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Presented at Government Restructuring, Privatization, Regulation and Competition June 26, 2008

Privatization of Local Service Delivery Mildred E. Warner mew15@cornell.edu http://government.cce.cornell.edu. Presented at Government Restructuring, Privatization, Regulation and Competition June 26, 2008 Grup de Recerca en Polítiques Públiques i Regulació Econòmica

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Presented at Government Restructuring, Privatization, Regulation and Competition June 26, 2008

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  1. Privatization of Local Service DeliveryMildred E. Warnermew15@cornell.eduhttp://government.cce.cornell.edu Presented at Government Restructuring, Privatization, Regulation and Competition June 26, 2008 Grup de Recerca en Polítiques Públiques i Regulació Econòmica Harvard University, Boston, MA

  2. Outline • Overview: Theoretical Expectations, International Trends, US data • New Trends: Importance of Market Structuring • Mixed Delivery • Discussion • Reverse Privatization • Discussion • New Challenges: Free Trade and New Global Governance Regimes • Discussion • Old Questions - Current Results • Efficiency, Voice and Access, Managerial Opposition, Regionalism, Alternatives • Discussion

  3. The New Public Management • Problem: • Oversupply of public goods, budget maximizing bureaucrats, inflexible, unresponsive government, lack of choice • Solution: • Private Sector Management can be applied to the public sector • Markets Can Provide Public Goods • Competition (Privatization) Promotes Efficiency • Market Provision Enhances Consumer Choice/Voice

  4. OverviewTheoretical Expectations • Market Solutions exist for public goods • Competition among local governments increases efficiency • Differences in services reflect citizen preference • Market solutions enhance democratic expression • Citizen and consumer voice are similar

  5. Theoretical Challenges • Public goods result from market failures. • There are limits to market solutions for public goods • Competition is costly • Government must structure the market, ensure stability and security • Government is more than a business • Must manage political interests, citizen expectations beyond efficiency • Network Management Challenges • Privatization raises challenges of accountability and blurs the line between public and private

  6. International Trends • U.K., Australia, New Zealand were early privatizers • Compulsory competitive tendering • Moderating Position in Last Decade • Disappointment with lack of cost savings • ‘Best Value’ recognizes a broader set of concerns than just cost efficiency • Reversals – Reinternalization of Service Delivery • Privatization Levels Higher in Europe than in the US • Reflects more flexible organizational forms • Pragmatic, dynamic, mixed market/government position emerging • Privatization is not a one way street

  7. Privatization Levels Data: US (ICMA), Spain (Bel), Europe (OECD, EUREAU )

  8. 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

  9. US Local Privatization Trends Flat 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

  10. 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 • Contracting out and back-in (reversals) – dynamic

  11. Discussion

  12. New Trends:Importance of Market Structuring • To use markets, government must play a market structuring role • Competition is not secured, contracts and monitoring important (transaction costs) • Government is about more than efficiency • Equity and access • Service quality and sustainability • Community identity and development • Political Interests and voice

  13. Shifts in Local Government Practice • New Public Management – manage like a business, competition, citizen as customer (Osborne and Gaebler) • Transactions Costs Economics – challenge of contract management: information asymmetries, principal agent problems (Sclar, Williamson, similar to ‘make’ or ‘buy’ literature in the private sector) • New Public Service – citizen as central, balance efficiency concerns with deliberative democracy (Denhardts)

  14. Contracting Peaked in 1997 Now Mixed and Public Delivery Rising Provision Rates: 66%, 61%, 53%, 49% for 1992, 1997, 2002, 2007 Respectively Source: International City/ County Management Association, Profile of Alternative Service Delivery Approaches, US Municipalities, 1992, 1997, 2002, 2007 Washington DC.

  15. What Explains Mixed 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

  16. Shift in meaning of mixed 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…”

  17. Evolution of a Balanced Position • Markets are just a tool • Government must manage for: • Efficiency • Competition • Quality • Customer satisfaction • Opposition • Mixed delivery gives the necessary flexibility • Oscillations between mixed, contracting and direct delivery reflect continued market experimentation

  18. US market mix in comparison to Spanish mixed firms Percent Data: 2002 US ICMA, 2003 Spain, Univ. of Barcelona Mixed firms can take advantage of monopoly and scale economies; privatization more stable in Spain Warner y Bel, 2008, “Competition or Monopoly?..” Public Administration forthcoming.

  19. Discussion

  20. Government Service Delivery is Dynamic • Governments Contract Out and Back-In • This question is not asked directly. So we paired samples from adjacent survey years • 1992-1997 (628) • 1997-2002 (480) • What do we know about the stability of contracts, of public delivery, and the level of new contracts and reversals? Hefetz and Warner 2007. Local Government Studies, update of Hefetz and Warner 2004, Journal of Public Administration Research and Theory

  21. Service Delivery is DynamicShift: Contracting Back In > New Contracting Average percent of total provision across all places. Source: International City/ County Management Association, Profile of Alternative Service Delivery Approaches, Survey Data, 1992, 1997, 2002, Washington DC. Paired sample size: 1992-1997: 628, 1997-2002: 480.

