The state recently privatized the operation of the Casco Bay Bridge , and I am wondering where the advantage is supposed to be. They did this under the guise of saving money. This is a drawbridge that must have operators on duty 24/7. Now instead of just paying to run the bridge and keep it maintained, they are also paying some company enough that they make a profit as well. Where is the savings supposed to be? Doing the same work as before, and lining somebody else’s pockets does not sound like a money saver to me.
Private operators often pay their employees less than the government does. But yes, they also want a profit, so the savings is small, if any. On top of that, it hurts the economy.
Privatization is generally a bad idea.
Generally, any savings are likely to be in personnel. State employees often have strong unions and receive better benefits than those available in the private sector. In theory, there is also a savings based on profit motive: the private contractor will have more incentive to find efficiencies because it needs to please its shareholders.
The latter force doesn’t really apply in this case, though, assuming the state has actually guaranteed the operator a profit. Usually companies that take on this sort of contract agree to do it for a fixed price, and the risk of profit or loss is on them. That’s how privatization of Chicago’s parking meters worked, to use one example.
The theory is that corporations motivated by making a profit will have a stronger incentive to keep costs down (lower pay for guards, more efficiencies in upkeep, better business processes) than a government entity would. Also multiple businesses would compete on price for the contract, so it is possible to get the same services for less money even when profit is included. And typically the contract would be firm fixed price, so the risk of loss is on the business not the government.
Sometimes this works, sometimes it doesn’t.
The theory at least is that there are certain tasks that the government is ill-equipped to do, that can be done more efficiently by soliciting bids from private operators with expertise in the area - even after they take a profit.
For example, no-one expects the government to build its own personal computers and cell phones for government employees to use: it makes more sense to leave these tasks to the private market to develop, and have the government simply purchase the end products as needed.
Notably, the private market also uses a similar model - for example, the increasing use in various fields of “contract manufacturers” who specialize in making some particular thing: rather than (say) a drug manufacturer owning a printing plant to print labels, and a drug-making plant to make drugs, and a research facility to research new drugs, the manufacturer may in some cases simply own the intellectual property, and “contract out” label-making, drug-making, and research to specialist organizations: even after they take a hefty profit, it is still more efficient and cheaper, for a number of reasons (to take but one example - if a drug maker owns a printing plant to print its own labels, unless that plant has exactly the capacity required, it is likely to be idle much of the time - but the manufacturer still has to pay overhead running the plant).
Now, that noted, not everything results in such efficiencies, and there are plenty of arguments that things that are “natural monopolies” can be run just as, or more, efficiently by the government. It’s an issue of fact in any particular case which model works best.
I’ll add that in the case of the military, they’ve recently (last 15-20 years or so) privatized a lot of the non-combat/non-logistical type tasks that they have. Partially out of a money-saving motivation, but also partially because they realize that with an all-volunteer force, they’ll get more and longer retention of troops if they are doing their actual military jobs, instead of peeling potatoes, mopping floors, mowing lawns, dealing with garbage, and generally doing all the crap-work that it was cost-efficient to have draftees do, but that professional military people balk at doing.
But the, they want to keep said profit, thus nothing is gained for the governmental entity… besides increased campaign contributions to the Politicos involved… which is really why they do it.
The Politicians get bribed.
But bribing a politician is also an expense a business must cover.
This is a very superficial analysis.
In general I don’t think privatizing the operation of bridges is a particularly good idea, but privatizing some kinds of things can benefit tremendously from economies of scale that are not available to small government agencies. It can also benefit from gains in efficiency that are politically infeasible in the public sector.
It is definitely a bad idea where it is not possible to create a competitive market or a regulated monopoly, and where profit incentives can lead to perverse outcomes (e.g. private jails.)
Some of the most successful privatizations have been of formerly nationalized industries (BP, British Steel, Telmex) and publicly-owned utilities. Another example is privatization of some kinds of government services; for example West Virginia turned their workers compensation system into a private insurance company. The system has been successful and resulted in reduced rates for WC. But the process had to be done carefully; the privatized entity is closely regulated and employers are still required by law to have WC insurance.
Government outsourcing of unskilled or semiskilled labor can often save money due to competition, lower labor costs, and economies of scale. Outsourcing of highly-skilled labor like engineering or software development or project planning can often be disastrous, though. Many cities have saved a lot of taxpayer money by starting to put things like building maintenance, landscaping, and cleaning services up for competitive bid where they would previously be handled by city employees.
