Privatization is as American as guns

It’s surprising that privatization makes some people feel uneasy. It just makes me feel long in the tooth, since privatization is as American as handguns.

Privatization is an arrangement under which private firms become involved in the financing, designing, building, owning or operating of public facilities or services. Another name for such arrangements is public-private partnerships. The underlying concept is that the public and private sectors both benefit by cooperating to provide services.

Public-private partnerships are more common than most people realize. For example, governments have always used private firms to prepare the engineering and architectural designs for public buildings. Essential public services such as electricity, gas, and telephone communications have traditionally been provided by private firms functioning as regulated monopolies.

More recently, private firms operate prisons, sanitation services, toll roads and other functions normally associated with public agencies.

If public officials had to list 10 reasons for their rising interest in public-private partnerships, the first nine would be saving money. This is driven by tight fiscal conditions and taxpayer demand for more services than governments have the resources to provide.

Since private firms must pay taxes and earn profits- two costs that public agencies don’t have- it is reasonable to wonder how profit-generating firms can deliver services at lower costs than public agencies can.

The usual answer involves vague references to “private sector efficiency.” But such vapid cliches undermine privatization’s credibility. An important factor that enables private firms to deliver services less expensively is that few of them are subject to the regulations that hamstring public agencies. As a result, their procurement procedures are simpler, faster and more strategic.

Private firms are always on the lookout for new technologies and other tools that promise to make  service delivery more effective. They understand we did not get out of the Stone Age because we ran out of stones. Most public agencies are risk averse. so the only practical way for government enterprises to get things done in new and better ways is to let private firms assume the risk of failure.

Public agency managers rarely have the option of choosing a supplier based on timely delivery, quality, and lower life cycle costs. They’re usually restricted to a small group of suppliers who have mastered  the intricacies of government contracts, are willing to dot every “i”, cross every “t” (often several times) and wait months to be paid.

Avoiding “waste, fraud and abuse” guide public agency procurement. The standard assumption seems to be that the public would rather waste countless extra dollars to avoid any possibility of losing a single dollar to fraud or abuse. And few public agency managers can be expected to lay his or her career on the line to exploit more efficient trade-offs.

The bottom-line focus of most private firms forces them to live in the real world, where practical results, not procedures, are what count, That’s why private managers can exploit the benefits of just-in-time inventory management, economies of scale in purchase orders, and meaningful supplier performance measures to make their operations more efficient.    ·

Greater efficiency also means being able to aggressively exploit new technology to improve customer service, streamline production, and reduce costs. But there’s always some risk in being among the first to embrace new technology.

Private managers are paid to accept and manage risk; public sector managers are paid to avoid risk. This, coupled with elaborate procurement rules, is why public agencies usually end up with trailing  technology. They prefer not to “risk the public’s money” until a better technology has been so totally proven that it’s often obsolete.

Persuading government officials to outsource the risk of developing, financing, operating, and maintaining new innovative technology is a full time job, one with plenty of opportunity for overtime.

originally published: March 29, 2014

Why not privatize public jobs?

Recently, the small band of Republicans in the Massachusetts Senate attempted unsuccessfully to tack an amendment repealing the so-called Pacheco law- the nation’s strongest anti-privatization law- onto a transportation bond bill. When moves like this are debated, the quality of managers, one of the most important reasons why governments need access to private-sector expertise, is almost never mentioned.

These days, privatization is usually defined as a process through which government contracts with private firms to deliver services traditionally delivered by public agencies. In theory, there is no reason why any government service could not be privatized. This extends all the way to sacred cows such as police and fire protection, elementary and secondary education, and even the armed forces.

Such presumably boundless potential may be why debates about how far privatization should go have become unnecessarily philosophical, involving stained-glass abstractions such as “public versus private goods,” “economic externalities,” “natural monopolies” and, of course, “the proper role of government.”

All of which ignore what may be a more pragmatic question: Has Americans’ growing mood of disenchantment with the apparent shortcomings of government increased their willingness to rely more on private companies to provide public services?    ·

If it has, we ought to ask ourselves how profit-seeking, tax-paying private companies may be able to deliver better services for less than not-for-profit, tax-free public agencies. Privatization advocates cite a number of reasons such as operating efficiency, easier access to capital, better technology, the absence  of conflicting goals and better management.

The role the latter plays in producing and delivering high-quality services with maximum efficiency is dangerously underrated. Efficiency requires managers who are bright, well-trained and highly motivated. The most obvious way to attract and hold on to such managers is to pay better than the competition.

