PRIVATIZATION

Privatization has become an intense ideological debate that still continues to exist all over the world.

Privatization involves increasing the use of the private sector to achieve public goals and provide services.

In essence, privatization offers government a way to enhance productivity and efficiency by purchasing goods and services from the private sector.

The idea is that if government cannot be efficient, we should let the private sector provide services.

Does it really matter who collects garbage, paves roads, maintains buildings, change streetlights, or operates city cafeterias?

Privatization advocates argued that there was no sensible reason for government to continue to produce services that could be produced more efficiently by private firms.

The notion of privatization was taken as a slap in the face to traditional public administration and was viewed as a sure way for public employees to lose their jobs.

Not surprisingly, the most adamant critics were public employee unions and liberal academics who viewed privatization as a way to dismantle the state.

Some critics of privatization argued that some critical services, such as garbage, providing water and sewage treatment, providing for the public health should not be devolved to the market or contracted to private vendors who could go broke.

Economists were able to demonstrate that efficiency was significantly different in the two sectors, and favored private production in most services.

The purest form of privatization involves getting government completely out of both production and delivery of a wide range of services.

Not everyone may agree with the definition of privatization that we provide here, but we can describe privatization as the attainment of any public policy goal through the participation of the private sector.

From the perspective of government, the motivation for using privatization is to save money.

As society became more complex because of industrialization, urbanization, and changing social values, government assumed more economic and social responsibilities.

The idea of a large and expanding government became the norm as the expectations and demands placed on government mushroomed.

For many, government action was viewed as the solution to society’s problems.

Privatization proponents found theoretical support from various schools of economics, such as market theory, public choice theory, and property rights theory.

Each of these schools of thoughts provided convincing arguments about why government should spend its time governing, which it is well suited for, and let the private sector produce and deliver services.

Market theory has been important in the privatization debate because competitive markets have produced most of the nation’s wealth.

Moreover, the market is designed to produce goods and services efficiently.

Market theory is based on an idealized model in which firms seek to maximize profits, are small relative to their industries, and have no restrictions preventing them from entering or exiting any industry.

The consumer is supreme in the competitive marketplace.

Firms must compete with similar operations for their “market share”.

Competition is the main factor that forces efficiency in the markets.

The efficiency use of resources, which is guarded by the inherent incentives in the market, provides the free market with supremacy over other models.

The penalty in the marketplace for failing to be efficient is bankruptcy, something that seldom occurs in government.

Government cannot fully simulate a competitive marketplace because governments are monopolies, and monopolies are inherently inefficient due to the lack of competition.

Public choice theory was the most influential theory that supported the case for privatization.

According to public choice theory, public managers are driven by self-interest, just like private sector managers, but in public monopolies, self-interest leads not to efficiency but to pathological problems that cause inefficiency.

Public choice theorists view inefficiency as an inherent characteristic of public bureaucracies because the incentive structures encourage empire building and overproduction of services.

Because government agencies are service monopolies, public employees will behave in ways that promote their own interests at the expense of the public’s interest in efficiency.

Serving some greater good is secondary to serving one’s self-interest.

The theoretical foundations of privatization are a powerful part of the privatization debate.

The thrust of the theories may be summed up markets versus monopolies.

Market theory and public choice theory both focus on the positive attributes of the competitive marketplace and highlight the inefficiency found in public monopolies.

These theoretical arguments set the debate in such a way that, to counter them, someone had to argue that something was more important than efficiency.

The Case against Privatization

Arguing against efficiency was not an easy task.

Critics were more effective at pointing out that simple cost comparison between public and private organizations failed to demonstrate how privatization would perform over time in the real world.

Most of the evidence was based on simple cost comparisons, but over the years longitudinal studies became more common.

But these studies also tended to favor privatization.

Critics of privatization focused their criticisms on issues related to equity and public accountability.

With the exception of contracting out for services, which does not affect accountability or equity because government remains responsible for provision, quality levels, and financing, both forms of privatization fall short in these areas.

Public accountability in the marketplace is usually left to government regulation, and equity is typically of little concern, since buying goods and services is based on the ability to pay.

The strongest opposition to privatization came from the orthodox school of public administration in academia and public employee unions in the governmental sector.

The orthodox school of public administration believes that democracy can only be achieved if power is concentrated so that it can be held accountable.

The argument is that government must be concerned with more than efficiency.

The orthodox school argues that public institutions are the principal vehicles for expressing common and public concerns.

Not only does the orthodox school hold that strong public institutions are necessary to govern, but it also rejects that basic assumptions of public choice theory.

The idea that behavior of public managers can be explained by a parsimonious theory that sees all people as self-serving egotists is unrealistic in the orthodox view.

Public managers and workers are not viewed as the self-serving, budget-maximizing bureaucrats described in public choice theory.

Rather, public administration views public managers as sincere, well-trained professionals committed to professionalism and high standards in the public sector; their activities serve the public interest.

The whole of public choice theory, in the orthodox view, is based on erroneous assumptions about the superiority of competitive markets and private business.

If private management is in fact so superior and private businesses so efficient and well managed, why do most new businesses fail?

