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Professor Simon Hakim


Economics & Management of Privatization Professor Simon Hakim * Privatization of Adoption: Lessons Learned * Partial contracting out of adoption ... – PowerPoint PPT presentation

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Title: Professor Simon Hakim

Economics Management of Privatization
  • Professor Simon Hakim

Lecture 1
  • Research Process and Paper Contents
  • Definition Political Science, Economics
  • The Concept of Public Goods Adam Smith
  • Characteristics of Goods that Require
  • Techniques of Public Sector

The Research Process
  • Definition of the Problem
  • Significance of Problem
  • Choice of client, Research Questions, and/or
    Objectives of Study
  • Description of Alternative
  • Evaluation of Alternatives
  • Selection of Preferred Alternative

Structure of paper
  • Cover Page Name, Course, Term, Contact
  • Abstract Problem, Significance of
    Problem, Alternatives, Major Findings.
  • Introduction Problem, Significance of Problem,
    the Client, Research Questions or
    Objectives of Paper, Review of Forthcoming
  • Historical or Literature Review, Background
  • Description of Alternatives. Include a summary
  • Evaluation of Alternatives. Costs and benefits
    to each alternative. Include a summary table.
  • Summary and Conclusions. The preferred
    alternative, rational for selection, improvement
    of preferred alternative, policy implications,
    future research.
  • References.

DefinitionsPublic Administration
  • Relying more on private institutions of society
    and less on government to satisfy peoples needs.
    Private institutions include businesses
    operating in marketplace, voluntary organizations
    (religious, neighborhoods, civic, co-operatives
    and charities), individuals, family, clan or
  • Act of diminished role of government or increased
    role of private sector in an activity or in the
    ownership of assets. It is a strategy to lower
    the cost of government and achieve higher
    performance and better outcomes for tax dollars
  • Act of transferring government enterprise or
    assets to the private sector
  • Websters Making private, especially changing
    from public to private control or ownership.

Public Administration Economic Definition
  • A move of an asset or activity from bureaucratic
    government monopoly towards competitive markets.

Public Goods Adam Smith
  • The need for national defense
  • The duty of protecting every member of society
    from injustice or oppression of every other
    member of society
  • Establish and maintaining highly beneficial
    public institutions and public works which are of
    negative profit nature if supplied in small
  • The duty of meeting expenses of ruling powers.

Public Intervention in Marketplace
  • Pure Public Good Collective consumption
    (non-divisible) with non-exclusion, and
    non-rivalry in consumption. MC0. Motivation
    for free ridership.
  • Externalities Positive and negative Production
    and Consumption.
  • Monopolistic Power.
  • Asymmetric information between the consumers and
    producers in the market
  • Equity.

Pure Public
  • The case of MC0 and constant is typical for pure
    public good. A non-competitive provider will
    produce at MRMC and eliminate a significant part
    of Consumers surplus. Example, a road without
  • Degree of collective consumption VS. Size of
    relevant interacting group.

Mapping of Public And Private Goods
Dichotomy of Goods Services
RIVALRY Pure Private Common Pool Public domain ponds, rivers. Regulation by licensing, contracting-out.
NON-RIVALRY Club Swimming pools, toll roads, country clubs. Membership, tolls or users charges. Private provision. contracting-out, and vouchers. Pure Public
Exclusion Consumption Properties of Goods
  • Definition By-product of activities that escape
    the price mechanism, and may be of positive or
    negative nature. Government role is to
    internalize externalities such that the price
    includes it.
  • In case of negative externalities the product
    is overproduced and at a lower price than it
    should (social).
  • Positive externalities cause under production of
    the good at a higher price than socially desired.

Natural Monopoly
  • A single provider in the market.
  • Absence of competition may be the result of
    significant economies of scale, technological
    superiorities, and/or asymmetric information that
    over time eliminated all competitors.
  • Entry of new competitors to increase supply and
    thereby lower prices is usually infeasible.
  • Govt intervention

Natural Monopoly (cont.)
  • Is aimed to control prices through regulation.
    Examples include local utilities. Improved
    technology increase availability of close
    substitutes and leads to elimination of the need
    to regulate.
  • Natural monopoly results of economies of scale,
    technological superiority, asymmetric
    information. Over time, one provider prevails.
    Consumers surplus in the case of a monopoly is
    smaller than that results in perfect competition.
    Government regulation sets the price to be lower
    and as close as possible to that of perfect
    competition. Action could be on the quantity.

Asymmetric Information
  • Examples food contents, medicine, Enron,
    corporate corruption
  • Here the consumers have no knowledge on the
    contents of their products while learning about
    it requires very high cost. Government needs to
    protect the consumers.

  • Requires government intervention.
  • Efficiency VS. Equity.
  • Shortcomings of perfect competition.
  • Voluntary activities to reduce inequity.
  • Progressive taxation.

History of Privatization
  • Peter Drucker suggested contracting out. Milton
  • Thatcher elected 1979. BP (79), British
    Aerospace (81), National Freight Corp (82), Cable
    and Wireless (83), Jaguar (84), British Telecom
    (84), British Aerospace-final portion of holdings
    (85), British Gas (86), British Airways (87),
    Rolls Royce (87), British Airport Authority (87),
    water utilities (89), electric utilities (90),
    mandatory compulsory tendering (compet. bidding)
    of local govt services (89).

History of Privatization
  • United States
  • Little privatization by sale by Fed.
  • Few state owned enterprise.
  • Contracting out data processing, food services,
    building maintenance, guard services.
  • Local waste collection, street cleaning,
    ambulance service, park maintenance.

History of Privatization
  • World
  • Late 1980s Mexico, Brazil, Chile, Argentina
    elected presidents who adopted strong privat.
  • China Agriculture (78), eliminating state owned
    and collective farms and allowing private
    farming. In the 80s private sector industrial
    and retail operations, multi ownership, joint
  • 89 Collapse of socialist block.

