Download Vision 2030 and Private Public Partnerships

Vision 2030 and Private Public Partnerships:
Using Capabilities and Contracts Theory to Understand
Ecosystem-Enabled Economic Development
Professor David J. Teece, Institute for Business Innovation
Chairman, Berkeley Research Group, November, 23, 2016
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“There is no manual on how to transform a
traditional economy into an innovation economy.”
Financial Times Special Report
November 15, 2016
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Table of Contents
I.
Introduction
5
II. Conceptual Framework
7
III. Essence of Vision 2030
16
IV. The Role of PPPs in Achieving Vision 2030
23
V. Sector Focus: The Role of PPPs in
A. Education and Research and B. Healthcare
42
VI. Conclusions and Next Steps
53
© Teece 2016
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I. INTRODUCTION
5
Focus Today
1.
Examine the role of PPPs in building a vibrant diversified economy based on
human resources (capital), not just natural resources
2.
We first explain how a vibrant, non-natural-resource-dependent economy requires
human capital plus strong technical and organizational capabilities, undergirded by
robust and innovative knowledge ecosystems
3.
We will then explain the important role PPPs can play in building firm-level
capabilities and in strengthening ecosystems
4.
We will examine how PPPs can help in two key sectors: education and health
5.
The focus will be on (a) building business enterprises that grow, transform, and
expand employment and profitability over the long run; and (b) renovating existing
institutions and public agencies to make them more productive and innovative
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II. CONCEPTUAL FRAMEWORK
7
Insights from Capability and
Contract Theory
While there is no manual for economic transformation, capability theory and
(incomplete) contracting theory provide frameworks for:
•
•
Understanding how innovation ecosystems work
Designing and managing PPPs
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Capabilities, Ecosystems, and
Contracts
Capabilities
Govern whether and how organizations (business firms, government agencies) can
define, select, and achieve specific goals.
Two categories:
• Individual capabilities
• Organizational capabilities (ordinary and dynamic)
Ecosystems
Identify business firms and other private and public institutions and structures that make
them succeed
Contracts
Govern how different organizations/partners cooperate and are rewarded (or penalized)
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Organizational Capabilities Are Undergirded by
Individual Skills/Capabilities
Contracts
National plus Expat Populations
INDIVIDUAL
SKILLS
INDIVIDUAL
ABILITIES
Learning
w/out Doing
and Using
Learning
by Doing
and Using
Human Capital
(individual skills/capabilities)
© Teece 2016
Organizational
Capabilities
Ordinary | Dynamic
Strategy
Competitive
Advantage and
High-Performing
Organizations
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Ordinary Capabilities
• Routines/standard operating procedures are key to ordinary capabilities
• Support operations, administrations, and governance
• “Best practices” are strong ordinary capabilities
• Ordinary capabilities reflect technical efficiency
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Dynamic Capabilities
“The ability of an organization and its management to integrate,
build, and reconfigure internal and external competences to
address rapidly changing environments” (Teece et al., 1997: 516)
Dynamic capabilities on higher-order capabilities can be thought of as
falling into three categories:
SENSING
Identification of
opportunities and
threats at home
and abroad
© Teece 2016
SEIZING
Mobilization of
resources to
deliver value and
shape markets
TRANSFORMING
Continuous
renewal and
periodic major
strategic shifts
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Ordinary vs. Dynamic Capabilities
ORDINARY
CAPABILITIES
DYNAMIC
CAPABILITIES
Purpose
• Technical efficiency in
basic business functions
• Strategic “fit” over the long
run (evolutionary fitness)
Tripartite
schema
• Operational,
administrative, and
governance
• Sensing, seizing, shaping,
and transforming
Imitability
• Relatively easy; imitable
• Difficult; inimitable
Doing
things “right”
© Teece 2016
Doing
the “right” things
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Central to Competitive Advantage and
Transformation Are Organizational/
Institutional and Supporting
Ecosystems
Dynamic capabilities lie at the core of corporate success;
learning is at the core of capability building
•
Strong ordinary capabilities (operations, administration, governance) are
necessary but not sufficient for long-run (financial) success. They can be
acquired (“bought”) from consultants or through investments in training.
•
Strong dynamic capabilities and good strategy are necessary and sufficient for
long-run (financial) success. They cannot be bought and must be built.
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Components of a Vibrant Business
Ecosystem Support Capability
Development
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III. ESSENCE OF VISION 2030
16
Foundational to Vision 2030 is training and motivating large numbers of technically
sophisticated (and motivated) individuals, building organizational capabilities, and
strengthening knowledge ecosystems.
