Privatization of Local Service Delivery

Mildred E. Warnermew15@cornell.edu

http://government.cce.cornell.edu

Presented at Government Restructuring, Privatization,

Regulation and CompetitionJune 26, 2008

Grup de Recerca en Polítiques Públiques i Regulació Econòmica

Harvard University, Boston, MA

Outline Overview: Theoretical Expectations, International

Trends, US data

New Trends: Importance of Market Structuring Mixed Delivery

Discussion

Reverse Privatization Discussion

New Challenges: Free Trade and New Global Governance Regimes

Discussion

Old Questions - Current Results Efficiency, Voice and Access, Managerial Opposition,

Regionalism, Alternatives Discussion

The New Public Management Problem:

Oversupply of public goods, budget maximizing bureaucrats, inflexible, unresponsive government, lack of choice

Solution: Private Sector Management can be applied to the

public sector

Markets Can Provide Public Goods

Competition (Privatization) Promotes Efficiency

Market Provision Enhances Consumer Choice/Voice

OverviewTheoretical Expectations

Market Solutions exist for public goods Competition among local governments

increases efficiency Differences in services reflect citizen

preference Market solutions enhance democratic

expression Citizen and consumer voice are similar

Theoretical Challenges Public goods result from market failures.

There are limits to market solutions for public goods

Competition is costly Government must structure the market, ensure stability and security

Government is more than a business Must manage political interests, citizen expectations beyond

efficiency

Network Management Challenges Privatization raises challenges of accountability and blurs the line

between public and private

International Trends U.K., Australia, New Zealand were early privatizers

Compulsory competitive tendering

Moderating Position in Last Decade Disappointment with lack of cost savings

‘Best Value’ recognizes a broader set of concerns than just cost efficiency

Reversals – Reinternalization of Service Delivery

Privatization Levels Higher in Europe than in the US Reflects more flexible organizational forms

Pragmatic, dynamic, mixed market/government position emerging

Privatization is not a one way street

Privatization Levels

Waste (% private contracts)

Water (% private contracts)

Netherlands 42 0

UK 35 88

Spain 56 42

US 40 7

Data: US (ICMA), Spain (Bel), Europe (OECD, EUREAU )

US Large Scale Longitudinal Data International City County Management Association Surveys of

Alternative Service Delivery 1982, 1988, 1992, 1997, 2002, 2007 U.S. Census of Governments Finance Files (same years)

Scope: 64 specific services 6 service delivery options (entirely public, mixed

public/private, for profit, non profit, inter-municipal cooperation, franchises

Factors motivating restructuring (approx 75)

Sample Frame: All cities over 10,000, All counties over 25,000. Response rate 31% - 1444 municipalities in 1992, 32% -

1460 in 1997, 24% -1133 municipalities in 2002, 26%-1599 municipalities 2007

US Local Privatization Trends Flat

Average provision as % of total provisionSource: International City/ County Management Association, Profile of Alternative Service Delivery Approaches, Survey Data, 1982, 1988, 1992, 1997, 2002, 2007

46.7

11.7

3.6

57.2 58.5

53.949.7

58.8

11.9 13.2 12.77.4

18.5

15.7 16.417.6

15.215.6 13.0

4.9 5.1 4.3 4.60

15

30

45

60

1982(N=1674)

1988(N=1627)

1992(N=1444)

1997(N=1460)

2002(N=1133)

2007(N=1577)

Public Employee Entirely Intermunicipal Cooperation

Privatization to For-Profit Privatization to Non-Profit

Why are the Trends Flat? Some governments do a lot; many do little (6 of 35

services on average) Government has always used private providers

Privatization - new name for longstanding practice

Government service provision is dynamic New services, service shedding, contracting out and contracting

back-in

Government managers use a variety of mechanisms to secure public service delivery Internal Reform (direct public delivery) –common and stable Mixed Public and Private Delivery – dynamic Contracting out and back-in (reversals) – dynamic

Discussion

New Trends:Importance of Market Structuring

To use markets, government must play a market structuring role Competition is not secured, contracts and

monitoring important (transaction costs)

Government is about more than efficiency Equity and access

Service quality and sustainability

Community identity and development

Political Interests and voice

Shifts in Local Government Practice New Public Management – manage like a

business, competition, citizen as customer (Osborne and Gaebler)

Transactions Costs Economics – challenge of contract management: information asymmetries, principal agent problems (Sclar, Williamson, similar to ‘make’ or ‘buy’ literature in the private sector)

New Public Service – citizen as central, balance efficiency concerns with deliberative democracy (Denhardts)

Contracting Peaked in 1997

Now Mixed and Public Delivery Rising

Provision Rates: 66%, 61%, 53%, 49% for 1992, 1997, 2002, 2007 RespectivelySource: International City/ County Management Association, Profile of Alternative Service Delivery Approaches, US Municipalities, 1992, 1997, 2002, 2007 Washington DC.

