|Volume 57 (4) — October 2008
Partnership between private and public sectors in service delivery
A number of factors have led to many National Meteorological Services (NMSs) becoming involved in the provision of value-added services, in addition to their core government-funded role. These include trends since the 1980s and 1990s for government bodies to take a more “business-like” approach, financial pressures on NMSs causing them to seek additional revenue sources, and an increasing ability for NMSs to add value to the core publicly funded services they already produce.
By value-added services I mean those which are not explicitly funded by the government. There are two types—cost-recovered services and commercial services. This article covers the nature of the various services and then goes on to give my views of what role the public sector (i.e. NMSs) should play specifically in commercial service provision. While drawing on experiences with the Meteorological Service of New Zealand Limited (MetService) and WMO, the views expressed in this paper are mine and do not necessarily reflect those of my employer or of WMO.
All NMSs rely primarily on government funding for their basic infrastructure and for public good services, including warnings. Freebairn and Zillman (2002(b)) cover well the issue of funding for meteorological services. Their paper is recommended for its description of the nature of public goods, private goods and mixed goods in the context of meteorological weather services and its explanation of various funding and institutional models.
Freebairn and Zillman (2002(b)) also explain why government funding for such core infrastructure and services is appropriate and necessary. Public good services have characteristics of being non-rival (one or many people can make use of them with little additional cost) and having a high cost of exclusion (i.e of restricting the use of the information to certain users only). In a companion paper, Freebairn and Zillman (2002(a)) discuss the economic benefits of meteorological services.
It is important that there is a clear definition and agreement on what services are being funded by the government, with a clear link to the level of funding provided. If there is to be a change in policy or new expectations on services or different funding levels, then the services and/or funding should be adjusted so they match.
The level of government-funded services varies widely between countries, depending on history, finance, legislation, culture and, indeed, the climate and weather of the country.
Historically, the delivery of government-funded forecasts and warnings from NMSs to the public has relied on using the media, plus services such as recorded telephone forecasts, which have a relatively high marginal cost per caller, so are often implemented using cost- recovery mechanisms. However, Internet technology is increasingly allowing direct delivery to the public of government-funded services at low marginal cost for delivery and customized formatting, so that such delivery may be explicitly government- funded rather than cost-recovered.
The definition of government-funded services is uniquely clear in New Zealand. As described in Steiner et al. (1997), a commercial contract was put in place in 1992 for delivery of NMS weather services on behalf of the Government. The weather services are provided by MetService, a State-owned enterprise, which is wholly owned by the Government but required by legislation to operate in the same manner as private sector companies.
When the contract was first established, the revenue was some two-thirds of MetService income, but, after 15 years, this has now fallen to around a half of its income, through a combination of a reduced real price for the contract (even though the level of services is markedly improved) and MetService business growth in other areas.
Direct government funding will never cover all the meteorological services required by the community at large. Cost recovery is appropriate where the services provided have the character of a “mixed good” or a “private good” (see the definitions in Freebairn and Zillman, 2002(b)) and where, for whatever reason, the NMS is effectively the only organization providing the service.
Such cost-recovered services are not truly commercial, since there is no market mechanism for establishing prices and no explicit competition or contestability. The amount charged should, in general, reflect the marginal cost of provision, including applicable overheads. The overheads should not be underestimated. For example, the chargeable cost of professional staff time may appropriately be in the range of 1.5-2.5 times the actual hourly salary cost, taking into account the cost of recruiting, training and managing staff, as well as their use of facilities.
Some examples where it is appropriate for the NMS to recover costs include the following:
A legislative and institutional framework is needed, which allows the NMSs to retain the revenues they receive from such cost recovery, or else all that happens is that they incur the costs but the money goes into overall government revenues.
