relatively low cost.

• This arrangement ended in the early 1990s, when the newlyelected Menem administration implemented the ConvertibilityPlan. The main pillar of the Convertibility Plan was the April1991 Convertibility Law, which pegged the new Argentinepeso to the U.S. dollar and forced the Central Bank to restrictthe monetary base to the dollar value of internationalreserves.

• The Convertibility Law, and the new 1992 Charter of theCentral Bank that supported it, profoundly affected theprovincial banks, by preventing the Central Bank fromrediscounting loans and from guaranteeing bank deposits.

• The Tequila Crisis hit Argentina in December 1994,accelerated privatization decisions further by imposingsubstantial fiscal costs upon the provinces and aggravatingsolvency problems at the poorly performing provincial banks.

• Taking advantage of the external shock, the Federal Government,with the assistance of the World Bank and the Inter-AmericanDevelopment Bank, created the Fondo Fiduciario to furtherencourage privatization. This federal agency extended loans to theprovinces to help them privatize their provincial banks.

• Under the Fondo Fiduciario program, the provinces split the publicprovincial banks into two parts—a healthy bank to be privatized an aresidual entity containing non-viable assets.

• the basic strategy was to shift the most attractive assets to theprivatized bank and then to match those assets with liabilities up tothe point that the privatized bank’s net worth met Argentina’sprudential standards. The provinces used the loans from the FondoFiduciario converting short-term obligations to long-term loans.

• With this new incentive, and an uncertain liability hanging over theirheads, many additional provinces decided to privatize. By the end of1997, almost half of the twenty seven provincial banks had beenprivatized and several other privatizations had been authorized butnot completed.

Provincial bank privatization contracts• In the Argentine, two important opponents to privatization –

bank employees and residents of underserved (mainly rural)areas – were bought off through agreements to limit layoffsand requirements that the banks maintain service.

• To pass a substantial share of low-quality assets onto aprivate purchaser while imposing branching and laborrestrictions would have been difficult, if not impossible, withoutconcessions on other dimensions. The most attractive ofthese were the service contracts that were awarded topurchasers to provide banking services to the provinces andguarantees as to the quality of the acquired assets. Ininterviews, the new private owners confirmed that thesecontracts are of vital importance, as an abnormally high shareof the privatized banks’ income is generated from services.

• Rather than verify the quality of individual assets, which wouldhave been time-intensive, many provinces guaranteed asubstantial share of the assets transferred to the privatizedbank.

• In particular, many of the contracts restricted the newowners’ ability to lay surplus workers off and closeunprofitable branches.

• However, to entice buyers, the provincial governmentswere willing to sweeten the terms of privatization byassuming responsibility for low-quality assets throughthe residual entities, guaranteeing assets allocated to theprivatized bank, and providing the new owners withservice contracts.

A Simple Model Of Bank Privatization

• Conceptual framework:Our basic premise is that political and economicconstraints dictate the timing and design of bankprivatizations. This will help us understand the secondlink in the framework—how political and economicconstraints affect features of the privatizations includingprivatization contracts.

Theoretical model

• The theoretical model below summarizes the tradeoffsfaced by two agents, a government and a potentialbuyer, in the sale of an insolvent state-owned bank.

• The purchaser is concerned about the probability thatthe privatized bank will remain solvent, the profits earnedif the bank does so, and the price paid for the assets andliabilities it assumes. They denote the probability ofsolvency f(xr), which we assume is bounded betweenzero and one and weakly decreasing in xr (i.e., as thepurchaser assumes more risky assets, the probability ofinsolvency increases).

Parameters and decision variables

• We denote the probability of solvency f(xr),

• We denote income on the assets assumed by the purchaser h(xr) andwe denote the cost of managing the portfolio as c(xr).

• Patronage jobs are denoted wL where w is the wage paid to employeesand L is the number of employees. The buyer’s payoff from purchasingthe privatized bank will be:

• where s ~[0. . .1] is the purchaser’s ownership share and Pb is a lump-sum payment paid to the government.

• We assume that the purchaser must receive its reservation profitlevel, p¯ , to take control of the bank. That is:

• The government derives fiscal benefits from three sources. First, itwill earn a share of the privatized bank’s profits from its retainedownership in the bank.

• It will also receive the lump-sum payment for the bank:

• Finally it will receive some revenue from recovery of residual assets,denoted g(xres), where xres is the quantity of assets in the residualentity managed by the government and it will expend somerecourses to recover these assets, cres(xres).

• We assume that the total value of assets recovered is increasing as additionalassets are passed to the private buyer.

• Where xpub denotes the total assets of the public bank prior to privatization.• The final component of the government’s optimization function is the benefits

it receives from patronage jobs at the privatized bank, which we denote k(L).

• We assume that the government chooses xres and L to maximize thefollowing:

• KL and KM are components that map the benefits that the government receivefor protecting jobs and the fiscal benefits related to the transaction into thegovernment’s utility function.

• Substituting Eqs. (5), (6) and the constraint into (10), the government’sproblem becomes:

• Equilibrium bank privatization contracts are characterized by two firstorder conditions which must be jointly satisfied:

• In short, (12) implies that government maximizes a weighted average ofits net income and the value of patronage jobs. (13) implies that xr isdetermined independent of the relative weights given by thegovernment to monetary resources and patronage jobs (KM and KL).

