Class Class Business-government cooperation St-Petersburg State University Graduate School of Management Master of International Business Program Business-government relations

Government functions Provision Production Financing Private sector

Funding and provision: state and private sector Financing ProvisionPrivatePublic Private Food, Clothes, Computers Writing materials for public agencies Public Public utilitiesPolice

Trends in public services delivery Cooperation between government and business From the “holistic provider of public services” to the “manager of providers” Shift form a monopoly to a competitive environment Competition must be run for “best value” rather than simply for “low cost”

The nationalization-privatization cycle Private enterprises start Industry consolidates Government regulates Firms lose money Service declines Government takes over Inefficiency grows Cut service or raise taxes? Privatization Government subsidize

Ex: promoting private education: innovative approaches Developed and developing countries are making use of a range of public- private partnerships in the education sector These innovative policies include: –vouchers; –contract schools; –student loans; –provision of information; and –use of the private sector, rather than government, as regulator.

Service arrangements for education ArrangementDescription GovernmentConventional Public School Government Vending Public school accepts out-of-district pupil and is paid by parents Intergovernmental agreement Public school accepts out-of-district pupil and is paid by sending district Contract Government hires private organization to run school Grant Government subsidizes private schools, as in whole or per-student

Service arrangements for education ArrangementDescription Voucher Government or private financing to parents to pay for tuition to private school Lease Government leases its facility for use as a private school Free MarketTraditional Private School Voluntary (NGO) Voluntary organization operates a school e.g., a religious school Self serviceHome schooling

Selecting the model for cooperation Mission Services Efficiency and effectiveness measures Available tools (appropriate) Political and social concerns

Different types of cooperation

Outsourcing Outsourcing is a management strategy that contracts out organizational activities to vendors Outsourcing is defined as the practice of turning over entire business functions to an outside vendor that ostensibly can perform the specialized tasks better and less expensively

Outsourcing

Competitive sourcing Competitive sourcing assumes a competition for work between the government and the private sector and can result in activities being performed either by government or by contract personnel depending upon who wins the competition

Privatization The process of transferring existing public entity or enterprise to private ownership. Forms:  Full privatization  Partial privatization  “Privatization-in-place”  Employee Stock Ownership Plan (ESOP)  Transitional Benefit Corporation Model (TBC)

Privatization

Government Entrepreneurship (Franchising) GE – is the development of separate fee-for- service entities operating within a government agency. These entities compete to sell services to other government agencies and often contract with the private sector to provide the services offered, while a core staff of government employees retains managerial control over operation.

Government Entrepreneurship (Franchising)

Public-Private Partnerships: world of definitions

Arguments for PPP Greater efficiency in the use of public resources (cost savings of 10 to 40 % through the use of PPP privatization schemes) PPPs are a means of increasing investment in infrastructure

Models of PPP

Traditional contractual relationship

Design-Build Model With design-build model, a single contractor is selected to provide both design and build services

Benefits of DB Single point of contact for the government owner Potentially reduce project delivery time Lowers the number of change orders May lower project costs Can foster innovative solutions

Build-Operate-Transfer Model Concession is needed. A private developer is awarded to finance, build, own, operate and transfer the facility. Commonly used in large infrastructure projects Private developer collects users fees for a specified period, after which ownership of the facility is transferred to the public sector

Factors of success in BOT (BOOT) projects There must be a genuine desire for win-win solution Complex BOT requires a strong, persistent, and persuasive project leader There should be adequate and accurate data and risk assessment of both procurement and operational phases Accurate calculation of project’s economics is needed Choice of the correct procurement methodology is important for construction phase

Government support of concession Creating the appropriate legislative structure Adequate regulatory environment Protecting the concession companies from competition Helping the concession companies to overcome bureaucratic opposition Developing the clear and effective program to allow public participation in the planning process

Benefits of BOT (BOOT) Infrastructure projects are obtained at little or no costs to taxpayers Government incur little risk The sponsors must operate and maintain the facility for a period of time exceeding 20 years. It influence the quality of initial construction Citizens can elect alternative routes if toll rates are unreasonable

Build-Transfer-Operate Model A private developer finances and builds a facility and upon competition transfers legal ownership to the sponsoring government agency The agency then leases the facility back to the developer under a long-term lease During the lease the developer operates the facility and has the opportunity to recover the investment and earn a reasonable return from user charges and commercial activity

Advantages of BG cooperation: the role of private sector It helps to identify and develop new, innovatively designed, user-financed, profit- making facilities or existing facilities in need or rehabilitation, renovation, or expansion. It assures in-depth review of the technical and financial feasibility of the project It accesses private capital markets to supplement or substitute for hard-to-get government resources It builds more quickly and more cost- effectively

Advantages of BG cooperation: the role of private sector It operates facilities more efficiently than government usually can Taxpaying private firms provide a new source of tax revenue It accepts risks It transfers technology and trains government personnel It establishes a private benchmark

Advantages of BG cooperation: the role of public sector Identification of needs, planning of concrete projects Feasibility analysis Transferring of monopoly rights Price regulation Development of services standards and control of their maintenance Contribution to funding

Procedures of partner selection Tree common bidding procedures are used to select the private partner: 1.Advertized procurement 2.Competitive negotiation 3.Three-step procurement: 1.Request for qualifications 2.Request for technical proposals 3.Comparison of economic proposals

Key strategic issues in the procurement terms Rate-setting and adjustment mechanism Funding of future capital upgrading and expansions Restriction of ownership transfer Tax concessions Labor understandings Investments protection

Capital costs. Sources of financing Public: –Subsidies –Grants –State bonds (revenues are not under the tax) Private –Securities issue –Financing at the expense of future customers Mixed

Revenue sources User charges Government subsidies Special dedicated taxes Value capture (including impact fees, special benefit assessments) Collateral revenue from advertising, services and more intensive development of the facility

Risks Business risk: –Cost-overran risk –Operating risk –Revenue risk Financial risk: –Debt-service coverage risk –Exchange rate risk

Risks Political risk: –Rate regulation risk –Expropriation risk –Reputation risk –Dispute resolution risk Other risks –Technology risk –Environmental risk –Force majeure risk

Areas for cooperation Transport Public utilities Ecology Real estate Public security Telecommunications Financial sector Education Healthcare …

Example of project structure Capital Water Treatment Plant Existing Wastewater Plant Expansion Water Users WaterWastewater Investors City government Private developer Tax-exempt and/or Taxable bonds Debt and Equity Financing Bank Service fee Water charges

PPP in Russia (legal aspects)

Factors constraining PPP development Lack of PPP development strategy Gap between national and international concession law Undeveloped institutional infrastructure Lack of financial instruments Problems of long-term government guarantees / budget process shortcomings Imperfect tax regulation Public officials qualifications