Public-Private Partnerships (PPP) and Opportunism: New Empirical Evidence in the French Water Industry Freddy Huet (GREDEG - Université de Nice) & Simon Porcher (GREGOR – IAE de Paris)

Water provision in France In France, municipalities must provide local public services on behalf of their citizens. These public services can be managed in-house or contracted out to a private operator. There is no national regulator: municipalities monitor prices, control entry and exit of operators and ensure uninterrupted service. A growing hot political topic in the 2000s.

Motivation Conventional wisdoms differ –Mayor of Paris: “Water is a public good, it is better managed by the public sector. Private firms behave opportunistically” (2009) –BCG: “Private management is associated with a higher level of information given to the users and to the municipality” (2007) –Cour des Comptes: “frequent bidding procedures and thus shorter contracts would lead to more competition and thus more efficiency in the water sector” (2011) Give a clear-cut answer to the debate opportunism vs. reputation in PPP (the consequences) and to assess the impact of competition and contract duration on private firms’ behavior (the causes).

Background to the research On the one hand, TCE underlines that incumbents have strong incentives to behave opportunistically i.e. maximize their private interests vs. the public interest: -Early termination is difficult → reneging on the contractual promises during the execution of the contract. -Inertia → costs from changing operators. On the other hand, a growing literature on reputational effects in game theory, career-concerns, relational contracting and IO: -Incomplete contracts: long-term relationship is based on performance. -Improving future earnings: implicit incentives to over-perform. -Oligopoly market: competition is about “quality”.

Background to the research Few papers show that firms try to increase their reputation when there is a strong threat from competitors: –Diminishing costs in the end of the contract. –Improving physical output quality before the renewal. –Improving quality to maintain margins. Some other show on the contrary that firms act opportunistically: –Decreasing investments in the end of the contract. –Keeping the information asymmetry to get informational rents.

Summary of the results Use as a dependent variable a proxy for information: % of the maps updated every year with topographical description. Competition has an U-shaped impact on information transferred by the firm to the municipality. The share of the market owned by public firms has a positive but not significant impact on the information transferred. The closer we are to the end of the contract, the lower is the level of information updated. Contract regulation can prevent firms from behaving opportunistically. Management practices differ also from a firm to another.

Models of information Information correlated with Left-wing mayors theory BCG theory Cour des Comptes theory Evidence Competition between private firms =/-=+? Share of direct public managed services +-Ambiguous? Shorter contracts ==+?

Data Original dataset of 2,300 municipalities in PPP for 2004 and 2008 including: –Characteristics about competition at the regional level: Share of directly public managed water utilities 1-HHI # bids and # switches –Characteristics of the contract: Number of years before the renewal Contract signed after 1995? Contract type (lease, concession, mixed management) Operating firm Same operator for sewerage?

Data Original dataset of 2,300 municipalities in PPP for 2004 and 2008 including: –Characteristics of the municipality Population Touristic area? Interconnected cities? –Characteristics of the water utility Volume of billed water Treatment type for water purification Pipes’ length Water source Leak detection technology Investment program?

Information A twin-peaks distribution

Results I: information & competition Information correlated with (1) 1-HHI (2) # bids (3) # switches Competition *** (1.490) *** ( ) *** (0.008) Competition squared *** (3.925) 0.001*** (0.000) 0.001*** (0.000) Competition has a significant negative effect on information disclosure. But the effect is positive for highly competitive regions.

Results I: information & competition Less information when we move towards the end of the contract

Results II: info & public management Direct public management has no significant impact on information disclosure.

Results III: information & duration 1 Regulatory change after 1995: contract duration is limited to 20 years. † Average duration after 1995 in the database: years (3.06) versus average duration for contract signed before 1995: years (21.73). Information correlated with (1) HHI (2) # bids (3) # switches Contract signed after † *** ( ) *** ( ) *** ( )

Models of information Information correlated with Left-wing mayors theory BCG theory Cour des Comptes theory Evidence Competition between private firms =/-=+Ambiguous Share of direct public managed services +-AmbiguousZero Shorter contracts ==++

Conclusion Incumbent firms in PPP contracts face a dilemma: protecting their informational rents vs. reputational effects. The “BCG theory” receives little support –Competition’s main effect is negative…but becomes positive for very high level of competition (large-medium cities). No support for the left-wing mayors theory –Share of direct public management at the regional level has no impact on private firm’s behavior. Improving firm’s governance depends more on contract regulation.

Policy response No fiscal incentives to increase direct public management. Opening the markets might have no positive impacts. Improved contract regulation must be deepened negotiating with private and public actors.

What is next? Improve our econometric analysis –Sample is somewhat truncated: in 9% of the cases, maps do not exist. –Run a two-stage with an endogenous variable. Thinking about the firm-level effect: –Why some firms more keen on delivering information? –Depending on the mayor ideologies?