Capability development (individual and organizational) is needed in areas including:
Hard Skills
• Applied data sciences
• Digital media
• Health systems information
• Virtual reality
• Autonomous vehicles
• Greater energy efficiency
• Minimizing carbon footprint
from oil and gas
© Teece 2016
Soft Skills
• Entrepreneurship
• Management
• Institutional design
• Coherent design
• Good governance
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KSA’s Trajectory Toward a
Dynamically Capable Economy
•
Economic
potential
•
KSA has to build a dynamically capable economic system that can animate and
govern a complex economy in an uncertain world
There are three relevant horizons:
Resources,
factor
endowments
Horizon 1
© Teece 2016
Development
of human capital and
“ordinary” capabilities
and entrepreneurial
culture
Horizon 2
(Vision 2020)
National- and
firm-level
Dynamic
Capabilities in
national and
regional
systems of
innovation
Horizon 3
(Vision 2030)
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Vision 2030 Implicitly Shouts Out for
the Development of Dynamic
Capabilities to Sense, Seize, and
Transform
Sensing requires:
Assessing current capabilities and diagnosing current and future
challenges and opportunities to develop and apply new technologies.
Consultants can help with this diagnostic step.
Seizing requires:
Making the decision and committing the capital to reshape the physical
and social infrastructure. Focus is on special incentives for new
enterprise formation.
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Transforming requires:
• Bringing about the reformation of the public sector and of other
incumbent organizations so that they at minimum get out of the way of
Vision 2030. Hopefully they can assist.
• Eliminating patronage and various forms of protection so that the new
enterprise can flourish. Institute merit-based systems in government
and business (Saudi Aramco modus operandi is one model).
• Cutting off the explicit (and embedded) energy subsidies to give
alternative technologies a chance.
• Making the necessary institutional changes and performing the data
analytics to enable the capture of the massive cost savings and
performance improvement available from using best practices
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Enabling Entrepreneurship and Innovation
Lies Naturally at the Core of Vision 2030
Vision 2030 mentions need for Transformation
in education (K-12, vocational), health, and
government, and implicitly stresses
entrepreneurship and innovation.
How else can one generate economic
dynamism and diversification?
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Vision 2030’s First Priority Should Be to
Develop a Robust National KnowledgeGeneration Ecosystem
Incentive realignment and targeted expenditures are required to develop the
human capital and entrepreneurial culture required to power the
entrepreneurship and innovation needed to escape the oil-based economy (the
“curse of oil”).
Universities and allied research entities must:
•
•
•
Benchmark and then upgrade to world class
Reorient toward a greater focus on STEM
Develop and enhance ecosystems around campuses
© Teece 2016
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IV. THE ROLE OF PPPS IN
ACHIEVING VISION 2030
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PPPs: Definition and Nature
DEFINITION
An agreement between a public entity and one or more private-sector partners
(including operators, financiers) to allow and enable the private party to charge (or be
paid) for delivering a valued service or product.
NATURE
• In essence, a cooperative arrangement between the private sector and the
government that involves building and/or managing physical and/or social
infrastructure and sharing risks and rewards
• A tool for coordination for capability development
• PPPs can range from informal cooperative public and private arrangements to
highly specified design, build, finance, and operate deals.
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TRENDS
1
Around the world, public agencies have looked to improve efficiency and
effectiveness by using PPPs.
2
Infrastructure development projects involve significant risks given large
costs and the time needed to negotiate contracts and construct, operate,
and maintain assets.
3
The private partner traditionally plans and builds; once built, the public
sector usually manages.
4
Increasingly, the private partner is invited to manage the built infrastructure.
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PPPs for Social (and Institutional)
Infrastructure vs. Physical Infrastructure
Most studies/experiences focus on PPPs for
building physical infrastructure, but opportunities
for strengthening social infrastructure and
associated capabilities are more exciting.
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The Exciting Promise of
PPPs in KSA
• Real value of PPPs is not so much the CAPX savings but in
building the organizational capabilities PPPs. Private enterprise
can transfer/create the new institutional arrangement, cut costs,
and build capabilities throughout the Kingdom.
• PPPs are one of the few ways to effectuate these outcomes.
• PPPs can do so in a bundled fashion, which ensures
effectiveness and simplifies management.
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The Exciting Promise (cont.)
