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Public Private Partnerships An Academic Understanding, or Not 2003 NEFPP Annual Conference. From An Economist’s Viewpoint. Presumption that Markets are Better Requires competition Not necessary to be private – competing govt. teams Markets can also fail
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Public Private PartnershipsAn Academic Understanding, or Not2003 NEFPP Annual Conference
From 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
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
Implications 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
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?
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
Undeveloped 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?
“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
Political 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
A 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?
Concerns 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
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.