MIT1_040s09_lec05 - MIT OpenCourseWare http/ 1.040 Project Management Spring 2009 For information about citing these materials or our

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: MIT OpenCourseWare 1.040 Project Management Spring 2009 For information about citing these materials or our Terms of Use, visit: 1.040/1.401 1.040/1.401 Project Management Spring 2009 Privatization Fred Moavenzadeh James Mason Crafts Professor Massachusetts Institute of Technology Privatization Privatization Transfer of responsibilities from public sector to private sector for: Construction Construction Operation Operation Management Management Maintenance of Infrastructure Maintenance Sectoral Allocation of Project Responsibilities by Stages PUBLIC Own-Finance-Construct-Operate PRIVATE ------------------ Own-Finance-Construct Own-Finance-Operate Own-Finance ---------------- Operate Construct Construct-Operate Own-Finance-Construct-Operate Argument Against Public Ownership Argument Private Sector Provides Greater Incentive for Efficiency Private Public Managers Have Weak Performance Standards and Incentives Public Public Managers are Encouraged to Maximize Budgets Public Public Enterprises are not subject to Market Controls: Public Bankruptcy Bankruptcy Takeover Takeover Public Enterprises do not have to Borrow in the Capital Market Public Potential Advantages of Privatization Potential Reduce Public Sector Borrowing Requirements Reduce Transfer development risks to the private sector Transfer Increase operating efficiency Increase Promote market competition and accelerate growth Promote Reduce size of public sector Reduce Why Privatization? Why Economic Argument: Economic Lower Cost Lower Improved Quality Improved Increased Economic Choice Increased More Efficient Allocation of Resources More Ideological Argument Ideological Role of Government is to Oversee the Provision of Services, Role Not their Production Reduce Government Spending, Thus Limiting Government’s Reduce Role in the Economy as a Whole Proponents Argue that Private Sector is Driven by: is Competition Competition Lower Cost or Better Service Lower Unit Costs Economy of Scale, Scope, and Experience Economy Easier Access to Capital Easier Incentive Driven Management Incentive Upgrading Equipment and Facilities More Flexibility in Management Government Should Set Policies that make Private Sector Alternative Government More Attractive than Government Production Critics Argue that Privatization Creates: Critics Inequity or Distributional Effects Inequity Monopolistic Behavior Monopolistic Lack of Concern with Externalities Lack Disruption of Services Due to Bankruptcy Disruption Private and Public Sector Seem to Chase the Same set of Private Projects Many Have Argued that Privatization is Successful When: is The objectives are relatively narrow and are easily defined and The measured; i.e., providing a certain level of service; The product processes are familiar and observable at a low cost; The There is competition among private sector producers; There There is competent, honest government that insures the lowest There qualified supplier wins the contract Forms of Privatization: Forms Alternative Service Delivery Alternative Denationalization Denationalization Public-Private Partnership Public Denationalization: Denationalization: Government Sells its Assets to Private Sector: Sell Assets/Firms to Private Individuals Sell Sell Assets/Firms to Private Companies Sell Sell Assets/Firms to Management and Employees Sell Sell Assets/Firms to the Public with Equity Issue Sell Public-Private Partnerships: Public Sharing the Risks and Responsibilities of a Project Sharing Degree of Risk and Responsibilities Taken by Each Degree Party Determines the Type of Partnership Nature of Risk: Nature Construction Risk: Normally Taken by Private Sector Construction Operational Risk: Public Sector, Transferable to Private Operational Sector Conditionally Government’s Role: Government Shift from Production to Regulation Shift Effective Contract, Monitor Performance, Enforce Effective Contract Standards Payment Based on Outcome or Goals Rather than on Payment Inputs and Costs Example: Weapon Procurement A Typology of Goods Typology Exclusion Possible Joint Consumption Individual Private Goods Toll Goods Not Possible Collective Goods CommonPool Goods Service Delivery Alternatives Service Service Delivery Arranges Service Gov Production Contracting Franchise Grant or Subsidy Voucher Market Gov Gov Gov Gov Private Private Supplier Pays Supplier N/A Gov Consumer Gov & Consumer Gov & Consumer Consumer Gov & Consumer Private Consumer Consumer Private Private Effectiveness of Service Delivery Methods Effectiveness Nature of Industry Service Quality/ Quantity not Easily Specified Competition Among Producers Economies of Scale Consumer Comparison Shopping Few Producers Gov Supply Contract Franchise Grant of Subsidy Voucher Market Most Least Least Somewhat Somewhat Somewhat Least Most Least Somewhat Most Most Somewhat Most Most Somewhat Somewhat Somewhat Least Least Least Somewhat Most Most Somewhat Some-what Most Somewhat Least Somewhat Privatization Goals and Service Delivery Methods Privatization Goals Reduce Gov Costs Reduce Consumer Costs Increase Consumer Choice Increase Competition Improve Quality Limit Size of Gov Distribution goals Other Policy Goals Direct Contact Between Consumers and Suppliers Decrease Potential for Service Disruption Gov. Supply No No No No No No Yes Yes No Contract Yes Maybe No Maybe Maybe Somewhat