• A vehicle for the achievement of several policy objectives in concert,
including:
–
–
–
–
Economic diversification
Economic growth
Productivity improvement
Transfer and diffusion of technology
• PPPs can enable governments to evolve from the direct provider/
actor/funder of business initiatives to a more supervisorial role aiming at
“monitoring” the market economy, as “commissioner’/‘governor.”
PPPs have a huge potential for developing indigenous
capabilities to power innovation and diversification
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© Teece 2016
Ten Requirements for Successful
PPPs
1.
High-level political commitment and understanding is needed for PPPs to
succeed—especially for “social infrastructure” PPPs.
2.
A consistent policy framework (i.e., policies cannot be at war with each other
at the same time or over time).
3.
At all stages, there must be a clear and transparent framework that both the
private and public parties can trust.
4.
Where possible, contracts need to be standardized to improve clarity and
lower transaction costs.
5.
If PPPs are to be long term, clear rules for continuation and renegotiation
need to be developed.
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Ten Requirements for Successful
PPPs (cont.)
6.
Because PPPs are contractual agreements, compliance and enforcement
issues are relevant and transparence and the rule of law is paramount.
7.
Consideration should be given to eliminating regulation, except that which is
contained in the contract.
8.
A “One-Stop Shop” for PPPs where all permits, licenses, and permissions
necessary for a project (or program) can be obtained from one agency or
tendering authority is likely required because of the sophisticated
contractual/incentive design issues likely to arise.
9.
Investment by all parties in cultural immersion and understanding of context
and alignment of expectatures.
10. Improved existing procurement and investment legislation.
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Adequacy of Legal Framework
• Nothing special is needed for PPPs when there is a solid body of
commercial law as in the UK, US, Canada, Australia, Germany.
• If a solid body of commercial law doesn’t exist, special legislation is
likely required (e.g., Kuwait has a well-established PPP framework:
Law no 7/2008).
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Regional Challenges
A Middle East business intelligence service (MEED) reports that 23% of the 80
projects brought to market in the MENA region since 1996 failed to close.*
The main reason was a poor deal structure. Investors felt they had been
asked to accept high risk for an uncertain upside.*
* Khaleej Times (25 September 2016)
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Challenges to Successful PPPs in
KSA
• KSA ranked poorly in World Bank doing business report.
This must be overcome to enable PPPs, or KSA will need
to bear most of the financial risk.
• Overregulation, suffocating bureaucracy, patronage, and
privileged access to resources and decision makers
cripples competition and makes PPP success more difficult.
© Teece 2016
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Design Principles: Economic
and Legal Scholarship Informs
Us That Control Rights Matter
• If given complete control, the private partner might exercise market power.
• If given insufficient control, the private partner will not invest, or will charge a
high premium to participate.
• The ideal is for the government to retain certain clear but necessary control
rights, such as those over KPIs.*
* See O.E. Williamson, “Franchise Budding for National Monopolies” (1976)
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PPP Contract Design Principles:
The Teachings of Nobel Laureates Oliver
Williamson, Oliver Hart, and Jean Tirole
Control rights trade-off
Control rights allocation
• If given complete control, the private
partner might exercise market power*
• If given insufficient control, the
private partner will not invest, or will
charge a high premium to participate
• The ideal is for the government to
retain certain clear but necessary
control rights, such as those over
pricing
• Private provision is preferred when
cost reductions don’t have a strong
negative effect on quality, or when
quality reductions are observable
(Hart et al., 1997)**
• If best practices can be tightly
specified by contract, the problem
fades
• It is often the case that best practices
cannot be fully specified or enforced
* O.E. Williamson, “Franchise Bidding for Natural Monopolies” (1976).
** E.g., prisons. Private provision can lead to quality reduction, and US data shows that violence is higher in private prisons.
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PPP Contract Design Principles:
Additional Teachings from Aghion,
Bolton, and Calabrese
Principles for allocating
control rights and risks
Principles for deciding whether to
bundle services and maintenance
• Control rights specify who makes
decisions (who “calls the shots”)
• Control rights should be allocated
according to who makes the more
efficient decision (Aghion & Bolton,
1992)
• Risk should be allocated according to
who can mitigate it at least cost
(Calabrese Principle – 1972)
• With deep uncertainty, control rights
should be allocated to who can
manage it best (Aghion & Tirole, 1994)
• A private partner will not invest in
services and maintenance of
infrastructure unless it is rewarded
for doing so in the contract
• Bundling helps internalize the
benefits made during construction;
e.g., a provider will build an
infrastructure right if he also has to
maintain and manage it; i.e. less
likely to “cut corners” (Hart, 2003)
• However, if the quality of service
cannot be specified, unbundling may
be best
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A PPP’s Central Contract Design and
Administrative Unit in KSA to Implement Design
Principles Articulated by Nobel Laureates?
