The decision to privatize government services often comes with political turmoil and heated debates. There are cases, however, where privatization initiatives have come with bipartisan and public support. In a survey we wrote about here, 65% were open to 3rd party initiatives by the DMV.
“Privatization is not the province of a single ideology or political party. It’s, rather, a pragmatic way to respond to major challenges.” This quote is from former congressman Dick Zimmer who was the Chairman of the New Jersey Privatization Task Force. It is from a committee report in 2010, while NJ was evaluating privatization initiatives with the DMV (the debate over this continues still). The full hearing can be found here.
Zimmer goes on to say: “After analyzing all this input, the Task Force concluded that through sensible planning and implementation, privatization offers a variety of benefits, including lower costs, improvements in the quality of public services, and access to private-sector capital and professional expertise. We recommended 40 privatization initiatives that would result in annual savings of more than $200 million a year. Many of the most promising of these opportunities are related to transportation.”
The Economics Behind Privatization
Privatizing industries allows for accurate pricing. When you have an open market working efficiently, a product or service is priced according to its true value. The players in that market work within the constraints of supply and demand and an equilibrium is achieved.
This is in contrast to a non competitive market where one firm decides the price internally. The result of this is skewed incentives and inefficiencies in the system. For example, DMV wait time has a price. Private companies receive feedback from the market, due to competitive pressures, and may realize that wait time is valuable to its customers. They would then work towards reducing wait time to remain profitable. Government run DMV’s don’t have this feedback mechanism.
Zimmer puts this quite well: “A public agency exposed to competition for the first time might be spurred to improve its own performance. Introducing competition helps managers determine their true costs; and promotes innovation, efficiency and greater effectiveness in serving customers’ shifting demands”
The Pitfalls of Privatization
A properly functioning industry has established institutions and regulations that have evolved over decades of trial and error. If you fundamentally change the foundation of an industry, it will take time for established practices and norms to catch up. The concerns with private companies stem from accountability, manipulative practices, and possible monopolies during this transition period.
Preparation and oversight can be a solution to these issues. Zimmer has this to say regarding previous privatization failures: “They were poorly conceived at the start, goals were not clearly articulated, due diligence was superficial, contractors were inexperienced or undercapitalized, and government oversight was lax or nonexistent. In extreme cases, government officials had clear conflicts of interest and engaged in official misconduct.”
In other words, make sure there is proper regulation in place and the appropriate watchdogs do their job. Without this, there can be problems.
From utility companies to private waste removal, there are plenty of examples where private industries can successfully replace government services. Privatization doesn’t have a 100% success rate and doesn’t fit for all government services. But when it does work, the end result is a more efficient and effective system.