Privatization, Part 5

Part 5: The Public Policy Debate–Executive Summary

Nora Leech, LWVUS Privatization Study Committee

The purpose of this article is to provide a description of the evolution of the public policy known as “Privatization.” Privatization is a movement to deregulate private industry and transfer many government services, assets and functions to the private sector.

Claims and Concerns

Those promoting privatization claim that:

the private sector can provide increased efficiency, better quality and more innovation in services than the government;
a smaller government will reduce costs to the taxpayer; and
less regulation will provide a better environment for business, thus creating more jobs.

Those concerned about privatization suggest the following.

Profits: The mandate to make a profit will endanger public safety and reduce services available to the general public.
Costs: There will be increased costs to consumers.
Transparency and Accountability: Private companies will lack transparency, adequate oversight and accountability.
Corruption: There will be increased corruption between government and for-profit, private companies.
National Defense: Privatizing sectors such as ports, utilities and defense can result in foreign control and will put the country at risk in the event of war.
Inequality: The scale of privatized programs will result in chronic high unemployment, low wages and abusive labor practices, leading to growing inequality between the wealthy and poor.

Larger than the United States

The privatization movement is an international movement. Outside the United States, prominent divestitures of government assets have included Russia’s natural gas (Gazprom), Bolivia’s municipal water system in Cochabamba and the United Kingdom’s British Rail. Inside the United States, privatization has taken the form of deregulation, e.g., the deregulation of the financial services industry; redistribution of the taxes “burden,” e.g., efforts to reduce individual taxes on capital gains and inheritances and reductions of corporate taxes; and privatization, the shifting of government programs to the private sector, e.g., the prisons and highways.

History

In the 1970s, disillusioned with the Progressive Era vision, leadership in the increasingly global private sector became more active, asserting that burgeoning tax rates and government regulations of industry were inhibiting free trade. Efforts were launched to dismantle many Progressive programs such as restrictions on financial lending, elimination of worker’s compensation, elimination of control over food and environmental safety, and a revamping of the tax system by eliminating progressive taxes and replacing them with a flat tax.

Competing Theories

Milton Friedman: The intellectual inspiration behind the public policies to privatize in the United States has come from the Public Choice and Property Rights schools of thought. Prominent leaders advocating these theories include Milton Friedman, the Chicago School of Economics, and Fredrick Von Hayek whose book, Road to Serfdom, warned of the growing welfare state. The basic assumptions include:

Democratic political systems have inherent tendencies toward government growth and excessive budgets.
Expenditure growth is due to self-interested coalitions of voters, politicians, and bureaucrats.
Public enterprises necessarily perform less efficiently than private enterprise.
The more individuals stand to gain from tending to their property, the better it will be tended.

John Maynard Keynes: The dominant economic theory after WWII was that of John Maynard Keynes. Keynes believed that to break a depression, the government needed to stimulate demand. It was necessary to get money into the hands of consumers to jumpstart growth. Businesses would not borrow and build if no demand was in sight, no matter how low the interest rates might go. Keynesian theories were later refuted by economist Milton Friedman and this dispute is at the core of the ongoing debate regarding how to break the current recession/depression.

Privatization in Practice

The key strategies as to how to downsize government and transfer programs to the private sector are described as:

Privatization by attrition : Cessation of public programs and disengagement of government from specific kinds of responsibilities. Example might be the U.S. postal system.
Transfer of assets:  Direct sale or lease of public land, infrastructure, and enterprises. Examples might be federal and state parks, state-owned liquor stores, and the proposed privatization of public libraries.
Contracting out (public/private partnerships) or vouchers:  Instead of directly producing some service, the government may finance private services, for example through contracting out or vouchers. Examples might be charter schools, prisons.
Deregulation : Deregulation of entry into activities previously treated as public monopolies. Examples might be utilities, water, waste management, air traffic control and ports.

Role of Government

 The public agenda of privatization requires a close examination of the proper relationship between government, business and civil society. What should the role of government be in protecting the environment, helping the poor, defending the nation, providing justice, ensuring democracy, protecting public health, ensuring public safety, providing education, promoting a thriving economy, and ensuring safe work environments and a living wage? Our country must seek a pragmatic balance between social and economic returns. 

The following Tables 1 and 2 present the Advantages and Disadvantages of Privatization.

TABLE 1–Potential Advantages of Privatization (1)

Proponents of Privatization Often Cite the Following as Reasons to Privatize:

Cost Saving Measure

Private enterprises are more efficient than government.
Competition among private enterprises provides an incentive to offer the best services at the lowest price.
Taxpayers will save money because the private sector may not require as many employees to provide a service and will pay less in employee benefits.

Greater Flexibility

Privatization offers options unavailable to government for financing expensive construction projects.
Privatization can help meet demands that exceed existing government capacity.
Private enterprises can respond to market conditions more quickly than government.

