Public Procurement. Stéphane Saussier Sorbonne Business School IAE de Paris

Transcription

1 Public Procurement Stéphane Saussier Sorbonne Business School IAE de Paris

2 Public Procurement What are we talking about? Public procurement is the process by which a government agency purchases goods, services and infrastructures (from the private sector) in order to provide public services. Different public entities: State, City, Hospital, University Different suppliers: private and semi private companies Different public-private contractual arrangements: concession / PFIs / PPPs / traditional Public Procurement contracts... 2

3 Public Procurement Why are we talking about public procurement? What are the main economic issues? Public money Huge amount of public money! But how much? Nobody knows exactly but 16% of the European GDP (Source: European Commission -- public-procurement/). 3

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5 Public Procurement Why are we talking about public procurement? What are the main economic issues? Public private contracts France: 71.4 billion euros in 2013 (OEAP 2015)» Only one part of public procurement is (badly) scrutinized» See Saussier and Tirole 2015 Europe: TED data base» Only (very partial data) 5

6 Public Procurement Why are we talking about public procurement? What are the main economic issues? Are public procurement practices efficient? Call for bids is the rule Rules of the game are evolving (European Directives, Codes of public procurement) Delays, opacity, rigidities, corruption, private agendas, 6

7 One typical example The Philharmonie de Paris is a cultural institution in Paris which combine spaces all dedicated to music. It opened January years late Budget rises from 175M to 385M Slide 7

8 (Economics of) Public Procurement What theoretical tools for what propositions? What disconnection between theory and practice? 8

9 Public Procurement This course: 12 classes Class 1-Public Procurement: introduction Class 2- Public-Private Contracting and Transaction costs O. E. Williamson, 1976, Franchise Bidding for Natural Monopolies - in General and with respect to CATV, Bell Journal of Economics Class 3- Public-Private Contracting and Incomplete Contracts Hart, Oliver, Andrei Shleifer, et Robert W. Vishny «The proper scope of government: Theory and an application to prisons». Quarterly Journal of Economics 112(4): Class 4- Auctions vs. Negotiations in Public Procurement Bajari, Patrick, Robert S. McMillan, et Steven Tadelis Auctions versus negotiations in procurement: an empirical analysis». Journal of Law, Economics, and Organization 25(2): Class 5- Renegotiations and Institutional Environment in Public Procurement Guasch, J. Luis, Jean-Jacques Laffont, et Stéphane Straub «Renegotiation of concession contracts in Latin America: Evidence from the water and transport sectors». International Journal of Industrial Organization 26(2): Le Squeren Z. and Moore J "The political cycles of public contract renegotiation: Evidence from the French car park sector", working paper, chaire EPPP 9

10 Public Procurement This course: 12 classes Class 6- Public Procurement, Defense and Security Issues (G. Farde, Althing) Classes 7 & 8 - Putting yourself in the skin of a decision maker: how to impulse and secure sound public investment projects Class 7: Having the right project launched Class 8: Attracting investors and industrial players Class 9 and 10- Cartels and Public Procurement (E. Chong, French Competition Authority) Class 11- Political dimension of public procurement in Europe (C. Simhea, Suez Environment) Class 12. Public Services and Regulation (M. Amaral, Arafer) (TBC) 10

11 Today introduction Public procurement, public services and complex contracting 1. Back to basics: why public procurement? Because of transaction costs 2. Alternative arrangements for public services Traditional procurement, PPPs, PFIs, Concession and other strange forms 3. What theoretical frameworks? Slide 11

12 Back to basics Why Public Procurement? Private vs. Public

13 First question is: what is the proper scope of government? Needs to invest in infrastructures and public services in order to increase growth but Infrastructure s needs Investment needs in public services Investments and growth Financial constraints for States and local public authorities Why can t we let private companies pay for and manage public services? Slide 13

14 Let the Market do the Job! Privatization: What limits? Slide 14

15 What Scope for government? A classical answer: Market Failures! Externalities Public Goods Natural Monopoly Slide 15

16 Externalities Over or underinvestments because there is no market for externalities Slide 16

17 Public Goods Issues: Shirking Marginal cost of production Slide 17

18 Natural Monopoly Cost 12c 5c AC Q/2 Q It is natural (i.e. efficient) to have only one company serving the demand Slide 18

19 The Coase Theorem (1960) Ronald H. Coase Nobel Prize ! The way property rights are distributed in an economy does not impact on the way this economy uses scarce resources if there is no transaction costs.! Allocative efficiency is reached: An efficient set of inputs to production and outputs from production will be chosen by agents regardless of how property rights over the inputs were assigned to the agents.

