Competition Yields Quality

Privatizing to cut costs, improve performance

Privatization in the United States is going through a dramatic transformation.

The Reason Foundation just released its 16th annual report on trends and practices in privatization – the transfer of responsibility for services or assets from the government to private firms – in the United States. From water utilities to school buses, new highways to airports, and welfare-to work programs, local, state and federal agencies ramped up their use of privatization over the past year as a means of balancing tighter budgets and increasing service demands.

Privatization as we know it began in the late 1960’s, mainly practiced by local governments. In the 1980s Ronald Reagan brought the idea of privatization to the federal government at the same time Margaret Thatcher was changing Britain via privatization. In the United States, governments traditionally privatized services or sold assets primarily for the money: Tight fiscal times often convince governments to cut costs to avoid raising taxes, and privatization is one way to accomplish this.

And times have been tight for more than a year now – almost half of the states and more half the cities are facing revenue shortfalls.

An example of privatization driven by fiscal concerns can be seen in Florida, where for the past two years Gov. Jeb Bush, a Republican, has been pushing for state agencies to use privatization to reduce budgets by at least 5 percent.

But recent years have also seen the start of dramatic shifts in why and how governments are privatizing. Cost savings is no longer the prime driver. More often, privatization is driven by a desire for cost savings linked to other factors such as:

  • Quality: Cities contract water and sewer utilities with private firms that can achieve compliance with environmental standards.
  • Flexibility: States privatize the design and construction of new roads to avoid having idle architects and engineers sitting around on the public payroll for years between projects.
  • Speed: Privatized construction of buildings and other facilities takes half as long as government-run construction projects, and private firms can set up new databases or information technology systems and deliver services much faster than government agencies.
  • Access to expertise: The people with the most experience and highest technical skills can make a lot more money in the private sector than in government, so when governments need those kinds of skills, often the only way is by private contracting.
  • Innovation: Competitive private firms have greater freedom and more incentive to innovate than government agencies. Privatization takes advantage of innovations in everything from helping foster children find permanent homes more quickly, to designing more efficient prisons.

All of these motives can be rolled together simply as “performance.” Privatizing to achieve a combination of cost savings, quality, innovation, speed, expertise and innovation is privatizing to achieve higher performance.

This is most obvious in cases like the controversial privatization this spring of Philadelphia’s worst performing schools. After years, if not decades, of trying to turn the schools around themselves, the city is privatizing to improve performance, including all the kinds of changes discussed above.

Less widely known but bigger and more important, is President George W. Bush’s ambitious goal to have both federal agencies and private firms compete over the next few years to perform work currently being done by more than 400,000 federal workers. This goal is part of the President’s Management Agenda (, and is rooted in the recognition that improved performance is more a result of competition itself than it is of whom – private firms or government – ultimately does the work. In the Bush plan, competition will induce various units within government agencies to improve performance, and will lead to contracts for the private firms only if they can deliver better performance than the government can.

Federal agencies are struggling to find ways to meet the president’s goal to conduct competitions for to work done by these positions. They are not used to competition and are not sure how to proceed, and there is plenty of opposition from internal cultures that resist change, especially public employee unions, which object to competition and even the possibility of privatization.

If federal agencies succeed in conducting these competitions, then Congress will face pressure to step up to the plate and make budget appropriations based solely on the performance of the winning federal employee group or private contractor. And this would entail a dramatic change from the traditional pork-laden budget process, along with much more transparency and accountability.

And that is the crux of things for taxpayers. Regardless of who wins these competitions – government units or private contractors – competition-based privatization efforts based on visible and measurable performance goals, with a transparent process that holds the winners accountable for results – overwhelmingly yield the best results.

Americans should hold their elected officials accountable for the same standards President Bush is setting for his administration: competition should determine who delivers most services, the process should be transparent and accountable, and the goal must be performance that serves the customers.

Adrian Moore is Vice President of Reason Foundation.