This growth of privatization has not, of course, gone uncontested. Critics of widespread privatization contend that private ownership does not necessarily translate into improved efficiency.
More important, they argue, private sector managers may have no compunction about adopting profit-making strategies or corporate practices that make essential services unaffordable or unavailable to large segments of the population.
A profit-seeking operation may not, for example, choose to provide health care to the indigent or extend education to poor or learning-disabled children. Efforts to make such activities profitable would quite likely mean the reintroduction of government intervention—after the fact.
The result may be less appealing than if the government had simply continued to provide the services in the first place. Overriding the privatization debate has been a disagreement over the proper role of government in a capitalist economy. Proponents view government as an unnecessary and costly drag on an otherwise efficient system; critics view government as a crucial player in a system in which efficiency can be only one of many goals.
There is a third perspective: the issue is not simply whether ownership is private or public. The debate over privatization needs to be viewed in a larger context and recast more in terms of the recent argument that has raged in the private sector over mergers and acquisitions. Like the mergers and acquisitions issue, privatization involves the displacement of one set of managers entrusted by the shareholders—the citizens—with another set of managers who may answer to a very different set of shareholders.
The wave of mergers and acquisitions that shook the U. In other words, the gains from takeovers were the result of the anticipated removal of managerial practices commonly thought to characterize public sector management. Refocusing the discussion to analyze the impact of privatization on managerial control moves the debate away from the ideological ground of private versus public to the more pragmatic ground of managerial behavior and accountability. Viewed in that context, the pros and cons of privatization can be measured against the standards of good management—regardless of ownership.
What emerges are three conclusions:. Neither public nor private managers will always act in the best interests of their shareholders.
Privatization will be effective only if private managers have incentives to act in the public interest, which includes, but is not limited to, efficiency. Profits and the public interest overlap best when the privatized service or asset is in a competitive market. It takes competition from other companies to discipline managerial behavior. When these conditions are not met, continued governmental involvement will likely be necessary. The simple transfer of ownership from public to private hands will not necessarily reduce the cost or enhance the quality of services.
Privatization, as it has emerged in public discussion, is not one clear and absolute economic proposition. Rather it covers a wide range of different activities, all of which imply a transfer of the provision of goods and services from the public to the private sector. For example, privatization covers the sale of public assets to private owners, the simple cessation of government programs, the contracting out of services formerly provided by state organizations to private producers, and the entry by private producers into markets that were formerly public monopolies.
Privatization also means different things in different parts of the world—where both the fundamentals of the economy and the purpose served by privatization may differ. In many developing countries, state-owned enterprises operated at substantial deficits and were responsible for as much as one-half of all outstanding domestic indebtedness.
As conditions worsened in the early s and credit markets tightened significantly, these governments sold off public assets to raise cash.
Sales also ran into the billions of dollars in France and Italy, and many less developed countries sold off a large portion of their interests in public enterprises. The story in the United States has been somewhat different, largely because the U. Compare, for example, the concentration of public sector employment in other nations to that in the United States.
Unlike other industrialized countries where many of the utilities and basic industries are state-owned—and thus ripe targets for privatization—in the United States, the telecommunications, railroad, electrical power generation and transmission, gas distribution, oil, coal, and steel industries are entirely or almost entirely privately owned.
If there is a similar privatization phenomenon in the United States to the one Vernon describes in developing countries, it is in state and local governments where financial conditions in recent years have reached crisis proportions. Budgetary shortfalls have induced administrators to consider privatization as a means to avoid higher taxes or large cuts in services.
Touche Ross surveys of state comptrollers in and city managers and county executives in show that the vast majority of state and local governments contract out some services to private providers. The most often cited motivation for contracting out was to achieve operating cost savings; survey results from city and county administrators suggest that, in nearly every case, some cost savings were achieved.
The second most often cited reason for contracting out was to solve labor problems with unionized government employees. Asset sales, on the other hand, were uncommon: only 5 state governments of the 31 that responded to the survey had used that approach. A second impetus for privatization emerged in the United States in the s. A book by former Reagan staffer Stuart Butler, Privatizing Federal Spending: A Strategy to Eliminate the Deficit, provides an intellectual rallying point for conservative efforts to reduce the federal government payroll and put a brake on the growth in government spending.
Butler argues that private enterprises will cut costs and improve quality in an effort to gain profits and compete for more government contracts. Government providers, on the other hand, will pursue other objectives, such as increased employment or improved working conditions for government employees—initiatives that only result in higher costs, poorer quality, or both.
But most important, Butler contends, is that privatization can simply reduce the size of government. The costs of state and federal government are also greater without privatization. To the Reason Foundation, the benefits of privatization are clear and nearly universal; there seem to be no limits to the type of government activities that would benefit from privatization.
Its annual report, Privatization , considers privatization activities of all sorts around the world, always with a uniformly optimistic perspective.
The message is clear: the shift in ownership or control from public to private hands will necessarily lead to cheaper, better services for the citizenry. This may sound extreme, but there is a practical experience to support its ideologically driven claim. Within the United States, an impressive array of cities and local governments has made effective use of privatization to improve efficiency, increase competition, and reduce expenditures.
Consider the case of Chicago. City towing crews could not keep up with abandoned vehicles that littered the streets, so in , the city government turned to a number of neighborhood companies. In addition, city crews were freed up to focus their efforts on illegal downtown parking. Chicago also found that competition from the private sector could create incentives for public managers to be more effective. In , city street-paving crews in Chicago were inspired to improve their performance when the city government decided to hire private contractors to pave adjacent wards.
According to Mayor Richard M. Of course, all of the evidence is not on one side of the privatization debate. The expansion of the private sector into prisons, for example, has generated considerable controversy.
Public services are different — they give us a chance to come together to decide what kind of society we want to live in.
Public services are important to meet everyone's basic needs, so we can all be part of the community. Schools and hospitals are not optional extras. We all need and rely on public services - they are universal. That means they need to be accessible and high quality for everyone. Privatisation often goes hand in hand with encouraging richer people to pay more and opt out of the services we all use. This leads to division, making it harder to provide excellent public services for everyone.
Privatisation was introduced because of a belief in free markets and consumer choice. If all your friends are using it, it's difficult for you not to. Private monopolies often become the worst of all worlds. For example, our railway. This makes it difficult to provide an integrated service. Private companies cherry pick the profitable bits of a service so they can make as much money as possible. For example, bus companies will only run services in busy areas, so rural communities lose out unless government steps in with a subsidy.
It's more efficient to run public services in public ownership so that profits can be reinvested across the whole network as needed. In probation services, private companies are paid to manage medium to low risk offenders, while the state continues to take responsibility for high risk offenders. Councils and government departments are responsible for meeting the needs of the public — but privatisation means less flexibility for changing circumstances.
If an outsourcing contract with a private company needs changing, government must pay more to make changes or improvements, add in extras or to opt out. Look what happened when Carillion failed. If private companies are running our public services and are too big to fail, the public has to pick up the pieces when things go wrong.
These are just some of the many arguments against privatisation. If you're keen to learn more about why we badly need to take our services into public ownership, take a look around our website, follow us on Facebook , Twitter and Instagram , and subscribe to our mailing list.
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