Tuesday, June 30, 2009

Contracting civic services

In recent years there has been a widespread trend wherein cities have been weighing the choice between delivering specific civic services with their own employees or by contracting with private or public sector providers. Jonathan Levin and Steven Tadelis have a working paper that develops a model of the "make-or-buy" choice that highlights the "trade-off between productive efficiency and the costs of contract administration" from a dataset of service provision choices by US cities. Their findings include

1. Services that are characterized by high "transactions costs" of contracting and those that are widely provided by cities or are ranked high by city managers in terms of resident sensitivity to quality are privatized less frequently.

This explains why majority of the efforts at outsourcing or privatizing water, sewerage and solid waste have failed in India. All of these have high contract management costs, have considerable public interface and carry high salience in civic services delivery. In each of them too, it may be more appropriate to outsource or privatize the upstream activities like sewerage, water, and solid-waste treatment facilities rather than downstream, citizen-interfaced activities like management of the water distribution, sewerage collection and solid waste collection and transportation.

2. Contracting to other public agencies appears to be largely a substitute for in-house provision, rather than an analogue of privatization. In any case, in developing countries there are very few specialized civic service providers in the government sector.

3. There exists a substantial degree of heterogeneity across cities in terms of their contracting practices - large cities and recently incorporated cities, and cities governed by an appointed city manager rather than an elected mayor do more private contracting and their choices exhibit a closer match to the trade-offs identified in the model.

It is natural that larger cities which enjoy economies of scale (and therefore attractive for service providers), have the resources and personnel to manage contracts, and are likely to have more private service providers, take the lead in opening up the market for such services. Unfortunately, in the Indian context, the smaller (second tier) cities, with all their inherent dis-advantages have been more pioneering with contracting civic services and the balance sheet has understandably been not very encouraging. The larger cities, where contracting stands greater chance of succeeding, have been less forthcoming, especially for political reasons.

4. There is some evidence of spillovers in contracting practices within a given city, so that privatizing one service may make it more likely to do further privatization.

The danger and reality with most of our cities is just the opposite - negative externalities associated with failed contracting interventions. A large part of this is inevitable given the nascent and under-developed nature of both sides of the market. However, such failures impose substantial barriers that come in the way of development of the market - the private sellers demand a "credibility premium" for the services and the local government buyers develop "risk aversion".

The services found commonly outsourced/privatized, in view of the relative ease of their contracting, include - vehicle towing, solid waste collection, tree trimming, streets cleaning, buildings maintenance etc. In contrast, crime prevention, elderly care and other welfare programs, inspections and code enforcement, libraries, emergency medical services are found to be difficult to contract and accordingly done in-house. Interestingly, services like street cleaning, utility meter reading, collection of delinquent taxes, operation of parking lots and maintenance of parks, and even water and sewerage treatment, while relative easy to contract, have not taken off in the out-sourcing market.

This data is reflective of the trends in India too, though the frequency of such contracting is on a much smaller scale.

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