On both sides of the Atlantic, privatization (or even privatisation!) is seen by many as a solution to the problems in many sectors of the economy. It seems to me that we could adopt a fairly simple test to decide if, on its face, a transfer from public operation would be a good idea.
Before looking at the test, we need to face the problem raised by the use of “good” in the preceding sentence. This of course implies a value judgment. If you think that government should not run anything at all, then you are likely to consider any privatization a good thing. However, maybe we can all agree on two objectives for any operation, deliver the best service/product at the lowest cost. Undoubtedly these objectives may be mutually exclusive, and there will be another set of value judgements about how to balance the two, but the objectives themselves should be acceptable to everyone.
So here is the test.
“Is the operation/service open to free competition?”
If it is, then it is a candidate for privatization, if not, then it should remain under public control.
Some examples :-
Prisons.
Using the test, prisons should certainly not be being privatized. The consumers of the product have zero ability to exercise the choice of establishment that would provide an incentive for quality in the delivery of the service. The only incentive a provider in this sector has is to minimize expenditure so as to maximize profits within a low bid price. True there are rules and regulations that are supposed to maintain standards, but reliance on those to constrain the actions of a monopolistic business has historically not been successful. There are reasons that there are laws that severely limit the monopolistic tendencies of businesses!
Hospitals
Within the cities where there are multiple hospitals, often right next to one another, the American example of privatization passes the test. In those places, private hospitals compete with one another to attract patients because they are their paying customers, and those customers can easily choose based on the relative performance of the hospitals.
However, in small towns where there will in all likelihood be only a single hospital, competition is severely limited by the patient’s inability, or at least extreme difficulty, in electing to go to a distant hospital. Interestingly, given the general absence of government or community hospitals in the US, those small town monopolistic hospitals that do not self regulate can reach a point of poor performance at which the delta between them and a more distant facility is so great that many patients will accept the inconvenience and risk of traveling to a larger city. Sadly, this level of competition is on such an uneven playing field that the local hospital can persist at a very low level of performance.
More examples where privatization fails the test.
FAA – Privatizing a national monopoly with zero competition makes no sense. Which is not to say that there may be many improvements that could be made in the way it is currently run.
Schools – While it may appear that privatizing schools passes the test because parents do have the ability to make a choice of school for their children, that choice can be severely limited by their economic and social situation. If you don’t have the ability to take time off work, or the access to the transportation that would be required to get your children to a school the other side of town, do you really have a choice? There may be situations where privatizing a school passes the test, but it would need reviewing on a case by case basis.
Competition can have a Time Dimension
The city/town where we live has privatized the collection of household waste, an action that would initially seem to fail the competition test since, as as an individual householder, I have no choice but to use the chosen provider. There are of course other ways I could dispose of our trash, but they would be totally non-competitive either in cost or level of inconvenience. What makes for the competition in this scenario is the time dimension. The privatization is of a service for only the limited length of a contract term. The cost of entry to compete for the next contract period is not high, and there are sufficient other companies within the geographical area to ensure that the current operator knows that they will not obtain an unchallenged renewal of their contract. Add to this, the immediate personal involvement of all of the relevant voters, and in particular the councilors representing them in the decision making bodies, with the performance of the company and you certainly have the required degree of competition for this privatization to work.
In contrast the prison decision still fails the test as even if there is a contract renewal requirement, those making the decision are not dependent on the performance of the operator and if the operator is also the facility builder/owner, the cost of entry for a competitor is very high.