20 Illustration of the Coase Theorem (like presented by Coase himself in 1959 at the Chicago U. research seminar)! Georges Stigler ( ) Nobel Prize 1982 Consider a farmer whose property is near a rancher's land. The rancher thinks of adding one head on his property The rancher's cow tramples the farmer's corn. This new head would cost to the farmer $200 per year (negative externality). This new head would generate a profit of $150 per year to the rancher. Coase's theorem would lead us to predict that, whatever property rights distribution, the final decision would be the same! I have spent all my professional life in the company of first-class scholars but only once have I encountered something like the sudden Archimedean revelation - as an observer (Eureka!, Ch. 5, Stigler, 1988)

21 Monopoly and transaction costs. CS PS $/Q P m P c Monopoly is not Pareto efficient. " Why? " Let s make a deal. DWL = DeadWeight Loss MC=AC D=AR Q m Q c Q/t MR

22 Monopoly and transaction costs. $/Q A P m " Consumers ask monopolist to produce at the competitive level Q c. " Consumers s surplus expands to AP c B. P c B MC=AC D=AR Q m Q c Q/t MR

23 Monopoly and transaction costs. $/Q P m P c " In exchange, consumers bribe the monopolist by transferring back: " all producer s surplus, " plus (say) half of the DWL. " Now both are better off. MC=AC D=AR Ah, but transaction costs! They differ from one governance structure to another. Let s compare! Q m Q c Q/t MR

24 ONE MESSAGE Complete contracts are unfeasible. Transaction costs (i.e. contracting costs) are at the core of the problem! To decide to go public or not To decide to use one contractual arrangement or another 24

25 Alternative Arrangements for Public Services Public Private Contracting

26 From a State that is producing to a State that is regulating «Instead of providing jobs through public administration and the production of goods and services with public companies, the state becomes the controller. His new role is to set the ground rules and intervene to address market failures and not to substitute» Jean Tirole, 2016 (page 24).

27 Several levels of private implication / government delegation Different kinds of public-private contracts Traditional procurement contracts Vs. PPPs Usually, two characteristics = A global contract with delayed payment (i.e. bundling). The private party invest AND provide the service (French) Concession contracts are good examples Concession-based transport and utilities projects have existed in EU member countries for many years (especially in France, Spain, Italy) Demand risk is supported by the private operator / revenues are derived from payments by end-users (English) PFI expanded this concept to a broader range of public infrastructures and combined it with the introduction of services being paid for by the public sector instead of end-users. Demand risk is supported by the public sector / revenues are based on performance indicators (KPIs) In reality, there is a continuum of PPPs lying between PFI and Concessions Slide 27 i.e. a continuum of public procurement contracts

28 PFIs investments in Europe Source: EPEC 2016 Slide 28

29 Investments through concessions in Europe? No available information Slide 29

30 Many problems associated with complex contracting (Scandals ) Public Private contracts with a high implication of private partners are under fire (PPPs) In addition there is a political dimension that is crucial

31 Do not forget the political dimension of those contracts: the French case 200 French PFI contracts signed since 2004 Feedbacks are good: Delays, budget constraints and quality The new French government seems to look for a reduction of PPPs! Slide 31

32 Number and amount (in thousands of ) of PPPs in France between 2004 and Investments (Municipalities) Investments (State) Number of signed contracts (Municipalities) Number of signed contracts (State) Slide 32

33 Concession contracts are attacked especially since Paris city decided not to renew their water concession contracts in Slide 33

34 The new European Directive on Concessions and Public Procurement (2014) The Commission wants to better control public expenses through traditional public procurement and other public private contractual forms Why do we need new Directives? What problems associated with public procurement the Commission tries to fight with? Slide 34

35 Toward an Economic Analysis of Public Private Contracts Nobel 2009 Transaction costs Pablo T. Spiller -- Univ. of California Berkeley Third Party Opportunism O. Hart - Harvard Property rights Jean Tirole TSE -- Nobel 2014 Incentives Slide 35

36 What to bring back? Public procurement expenses are significant Public procurement gives rise to many types of contractual arrangements Those arrangements differ depending on transaction costs (i.e. contractual difficulties) associated with 36

37 Next Class Class 2- Public-Private Contracting and Transaction costs O. E. Williamson, 1976, Franchise Bidding for Natural Monopolies - in General and with respect to CATV, Bell Journal of Economics 37

38 Election of a class representative 38