An Introduction to Privatization/Competition
Today, it seems that many discussions involving government services or public projects sooner or later turn to the subject of privatization and competition and the issues they raise. Both states and large cities report saving millions of dollars through privatization and competition of a variety of government functions ranging from private prisons, the sale of assets, to providing nursing home care. Even small towns and county governments throughout the United States are seriously considering competing the management of everything from public libraries, airport management, to public works facilities.
What is privatization/competition anyway? Is it a new development? And what forces are driving it? It is a concept that covers a wide variety of approaches to involving both the public and private sector in the delivery of services and the development of projects intended to benefit the general public. It applies to everything from outright turnover of government functions to the private sector (getting out of the business), contracting out the service with continued government oversight, managed competition between the government and the private sector (in which the most efficient organization competes and wins), public-private partnerships, to employee stock ownership plans (ESOPs). The determination of the most efficient method to provide the service normally starts with performing a public-private performance analysis.
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public-private performance analysis
These questions and answers explain specific terms related to privatization/competition (listed alphabetically in bold type and cross-referenced in teletype). It is generally useful to consider privatization/competition techniques as falling into one of four broad categories, or some combination of them. These categories include:
- Transferring ownership of government assets to the private sector.
- Contracting with private sector firms to provide services previously provided by the government.
- Involving the private sector in the financing and development of public capital improvement projects as a substitute for purely public financing through taxes and bonds.
- Competition when two or more parties independently attempt to secure the business of a customer by offering the most favorable terms or the highest quality service or product. Competition in relation to government activities is usually categorized in three ways: (1) managed competition in which public-sector organizations compete with the private sector to conduct public-sector business; (2) public versus public, in which public-sector organizations compete among themselves to conduct public-sector business; and (3) private versus private, in which private-sector organizations compete among themselves to conduct public-sector business.
Historically speaking, privatization/competition in the United States is far from a new development. Private sector involvement in major public improvement projects occurred in the building of 19th Century projects like the Erie Canal and the transcontinental railroad. Taking the long view, the current trend toward privatization/competition is more like the swing of a pendulum than a radical change in direction. Typically, the forces behind the popularity of privatization/competition are primarily financial and philosophical. Financially, governments at all levels struggle with the demand to provide services without increasing taxes. Philosophically, the proponents of privatization/competition agree with the pragmatic financial considerations, but they also support privatization/competition when government budgets are balanced.
The philosophical argument for privatization/competition is based on two main premises. The first is that the free market offers benefits not found in the public sector, such as, relative ease of innovation, quicker decision-making, and the general efficiency that results from market discipline and the need to compete for business. With the global economy, American enterprise has learned that effective competition improves productivity. The second is that these benefits more than offset any dangers of fraud or predatory commercial practices that the competitive free market creates. In fact, these free market tendencies are considered to be beneficial because they actually threaten the destruction of businesses that do not provide the best value for their customers and thereby encourage creativity and economical customer service.
Based on these philosophical points of view, privatization/competition is a good idea even with balanced budgets, since taxpayers are entitled to get the best value for their tax dollars. The bottom line on privatization/competition is: "its purpose is public benefit, not private gain."
The Council believes that the terms and examples will answer some of the most frequently asked questions about privatization/competition activities and processes.
April 1998
Richmond, Virginia