A Quick Glance at Privatization

As more and more cities like Ann Arbor face the dizzying challenge of providing reliable, quality services in the midst of pinched funding and "anti-tax" sentiment, municipal governments are looking away from tax-generated revenue and focusing on the use of private sector expertise and efficiency as a money-saving alternative for delivering those services. Utilizing the private sector as an alternative method of service delivery, or privatization, as this tactic is usually termed, can be diffracted into an entire spectrum of techniques ranging from volunteerism to contracting out to load shedding.

Load shedding, the most drastic method of privatization, occurs when a city relinquishes all ownership, responsibility and operation of a service. For example, Traverse City recently discontinued solid waste collection, relying on the existence of private collectors and state laws requiring consistent disposal of garbage to ensure provision of that service at zero cost to the city. A private firm in the area purchased all of the city's refuse collection vehicles and hired the city's employees.

When a government doesn't have the facilities, technology, skills or resources to be shed in the first place, Build-Operate-Transfer agreements (B-O-T's) may be used. A B-O-T entitles a private firm to build a facility, operate it and retain the revenues for a specified length of time, say, 10 to 30 years, when ownership is then transferred to the government.

Contracting services out – hiring a private firm to deliver a service or operate a government owned facility – is the most popular form of privatization. In 1987, a Touche Ross (now Deloitte and Touche) survey of over 5,000 city and county governments (yielding almost 1,100 responses) indicated about 80% of those polled had contracted services out in the last five years. [5]

Other less popular forms of privatization include volunteerism, vouchers, user fees, franchising, joint funding, grants and subsidies, incentives (e.g. tax encouraged) and self-help programs (e.g. neighborhood organizations).

Virtually any government-provided service can be delivered by the private sector with equal or better performance at equal or lower cost. Using one of the above techniques, local governments across the United States have privatized virtually every "public" service imaginable. A 1988 International City Management Association (ICMA) study lists 71 services that have all been privatized at least once by some city or county government within the United States. A sampling of these services include: solid waste collection, landfill management, tree trimming, park maintenance, street resurfacing, custodial services, data processing, towing, vehicle maintenance, fire departments, parking structures, ambulance service, low-income housing, waste water treatment, water distribution, schools and public transportation.

The effectiveness of privatization lies in the magic of the free market. Markets, like energy, in a sense, can not be created nor destroyed. They evolve out of the needs of people and the willingness of those people to pay for what they think they need. If a profit can be made producing a certain product or service, that is, if a market exists for that product or service, it will be produced.

Once a market has been defined and is open to competition, the entities producing the goods or services within that market will operate as efficiently as possible to maximize their profits and outdo each other. In other words, the resources utilized in production will be allocated to where they are most productive.

Somewhere along the line governments – whose principal role is to see that services are provided – and the private sector, have come to produce many of the same services. And, in general, the public sector does not have the incentive to maximize profits or reduce costs; the public sector usually is not competing to survive. Reward systems are based on size rather than performance. Sustaining an unchallenged monopoly, the public sector tends to allocate resources less efficiently, thus raising the cost of producing the services. Steve Hanke, professor of applied economics at Johns Hopkins University spoke of what he terms the "bureaucratic rule of two" in a 1988 Insight article discussing privatization: "If you want to find the public cost of doing something, you just find the private cost and then multiply by two, and that'll get you pretty close." [6]

Some people argue, "If you privatize, private firms will be making a profit." That's exactly right. A private firm would not even offer the service if the opportunity to make a profit did not exist. But the existence of "profit" should not be erroneously viewed as a "cost" to the government. If the private firm can deliver a service at equal or better quality than the government at lower or zero cost to the government, the government is doing its job of making sure the service is provided and saving money which can be transferred into tax decreases or delivery of services not adequately delivered by the private sector.