Comparative statics• Jobs protected by the government• From Eq. (12), we fined:

• Changes in KM and KL affect the price that the buyer is willing to payfor its share of the privatization bank. From Eq. (6):

• Assets assumed by the purchaser• From Eq. (13):

• We assume:

• For the simplicity we also assume that private owners and managersof the residual entity are equally good at managing their respectiveportfolios and that there are constant returns to scale in managingassets. That is, we assume:

• where c¯ is a constant. Under these functional form assumptions (anddenoting β٭s= βs/ xpub), Eq. (15) implies:

• This implies:

• Increase in βr will result in higher equilibrium values of xr ٭.

• This means that when the privatized bank is relatively good atrecovering assets. It will assume a greater share of the formerpublic bank’s assets.

• Empirical Results• In this subsection, we empirically test some of the predictions of the

theoretical model, looking at the characteristics of the banks andprovinces that affected the privatization contracts.

• We are primarily interested in factors that might affect either thepreferences of policymakers (i.e., that might correspond to KM andKL in the theoretical model), the risk associated with banking (i.e.,that might correspond to βs ) or the attractiveness of the bank topotential buyers (i.e., that might affect the quality of buyer and,therefore, influence βr ).

• The model that we estimate is:

• where i is the index for different banks, yi represents the contractprovisions, xi represents province- and bank-level characteristics, andєi is an error term.

• The contract provisions studied that relate directly to the theoreticalmodel are: restrictions on layoffs (L); the percent of public bank assetstaken by the privatized bank rather than put into the residual entity (xr);and the price paid relative to size of the bank (Pb).

• The independent variables include two that might proxy for politician’spreferences (i.e., KM and KL) and three variables that might affect theprobability of insolvency (βs ) or how attractive buyers find the bank,which might in turn affect the quality of the buyer (βr ). the politicalaffiliation of the governor appears to be a reasonable proxy forpreferences regarding bank privatization in Argentina.

• In practice, the reverse seems true—provinces with dominant publicbanks managed to impose fewer restrictions on layoffs andassumed a greater share of the public bank’s assets and liabilities.The coefficient on the length of the service contract was alsopositive and significant. This is consistent with the previous tworesults—contract provisions were more generous to the buyer whenthe bank was relatively large. This could be because publicprovincial banks tended to be especially large (relative to thebanking sector) in sparsely populated rural provinces, which tend tobe unattractive banking environments. The coefficients on the sizeof the public bank relative to the provincial banking sector wereinsignificant in the other two equations (price and percent of theportfolio that was guaranteed).

Conclusion

• Argentina’s provincial bank privatizations of the 1990s offer a uniqueopportunity to study these issues. During this privatization episode,different provincial politicians, who faced different constraints,crafted agreements with private purchasers for the sale of their loss-making public banks. Since the privatization contracts differedsubstantially in some regards, this provides an opportunity toexplore how the different incentives and constraints facing differentdecision makers affected contract design.

• Although we recognize that our sample is quite small, the empiricalevidence supports a number of the theoretical predictions. Forexample, politicians in provinces with poor fiscal health were able topreserve jobs for fewer bank employees and received higherpayments for their banks. In addition, the evidence suggests that theTequila Crisis meant that politicians could protect fewer jobs andhad to assume a higher share of their public banks’ assets.

• Finally, our model predicted that when buyers had lessexpertise in managing a loan portfolio, smaller portions of theloan portfolio would be transferred to the privatized bank. Inlocations where the provincial bank dominated the localfinancial landscape, and buyers were presumably difficult toattract, this appears to be the case.

• In practice, this is difficult to fully assess in Argentina due tothe relatively short post-privatization experience for mostbanks and because the banks are still going through anequilibration process as they refocus their business activitiestowards commercial lending. However, there is someevidence that banks privatized after the Tequila Crisis haveperformed better than those privatized before the crisis. Thissuggests that the Crisis may have wrought some unforeseenbenefits by tying politicians’ hands.

References

• 1-Robin A. Johnson and Norman Walzer.” local government innovation:issues and trends in privatization and managed competition”.2000

• 2-Saebi m.;” privatization in the Republic of Iran” , Asian review ofadministrative, Vol. XI,No.2(July_December 1999).

• 3-”Terms related to privatization activitiesand processes” GAO/GGD-97-121,July 1997.

• 4-Tongzon J.,Heng W.” Port privatization, efficiencyandcompetitivness”.Transportastion research part A 39(2005) pp405-424.

• 5-Button K., McDougall G.;”Institutational and structure changes in airnavigation service-providing organization”; Journal of Air transportationmanagement 12(2006) pp236-252.

• 6-Clarke G.R.G, Cull r.;” Bank privatization in Argentina”; JournalofDevelopment Economics 78(2005)pp1333-155.

• 7-WWW.madaan.com.• 8-S. Kulkurni. And A. Sharma.;’ Supply Chain Management’;

Chapter 12.• 9-M. Boyer.;’ Foundation of public outsourcing’.• 10-K. M. Rich.;’ Perspectives on the Supply Chain Management of

High-Value Agriculture: The Role of PPP’s in Promoting SmallholderAccess’; International Conference on Public-Private Partnerships forHarnessing the Potential of Rainfed Agriculture; 2005.

• 11-J. V. Braum.;’ Pro-Poor Public-Private Partnerships (“5P”) inFood and Agriculture’; Conference on Public-Private Partnershipsfor Harnessing the Potential of Rainfed Agriculture; 2005.

• 12-http:// www. Ozemail. com. au.• 13- www.unglobalcompact.org.