28 3318

30

1817 18

52

24

5954 50

0

100

1992 1997 2002 2007

Survey Years

PC

T o

f P

rovi

sio

n

Direct PublicDelivery

MixedPublic/PrivateDelivery

CompleteContracting Out

What Explains Mixed Provision?Miranda and Lerner 1995 Redundancy is efficient – reduces costs,

creates competition, ensures failsafe delivery Benchmarking – track process and costs by

remaining in service delivery (transaction costs)

Warner and Hefetz 2008 (Probit and GEM models)

Rise in mixed delivery explained by efforts to: decrease costs, ensure competition, manage opposition, ensure citizen satisfaction

Managerial Learning – market management and political management

Shift in meaning of mixed delivery

1992 – Reinvention - Mixed delivery associated with efforts to reduce costs and increase competition, and explore new contracting

1997 - Managerial Learning - Professional managers recognize the need to mix even as the level of total contracting out is rising - use competitive bidding

2002 – Managing for Public Service – all managers see need to mix delivery, recognize problems with lack of competition. Increased attention to citizen satisfaction.

Warner & Hefetz 2008, Public Administration Review, “Understanding Mixed Delivery…”

Evolution of a Balanced Position Markets are just a tool

Government must manage for: Efficiency

Competition

Quality

Customer satisfaction

Opposition

Mixed delivery gives the necessary flexibility

Oscillations between mixed, contracting and direct delivery reflect continued market experimentation

US market mix in comparison to Spanish mixed firms

Public Mixed Firm

Mixed Contract

Complete Contract

Water Distribution

51 Sp

76 US

6 0

14

42

10

Solid Waste Collection

37 Sp

45 US

7 0

11

56

45Data: 2002 US ICMA, 2003 Spain, Univ. of Barcelona

Mixed firms can take advantage of monopoly and scale economies; privatization more stable in Spain

Warner y Bel, 2008, “Competition or Monopoly?..” Public Administration forthcoming.

Percent

Discussion

Government Service Delivery is Dynamic

Governments Contract Out and Back-In

This question is not asked directly. So we paired samples from adjacent survey years 1992-1997 (628)

1997-2002 (480)

What do we know about the stability of contracts, of public delivery, and the level of new contracts and reversals?

Hefetz and Warner 2007. Local Government Studies,

update of Hefetz and Warner 2004, Journal of Public Administration Research and Theory

Service Delivery is DynamicShift: Contracting Back In > New Contracting

1997 to 2002

Stable Public

43%

Stable Cont.27%

New Cont.12%

Back-in

18%

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

1992 to 1997

New Cont.18%

Stable Public

44%

Back-in

11%

Stable Cont.27%

New Contracting Out is Dropping Contracting Back-In is Rising

Percent governments using for at least one service

Source: International City/ County Management Association, Profile of Alternative Service Delivery Approaches, Paired Survey Data, 1992-1997 N = 628, 1997-2002 N= 480

3.6Services

6.3Services 5.3

Services

3.7Services

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

1992 to 1997 1997 to 2002

New Contracting Out

Contracting Back In

Contracted Services Are UnstableNew Out “Top 10” Back In “Top 10”*Legal Services *Fleet Management

*Fleet Management *Street Repair

Traffic Sign *Park Landscaping

*Building Maintenance *Recreation

*Data Processing *Public Relations

*Recreation Data Processing

*Park Landscaping *Building Maintenance

*Street Repair Emergency Medical

*Tree Trimming Snow Plowing

Sludge Animal Control

Top ten services 1997-2002 *top ten 1992-1997

Source: International City/ County Management Association, Profile of Alt. Service Delivery Approaches, Paired Survey Data, 1997-2002 N= 480

Why Contract Back-In? ICMA survey 2002

245 governments reporting

73% Service quality was not satisfactory

51% Cost savings were insufficient

36% Local government efficiency improved

22% Strong political support to bring service back in house

15% Problems with contract specification

What Explains the Direction of Contracting: New and Reverse?

Principal Agent Theory – labor opposition and budget maximizing bureaucrats.

Market Failure – creates public services

Transaction Costs– contract specification, information, monitoring.

Citizen Voice – Government’s primary concern is to ensure citizen deliberation and secure public values

Social Choice – combines market with public production. This balance creates a more capable, responsible and flexible system.