But government agencies are at a serious disadvantage when it comes to attracting good managers. The salaries of elected officials tend to impose an artificial ceiling on how much public agency managers can be paid. This ceiling usually ignores the realities of the marketplace, but elected officials are reluctant to advocating higher salaries for themselves because they believe it looks bad to voters.

Since managers rarely earn more than their elected bosses, comparatively low pay means too many government agencies lack the management talent they need to deliver services efficiently.

Few professional managers are independently wealthy. Their choice of where to work reflects the financial realities of paying mortgages, supporting their families and providing for their children’s education. For the best managers, the public sector is rarely where they can earn the most.

Sadly, some recent newspaper reports have gone after the Massachusetts Convention Center Authority, one of the quasi-public authorities where managers can earn salaries that, though still not comparable, are at least closer to what professional managers can command in the private sector. One report criticized the increased compensation some MCCA employees earned thanks to performance-based incentives.

Perhaps it’s not a coincidence that the MCCA might be the best-managed public agency in Massachusetts. Executive Director James Rooney is an outstanding manager and knows that using performance-based incentives that link compensation to performance is a tool that can help him attract and maintain talent.

Given the uniquely American attitude toward government and civil servants, there is little likelihood that these salary constraints will ever disappear. So the only practical way to assure that public agencies are consistently well-managed may be to tum at least some of them over to private companies that are willing and able to pay top dollar for superior managers.

originally published: March 5, 2014

We need to think of our roads as cows

Academics have filled volumes on the differences between what they call public and private goods. Too often the distinction seems to come down to ownership: If something is owned by society as a whole, it is a common good. If owned by one or more individuals, it is a private good.

Common goods are things like public schools, parks or roads that are owned by all of society. The responsibility for operating and maintaining them is (usually) assigned to government and supported by tax revenues.

This is the standard pattern for metropolitan roadway systems in the United States. They are built and maintained by a mixture of municipal, county and state governments that fund most of the cost from general tax revenues. They are often supplemented by “user taxes” levied on the purchase of motor­ vehicle fuel, which implies that motorists pay based on how much they use the roadways.

But even when a roadway network is supported by fuel taxes, there remains a disconnect in the minds of motorists between the act of driving on roadways and paying for them. This is quite different from commodities distributed through the marketplace, where a consumer must buy and pay for some quantity of a commodity before being able to consume it.

The result is an instinctive sense among motorists that roadways are free.

A useful metaphor popularized by biologist Garret Hardin in 1968 illustrates the basic problem. Imagine a community that has a publicly owned pasture where local farmers can graze their dairy cows without having to pay any user charges. Under these circumstances, each farmer seeks to graze as many cows as possible in the pasture because each additional cow will increase milk production but not feeding cost.

This only works so long as the number of grazing cows remains within the pasture’s feeding capacity. Once the farmers exceed this limit, the pasture’s viability begins to break down. The cows consume its grass faster than it can replenish itself with fresh growth, resulting in less nourishment for each cow.

When farmers are faced with cows that are producing less milk to sell, their logical response is to add still more cows to the overused pasture. When all the farmers do this, the result can only be an increasingly dysfunctional pasture and declining milk production for everyone.

In Hardin’s words: “Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit – in a world that is limited. Ruin is the destination towards which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons.”

Severe traffic congestion is a modern example of the tragedy of the commons. Hardin’s metaphor illuminates a broad range of socioeconomic questions about why congestion afflicts so many metropolitan areas.

It illustrates the inevitable tendency to overuse common goods that are perceived to be free. It explains why this tendency leads to a condition in which supply never catches up with the demand. It describes how the widespread availability of free public goods can significantly influence the underlying economics of many private activities that come to depend on them. And it demonstrates the relative ease with which an entire society can be locked into counterproductive behaviors.

The most sensible solution to the tragedy of the commons may be to charge farmers grazing fees. This immediately confronts them with a series of critical business judgments about how to maximize their milk revenues, such as how much to spend feeding pasture grass to their cows or whether to feed them corn or other grains instead.

When all forms of cattle feed are distributed at prices that reflect supply and demand, the business of milk production becomes more rational. Perhaps the same is true for metropolitan roadway systems: directly charge motorists for roadway use and the economics of building, operating and maintaining roadways change rapidly- and for the better.

originally published: March 4, 2014