Professor Simon Hakim

1
Economics Management of Privatization

• Professor Simon Hakim
• hakim_at_temple.edu

2
Lecture 1

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

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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

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Structure of paper

• Cover Page Name, Course, Term, Contact
  information
• Abstract Problem, Significance of
  Problem, Alternatives, Major Findings.
• Introduction Problem, Significance of Problem,
  the Client, Research Questions or
  Objectives of Paper, Review of Forthcoming
  Sections.
• Historical or Literature Review, Background
• Description of Alternatives. Include a summary
  table
• 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.

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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
  tribe.
• 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
  spent.
• Act of transferring government enterprise or
  assets to the private sector
• Websters Making private, especially changing
  from public to private control or ownership.

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Public Administration Economic Definition

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

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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
  quantities
• The duty of meeting expenses of ruling powers.

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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.

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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
  congestion.
• Degree of collective consumption VS. Size of
  relevant interacting group.

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Mapping of Public And Private Goods
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Dichotomy of Goods Services
EXCLUSIVE NON EXCLUSIVE
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
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Exclusion Consumption Properties of Goods
Services
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Externalities

• 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.

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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

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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.

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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.

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Equity

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

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History of Privatization

• Peter Drucker suggested contracting out. Milton
  Friedman.
• 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).

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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.

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History of Privatization

• World
• Late 1980s Mexico, Brazil, Chile, Argentina
  elected presidents who adopted strong privat.
  policies.
• 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
  ventures.
• 89 Collapse of socialist block.

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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
  America
• Change of trend Thatcher and Reagan
• Collapse of Eastern European block
• Liberalism in Western Europe and Americas
• The role of privatization

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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
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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
  costs.
• Innovations Competition yield cutting
  esourcesdge solutions.

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Why privatize?

• Meeting peak demand Contracting out can satisfy
  extra demand when public resources are
  unavailable.
• 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
  government.
• (Source Gilroy Leonard and Adrian Moore,
  Privatization, in The Patriots Toolbox, The
  Heartland Institute, 2010).

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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
  large.
• 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
  before.

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Forms of Privatization

• Delegation Requires a continuing active role for
  govt. Remains responsible for overseeing the
  results.
• 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
  services.
• 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.

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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
  specific.
• 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.

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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.

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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.

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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.

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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.

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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.

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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
  performance

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Contracting Out Actual Process

• Wastewater treatment plants in Indianapolis,
  1993.
• 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
  plant
• 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

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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
  specifications
• 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
  available.

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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
  insurance

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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.

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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.

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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.

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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.

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Contracting Out 8. Initiating Public Relations
Campaign

• 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.

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Contracting Out 9. Managed Competition

• Effective for short term contract or where
  capital expenditures are required
• Allows the management to work with its labor
  force
• Improves employees morale and builds community
  support
• 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.

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Contracting Out 10. Fair Bidding Process

• Widely advertise the RFP
• Allow enough time between announcement and due
  date
• 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
  favoritism.

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Reasons for PrivatizationPolitical Science View

• Pragmatic Greater efficiency in the production
  of G S. Dissatisfaction with govt
  performance.
• 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.

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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
  marketplace
• 4. Improve the financial stance of the public
  sector
• 5. Develop better capital markets
• 6. Use the revenues generated by the
  privatization for other social, security or
  infrastructure purposes.

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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.

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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.

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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.

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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
  authority
• 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
  privatize
• Conduct an periodical inventory of govt
  activities distinguishing between inherently
  public and possible public.

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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
  contractor
• 4. Lowest bidder contractor performs low-quality
  workmanship
• 5. Concealed or unforeseen conditions
• 6. Huge task of renewing the public
  infrastructures, and insufficient funds.

51
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.

52
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

53
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
  facility.
• 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
  govt.
• BOO Outright privatization without a transfer of
  ownership to govt. At the end of the
  concession, the original agreement can be
  renegotiated.
• 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
  investment.

54
Reasons for PPP

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

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Advantages for Govt of PPP

• Profit oriented businesses identify new projects
  that otherwise wait till govt funds are
  available
• 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

56
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).

57
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
  partnership.
• 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.

58
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
  co.

59
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
  changes
• Provisions for termination of contract
• Circumstances where grantor takes over the
  concession.

60
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
   opposition
5. Develop a clear and effective program to allow
   public participation in the planning.

61
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

62
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.

63
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.

64
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.

65
PPP Highways Principles

• Always PPP where ownership shifts to public
  entities
• 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
  Parkway).

66
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.

67
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
  car.
• Demand sensitive pricing by time of day and
  distance.
• 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
  (3)

68
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
  road
• A commission was set up to regulate applicants,
  supervise, control operators, and approve/revise
  prices.
• 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.
• http//americancityandcounty.com/mag/government_ma
  king_inroads_private/
• http//americancityandcounty.com/mag/government_ma
  king_inroads_private/

69
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.

70
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
  congestion.
• 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.

71
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
  acquisition
• Success requires a committed political champion

72
Problems with Dulles Greenway

• Fixed price for tolls. Demand sensitive prices
  over distance traveled, time of day,
  weekday-weekend
• 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

73
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
  penalty
• 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.

74
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.

75
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.

76
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.

77
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
  conflicts.

78
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
  charges.
• 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
  arrangements.

79
Privatizing Adoption _at_ Foster Care Services The
Problem

• Higher incidents of criminal behavior when
  growing up without family ties and lack of
  permanency.
• 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
  17,500

80
Privatizing Adoption _at_ Foster Care Services
Background

• 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.

81
Privatizing Adoption _at_ Foster Care Services
Objectives

• Reduce the number of children in fc and increase
  permanency
• 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.

82
Privatizing Adoption _at_ Foster Care Services in
Michigan

• 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
  case.
• 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.

83
Privatizing Adoption _at_ Foster Care Services in
Michigan

• 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
  program.
• 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.

84
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.

85
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
  contracted.
• 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.

86
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
  competition.
• 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.

87
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
  nationwide.
• The median of length of time in fc grew from 8
  months in 1986 to 40 in 1996.

88
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
  permanency
• 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

89
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
  (94)
• 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.

90
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.

91
Privatizing Adoption and FC in Illinois Lessons
Learned

• Effective performance contracting brought good
  results
• 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.

92
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.

93
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.

94
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.

95
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.

96
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
  process.
• 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.

97
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
  matching.
• Bid all children at one time. Sequential bidding
  leads to mo