Privatization: Analyzing the Process of Privatization in Theory and Practice

Theoretical Explanations: A Review of Literature

The essential ‘make or buy’ privatization question requires governments to evaluate whether they believe there is greater benefit in paying to create service provision within public agencies or if it is more beneficial to purchase those services from the private sector. The ultimate decision will depend on both political and pragmatic factors.27 The major considerations requires a comprehensive assessment to determine the true cost of providing services, which includes the quality of service, fiscal conditions and efficiency of the options available to the public administrator. This section will examine theories that attempt to define major factors effecting this process including how service quality can be addressed, the role that political ideology and ulterior motives can play and the connection between privatization, competition and efficiency that make privatization capable of improving the status quo.

Defining and Evaluating Service Quality

Service quality refers to the degree to which a service is provided as intended, to all those who are meant to receive it and that the recipients are satisfied with their interactions with the service providers or their products. As discussed in Section II of this paper, evaluating public services can be extremely difficult, time consuming and expensive. Theories pertaining to service quality attempt to define uniform methods for measuring, evaluating and controlling the quality of public services. These processes are methods that fall within the definition of performance measurement, however, they are specialized to address the goals of public service agencies.

The complexities of evaluating agency performance are addressed by Robert S. Kravchuk and Ronald W. Shack in their 1996 article, Designing Effective Performance-Measurement Systems under the Government Performance and Results Act of 1993. Kravchuk and Shack highlight “impact which the complexity of modern government operations has upon the task of measuring performance and managing improvement efforts” and attempt to outline a strategy for developing performance measures that address the unique attributes of the agency being evaluated.28 The postulate that any effort to craft a system for performance measurement must include clearly defined and agreed upon goals of the program in question to “provide the basis for development of specific measures and standards for the interpretation of results.” The also notes the importance of considering service recipients satisfaction so that any future changes in service quality “can be examined in the context of [recipient] needs and satisfaction levels.”29

The need for clearly defined goals and measures of success are echoed by Robert D. Behn in his 2003 article Why Measure Performance? Different Purposes Require Different Measures, who eloquently states that in order “to evaluate the performance of a public agency, the public manager needs to know what the agency is supposed to accomplish.” Behn goes on to express the need for performance measures to be developed on a case-by-case basis, stating that “if given responsibility for achieving widely accepted policy objectives with an insane program structure (multiple constraints, inadequate resources, and unreasonable timetables), even the most talented managers may fall short of the agreed-upon performance targets.”30 According to Behn, with out specific goals for every individual program, evaluators cannot ask the essential question, “did the agency achieve the results it set out to produce?”31

The Role of Political Ideology and Ulterior Motives

Understanding the fiscal conditions surrounding public service provision and estimating the impact of privatization requires administrators and budget directors to consider and weigh the merits of a myriad of factors. In their article, The Political Underpinnings of Privatization, Harvey B. Feingenbaum and Jeffery R. Henig argue that the fiscal merits of privatization, what they refer to as the “economic perspective”, is rooted not in a desire to identify and implement the most beneficial fiscal policy, but is instead judged according to political ideologies over the ideal size and role of government.32 According to Feingenbaum and Henig, privatization will be viewed as a beneficial fiscal decision among those who believe that,

“there are structural limitations to the relative size and intrusiveness of the public sector, that movement beyond those limits is sustainable only for short periods, and that efforts to challenge this economic reality result in stagnation decline.”

They go on to explain that for these individuals, asset sale,

“is implicitly treated as the most extreme (and in this sense ‘best’) form of privatization, since it simultaneously reduces the public sector deficit, reduces the size of the governmental apparatus, shifts decision making to private actors presumably more attuned to market signals, and gives more people a direct material stake in promoting economic growth.”33

Feigenbaum and Henig’s theory would suggest that instances where privatization failed to result in cost savings could be the result of situations where services were privatized because political ideologues chose to privatize due to their own political biases and not because they believed that the decision would result in cost savings. However, if this is true, then a portion of the 68% of budget directors who cited cost savings as a primary goal of privatization were either mistaken, misinformed or simply being dishonest.

Futhering Feigenbaum and Henig’s assertion, Bruce A. Wallin’s Privatization of State Services in Massachusetts: Politics, Policy, and an Experiment That Wasn’t, asserts that privatization policies can be supported or opposed for partisans reasons or because it is advantageous to one’s political self-interest.34 Further strengthening the argument that privatization is supported or opposed due to political ideology, Wallin offers a summary of common, largely ideological, beliefs often posed by opponents of privatization programs. According to Wallin common criticism of privatization argue that:

• government workers have expertise;
• government exists to promote goals beyond low cost;
• the need to lower bids may lead to reduced services;
• government looses direct control, becoming dependant on private service providers;
• “legal corruption,” in the form of campaign contribution, occurs.35

These generalized ideological opinions of privatization illustrate the counter argument to the politically motivated pro-privatization ideology identified by Feigenbaum and Henig. Wallin goes on to qualify his argument by examining an extremely partisan debate over privatization that took place in Massachusetts in the 1990’s, which is explored in depth in Section IV.