Markets are appropriate arenas for fast-food chains, hotels, and computer manufacturers to compete with each other, but they are not the appropriate arenas for providing essential public services.

Critics pointed to the questionable ethics and practices of modern business as a reason to question the appropriateness of using privatization.

Critics of privatization have argued that it is more difficult for the public to hold private firms responsible than elected officials or bureaucrats when problems with services arise.

The orthodox school of public administration holds that the general public must have a clear perception of who is responsible for services.

Public administration’s position on the public-private dichotomy is that the public sector cannot be compared to private business.

Governments function in a political environment, whereas private firms function in a competitive-economic milieu.

Since the objective of private firms is to maximize profits, firms may skimp on service quality.

Unlike government, contractors often go bankrupt.

Corruption is an important concern when contracting out the services to private companies; like the one that happened in Union City, New Jersey, US; mayor of the city set up his companies to contract out the services that once city provided by public agencies.

Displacement of public employees, and especially public employee unions, is another significant concern for critics of privatization.

What happens to public workers when they lose their jobs because of privatization?

Some have argued that contracting is actually a disguised form of public employment, since thousands of jobs exist because of government contracts.

Critics of privatization also have been able to ground their position in economic theory, mainly the theory of market failure and public goods.

Opponents of privatization acknowledge the accomplishments of the market but associate its evaluation with a variety of negative consequences, such as macroeconomic instability, microeconomic inefficiency, and social inequality.

Therefore, the deficiencies of the market require government to intervene to enhance efficiency and social equity.

Reinventing Government

Like so many reform movements, reinventing government was born at the local level.

The problem in the eyes of the “reinventing” reformers was that government is so concerned with process, it cannot effectively accomplish its goals.

Thus, the movement had a results-orientation that wanted government to loosen some of its cumbersome rules and regulations designed to ensure accountability, and thereby let public managers manage.

The reinventing government movement saw the relationship between the public and private sectors as a partnership and sought to free government agencies and managers to perform and accomplish goals.

The goal was to simply to make government work better.

Moreover, it gave more power and freedom to public managers.

The reinventing government movement highlighted what private managers can do and emphasized why public managers cannot perform with the same degree of freedom.

David Osborne and Ted Gaebler articulated the differences in public and private management and made a convincing argument that the public sector could perform better if it focused on results by altering some of its processes.

The reinventing government message ignored much of the public choice argument and based its ideals on the values of accomplishing something.

The message was positive rather than negative.

Government could accomplish many things by simply making some alterations in the system.

The movement indicated that government, bureaucracies, and monopolies could be efficient and effective, accomplish great things, and be entrepreneurial at the same time.

There are 4 main categories of reforms in this movement;

Cut red tape: the recommendation included streamlining the budget and procurement processes, decentralizing human resources policy, eliminating regulatory overkill, and empowering state and local governments.

Advocates of this notion argued that red tape hindered the public sector and that eliminating the red tape, which is process originally implemented to ensure accountability and control, managers could be more effective.

Put customers (citizens) first: this included giving citizens a voice and a choice, introducing competition to government service organizations, creating market dynamics, and using market mechanisms to solve problems.

The idea of “putting customers first” has long been considered a key element to the success of businesses.

It is erroneous to believe that citizens can be viewed as consumers of government services that are paid for with their taxes in the same sense that a consumer buys a new car, television set, or DVD player.

Can one imagine the department of defense of any given country asks citizens how they would like national defense delivered?

Empower employees to get results: this recommendation involves decentralizing decision-making power, holding all federal employees accountable for results, giving federal workers the tools needed to do their jobs, enhancing the quality of the workplace and work life for the government employees, forming a labor-management partnership, and exerting leadership.

If employees become stakeholders, they will work harder; feel that they are a part of the organization, and work to help the organization accomplish its goals and overall mission.

Public managers were not intended to be free to interpret the law as they saw fit; they are supposed to manage agencies that implement and follow public law.

What proponents of reinventing government wanted to do was to give managers enough discretion to effectively manage their agencies.

Cut back to the basics: this recommendation includes phasing out unneeded services and replication, collecting more revenues (by imposing more user fees), investing in greater productivity, and reengineering programs to cut costs.

Public choice theorists had long claimed that government overproduces services and is rampant with replication, waste, and inefficiency.

Thus, they called for the increased use of user fees.

The reason behind public choice’s advocacy for user fees was that the public at large should not have to pay for the benefits of the few.

The central idea behind reinventing government was to loosen up the system to enable managers to manage and achieve results much like private sector.

But when a results-oriented replaced the process-orientation, problems arise regarding accountability and democratic principles.

Government is not a private business and therefore rules, regulations, and procedures are put in place for accountability and to reduce the possibility of corruption.

Lack of oversight will increase the possibility of corruption in the government.

The movement succeeded in making us to think about the importance of results versus the importance of stability.

One of the problems with too much of a results-orientation is that the “ends may justify the means”.

The reinvention era has not completely run its course, but it appears that the values of the orthodox school of public administration are still very much the core of public management in the new century.

After a century of debate, we are once again arguing over whether government and business can be compared, and whether it is appropriate to operate public agencies in a businesslike fashion.