Abstract
This paper explains the use of cost-benefit analysis for the evaluation of global public–private partnerships that combine international intergovernmental organizations with national governments, businesses, and the non-profit organizations of civil society. The partnerships allocate resources to projects that are socially desirable from an international perspective, yet without the global partnerships will not be performed. Cost-benefit analysis can identify and compare the social and the private costs and benefits of the projects, thereby identifying cases where global public–private partnerships will provide socially desirable results when markets alone will not. Cost-benefit analysis can assess the necessity and the sufficiency of strategies proposed by the partnerships. The paper discusses modifications to cost-benefit analysis required for its use in evaluations of the global public–private partnerships, explaining the need for market-centered valuations, but also explaining the role of alternative social valuations.
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Notes
Focusing on government policy to correct markets’ underinvestment in research and development and innovation, Martin and Scott (2000) develop a taxonomy of innovation modes and associated market failures and appropriate policy responses. Focusing on technology policy in a national context, Tassey (1997) explains how technology policy addresses market failures resulting from barriers to the private sector’s development of new technologies. Conceição and Mendoza (2006) provide a taxonomy of global public goods focused on the problems that hinder successful provision of the goods.
For an accessible yet thorough discussion, see Stiglitz and Walsh (2002, Chap. 11).
Following the conventional view of the government’s role, I am portraying the government as the primary vehicle for joint action, with civil society and its various philanthropic organizations—in both the national and international contexts—filling needs not adequately addressed by government. In discussions with me, Meir Kohn has made the following observations that I paraphrase in this note. He observes that while in descriptive terms my portrayal may be accurate today, historically it is not accurate. Both government and the philanthropic organizations of civil society offer frameworks for joint action when market (individualistic) solutions are unsatisfactory. The basic difference between them is that government relies on coercion while civil society relies on voluntary efforts. The ideal division of labor between government and civil society is an open and important question. It is also, of course, a difficult one.
See Scott (2000b). The set of efficient outcomes (regarding the mix of goods and services and the investment projects undertaken) would differ because the distribution of income determines whose preferences count in the markets where consumers cast their dollar votes for the various goods and services. A different distribution of income implies a different set of preferences will determine the values of goods and services as reflected by the demands for them. The optimal set of goods and services (the efficient mix of output) and the optimal set of investment projects will vary with the differing relative demands.
Arrow established the result formally with his “impossibility theorem.” As Stiglitz and Walsh (2002, pp. 333–334) point up, the result is a more general statement of the problem identified by Condorcet’s “voting paradox” regarding majority voting. Arrow’s impossibility theorem shows that no voting system can avoid inconsistencies which are inherent in the decision-making process of any democratic government.
The term “social welfare” covers a wide range of views about what is good for society as a whole. For example, economists often use the term “social economic welfare” to denote the total net value (value in excess of the opportunity costs of the resources used) produced by scarce economic resources in a particular use. Social philosophers might equate “social welfare” with fairness or social justice.
These three situations for market failures to be addressed by intergovernmental organizations are set forth in the terms of reference, prepared by the Office of Development Studies at the United Nations Development Programme, for Scott (2006).
The streams of returns can be discrete—that is, the returns occur at discrete points in time—or continuous, flowing at a rate per unit of time. Whether discrete at varying intervals or continuous, the substance of the idea of present value is the same. For illustrations of cost-benefit analyses using discrete flows, see Link and Scott (2005b); Link and Scott (2001) provides examples using continuous flows. Link and Scott (1998b) provide detailed discussion of the various cost-benefit metrics such as the benefit-to-cost ratio and the net present value and the internal rate of return. Typically—Link and Scott (2005b) provides many examples—the cash flows are “real” and the rates of return are “real”—that is, appropriate adjustments are used to keep the purchasing power of the monetary unit (that measures the cash flows) constant despite inflation.
Different discount rates could in principle be appropriate for flows of different kinds, including flows at different times. The simple single-discount rate case is useful for exposition of concepts and also in practice.
For the archetypal illustrative case to explain the concept, the net cash flows of benefits minus the costs begin as negative and then become positive, with just a single reversal in the sign for the series of flows. There is then at most a single real solution for the internal rate of return. Of course, for actual investment projects there can be multiple reversals in the signs for the net cash flows, and then using the internal rate of return concept for a cost-benefit analysis requires some additional work with the time series of benefits and costs. For an actual example with an explanation of how to treat the issue, see Link and Scott (1998b, p. 46).
Kaul (2006, p. 246) adapts the figure from the ones in Link and Scott (2001) and in Audretsch et al. (2002). Jaffe (1998, p. 16) introduced the basic diagram in the discussion of the role of the Advanced Technology Program—a public-private partnership at the US National Institute of Standards and Technology; Link and Scott (1998a) adapted that figure to illustrate their analysis of the desirability of a particular public-private partnership in a national context, an analysis that is reprised in Link and Scott (2001, forthcoming) and Audretsch et al. (2002).