Yet another example of ideological interests effecting privatization decisions is the debate over changes that privatizing labor intensive services has on the workforce. The process of contracting-out a public service, in general, tends to reduce the number of public sector jobs and, in turn, effects the size and power of public labor unions.36 In Privatization in Theory and Practice, Yarrow, King, Mairesse and Melitz, assert that “where privatization is accompanied by increased competition – as is usually the case when franchising or contracting out policies are adopted – it is likely that trade union power will be reduced.37 Yarrow et al. also caution that intentionally reducing the power of public unions can be a factor in the decision to implement privatization programs.38

Marc Pacheco, a member of the Massachusetts State Senate, is well known for decades of interest in privatization policies. In an interview with Sen. Pacheco, he discussed the opinion he shares with many of his collogues in the MA legislature, that wages and benefits for workers who are working for the government, whether directly or employed by a public service vendor, ought to be guaranteed a minimum level of wages and benefits above what some private service providers try to provide. According to Pacheco, this belief is the result of “a value system that cares about the workers and the people.” For this reason, Pacheco believes it is up to lawmakers to legislate regulations that ensure the workforce is protected, adding that the potential impact of any public employee lay-offs must be taken into account when governments are weighing the decision to privatize.39

The Link Between Privatization and Efficiency

Governments and public administrators also look to privatization as an effective management tool because it brings about beneficial competition among service providers. In their article, The Viability of Public-Private Competition as a Long Term Service Delivery Stragety, authors David N. Ammons and Debra J. Hill, propose that increased competition between the public and private sector is a sustainable method of encouraging each sector to perform in the best and most efficient manner possible. They propose long-term “competitive arrangements” between public and private service providers. Say Ammons and Hill of these contracts:

“Neither entirely fish nor entirely foul, competitive arrangements involving both public and private sector service delivery agents eschew notions of the inherent superiority of either sector as a service producer. They break the common pattern of service delivery … and allow the public and private sectors to compete with one another.

“Such arrangements reflect the belief that competition brings out the best among contenders…”40

Ammons and Hill go on to explain that such competition is effective both in contracting situations, where private vendors strive find more efficient and cost effective methods of delivering services than the current public agencies and in situations where public agencies and employees are challenged to prove their ability to perform as well, if not better than their private sector counterparts. Ammons and Hill posit that competitive arrangements benefit not just public and private service providers and their managers, but can also service recipients who will reap the benefit of more efficient, higher quality service. According to Ammons and Hill, “by inserting government units into a competitive environment, service recipients stand to gain much while risking little.”41

In Privatization, Contracting and the States, Deborah A. Auger further examines the value and importance of competitive arrangements or “managed competition” between public and private service providers.42 Auger explains how instituting managed competition policies can “mobilize competitive impulses as a spur to cost savings and service information, without making prior judgments as to which sector, public or private, should actually provide the service in question.”43 In this regard, managed competition helps to alive the competition and information problems discussed in section two. Auger’s argument also serves, if indirectly, to address the accountability/control problem associated with contracting because, according to Auger, “it can keep both sides attentive to efficiencies” and encourage “continued contemplation of much-needed innovation and productivity changes” among public managers, directors and administrators.44

Managed competition further mitigates privatization’s accountability/control problem by allowing privatization to become a ‘two-way’ practice. Contracting-in is the process of allowing public employee unions and even public agencies to submit bids to service contracts to the public sector. With managed competition, more is known about the cost and quality of service each sector is able to provide. This makes formulating public bids less expensive and time consuming as well as more accurate. MA State Senator Marc Pacheco is among the proponents of ‘two-way contracting’, stating that if either the public or private sector “can provide the same or better service more efficiently, they should.”45

Pacheco believes that despite wage and benefit constraints, public agencies have the potential to do many tasks that are currently outsourced for less money than they are costing the state to purchase. He points to high administrative costs, unrestricted salaries and lack of viable private competitors as areas where public agencies could undercut private service vendors.46

A dissenting opinion of managed competition and two-way contracting is offered by Steve Poftak, director of research for the Pioneer Institute, a non-partisan, private, government research group based in Massachusetts. Poftak challenges the benefit of managed competition and frequent contract reconsideration because he believes that it creates an environment that dissuades private vendors from wanting to participate. He explains that longer, guaranteed contracts encourage businesses to make capital investments necessary to eventually profit from providing public services. Without the opportunity to capitalize on long-term investments, private firms will be dissuaded from competing for these contracts.47Continued on Next Page »