Political historical Discussion
  • Rise of Communism and greater state involvement
    in marketplace Eastern block
  • Rise of Socialism in Western Europe
  • Rise of Fascist regimes in South and Central
  • Change of trend Thatcher and Reagan
  • Collapse of Eastern European block
  • Liberalism in Western Europe and Americas
  • The role of privatization

Forms of Privatization
I. By Divestment A. Sale B. Free Transfer C. Liquidation To Private Sector To the Public To Employees To Users or Consumers To Employees To the Public To Users or Consumers To Prior Owner
II. By Delegation Contract Franchise Grant Voucher Mandate Public Domain (Concession) Public Assets (Lease)
III. By Displacement Default Withdraw Deregulation
Why Privatize?
  • Cost Savings Ranges from 20-50 percent.
  • Access to Enterprise Contracting gives access as
    needed to unavailable expertise.
  • Better quality Competition brings best
    performance. Bidders have incentives to offer
    better quality in low prices.
  • Improve risk management Contractors, rather than
    government, are responsible for delays, overrun
  • Innovations Competition yield cutting
    esourcesdge solutions.

Why privatize?
  • Meeting peak demand Contracting out can satisfy
    extra demand when public resources are
  • Timelines Private contractors can hire part-time
    workers or temporarily rent capital to meet
    deadlines, avoid penalties or enjoy extra
    payments. This option is often unavailable for
  • (Source Gilroy Leonard and Adrian Moore,
    Privatization, in The Patriots Toolbox, The
    Heartland Institute, 2010).

Forms of Privatization
  • Divestment Shedding an enterprise or an asset.
    One time affair. Sold or given away.
  • Free transfer Given away to employees, users,
    customers, previous owners, or the public at
  • Sale to joint venture, private buyer, the
    public, employees, users or customers. More than
    100 airports were sold/privatized including
    Buenos Aires, Frankfurt, Johannesburg, London,
    Madrid, Paris, and Rome. The Empire State
    Development Corp. sold the NY Coliseum, State
    parking lots, armories, golf courses, State
    mental health campuses. This generates, in
    addition, property tax base that did not exist

Forms of Privatization
  • Delegation Requires a continuing active role for
    govt. Remains responsible for overseeing the
  • Contract for part of service, for total
    management. Solid waste collection, street
    repair, street cleaning, snow removal, tree
    maintenance, loan processing, data processing,
    audio visual services, food, mail and filing
  • Franchise (concession) exclusive right to sell a
    service or product to the public.
  • a. Use of the public domain in the course of
    carrying out their commercial activities use of
    the public domain airwaves, air space,
    underground space. Examples, broadcasting,
    airlines, bus and taxi co.'s, electric, gas,
    water, telephone.

Forms of Privatization
  • Delegation (continued)
  • b. A lease. Government owned tangible property
    is used by a private lessee to engage in a
    commercial enterprise. Chicago leased for 1.15B
    its downtown meters system in 2009, and earlier 4
    downtown parking garages for 563M.
  • 3. Grant private entity does the work-subsidy,
    grants for public transit, low income housing,
    maritime shipping. To run a bus service, to do
    research, to promote the arts. Contracts are more
  • 4. Mandate Govt requires private companies to
    provide services at their expense. Ex.
    Unemployment Compensation. Replacing Govt by
    mandatory indiv retirement accts.
  • 5. Vouchers subsidize eligible consumers instead
    of producers to purchase services in the market.
    Used for food, housing, education, health, day
    care, transportation.

Forms of Privatization
  • Displacement Passive process as markets develop
    to satisfy needs.
  • By default Gradually the public looks for the
    private sector. Ex. Municipal tennis courts and
    other rec. facilities. Commercial ventures,
    voluntary groups like charitable, social,
    philanthropic and community org. Ex. Police is
    replaced by private guards. In transportation
    gypsy cabs, commuter vans, minibus systems and
    other unofficial or technically illegal trans.
    Providers emerge as public means are inadequate.
    Private co.'s finance, build, operating, owning
    roads, bridges, prisons. Ex. tunnel connecting
    England and France.

Forms of Privatization
  • By Withdrawal Govt shuts down failing public
    enterprise or accommodates private sector private
    sector expansion.
  • By deregulation State monopoly vs. competition.
    Privatization if the private sector challenges a
    govt monopoly and even displaces it. Packages
    and express mail.

Delegation Contracting Out
  • Most common in the US (28 of all services).
  • Mandatory for municipal services in the UK.
  • Managed competition bidding for contracting out
    that includes the govt agency.
  • Goldsmith A city could run with its mayor, a
    police chief, a planning director, a purchasing
    agent, and a handful of contract monitors.

Contracting Out
  • Success in waste management collection,
    disposal, extracting energy and recyclables from
    the waste stream, and to treat hazardous wastes.
  • Principal-agent problem The principal bears 1.
    the cost of providing incentives to encourage the
    agent to pursue the goals of the principal. 2.
    the cost of obtaining information and monitoring
    the agent to reduce opportunistic behavior. 3.
    the cost of any residual opportunistic behavior
    by the agent.
  • A govt with budget problems is a good candidate
    for contracting out. Loss of hospital
    accreditation by the State, courts order the
    closure of a municipal landfill, sudden need for
    a large public facility-- all necessitate
    contracting out.

Contracting Out
  • Since 2005, 5 cities in metropolitan Atlanta, GA
    contracted with private firms to deliver all its
    non-safety related services (required under state
    constitution to be provided by govt entities).
    Sandy Springs residents incorporated as an
    independent city. CH2M-Hill OMI overseas and
    manages daily city operations. Sandy Spring
    maintains ownership of assets, and setting
    service levels. Contractor is responsible for
    staffing and all operations. Contract value is
    just above half of what Fulton County charged in
    taxes the City.

