Local Government Privatization: New Challenges in Governmental Reform Mildred E. Warner

1. Local Government Privatization:New Challenges in Governmental ReformMildred E. Warner Presented at Government Restructuring, Privatization, Regulation and Competition June 23, 2009 Grup de Recerca en Polítiques Públiques i Regulació Econòmica Harvard University, Boston, MA Cornell University, Dept. of City and Regional Planning, mew15@cornell.edu http://government.cce.cornell.edu

2. Overview • Late 20th century experiment to expand role of markets in local government service delivery • Privatization experience uneven • Lack of cost savings (Bel and Warner 2008a, 2008b, Bel Fageda and Warner 2009) • Exacerbates inequality, does not promote citizen voice (Warner 2006, Warner and Hefetz 2002) • Reversals appear in the late 1990s • Not a return to old bureaucratic delivery, instead • A shift to a new mixed position – markets and public delivery • Rebalancing Governmental Reform – Pragmatic Approach • What is the new research agenda? • Limits of markets, critical role of the public sector • Hybrid forms, cooperation to gain scale

3. Shifting Trends in Privatization • 1980s-1990s New Public Management – Emphasized competition and efficiency • 1990s-2000s Transactions Costs – Emphasizes the challenges of contract management • 2000s New Public Service – Emphasizes citizen engagement and satisfaction • 2008 Financial Crisis – New Role for the State in Propping up Markets • The new reforms are a search for balance

4. From Government Failure to Market Failure • Privatization reforms were motivated by concern with government failure • Oversupply of public goods, budget maximizing bureaucrats, inflexible, unresponsive government, lack of choice • Current financial crisis raises attention to market failure • Inadequate assessment of risk • Lack of fail safe delivery • Collusion and corruption • Need for regulation

5. Market Failures in Public Contracting • Competition is hard to ensure • Many public services are natural monopolies • Competition erodes • Government must structure the market • Need for Failsafe Delivery • Loss of internal intelligence and control • Transfer risk to public sector • High Costs of Contracting • Transactions costs (information asymmetries, structuring contracts) • Leads to relational contract (collusion) • Democracy ≠ Markets • Accountability challenges • Preference alignment problems • Need for public participation in service delivery

6. Role of Government in the Market • Ensure a competitive market • Regulation • Act as market player • Manage a Collaborative Network • Government money makes all organizations public (Bozeman) • Networks need a central coordinating role (Milward and Provan) • How to avoid collusion? • Insurer of Last Resort • As in the current financial crisis No longer believe we can contract out and walk away

7. Learning from Past Reforms -Need to Balance Market and State • Institutional Framework for Markets is Socially Constructed • Often lags market development (eg Post Socialist Transition) • Requires governmental capacity (regulatory standards, anti-trust law, enforcement capacity) • Many Public Services are Natural Monopolies – public monopoly better than competition (Warner and Bel 2008) • Human Interaction is more than market exchange: Redistribution, reciprocity, engagement • Privatization shifted the social contract, undermined citizen rights to services • Community building is the ultimate public good • Public services provide the mechanisms for citizens to learn to engage heterogeneous differences

8. Role of Government In Service Delivery • Market player or market manager? • Can government promote competition? • Direct Provider, or some form of hybrid public/private firm? • What role for public management? • Is this a return to government enterprise? • Inter-Governmental Cooperation • Gain scale, ensure accountability? • Stay public, or go private?

9. US Large Scale Longitudinal Data • International City County Management Association Surveys of Alternative Service Delivery 1982, 1988, 1992, 1997, 2002, 2007 U.S. Census of Governments Finance Files (same years) • Scope: • 64 specific services • 6 service delivery options (entirely public, mixed public/private, for profit, non profit, inter-municipal cooperation, franchises • Factors motivating restructuring (approx 75) • Sample Frame: • All cities over 10,000, All counties over 25,000. • Response rate 31% - 1444 municipalities in 1992, 32% -1460 in 1997, 24% -1133 municipalities in 2002, 26%-1599 municipalities 2007

10. US Privatization Peaked in 1997 Average provision as % of total provision Source: International City/ County Management Association, Profile of Alternative Service Delivery Approaches, Survey Data, 1982, 1988, 1992, 1997, 2002, 2007

