Transaction Costs in Assessing Canadian
Government Services Sector P3s
Prof. Murray Cooke
March 20, 2012
Every public private partnership differs in its ability to achieve efficiency. However, some sectors seem to have inherent differences in terms of the types of risk they subject projects to, and the subsequent transaction costs involved. The challenge in assessing the use of public private partnerships is to create a baseline against which individual projects can be compared. John and Salim Loxley make the case for Value-for-Money assessments, which should include Public Sector Comparisons for partnerships. This paper attempts to show that higher quality VfM assessments must include transaction costs in the equation to establish value. It goes on to explore the variables that most impact transaction costs in the sector of government services. This paper agrees with the literature that transaction costs are a critical element too often excluded from value equations. Secondly, it finds that despite difficulty in distinguishing the category the government services sector shows some propensity towards higher transaction costs due to a push for electronic service delivery due to high levels of uncertainty, long contract lengths, and asset specificity on the part of private partners.
This paper employs a mixed approach of explanatory case study and systematic literature review to identify what measures were used to assess the performance of public private partnerships (“hereafter P3s”) in the government service sector, what previous research has determined as their level of performance, and the variables that influenced their success. The paper is structured to first discuss how transaction costs factor into efficiency assessments and explore what variables influence these costs. The paper then goes on to analyze cases of P3s in the government services sector against these variables, in order to explore the relationship between the government services sector and transaction costs. The relationship is then evaluated against the perceived success of P3 projects. Given the data limitations and its prescribed length, this paper has chosen to narrow the scope of its assessment to what has been called a hidden cost of Value-for-Money assessments: transaction costs. The limitations of this study are the reliance on underdeveloped existing data, limited access to project documentation, a small sample of cases, and changes to public actor competencies with the introduction of specialized P3 agencies. The time span offered by the case studies is short; out of the six cases used by this paper, the oldest dates back only 12 years. Access to data on projects presents a limitation in that materials used in doing preliminary assessments, contracts, and other project documents are often inaccessible to the public. This paper also assumes a bias in that disparaging data has a higher probability of being suppressed, particularly since the main sources of case study data- the Canadian Council for Public Private Partnerships (hereafter the “CCPPP”) and project proponents both public & private- are P3 advocates.
In order to assess the use of P3s, we must begin by defining the terms, identifying relevant variables, and establishing criteria for a baseline. John and Salim Loxley make the case for better Value-for-Money assessments including Public Sector Comparisons for P3s in his book Public Sector Private Profits (2010: 180). Higher quality VfM assessments include address of transaction costs. The following section begins by discussing why transaction costs are relevant to assessments of efficiency, and explores further what variables influence these costs. Sourcing & Transaction Costs
Sourcing refers to a number of procurement practices, including traditional procurement, outsourcing to the private sector, or partnership hybrids such as P3s. Sourcing decisions are driven by competencies/considerations of internal resource capabilities- such as scale considerations- and transaction cost, but the assumption that private sector organizations intrinsically offer the benefit of economies of scale has been discredited. The literature agrees that proper assessment of cost savings must include address of both parties’ comparative advantage in creating economies of scale and scope, and that sourcing decisions must be based on the consequences of strategic choices of both firms’ capabilities and strategic goals. This is where the concept of partnership becomes valuable, in that an optimal sourcing decision may be a compromise between traditional vertically-integrated government procurement methods and pure market contracting. This paper uses the CCPPP definition of P3s, which is: “A cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.” While partnerships can take a number of different arrangements, the public private partnership is simply this at its core. The assessment of P3 efficiency involves multiple components. John Loxley describes the commonly accepted sources of efficiency- the maximum level of services provided with a given amount of resources- as including cost savings in the form of lower labour costs, economies of scale, economies of scope, and innovative management. Value-for-Money (VfM) assessments are a common method of assessing P3 arrangements in Canada, which calculate the cost of the public sector comparator (PSC) minus the cost of the P3. The P3 option is chosen if VfM is sufficiently positive. Transaction costs in sourcing projects, however, have been described as a substantial cost th...