presented at government restructuring, privatization, regulation and competition june 26, 2008
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Privatization of Local Service Delivery Mildred E. Warner [email protected] 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 - PowerPoint PPT PresentationTRANSCRIPT
Privatization of Local Service Delivery
Mildred E. [email protected]
http://government.cce.cornell.edu
Presented at Government Restructuring, Privatization,
Regulation and CompetitionJune 26, 2008
Grup de Recerca en Polítiques Públiques i Regulació Econòmica
Harvard University, Boston, MA
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
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
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
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
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
Privatization Levels
Waste (% private contracts)
Water (% private contracts)
Netherlands 42 0
UK 35 88
Spain 56 42
US 40 7
Data: US (ICMA), Spain (Bel), Europe (OECD, EUREAU )
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
US Local Privatization Trends Flat
Average provision as % of total provisionSource: International City/ County Management Association, Profile of Alternative Service Delivery Approaches, Survey Data, 1982, 1988, 1992, 1997, 2002, 2007
46.7
11.7
3.6
57.2 58.5
53.949.7
58.8
11.9 13.2 12.77.4
18.5
15.7 16.417.6
15.215.6 13.0
4.9 5.1 4.3 4.60
15
30
45
60
1982(N=1674)
1988(N=1627)
1992(N=1444)
1997(N=1460)
2002(N=1133)
2007(N=1577)
Public Employee Entirely Intermunicipal Cooperation
Privatization to For-Profit Privatization to Non-Profit
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
Discussion
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
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)
Contracting Peaked in 1997
Now Mixed and Public Delivery Rising
Provision Rates: 66%, 61%, 53%, 49% for 1992, 1997, 2002, 2007 RespectivelySource: International City/ County Management Association, Profile of Alternative Service Delivery Approaches, US Municipalities, 1992, 1997, 2002, 2007 Washington DC.
28 3318
30
1817 18
52
24
5954 50
0
100
1992 1997 2002 2007
Survey Years
PC
T o
f P
rovi
sio
n
Direct PublicDelivery
MixedPublic/PrivateDelivery
CompleteContracting Out
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
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…”
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
US market mix in comparison to Spanish mixed firms
Public Mixed Firm
Mixed Contract
Complete Contract
Water Distribution
51 Sp
76 US
6 0
14
42
10
Solid Waste Collection
37 Sp
45 US
7 0
11
56
45Data: 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.
Percent
Discussion
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
Service Delivery is DynamicShift: Contracting Back In > New Contracting
1997 to 2002
Stable Public
43%
Stable Cont.27%
New Cont.12%
Back-in
18%
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.
1992 to 1997
New Cont.18%
Stable Public
44%
Back-in
11%
Stable Cont.27%
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
3.6Services
6.3Services 5.3
Services
3.7Services
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
1992 to 1997 1997 to 2002
New Contracting Out
Contracting Back In
Contracted Services Are UnstableNew Out “Top 10” Back In “Top 10”*Legal Services *Fleet Management
*Fleet Management *Street Repair
Traffic Sign *Park Landscaping
*Building Maintenance *Recreation
*Data Processing *Public Relations
*Recreation Data Processing
*Park Landscaping *Building Maintenance
*Street Repair Emergency Medical
*Tree Trimming Snow Plowing
Sludge Animal Control
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
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
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.
Social Choice
Structure the Market Assure Citizen Voice
Contract ManagementService Characteristics
Communications ManagementPlace Characteristics
New Public ManagementMarket and Consumer
New Public ServiceVoice and Diversity
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
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
Discussion
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
Discussion
Old Questions – Current Results
Privatization and Efficiency
Privatization and Voice/Access
Managerial Opposition
Market Solutions to Regionalism
Alternatives to Privatization
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
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
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?
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.
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)
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
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
ResultsWarner 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
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)
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
Discussion