An Interview with Dr. E.S. Savas

Public-Private Partnerships:
Where Do We Go From Here?

By Matthew Hensley

About The Author...

Dr. E.S. Savas is a professor in the School of Public Affairs of Baruch College of the City University of New York, and is a former First Deputy City Administrator of New York, former Assistant Secretary in the U.S. Department of Housing and Urban Development, and author of the ground breaking books, Privatization: The Key to Better Government and Privatization and Public-Private Partnerships

Foreword

Mr. Matthew Hensley, Co-Founder and President of the Institute for Public-Private Partnerships (IP3) and Dr. E.S. Savas recently discussed the current state of privatization and public-private partnerships. An excerpt of their session follows.

Mr. Hensley: Steve, first, I want to thank you for taking the time to share some of your thoughts on Public-Private Partnerships with our readers. To begin our interview, since you are often regarded as one of the "Fathers" of the PPP movement, what is the Steve Savas working definition of PPP?

Dr. Savas: A PPP is a joint public-private arrangement that harnesses -more fully than conventional government arrangements do- the different strengths of the two sectors to provide public services and satisfy people's needs.

Mr. Hensley: Do you recall a single defining moment or event when you realized that PPP was a more effective policy instrument than previous economic and public policy theories?

Dr. Savas: When I was First Deputy City Administrator of New York, I realized that politicians often looked at the private sector merely as a convenient cash cow to be milked instead of a possible partner working in the public interest.

Mr. Hensley: PPP is often viewed as a tool to develop and finance economic infrastructure. Yet, you are one of the pioneers in using PPP as a vehicle to develop more effective social infrastructure. Can you give us some examples in the U.S. where PPP has been used to reform and even revolutionize social service delivery?

Dr. Savas: PPPs are now routinely utilized for administering social services, processing paperwork, providing information services, collecting from "deadbeat dads," running homeless shelters, and doing job training and job placement for welfare recipients.

Mr. Hensley: Steve, you and I have worked in many countries together and have advised several policy makers around the world. If you were advising a Minister or Mayor at this moment on the benefits of using PPP, what would your argument sound like?

Dr. Savas: I would use two arguments: (1) Many government activities are very inefficient because they are monopolies, even when they don't have to be; they can be made much more efficient and the people would be better off if there were competition in the delivery of public services. Introducing PPPs is the best way to inject competition and awaken slumbering bureaucracies. (2) The word "govern" is from a Greek word meaning "to steer," that is, the job of government is to steer, not to "row". Much of what government does is rowing, and a competitive private sector is much better at rowing.

Mr. Hensley: Since PPPs have worked so successfully in advanced democracies with free market tendencies such as the U.S., Australia, New Zealand, and the U.K., why has the concept not enjoyed the same level of acceptance in other countries, including parts of Europe. Is there a correlation between adoption of PPP policies and representative government?

Dr. Savas: That's a good question. Many European countries are still welfare states, with excessive reliance on the state instead of free individuals and free markets. Perhaps this is the residue of a feudal past and hereditary monarchies, where the all powerful lord or king was the source of all benefits. Thanks to Margaret Thatcher, this rigid mold was broken in Great Britain.

Mr. Hensley: At IP3, we often advise clients that PPP is not a substitute for government; it is simply a practical policy instrument that can be used to enhance government delivery of services. What is the best way for national and local governments to determine if and when a PPP approach is the right fit? Can a "cost comparator" model be applied and institutionalized?

Dr. Savas: Yes, governments have to learn to look for, examine, and compare alternatives.

Mr. Hensley: PPPs can be used to achieve several policy objectives in addition to better service delivery and the introduction of managed competition. When you were working as a First Deputy City Administrator of New York, what were your top priorities and objectives in using PPPs? What about when you were the Assistant Secretary in the Department of Housing and Urban Development?

Dr. Savas: In New York I quickly learned that poor management was not due to ignorance about good management but to excessive reliance on government monopolies that operated in the interests of the employees and not the public. It fell to me to challenge old ways and introduce heretical new ideas, like privatization and PPP models. The situation was totally different when I served in the Reagan Administration as Assistant Secretary of Housing and Urban Development. The climate was very supportive of my ideas. I focused on changing national urban policy and on introducing housing vouchers instead of building more public housing projects. Both of these emphasized PPPs, in the broad sense defined above. I'm proud to say that both of these efforts proved successful over time and that I contributed to the "Reagan Revolution."

Mr. Hensley: Implementing PPPs successfully is not an easy task. Our experience is that most of the mistakes made are in the conceptualization of the transaction itself or in the absence of an effective legal and regulatory environment. How can governments avoid costly mistakes in planning and implementing PPPs?

Dr. Savas: The best way is to take advantage of the knowledge and experience gained elsewhere; there is no need to reinvent the wheel.

Mr. Hensley: Opponents to PPPs often claim that these types of transactions will negatively affect workers, result in exorbitant price increases, or result in "giving" control of national assets to foreigners (or all of the above in a conspiratorial "typhoon" of private sector greed). If those claims have no validity, why do opponents fear PPPs so much?

Dr. Savas: The fear is based on ignorance, on self-interest, and on knowledge of bad experiences elsewhere. The experiences and lessons learned have to be presented fully and honestly to overcome the opposition that is based on ignorance. Self-interest has to be exposed and the countervailing benefits identified. Bad experiences, usually the result of government corruption, poorly prepared contracts, and poor oversight, have to be discussed and the lessons learned and applied successfully elsewhere have to be explained.