Contracting Out Steps
  • Consider the idea of contracting out.
  • Select the service
  • Conduct a feasibility study
  • Foster competition
  • Request expression of interest or qualifications
  • Plan the employee transition
  • Prepare bid specifications
  • Initiate a public relations campaign
  • Engage in managed competition
  • Conduct a fair bidding process
  • Evaluate the bids and award a contract
  • Monitor, evaluate, and enforce contract

Contracting Out Actual Process
  • Wastewater treatment plants in Indianapolis,
  • Mayor creates Review Committee (6 mayoral
    appointees, and 2 from City Council)
  • Review Committee issues RFQ to 28 Cos.
  • 7 Responses are received including one from the
    current managers of plant
  • Committee reviews and cuts down to 5
  • City provides 15K for consultants to help
    existing managers Cost estimate and preparation
    of RFP
  • RFP are issued to 5 qualified teams
  • Teams of all 5 qualifiers visit separately the
  • 5 qualifiers submit proposals and prices
  • A technical and financial consultants are hired
    to help the Committee
  • 3 of 5 including existing management are rejected
  • Each finalist briefs the Review Committee
  • Review Committee visits plants operated under
    contract by 2 finalists
  • Review Committee picks the winner
  • Winner starts contract operation

Contracting Out 2. Select the Service Criteria
  • Service with no legal or contractual impediments
    to contracting
  • Easy to carry out competitive contracting
  • Hard services for which easy to write enforceable
  • Stand-alone service
  • Can be segmented by location into 2 contracts
  • Services that have been successfully contracted
    out elsewhere
  • Yellow pages test. Enough, responsible and
    experienced bidders
  • Services for which part timers can be used.
    Significant savings since govt cannot readily
    employ part timers
  • Services where govt operation is overstaffed,
    poorly managed or could be re-engineered.
  • Services that are subject to public complains
  • Services where employees and union resistance can
    be overcome
  • Services where overpowering political opposition
    will not result
  • Services where in-house monitoring expertise is

Contracting Out 3. Feasibility Study
  • Establish current cost to establish a baseline
    against which to compare prices
  • Assess quality of current operationcomplaints,
    measuring performance, conducting surveys
  • Public cost relies on published budget. Need for
    ABC accounting which includes
  • Capital expenditures which often are not included
    in operating budgets
  • Interest costs on capital expenditures
  • Costs of supplies- fuel for vehicles that appear
    in a different category of budget
  • Fringe benefits
  • Budgetary pensions
  • Cost of labor borrowed from other agencies or
    hired seasonally and are not included in the
    analyzed budget. E.g. hierarchical and hidden
    costs. Or, many attorneys budgeted by the DOJ
    work full time defending the Bureau of Prisons
    against suits brought by litigating prisoners.
  • Foregone property tax and OC of building and land
    used by the activity
  • Cost of premiums paid for liability and fire

Contracting Out 4. Foster Competition
  • It is best to have multiple competitors.
    However, when there are marginal competitors it
    is best to negotiate bids with handful of clearly
    eligible contractors after the qualifying round.
    Best for contractors of hospitals, prisons,
    social and professional services. Often due to
    bureaucratic behavior of govt there are only few
    bidders and/or high bids to compensate for it.
  • To foster competition
  • divide the geographical area to smaller units as
    long as econ of scale are not adversely affected.
  • give a long lead time to bidders
  • publicize and use the web for the bidding
  • provide sufficient information
  • award enough contracts and permit a large number
    of bidders to get contracts.
  • Minimize incumbent advantage to encourage new
    contractors to bid. Philadelphia did just that
    by including in the bid for the maintenance of
    street lighting detailed information on equipment
    and practices used by the incumbent contractor
  • Avoid request for sensitive non-essential
    business information to the procurement like
    profits, wages of managers/employees
  • Avoid restricted contracts for nonprofit
    organizations but keep it open for all. Such
    restrictions are often used for local political
    patronage (e.g. social foster care agencies)
  • When service is site based like center for
    homeless, the owner of the facility has an
    advantage in such a bidding. It is suggested to
    separate the rent from the operation to encourage
    companies that could provide the service however
    do not own the (a) facility.

5. Contract out Express Interest or
Qualifications (RFEI)
  • When initially considering privatization, govt
    may be unsure about the exact nature of the
    proposed contract. So, it announces RFEI to
    prospective bidders, pre-bid conference to
    discuss the issues, checking the submission of
    the firms, prepare a list of firms to which RFP
    or an invitation to bid is issues.

Contracting Out 6. Plan the Employee Transition
  • Biggest problem is how to handle with redundant
    workers and the prospect of labor unrest.
    Surveys showed that most workers are hired by the
    private contractor, followed by early retirement,
    severance pay, attrition, redeployment in other
    public agencies. Only few are fired.

Contracting Out 7. Prepare bid specifications
  • Contract wording should be in ordinary language,
    accurate and unambiguously.
  • The contract should not specify exactly how the
    work should be done but merely the output
    quantitative specifications.
  • Govt should allow freedom of contractor to
    employ the people at salaries and in procedures
    that achieve the contract specified outputs.
  • Hard services that involve tangible and
    visible physical results are easier to write
    specifications in output and lend themselves to
    contracting out.
  • Soft services that involve social workers are
    more amenable for contracting out.

Contracting Out 8. Initiating Public Relations
  • Strong opposition is almost certain to surface by
    public employee unions, private firms that want
    to avoid competition, or special interest groups.
  • Aggressive campaign in support of privatization
    should include a coalition of civic associations
    for better govt, neighborhood groups
    dissatisfied with poor services, minority
    businesses that see opportunity in providing such
    services etc.

Contracting Out 9. Managed Competition
  • Effective for short term contract or where
    capital expenditures are required
  • Allows the management to work with its labor
  • Improves employees morale and builds community
  • Reduces the possibility of collusion among
    private providers
  • Induces private firms to submit better bids
  • Mandatory competitive bidding by govt agencies
    for routine functions was introduced in the UK.
    Also, requirement of govt agencies to maintain
    separate accounts of income and expenditures and
    to achieve a prescribed rate of return on the
    capital equipment they employ. (Local Govt Act,
    1988). Included refuse collection, street
    cleaning, cleaning of public buildings, vehicle
    and ground maintenance, and food services.
    Result Many services were won by in-house
    departments with savings of 20 and reduction in
    manpower of 20-30.