•
All agencies and authorities need some understanding of design and incentive
issues. However, an elite cadre of experts is necessary to navigate complex
issues.
•
Training will be required to enhance public officials’ understanding of design
with respect to the functioning of PPPs. E.g., for infrastructure projects, basic
groundwork needs to get done to enable an open bidding process to succeed.
•
To allow innovative capabilities and experience of private sector to be
harnessed, government should generally specify desired outcome, not required
inputs. There will be exceptions.
•
Executive education and transactional advisors will be needed to assist in
capability building with respect to Saudi contract design and administrative
work (perhaps Aramco can do it?).
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Indirect—and Often Hidden—
Benefits of PPPs
• Well-designed PPPs can improve capabilities and national
competitiveness and save resources by attracting top foreign
companies with transferable skills, using best practices.
• PPPs can trigger regulatory and governance changes that create an
investment climate that not only attracts investment but reduces
future funding needs.
© Teece 2016
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Indirect—and Often Hidden—
Benefits of PPPs (cont.)
• PPPs create an opportunity for KSA to institute necessary
merit-based systems in business and government.
• As PPPs grow in number, they will change the business
culture, thereby invigorating competition, spreading best
practices, and raising productivity, while stimulating
innovation.
© Teece 2016
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PPPs Facilitate Capability Transfers and
Ongoing Capability Development in
KSA
Ordinary capabilities
Dynamic capabilities
• Foreign firms often possess “best
practices” that they are willing to
share
• These “best practices” support
technical efficiency that:
– May be unknown in the
Kingdom
– Involves “doing things right”
– Can be accessed at low cost
through PPPs
• Involve “doing the right things”;
i.e., picking and choosing where
and when to invest
• Are much harder to transfer than
best practices (they are in fact
“beyond best practice”)
• Cannot be obtained absent close
engagement with a dynamically
capable partner
Engagement with partners will trigger learning through
osmosis involvement.
© Teece 2016
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Success Can Build on Itself
VIRTUOUS
CIRCLE
© Teece 2016
VICIOUS
CIRCLE
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V. SECTOR FOCUS: THE ROLE OF PPPS IN
A: EDUCATION AND RESEARCH AND
B: HEALTHCARE
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A: Education and Research
Two Key Questions:
1. Can PPPs succeed in this sector?
2. Can PPPs succeed in KSA?
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Can PPPs Succeed in Education?
• PPPs have been used in the secondary education sector, particularly in
the UK, Canada, and the US.
a) Physical infrastructure
I. School buildings and facilities
II. School buses
b) Social infrastructure
• Administration services
• Enrollment, collections, reimbursements
• Support services
• Cleaning, security, food services, transportation
• Professional services
• Teaching, curriculum development
• Ease of implementation decreases as performance measurement
becomes more ambiguous
• For teaching services to be provided by PPPs, agreement is first
necessary on curriculum and standards
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Performance Assessment Is
Harder with Social Infrastructure
Projects
Physical
infrastructure
Social
Infrastructure
Ease of
Performance
Assessment
(KPI)
Buildings &
Facilities
© Teece 2016
Support
Services
Administrative
Services
Professional
Services
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Comment with Respect to ResearchOriented Tertiary Education
• Similar issues apply.
• Adding a research component does not make the problem much harder, as
metrics (KPIs) with respect to scientific output now exist (e.g., Google
Scholar).
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Private-Public Research Partnerships
(PPRPs)
• PPRPs are designed to leverage research so as to capture commercial
value and assist with economic development.
• University PPRPs engage faculty and graduate students (but not
undergrads) in agreements between the university and private firms.
• This does not “corrupt” the university career choices, as undergrads are
usually excluded.
• In the West, there have been good PPRPs along with poorly structured
ones… much learning has occurred.
• Academic integrity can be compromised and public resources misdirected
when partnerships are poorly designed and don’t have appropriate
contractual protection.
PPRP can turn universities into innovation ecosystem champions
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Strategies for PPRP
Cooperation
• Universities and public research institutions can take the strategic
initiative and generate RFPs, allowing private parties to respond,
guided by the university’s principles and goals, and available financial
resources.
