Second Opinion by Cliff Slater
February 24, 2003
Privatizing is not just saving money
The recent scathing report from the State Auditor on privatization details how Hawaii is missing out on potential savings.(1) But privatization offers many advantages to taxpayers; saving money is just one of them. The other advantages become evident in reviewing the different kinds of privatization.(2)
You can “contract out” a government service to a single supplier—or several suppliers. You can let suppliers compete but under very heavily regulated conditions. Or you can let the free market run the service, which is known as “service shedding.”
Back in the 1980’s the Chinese government faced these choices when they decided to privatize the manufacture of clothing—then, principally, the ubiquitous Mao jacket.
They could have simply contracted out their manufacture to one winning bidder. This would have led to a monopoly supplier of government designed Mao jackets—but at lower cost.
Or they could have contracted them out to several manufacturers. This would have been better because then the Chinese government could have then compared qualities. But they would still be government designed Mao jackets albeit at a lower price and better quality.
Or they could have chosen the heavily regulated private market route where anyone can manufacture Mao jackets—but only Mao jackets. It would still be the Mao jacket but the prices and qualities would be better.
Or they could have chosen the free market route where people could both manufacture and design whatever they liked. This is what the Chinese actually did. And that was the end of the Mao jacket.
Now there are some good reasons to have a monopoly supplier. For example, in Arizona, the Rural Metro Company is the sole operator of the Scottsdale Fire Department.(3) It would be tough to have privatized this service with competing companies for obvious reasons.
Contracting out among many suppliers is useful to compare service qualities. In the UK, the London bus system has been contracted out to several operators.(4) The buses and routes are the same but subsidies have disappeared and service is better.
Competing under heavily regulated conditions may be justified at times. Applying such conditions to nuclear power plant construction seems reasonable. Allowing the providers of such plants to compete with the ferocity of New York garment manufacturers would not be quite appropriate.
But for the most part, there is little to be said for not letting the market be free—getting rid of the Mao jacket, so to speak. For the consumer, there is nothing like having a zillion suppliers groveling at your feet begging you to buy their goods and services.
Giving the TheBus, run by a private operator,(5) a monopoly on mass transportation is the Mao jacket efficiently operated. Having residential garbage collection as a city-run monopoly is the Mao jacket inefficiently operated. But the real decision is still whether to get rid of the Mao jacket.
For example, for city buses we could take the example of Buenos Aires, Argentina, which has developed what the American Public Transportation Association calls, “one of the world's better urban transportation systems.”(6) Some 400 private companies ply 1,100 buses on 60 different routes—all profitably.(7) They got rid of the Mao jacket.
For residential garbage collection, many U.S. cities allow residents to choose from among many competing collection companies. Under these conditions, the companies typically charge according to the size of the containers and also offer curbside recycling. This kind of pricing reduces costs for homeowners and reduces waste.(8) Again, no Mao jacket.
That is the big question facing our state and county elected officials today, should they keep the Mao jacket? You must help them decide.
Cliff Slater is a regular columnist whose footnoted columns are at www.lava.net/cslater
(1) Review of Privatization Contracts for Certain State and County Agencies. A Report to the Governor and the Legislature of the State of Hawaii. THE AUDITOR, STATE OF HAWAII, Report No. 02-21. December 2002.
(5) Oahu Transit Services, Inc. is a private company that has contracted with the City and County of Honolulu to operate TheBus.
(6) RESEARCH RESULTS DIGEST. April 1999 Number 33. International Transit Studies Program. Report on the Spring 1998 Mission, Part 1: Private Urban Transit Systems and Low-Cost Mobility, Solutions in Major Latin American Cities @ http://www.apta.com/intnatl/intstudy/rrd33.htm
(7) For Spanish speakers, more information is at: www.loscolectivos.com.ar
(8) Marie Lynn Miranda and Joseph E. Aldy. Unit Pricing of Residential Municipal Solid Waste: Lessons from Nine Case Study Communities. Prepared for Office of Policy, Planning and Evaluation U.S. Environmental Protection Agency. March 1996