Contracting Out 10. Fair Bidding Process
  • Widely advertise the RFP
  • Allow enough time between announcement and due
  • Hold a bidders conference to address questions
  • Use internal team and an outside consultant to
    evaluate proposals using clear criteria and an
    agreed upon score system
  • Avoid asking for too many bid prices. (e.g.
    price for year 1, year 2) This will create

Reasons for PrivatizationPolitical Science View
  • Pragmatic Greater efficiency in the production
    of G S. Dissatisfaction with govt
  • Ideology Less govt. Govt plays a smaller role
    than the private sector.
  • Commercial To do more work at profit.
  • Populist Better society by giving people greater
    power through the marketplace while diminishing
    the power of large public bureaucracies.

Reasons for PrivatizationThe Economist View
  • 1. Improve economic efficiency
  • 2. Strengthen the share of the private sector in
    the economy
  • 3. Reducing the role of government in the
  • 4. Improve the financial stance of the public
  • 5. Develop better capital markets
  • 6. Use the revenues generated by the
    privatization for other social, security or
    infrastructure purposes.

Reasons for privatization varies by economies
  • The relative importance of the reasons depends
    upon the characteristics of the economy in
    question. In a nation where capital markets are
    weak reason 5 dominates. In a nation that
    changes its structure (from Communism) then
    reasons 2, 3, and 5 are central. In a developed
    economy where the private sector is strong and so
    are capital markets then reason 1 applies.

Keys for Success (in Declining Importance)
  • Having committed political leader (s) to champion
    the initiative. E.g. a governor, mayor, or
    several legislators. Flexibility in adjusting
    strategies when problems arise in the
    implementation. Maintenance of momentum.
  • Establishing an organizational and analytical
    structure to implement the initiative.
  • Enacting legislative changes and/or reducing
    available resources to encourage greater exposure
    to competition. Signaling managers and employees
    that the restructuring efforts are real.
  • Developing reliable Activity Based Costing (ABC)
    accounting to determine performance of the govt
    agency and the feasibility of private sector
    provision of service. Cost data on individual
    activity and not the traditional agency wide
    accounting system.

Keys for Success (Cont.)
  • Involving employees and local unions in the
    privatization process. Unions concerns and
    political influence led to legislation that made
    privatization in MA more difficult. In
    Indianapolis, employees are involved from early
    stage. Workers trained in ABC and allowed to
    compete. Front line workers were given
    decision-making power. Some supervisory jobs
    were eliminated, training to workers responding
    to RFP, safety net for displaced workers.
  • A 1989 National Commission on Employment Policy
    survey showed that 24 of contracted out public
    services were transferred to other govt jobs.
    58 went to work for the private contractor, 7
    retired, and only 3 laid off.
  • A monitoring body should be established by govt
    to assure compliance with the designated
    contractual terms.

2nd key Council on Efficient Govt
  • Single independent decision-making body to
    manage initiatives. Good example, Florida
    Council on Efficient Govt. 2004-2010 550M in
    cost savings through 130 privatization
    initiatives. The council should get the
  • Develop a process for identifying implementing
    competitive sources.
  • A feasibility study of alternatives.
  • Develop performance-based contracting focus on
    outputs not inputs when choosing whether to
  • Conduct an periodical inventory of govt
    activities distinguishing between inherently
    public and possible public.

Problems with Traditional Contract Out Model
  • Infrastructure controlled by govt
  • 1. Separate contracts with private agencies
  • 2. Labor disputes
  • 3. Disputes between the planners and the
  • 4. Lowest bidder contractor performs low-quality
  • 5. Concealed or unforeseen conditions
  • 6. Huge task of renewing the public
    infrastructures, and insufficient funds.

Public Private Partnerships (PPP)
  • Definition PPP is an arrangement of roles and
    relationships in which 2 public and private
    entities coordinate in a complementary way to
    achieve their separate objectives through the
    pursuit of common objectives (s).
  • Private design, finance, construction,
    maintenance and operation of a project for public
    use for a specific period of time. When time
    expires, title reverts to govt.
  • The private sector aids govt in identifying new
    private financed profit-making facilities, and
    seek out new projects that otherwise have to wait
    until public funding becomes available.
  • The public sector investigates feasibility of
    project, execute the contract, choose the private
    partner, regulate prices, establish and monitor
    performance standards.
  • BOT is a general term for PPP. A concession is
    granted to a contractor to design, finance,
    operate and maintain for 10-30 years. Contractor
    charges tolls for the use of the facility.

Forms of PPP From mostly Public to mostly private
  • Fully public
  • DB Design Build
  • DBFO Design, Build, Finance, Operate
  • BOT Build. Operate, Transfer
  • BTO Build, Transfer, Operate
  • BOOT Build, Own, Operate, Transfer
  • BOO Build, Own, Operate
  • Fully Private

Forms of PPP
  • DB A contract with a private contractor to
    provide architecture/engineering design and
    construction services
  • DBFO Contractor responsible for these services
    and is compensated by specific service payment by
    govt during life of project. No actual tolls are
    collected by private contractor. Here payments
    by govtcost to taxpayer. Still efficient since
    construction operation by a private entity
  • BOT A concession is granted to a contractor to
    design, finance, operate, and maintain for 10-30
    years. Contractor charges tolls for the use of
  • BTO Build, Transfer, Operate. The govt then
    leases the facility back to developer under a
    long term lease.
  • BOOT Build, Own, Operate, Transfer. Ownership
    with the contractor until the end of the
    concession period and is transferred free to the
  • BOO Outright privatization without a transfer of
    ownership to govt. At the end of the
    concession, the original agreement can be
  • Wraparound addition The private developer
    constructs an addition to an existing public
    facility and then operates the entire facility
    for a fixed period of time or until the developer
    recovers costs plus a reasonable return on

Reasons for PPP
  • Greater efficiency in the use of public
    resources. State and local govts save 10-40
  • PPP are means of increasing investment in
    infrastructure particularly utilities and
  • Needs for social infrastructure hospitals,
    prisons, schools, housing

