Opinion Editorial

By Dennis Polhill

As a fundamental rule of negotiation and basic courtesy, it is counterproductive to offend ones adversary when first introduced. The predictably defensive reaction among government managers ostracizes the word “privatization” to the lexicon of words rarely spoken in government circles, throttling an open and honest discussion of “privatization” as a tool for governments to improve efficiency. Ambiguous semantics do not help, but hinder the process of making government more efficient and effective.

When intended as an umbrella term encompassing all forms of improving government efficiency, the word “privatization” fails. Are the myriad of management tools, including zero-based budgeting, performance budgeting, leadership-effectiveness skills, management-by-objectives, organizational development, quality circles, and so on, subsets of privatization? If managements efficiency tools were located under the “privatization umbrella,” would they then be called “privatization” when the same management tools are applied in the private sector? How can something private be privatized? Maybe competivized or efficiencyized would be a more accurate term.

Use of the word “privatization” does not help to clarify and focus the debate. Alternate, more precise and less confrontational words would help advance the “privatization” cause.

Government Reinvention

Most private-sector entities are under enormous competitive pressures that cannot be replicated in government. Governments fundamentally perform monopoly functions. Competition is the core motivating force that yields more service for less money than governments can achieve. When competitive forces are unleashed in various quasi-private entities, significant efficiencies emerge. In a study of deregulated “natural monopolies,” the Brookings Institution found on average that deregulation of airlines (1977), trucking (1980), railroads (1980), natural gas (1984), and long distance telephone (1984) yielded lower costs to consumers of 13 percent after two years, 22 percent after five years, and 40 percent after 10 years in inflation-adjusted dollars. These efficiencies are hardly trivial and add several hundred dollars per year to every familys wealth.

Governments have been found manufacturing furniture, selling hearing aids, consulting on international contracts, manufacturing lifeboats, performing photogrammetric flights, operating grocery stores, providing Internet services, and much more. Most people, including most politicians and government managers, would concede that these are not proper government functions. Because this group of examples exploits the tax exemption, tax subsidy, regulatory exemption, and liability exemption advantages of governments to compete unfairly against privately owned taxpaying businesses, it is referred to as “unfair government competition.”

Honest government managers are sometimes blindly trapped into committing similar abuses by their dedication to implementing efficiency. What should the manager of a government-owned asphalt plant do when he learns that 20 percent more product can be produced (the same notion applies to smaller examples, like use of dump trucks, street sweepers, and car washes)? If he fails to produce the excess product, then unit cost of the remainder output is inflated. If he uses the product wastefully, then no efficiency is gained. If he sells it on the market, he enters into competition with private suppliers, potentially injuring the market and causing unit costs to escalate for others at a subsidy expense to his government. What to do? Excess-capacity is a signal to government managers. Any internal function with excess production capacity is a function with inflated internal unit costs requiring internal cross-subsidization. Thus, divesting the function and purchasing the units externally would capture efficiencies. Governments must invent new salary structures, incentives, and bonus systems that reward managers for capturing efficiencies.


Copyright 2002, Independence Institute

INDEPENDENCE INSTITUTE is a non-profit, non-partisan Colorado think tank. It is governed by a statewide board of trustees and holds a 501(c)(3) tax exemption from the IRS. Its public policy research focuses on economic growth, education reform, local government effectiveness, and Constitutional rights.

JON CALDARA is President of the Institute.

DENNIS POLHILL, a Senior Fellow with the Independence Institute, wrote this article, which was originally published in the March 2002 edition of Privatization Watch.

ADDITIONAL RESOURCES on this subject can be found at: http://independenceinstitute.org/

NOTHING WRITTEN here is to be construed as necessarily representing the views of the Independence Institute or as an attempt to influence any election or legislative action.

PERMISSION TO REPRINT this paper in whole or in part is hereby granted provided full credit is given to the Independence Institute.