  22. New Contracting Out is Dropping Contracting Back-In is Rising Percent governments using for at least one service Source: International City/ County Management Association, Profile of Alternative Service Delivery Approaches, Paired Survey Data, 1992-1997 N = 628, 1997-2002 N= 480

  23. Contracted Services Are Unstable Top ten services 1997-2002 *top ten 1992-1997 Source: International City/ County Management Association, Profile of Alt. Service Delivery Approaches, Paired Survey Data, 1997-2002 N= 480

  24. Why Contract Back-In? • ICMA survey 2002 • 245 governments reporting • 73% Service quality was not satisfactory • 51% Cost savings were insufficient • 36% Local government efficiency improved • 22% Strong political support to bring service back in house • 15% Problems with contract specification

  25. What Explains the Direction of Contracting: New and Reverse? • Principal Agent Theory – labor opposition and budget maximizing bureaucrats. • Market Failure – creates public services • Transaction Costs– contract specification, information, monitoring. • Citizen Voice – Government’s primary concern is to ensure citizen deliberation and secure public values • Social Choice – combines market with public production. This balance creates a more capable, responsible and flexible system.

  26. Probit Model • Respondents to both surveys ICMA data • 1992-1997 (621 municipalities) • 1997-2002 (480 municipalities) • Dependent Variables: Level of new contracting out and reverse contracting (back-in) • Results • Transaction Costs and New Public Management explain levels in the first period • New Public Service and Social Choice explain levels in the second period

  27. Balance: Market and Government • Government must structure the market • Competition is not secured, monitoring and contract specification are important • Government has more objectives than just efficiency • Equity and voice are more important • Public managers must secure public values • Service quality, local identity, sustainability • Social Choice represents a balanced position – gives benefits of market and public sector

  28. Discussion

  29. New Challenges: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

  30. Discussion

  31. Old Questions – Current Results • Privatization and Efficiency • Privatization and Voice/Access • Managerial Opposition • Market Solutions to Regionalism • Alternatives to Privatization

  32. 1. What About Efficiency? • Bel, Fajeda and Warner 2008 • Meta Analysis of all econometric studies of water distribution and solid waste collection (1965-2006) • Can not confirm privatization results in lower costs • Consistent with earlier meta analyses by Boyne and Hodge • Policy environment matters – UK more likely to find cost savings in waste due to competitive tendering

  33. Why No Cost Savings? • Property Rights Theory – Private owners will reduce service quality to increase profits (can’t do this in water since standards closely regulated) • Transactions Costs Theory – Cost of contracting and monitoring higher than any savings • Public Choice Theory – Competition is key; but water is a natural monopoly and waste has consolidated • Industrial Organization Theory – Must look at organizational structure and incentives of actors • Government regulation of monopoly may be better than competitive market management for these services

  34. II. What about Voice? Update of Urban Affairs Review article 2002 • Public choice theory argues market solutions enhance public sector efficiency and promote consumer/citizen voice. • Competition promotes efficiency. • Promoting consumer sovereignty enhances citizen voice. • Are competitive markets and consumer sovereignty adequate foundations for service delivery reform?

  35. Results • Hipp and Warner 2007, Social Policy and Administration – Job training vouchers, US and Germany. • Preference misalignment and information asymmetries lead to poor choices by job seekers. Government efforts to reduce these problems through closer monitoring undermine private supply of training • Warner and Hefetz 2002, Urban Affairs Review, Warner 2006, Revista de Economia Pública Urbana • Efficiency: Cooperation and privatization associated with lower expenditures if governments monitor. • Equity: Privatization favors richer places, Cooperation is neutral. • Voice: Cooperation more associated with citizen voice than privatization in 1992 and 1997. Managers learn to give increased attention to voice under privatization by 2002.

  36. III. What About Managerial Opposition? • Do government managers and labor opposition limit privatization? • Management attitudes, monitoring, opposition • Or is it a result of structural features of markets? • Scale and cost considerations, income Used discriminant analysis to determine if restructuring patterns differed by metro status. (N=1400 municipalities in1992 and 1997, 1100 in 2002)

  37. Model Results • Structural features are more important than management in explaining differing restructuring patterns by metro status. • Explained more than 80% of variance in all three models • Government management, labor opposition and monitoring explained less than 20% of variance in all three models. • Level of motivators and obstacles drop in 2002 and monitoring rises. Warner and Hefetz 2003 Government and Policy, Warner 2006 Social Policy and Administration

  38. IV. Are Markets a Solution to Regionalism? • Fragmented metropolitan areas 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. • Market solutions to regionalism are common • Privatization and inter-municipal cooperation

  39. Results Warner 2006, Social Policy and Administration • Discriminant analysis shows market solutions are biased against rural places. • Suburbs have wider range of choice in market approaches - use both inter-municipal cooperation and privatization. Warner, 2006 Urban Public Economics Review • Levels of privatization and cooperation are dropping 1997-2002 • Explained by problems with efficiency, accountability and citizen satisfaction

  40. V. Alternatives to Privatization • Bel, Hebdon and Warner 2007. Privatization and Its Alternatives, Local Government Studies, special issue • Factors Explaining Privatization (Bel and Fageda) • Municipal Corporations, hybrid public/private firms (Tavares and Camoes, Warner and Bel) • Market management – reverse privatization (Hefetz and Warner) • Relational Contracts – trust (Brown et al) or collusion (Dijkgraaf and Gradus)? • Local vs National Differences (Fitch) • Bel and Warner 2008, Challenging Issues in Local Privatization, Government and Policy, special issue • Lack of Cost Savings (Bel and Warner), Regulatory Policy (Miralles, Dijkgraaf and Gradus), Contract Instability (Brown et al), Regional Variation (Hebdon and Jalette)

  41. Future Research • Must look beyond privatization – at a broader set of reform alternatives • Address importance of market structuring and regulation • Pay attention to citizen participation and political interests • Local government must balance political, economic, regulatory roles • Social choice represents a balanced position

  42. Discussion

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