Advantages for Govt of PPP
  • Profit oriented businesses identify new projects
    that otherwise wait till govt funds are
  • Private sponsors and commercial lenders assure
    financial and tech feasibility of project
  • Private sector can access private capital markets
    to substitute hard to get govt sources
  • Private sector builds faster and more cost
    effective than govt. Less bureaucracy and
    procurement rules
  • Private sector operates facilities more
    efficiently due to profit motives
  • Private firms provide more tax revenues
  • Private sector shares or accepts risks otherwise
    borne by public sector
  • Private sector transfers technology and provides
    training to govt workers

6 Keys for Success of PPP
  1. Statutory and Political EnvironmentA successful
    partnership can result only if there is
    commitment from "the top". The most senior public
    officials must be willing to be actively involved
    in supporting the concept of PPPs and taking a
    leadership role in the development of each given
    partnership. A well-informed political leader can
    play a critical role in minimizing misperceptions
    about the value to the public of an effectively
    developed partnership. Equally important, there
    should be a statutory foundation for the
    implementation of each partnership.
  2. Public Sectors Organized StructureOnce a
    partnership has been established, the
    public-sector must remain actively involved in
    the project or program. On-going monitoring of
    the performance of the partnership is important
    in assuring its success. This monitoring should
    be done on a daily, weekly, monthly or quarterly
    basis for different aspects of each partnership
    (the frequency is often defined in the business
    plan and/or contract).
  3. Detailed Business Plan (Contract)You must know
    what you expect of the partnership beforehand. A
    carefully developed plan (often done with the
    assistance of an outside expert in this field)
    will substantially increase the probability of
    success of the partnership. This plan most often
    will take the form of an extensive, detailed
    contract, clearly describing the responsibilities
    of both the public and private partners. In
    addition to attempting to foresee areas of
    respective responsibilities, a good plan or
    contract will include a clearly defined method of
    dispute resolution (because not all contingencies
    can be foreseen).

Keys for Success of PPP (continued)
  • 4. Guaranteed Revenue StreamWhile the private
    partner may provide the initial funding for
    capital improvements, there must be a means of
    repayment of this investment over the long term
    of the partnership. The income stream can be
    generated by a variety and combination of sources
    (fees, tolls, shadow tolls, tax increment
    financing, or a wide range of additional
    options), but must be assured for the length of
    the partnership.
  • 5. Stakeholder SupportMore people will be
    affected by a partnership than just the public
    officials and the private-sector partner.
    Affected employees, the portions of the public
    receiving the service, the press, appropriate
    labor unions and relevant interest groups will
    all have opinions, and frequently significant
    misconceptions about a partnership and its value
    to all the public. It is important to communicate
    openly and candidly with these stakeholders to
    minimize potential resistance to establishing a
  • 6. Pick Your Partner CarefullyThe "lowest bid"
    is not always the best choice for selecting a
    partner. The "best value" in a partner is
    critical in a long-term relationship that is
    central to a successful partnership. A
    candidate's experience in the specific area of
    partnerships being considered is an important
    factor in identifying the right partner. The
    listing of NCPPP members provides a logical
    starting point for the identification of
    potential partners or services that might be
    required in the development of a partnership.

BOT Model
  • Usually a large project requiring consortium of
    designers, builders, financiers and more.
    Contractor enters into 4 agreements
  • A concession agreement with host govt
  • A construction contract usually DB type. It may
    be a member of the bidding consortium
  • An operation and maintenance agreement with
    operator of facility. It may be a member of the
    bidding consortium
  • Loan agreements. Funds flow through concession

BOT Concession Agreement
  • Establishes concession rules and contractual
    rights of parties. Issues Included
  • Nature, length, scope of work, operation of
    completed facility
  • Specification of what is provided
  • Extent of permitted variations to specification
  • Performance standards
  • Tolls, prices, payments to be charged
  • Concessionaire's rights if enabling legislation
  • Provisions for termination of contract
  • Circumstances where grantor takes over the

BOT Govt support
  1. Creating appropriate legislation that enables
    effective operation
  2. Setting tolls to allow reasonable IRR given level
    of risk
  3. Protecting concession companies from competition
    at early years
  4. Helping concession co. to overcome bureaucratic
  5. Develop a clear and effective program to allow
    public participation in the planning.

BOT Advantages
  1. No or little cost to taxpayers
  2. Little risk for govt. Sufficient bonds and
    letters of credit that ensure completion if
    private sponsor defaults
  3. Private sector can move pre and construction more
    rapidly than govt
  4. Sponsors must operate and maintain facility for
    20 years
  5. General taxes are unaffected and revenue bonds
    are unnecessary
  6. Only users of BOT facilities pay tolls. Thus,
    costs are borne by beneficiaries and not by
    public at large

BOT Risks
  • LDC Long term political instability
  • Cost overruns. Project could come to halt
  • Currency devaluations causing payback loans with
    devalued revenue
  • Drastic changes in demographics over the
    concession period may affect revenues.

PPP in Highways
  • Problem Maintenance of existing roads is short
    20B than available Federal, State and Local
    budgets. If we wish to accommodate expected
    economics growth then the shortage expands to
    40B than what public budget will be available.

PPP Highways
  • Impetus Intermodal Surface Transportation
    Efficiency Act (ISTEA), 1991. Expanded toll
    facilities eligibility for Federal aid for
    construction (re), resurfacing, rehabilitation,
    conversion to toll roads. Allowed also State
    funding and shared responsibility with private
    sector. Exception Interstate system.

PPP Highways Principles
  • Always PPP where ownership shifts to public
  • Always existence of non-toll alternative road
  • Toll roads and private highways have been built
    in many Asian, European, and Latin American
    countries. Since 2005, govt run toll roads have
    been contracted out in Colorado (Northwest
    Parkway), Illinois (Chicago Skyway), Indiana
    (Indiana Toll Road), and Virginia (Pocahontas

Rt. 91 in Ca.
  • Description 10 miles 91 express 4-lanes within
    the median area of SR 91. Connecting 55 Freeway
    near Anaheim to run east-west to the border of
    Riverside County. Affluent local population, 8
    annual increase in traffichigh congestion.

