Efficiency Vs Cost trade-off in infrastructure

Conventional wisdom would have it that governments are not only very inefficient but also expensive in delivering public services. It is also widely believed that private sector is not only more efficient but can also deliver the same service more cheaply. In other words, in contrast with the private sector, government service delivery offers the worst of both worlds - inefficient and expensive. How does this conception square up with reality?

The cost-efficiency curves for a typical market for public service delivery in developing countries would look something like in the graph below.



Atleast for the short term (given the same investments), the cost of delivering a service at the same efficiency is much higher in the private sector than the public sector. See this, this and this (there are many more other reasons). This raises the issue of whether people are willing to pay the higher prices required to access these basic public services.

However, certain markets are more amenable for private contracting. The curves for such markets would look like this



In these markets, to achieve efficiency beyond certain point, Ee, the private sector is easily more cost-effective than the government. In such cases, beyond a basic minimum level of efficiency, Ee, the private sector can achieve the same efficiency as government, Eg, at far less cost than government (P1-P2).

In conclusion, public provision of services may be more cost-effective in most public infrastructure services. However, if the private sector is made to deliver the same services, at greater efficiency, that would have to come with a cost. In the absence of willingness of users to pay the higher price, governments may have to bear the higher cost of these services by subsidizing service delivery.

But in certain infrastructure services like airports, ports, power generation, and telecoms, which are single location services, involve considerable professional expertise in their management, and where cost recovery is possible (due to the economic profile of its users), it may be prudent to rely on private providers. They can deliver such services in a more cost-effective manner than government service providers.

PS: The graphs are intuitive representation and not based on any data.