In short, it’s complicated, and there’s no single answer. Just yelling “privatization!” at a government agency doesn’t accomplish anything, and if you want to try privatization it’s important that you pick things where it makes sense (e.g. not public infrastructure, not criminal justice, and not the army) and that you be willing to do the hard work of ensuring market fairness and transparency.
Interesting point.
Some times it is a win win for everyone. Many times it is not.
The win win comes because many times a government agency will miss manage the operation and just plain waste money. A lot of the stadiums in this country are managed by the government agency and are costing the citizen’s a lot of money. The San Jose SAP center is managed by the Sharks and it is making enough money to show a profit every year and the city gets some of that profit. The convention centers were being miss managed by the city and loosing money. Turn them over to a private operator and they are up grading the area and running at a profit while maintain the pay level.
Some of the school districts started using contractors to operate the school busses. the drivers are making minimum wage or just above, no retirement, no benefits. Many companies are maintaining the busses at a much lower level and the CHP has to get involved. The bus companies cost the districts less than having employees and maintaining their equipment.
Many times after many years of operation a contractor will not have his contract renewed. Then when the government agency goes to a new contractor they demand that the system be brought up to safe standards before they will sign the contract. And many times it costs the agency more money that what they “saved”, but at the same time this expence comes out of a different budget so the head of the agency will claim they saved the citizens money.
And if all else fails remember FIGURES DON’T LIE, LIERS FIGURE.
Well, yes, to a extent, but they shouldn’t have been nationalized in the first place.
Sometimes (often ?) privatization involves an upfront payment from the corporation to the government. They sell the right to collect the bridge tolls, for example. To the extent that they can incorporate some of those revenues into their current budget, the government can decrease the current deficit or show more of a surplus. This makes the current mayor/governor look good.
Privatizing functions that shouldn’t have been run by the government in the first place should be more efficient. For a bridge privatizing may work if the bridge is sold to the private company but paying them to run it is unlike to result in savings long run. Even if the bridge is sold it has to be reasonably profitable for the company or they won’t maintain it and the government will have to buy it back in the end if it’s needed for the common good. Simply having a company run the toll operations will leave the cost of maintenance in the hands of the government, and if that becomes the responsibility of the private company they won’t have much incentive to perform proper maintenance since they can drop the contract once it becomes unprofitable. Even contract terms are unlikely to keep the bridge properly maintained in that circumstance since the company will just fight any penalties in court and/or bribe some more politicians to make their problems go away.
I’m not sure if it applies to this specific example, but consider privatization of previously publicly performed tasks as you would outsourcing certain activities within a business. Outsourcing or privatizing certain functions means you don’t need to maintain the overhead inhouse. It could provide more flexibility in your operational structure, and in the case of government, could reduce your pension or other benefit load. Pension costs would be my guess as the biggest potential savings.
When deciding whether or not to outsource one consideration is whether the activity is part of your core business that you want to maintain expertise in. An engineering firm may outsource some of their back office function because doing payroll is not a skill set they wish to maintain in house. They may outsource a function to remain nimble to take advantage of changes in available technology so rather than retrain, they can engage a new provider.
And after I write this, I look it up and find the following:
This is consistent with my thought process above.
That’s not a feature, that’s a bug. Allowing the government to pay the administrative costs of a facility while collecting the revenues yourself is one of the biggest parts of the sweetheart deals that teams with publicly funded stadia enjoy.
If a company in business that should be private outsources some of it’s functions and ends up losing on the deal I don’t have to pay for their losses. If they operating a bridge needed by the public and screw it up then the government has to step in and cover the cost to keep that bridge open. I end up paying for it, and somebody somewhere along the line has kept the money that was intended to keep the bridge open in the first place.
Ok. But that’s a political question about the relative value of risk mitigation. Some people may feel differently. The question at hand was how privatization can save money. Reducing benefit load is a way that can happen. Cost overruns put that outcome at risk for sure - but the risk tolerance involved in making these choices is subjective.
However, are you really “saving” any money if you are spending less but also receiving less benefit?
I would argue no. If you spend less now but are very likely to spend more later to repair the damage, you’ve shifted the money around in time but the total didn’t decrease. If you are spending less now but have reduced benefits, then it is likely that you are spending time and money elsewhere to make up for those reduced benefits. The example was given upthread of replacing reasonably well-paid bus drivers with near minimum-wage workers; at very low wages, they probably qualify for food stamps and other welfare benefits. Those come out of a different pot of money, but it is still tax money being spent to employ bus drivers, and by the time you add on the costs of administering welfare, it’s probably MORE tax money being spent so one group of politicians can point to one budget line item.
You would need to put numbers around your assumptions as well as time frames to properly evaluate it. Your answer assumes much.
Pensions can be really expensive.