1 Public-Private Partnerships and Prices: Evidence from Water Distribution in France Stéphane Saussier ADIS GRJM– University of Paris XI Sceaux & ATOM – University of Paris I Sorbonne

2/27 Introduction  A precise question: Should the State (or local public authorities) contract with a private operator in order to provide a public service?  A large range of transactions can possibly be organized through PPP. Possible advantages:  1/lower capital constraints;  2/incentive-based contracts;  3/encouragement of innovation;  4/lower production costs (scale and scope economies).

3/27 Introduction  The efficiency of PPP: remains an unresolved question  At the theoretical level: TCT: Williamson 1976, Williamson 1999 ICT: Hart-Shleifer-Vishny 1997 ; Hart 2003 ; Bennett & Iossa AT: Bentz & Grout  At the empirical level: Guash & al 2002, Estache 2003, Littlechild 2002, Zupan 1989, …

4/27 Introduction  The case of water supply in France Interest  Local public authorities - plenty of data  One institutional framework  Empirical studies not conclusive : DGS 1995, DGCCRF 1997, IFEN 2000, Cour des comptes 1997,  An empirical paper  A transaction cost economics approach

5/27 I. A TCE approach  A TCE approach would stress a simple idea: « The common error to be avoided is to pronounce that governance structures are efficient or inefficient without reference to the transaction… there are transactions for which the firm is superior to the market, its bureaucratic disabilities notwithstanding » O.E. Williamson 2002, page 20.  Possible drawbacks of PPP : contractual costs Transaction costs may, in certain situations, overcome advantages in terms of production costs

6/27 What are the potential transaction costs? Choice of the Private Operator Competition for the field Contract renewal Competition for the field Service specification Contract execution t I. A TCE APPROACH

7/27 Franchising: problems to overcome ex ante  Specification of the franchised service and effective competitive bidding Imprecise specification adverse selection problem (the winner’s curse) Small number of bidders Price and quality do matter  Artificial or obscure award criterion. I. A TCE APPROACH

8/27 Franchising: problems to overcome ex post  Risks of opportunism Delays in construction and provision Efforts to renegotiate the contract Lower level of quality than promised Absence of responsiveness to consumers’ needs Price increase  Risks of maladaptation Price-cost divergences Indeterminacies Those problems are particularly important when the transaction is uncertain and needs high level of asset specificity I. A TCE APPROACH

9/27 Potential transaction costs: solutions exist!  Contractual solutions:  Choice of the operator Menu auctions Pre-qualification criteria Bids formulated in terms of a constant revenue stream (E-F-G 02) Allocation of risk Minimum level of quality required  Execution stage Dissuasive but realistic penalty clauses Enforceable sanctions; Monitoring and accounting procedures; Capacity of expertise ‘Open Book’ Policy – Yardstick competition ; Information transparency I. A TCE APPROACH

10/27 Potential transaction costs: solutions exist!  Institutional solutions: Credibility of the contracting parties  Reputation  Institutional dotations (corruption, property rights …) Laws that constrain contractual choices and potential opportunistic behavior I. A TCE APPROACH

11/27 General conclusions from a TCE perspective  No institutional choice is better than another a priori.  The choice between PPP and direct public management depends on the characteristics of the transactions (asset specificity / uncertainty / complexity)  Recent developments show that solutions may exist that qualify PPP in many situations (Littlechild 2002; Engel, Fisher, Galetovic 02, …) I. A TCE APPROACH

12/27 II. Putting TCE to work: Data  Data sets coming from the French Environment Institute and the French Ministry of Agriculture  A representative sample of all the French local authorities  5,000 local authorities in 1998 Restricted to 4,443 observations in our statistics Restricted to 3,613 observations in our econometric tests  Account for more than 50% of the consumers  The question: Price, cost and organizational choices

13/27 The case of water supply in France  French local authorities decide / not the State  A great variety of organizational choices TCE TO WORK

14/27 Putting TCE to work: The case of water supply in France  Characteristics of transactions and potential transaction costs  Asset specificity Physical investments are specific (site specificity)  Complexity Mainly due to  the difficulty of the treatments for producing drinkable water (e.g. the quality of the water before treatment)  The difficulty of transporting water to the consumer (the density of population) TCE TO WORK

15/27 Institutional environment and potential transaction costs  Drawbacks of PPP resulting from contract incompleteness can be reduced by the institutional framework The intuitu personae principle  May avoid problems linked to the choice of the operator (Bajari-McMillan-Tadelis 2003)  Risk of corruption/collusion PPP are « administrative » contracts  An asymmetric position between contracting parties  Ex post renegotiations take place within a rigid framework TCE TO WORK

16/27 In what situations could drawbacks overcome advantages of a PPP? TCE TO WORK

17/27 The case of water supply in France  The use of PPP TCE TO WORK

18/27 The case of water supply in France  Prices (for one cubic meter in francs) and geographical areas TCE TO WORK

19/27 Prices and organizational choices: a first look In euros for 120 m3, without tax Two possible interpretations Collusion prices - PPP are inefficient because of ex ante transaction costs PPP are specialized on complex transactions - PPP are efficient Prices for local authorities that do not contract out the service are lower The price difference between lease and direct public management is 32 € TCE TO WORK

20/27 Prices and organizational choices: an econometric test TCE TO WORK Other control variables used in the econometric study: the area (France is divided in 100 “departments”); the technology used in measuring and controlling links on the network; the organizational choice made concerning the cleaning of used water +

21/27 Prices and organizational choices: an econometric test  «Naïve» OLS equation, controlling for other parameters than organizational choices that may have an impact on prices: TCE TO WORK  R2 = 0,50  Lease contracts account for 27 € in the price (average bill of 140 €)  All types of PPP lead to an increase of price paid by the consumer

22/27 Prices and organizational choices: an econometrical test  Cost structure might be different from one organizational choice to another We estimate 2 equations:  Possible selection bias Organizational choices are not randomly chosen  TCE propositions  Heckman Method TCE TO WORK

23/27 In what situations could drawbacks overcome advantages of a PPP?  Robust probit estimate of lease vs. direct public management  Complex transactions (complex treatments, low density of population) are more probably organized through lease contracts  Non-linear effect of the population size  More than 75% of observed choices accurately predicted TCE TO WORK

24/27 Prices and organizational choices: an econometrical test Correcting for selection bias, direct public management is still the most efficient organizational choice  However the price difference between lease and direct public management decreases again (About 10 €) TCE TO WORK

25/27 The impact of mis-specified modes of organization  Do transaction cost propositions affect performances? Do organizational choices matter? “Theoretical” Misfit variable defined as equal to 1 as soon as local authorities do not respect TCE propositions (focus on complex transactions). 13% of our observations do not fit TCE propositions TCE TO WORK

26/27 The impact of mis-specified modes of organization  Local authorities that did not choose modes of organization that correspond to a TCE prescription have higher prices.  This result is true whatever the « direction » of the error.  This result confirms previous recent works that attempted to connect organizational choices and performances through the lens of TCE in Strategic Management fields ( Masten et al. 91, Leiblein et al. 02, Mayer et Silverman 02, Sampson 04, Nickerson et al. 97, Mayer 00, Yvrande 04, Bigelow 03, Nickerson et Silverman 04 ) TCE TO WORK

27/27 Conclusions and perspectives  Organizational choices matter!  Transaction costs matter!  More general conclusions concerning the relative efficiency of public-private partnerships  Limits concerning our results to be resolved What about contractual choices? What about price and efficiency? Price is questionable Other measures of efficiency (quality,…)