Is it more efficent to privatize?

One big debate that I have never really engaged with in politics is privatization. I’m sure that all my readers are familiar with the broad strokes of the debate, with the argument being over whether services should be owned privately or publicly. The argument in favour of privatization is usually that it will improve efficiency, the argument against is that private ownership may not deliver good outcomes for citizens. Recently, however, I have been exposed to the topic through some of my work, and I am therefore writing this piece to explore the question of whether privatization is really more efficient than public services.

It seems to me that privatization has two forms. Governments can either privatize by contracting services out, or by simply not delivering services. To illustrate, consider the following example. You may have a publicly owned hospital, where the employees are directly employed by the government. You can have a privately owned hospital, perhaps more tightly regulated by government but otherwise a private business like any other. And then you can have a privately staffed/run/owned hospital which receives some or all of its funding from the government. The theory behind both kinds of privatization, as I understand it, is efficiency through competition, either directly in the open market or in competition over the contract. In this piece the kind of privatization I really want to talk about is that which is achieved through procurement.

So, does contracting out services make them more efficient? I propose there are at least two reasons that this is not the case.

First, contracting out services requires strong procurement and oversight capabilities (procurement being the process by which an organization or government
may contract out work to private companies, often through some kind of
bidding process). Something that I have realized is how difficult it is to do a procurement process well. Procurement is really a perennial issue, when you think about it. How do you predict whether a company will deliver promised goods and services at an affordable rate? How do you monitor whether they are adhering to the terms of an agreement? These two challenges can easily eat into any savings that might have been made by contracting the service out in the first place.

Second, and I think this is the more traditional critique, the incentive structures for government organizations are different from that of private organizations. The goal of private companies is usually to make money, while public services are more closely tied to the goals and objectives of politicians. By this I do not mean that democratic incentives are always great, but they are importantly different from private incentives, and they more directly pertain to public opinion.

It is important to note that the issue I have explored here is very narrow: does contracting out public services make them more efficient? I have cursorily explored reasons why they may not be more efficient. I have not tackled the problem of whether privatization is better or worse, to which the answer is probably just ‘it depends’. As pointed out by my partner, contracting services out can have many upsides, such as if a government does not have the resources to develop and deliver a service, or if the government desires something like independent out-of-house evaluation.

Let me know what you think,

CreativePhilo

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