Privatization efforts face many obstacles, including existing legislation and regulations, public employee resistance, misperceptions about privatization, and a general resistance by governments to change.

Privatization programs, if they are to be successful, must incorporate innovative strategies to overcome obstacles to privatization. These strategies need to be developed and put in place early on in the development of the privatization program. Most of the obstacles can be substantially reduced or eliminated by well-conceived and structured privatization plans and agreements.

Public Employee Opposition. The main obstacle to privatization in cities is likely to be public employee unions. In a 1992 Reason Foundation survey of the 24 largest cities in the United States, public employee unions were cited by more than 80 percent of the cities as a major obstacle to contracting out. In 1988 a survey conducted by the International City/ County Managers Association (ICMA), 40 percent of respondents cited public employee opposition as an impediment to privatization.[23]

Unions primarily focus on three types of problems they believe are created by privatization:

  • Elimination of Well-paying Public-sector Jobs;

  • Undermining of Wage and Benefit Standards; and

  • Decline in Service Quality.

Policymakers must address these concerns in the early stages of designing privatization programs. They can use a number of techniques, for example, to minimize job losses of public-employees.

Attrition. The most common technique for avoiding public employee job loss is to phase in privatization and then rely on yearly attrition of public employees, which averages around 5 percent in most jurisdictions. Early retirement incentives can also be given to workers to reduce the size of the current work force.

First Consideration. Many public employees will go to work for the private firm when a service or facility is privatized. A 1989 nationwide survey by the National Commission on Employment Policy (NCEP) found that 58 percent of public employees went to work for the participating private contractors.[24] If necessary, city governments can encourage or require private contractors to give first consideration to public employees for new positions. In Los Angeles County, bonus points in the bidding process are awarded to contractors who provide public employee accommodation plans.

ESOPs. Another option is to set up mechanisms whereby public employees are encouraged and assisted in taking their departments private and providing the public service themselves. Employees could set up Employee Stock Ownership Plans (ESOPs) and operate the public services as private enterprises. Employee buy-outs of government enterprises and services have been widely employed in Britain.

Noncompetitive Public-Employee Wages and Benefits. Public employees strongly oppose privatization because they believe that private firms pay lower salaries and provide less fringe benefits than public agencies. Although there are important exceptions, most research on this subject has demonstrated that wages and benefits paid by public agencies are higher than private contractors in most cases, depending in part on job category. In many social services, however, private wages are typically higher than public-sector wages.

Higher pay in some public-sector job categories results largely from the lack of competition in labor prices in public employment, rather than rock-bottom pay from private contractors. Public-sector compensation tends to be determined on the basis of administrative and political factors, rather than on prevailing rates in the competitive market.[25] If public-sector wages had just kept pace with private-sector wages, state and local governments could have reduced employment costs by $39 billion in 1989 alone.[26]

Service Quality. Some cities also argue that privatization causes an erosion in service quality. Again, the evidence indicates that generally this is not the case. In a 1992 Survey on State Government Privatization conducted by Apogee Research and sponsored by the National Association of State Comptrollers, "Higher Quality Services" was ranked near the top of the "Advantages of Privatization." Only "Capital Cost Savings" and "Operating Cost Savings" were ranked higher. In a 1980 survey of 89 municipalities, 63 percent of public officials reported that contracting out resulted in better services.[27]