For details about the mandate and purposes for the US National Institute of Standards and Technology, see Link and Scott (1998b). For the description of the mandate and purposes for the Advanced Technology Program, see Link and Scott (2005b). Audretsch et al. (2002) provide a description of the mandate and goals for the US Small Business Innovation Research Program.
See Link and Scott (1998b) for discussion, in the context of institutional evaluations, of the traditional models based on the work of Griliches (1958) and Mansfield et al. (1977) in which benefits are measured by the stream of total economic surplus, itself the sum of consumer and producer surplus.
There are many examples of companies responding to public concerns about the environment by adopting environmentally friendly behavior and then advertising that behavior because it is expected to increase sales and profits. One example, as reported in Sneyd (2005), is for McDonald’s, the world’s largest fast-food chain. Sneyd reports that McDonald’s introduced to its New England and up-state New York outlets a new organic coffee certified as “Fair Trade.” That is, the coffee is certified to have been made from coffee beans produced by farmers who receive a guaranteed basic minimum wage and who practice organic and sustainable cultivation. McDonald’s promotes the new coffee as “Good for you. …Good for the environment. …Good for the world.” Sneyd (2005, p. A3) reports that “McDonald’s will be promoting the new brew heavily and will be emphasizing the organic and Fair Trade angles. …A trade association that promotes Fair Trade products said the move makes great business sense for McDonald’s and could further enhance the market for such goods.”
These partnerships are profiled in the website http://www.thenewpublicfinance.org/ for Kaul and Conceição (2006) where the Office of Development Studies, United Nations Development Programme, has posted a database of global public-private partnerships.
Note the distinction between the question that we are asking and the fundamental question posed by Rawls (1971) about what individuals would choose as a just society. The typical discussion of fairness in the distribution of income asks for assessment of whether less inequality in the distribution is desirable. Rawls considers what individuals in a hypothetical “original position”—that is, without knowledge of their subsequent positions in society—would unanimously choose for a society’s approach to justice. In the original position they might be more disposed toward the virtues of equality in the distribution of income than society in general seems to be. In any case, here we are not asking what people think about more or less equality in the distribution of income. Rather, we are asking them to think about how the valuations of various goods and services would change if the distribution of income were equal rather than its actual distribution. The market values of goods and services have been determined by that actual distribution, and we would like to know what the market values would be given the hypothetical situation of equality in the distribution of income.
A detailed description of the way that appropriability difficulties and risk interact to make a project like project A unacceptable to the private sector, and then a description of how the partial public funding overcomes the problems, is provided in Scott (1998, p. 71). Additional detailed description including a diagrammatic presentation of risk and return is provided in Link and Scott (2001) in the context of actual projects for public-private partnerships.
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Acknowledgments
This paper is a revision of a report, Scott (2006), prepared for the United Nations Development Programme’s Office of Development Studies. For helpful comments, I thank Pedro Conceição, Inge Kaul, and Albert N. Link.
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Appendix: Topics for additional research
Appendix: Topics for additional research
In this appendix, several topics for future research are discussed.
Topic 1. Practical methods for identifying the opportunity costs of public funds. We can get the private sector’s opportunity cost of funds—the private hurdle rates—for various types of projects. The concept of the required rates of return for the private sector’s investments in various types of projects is well-developed in the literature of corporate finance. Experts in industry are able to discuss and provide appropriate private hurdle rates as they did for evaluations in Link and Scott (2000, 2001) and Scott (2000a), and the corporate finance literature provides several approaches for estimating private hurdle rates. However, appropriate opportunity costs for public funds—the appropriate social hurdle rates for particular types of projects—are not so readily found. For the evaluations in Link and Scott (1998a, b, 2000, 2001, 2005a, b, 2006, forthcoming), the social hurdle rate used was mandated by the national government. The government came up with the official number, but there are many questions about how the decision is made and how well it reflects the opportunity cost of the public funds. In Sect. 3 above, I discussed the theory of why the social and private hurdle rates are expected to differ. Additional research should be done to inform the public’s choice about the opportunity cost for public funds; those costs should differ for projects with different risk characteristics, and research to systematize the choice for appropriate social hurdle rates is needed. As observed in Scott (2000b), social opportunity costs are not readily known; even projects with high social rates of return when evaluated with conventional cost-benefit analysis might find better uses for their resources (Scott 2000b, p. 12, italics in original):
… [T]here are two sensible reasons that governments might direct the use of economic resources away from uses with high social rates of return. First, there may be … projects with even higher rates of return conventionally defined—that is, defined using actual … expenditures and the present value of total economic surplus given the current distribution of income and wealth. Especially in the redirection of R&D resources that can shape the path of technological change for better or for worse, government needs to address such alternatives explicitly rather than setting a rather arbitrary hurdle rate. Second, governments can rationally choose to deploy … resources using an evaluation metric other than the total economic surplus of the current economic majority.
