1.040/1.
401
Project Management
Spring 2009
Privatization
Privatization
Transfer of responsibilities from public sector to private sector for:
Construction
Operation
Management
Maintenance of Infrastructure
Sectoral Allocation of Project
Responsibilities by Stages
PUBLIC PRIVATE
Argument Against Public Ownership
Private Sector Provides Greater Incentive for Efficiency
Public Managers Have Weak Performance Standards and Incentives
Public Managers are Encouraged to Maximize Budgets
Public Enterprises are not subject to Market Controls:
Bankruptcy
Takeover
Public Enterprises do not have to Borrow in the Capital Market
Potential Advantages of Privatization
Reduce Public Sector Borrowing Requirements
Transfer development risks to the private sector
Increase operating efficiency
Promote market competition and accelerate growth
Reduce size of public sector
Why Privatization?
Economic Argument:
Lower Cost
Improved Quality
Increased Economic Choice
More Efficient Allocation of Resources
Ideological Argument
Role of Government is to Oversee the Provision of Services,
Not their Production
Reduce Government Spending, Thus Limiting Governments
Role in the Economy as a Whole
Proponents Argue that Private Sector
is Driven by:
Competition Lower Cost or Better Service
Economy of Scale, Scope, and Experience Lower Unit Costs
Easier Access to Capital Upgrading Equipment and Facilities
Incentive Driven Management More Flexibility in Management
Government Should Set Policies that make Private Sector Alternative
More Attractive than Government Production
Critics Argue that Privatization Creates:
Inequity or Distributional Effects
Monopolistic Behavior
Lack of Concern with Externalities
Disruption of Services Due to Bankruptcy
Private and Public Sector Seem to Chase the Same set of
Projects
Many Have Argued that Privatization
is Successful When:
The objectives are relatively narrow and are easily defined and
measured; i.e., providing a certain level of service;
The product processes are familiar and observable at a low cost;
There is competition among private sector producers;
There is competent, honest government that insures the lowest
qualified supplier wins the contract
Forms of Privatization:
Alternative Service Delivery
Denationalization
Public-Private Partnership
Denationalization:
Government Sells its Assets to Private Sector:
Sell Assets/Firms to Private Individuals
Sell Assets/Firms to Private Companies
Sell Assets/Firms to Management and Employees
Sell Assets/Firms to the Public with Equity Issue
Public-Private Partnerships:
Sharing the Risks and Responsibilities of a Project
Degree of Risk and Responsibilities Taken by Each
Party Determines the Type of Partnership
Nature of Risk:
Construction Risk: Normally Taken by Private Sector
Operational Risk: Public Sector, Transferable to Private
Sector Conditionally
Governments Role:
Shift from Production to Regulation
Effective Contract, Monitor Performance, Enforce
Contract Standards
Payment Based on Outcome or Goals Rather than on
Inputs and Costs
Example: Weapon Procurement
A Typology of Goods
Service Delivery Alternatives
ov /A
ov ov
ov
Grant or Subsidy
Effectiveness of Service Delivery Methods
Privatization Goals and Service Delivery Methods
Delivery Systems and Government Costs
4 2
5 3 1
2 3 1
2 3 1
1 1
Framework for Facilitating Private
Participation:
Response in Four Complementary Areas
mitigation and
and Term
Funding Structure of BOT Projects
Equity Funding
Loan (Limited Recourse Finance)
Credit Facilities
Eventual Flotation of Shares
Legal Framework of BOT Projects
Enabling Legislation Usually Stipulates
Franchise (rights to design, finance, construct & operate)
Concession period
Capital Structure
Directorship
Royalty to Government
Completion Period
Approval of design, method of construction & conditions of
contract
Power to make by-laws for traffic regulation
Power to collect tolls
Level of tolls/mechanisms for adjustment
Risks of BOT Projects
Sponsor Risks
Sovereign Risks
Political Risks
Technical Risks
Income Risks
A Typical Build-Operate-Transfer Structure
Lenders
Example:
Specific Case of Highway
Privatization
Cost of Bad Roads in Vehicle Wear and Tear
on
2.0 1.1 2.5
11.0 6.1 10.9
29.0 15.3 26.6
38.0 22.2 39.8
Highway Mileage in the United States by
Administrative Responsibility
y
The Policy Challenge:
Arguments for Government Provision
1. Non Economic
Military, Political
2. Economic
Non-Excludable Shadow Tolls
Imperfect Competition Oligopoly high prices
can be exacted
Externalities Air pollution, health, vehicle wear & tear, congestion
Traditional Highway Solution:
Government Ownership
Possible Effect of Government Ownership
Argument for Privatization: Improve
Production Efficiency
Economic Argument for Privatization of
Highway Ownership
W0 W1 W2
W2
W1
W0
Problem with Fair ROR Regulation
Excess Toll Problem: Two Non-
Traditional Solutions
1. Unlimited Access Non-Toll Private Road
2. Non-ROR Based Toll Regulation
Sub-Optimal Quality Problem
Two Solutions (Complementary):
1. Legalistic:
Covenants, Performance Bonds
2. Market-Like:
Pigouvian Subsidy, Incentive Fee
S = F + P/E
F=Fuel Tax per VMT
P=Total User Cost per VMT
E-Price Elasticity of Demand for usage of the highway
