«The specificities of public-private contracting»

Transcription

1 Stéphane Saussier MBA Social Leadership University Ben Gurion «The specificities of public-private contracting» SSA

2 NPOs and contracting NPOs have to contract with: Employees Partners Private firms Governments Because they differ from private firms, they may contract differently and have drawbacks and some «competitive advantage» compared to private firms in some specific situations SSA

3 Punchline of the talk Contracting (70 s! now) Complete vs. incomplete contracts Many identified issues and (imperfect) solutions Public contracting differs (08!now) Third party opportunism Many solutions that works for private contracts don t for public ones Parallels with and implications for NPO s NPOs are lying between public and private entities and are susceptible to contract with both SSA

4 I. Contracting No uncertainty Jean Tirole - TSE Asymmetric information (Contingent) Complete contracts Rationality Efficient courts Incentive theory Adverse selection Moral Hazard SSA

5 I. Contracting Uncertainty Specific Investments Incomplete contracting Bounded rationality Inefficient courts Transaction cost theory Incomplete contracts opportunism SSA

6 Issues associated with long term incomplete contracts Choice of a partner Contract renewal t Service specification Contract execution Competition for the contract Competition for the contract SSA

7 Issues Step 1 Selection. The difficulties to put firms in «competition for the contract» Price criteria does not always resume what is expected from the partner Aggressive bids!and then quality shading Winners curse Collusion: ex: case of urban transport in France (2005) penalty 12M Corruption: anti-corruption law in France in 1993 SSA

8 Potential (imperfect) solutions Winners curse and contracts that adapt to different scenarios Ex: Building a new nursery Needed revenues D1 D2 D3 SSA

9 Issues Step 2 -- enforcement. Difficulties to enforce (incomplete) contractual agreements Disconnection between price and costs over time Penalties are difficult to apply Non-verifiable dimensions of the contract Opportunistic behaviors might arise Efforts to evade or renegotiate the contract (Guasch 2004) Underinvestment Lower level of quality than promised (but not enforceable) Absence of responsiveness to consumer s needs Connected to the kind of PPPs contract Concession vs. PFI SSA

10 Jamie Oliver SSA

11 One example of opportunistic behavior «But it is difficult to be clear and comprehensive in defining service targets. Governments tend to be nervous about providing only general performance obligations, fearing that the concessionaire will do less than they deem necessary. An example in the United Kingdom helps show why. In the competition for a build-operate transfer (BOT) contract for a prison, granted under the country s private finance initiative, it turned out that the winning company s bid was based on a plan to house several prisoners in each cell. The government had wanted single occupancy, but had forgotten to specify this in the tender documents.» M. Klein, World Bank, Bidding for Concessions The Impact of Contract Design, /158klein.pdf SSA

12 Issues Step 3 Specific Investments Long term contracts Lack of bidding parity at contract renewal time («Fundamental transformation») Lock-in effect Water sector and urban transport in France: 90% of renewed contracts with the same firm! SSA

13 One solution : the use of relational contracts Incomplete self-enforcing contracts Let s sign «light» contracts and adapt informally as soon as uncertainty is resolved over time. A relational contract is a contract whose effect is based upon a relationship of trust between the parties. Trust can be calculated, based on the value of future relationships Formalized with repeated game theory / trigger strategy Opportunism! R = 40; Respect of the spirit of the contract! R = <? 20 + ß.20 + ß ß " ß > 0.5 BUT are relational contracts an option for public contracts? SSA

14 II. Public contracting differs Public contracts are often associated with: Inefficiencies, low quality, delays, expensive, corruption, favoritism, bureaucratic, red tape, politics, intricate, convoluted, scrutiny, regulation, controls, inspections, protests, courts Those contracts are clearly different from private ones --> What is intrinsic to public contracts? Few answers in contract theories. SSA

15 One possible explanation: Third Party Opportunism (Spiller 2008) Pablo Spiller U. Of Calif. Berkeley A fundamental difference between private and public contracts is that public contracts are in the public sphere, and thus, although politics is normally not necessary to understand private contracting, it becomes fundamental to understanding public contracting (page 3) Public contracts are characterized by the fact that: A substantial amount of supervision and control is done by third parties (such as political contesters and interest groups) not necessarily interested in the success of the contractual relationship Think of a city mayor contracting out for the provision of public services SSA

16 Political Contestability in a Nutshell... third parties (political opponents, excluded bidders, and interest groups) not necessarily interested in the success of the contractual relationship Figure: Monster-in-Law Public parties fear for: - Third party opportunism prevents the use of relational contracts (Macaulay 1963, Baker & al 2002) for public private contracts - Political contestability is an issue for public authorities SSA

17 Political Contestability in a Nutshell... third parties (political opponents, excluded bidders, and interest groups) not necessarily interested in the success of the contractual relationship CONSEQUENCES : Public contracts are (too) more rigid than private ones Renegotiations are unavoidable and a sign of good cooperation! Especially true when political contestability is high SSA

18 Third party s opportunism one on-going study on car parks SSA

19 III. Parallels with and implications for NPO s? NPOs are contracting with governments: NPOs might be considered as less opportunistic Nonprofits are deemed particularly valuable for responding to specific service demands that cannot be easily differentiated and satisfied through purely governmental provision Transaction costs: For governments, this threat may be reduced when service responsibility is given to non- profit organizations because they are perceived as more trustworthy agents than private vendors, more likely to share public interest goals, and they are monitored by a combination of donors, clients, and government officials (Richard C. Feiock and Hee Soun Jang, 2009, Public Administration Review ) Trust pre-exist and don t have to be built This competitive advantage for NPOs is particularly true for complex transaction that are not fully contractible. SSA

20 Parallels with and implications for NPO s? NPOs share characteristics with public entities NPOs are publicly accountable They have special public benefits such as tax exemptions They may have a political agenda which is somehow partisan (e.g., Greenpeace may not be the most friendly organization to everybody). Third party opportunism might be a problem Relational contracting might be problematic: contractual inefficiencies must be accepted Possible solution: light formalism e.g. minutes during meetings instead of formal amendments SSA

21 Wrap up and conclusion Incomplete contracting leads to transaction costs Opportunism is an issue Reputation based contracts might solve this problem but are not usable for public contracts Third Party Oppotunism (TPO) NPOs Are more credible than private firms when opportunistic behaviors is an issue (i.e. complex transactions) But need to think carefully of their contractual agreements in order to cope with TPO. When contracting with Gvts Or when contracting with private firms SSA

22 QUESTION? Stéphane Saussier Mandel Social Leadership MBA University Ben Gurion «The specificities of public-private contracting» SSA