The old adage has always been that governments are the prime example of waste and inefficiency, while businesses are cost-effective and productive. In recent years, this idea has spurred governments to hire private companies to deliver everything from mass transit and mail delivery to secondary education.
But privatization has its costs -- both economically and socially -- says Columbia Professor Elliott Sclar in his new book You Don't Always Get What You Pay For: The Economics of Privatization (Cornell University Press), which recently won the Louis Brownlow Book Award from the National Academy of Public Administration.
Last year, with a grant from the Century Foundation, Sclar traveled across the country, examining how different state and local governments attempted to privatize their services. He found that privatization often results in less service for more money, because agencies frequently overlook the high cost of making sure work gets done correctly.
"The question is, 'why do good contracts go bad?' " says Sclar, director of Urban Planning Programs at the School of Architecture, Planning and Preservation and the School of International and Public Affairs. "The standard answer to this question is that it was simply a flaw in this particular contract. But if there are so many mistakes in so many contracts, maybe there's a systemic flaw in the entire notion of public contracting."
One example Sclar offers in the book is the privatization of Massachusetts' highway maintenance. In the early 1990's, the state contracted out every element of its highway maintenance, from cleaning and repairing the roads and bridges to mowing the grass along the medians and shoulders. Because the project involved such a wide range of jobs, it was almost impossible to write each detail into the contract.
For instance, the contract failed to specify that litter should be removed from the shoulder before workers cut the grass; instead, workers cut the grass first, spreading bits of trash along the highway which ultimately resulted in a need for more clean-up. By 1994, when independent auditors examined the project, some estimates found the state had lost as much as $1 million by privatizing the work.
The cost to draft a contract in such minute detail and oversee the work, Sclar explains, often makes it more cost-effective to do the work in-house.
"Even if you hire an outside company you have to be able to manage it competently," Sclar says. "Why would an agency that's incompetent to manage itself and its own workers suddenly be competent to manage a company to do a job that its own workers are supposed to do in the first place?"
In addition, Sclar points out that in contracting situations, "History matters. If governments have been providing a service for a long time, outsiders rarely have the knowledge or expertise to do the job done by the public agency."
He cites an experiment undertaken in Miami, in which the Federal government gave the city 40 buses -- 20 that the city would run and 20 to be run by a private company.
Private bus companies are often adept at running inter-city routes but often don't know enough about a city's transit system to mesh the different commuter routes. Additionally, the company took an initial loss to win the contract, then tried to save on operating costs. Within six months, ridership dropped 18 percent; six months later, it fell another 13 percent.
This represents what Sclar and other economists call a "moral hazard," a conflict between what the government and the company want. In this case, it was in the company's best interest to keep costs down through maintaining a high rate of driver turn over and by neglecting bus maintenance. Unlike the local operating agency, the company cared little about its ridership. Its customer was not the riding public.
The notion of privatizing government services first gained popularity in the 1960's and 1970's, with what Sclar calls the "disillusion that developed during the Vietnam and Watergate years. When Roosevelt was elected in the 1930's, he said that government is the solution to our problems. By the 1980's, when Ronald Reagan was elected, one of the things he said was 'government isn't the solution to our problems. Government is our problem.'"
Sclar says that private contracting works best with services that require lower-skilled work, like janitorial services, since there is a discrepancy between what private companies pay their cleaning crews and what public agencies, with their more cumbersome work rules, pay their workers. Services that require more high-skilled or professional management often do not save much money since the gap between public and private salaries on that level is continually shrinking. However, while these types of contracts may work best, there is what Sclar calls a "social cost."
"You can save money," Sclar says, "but you're taking the cost out of people's hides at the low end of the wage scale."
Still, Sclar says, private contracting is not an outright failure. Fifty percent of all taxpayer money goes to private contractors, he says, and there are ways to make it effective. Throughout his book, Sclar cites examples in which public agencies contracted with private companies and blended in-house work with close supervision of privately contracted services. These also tend to work best when immediate results are evident.
"Its one thing to contract for people to cut the grass because you know if the grass has been cut or it hasn't," Sclar says. "It's another to contract to educate students or deliver health care because you don't know for years whether the right treatment's been done, or the right pedagogy has been used."