A major area of cost recovery for many NMSs is for their provision of aviation meteorological services. This illustrates an issue which is relevant to public weather services (PWS)—the recovery of costs other than the marginal cost of provision of the service. As a matter of policy for the International Civil Aviation Organization and WMO, NMSs are entitled to include in costs recovered for aviation meteorological services a share of the basic infrastructure contributing to those services, including observing systems, numerical weather prediction and core forecasting. This helps to fund the core infrastructure and implicitly, if not explicitly, changes the agreement between the government and the NMS, because it effectively reduces the amount the government needs to publicly fund the NMS for core services.
There is a related issue in PWS, where some governments require their NMSs to recover costs not just for access to observational information and products, but to contribute a share of the cost of gathering or producing it. Because such data and products are also freely exchanged internationally, intense debate in the 1990s led to the passing of WMO Resolution 40 by Twelfth Meteorological Congress in 1995, which resolved the matter.
By commercial services, I mean those value-added services for which the NMS is not the only possible provider and so the price for them will be set by the market through competition. Although the distinction between cost- recovered services and commercial services may not always be clear, especially in countries where there is not an active private sector, this does provide a useful framework for considering the issues.
Why do NMSs consider becoming involved in commercial service provision? Five main reasons are:
Issues with NMSs providing commercial services
Embarking on commercial services may seem initially attractive, for the reasons in the previous section. However, there are a number of issues which need to be taken into account.
By definition, revenue to be obtained from commercial services will be in competition with other providers and this will require a level of business acumen and experience in working in a highly competitive market which is often lacking in NMSs, at least initially.
Establishing and increasing com mercial revenue require an upfront investment of resources before any return is produced, which means that, in the absence of any explicit additional investment in the NMS, commercial services may effectively be cross-subsidized by government funding. There is an overall risk that an NMS may divert resources and focus too much on trying to establish and increase commercial services at the expense of improving its traditional core activities.
If an NMS does manage to gain significant profitable commercial revenue, it then becomes vulnerable if it loses the business to competition from the private sector, and the NMS may not have an institutional form that allows it to cope with the impacts (particularly on staffing) of large swings in revenue.
Furthermore, an NMS can find itself in a difficult position with regard to conflict of interest and transparency of costs. The NMS is both the source of basic data and products for private sector companies and a potential or actual competitor for services with those same companies. An NMS may be tempted to restrict access by a competitor to its information or expertise, which may not be in the best interests of overall community benefit. In many jurisdictions, competition law requires full transparency and separation of activities so that the NMS does not have any advantages over other commercial suppliers, which can lead to additional transaction costs to prove this is indeed the case.
While it is true in my experience that embarking on commercial services can have cultural benefits in the way of customer focus and innovation, many of the same benefits can also be realized through taking a more customer-orientated approach to the government and to the public and other institutions, on whose behalf they fund services, and seeking to apply innovation to those same services.
Any profession is interested in maintaining standards to ensure that customers receive the highest quality service and meteorology is not alone in this. This is particularly important where the safety of life and property is at stake, which has led to regulatory control and guidelines in, for example, aviation forecasting—and we all cringe at publicity given to clearly unscientific forecasting approaches. One means of dealing with this is education of the public and customers. However, commercial services are by definition responding to customer needs through market mechanisms; regulation and education aside, the customer is the ultimate arbiter of the required service quality, including the level of professionalism applied.
Finally, if there are unmet needs, it is worth exploring whether these are best met through having the NMS work in partnership with private sector companies to facilitate access to government-funded data and products, and research and development, on which new services can be based. For the US perspective on this approach, see National Academy of Sciences (2003).
In my view:
Freebairn, J.W., and J.W. Zillman, 2002(a): Economic benefits of meteorological services, Meteorol. Appl., 9, 33-44.
Freebairn, J.W., and J.W. Zillman, 2002(b): Funding Meteorological Services, Meteorol. Appl., 9, 45-54.
National Academy of Sciences, 2003: Fair Weather: Effective Partnerships in Weather and Climate Services, 238 pp.
Steiner, J.T., J.R. Martin, N.D. Gordon and M.A. Grant, 1997: Commercialization in the provision of meteorological services in New Zealand. Meteorol. Appl., 4, 247-257.