Cost Savings from Privatization

A Compilation of Findings

Executive Summary

Opponents of privatization and other methods of increasing competition in government-financed services frequently claim that privatization/competition rarely results in cost savings for government or society at large. In fact, some argue that privatization increases costs to the taxpayer.

These claims are refuted by a substantial body of research that has documented significant savings from privatization/competition. More than 100 studies over the course of the last 20 years have demonstrated privatization/competition cost savings in service areas from airport operation to weather forecasting.

The wide variety of reasons for the cost savings include, for example: 1) better management techniques; 2) better and more productive equipment; 3) greater incentives to innovate; 4) incentive pay structures; 5) more efficient deployment of workers; 6) greater use of part-time and temporary employees; 7) utilization of comparative-cost information; and 8) more work scheduled for off-peak hours. All these benefits stem primarily from the introduction of competition into the bidding process to perform the service.

Insulated from competition, most government units have lower incentives to-or are even prohibited from-adopting the productivity-increasing techniques of private firms. When government units compete against private bidders to provide a service, cost savings are significant regardless of who wins the contract because the government unit typically responds by cutting its costs greatly.

The following service-by-service table is a compilation of cost studies that compare the costs of inhouse (sole-source) government agencies versus alternative-and mostly private-sector providers. It is derived from my book, Competition in Government Financed Services, published by Quorum Books in 1992. The over 100 independent studies typically found cost reductions of 20 percent to 50 percent that resulted from privatization and, more importantly, increased competition.