Increase Choice Among Providers

Clients usually have fewer options for services when the services are provided only by the government.
Alternative approaches for service delivery such as vouchers and non-exclusive franchises give clients more service delivery options (provider, level of service, location).

Greater Efficiency

Outsourcing can provide a quicker response to changing demand for labor and services.
Private enterprises can implement cost cutting measures that may not be available to the government.
Greater efficiency often leads to faster completion times.

Greater Productivity

Private enterprises have a profit incentive to increase productivity.
Privatization allows public administrators to focus on planning instead of managing day-to-day operations.
Private enterprises often have more leeway than government managers to increase productivity.

Lower Startup Cost

Private enterprises having capital investments in equipment, facilities, and/or training can often implement new programs quickly and without significant capital outlays.

Lower Unit Cost

Large private firms can take advantage of greater economies of scale and centralize the purchase of supplies and equipment.
Private firms can procure and employ new state of the art equipment and management information systems better than public agencies.

Greater Risk Sharing

Risks to the taxpayer (e.g., cost overruns) can be shared with the contractor.

Increased Services

Private enterprises may offer services that are not provided by the government.

Specialized Skills

Private contractors may provide specialized skills that are not normally required by the government.
The expense of recruiting, hiring and retaining government personnel with specialized skills may be too costly compared to outsourcing.

More Jobs

Privatization can create jobs in the private sector.

Less Government Bureaucracy

Private enterprises are not required to adhere to as many restrictive procedures and policies.
Private enterprises can respond more quickly to the market because the private sector is less restrained than the government.

Increased Tax Revenues

Private businesses are taxed and generate revenue for municipal, state, and the federal governments.

Competitive Pressure

Outsourcing provides a competitive pressure on public employees that remain following privatization.
Competitive pressures tend to motivate competitors to lower their prices and improve service quality.

Ideology

Privatization reduces the size of “big government.”

(1) Mark J. Rosen, Researcher, “Privatization in Hawaii,” p. 27-30 (Honolulu: Legislative Reference Bureau, December 2007).

TABLE 2–Potential Disadvantages of Privatization (1)

Opponents of Privatization Often Cite the Following as Reasons to Oppose Privatization:

Reduced Service Quality

A decrease in service quality may occur because government loses control over service delivery.
For-profit businesses will be tempted to cut corners (e.g., hire inexperienced staff, ignore contract requirements, use cheap equipment and materials) to increase profitability.

Higher Cost and Illusory Cost Savings

Reasons why private enterprises can be more costly than government include:

o Corruption;
o Lack of competition in the private sector;
o Certain types of contracts (e.g., cost plus fixed fee) provide no incentive for savings;
o Unemployment benefits are a cost to the taxpayer when employees are laid off.

Financial benefits of privatization are often exaggerated due to hidden costs associated with contract preparation, contract administration, privatization transition cost, and increased oversight cost.

Increased Service Interruptions

Unlike government, private vendors are subjected to influences (e.g., low profitability, bankruptcy, labor strikes) that can lead to service interruptions.

Loss of Flexibility

Government contracts for services must be written in very specific terms. This could result in less flexibility for public officials who are restricted by contract requirements when responding to unforeseen circumstances.

Loss of Capital

Capital investments in equipment and training are often lost when they are subject to privatization.

Less Control and Accountability

Government officials are able to respond to citizens when government is in total control of a service.
In contrast, the response by government officials is subject to contractual limitations when a service is outsourced to a private contractor.

Dual System

Privatization creates government inefficiency by creating a dual system government; one in which public workers are subject to strict procedural regulations, pay and benefit schedules and another system where outsourced labor is working on behalf of the government but are subject primarily to rules established by their private employers.

Increased Potential for Corruption

When large sums of money are involved, there is a temptation for government workers to accept or demand offers of kickbacks for awarding a contract to a private business.
When large sums of money are involved, there is a temptation for private entities to offer patronage if awarded a government contract.

Increased Potential for Discrimination

Private enterprises often do not have a policy for hiring minority and disadvantaged populations.
Private businesses may avoid serving clients who are minority or disadvantaged or perceived to be less profitable clients.

Displaces Public Employees

If displaced, government employees may lose their jobs and/or benefits and/or collective bargaining rights.
There may be a decline in morale among the remaining government employees.
Civil service policies and merit principles are weakened.

Lack of Competition in the Private Sector

The advantages of privatization will be lost if there is little or no competition in the private sector for outsourced services.

Weakened Policies and Values

Important values such as worker safety, quality, and integrity will be diminished or lost when government services are entrusted to corporations that are obligated to maximize profitability for stock holders or private owners of the company.

(1) Mark J. Rosen, Researcher, “Privatization in Hawaii,” p27-30 (Honolulu: Legislative Reference Bureau, December 2007).

Part 5: The Public Policy Debate–Executive Summary

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