Privatization Gets a Reality Check

Political dialogue in the 1980s and 1990s produced a powerful and appealing vocabulary that exalted the private market and deprecated government. Among the most potent and durable buzzwords seemingly co-opted by the true believers in free enterprise and limited government: privatization.

Abroad, privatization usually means the sale of government-owned enterprises such as oil refineries, telephone companies and airlines. Here, where the public sector is relatively limited in scope, privatization generally refers to providing public goods and services with products and resources furnished by for-profit entities. These days, depending on one's point of view, a variety of public services - fire protection, jails, schools, waste collection and disposal - are deemed as potential opportunities for private initiative.

Privatization proponents believe that government services can be delivered more efficiently, with higher quality and at lower cost by private firms, which, so the argument goes, are responsive to competitive market pressures. The public sector, which allegedly is sheltered from the "cleansing" effect of the competitive market, is presumed to be awash in inefficiency. By contrast, private service providers, thanks to competitive pressure, strive to minimize their costs, and pass along the fruits of efficiency in the form of lower prices to customers.

Before another officeholder is seduced into believing that the competitive-market model is the key to cost-effective, more productive, beneficial levels of public services, maybe it's time for the analytical cold shower. Professor Elliott D. Sclar turns on the faucet in his book, "You Don't Always Get What You Pay For: The Economics of Privatization" (A Century Foundation Book, Cornell University Press, 2000).

Professor Sclar, who teaches planning and public policy at Columbia University, New York, is skeptical about how effective the profit motive and competition are in ensuring efficiency and quality. He believes that the wholesale adoption of a private sector mentality is "a bit simplistic, ignoring, for example, the powerful discipline imposed by elections and the media on the operations of government." Indeed, he believes that public officials' craving for popularity, together with open government and competitive elections, can be "more relentless and ruthless than the market itself."

Sclar looks at the pros and cons of privatization through a number of case studies. He cites cost comparison research by pro-privatization forces in the 1970s. The methodology of these studies was straightforward: Identify a service where public delivery and privately contracted delivery exist; then, compare costs. If the private operator appeared to be delivering service at less cost than the public operator, researchers invariably attributed the difference to competitive market pressure. This motivated the private sector toward efficiencies while the public sector remained aloof.

While many public services were probed, solid waste collection seemed to be the "most popular target of opportunity," according to Sclar. The simple analytical methods worked well in North America where investigators could find many different styles of public and private waste handling.

On the surface, these studies supported the notion that contracting for garbage collection made sense. Looking deeper, one can observe many communities where small- and medium-sized haulers were providing good service at a reasonable price. Elsewhere, however, company size and a distorted sense of competitiveness can produce collusion, price-fixing and monopoly. Nearly 50 years ago, the city of New York declared laissez-faire in the commercial waste collection market. Thereafter, waste generators probably paid hundreds of millions of dollars more for collection than if a truly open, fair and competitive market had existed. The city only recently has purged a number of "bad actors" from the commercial waste market and has restored a relatively competitive environment for waste collection services. As a result, businesses and commercial establishments have seen their trash collection bills decline dramatically.

"[M]ost public contracting takes place in markets that range from no competition (monopoly) to minimal competition among very few firms (oligopoly)," Sclar writes. "For these places, how potent can the so-called invisible hand of competition be?"

Through many examples, the book illustrates that privatization - i.e., garden variety public contracting - is not a universal answer to containing costs in the public sector. Sclar's key point is that even where state or local officials accomplished certain tasks with private sector resources, the government agency remains responsible for carefully setting priorities and service standards, attentively monitoring contract performance, and comparing the results quantitatively and qualitatively with a conscientious in-house operation.