• The process can go the other way, too, but only if the university is
world class will it be able to compete as a supplier of
inventions/innovations.
• Particular areas of interest (i.e., robotics, solar technology) can be
specified.
• In the US, MIT, Stanford, UC Berkeley, and UCSF have been very
successful with PPRPs.
© Teece 2016
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PPRP Issues to Manage:
Conflicts and Colocation
Conflicts
Colocation
• Conflicts are not a reason to eschew
PPRPs; rather, they call for conflict
management machinery
• Potential conflicts need to be
recognized up front, and contract
should anchor a framework for
resolution
• At their core, PPRP contracts should
promote collective decision making
that maximizes social welfare and gain
to the parties to the agreement
• Partners need to expect to be on
campus, but should not get special
privileges
• Campus researchers will also need
to colocate with the private partner
• Colocation and collaboration will
increase both the quality and quantity
of university research, if US and UK
experience is a guide
© Teece 2016
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Relevant Vignettes
Lockheed Martin, Babson College, and King Abdullah
Economic City (KAEC) and the Saudi Arabia Economic offset
program
• Goal is to advance education and entrepreneurship
skills. Degree programs to be launched 2017.
• Aim is to eventually have up to 1,400 students in
graduate and UG entrepreneurship program.
PPPs can be focused on a particular deliverable; e.g., Cisco
Networking Academy Programs is a PPP operation in over a
dozen countries funded in part by Cisco to prepare students
for entry-level jobs in ICT.
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B: Healthcare
• Healthcare expenditure in KSA is approximately $20 billion and rising
• Better patient outcomes and much lower costs could be achieved with
PPPs
• Management contracts could be entered into to help cut costs and
improve patient care
• Additional international healthcare providers could be attracted to KSA
• Key benefits are efficiency, greater Saudi employment, and improved
care, all of which are possible
• Education standards in the Kingdom for medical and nursing degrees
will need to be raised… which can itself be facilitated by PPP
© Teece 2016
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Relevant Vignettes
Government of Egypt did PPP in healthcare sector for the
design, construction, financing, equipping, and facilities
management for two teaching hospitals at Alexandria
University. Local and international partners included Bareeq
Capital (Egyptian private equity firm), Siemens, G4S, and
Detac won both 20-year concessions.
BRG partnered with Yale-New Haven Hospital System and
used data analytics to subtract $200 million in annual costs
from a $2 billion system, all while improving patent care as
determined by agreed-upon KPIs.
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VI. CONCLUSIONS AND NEXT
STEPS
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Concluding Observations
• With our framework, we have addressed the themes of the ADEC
conference.
• BRG has used experts, experience, and the research of Nobel Laureate
economists to help create a new framework to inform policymakers with
respect to designing and governing PPPs and PPRPs.
© Teece 2016
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Concluding Observations (cont.)
• PPPs can help bring to the Saudi Arabia private sector technological and
organizational/managerial capabilities and, if necessary, financial capital.
• More importantly, PPPs can drive efficiency and lower costs.
• PPPs can be used to both:
• Build new projects/progress
• Take over and transform existing activities, such as the provision of
healthcare and education
© Teece 2016
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Concluding Observations (cont.)
• PPPs do involve some loss of government direct control but will
enhance consumer/user/citizen satisfaction.
• While PPPs are not a silver bullet, they can address many critical
economic development questions besides financing.
• While benefits of PPPs with respect to physical infrastructure are
somewhat well understood, their benefits with respect to social
infrastructure are not. We believe our framework can help.
© Teece 2016
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Schematic Summary of PPP
Benefits
TRADITIONAL
NON-TRADITIONAL
Fiscal
Reduce governmental capital
outlays and outgoing budgetary
outlays
Technological
Facilitate technological Transfer
Risk
Allocated to the party best able to
manage it
© Teece 2016
Capabilities
Facilitate transfer of best
practices
Social
Improve service coverage,
quality, and timeliness while
simultaneously changing attitude,
lowering costs, and stimulating
innovation
Enhanced innovation, diffusion of merit-based
systems productivity improvement, cost
reduction, and service quality enhancement
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Next Steps
• Stumbling forward is not the answer.
• There is a body of scholarship and international
experiences with respect to capability theory and contract
theory that is available.
• It can be married to an understanding of strategy and
business ecosystems.
• If properly designed and aggressively championed by
KSA, PPPs can be a catalyst that can make Vision 2030
a reality.
• BRG is equipped to assist with this critical mission.
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