Contracting Out to Private Operators

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2 Contracting Out to Private Operators Managing Incentives and Risks Workshop on Iraqi Economic Zones Strategy Bathylle Missika, OECD/PDG

3 Some Definitions Contracting out Contracting out is when a purchaser (the state) pays a third party (e.g private firm) to perform a task set out in a formal agreement (the contract), which is enforceable by law. Post conflict or state in situation of fragility A post conflict state is most often unable to meet its population s expectations or manage changes in expectation and capacity through the political process.

4 The Haiti example A law (2002) created a Direction des Zones Franches This government agency is linked to the Ministry of Trade and Industry and examines requests to create free economic zones (FZ) The law gives the choice of public, semi-public or private (contracted out) management and exploitation of FZ Creation of the first FZ in 2003 (privately exploited) Contracting out seemed like a good option because of the lack of government resources

5 The Haiti example Pros Contracting out of development and management of FZ while retaining stewardship over investment and professional training policies Diversification of revenue sources Allows donors and investors to pool funds Simplifies interactions with possible investors (one-stop shop)

6 The Haiti example Cons The developer of the FZ should not be the manager (exploiting the zone) because this could lead to a monopoly with high entry costs Low salaries Negative externalities on the environment Need an assessment (political/technical) to weigh the pros and cons identified ex-ante

7 What is Contracting Out? The contracting out of government functions and services to private contractors is an established practice in many developed and developing countries. It can offer pivotal alternatives to states that must urgently deliver and generate revenue. But it risks bypassing governments and undermining their legitimacy and control.

8 What is Contracting Out? The contracting out of government functions and services to private contractors is an established practice in many developed and developing countries. It can offer pivotal alternatives to states that must urgently deliver and generate revenue. But it risks bypassing governments and undermining their legitimacy and control.

9 What is Contracting Out? The contracting out of government functions and services to private contractors is an established practice in many developed and developing countries. It can offer pivotal alternatives to states that must urgently deliver and generate revenue. But it risks bypassing governments and undermining their legitimacy and control.

10 What is Contracting Out? The contracting out of government functions and services to private contractors is an established practice in many developed and developing countries. It can offer pivotal alternatives to states that must urgently deliver and generate revenue. But it risks bypassing governments and undermining their legitimacy and control.

11 What to Consider before Contracting Out? Political incentives of all actors (government, contractors, endusers, donors, investors) Technical capacity to manage the function or to contract it out Enabling environment (regulatory framework, corruption...)

12 What to Consider before Contracting Out? Making the decision to contract out has to be based upon a careful assessment of POLITICAL and TECHNICAL risks Political incentives of all actors (government, contractors, endusers, donors, investors) Technical capacity to manage the function or to contract it out Enabling environment (regulatory framework, corruption...)

13 What to Consider before Contracting Out? Making the decision to contract out has to be based upon a careful assessment of POLITICAL and TECHNICAL risks Political incentives of all actors (government, contractors, endusers, donors, investors) Technical capacity to manage the function or to contract it out Enabling environment (regulatory framework, corruption...)

14 What to Consider before Contracting Out? Making the decision to contract out has to be based upon a careful assessment of POLITICAL and TECHNICAL risks Political incentives of all actors (government, contractors, endusers, donors, investors) Technical capacity to manage the function or to contract it out Enabling environment (regulatory framework, corruption...)

15 Political Risks

16 Political Risks An assessment of political risks should take into account the fact that the government is not necessarily a homogenous entity.

17 Political Risks An assessment of political risks should take into account the fact that the government is not necessarily a homogenous entity.

18 Political Risks An assessment of political risks should take into account the fact that the government is not necessarily a homogenous entity.

19 Political Risks Different stakeholders within government may hold different incentives, depending on their position.

20 Political Risks Different stakeholders within government may hold different incentives, depending on their position.

21 Political Risks Different stakeholders within government may hold different incentives, depending on their position.

22 Political Risks Different stakeholders within government may hold different incentives, depending on their position.

23 Political Risks Assessing the balance of power and interests among these groups is essential to understanding: how much support for contracting out exists within each set of actors; where that support lies precisely whose influence is going to have more bearing on the decision.

24 Technical Risks Contracting out is vulnerable to technical risk when: Gaps in national oversight capacities Poor access to information Inexperienced firms willing to bid

25 The Enabling Environment Enforceable rules Policy Framework Enabling Environment Legal framework Regulatory Framework

26 Interface between political and technical risks

27 Interface between political and technical risks Low political risk + Low technical risk = Ideal situation

28 Interface between political and technical risks Low political risk + High technical risk = Possible

29 Interface between political and technical risks High political risk + High technical risk = Not conducive

30 The PDG Handbook: Chapter 2 Managing incentives and risks Chapter 2 examines the major political and technical factors that need to be considered when deciding whether or not to contract out The potential sources of support and opposition from various actors that affect the incentives and counter-incentives for contracting out in a fragile state, and the interplay between them The potential political and technical risks involved in contracting out, and how they can be reduced

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