The Value of the Contract Model

I appreciate Sheldon Richman’s response that he’s not necessarily opposed to incremental privatization and that the onus should be on advocates to make the case that “the direction is indeed right.” That’s certainly a valid point, though it’s unclear from some of his other comments how surmountable the required burden of proof of what’s “right” would actually be in real life.

For example, I find it difficult to understand how the experience of Sandy Springs, Georgia and other contract cities—in which private contractors handle the vast majority of non–safety related government operations—would not be considered a “step in the right direction” toward privatization, and I could not disagree more with Richman’s view that the major lesson learned from them is likely “that government has a wider array of options for coercively providing services than we thought.”

Citizens in Sandy Springs probably see that differently. Indeed, it was a decades-long dissatisfaction with the perceived coercion imposed by Fulton County prior to incorporation (via various taxation and land use decisions, among others) that drove the creation of Sandy Springs in the first place.

But citizens weren’t looking to eliminate coercive local government outright. They simply wanted to see their tax dollars stay in the community, as opposed to being funneled elsewhere by the county. They wanted better infrastructure and more efficient services than the county was providing to them, and they wanted more local control over land use policies, as opposed to more distant county control.

Sandy Springs broke from the county to achieve this, and the contract city model they ultimately adopted was not driven by ideology, but rather a pragmatism that centered on how to best construct a city from the ground up to achieve the maximum bang for the taxpayer buck while avoiding the trappings of the traditional city model (e.g., pensions, union power, bureaucratic sprawl, etc.).

Citizens continue to voice overwhelming satisfaction with their new city, and most recognize that they are getting far more efficient and responsive public service delivery today (on about the same tax dollars) that they were when under the thumb of Fulton County prior to incorporation. They have also been able to avoid the chronic public pension liabilities so common in municipal governments today, as they adopted a 401(k) style defined contribution system from the outset for their small number of truly “public” employees. They are not on the hook for covering the retirement costs for the employees of contracted service providers, which the companies themselves are responsible for.

The success of Sandy Springs prompted citizens in nearby jurisdictions like Johns Creek and Dunwoody to subsequently break from oppressive county control and incorporate themselves, with similar contract city models that rely primarily on outsourced service delivery. In fact, these cities are not far off what Reason Foundation founder Robert Poole envisaged in his seminal privatization book, Cutting Back City Hall, which argued over thirty years ago that most of the municipal functions typically viewed as “public” could in fact be provided via contract, with a lean government that concentrated primarily on contract administration, not “traditional” in-house service delivery.

In reality, the major lesson learned from Sandy Springs for most observers that I’m familiar with—and one that goes a long way toward changing societal mental maps on the larger role of government—is that there’s very little that local governments do day-to-day that cannot be handled by the private sector. This is no small feat for a society that is generally unaware that the private sector can take on a far bigger role than just filling potholes, picking up garbage, and handling other discrete tasks. Though libertarian ideas appear to be making significant inroads into the larger society, a skeptical public will nonetheless demand proof that ideas like privatization work on a smaller scale before they become willing to tackle larger efforts. Hence, incremental reforms along the lines of Sandy Springs offer a proof of concept that work to break down societal conceptions of “traditional” government, making it easier down the line to advocate for free markets and liberty in bolder ways.

And we should never forget a critical, but often overlooked, point: It is far easier politically for policymakers to cancel or limit the scope of a contract than it is to eliminate or downsize the scope of a government bureaucracy. If Sandy Springs wanted to begin eliminating particular city services, all they would need to do is remove them from the contract terms the next time they rebid it. Sure, a private contractor could try to exert political influence to preserve the status quo, just as public employee unions do on the other side. But once a function has shifted out of the in-house bureaucracy to a private contract delivery model, the tether begins to thin considerably and is far more easily cut relative to the herculean efforts typically needed to shutter a government agency.

To dismiss Sandy Springs and other contract cities as merely “blur[ring] the line” between the public and private sectors seems shortsighted to this author. Just because we may share a long-term goal of radically downsizing government does not mean we should not embrace smaller steps in the interim that measurably improve outcomes for taxpayers today.

Also from This Issue

Lead Essay

  • From State to Society by Sheldon Richman

    In a sweeping essay, Sheldon Richman explains why private property and free competition are superior to state-provided goods and services. He warns against granting “private” corporate monopolies, which are not true privatizations, but act as arms of the state. He adds that for many state activities, the best way to privatize is not to provide the service at all — as in the case of punishing victimless crimes, which no one should do. For legitimate services, he recommends a “homesteading” approach, in which stakeholders in a public service, such as a school, would receive shares in a new, independent corporation.

Response Essays

  • The Incremental Approach to Privatization by Leonard Gilroy

    Leonard Gilroy argues for the benefits of incremental privatization. The general public, he writes, must still be convinced that private entities can perform many of the services that have for a long time been provided by monopoly government entities. To win them over, demonstrations will be necessary, and these should be incremental in nature. Gilroy cites several such attempts and argues that they have successfully built support for the idea of privatization.

  • Nuanced Privatization by Dru Stevenson

    Professor Stevenson agrees that much so-called privatization does not deserve the name. It both fails to shrink the government and also creates new constituencies for government spending–the private firms who win lucrative contracts. That said, we must think very carefully about what a more privatized world would look like, and whether we would really prefer it in all cases. Are we comfortable, for example, with the largely religious education system that would likely replace state-run schools?

  • Paying Attention to Incentives by Randal O'Toole

    Randal O’Toole argues that the difference between success and failure in privatization is primarily a matter of incentives. He cites examples of failed incentive structures, like British Rail and New Zealand’s fishing quota system, as well as some successes: Denver’s Regional Transit District has contracted bus service that runs for half the cost of its government-operated lines, and Atlantic City has an entirely private bus fleet.

The Conversation