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Foundations of public outsourcing Marcel Boyer. Foundations of public outsourcing Public and private decision makers’ conceptions about public-private.

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Presentation on theme: "Foundations of public outsourcing Marcel Boyer. Foundations of public outsourcing Public and private decision makers’ conceptions about public-private."— Presentation transcript:

1 Foundations of public outsourcing Marcel Boyer

2 Foundations of public outsourcing Public and private decision makers’ conceptions about public-private partnerships have dramatically changed lately New economic theories enable the analysis of organizational or institutional designs in contexts where there exist: –Complex interrelationships between various parties –Incomplete information structures (different parties having private information) –A willingness to enhance performance through organization reforms (coordination and incentives)

3 The prosperity of a society is based on the quality of its institutions/organizations The prosperity of a society, its efficiency and its capacity to adapt to an ever moving environment is strongly linked: –not only to the quality of human (education) and natural resources –but also to the quality of its institutions. The essential role of institutions and organizations is to: –organize cooperation and coordination of decisions made by large numbers of agents –motivate those economic agents to fully contribute to the mission (value maximizing, goal attainment) of the organizations/institutions –that is, to use the resources and the information at their disposal in the most efficient manner.

4 Institutional Design PRINCIPAL AGENT Regional Specific Context Techno-economic Characteristics Constraints Information Transaction Administrative and political Performance of institutions  Efficiency  Equity  Imputability  Economic Development (regional) Public Monopoly Public-corporate management Delegated Mgt.ConcessionPrivatization Options

5 Principal-Agent Model Information Asymmetry Divergent Interests OPPORTUNISM

6 Social Objectives A high performance institutional arrangement achieves in a cost efficient manner the core objectives (adapted to the specific task or project considered): –Efficiency –Equity –Imputability –Regional economic development given the transactional and informational constraints.

7 Objectives: Efficiency Static and Dynamic Efficiency –Absence of spoilage, minimization of costs –Maximization of social wealth –Standards must be established, respected and verifiable Allocating a resource to its best economic usage. –Long term Investment in: Capacity building, innovation, R&D, quality improvement Eco-efficiency - Global sustainable development

8 Objectives: Equity and Imputability Equity- user-payer - direct redistribution rather than indirect taxation and subsidies: accessibility but no cross-subsidization - stand alone cost (CORE) Imputability- the protection of the public - open and transparent bidding - incentives for long term decisions (intergenerational equity) - level and extent of political delegation of instruments

9 Objectives: Economic development (regional) –Knowledge and capability building (core competencies) –Business opportunities and job creation –Efficient provision of business and social services (infrastructure) –Network economies, Economies of scale, Economies of scope

10 Productive efficiency requires the minimization of costs and the allocation of resources to their best economic usage. Allocative efficiency gains can be made from cost reflective pricing (or tarification). Productive efficiency can be separated from the pricing of public goods and services. Prices can be regulated by an independent regulator through a wide range of regulatory instruments –Ramsey-Boiteux pricing –Price caps for costs control –Global price caps in Networks –Rate of return regulation –Yardstick competition Delegated Management and efficient/optimal pricing

11 Types of Delegated Management vs. Characteristics Public Service agreements Lease, affermage Franchise, Concessions Privatization short termperpetualRights Limited Extended limitedpartialcompleteextensive Delegation none long termperpetual None Private sector commitment Ownership Financing Risks Operation

12 Delegated Management and Regulation - base pricing Incentive regulation - cost overruns - productivity gains Cost plus regulation (ROR) Price-cap regulation (RPI - X + Y) Menu of contracts

13 Incentive power of pricing schemes HIGH POWERED (firms keep all gains from reduction of costs) Fixed fee or fixed price cap Price cap with revisions every N years on the basis of yardstrick performance Price cap with expectation of revisions on the basis of cost Expected (ex-ante) cost + rate of return fixed for multiple years Expected (ex-ante) cost + rate of return revised every year Actual (ex-post) cost + rate of return LOW POWERED (firms keep none of the gains from reduction of costs) Source: adapted from Jones (1994). Examples:

14 Designing contracts for public-private partnerships: Different clauses  different compensation liability & control sharing risk management and sharing cost sharing conflict resolution

15 Designing contracts for public-private partnerships: Liability and control / Information  strict liability strict, joint and several liability extended liability  capital structure limited liability  incentives for care and diligence

16 Designing contracts for public-private partneship: Risk management (integrated) * Choosing a risk-return combination risk management ressource management * Sharing risk - risk aversion / tolerance - risk pricing risk return

17 Delegated Management and Cost Sharing Multiple public - one private partnerships Principles- fairness / equity - coherence - efficiency - cross-subsidies The Shapley-Shubik approach (incremental costs) The sequential cost sharing approach (heterogenous needs and demands)

18 Designing contracts for public-private partnership: Conflict resolution Inserting the process in the contract Exchanging information / arguments Third party arbitrage Residual rights owner - value and pricing

19 Choosing partners in public-private partnership: Competitive tendering (public and private) Multiple steps auctions Multiple criteria selection Open bidding rules - participation conditions - open access to information  Dynamic incentives and opportunism Contract renewal procedures

20 Delegated Management and Performance Incentives Principles- informativeness - intensity of incentives - equal compensation - intensity of monitoring - ratchet Benchmarking / Scorecard Auditing process

21 Role of the public partner (municipal) Core competencies - identifying public needs (broker of citizens interests) - arbitrage between needs - managing contracts for maximal social value creation Time horizon and incentives

22 The role of the private partner Core competencies - technology use and development - economies of scale and scope - development and export of know-how (human capital) Reputation building: Dynamic incentives and opportunism