Future research could usefully address how to identify alternative uses of resources rather than just using a rather arbitrary social hurdle rate that is same for all projects.
Topic 2. Practical methods for determining public contributions versus private contributions to funding. The “hurdle lowering auction” described in Scott (1998) is in principle a way to ensure that the public pays no more than necessary to achieve the socially desirable results of a public–private partnership. The mechanism lowers the hurdle faced by the private sector—the private rate of return is raised to the private hurdle rate but no more, and then the investment can be made by the private sector. The bidding mechanism suggested is, however, quite complex and awaits development in actual applications if it is to be a useful approach to leveraging the public financing of public–private partnerships. Despite the innovations—documented and reviewed in Conceição (2006) and in Conceição et al. (2006)—in the financing of global partnerships, there is room for applying Lesson 6 above to the refinement of the financing mechanisms to ensure that the public does not pay more than necessary to achieve the goals of the partnerships.
Topic 3. Practical methods for measuring the social value of benefits for those without the ability to pay. As observed earlier, a complete analysis of the social benefits of the work of a global public–private partnership would require a measure of the value that reflects the benefits to those who have no ability to pay for the results of the partnership’s work yet are the direct beneficiaries of that work. Future research to develop understanding of those social benefits is needed. The approaches set out in Lesson 5 above for forming non-market measures of social value provide a useful starting point. Clearly, however, those practical non-market measures at best only indirectly capture value for the direct beneficiaries. Sophisticated surveys with responses about preferences conditioned on counterfactual situations regarding the ability to pay and with control for sample selection are one possibility. For another, researchers could use samples of people within and across countries to develop models of income-constrained consumption behavior. Possibly, the models could be used to predict consumption behavior and thereby reveal preferences and value in different circumstances regarding the distribution of income and wealth.
Topic 4. Hypothesis tests using the UNDP/ODS global public–private partnership data set. The website http://www.thenewpublicfinance.org/ for Kaul and Conceição (2006) has posted a dataset of global public–private partnerships. The sets of partnerships and data about them posted at the website have been assembled by the Office of Development Studies (ODS) of the United Nations Development Programme (UNDP). These posted inventories of global public–private partnerships include the links to the websites for the partnerships and systematic descriptions of the partnerships that ODS has developed by studying the information available about each partnership. Future research can use the UNDP/ODS data about global public–private partnerships, developing the data and putting it in a form suitable for using econometrics to test hypotheses about the behavior and performance of the partnerships, and then carrying out the hypothesis tests.
The econometric hypothesis tests will develop understanding about the circumstances in which the private sector will, absent special policies, provide finance to support government or intergovernmental-organization funded investments to be performed in the private sector—analogous to the evidence developed in Scott (2000b) about third-party private finance of Small Business Innovation Research projects. Further, the hypothesis tests will develop understanding about the ways that government or intergovernmental-organization support of a variety of policies can make socially desirable projects commercially attractive for private business—analogous to the evidence developed in Scott (2005a, b) about corporations’ socially responsible investments in environmental R&D in response to various public policies. The UNDP/ODS data sets as well as the websites for the partnerships provide the names of the members of the partnerships. Analogous to the evidence developed in Link and Scott (2005c) about the presence of universities as partners in research joint ventures, econometric study of the circumstances in which particular types of partners—such as universities—are among the organizations participating in a global partnership can provide insights about economics of the partnership—the appropriability conditions faced by the business partners and the importance of scale and scope for the realization of efficiencies and synergies.
The knowledge generated by the hypothesis tests will inform policies to encourage corporate social responsibility and help intergovernmental organizations design effective projects to combat crucial world-wide problems including poverty and hunger and disease, pollution and climate instability, and terrorism. These and other world-wide problems are the focus of a burgeoning array of global public–private partnerships, and econometric hypothesis testing grounded in the theoretical framework exposited in the present paper will help in the development of practical ways to improve the performance of the partnerships.
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Scott, J.T. Cost-benefit analysis for global public–private partnerships: an evaluation of the desirability of intergovernmental organizations entering into public–private partnerships. J Technol Transf 34, 525–559 (2009). https://doi.org/10.1007/s10961-009-9120-8
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DOI: https://doi.org/10.1007/s10961-009-9120-8
Keywords
- Cost-benefit analysis
- Global public–private partnerships
- Intergovernmental organizations
- International organizations
- Market failure
- Program evaluation
- Social opportunity costs