No No No Franchise Yes Maybe No No Maybe Somewhat No No Yes Grant or Subsidy Maybe Yes Maybe Maybe Maybe Somewhat Yes Somewhat Yes Voucher Maybe Yes Yes Yes Yes Somewhat Yes Yes Yes Market Greatly Yes Yes Yes Yes Greatly No No Yes No Yes Yes Maybe Maybe Maybe Delivery Systems and Government Costs Delivery Type of Good Private Govt. Service Toll CommonPool 4 5 2 2 2 1 3 3 1 1 1 3 Collective 2 1 Arrangement Contract Franchise Grant Voucher Market Framework for Facilitating Private Framework Participation: Response in Four Complementary Areas Response Conducive Policy, Legal and Regulatory Framework Government Decision-Making & Project Facilitation Unbundling mitigation and management of risks Capital Markets Development and Term Financing Funding Structure of BOT Projects Funding Equity Funding Equity Loan (Limited Recourse Finance) Loan Credit Facilities Credit Eventual Flotation of Shares Eventual Legal Framework of BOT Projects Legal Enabling Legislation Usually Stipulates Enabling Franchise (rights to design, finance, construct & operate) Franchise Concession period Concession Capital Structure Capital Directorship Directorship Royalty to Government Royalty Completion Period Completion Approval of design, method of construction & conditions of Approval contract Power to make by-laws for traffic regulation Power Power to collect tolls Power Level of tolls/mechanisms for adjustment Level Risks of BOT Projects Risks Sponsor Risks Sponsor Sovereign Risks Sovereign Political Risks Political Technical Risks Technical Income Risks Income A Typical Build-Operate-Transfer Structure Government After Agreed Period Franchise Concession To Operate Hand Over Loans Equity Dividends Lenders Interests Design & Build Promoter = Concession Company Equity Contract Other Investors Construction Company Lenders Credit Agreements Independent Checking Engineer Consultants Agreements Engineer Consultants Agreements Lenders Credit Agreements MTRC Rail Operating Agreements EHCC Rail Franchising Assignments NHKTC Road Operating Agreements Road & Rail Franchises H.K. Gov’t Design & Contract Agreements Shareholders Agreements Shareholders Agreements Shareholders Shareholders Project Management Company Main Contractor Design Agreements Construction Agreements Design Engineers Named Contractor Independent Checking Engineer Consultants Agreements Engineer Consultants Agreements Lenders Credit Agreements Tunnel Operation & Management Organization Operation Function Tate’s Cairn Tunnel Company Design & Contract Agreements Tunnel Franchise H.K. Gov’t Shareholders Agreements Shareholders Project Management Team Main Contractor (A joint venture Co.) Design Agreements Sub Contracts Designers Subcontractors Relationship of parties to the Tate’s Cairn Tunnel, Hong Kong Example: Example: Specific Case of Highway Specific Privatization Privatization Cost of Bad Roads in Vehicle Wear and Tear Cost Pavement Condition Very Good Good Fair Poor Very Poor Small Auto 0.0% 2.0 11.0 29.0 38.0 2-Axle Vehicle 0.0% 1.1 6.1 15.3 22.2 5-Axle Vehicle 0.0% 2.5 10.9 26.6 39.8 Estimated percentage increase in auto operating costs as a function of pavement condition. Highway Mileage in the United States by Administrative Responsibility Administrative Administrator Federal Agency State Agency County Agency City, Town and Township Other Local (only Residential streets) Toll Highway Authority Total No. of Agencies 5 50 2,500 10,000 25,000 35 38,000 Miles 262,403 934,696 1,577,420 486,575 605,153 4,773 3,871,020 The Policy Challenge: The ? How to Avoid Tolls too High Quality too Low While Still Obtaining: Production ?...... Efficiency Arguments for Government Provision Arguments 1. Non – Economic Military, Political Military, 2. Economic Non-Excludable Non Imperfect Competition Imperfect can be exacted Shadow Tolls Oligopoly high prices Externalities Externalities Air pollution, health, vehicle wear & tear, congestion Air Traditional Highway Solution: Traditional Government Ownership Market Failure & Laissez-Faire Tolls Too High Quality Too Low Possible Effect of Government Ownership Possible Everything else society must produce and/or want M PPF H H= highway (quality & quantity) P.P.F = Production Possibility Frontier Argument for Privatization: Improve Argument Production Efficiency Production M PPF H Economic Argument for Privatization of Highway Ownership Highway Economic Efficiency Rationale* Feasibility of Implementation wrt Economic Efficiency ** *Auction highway at bids that are above the production of government, thus their buyers believe that they could reduce the cost of production this is an Important economic efficiency arrangement. **How can we have our cake and eat it to? Different kind of government interaction And regulation is necessary. W0 W1 W2 M The policy challenge: How to obtain a c Instead of a b?....... W equal welfare contour b C a W2 W1 W0 H Problem with Fair ROR Regulation Problem Under Laissez – faire: Profit Max. Cost Min. Efficient Production Under Fair ROR Reg: Profit Max. Cost Min. Excess Toll Problem: Two NonExcess Traditional Solutions 1. 2. Unlimited Access Non-Toll Private Road Non-ROR Based Toll Regulation Sub-Optimal Quality Problem Sub Two Solutions (Complementary): 1. Legalistic: Covenants, Performance Bonds 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 2. ...
View Full Document

This note was uploaded on 11/29/2011 for the course CIVIL 1.018j taught by Professor Markusbuehler during the Fall '08 term at MIT.

Ask a homework question - tutors are online