Privatization

The dismal science Economics

Economic systems

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Major concepts

Social Credit Externalities George Mason University Akinwumi Adesina Adam Smith

The worldly philosophers

Adam Smith Ben Bernanke Friedrich Engels David D. Friedman v - t - e

Privatization, in the strictest sense, is the opposite of "nationalization": it constitutes the transfer of state-owned property, usually economic operations such as railroads or utility companies, into private hands. For some reason these assets are almost always sold at prices (well) below their 'market' value. This is usually done in the hope that having to compete on the free market, the new owners will make the necessary changes to cut costs and/or improve services that may not be politically acceptable for elected officials.

In a looser sense, it also includes the practice of outsourcing by government, i.e., moving services provided directly by the government, such as public health, education, or security for overseas citizens, to the private sector, in hopes that the "free market" will lower costs by magic, or by reducing overheads, staff, costs, and perhaps services provided.

In actual fact, such privateering has the effect of shifting responsibility for resources previously held in common, or for services previously distributed more or less evenly for the public good, into the for-profit corporate branch of government, where the delivery and quality of services is skewed in favor of those who can pay the most. Since the private sector has scant motive to provide the protection and facilitation necessary for citizens to go about their daily business, it often acts contrary to the public's best interest. This privateering can have the effect of reducing public benefits such as education, diluting the effectiveness of some protections (e.g. environmental, drug safety) or bloating other "protections" such as corrective incarceration.

Which services are run by the state and which are in private ownership varies radically from country to country, and even between administrative districts in some countries.

Examples of potential or actual privatization

Trash collection

A city might decide to outsource their trash collection to private companies. As, in the US at least, the Mafia has another need for access to landfills and car-crushing facilities, they often will underbid all other competitors, including the existing city employees; they usually win. New Jersey suburbs are particularly famous for this phenomenon. (What, you thought The Sopranos was joking?)

Fire protection

The fire protection sector could be privatized. In the US privatization of the fire protection puts less emphasis on full-time salaried persons, and more on volunteers. Four methods can be used for privatization: Volunteers, Public-Private Competition, Competitive Contracting and Intergovernmental Contracting. Interestingly enough the Romans actually tried this. Marcus Licinius Crassus owned his own private fire brigade which would come to the rescue of Romans whose property was on fire. However, he would only let his men go to work if the property owner agreed to sell him the burning building at a heavily discounted price. As a result, Crassus got very wealthy on the Roman real estate market.

In London from the late 17th century (after the 1666 Great Fire of London) multiple private fire-fighting companies existed and cover depended on regular insurance payments. The brigades concentrated on minimising damage to insured property, and it was left to a charity, the Royal Society for the Protection of Life from Fire founded in 1828, to help people escape burning buildings. A publicly-funded fire and rescue service was only created in 1866.

This was tried recently in rural Tennessee, where fire protection for far flung houses cost $75 a year. When one resident forgot to pay the fee, and his house caught fire, the fire company let it burn to the ground (along with the 4 pets inside). A spark caught on the neighboring house where the owner had paid, and they rushed over to put it out. Firefighters then stood there and watched the house on fire continue to burn, even though they were there with the home owner begging to give them money. The fire department sagely said that no one would pay the fee till their house was on fire.

Space exploration

There is advocacy to privatize NASA. Cato Institute in an article wrote "As long as NASA dominates civilian space efforts, little progress will be made toward inexpensive manned space travel." Cato believes privatization of NASA will increase efficiency, criticized excess government funds for NASA and said "Congress should cut off their funding and sell the shuttle fleet and the station, or whatever part of it has been built, to private purchasers who will, if nothing else, operate them in a fashion to recover their costs." Former NASA director Dan Goldin also supported privatization. Andy Falkof wrote, "Why should the government be in the space business at all? Why not leave space exploration to the private sector?"

Of course, this leaves a significant problem: the current advancements in private space travel have relied extensively on NASA expertise - we dare to see SpaceX or Virgin Galactic try to garner the hundreds of billions required to surpass the Apollo program.

Legal system and prisons

Prisons can be privatized, and to an extent are in the UK. Proponents claim "As prisons consume more and more scarce tax revenue, privatization is being advanced as a means to help curb a seemingly endless drain on government revenue." No mention is usually made of the huge number of prison inmates who are there as a result of the misguided and overly zealous War on Drugs or the fact that privatization ends up costing the state more. The probation system in the UK is also largely privatised, with companies who bid too little for contracts not being able to afford to adequately supervise criminals.

Anarcho-capitalist British think tank, the Adam Smith Institute, has called for the UK's court system to be privatised, and civil justice partly replaced by private arbitration companies. Private arbitration services have been promoted in the US as an alternative to the court system, but while such arbitration can in theory offer a faster and cheaper service, often it results in a bloated bureaucracy resembling the public system it aims to replace.