Mr. Hensley: Argentina, once one of the pioneers in the privatization and PPP area, has suffered a political and economic meltdown. Unfortunately, many of the PPP transactions that were once considered as "best practices" are now being criticized. What happened in Argentina? Was PPP a part of the problem or one of the few things that worked in the economy? Are their lessons to be drawn from the Argentine experience?

Dr. Savas: Argentina is a rich country with huge natural resources and was the target of large emigration waves from Europe; like the United States, it was a promised land. Alas, it is one of the great national tragedies of the 20th Century, for it was misruled most of the time. It followed a commendably broad and aggressive PPP program but there was little transparency and strong hints of corruption in some of the transactions. The main problem as I understand it is that national and provincial governments continued to spend wildly beyond their means, assuming that blue smoke and mirrors, phony bookkeeping, and foreign saviors would bail them out, as usual.

Mr. Hensley: At the end of the day, even with successful PPPs in a variety of sectors, the issue of cost-recovery and affordability remains. Can PPP work in countries or sectors where the politicians continue to massively subsidize consumers? Are there economic and social benefits to PPP even if the private sector requires a rate of return that results in a tariff that is higher than the normal consumers "ability to pay"?

Dr. Savas: Although mass subsidies of consumers is bad public policy, in my opinion, that is a policy decision best left to the government. Such a policy is not incompatible with PPPs, but it is generally not sustainable, because few countries can continue such a policy for long. The most egregious examples with which I'm familiar are in water supply. Many developing countries with national water systems deliberately keep the price of water low on the grounds that the public lacks the ability to pay. But the net effect, invariably, is that the water system has low capacity and is not expanded or maintained; moreover, there is a shortage of water and the water supply is contaminated. PPPs in water expand the supply, maintain the system, reduce leakage, reduce theft, and provide adequate water of high quality, but they require payment. The tariff must be paid for one way or another.

Mr. Hensley: Steve, the recent Summit in Johannesburg stresses the use of public-private partnerships as a new development paradigm. In addition to traditional forms of PPP, other community-based or NGO-based partnerships are gaining utilization. In these arrangements, services are managed and delivered by users or beneficiaries in an efficient, but not-for-profit manner. What do you think about those types of partnerships? How can they be expanded?

Dr. Savas: Such partnerships can work and work well. Successful examples are found in rural irrigation systems owned and managed by water-user associations. One problem, however, is that they are difficult to sustain over long periods. By the way, one should not assume that a nonprofit NGO is automatically lower cost than a for-profit business. Mountains of evidence demonstrate, for example, that public services supplied by governments -which are nonprofit- are generally more costly than identical services provided by for-profit firms under competitive contracts.

Mr. Hensley: Your book Privatization and Public-Private Partnerships is a classic and a must read for any serious practitioner. In the book, you stress that effective management of PPP can promote greater transparency, increase good governance, and reduce corruption. Can you give us a few examples of how that can work? Will the Internet accelerate this accountability in public sector accountability?

Dr. Savas: A key feature of PPPs is an open procurement process. This means professional preparation of invitations to bid or requests for proposals, broad dissemination and publication of those requests, a transparent process for reviewing and evaluating the submissions, and selecting the winner using explicit and public criteria. The Internet makes it even easier and cheaper to advertise the bid widely and to distribute information that will encourage responsible bidders to participate.

Mr. Hensley: In your judgment, what is the one critical obstacle standing in the way of more effective PPP's at the local level in most countries? Is it lack of capacity? Dearth of a local private sector? How does a city or agency overcome such an obstacle?

Dr. Savas: The critical obstacle is the absence of political will, usually the result of opposition to change on the part of workers and middle managers. Training, education, and exposure to successes elsewhere are the way to overcome this barrier. An even better bet is to get better political leaders!

Mr. Hensley: Steve, I want to thank you so much for your friendship and support. All of IP3's alumni, staff, and friends that have had a chance to work with you want to recognize you for your enormous contributions to this exciting field. Before we end, give me your brief vision for the future? Will PPP become widespread and increasingly mainstream? Is PPP the new irreversible paradigm for economic development? Or will it be adopted on a case-by-case basis in cities and towns where local leaders see it is a means to an end. If it is a means, then what, in your opinion, is the end?

Dr. Savas: PPPs are already mainstream in the United States, for example, embraced by Democrats and Republicans, liberals and conservatives. Elsewhere, they are found in dictatorships and democracies, and among communists and socialists. Why? Because PPPs work and we know how to make them work. Therefore acceptance will be inexorable in my view. I saw a good example recently in Denmark, a democratic socialist country with a long history as a welfare state. They created a superb PPP to manage and operate the Copenhagen bus system. Three competitively contracted foreign firms, a British, a French, and an American one, operate most of the buses, under the control of a regional public transportation agency.
Free markets and a private sector are necessary for economic development, and this means a prominent role for PPPs. Finally, the case-by-case approach is common and politically easier than a wholesale national program. In every instance, the desired end is better government (one that steers and doesn't row), better service to the public, and -ultimately- a better society.

Dr. Savas continues to teach and consult on privatization and public-private partnerships globally. He has advised scores of Ministers, Governors, Mayors, and City Managers in over 50 countries on the applications of PPPs as a sustainable development tool. His most recent book, Privatization and Public-Private Partnerships, published now in fifteen foreign editions, can be purchased through the publisher, Chatham House Publishing, at www.chathamhouse.com.