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Privatization and Public Works

 By Earl King, Asst Public Works Director


City of Hallandale Beach, Fl

For over 25 years, governments around the world have been significantly impacted on a local, regional and national level by a powerful trend called “privatization.” Privatization has been defined as “the transfer of ownership rights from the public to the private sector.” This movement, championed by Margaret Thatcher in the United Kingdom and by Ronald Reagan in the United States, reached its zenith in the late 1990s. In industrialized nations, privatization has reduced the portion of state-owned enterprises by approximately 50%.

The considerable effects of privatization have not only been realized globally, but they have also been evidenced locally. Since the 1980s, privatization trends have impacted South Florida, including the public works sector. Fleet services, custodial services and even utilities services have all been subject to privatization. The branch of public works that has been most dramatically affected by the wave of privatization, however, has been sanitation services. Whereas virtually all sanitation services used to be public, currently the vast majority in South Florida are private.

While the vast subject of privatization in relation to public works cannot be explained in a brief report, the intent of this paper is to provide a basic overview of this relevant matter in hopes that it can provide helpful perspective.

Benefits of Privatization

The theoretical foundation of privatization is sometimes called “principles of management”; this theory emphasizes efficiency. Government-owned enterprises have often been inefficient. Governments come to a rational decision that efficiency would be improved by privatization. They then take the rational step to privatize these enterprises. This perspective essentially reduces the question of privatization to the bottom line: efficiency of operation, resulting in the “biggest bang for the buck.”

A second benefit is the ease of management. A manager of a contracted private company does not need to deal with such difficult issues as personnel, equipment failure, or complaints from customers. All of these challenges and issues will be resolved by the private contractor.

Benefits of Public Ownership

The theoretical foundation for public ownership sometimes emphasizes the benefit of superior service. While the bottom line of private companies tends to be economic efficiency, the bottom line of public organizations tends to be responsiveness to the public. Proponents of public ownership sometimes claim that privatization results in a betrayal of public trust, as service is sacrificed at the altar of economy.

A second benefit of public ownership pertains to management. While proponents of privatization emphasize ease of management, proponents of public ownership emphasize extent of management. Public ownership enables managers to exercise greater freedom and versatility. While private contractors are limited by the terms of contracts, this limitation is not as clearly defined with public ownership. Accordingly a manager can use equipment and personnel as may be needed whenever and wherever deemed appropriate.

The Best of Both Worlds

Rather than recommending one form of ownership over the other, the following two models are recommended, as they would combine the strongest qualities of the public and the private while minimizing their respective weaknesses.

1. Private Ownership: The Well-Designed Contract

In order to maintain the benefit of efficiency while minimizing the deficiency of reduced service, a well-designed contract is advised. The contract can specify the particular details of levels of service that the local government demands. These specifications need to be supported by clear performance measurements that can force the contractor to keep in line with community expectations.

2. Public Ownership: The Efficient Government Workers

One of the effects of the privatization movement that has proven beneficial for the public has been a marked improvement in efficiency in the public sector. The public sector has had to adapt in order to survive. In so doing, the public sector has been able to compete effectively with the efficiency characterized by private companies. In fact, the public sector has two advantages over the private sector that enables it not only to compete but often to win.

First, the public sector is not required to pay sales taxes.

Second, the public sector is nonprofit and is not required to pay stockholders.

Given these two advantages, the efficient publicly-owned Public Works department is able not only to provide a high level of service to the community but also to do so at a cost comparable to, or even lower than, that of a private company. A comparison of sanitation rates of public and private sanitation services in South Florida demonstrates the viability of this proposed model.

Concluding Considerations

Newly-incorporated communities may find privatization of many local services extremely attractive because of the ease of management. Older communities that are offered the opportunity to privatize should consider the following two cautions before taking a plunge that may be difficult, if not impossible, to reverse.

 First, decision makers need to look at the long-term, not the short-term, bottom line of cost. A private company will doubtless offer an extremely attractive package whose short-term benefits cannot be matched by the public service. Only in the long term will the true benefit (or cost) of the decision be evidenced.

Second, the social impact should never be ignored. Privatization typically results in loss of jobs and/or reduction in wages and benefits. Loyal workers who were laboring for years in anticipation of retirement will have this retirement taken away from them and their families.

Decision makers must determine whether or not the theoretical benefits of privatization are worth the socioeconomic costs that will doubtless be paid by some of the most loyal, though least compensated, workers.