Social Choice

Structure the Market Assure Citizen Voice

Contract ManagementService Characteristics

Communications ManagementPlace Characteristics

New Public ManagementMarket and Consumer

New Public ServiceVoice and Diversity

Probit Model

Respondents to both surveys ICMA data

1992-1997 (621 municipalities)

1997-2002 (480 municipalities) Dependent Variables: Level of new contracting out

and reverse contracting (back-in)

Results

Transaction Costs and New Public Management explain levels in the first period

New Public Service and Social Choice explain levels in the second period

Balance: Market and Government

Government must structure the market Competition is not secured, monitoring and contract

specification are important

Government has more objectives than just efficiency Equity and voice are more important

Public managers must secure public values Service quality, local identity, sustainability

Social Choice represents a balanced position – gives benefits of market and public sector

Discussion

New Challenges:International Governance Regimes

Free Trade Agreements (GATS, NAFTA) Promote Privatization but undermine Coasian Requirements Clear Property Rights – Superior Property Rights for Foreign

Investors (compensation for regulatory takings)

Adjudicatory Mechanism – Substitute private arbitration for the public courts

Balanced Bargaining Position – Local government regulations subject to international harmonization and foreign investor challenge

Gerbasi and Warner 2007, Administration and Society

Ironically, these features undermine the ability of local government to use private markets for public goods delivery

Discussion

Old Questions – Current Results

Privatization and Efficiency

Privatization and Voice/Access

Managerial Opposition

Market Solutions to Regionalism

Alternatives to Privatization

1. What About Efficiency?

Bel, Fajeda and Warner 2008

Meta Analysis of all econometric studies of water distribution and solid waste collection (1965-2006)

Can not confirm privatization results in lower costs

Consistent with earlier meta analyses by Boyne and Hodge

Policy environment matters – UK more likely to find cost savings in waste due to competitive tendering

Why No Cost Savings? Property Rights Theory – Private owners will reduce

service quality to increase profits (can’t do this in water since standards closely regulated)

Transactions Costs Theory – Cost of contracting and monitoring higher than any savings

Public Choice Theory – Competition is key; but water is a natural monopoly and waste has consolidated

Industrial Organization Theory – Must look at organizational structure and incentives of actors

Government regulation of monopoly may be better than competitive market management for these services

II. What about Voice? Update of Urban Affairs Review article 2002

Public choice theory argues market solutions enhance public sector efficiency and promote consumer/citizen voice. Competition promotes efficiency.

Promoting consumer sovereignty enhances citizen voice.

Are competitive markets and consumer sovereignty adequate foundations for service delivery reform?

Results Hipp and Warner 2007, Social Policy and Administration –

Job training vouchers, US and Germany. Preference misalignment and information asymmetries lead to

poor choices by job seekers. Government efforts to reduce these problems through closer monitoring undermine private supply of training

Warner and Hefetz 2002, Urban Affairs Review,

Warner 2006, Revista de Economia Pública Urbana

Efficiency: Cooperation and privatization associated with lower expenditures if governments monitor.

Equity: Privatization favors richer places, Cooperation is neutral.

Voice: Cooperation more associated with citizen voice than privatization in 1992 and 1997. Managers learn to give increased attention to voice under privatization by 2002.

III. What About Managerial Opposition?

Do government managers and labor opposition limit privatization? Management attitudes, monitoring, opposition

Or is it a result of structural features of markets? Scale and cost considerations, income

Used discriminant analysis to determine if restructuring patterns differed by metro status.

(N=1400 municipalities in1992 and 1997, 1100 in 2002)

Model Results Structural features are more important than

management in explaining differing restructuring patterns by metro status. Explained more than 80% of variance in

all three models Government management, labor opposition

and monitoring explained less than 20% of variance in all three models. Level of motivators and obstacles drop in

2002 and monitoring rises.Warner and Hefetz 2003 Government and Policy,

Warner 2006 Social Policy and Administration

IV. Are Markets a Solution to Regionalism? Fragmented metropolitan areas make regional integration of

service delivery difficult. Local government boundaries do not coincide with the economic

boundaries of the metro area.

Political fragmentation leads to inequity High need inner city Low need but higher tax base suburbs.

Planners’ ideal solution - regionalism Political consolidation politically unpopular. Representative regional government is rare.

Market solutions to regionalism are common Privatization and inter-municipal cooperation

ResultsWarner 2006, Social Policy and Administration

Discriminant analysis shows market solutions are biased against rural places.

Suburbs have wider range of choice in market approaches - use both inter-municipal cooperation and privatization.

Warner, 2006 Urban Public Economics Review

Levels of privatization and cooperation are dropping 1997-2002

Explained by problems with efficiency, accountability and citizen satisfaction

V. Alternatives to Privatization Bel, Hebdon and Warner 2007. Privatization and Its

Alternatives, Local Government Studies, special issue Factors Explaining Privatization (Bel and Fageda) Municipal Corporations, hybrid public/private firms (Tavares

and Camoes, Warner and Bel) Market management – reverse privatization (Hefetz and

Warner) Relational Contracts – trust (Brown et al) or collusion

(Dijkgraaf and Gradus)? Local vs National Differences (Fitch)

Bel and Warner 2008, Challenging Issues in Local Privatization, Government and Policy, special issue Lack of Cost Savings (Bel and Warner), Regulatory Policy

(Miralles, Dijkgraaf and Gradus), Contract Instability (Brown et al), Regional Variation (Hebdon and Jalette)

Future Research

Must look beyond privatization – at a broader set of reform alternatives

Address importance of market structuring and regulation

Pay attention to citizen participation and political interests

Local government must balance political, economic, regulatory roles

Social choice represents a balanced position

Discussion