11. Why are the Trends Flat? • Some governments do a lot; many do little (6 of 35 services on average) • Government has always used private providers • Privatization - new name for longstanding practice • Government service provision is dynamic • New services, service shedding, contracting out and contracting back-in • Government managers use a variety of mechanisms to secure public service delivery • Internal Reform (direct public delivery) –common and stable • Mixed Public and Private Delivery – dynamic • Inter-municipal Cooperation – to gain scale • Contracting out and back-in (reversals) – dynamic

12. Most Delivery is Stable (contract or public), Experimentation is at the Margin Average percent of total provision across all places. Source: ICMA Survey of Alternative Service Delivery Approaches, 1992, 1997, 2002, 2007 Washington DC. US Municipalities Paired samples. N=500-600 (Hefetz and Warner 2004, 2007)

13. Why Contract Back-In? • ICMA survey 2007 • 245 governments reporting • 61% Service quality was not satisfactory • 50% Cost savings were insufficient • 37% Local government efficiency improved • 17% Strong political support to bring service back in house • 17% Problems with contract specification

14. Shifting Trends in Privatization • U.K., Australia, New Zealand were early innovators • Moderating Position in Last Decade • Disappointment with lack of cost savings • Recognize a broader set of concerns than just cost efficiency • Reversals – end of CCT in UK, reverse privatization in US, Australia and New Zealand • Privatization Levels Higher in Europe than US • Reflects more flexible organizational forms • Pragmatic, dynamic, mixed market/government position emerging

15. Hybrid Approaches: Mixed Market or Public/Private Firm? • US “Free Market” • US preference for market competition • Primary concern with government failure and with avoiding public monopoly • Strategy – Pursue competitive mixed market or prop up private market • Spain/Latin America “Social Market” • Recognize a wider role for the State and benefits of monopoly • Strategy - Mixed public/private firms • Both approaches try to balance New Public Management and Transaction Cost concerns

16. Hybrid Approaches • Mixed Market Delivery • Mixed Firm – Public/Private Hybrid • Governance Network on Public and Private Actors • Informal Economy (no government) • Club Goods – voluntary bargaining for public goods

17. Importance of Mixed Delivery Dynamic Process of Innovation and Reform Source: International City/ County Management Association, Profile of Alternative Service Delivery Approaches, 1992, 1997, 2002, 2007 Washington DC. (Warner and Hefetz 2008) Sample Size 1100-1500 US municipalities nationwide

18. What is Mixed Market Delivery? • Benchmarking – information asymmetries • Market Management – create competition • Redundancy – ensure failsafe delivery • Work sharing – network governance or inter-firm alliances • Public Engagement – ensure public participation in the delivery process

19. What Explains Mixed Market Provision? Miranda and Lerner 1995 • Redundancy is efficient – reduces costs, creates competition, ensures failsafe delivery • Benchmarking – track process and costs by remaining in service delivery (transaction costs) Warner and Hefetz 2008 (Probit and GEM models) • Rise in mixed delivery explained by efforts to: decrease costs, ensure competition, manage opposition, ensure citizen satisfaction • Managerial Learning – market management and political management

20. Shift in meaning of mixed market delivery • 1992 – Reinvention - Mixed delivery associated with efforts to reduce costs and increase competition, and explore new contracting • 1997 - Managerial Learning - Professional managers recognize the need to mix even as the level of total contracting out is rising - use competitive bidding • 2002 – Managing for Public Service – all managers see need to mix delivery, recognize problems with lack of competition. Increased attention to citizen satisfaction. Warner & Hefetz 2008, Public Administration Review, “Understanding Mixed Delivery…”

21. Future Research Questions • Is there a future to promoting competitive mixed markets? • U.S. mixed delivery down again in 2007 • What about a more collaborative mixed market? • Public Private Partnerships • Networks • Hybrid Firms • Will this raise its own challenges – collusion, management and accountability?

22. Mixed: Hybrid Firms • Public/Private Firms – • Private operates under commercial law (labor flexibility) • Public accountability rules still apply • Common alternative in Spain in water and waste • Common in Latin America – • Does it matter who has controlling share – public or private? • Does it matter if private partner is foreign (free trade rules apply)?

