Privatization of Government Services
Posted on November 1, 2016
Privatization of government services is always sold as an “efficiency” measure. Efficiency is a weasel word. It has meanings in business and politics that are vastly different from what it means in economics. In economics it means increasing output without hurting anyone (a.k.a. “social efficiency). In business it means increasing profits, no matter who gets hurt (a.k.a. “private efficiency”). In politics it means cutting costs to taxpayers while increasing business profits, all the while pretending that no one gets hurt (a.k.a “political expediency”).
There are powerful economic reasons to predict that privatization will normally be inefficient in the economist’s sense. Moreover, the normally predicted outcome of privatization will be reduced quality of service and increased inequality.
1. Privatization is always expected to save money. This is justified as “eliminating government waste.” But actually eliminating waste is very difficult and very expensive. There is no big bundle of stuff labeled “waste” we can kick to the curb. Instead, waste normally consists in thousands of tiny details that are poorly planned or poorly controlled. Detecting these details has to be done on a one by one basis. That is extremely time consuming and requires skill and knowledge. Each and every wasteful detail is hard to fix and requires separate time and attention. Fixing waste can sometimes be a good investment, but quite often it is simply not worth the cost. Privatizing doesn’t fix anything–it just hands the problem over to new managers. So any cost savings have come out of the quality of service.
2. It is widely claimed that private companies are better at doing things than government agencies. In reality both companies and agencies have levels of competency that vary all over the map. However, government agencies are typically better adapted than private companies to doing government work, because it has different characteristics. Government work generally requires negotiation between multiple stakeholders to determine goals and directions. Private work has the sole goal of making profits. Government work generally produces “public goods,” which means that multiple people benefit simultaneously from the same action, and in many cases no one can be excluded (e.g. national defense defends everyone, like it or not). Private work generally produces private goods, which means there is a single beneficiary, and he can be cut off if he doesn’t pay up.
3. What can really make private companies efficient is competition. But there can be no true competition in government contracting. Even if the government uses competitive bidding, there is no competition at the level of the individual citizen/beneficiary. She is faced with a monopoly supplier. Hence there is none of the customer feedback that (in many though not all cases) makes private competitive businesses socially efficient.
Of course in most cases direct government services are also monopoly services. However in that case there is customer feedback through the political process. Privatization has the effect of attenuating the political feedback, because feedback has to be filtered through clumsy contractual arrangements.
4. Privatization inevitably adds an unnecessary layer of politicization. In particular, private contractors who want a piece of the action naturally vie with each other to influence the terms of the bidding process. At worst, we end up with crony capitalism. At best we have an expensive process to allocate profits to the best bidder (not necessarily the best service provider).
5. It is nearly impossible for governments to write fully satisfactory contracts with vendors who supply public services. (However contracting often works quite well for buildings, hardware, and other private-good type inputs.) The problem is that there is not and cannot be any explicit definition of quality for a public good that is fully satisfactory.
The reason is that each citizen has different ideas about what the service should look like. Democratic political processes are the best means we have for reconciling these differences in a socially efficient manner. Contracting processes tend to be inadequate.