5 The ownership of facilities that deliver public services
5.1 Introduction
While there is a wide range of potential options for government to contract out the provision of public services to private profit-maximising firms, the most complex are those that require substantial investment in facilities associated with the provision of those services. In countries such as the UK, private investment in the infrastructure associated with public services makes up a significant portion of the total investment in public infrastructure, including investment in prisons, hospitals, schools, electricity, water and defence facilities.
Advocates of private ownership and management traditionally argued that the public sector tends to be wasteful and inefficient—characterised by rigid work practices, excessive staffing levels, and provider capture. Critics of this view tend to point to the problems of specifying the quality dimension of desired outcomes, establishing appropriate performance targets, monitoring subsequent performance and enforcing the relevant contractual obligations. They sometimes also argue that, as a matter of principle, the provision of services on behalf of the community should be undertaken by institutions of a wholly public nature.[25]
The incomplete contracts literature provides the potential to get past what had become a rather sterile and ideological debate on the role of the private sector in the ownership and management of facilities delivering public services. From an incomplete contracts perspective, ownership structures matter, because value is created by research into innovative approaches to carrying out the tasks of constructing and delivering services with the facility, but are not contractible ex ante even though they may be verifiable ex post. This means that ownership rights are associated with the residual decision rights to determine whether investment in research on innovations will take place, and whether the innovation will be implemented.
There is now a substantial literature looking at incomplete contracts analysis of the construction and operation of such facilities, beginning with the simple analysis of contracting out of management under public and private ownership in Hart et al (1997), and extended by numerous papers that develop more complex and realistic models of the costs and benefits of traditional procurement and government ownership, versus private construction and management of public facilities such as prisons. In this chapter we provide an analysis of this literature, and in addition, consider the implications of real options for these analyses of the optimal form of contracting for constructing and managing public facilities.
Notes
- [25]For example, the traditional debates about the role of public ownership are highlighted by the literature on prison management (see Trebilcock, 1995; Boston et al, 1996:8-9).