23. Hybrid Firms: Water and Solid Waste • Case: Spain • Benefits: • Public Side: Public Control, Public Values (coverage, equity, accountability, socialize monopoly rents) • Private Side: Commercial management, labor flexibility • More stable form of ‘privatization’ • Enjoy benefits of monopoly but manage its costs. • Recognizes lack of competition. • Europe has both higher and more stable privatization. Probably due to higher use of hybrid firms Warner and Bel, 2008, “Competition or Monopoly…” Public Administration

24. Hybrid Firms: Berlin Transit • Purpose to lower costs and bargaining power of labor – cross train drivers, increase flexibility • Public controls routes, system integration • Private coordinates drivers on bus and rail lines • Most labor shedding and efficiency gains occurred on public side as part of public planning and coordination • Once private contractor was unionized, ‘efficiency’ advantages disappeared • Are hybrid firms just a strategy to reduce labor power and benefits? Swarts, Doug 2009. Masters Thesis, Cornell.

25. Future Research Questions:Hybrid Firms • Which law will apply? • Civil or Commercial, or new Hybrid Law? • What happens to public accountability, labor relations? • What Criteria will we measure? • Costs, Quality, Security, Accountability • How do we promote process improvement – real efficiency gains? • What benefits or risks occur when the firm is foreign? • (e.g. Spanish firm in Latin America or US) • Do free trade rules make a difference?

26. International Governance Regimes Free Trade Agreements (GATS, NAFTA) Promote Privatization but undermine Coasian Requirements Clear Property Rights – Superior Property Rights for Foreign Investors (compensation for regulatory takings) Adjudicatory Mechanism – Substitute private arbitration for the public courts Balanced Bargaining Position – Local government regulations subject to international harmonization and foreign investor challenge Gerbasi and Warner 2007, Administration and Society Ironically, these features undermine the ability of local government to use private markets for public goods delivery

27. Networks for Service Provision • Shift from government to governance networks • Looser structure than hybrid firms • More flexibility, more competition • Linked through interdependence and contracting • Public Private Partnerships, Collaborative Networks • Common and growing

28. Networks: Job Training • Case: Job Training US vs Germany • Replace former government contracting with greater consumer choice (voucher) to stimulate more competition and choice in supply. • Result – under supply training in rural areas and in key job categories • Information asymmetries, risk to providers due to uncertain demand • Preference misalignment Hipp and Warner, 2006 Social Policy and Administration

30. Networks: Child Care • Case: US, Netherlands and Australia • Promote consumer choice via vouchers to parents • Stimulate private sector supply • Supply response best is dense markets where voucher is high (Netherlands) • Low value of vouchers leads to higher use of lower quality informal care in US • Undersupply in rural markets in all 3 countries (Warner and Gradus, 2009)

31. Research Questions: Networks • Government needs to be at the center • Public Coordination with private contracting • (Barter, Paul, 2008 Policy and Society) • Need strong actor at center of network (govt) • (Milward and Provan, JPART) • What control does government really have in a network? • Diffused sovereignty throughout the system • Harder to manage and ensure accountability • Inter-dependence of network is the key • (Salaomon 2002, Tools of Government)

32. Informal Economy and Club Goods • What if government is not at the center, or not even in the game? • Informal Sector – provides many urban services in developing countries • Property Rights proponents herald “spontaneous innovation” of private market solutions to public goods problems (Webster and Lai) • “Club goods” and private interest government are becoming more common models of service provision even in the US • What does this mean for the role of local government?

33. Part 2: Inter-Municipal Cooperation • Inter-municipal cooperation is the second most common form of local government restructuring in the United States. Now higher than privatization. • Increased academic attention is being given to the potential of such cooperation • To gain scale economies and market power • Keep the service public • Address problems of political fragmentation

34. US Inter-Municipal Coop Rises in 2007 Average provision as % of total provision Source: International City/ County Management Association, Profile of Alternative Service Delivery Approaches, Survey Data, 1982, 1988, 1992, 1997, 2002, 2007

35. Inter-municipal Cooperation:An Approach to Regional Coordination? • Fragmented metropolitan areas in the US make regional integration of service delivery difficult. • Local government boundaries do not coincide with the economic boundaries of the metro area. • Political fragmentation leads to inequity • High need inner city • Low need but higher tax base suburbs. • Planners’ ideal solution - regionalism • Political consolidation politically unpopular. • Representative regional government is rare. • Inter-municipal cooperation is common.

