Public Services, Social Benefits and Public-Private Partnerships:an example of solid waste processing

Dr Elena ShadrinaHigher School of Economics, Perm

Introduction

PPP is often seen as a form of interaction between the state and the business.

We consider PPP as a form of business organisation.

This allows us to discuss the advantages of PPP as compared to other forms of business organisation.

Introduction (cont.)

There is no agreement in the literature on the nature of PPP. Several definitions are in use. Their focus ranges from legal covenants and regulatory framework to business risks and social benefits.

Review of different approaches can be found in A. Coulson, 2005, J. Friend, 2006, G. Hodge, 2006, R. Wettenhall, 2007, V. Varnavskiy, 2002, N. Kholodnaya, 2009

Our approach: PPP is a form of business organisation based on combining public and private resources.

It follows that only socially important businesses can be organised as PPP (otherwise the state has no incentives to provide public resources).

Properties of PPP• Partnership between the state and private business• There is a formal legal agreement between the two parties

to engage in the joint business (e.g. contract, lease agreement, etc.)

• Partnership principle: each party has incentives to protect the interests of the other party.

• Main objective: improvement of the social welfare.• Consolidation of both parties’ resources• Risk sharing between the parties and transfer of risks to

the party with a more efficient risk management capabilities.

• Long-termism: results are visible in the long term, “full life cycle” approach

• Competitive choice of private partners.

Mixed evidence•Empirical research reveals mixed evidence

with regards to benefits from PPP.•Benefits from PPP include improved

infrastructure, quality and range of services (e.g. UK education, London Tube, etc.)

•Warnings include dangers of corruption, increase in prices of services, using PPP as a substitute to privatization (Grimsey and Lewis, 2004, Coulson, 2005, Wettenhal, 2007)

Mixed evidence: solution• Most warnings refer to an institutional environment.

Therefore it is important to distinguish between PPP as form of business and the surrounding issues.

• PPP is justified if other forms of business organisation are inefficient:▫ individual production (each household produces services for

individual needs) – large production costs;▫ private enterprise - enjoy economy on scale to reduce costs;

problems include negative externalities and market power;▫ public enterprise – socially oriented, solves the problem of

negative externalities but low efficiency (no incentives for managers to reduce costs);

▫ publicly regulated private enterprise – regulation limits efficiency;

▫ joint public-private enterprise – PPP.

Should PPP be large?• PPP in Russia is usually seen as an interaction

between the state and the business on large-scale projects:▫Most researchers and practitioners agree that it is

necessary to establish special PPP management entities within government bodies

▫ large-scale PPP involve participation of large banks. • Our approach does not make assumptions on the size

of PPP:▫PPP can be beneficial on small projects▫ this does not require creation of large new entities▫small projects are more transparent

Role for PPP in solid waste processing?• Solid waste processing (and disposal) is one of the most

common examples of a public good.• Traditional approaches to processing and disposal of

solid wastes:▫ processing by the state (municipalities), therefore

Municipal Solid Waste (MSW) – efficiency issues as no profit orientation of municipal enterprises.

▫ processing by private business – creates moral hazard as disposal is hardly verifiable and thus creates incentives for entrepreneurs to cheat (e.g. forest pollution).

▫ regulation of private enterprises is not efficient due to large verification costs (waste has no ID => who pollutes the forest?)

Characteristics of MSW• MSW processing includes five stages:

▫ collection ▫ transportation ▫ sorting ▫ recycling ▫ disposal

• More than 80 bln tonn unprocessed MSW accumulated in Russia (2008). Annually grows by 11 bln tonn.

Landfill disposal Energy production Recycling

Russia 81% 13% 6%

USA 55% 12.5% 32.5%

EU 40% 20% 40%

MSW in Perm krai

•1.15 mln tonn MSW annually. •Annual growth 11,5%. •0.705 mln tonn disposed through special

purpose sites•0.445 mln tonn (39%) illegally disposed in

the environment•More than 1000 landfill sites•4% recycled

Case 1: Transportation• MSW collected and transported by private enterprises

(transportation and collection agent, TCA)• TCAs selected by municipalities through open

competition.• Households pay TCA a fee for collection,

transportation and disposal/recycling.• TCA collects, transports and pays the landfill site to

dispose MSW.• TCA has incentives to avoid extra cost for disposal

and illegally dispose in the environment (forest) instead.