The military

Why bother recruiting, training, paying, housing, feeding, and deploying national armies when companies like Blackwater or Halliburton will do that for you? Sure, they are borderline mercenaries, the oversight on such groups isn't so great, and their employees don't exactly have to answer to the Uniform Code of Military Justice. But hey, it saves the taxpayers money right? Well, it's easier to justify doing it when you own the company in question.

Pothole repair

On 25 March 2009, Kentucky Fried Chicken announced a program wherein it would repair the potholes on America's streets in exchange for the right to paint a stencil of their logo over the patch. So, if you've ever seen KFC logos painted on the street: no, it wasn't an act of vandalism. Or, depending on your view of privatization, maybe it was.

Infrastructure

What is commonly thought of as infrastructure is usually in public hands, however not all infrastructure is always public and some sectors are almost all-private, among them Internet infrastructure in the US, which is so badly regulated that Romania has faster Internet than parts of California. Other examples of major private infrastructure are the highways in France which are almost exclusively private toll roads or the railroads in the US.

Criticism

There are many obvious problems with this kind of outsourcing or privatization:

1. The work goes to the lowest bidder. Wages are a huge component of costs, so companies will often do as much as possible to drop costs. This often includes hiring of undocumented workers (especially for agricultural products), outsourcing to low cost countries (Nike, HP), replacing workers with technology (those awful scanners at grocery stores that never work), or "help yourself" type troubleshooting documents included with many electronics now.
2. Quality of products input is often the lowest companies can get away with without too many lawsuits or regulators going after them. Take a look at Toyota, which dismissed early reports of failures until safety regulators stepped in.
3. Companies that take over for natural monopolies often have little incentive to provide good service, just provide the basics for the job to get done. People really can't go anywhere else, so the company dumps service (labor costs) till it starts receiving so many complaints that regulators/government gets wind of something wrong. Then they push up service quality just till that stops (Qwest is always a good example).
4. If people privatize natural monopolies, such as power and water companies, it can have disastrous results on the market and consumers. California attempted this, and private companies immediately started taking power plants offline for "maintenance" to artificially reduce supply. This caused rolling blackouts and increased the price of power (at peak times, sometimes 20x the price previously), resulting in gross profits for energy traders.. When things came to a head, as the government mandated how much energy prices could increase to consumers, the energy traders and suppliers imploded while the upper management bailed out with million dollar golden parachutes while taxpayers foot the bill for cleaning up the mess.
5. Private companies are often railed against to think of only the bottom line in ways that are often very detrimental to the people they are intended to serve. Health insurance is a source of many complaints, as companies retroactively deny coverage for patients that have paid up and drop coverage for high-cost patients. These companies kept the paid premiums as well. This is why public insurance often covers high-cost patient populations (like old folks), as private insurers would just dump them to keep profits high.
6. Labor quality goes down significantly as trained, experienced, or educated personnel is expensive. Jackson County Oregon needed to drop costs of its library system, so it was sold to a private company (Library Systems & Services). Wages and benefits were cut dramatically (plus hours the library was open), in addition to getting rid of ~60% of those with degrees and experience, showing a total cost reduction of 36%. It works well if all you want is someone to sign books out for you, but not if you want anyone to actually know anything helpful.
7. Private pension plans are another very good example of what can go wrong. Many companies have underfunded or raided pension plans for operations when times are rough, only to have them fail and be picked up by the federal government. Now as 401(k) plans are being touted consumers must learn investing while keeping an eye on the investing company their employer hires to manage the fund (fees, investment choices). Many companies have dropped their matching when times are tough, and few have reinstated them when revenues have increased.
8. Cronyism. Some contracts are ways to benefit the politically connected firms that have contracts. Some companies get valuable profits from government contracts. Others get control of a formerly public resource without paying what it is worth. No-bid contracts are used to provide these benefits. In particular, this problem plagued Boris Yeltsin's Russian privatization, as former government controlled property was sold cheaply to friends of the party's inner circle and/or criminals (who thus also laundered their money), leaving Russia with one of the sharpest divides between rich and poor in the world.

Ironically, in the realm of health care, in the United States, at least, the government programs (Medicare and Medicaid) run a far lower overhead and lower denial rates than the private operations. Since Medicaid covers nursing home attention, payment for telemedicine is now becoming mainstream as stated by Richard Kimball of HEXL. But, then, there are almost as many complaints about what rotten service these programs provide as there are about the free market "health care providers", so take your eggs with some salt. Private companies often deride public services for denials of new expensive (usually experimental) procedures or pharmaceuticals, such as Avastin, even though private companies do not cover these items either. It is called a good business decision when a private company imposes such limits, while it is a "Death Panel" if a public insurer does anything similar.