You Don't Always Get What You Pay For: The Economics of Privatization
By Elliott Sclar
(Cornell University Press, $25)
Reviewed by Diana B. Henriques
Privatization has been one of the most durable buzzwords of the post-Reagan era.
In Europe, the term means selling off state-owned companies that provide private-sector services such as telecommunications, oil production and air travel. But in America, it means letting private-sector companies provide traditionally public services such as fire protection, prison supervision and road maintenance.
The domestic enthusiasts of privatization seem to think that if you want a job done right, you must ask the private sector to do it. As a result, they ignore every modern example of private-sector incompetence from New Coke to Ishtar. Is there much difference, after all, between the Defense Department paying $600 for a toilet seat and a private-sector corporation paying $600 a share for an Internet start-up with no assets, no profits and no plan for producing either?
Before they bubble over with giddy, rich-kid ideas such as letting FedEx take over the local post office, they should sit quietly in a corner and read Elliott Sclar's new book, You Don't Always Get What You Pay For: The Economics of Privatization.
The author, described on the book jacket as "an economist by training," teaches urban planning at Columbia University. His book offers a refreshing dose of common sense, even if the clammy jargon of organizational theory sometimes clouds his arguments.
Despite its subtitle, the book is really about the management of public services. With breathtaking clarity, Sclar reminds us that today's privatization is nothing more than a fancy label for yesterday's public contracting, a gloriously rapacious activity made famous by Boss Tweed.
But as this book demonstrates with one delicious and well-documented example after another, you don't have to be corrupt to botch public contracting. Being dumb will do nicely. Just being dogmatic and unimaginative will suffice.
When state highway maintenance in Massachusetts was gradually privatized, nobody accounted accurately for the state's continuing overhead expenses. Nor did contract language specifically anticipate what could go wrong; it did not, for example, say litter should be collected before, not after, the grass was mowed. As a result, the author writes, "there is no way of ever knowing whether or not privatization added value for the citizens of the commonwealth."
His message is that privatization is not and never will be an adequate substitute for good public management. Whether you call them privatization plans or public contracts, they must be artfully drawn, intelligently monitored and then measured against accurate internal costs to ensure that the public's interest is protected in the pursuit of profit.
Consider the privatization experiment of the Metro-Dade Transit Agency in the 1980s. As Sclar tells it, the agency hired a private company to run 10 of its bus routes, keeping 10 comparable routes in public operation as a control group.
But the contracts were silent about equipment maintenance. When the experiment was abandoned after 18 months, complaints had more than doubled on the routes with private-sector service, ridership had plummeted and the new equipment that the agency provided to the bus contractor had been so poorly maintained that only 10 of 40 new buses could be kept in service.
Moreover, Sclar points out that "most public contracting takes place in markets that range from no competition (monopoly) to minimal competition among very few firms (oligopoly)." In such markets, the invisible hand cannot be relied upon to protect the public's interests.
Even where markets are initially competitive, they may not be cheaper than a smart in-house operation. When Fort Lauderdale considered privatizing its sewer pipe-laying in the early 1990s, contractors prepared bids as high as $130 a linear foot. But city engineers did a cost analysis and found that the city's in-house cost could be cut to as low as $43 if the work were better organized. The contractors promptly cut their bids to $52 to $60 and still could not compete with a reorganized city service.
But the wisest lesson Sclar offers is that poorly managed privatization can collide with important public values.
Soon after Westchester County, N.Y., officials privatized parking services at the county medical center, parking fees rose beyond the reach of the families of poor patients. Only then did officials realize, he said, that there was more to running a hospital parking lot than making money.
His wise and useful book is flawed by academic jargon; someone should take pruning shears to the fifth chapter, "All in the System: Organizational Theories and Public Contracting." There are a few very minor but unfortunate errors that will cheer the professor's critics: The name of a Salomon Smith Barney predecessor, for example, is slightly garbled.
But on balance, his examples, his analysis and, most of all, his plea for sensible attention to good public management techniques, deserve wide notice. Even if politicians don't heed his advice, taxpayers should.
_ New York Times