Rt. 91 Ca. Nature of PPP, Operation
  • BTO. CPTC built, cedes ownership to State in
    exchange for 35 years lease to operate the road.
    Toll charged and 50 discount for 3 people in
  • Demand sensitive pricing by time of day and
  • Guaranteed 65 MPH otherwise money back
  • Fully automated operation
  • Immediate removal of non-operating vehicles.
  • Results Profitable from first year. Average
    occupancy 1.65 where 20 of which are carpoolers

Dulles Greenway
  • Built as BOT in 1995 in Virginia. 15 miles from
    Dulles Internl Airport to Leesburg. 4 lanes and
    250 ft. right of way. Private consortium
    financed, built, and operates it. Connecting the
    Beltway near D.C. (I-495) with Dulles Airport.
  • Special legislation to establish prerequisites
    for construction operation of a private toll
  • A commission was set up to regulate applicants,
    supervise, control operators, and approve/revise
  • Total estimated cost 326M. 68M initial
    investment by partners of which 22 equity and
    46M guarantee against project risk. 202M by
    consortium of 10 lending institutions.
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Greenway Features
  • BOT. Transferred to State (VI) after 40 years.
    Subjected to utility style regulation. Targeted
    return 21.
  • Prices fixed for all day and all 7 interchanges.
    In 1995 price 1.75 ridership 10K vs. anticipated
    30K. In 1996, price lowered to 1 ridership
    grew to 17K. In 1997, price increased to 1.15.
    Toll collection below anticipation.

Lessons learned
  • Drivers are reluctant of paying tolls that do not
    vary by distance and time of day. Demand
    sensitive pricing (discriminatory prices) also
    assure higher revenues, and avoidance of
  • Private toll road companies face difficulties in
    land acquisition and managing environmental
    concerns. Rt. 91 had no land acquisition while
    the Greenway suffered additional cost related to
    delay in land purchase. DOT enjoys eminent domain
    provision in assembling land. Timely land
    acquisition added to the cost of the Greenway.
  • Private companies unlike public entities cannot
    finance using tax exempt securities. Thus,
    private companies pay higher interest.
  • Private companies unlike public entities do not
    enjoy sovereign immunity. Full liabilities for
    accidents adding in case of BOT additional
    operating cost.
  • Toll roads should enjoy existing demand and not
    be subjected to induced development that will
    produce travel demand. The initial cost of toll
    roads includes high land acquisition and
    construction while revenues are low extending for
    a long period of time.

Lessons learned (Continued)
  • Metropolitan roads that serve peak time traffic
    (e.g. Rt. 91) are more financially viable than
    intercity roads (e.g. the Greenway).
  • Most private investments have alternative use in
    case of failure. No alternative use for failed
    toll road which raises uncertainty and higher
    financial costs.
  • Success requires one company to build and operate
    the toll road for a long period of time.
  • Success requires simple and immediate land
  • Success requires a committed political champion

Problems with Dulles Greenway
  • Fixed price for tolls. Demand sensitive prices
    over distance traveled, time of day,
  • Excessive regulation by state/lenders for toll
    restructuring, change of speed
  • Real cost of regulation in time and expenses
  • No tax exempt securities raising developers
    interest payments
  • Accidents and other liabilities absent for public
    roads that enjoy sovereign immunity
  • No eminent domain provision to acquire necessary
    land. Negotiations for land took time and
    additional resources adding to cost
  • Expensive project that is contingent upon
    stimulation of land use or induced traffic in the
    remote future with high risk

BOT Tunnel in Hong Kong
  • Feb 1988, the HK Govt granted a 30 year
    franchise to a private consortium. Longest road
    in HK 4 KM twin tube 4 lanes tunnel and
    approaching lanes. Completed 2 months ahead of
    schedule at TC of 276.5M
  • Financed completely by private sector
  • Shareholders contributed equity 1 to 2.6 debt
  • Risk for non-completion ran for just 18 months
    construction period. Risk was low because the
    tunnel method used was well known. Good
    reputation of contractor, and 400K per day
  • Cost overrun risk was overcome by several
    guarantees of shareholders. To ensure project
    quality, a 10 year performance bond to address
    performance risk was put up by contractor
  • Post completion risks ran for 12 year loan
    period. Shareholders purchased i.r. cap. Cash
    flow risk was mitigated by HK govt approval to
    increase tolls.

PPP for public schools
  • PPP adopted to upgrade schools facilities at
    lower costs and less time than govt.
  • PPP are unbounded by regulations that govern
    public sector bond offering, voter approval, and
    review of competitive bids.
  • A PPP school in Fl was built in less than 9
    months compared with 5 years by Fl govt.

PPP for Schools
  • Nova Scotia 41 schools constructed under
    Built-Lease-Transfer-Maintain (BLTM). Private
    sector designs, finances, and constructs. Leased
    back to Govt for predetermined period of time at
    a pre-agreed rent. When the lease starts, the
    school is operational.
  • Advantages speed of upgrade, and 15 percent
    savings on lease. The school leases the facility
    for 20 years at rent lower than the capitalized
    construction and furnishing cost. Developer uses
    the facility when not used other time of the
    day, weekends, summer holidays. Activities are
    predetermined like vocational education, meeting
    space for civic and political groups.

PPP for Public school Pembroke Pines Charter Fl.
  • Haskell Educational Services (HES) designed and
    built the school between 22 and 34 percent less
    cost than other public schools in Fl. Unlike the
    previous case, here Govt owns and leases the
    facility to the private entity.
  • Public tax exempt bonds financed the building,
    owns it, and leases it back to HES. HES operates
    it as charter school and offers additionally
    fee-based after-school programs daycare,
    enrichment, and student services.

