The Morning Report
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Privatization is being pushed as a panacea to the financial problems facing the nation’s cities and states. Closer to home, Mayor Jerry Sanders is proposing to privatize trash collection and landfill services, and Councilman DeMaio is proposing a sweeping reform that will make it easier to outsource government functions.
The presumption is that the private sector can do things better and at a lower cost. This gets repeated so often, it has become like a religious litany, taken on faith. But the facts suggest it’s often simply not true.
For example, in 2004 Texas privatized several functions that had been performed by state workers. A state audit found that none of the projected $21 million in savings was realized.
Texas’ experience is not unique. That may explain why there has been a recent trend for bringing previously privatized work back in-house. The primary reason for reversing the decision to privatize — cited by nearly 61 percent of governments responding to a survey run by the International City/County Management Association — was problems with service quality. The next most common reason was lack of cost savings, cited by 52 percent of responding governments.
It’s not surprising that the conventional wisdom on privatization often doesn’t pan out. Private companies have to make a profit — usually a minimum of 7-10 percent — public entities don’t. Moreover, private companies have an incentive to slice services to the bone, while public programs are directly answerable to citizens, and must meet expected standards of service.
There are other hidden costs in privatization, including expensive legal proceedings for running contracts, the need for government oversight functions and the need to recomplete the contract periodically.
Finally, privatization often merely shifts the cost from government to citizens. For example, Sander’s proposed privatization of trash collection will cut city costs, but San Diegans will pay more, since the city does not charge a pickup fee, and the public system is already among the most efficient in the nation.
Privatization increases the prospects of graft and corruption and the consequences of greed. The design and award of contracts is often not transparent and subject to all manner of ethical abuse. Doubters need only look to the pallets of cash that vanished in the sands of Iraq and the mountains of Afghanistan or the hundreds of billions that are disappearing into the pockets of fat cat CEO salaries.
Public sector employees are often portrayed as incompetent and unmotivated, but here again, the facts belie the stereotype. For example, Medicare, Medicaid and Veterans Affairs Health Care all operate at about a 4 percent overhead, compared to 30 percent for private sector health insurance, and yet, they have higher satisfaction rates and better health outcomes than private insurance.
Whether DeMaio’s privatization initiative makes it on the ballot or not, privatization is an important issue for San Diegans — and when people start mouthing empty slogans about “big bad gubmint” and making emptier promises about savings, we’d all do well to hold onto our wallets and keep our eyes open.