23 Delegated Management of Municipal Services in Canada: The CIRANO Survey # of municipalities surveyed # of questionnaires returned (filled by General Manager) 71 activities in 10 categories For 8 major activities, -questions on the following characteristics: independence, complexity, standardization, uncertainty specificity -questions on the importance of core (field, municipal business) competencies -questions on the definition and verification of performance (cost, quality) -questions on contract renewal procedures stipulated in contracts

24 Delegated Management of Municipal Services in Canada: The CIRANO Survey For 8 major activities (suite) -questions on contract management procedures and use of municipal assets and employees -questions on problems encountered during the contract -questions on investment financing - questions on flexibility, economies of scale, pricing (tarifs) Perceived advantages (suggested list of 13 elements) and disadvantages (suggested list of 13 elements) Data on the municipality (size, area, assets, income and expenditures, taxes, debt, percentage of unionized employees, etc.)

25 Table 1: The top ten contracted out activities (% performed by outside contractors) _____________________________________________________________________________________________ ActivitiesPercentage Number of respondents ______________________________________________________________________ Construction of buildings 89.0296 Recycling 79.2269 Legal services 77.9321 Refuse collection 70.6302 Engineering and architecture 69.0290 Burial of waste 67.7266 Development of IS applications 65.1280 Street lightning 60.5307 Installation of sewers 59.3292 Caretaking 46.3325

26 Table 2: The bottom 10 activities being contracted out (% performed by outside contractors) ______________________________________________________________________ Activities Percentage Number of respondents ______________________________________________________________________ Secretarial services 3.49346 Permits and licences 5.92333 Billing and collection 6.27347 Accounting 6.51347 Tax collection 7.55323 Human resources 1.90339 Road signs11.07330 Suplies11.30327 Fire department13.17330 Archives14.28315

27 Table 3: The ten activities for which outsourcing intentions are the highest (in %) _____________________________________________________________________________ Activities Percentage Number of respondents _____________________________________________________________________________ Ice rinks10.4269 Development of I.S. applications 9.6281 Snow removal 8.5331 Caretaking / security 7.6327 Sewage treatments 7.5266 Refuse collection 7.3301 Road maintenance and repairs 7.2332 Management of SI-related activities 6.5294 Water supplies 5.9271 Recycling 5.5273

28 Table 4: The ten activities for which outsourcing intentions are the weakest (in %) _____________________________________________________________________________ Activities Percentage Number of respondents _____________________________________________________________________________ Fire department0.6330 Supply0.9331 Permits and licences1.5334 Secretarial services1.7346 Accounting1.7346 Strategic planning2.2323 Legal services2.2323 Human resources2.4339 Tax collection2.5323 Archives2.5317

29 Table 5: The ten top activities for which outsourcing would be most profitable (in %) _____________________________________________________________________________ Activities Percentage Number of respondents _____________________________________________________________________________ Refuse collection21.3301 Caretaking18.0328 Engineering and Architecture18.0295 Development is IS applications17.2279 Ice rinks17.2268 Building maintenance 17.0342 Construction of buildings16.2297 Installation of sewers15.8292 Snow removal15.4331

30 Table 6 : Five activities for which intentions are constrained (in %) _________________________________________________________ Activities Percentage _________________________________________________________ Engineering and architecture15 Blue box system15 Refuse collection14 Construction of buildings13 Collection of hazardous waste13

31 Table 7 : Profile of outsourcing contracts _______________________________________________________________________________ Probability of renewingAverage length of contract the contract (in years) _______________________________________________________________________________ Refuse collection5.53.9 Processing of hazardous waste5.52.8 Water supply5.87.8 Sewer maintenance and repairs5.22.2 Snow removal5.03.2 Road maintenance and repairs4.82.7 IS operations5.52.3 Development is IS applications5.42.3

32 Table 8 : Management problems with outsourcing contracts (% of respondents) _________________________________________________________________________________ Reliability Quality of Controversy in Breach of Legal service interpretation contract settlement ____________________________________________________________________________________________ Refuse collection 15 20 24 5 4 Processing of hazardous waste 1 2 2 1 0 Water supplies 4 5 8 2 5 Sewer maintenance and repairs 3 6 6 0 1 Snow removal 12 21 12 4 2 Road maintenance and repairs 9 10 10 2 3 IS operations 5 7 2 0 0 Development of IS applications 6 9 2 0 0

33 Table 9 : Management mechanisms ____________________________________________________________________________________ Contract Refuse Processing of Water Sewer Snow Highway IS operations Computer management collection hazardous supplies maint. & clearance maint. & application measure waste repairs repairs development ____________________________________________________________________________________ Meetings between 49 22 28 12 21 14 29 31 senior management and outsourcer Meetings between 41 25 23 24 41 27 29 28 middle management and outsourcer Meetings between 18 6 15 9 25 18 18 17 municipal employees and outsourcer Regular employee 30 8 10 9 17 9 10 13 exchanges Use of municipal 3 4 3 3 2 1 6 7 equipment by contractor Transfers of employees 1 0 4 2 0 1 1 1 Arbitration mechanisms 27 10 13 7 8 7 3 4 for disagreements

34 Table 10 : Main advantages and disadvantages of outsourcing ___________________________________________________________________________________ Advantages Disadvantages ___________________________________________________________________________________ 1. Savings 1. Difficult to select best supplier 2. Access to specific expertise 2. Loss of control over the activity contracted out 3. Alleviation of constraints arising from 3. Negative impact on labour relations collective agreements 4. Improved ability to adapt to change 4. Irreversibility of the decision to contract out 5. Reduction of payroll 5. Difficult to monitor the contract

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