Case 1: problems• Two types of prices for TCA:

▫ fee obtained from households – determined through competition at the selection stage at the municipal level

▫ fee paid to the landfill site –fixed by the federal law.• Competition reduces the collection fee. Conscientious TCAs

exit competition because lowering the collection fee removes profit. Unconscientious TCAs win competition by offering a lower collection fee. They ensure profitability by polluting the environment.

• Same problem relates to maintaining the transport: unconscientious TCAs save on modernisation.

• Resulting problems: ▫ irregular collection▫ no household waste separation/sorting▫ unregistered landfill sites => pollution

Case 2: Storage and Recycling• Delegation of storage and recycling functions

from municipality to private business.• Open competition in 2008 in Perm• With an objective of building recycling facilities,

private business acquired land sites on a lease basis for 15 years.

• Results (as of 2011):▫project start delayed by 1 year▫facilities so far not available

Case 2: problems• Partnership principle violated:

▫ all formalities to be completed by the private party▫ this includes registration of municipal property rights

for the land sites on lease▫ most business risks on the private party

• Procedural issues: ▫ technical errors in the competition procedure▫ incorrect Terms of Reference,▫ errors in the lease agreement

• Contractual issues:▫ lease agreement is of fixed term and fixed rent▫ delays on start remove completion incentives

Case 3: Sorting• General information on MSW in Krasnokamsk municipality:

▫ total area of landfill sites 0.192 km2, ▫ total volume of waste 0.395 mln tonn, ▫ including 0.274 mln tonn on Krasnokamsk land fill site▫ 74 illegal sites identified in 2009 (2 liquidated)▫ Krasnokamsk land fill site disused since June 2008, instead new

Bekriatinsk site in use

• Management of Bekriatinsk site is delegated to private business since June 2008.

• Sorting facilities in operation on Bekriatinsk site since November 2008▫ in 2009 total MSW collected at site 16883 tonn▫ sorted and recycled 1996 tonn (11.82%)

Case 3: problems• Bekriatinsk sorting/recycling facility is the only one in

Perm Krai.

• Planned recycling capacity 30 000 tonn MSW/year:▫ actual load currently at 56% - wrong estimation▫ low profitability

• No pricing flexibility (prices fixed by the law)

• Separation of the processing phases increases information risks.

Main results from the cases:• MSW management is mostly through municipal

enterprises• The three cases represent examples of the delegation of

municipal functions to private businesses• Main problems include

▫ imperfect (incomplete) contracting (issues arise that delay the start of the project)

▫ short-term lease agreements (incentives for quick fix solutions)

▫ imperfect risk sharing (most risks on the private party)▫ imperfect information from municipalities to the private

counterparts▫ no unified objective of public and private parties of the

agreement

Role for PPP• Formal legal agreement can still be incomplete ...• Partnership principle creates incentives to protect other

party’s interests. This provides a solution to incomplete contracting: parties jointly solve unexpected problems.

• Social welfare objective: through the partnership principle the state creates incentives for the private party to follow the unified objective.

• Consolidation of resources improves feasibility of projects, ensures co-production and information sharing.

• Risk sharing provides a better protection against risks.• Long-termism resolves the problem of quick-fix solutions.• Competitive choice of private counterparts ensures

efficiency of the joint enterprise: price is not the only criterion.

Conclusions• PPP is a joint enterprise of the state and the private

business.• In public sector it is beneficial compared to other forms

of business organisation.• We have presented three examples of interaction

between the state and the business in MSW processing in Perm Krai.

• PPP can resolve problems identified in all three cases.• Critique of PPP mainly addresses institutional

environment.• Optimal PPP agreement is (i) long-term, (ii) based on

the partnership principle and (iii) clear about shared resources, risks and benefits from the project.