public private partnerships an academic understanding, or not 2003 nefpp annual conference
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Public Private PartnershipsAn Academic Understanding, or Not
2003 NEFPP Annual Conference
Public Private PartnershipsAn Academic Understanding, or Not
2003 NEFPP Annual Conference
From An Economist’s ViewpointFrom An Economist’s Viewpoint
• Presumption that Markets are Better– Requires competition– Not necessary to be private – competing govt. teams– Markets can also fail
• Excluded social costs – then markets over provide• Excluded social benefits – then markets under provide• Anti-competitive
• Measuring Benefits– Sum of net benefits to private & public entities– Include social effects not priced by the market
• Incentives Matter
• Presumption that Markets are Better– Requires competition– Not necessary to be private – competing govt. teams– Markets can also fail
• Excluded social costs – then markets over provide• Excluded social benefits – then markets under provide• Anti-competitive
• Measuring Benefits– Sum of net benefits to private & public entities– Include social effects not priced by the market
• Incentives Matter
Structuring the Academic Question:Incomplete Contracts
Structuring the Academic Question:Incomplete Contracts
• What is a Contract?– Identifies investment/contribution– Measures output– Defines payoff– Allocates ownership (control of residuals)
• Human capital generated – knowledge• Decisions making power
• Theory of the Firm– If a complete contract is possible – contract out– Firm is the set of activities not contracted out
• Incomplete Contracts– What?– Typically keep internal to the firm
• What is a Contract?– Identifies investment/contribution– Measures output– Defines payoff– Allocates ownership (control of residuals)
• Human capital generated – knowledge• Decisions making power
• Theory of the Firm– If a complete contract is possible – contract out– Firm is the set of activities not contracted out
• Incomplete Contracts– What?– Typically keep internal to the firm
Implications for Public-Private AllocationImplications for Public-Private Allocation
• If Complete Contracts: Private
• Incomplete Contracts and Public Services– Identifying service quality objective
• Education• Health care
– Maintaining asset quality– Identifying investment– Responding to new conditions
• Then What?– Complete public– Partnership – set up contracts where possible = PPP
• If Complete Contracts: Private
• Incomplete Contracts and Public Services– Identifying service quality objective
• Education• Health care
– Maintaining asset quality– Identifying investment– Responding to new conditions
• Then What?– Complete public– Partnership – set up contracts where possible = PPP
What Is A PPP?What Is A PPP?
• I’m Not Really Sure
• Areas for Private Role– Financing– Construction– Operation– Ownership
• Not Complete Privatization– Public must continue to have role– The 3rd P – partnership is key
• Is it Contracting Out?
• I’m Not Really Sure
• Areas for Private Role– Financing– Construction– Operation– Ownership
• Not Complete Privatization– Public must continue to have role– The 3rd P – partnership is key
• Is it Contracting Out?
Where is the Academic Literature?Where is the Academic Literature?
• Theory of the Firm – Endless Arcane Work
• Privatization – Big in UK/Europe– Valuing public assets– Allocation of assets– Post-privatization regulation
• Explicitly PPPs– Very little in the economics literature– Focuses on contracting out
• Role of budget incentives• Strength of public sector union
– Costs we can measure – quality is harder
• Theory of the Firm – Endless Arcane Work
• Privatization – Big in UK/Europe– Valuing public assets– Allocation of assets– Post-privatization regulation
• Explicitly PPPs– Very little in the economics literature– Focuses on contracting out
• Role of budget incentives• Strength of public sector union
– Costs we can measure – quality is harder
Undeveloped Beliefs: The Economist’s PriorsUndeveloped Beliefs:
The Economist’s Priors
• Are the Arguments for PPPs Valid?– Economic Benefit from Private Sector Role– Economic Benefit of Government Role– Political Motivations
• What are the Concerns?
• What Guidelines Do We Have?
• Are the Arguments for PPPs Valid?– Economic Benefit from Private Sector Role– Economic Benefit of Government Role– Political Motivations
• What are the Concerns?
• What Guidelines Do We Have?
“Economic” Motivation for Private Role“Economic” Motivation for Private Role
• Cost Savings in Private Sector– Public sector unions
• Wages• Work rules
– Speed of action (process is less of a value)– An underlying assumption about public values
• Better Incentives for Innovation in Private Sector– Does the manager reap the reward?– How is the risk allocated?
• Greater Flexibility in Responding to the Unexpected
• Cost Savings in Private Sector– Public sector unions
• Wages• Work rules
– Speed of action (process is less of a value)– An underlying assumption about public values
• Better Incentives for Innovation in Private Sector– Does the manager reap the reward?– How is the risk allocated?
• Greater Flexibility in Responding to the Unexpected
Political Motivations for Private RolePolitical Motivations for Private Role
• Get Debt Off Government Books– Private firms finance / own– Public agency pays user fee
• Avoid Political Process: No Scrutiny
• No Policy Reversal: Commit to Long-Term Contracts
• Economists Do Not Treat These as Benefits– Commitment to long term stream of payments = debt– Assume the political & bureaucratic processes are valid
• Get Debt Off Government Books– Private firms finance / own– Public agency pays user fee
• Avoid Political Process: No Scrutiny
• No Policy Reversal: Commit to Long-Term Contracts
• Economists Do Not Treat These as Benefits– Commitment to long term stream of payments = debt– Assume the political & bureaucratic processes are valid
A Comment of Government FinancingA Comment of Government Financing
• Lower Cost of Capital as Argument for Govt. Role– Project cash flows– Corporate guarantee – Tax base
• Getting the Price Right– Interest on the debt– Effect on interest on other borrowing– Cost of repayment
• Private – diverted cash flows• Public – economic cost of taxation (20-30%)
• Is the Risk Being Priced?
• Lower Cost of Capital as Argument for Govt. Role– Project cash flows– Corporate guarantee – Tax base
• Getting the Price Right– Interest on the debt– Effect on interest on other borrowing– Cost of repayment
• Private – diverted cash flows• Public – economic cost of taxation (20-30%)
• Is the Risk Being Priced?
Concerns About PPPConcerns About PPP
• Who is the Partner?– Presupposes experience– Public subsidy of corporate learning by doing
• Is the Risk Really Being Shared?– Transferring risk ≠ lower cost, unless…– Who picks up the pieces when it blows up?
• What is the Exit Plan?– This in part defines ownership– Does it create the right incentives?
• Writing the Contract– Incentives– Cost minimization vs. quality provision
• Who is the Partner?– Presupposes experience– Public subsidy of corporate learning by doing
• Is the Risk Really Being Shared?– Transferring risk ≠ lower cost, unless…– Who picks up the pieces when it blows up?
• What is the Exit Plan?– This in part defines ownership– Does it create the right incentives?
• Writing the Contract– Incentives– Cost minimization vs. quality provision
What are the Guidelines of Theory?What are the Guidelines of Theory?
• Model– Cost minimization vs. service quality– Private Sector
• Good at cost minimization• Weaker incentives for provision of quality
– Can’t write contract for quality– Benefits are shared
• When Does a PPP Work Best?– When negative effect of cost reduction on quality are smaller– Quality is easier to observe/measure/contract– Service quality is less important.
• Model– Cost minimization vs. service quality– Private Sector
• Good at cost minimization• Weaker incentives for provision of quality
– Can’t write contract for quality– Benefits are shared
• When Does a PPP Work Best?– When negative effect of cost reduction on quality are smaller– Quality is easier to observe/measure/contract– Service quality is less important.