Conclusions for PPP
  • The traditional model of Govt contracting
    separately a construction co (bid) and a designer
    has not been successful. Often, the lower bidder
    uses low quality material where possible. Also,
    the fragmented relationship and responsibilities
    among the govt, the designer and the
    construction co. is a source of problems where
    the govt plays a mediation role. In PPP, the
    construction co. has vested interest in high
    quality construction since it will operate the
    facility upon completion.
  • DB is preferred to traditional model since a
    single organization exists for both avoiding

Conclusions for PPP (Continue)
  • BOT, and DBFO are used for major infrastructure
    projects like roads, and power generators.
    Attract new private investment without recourse
    to govt funding. BOT reduces the common cost
    overruns experienced by govt. Only the users of
    BOT facilities pay tolls. In DBFO services
    charges are paid by public sector no user
  • Hospitals and schools use BLMT (Build, Lease,
    Maintain, Transfer). Facility is leased back to
    govt. PPP can be used to acquire many different
    types of facilities with various contractual

Privatizing Adoption _at_ Foster Care Services The
  • Higher incidents of criminal behavior when
    growing up without family ties and lack of
  • 90 of Rochester NY who endured 5 family
    transitions became delinquent.
  • 17 of all local jail inmates are former foster
    care children.
  • Annual pubic cost of per child foster care is

Privatizing Adoption _at_ Foster Care Services
  • 400,000 in foster care in 1991, increasing
    annually by 4. 542,000 in 2001.
  • 1.5 million children or 2 of all children
  • Average age 10.1 in 2001 and the average child
    remains in fc 44 months
  • Special subsidy is available for special needs
    children Emotional and Physical problems,
    siblings, age, and ethnic belonging.
  • International adoption becomes common. 20K in
    2002 40 of50,000 children adopted in 2002. 50
    of intl adoptions are infants while only 2 from
    foster care. Cost 7K - 25K.
  • Private adoptions in the US include expenses for
    the birth mother, agency and court, and could
    exceed 30K.
  • Minorities in fc and awaiting adoption comprise a
    greater than their respective share in the
    population. Blacks are 17 of population, 49 of
    adopted and 55 of those awaiting adoption.
  • Number of children is foster care rises, length
    of time in pipeline is long, and few children are
    being adopted.

Privatizing Adoption _at_ Foster Care Services
  • Reduce the number of children in fc and increase
  • Reduce the period of time in pipeline
  • Federal Adoption and Safe Family Act (ASFA)
    offers incentive payments to States that
    increases adoption from fc above the national
    standards. Incentives appeared effective in
    raising the rate of adoption.

Privatizing Adoption _at_ Foster Care Services in
  • Six months exclusivity for the State agency,
    family independent agency or fc provider to place
    an eligible child in adoption. Within 3 months,
    the adopting parents need to be identified. If
    not, the child is publicly listed.
  • Once publicized, the 53 licensed private agencies
    can compete. These companies provide both fc and
    adoption services.
  • Fixed prices are paid for placing children based
    on outcome, time, and the difficulty of the
  • The State imputes estimated cost for 8 prototype
    cases and adds an incentive component. The
    adoptive family can act as a fc family for the
    child for up to 150 days.
  • Private agencies handle 60 of adoption services
    and the rest are managed by the state agency.

Privatizing Adoption _at_ Foster Care Services in
  • No obvious success to the privatization efforts
  • 1991-99 total number of children adopted higher
    by 83. However, number of children available
    for adoption increased 116. Ranked 5 lowest
    among the 50 states.
  • Advantages introduced some competition to the
    process and dissemination of information on
    Internet. Private companies have an incentive to
    search for high quality and many adoptive
    parents. Greater choice to prospective parents
    now than before when a state agency ran the
  • Shortcomings Prices set by the State and are not
    market sensitive. The State provides identical
    services for the private providers that compete
    with it. The cost per child for the State is of
    no concern thus no managed competition features.
    No justification for the 6 months exclusivity
    awarded to the company. Immediate competition of
    all agencies could reduce time to adoption with
    no cost to the child.

Privatizing Adoption _at_ Foster Care Services in
Kansas Description
  • Privatization started in 1996 to benefit the
    children and save resources following a suit by
    Civil Liberties Union. Description
  • 1. The State was divided into 5 regions for fc.
    Bidding in each for 1 contractor for 4 years
    period and prices negotiated. Important that the
    child remains close to biological parents for
    possible visitation and reunification.
  • 2. Foster Care Fixed amount per child and ranged
    among regions 12,860 and 15,504. Over time,
    prices were changed and adapted for children with
    special needs.
  • 3. Adoption Bidders compete for a statewide
    contract. Lutheran Social Services had 12
    sub-contractors throughout the State.
  • 4. Kansas Dept. of Social Rehab Services
    established performance standards that will be
    used for contract renewal or subsequent bidding.
    FC Standards include max 3 placement moves and
    65 achieve permanency within 12 months of
    initial referral.
  • 5. Adoption standards require 70 are placed
    within 180 days of referral and 90 of adoptions
    be intact for 18 months from finalization.

Privatizing Adoption _at_ Foster Care Services in
Kansas Evaluation
  • During 4 first years, Kansas paid foster care
    contractors 105.1M above the 178.7 contracted,
    and to adoption providers 31.4M above the 37.4
  • Adoption provider lost 5.5M in the first 2 years
  • As a result, revision of contracts to
    1,958-2,200 a month per child for 1st year.
    The initial contract was unrealistic. Children
    in foster care more than 6 months yield loss to
    contractors since 32 remain in fc 1-2 years.
  • Privatization led to better data collection of
    cost and performance for both fc and adoption.
    Quality of both services has improved with 178
    rise of budget.
  • Number of adopted children rose on the 1st year
    by 55 and over the 4 years by 78. Ranked
    lowest 7th among the 50 states.
  • Improved service case workers available 24/7 and
    71 of fc children were now in their own or
    continuous county. children in fc home rather
    than group homes and institutions grew from 67 to
    85. Unsuccessful adoptions were 2.4 compared
    with 12 nationally. Social workers can spend
    more time investigating leading to an increase
    uncovering child abuseng abused children.

