Privatization Summary

  • Last updated on November 10, 2022

Privatization exists on a continuum ranging from the complete takeover of what was once public to the mere charging of a user fee for what was previously funded by a collective account. Public managers use privatization as an administrative tool through which they can control the cost of governance.

Privatization is an important concept for all levels of government and American businesses. The process determines both the extent of state power and the scope of the free market. Opinions regarding privatization are both varied and intense. Some, including libertarians, would have government shed all noncore functions and exist in only its most minimal form. Others, including socialists, would argue for more public provision of goods and services.Privatization

Like any political controversy, most of the action, both theoretically and practically, takes place somewhere in the middle. Complicating the arguments for and against privatization is the fact that the same people who want privatization in one area might not want it in another. For instance, a citizen in favor of cost cutting who backs a jail privatization could be a strong advocate for quality public schools. As a result, debate about privatization has both an ideological and an ad hoc nature to it.

Arguments Pro and Con

Arguments for robust privatization efforts most often center on potential cost savings to taxpayers. Indeed, politicians and public managers alike frequently mention economic necessity as the justification for scaling back government. Governments at the federal, state, and local level are experiencing increased fiscal pressure as the result of both macroeconomic conditions and a reduction in supportive cash flow from the federal government.

This financial pressure can be relieved by either raising revenue intake or cutting costs. Many politicians, if they seek to continue their careers in the public service, would rather cut costs than take the politically unpopular step of raising taxes. Consequently, in recessionary times, as experienced during the early 1980’s, governments have turned to potentially saving costs through privatization rather than to increasing revenue through taxation.

Advocates of privatization believe that the introduction of market forces to a service area will drive down cost. For example, traditionally, refuse disposal was a public monopoly performed by public employees using public equipment carting trash to public land for indefinite storage. The expense of this operation is easily measured, and when compared with private firms performing a sanitation function, it has been proven that money is saved when competition is thrown into the mix.

Privatization cost savings are most heavily realized through either labor savings or increased supply-chain efficiency. Compared with governments, private firms are not as constrained in hiring choices, and they can offer cheaper benefit packages. Firms can take advantages of economies of scale when buying supplies, and they need not purchase material through an open-bidding process. Instead, a company can use expert knowledge to negotiate a better price behind closed doors.

Those who are generally against privatization argue that short-term cost savings are exaggerated and that such a goal is myopic. Instead, they reason, the country should be focused on society-wide, long-term improvement. Opponents argue that there is frequent confusion during privatization about what is best for the general public and what is best for the firms assuming the work. Citizens who need government services are not consumers in the usual sense. There have been privatization missteps in the past, and this track record is highlighted by opponents when a new discussion on the issue emerges.

Issues

Examples of privatized services that have not worked out well include military subcontracting, health insurance, prisons, and education. Some would include pharmaceuticals and other industries in that mix as well. Many services, such as ambulance care, water treatment, and information technology, have been commonly privatized for quite some time, and others, such as fire prevention and extinguishing, urban policing, and military combat, have been traditionally under public purview. When these commonly held traditions are challenged, controversy will arise. For example, Blackwater Corporation has made headlines by providing security functions for United States government personnel in Iraq. When Blackwater employees made a series of deadly gaffes, the media coverage of the event centered on the legitimacy of Blackwater’s contracting work in the conflict.

Still, most discussion about privatization flies below the public radar, and the debate about the issue mostly takes place between interested parties with opposing points of view. When a municipality debates turning over a zoo or a museum to a private foundation, it is usually the groups’ donors and administrators who hash it out among themselves.

Not all privatization issues are of international significance or on the level of administrative detail. Issues that have excited public interest include the proposed sale of a state lottery system to an investor. This would provide a state with hundreds of millions of dollars in cash in the short term but would eliminate a long-term source of revenue for the state government. Likewise, some state or local governments have researched selling toll roads to private firms.

Such large amounts of money are appealing to elected officials who are feeling pressure to provide benefits for their constituency, but the long-term cost-benefits are not clear.

The central difficulty in discussing privatization is its diversity in both topic and form. It touches on many areas of society, from education to health care, from pulse-pounding overseas military expeditions to the mundane routine of trash collection. Within these sectors it takes on many forms, from a complete sale of all assets to a small lease of public land. This complexity is what gives American business the opportunity to pick and choose where it wants to insert itself into the fray.

Further Reading
  • Avant, Deborah D. The Market of Force. New York: Cambridge University Press, 2005. Compares military privatization efforts of the United States to those of some smaller nations. It is a good read on a fascinating group of private contractors sometimes referred to as mercenaries.
  • Donahue, John D. The Privatization Decision. New York: Basic Books, 1989. Though written after the push for privatization by Ronald Reagan during the 1980’s, this well-argued overview of the topic remains the only fair-minded critical volume tackling the subject of privatization. Its principal arguments still hold true.
  • Osborne, David, and Ted Gaebler. Reinventing Government. New York: Penguin Books, 1992. Privatization does not occur in a vacuum but is a direct response to the call for better government. This book sparked the most recent wave of reform by both Republicans and “new” Democrats.
  • Savas, E. S. Privatization and Public-Private Partnerships. New York: Seven Bridges Press, 2000. An overview of the topic written from the point of view of a privatization advocate.
  • _______. Privatization in the City. Washington D.C.: CQ Press, 2005. A noted expert and advocate of municipal privatization looks at how American cities approach the topic.

Education

Insurance industry

Iraq wars

State-run lotteries

U.S. Postal Service

Private security industry

Public utilities

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