Perils of privatization

Louis Proyect lnp3 at
Fri Dec 22 09:50:58 MST 2000


Professor Elliott Sclar's Book on Privatization Wins Louis Brownlow Book
Award from the National Academy of Public Administration

By Abigail Beshkin

The old adage has always been that governments are the prime example of
waste and inefficiency, while businesses are cost-effective and productive.
In recent years, this idea has spurred governments to hire private
companies to deliver everything from mass transit and mail delivery to
secondary education.

But privatization has its costs -- both economically and socially -- says
Columbia Professor Elliott Sclar in his new book You Don't Always Get What
You Pay For: The Economics of Privatization (Cornell University Press),
which recently won the Louis Brownlow Book Award from the National Academy
of Public Administration.

Last year, with a grant from the Century Foundation, Sclar traveled across
the country, examining how different state and local governments attempted
to privatize their services. He found that privatization often results in
less service for more money, because agencies frequently overlook the high
cost of making sure work gets done correctly.

"The question is, 'why do good contracts go bad?' " says Sclar, director of
Urban Planning Programs at the School of Architecture, Planning and
Preservation and the School of International and Public Affairs. "The
standard answer to this question is that it was simply a flaw in this
particular contract. But if there are so many mistakes in so many
contracts, maybe there's a systemic flaw in the entire notion of public

One example Sclar offers in the book is the privatization of Massachusetts'
highway maintenance. In the early 1990's, the state contracted out every
element of its highway maintenance, from cleaning and repairing the roads
and bridges to mowing the grass along the medians and shoulders. Because
the project involved such a wide range of jobs, it was almost impossible to
write each detail into the contract.

For instance, the contract failed to specify that litter should be removed
from the shoulder before workers cut the grass; instead, workers cut the
grass first, spreading bits of trash along the highway which ultimately
resulted in a need for more clean-up. By 1994, when independent auditors
examined the project, some estimates found the state had lost as much as $1
million by privatizing the work.

The cost to draft a contract in such minute detail and oversee the work,
Sclar explains, often makes it more cost-effective to do the work in-house.

"Even if you hire an outside company you have to be able to manage it
competently," Sclar says. "Why would an agency that's incompetent to manage
itself and its own workers suddenly be competent to manage a company to do
a job that its own workers are supposed to do in the first place?"

In addition, Sclar points out that in contracting situations, "History
matters. If governments have been providing a service for a long time,
outsiders rarely have the knowledge or expertise to do the job done by the
public agency."

He cites an experiment undertaken in Miami, in which the Federal government
gave the city 40 buses -- 20 that the city would run and 20 to be run by a
private company.

Private bus companies are often adept at running inter-city routes but
often don't know enough about a city's transit system to mesh the different
commuter routes. Additionally, the company took an initial loss to win the
contract, then tried to save on operating costs. Within six months,
ridership dropped 18 percent; six months later, it fell another 13 percent.

This represents what Sclar and other economists call a "moral hazard," a
conflict between what the government and the company want. In this case, it
was in the company's best interest to keep costs down through maintaining a
high rate of driver turn over and by neglecting bus maintenance. Unlike the
local operating agency, the company cared little about its ridership. Its
customer was not the riding public.

The notion of privatizing government services first gained popularity in
the 1960's and 1970's, with what Sclar calls the "disillusion that
developed during the Vietnam and Watergate years. When Roosevelt was
elected in the 1930's, he said that government is the solution to our
problems. By the 1980's, when Ronald Reagan was elected, one of the things
he said was 'government isn't the solution to our problems. Government is
our problem.'"

Sclar says that private contracting works best with services that require
lower-skilled work, like janitorial services, since there is a discrepancy
between what private companies pay their cleaning crews and what public
agencies, with their more cumbersome work rules, pay their workers.
Services that require more high-skilled or professional management often do
not save much money since the gap between public and private salaries on
that level is continually shrinking. However, while these types of
contracts may work best, there is what Sclar calls a "social cost."

"You can save money," Sclar says, "but you're taking the cost out of
people's hides at the low end of the wage scale."

Still, Sclar says, private contracting is not an outright failure. Fifty
percent of all taxpayer money goes to private contractors, he says, and
there are ways to make it effective. Throughout his book, Sclar cites
examples in which public agencies contracted with private companies and
blended in-house work with close supervision of privately contracted
services. These also tend to work best when immediate results are evident.

"Its one thing to contract for people to cut the grass because you know if
the grass has been cut or it hasn't," Sclar says. "It's another to contract
to educate students or deliver health care because you don't know for years
whether the right treatment's been done, or the right pedagogy has been

Louis Proyect
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