Privatizing Adoption _at_ Foster Care Services in
Kansas Conclusions
  • Fixed fee contract failed due to unknowable
    medical costs and delays by judicial procedures
    outside the contractors control. Changed to a
    per month fee which lacks incentives for prompt
    placement. Performance, however, is still a base
    for renewal of contract.
  • Separation of the many fc providers and the one
    adoption provider creates inefficiency in the
    care of the children that experience a shift in
    their contact social worker. Allowing
    integration of both services could raise
  • Longer contracts increase incentives to compete
    for a contract, leading to lower bid prices
    and/or better service. Longer contracts leads to
    more resources provided by contractors to improve
    efficiency. However, longer contracts enable
    contractors to exercise monopolistic power and
    reduce service.

Privatizing Adoption _at_ Foster Care Services in
Illinois Background
  • Illinois had the highest number and rate of
    children in fc. Number of children in fc per
    1,000 was 17.2 compared with 6.9 for the nation
    as a whole, 1996.
  • Social workers caseload was 60 compared with 25
  • The median of length of time in fc grew from 8
    months in 1986 to 40 in 1996.

Privatizing Adoption _at_ Foster Care Services in
Illinois Privatizing Adoption _at_ Foster Care
Services in Illinois Description
  • Contracting started in 1997 to reduce fc
    population and achieve permanency.
  • Case confined to Cook County which comprised 75
    of the state cases.
  • Private agencies paid 394 per case
  • The private agency was expected to move 24 to
  • The 24 standard was aimed to reduce the average
    stay in fc from 56 to 48 months a 25 exit from
    fc each year
  • If more than 24 of its cases, paid still the
    same per child and receive more children. In
    non-Cook County, bonus of 2000 for all children
    adopted above standard
  • If placement less than 24, funding is the same
    for a larger number of children under the
    agencys care and the State did not provide the
    agency additional children

Privatizing Adoption _at_ Foster Care Services in
Illinois Evaluation
  • The FC caseload diminished from 51,000 in 97 to
    22,000 in 03 (-57)
  • Adoptions increased from 1600 in 97 to 3100 in 03
  • In the 9 years pre 97, 2-4 reached permanency.
    In the 5 years post 97, 12-23 reached
    permanency. In the first year it grew 200 and
    reached 300 in the 3rd year. Eventually, the
    rate declined due to the hard core of the
    difficult cases.

Privatizing Adoption _at_ Foster Care Services in
Illinois Evaluation (Cont.)
  • Median duration in FC diminished from 40 months
    in 96 to 25 in 02.
  • Total nominal funding declined in 03 compared
    with 96 by 3.5.
  • In 97 there were 42 private agencies and 3 state
    offices, In 03, only 26 private agencies and one
    state office exit of inefficient providers and
    more adoptions. Illinois was ranked near the top
    states in achieving permanency.

Privatizing Adoption and FC in Illinois Lessons
  • Effective performance contracting brought good
  • More children achieved permanency
  • Lower caseload to social workers leading to
    better services for children remaining in FC
  • Growth of better performing private agencies and
    elimination of inefficient providers.
  • Realization of economies of scale.
  • The system where private agencies provide both FC
    and adoption services led to economies of scope,
    and avoidance of duplicating services and
    disruption to children.
  • Elimination of 2 public agencies and transfer of
    service to private providers.

Adoption Services An Economic Auction Model
  • Problems
  • Lack of resources for adequate FC of older,
    disabled, minority children.
  • Shortage of healthy infants leading to black
    markets and/or queuing for 7 years. Surplus of
    children with less desired attributes.
  • Public system is inadequate and inefficient while
    partial privatization does not resolve the above
    two problems.
  • Govt management is inefficient and does not
    address special needs due to lack of market
    signals. Privatization partially improves the
    delivery of children. However, still greater
    efficiency could be achieved with ubiquity of
    information, and allowing prices to better match
    children and adopting families.

Auctioning of Wives Herodotus in Ancient Greece
5th Century BC
  • In every village once a year all the girls of
    marriageable age were collected together in one
    place, while the men stood around them in circle
    an auctioneer then called each one in turn to
    stand up and offered her for sale, beginning with
    the best looking and going on to the second best
    as soon as the first had been sold for a good
    price. Marriage was the object of the
    transaction. The rich men who wanted wives bid
    against each other for the prettiest girls, while
    the humbler folk, who had no use for good looks
    in a wife, were actually paid to take the ugly
    ones. The money came from the sale of the
    beauties, who in this way provided dowries for
    their ugly or misshapen sisters. It was illegal
    for a man to marry his daughter to anyone he
    happened to fancy, and no one could take home a
    girl he had bought without first finding a backer
    to guarantee his intention of marrying her. In
    case of disagreement between husband and wife the
    law allowed the return of the purchase money.
    Anyone who wished could come, even from a
    different village, to buy a wife.

An Economic Auction Model Objective
  • To increase quality of matching between adopted
    children and adopting families.
  • To produce resources that will improve quality of
    life for children that are difficult to adopt and
    remain in FC.
  • Adoption is not a vehicle to improve equity of
    adopting families.

An Economic Auction Model Background
  • The three states that partially privatized the
    service introduced economic incentives to private
    entities that do nor exist in the public sector
    to fasten the service and/or improve the
    permanency of placement.
  • The privatization, however, does not increase the
    exposure of the children to more potential
    families and retains the excess supply/shortage
    of children.
  • Adoption of market forces could improve the
    matching of children, increase the number of
    participants, and prevent excess supply/shortage.

An Economic Auction Model Method
  • Auctioning is used by economists as a welfare
    maximization for the buyer and seller. It is
    applied for first time sale, thinly traded goods
    and services. Generally auctions are designed to
    best match and at the same time to clear the
    market. A fix price, like is currently
    experienced, causes years of waiting for the most
    desired children, black markets of children, and
    losses for families that withdraw from the
  • Potential parents are attributed by wealth which
    is observable and fitness which is only known to
    the parents. A test needs to be conducted in
    order to determine the condition of the baby. If
    potential parents have no test results and obtain
    an unhealthy baby then potential parents will be
    reluctant to adopt. The market for lemon.

An Economic Auction Model
  • Make a health test of each child and make results
    available to potential parents.
  • Make a national market to increase the number of
    children and potential parents improves
  • Bid all children at one time. Sequential bidding
    leads to mo
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