36. US Evidence: Metropolitan Differences • Discriminant analysis 1992, 1997, 2002 shows suburbs have wider range of choice - use both inter-municipal cooperation and privatization more than rural or metro places. • Core metro communities rely less on cooperation - have internal economies of scale. Privatization catches up to suburb level by 2002 • Rural places tried cooperation and privatization but use drops in 2002 and they rely even more heavily on public provision. Warner, Social Policy 2006

37. US Evidence: Efficiency, Equity and Voice Probit analysis of metro governments (1000 in 1992 & 1997, and 750 in 2002) comparing for profit privatization and inter-municipal cooperation • Efficiency: Governments which use more cooperation and privatization have lower expenditures and higher technical monitoring. • Equity: Richer places privatize more, poorer privatize less. Cooperation is neutral with respect to income and poverty. • Voice: Places with more cooperation gave more attention to citizen voice in 1992 and 1997, but were voice neutral in 2002. Those which privatize more were voice neutral in 1992 and 1997 but gave more attention to citizen voice in 2002. • Warner and Hefetz, 2002, Urban Affairs Review

38. US Evidence • Levels of privatization and cooperation dropped 1997-2002 • Explained by problems with efficiency, accountability and citizen satisfaction • Warner, 2006 Urban Public Economics Review • Levels rising again in 2007 • Monitoring lags increases in contracting • Leads to accountability problems and reversals • Warner and Hefetz ICMA Yearbook 2009

39. Spanish Evidence • Cooperation to gain market power • Rural municipalities cooperate and then contract out (51% water 30% waste) (Bel and Fageda 2008) • Such consortiums can lead to lower costs – esp for small rural municipalities (Bel and Mur, 2009, Bel and Costas 2006, Bel and Fageda 2008, González-Gómez and Guardiola, 2009) • May generate more private competition for these markets

40. Cooperation: Future Research Agenda • Is voluntary cooperation sufficient to address regional inequality? • How do we build reciprocity in a fragmented political system? • Can we build regional democratic accountability structures –or is cooperation just collusion among government officials? • Dispersed ownership -> lower incentives for performance improvement • Transaction Costs higher for inter-municipal cooperation than for privatization • Political TC as well as service/market related TC

41. Cooperation: Future Research Agenda • Is the Spanish approach of cooperating to then privatize a way to help rural communities take advantage of privatization? • Isn’t cooperation just a return to government owned enterprise? • Inter-municipal corporations (private labor law, public accountability) • Norwegian data shows municipal corporations have higher costs and more employment (Sorenson 2007)

42. References • Warner, M.E. 2008. “Reversing Privatization, Rebalancing Government Reform: Markets, Deliberation and Planning,” Policy and Society. • Bel, G and M.E. Warner 2008, “Does privatization of solid waste and water services reduce costs? A review of empirical studies,” Resources, Conservation & Recycling. 52: 1337-1348 • Bel, G. and M. E. Warner 2008b. “Challenging Issues in Local Privatization,” Environment and Planning C: Government and Policy, 26(1): 104-109 • Warner, M. E. and G Bel 2008. “Competition or Monopoly? Comparing US and Spanish Privatization,” Public Administration: An International Quarterly, 86(3): 723-736. • Warner, M. E. and A. Hefetz 2008. “Managing Markets for Public Service: The Role of Mixed Public/Private Delivery of City Services,” Public Administration Review,68(1):150-161.

43. References • Warner, M. E. 2009. “Civic Government or Market-Based Governance? The Limits of Privatization for Rural Local Governments," Agriculture and Human Values 26(1):133-143. • Hipp, Magdalena and Mildred Warner 2008. “Market Forces for the Unemployed? Training Vouchers in Germany and the U.S.” Social Policy and Administration, 42 (1): 77-101 • Hefetz, A. and M. E. Warner. 2007. “Beyond the Market vs. Planning Dichotomy: Understanding Privatisation and its Reverse in US Cities,” Local Government Studies, 33(4): 555-572. • Gerbasi, J. and M.E. Warner 2007. “Privatization, Public Goods and the Ironic Challenge of Free Trade Agreements,” Administration and Society, 39(2):127-149. • Warner, M. E. 2006. “Market-Based Governance and the Challenge for Rural Governments: U.S. Trends” Social Policy and Administration 40(6):612-631. • Warner, M.E. and A. Hefetz. 2002 “Applying Market Solutions to Public Services: An Assessment of Efficiency, Equity and Voice,” Urban Affairs Review, 38(1):70-89.