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

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


1
Local Government PrivatizationNew 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_at_cornell.edu http//government.cc
e.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. N500-600 (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 QuestionsHybrid 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

29
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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 CooperationAn 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 -gt 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?
  • Isnt 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.
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