The Incremental Approach to Privatization

Sheldon Richman makes a persuasive case for privatization, accurately noting the calculation/knowledge problem and the incentive problem as critical flaws in the government provision of services and assets that justify their ultimate devolution to the private sector.

Richman also provides a useful theoretical construct for privatization, making a sound argument that just because a public sector activity or asset can be turned over to the private sector in some fashion doesn’t necessarily mean that it gets us closer to a smaller, more constrained government; it may be an unnecessary or illegitimate function in the first place.

That said, theory and practice are different. The style of privatization that Richman argues for, which draws a clear distinction between what is and is not a legitimate government function, is a very worthy “end state” goal. However, if that goal is to be achieved, it is likely to come only through a slow unwinding of the functions and assets of government, with many incremental steps along the way from here to there.

Rather than a sweeping devolution of K–12 schools and road systems, for example, from public to private sector provision, the relatively glacial pace of government reform in practice, and deeply entrenched social and political views on the role of government (warped by a century of government sprawl started in the Progressive Era) will make devolution through privatization a long, piecemeal, and challenging process. To bridge the gap to the end state, the private sector has to demonstrate to the public that it can take on an increasing share of the load from the public sector.

Given the nature of modern politics, scaling back the size and scope of the public sector will not likely come in giant leaps, such as devolving control of K–12 schools to groups of parents and/or teachers with no ongoing state subsidy, as Richman envisions (and which represents a worthy long-term aspiration). Rather, the devolution of public functions to the private sector will (of necessity, in this author’s opinion) continue as it currently does: incrementally, through the slow adaptation and expansion of existing contracting and government procurement models, shifting ever more functions over time from public to private provision.

There are several practical constraints standing in the way of rapid and aggressive devolution of the sort implicitly envisioned in Richman’s essay. First, political and bureaucratic inertia—clinging to the status quo—dominates the public sector culture. Regardless of their intentions upon taking office, many policymakers fall prey to a sense of parochialism that grants political deference to existing public employees, making it difficult to advance even simple outsourcing contracts, much less more substantial shifts toward privatization and devolution. The public sector’s desire to retain some control over the process will, for better or worse, remain until the private sector takes on such a predominant role in the delivery of what society views as “public” services and assets that the public-sector role itself becomes seen as redundant or irrelevant.

Just launching a fairly straightforward procurement for an outsourcing contract today often requires running an internal gauntlet, despite the potential to reduce the costs of service delivery and drive better value for taxpayers’ money. Add in aggressive political campaigns by public employee unions, circus-like public meetings, media pressure, and politicians’ tendencies toward self-preservation, and it becomes even more difficult to take even baby steps toward privatization.

While some libertarians accurately note, as Richman does, that the pursuit of increased efficiency alone (through contracting out, etc.) will not ensure that government will be meaningfully shrunk, that doesn’t mean that efficiency through sensible outsourcing should not be pursued nonetheless, both on moral grounds (e.g., spending taxpayers’ money wisely) and as a necessary part of the evolution toward a more privatized end state.

Richman’s vision—only a bare bones government with the private sector delivering the vast majority of societal needs—is worthy of aspiration, but we will only get there incrementally over time. It is likely to involve devolving functions and assets to the private sector that are determined more, at least initially, by political and pragmatic expediency, than by a shared libertarian vision of a proper (and radically minimized) role for the state. This shift will probably be driven less by principle and more by immediate fiscal pressures, looming debt obligations, and a general fiscal triage as governments confront the “new normal.”

But while imperfect, this evolutionary, incremental process toward privatization is necessary for two key reasons. First, while Richman argues that “privatization devices” like contracting out “merely blur the line between ‘private’ and ‘public’ sector […] and undermine the case for the genuine divestiture of state-held assets,” this author would respectfully submit that the opposite is true. For the longer term societal shift, the private sector will need to prove itself, taking on ever more functions over time and demonstrating to the public at large that it can be trusted with an increasing share of responsibilities generally seen as “public” today.

Governments did not grow to their current size overnight, and it will similarly take generations to prune them back to a size and scope more palatable to many libertarians. The government is not just one large monopoly, but rather the aggregation of many smaller monopolies, each of which has a unique path to privatization.

There’s another practical and more immediate reason to support incremental privatization: unfair government competition with private enterprise. Governments at all levels today routinely spend tax dollars to hire in-house staff to perform a wide array of functions and services—everything from print shops and vehicle maintenance stations to park operations and various healthcare services—that are commercial in nature and, thus, could be subject to private sector competition to drive costs down and drive better quality in service delivery.

For example, let’s look to Sandy Springs, Georgia. It’s an Atlanta suburb incorporated in 2005, and it has gained national attention as a startup “contract city,” with the bulk of non-safety functions provided through private firms via competitive contracting. Long dissatisfied with Fulton County control, citizens overwhelmingly approved incorporation and opted to pursue a largely privatized service delivery model to avoid setting up a traditional—and more costly—“City Hall.” Citizens today are getting far better services for their tax dollars than when under county control, and the example has proven to many observers that there is little that a traditional city can do that cannot be successfully implemented through a privatized delivery model—a critical step toward building the case toward larger devolution.

Some libertarians could argue, correctly, that Sandy Springs doesn’t represent a radical shift to privatization. Yet Sandy Springs also did not have a realistic option to secede from Fulton County to start a “Free State”–type project, so incorporation with a primary reliance on private contracting can be seen as the next best pragmatic approach if the goal is to advance privatization.

For example, planning and zoning—which many libertarians view as illegitimate and market-distorting government functions to begin with—are now just performed by private contractors rather than public agency staff in Sandy Springs. Despite such imperfections, the Sandy Springs model nonetheless offers a powerful (albeit incomplete) example to society showing that what are thought to be “traditional” planning and zoning functions (among many others) are not inherently governmental and can be, as a starting step, handled by private contractors. Given the almost ubiquitous entrenchment of professional urban planning in local governments today, there will be many policy battles to fight—and minds to change—to reverse it. But we shouldn’t wait to take small steps toward privatization in the meantime to help sustain the larger case for radical devolution in the future.

In highways and roads, for example, this means continuing to build on the nascent movement towards the private financing of toll roads and other roadway assets in partnership with governments, as both Reason Foundation and the Cato Institute have advocated. And we should continue to build on the innovations in contracted road maintenance and other functions formerly delivered in-house by government agencies.

Similarly, in education we should not shun things like competitive contracting for non-instructional K–12 services (e.g., food, custodial, and transportation), nor should we reject as half-measures innovations like charter schools in favor of a less realistic (at least today) full devolution of K–12 schools to private actors. The success of the charter school movement is ultimately building the case for the latter, not distracting away from it.

To truly devolve the functions and assets of government, libertarians will need to continue to build the case for more radical privatization, even as they work on pragmatic, incremental reforms. The key, then, is crafting sensible procurements, contract structures, and market-based reforms that allow the public sector to steer while the private sector rows, at least until libertarians can build a broad political and social consensus that the private sector is ready to step into the captain’s chair as well.

Also from this issue

Lead Essay

  • 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

  • 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.

  • 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?

  • 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.