Sunday, January 17, 2010

Privatizing Government services

Privatizing government services.

Many people believe that privatizing government functions will provide the public with improved services. In some cases that's clearly false; in others it is doubtful; in others again it is not clear what is the best policy.

Two years ago my region of the country experienced a serious ice storm. Trees were down everywhere, utility lines were damaged; in the dead of winter many people were left without heat or hot water. One part of our region is serviced by a private utility company. After the storm. its customers were without services for a week or more. Some neighboring towns have had public, municipal utilities for many years. Their services were restored in a day or two. Subsequent inquiries also showed that the customers of the privately owned, for-profit utility payed higher rates than the customers of public, municipal utility companies. This is one example where private, for-profit companies provided worse service at a higher price than government owned and run services..

No big surprise, once you think about it. The municipal utility has one job, namely to provide cheap electricity to its customers. The private, for-profit company has a different goal it needs to make as much money as possible for its stockholders. The customers of the municipal utility company pay for the power and the service they get. So do the customers of the private, for-profit utility company. But in addition they have to provide a profit to the utility company on top of paying for the service and the power. It makes sense that, at least in some cases, the private company is more expensive and/or provides worse service.

That is, of course, not always true. Private companies can provide products and services more cheaply than publicly owned companies, if the public employees belong to a union. The private company may hire nonunion employees, it may hire immigrant workers, it may even hire workers without papers and pay them a lot less than the unionized employees. Their lower wage bill may benefit the customers. The private companies still makes its profit, the customers pay a lower price but the saving comes at the expense of the people who provide the services. They may be forced to work two jobs to support their families. Here outsourcing public services to a private company saves the public money but at the price of underpaying fellow workers. Should we support that? Thats not so easy to say.

Outsourcing public services to private companies is often thought to lower prices because there is competition in the private sector that tends to lower prices by forcing companies to be more efficient. But that is just one more thing everybody says without thinking about it.

Consider the case of public schools. There have been some examples of private, for-profit schools doing better than a public system. These have been cases where the public school system had become completely non-functional and almost anything was better than what the city had. But we have not seen a large number of for-profit private schools. The reason for that is simple: it is very difficult to make money on providing good education. Some companies that have tried it went bankrupt. Others are limping along.

If there is one gas station in your neighborhood, there may well be a competing gas station on the opposite corner. Gas stations cost money but competition is a reasonable way of proceeding. But if your neighborhood has an elementary school, would you consider it a good investment to build and staff another elementary school right across the street? We haven't seen that very often and for good reason. It's a terrible business model. Getting some real competition going in public schooling is not so easy. Having a government service transferred to a private company does not automatically produce competition.

Making the post office a quasi private corporation has not helped its bottom line. It still needs annual cash infusions from the government. Paying private contractors to clear the snow after a storm seems reasonable. Having the city stationary printed up by private print shops rather than by any city owned and run printer seems also reasonable.

Allowing cities and towns to get some services from private companies is not objectionable. But it is a mistake to assume, without further investigation, that private companies will always do better than government in providing services for citizens.