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Friday, May 18, 2007
You Might Have Thought I Was Done Talking About Contracting, But You'd Be Wrong
One thing lacking from the last couple of posts on privatization was good old-fashioned data. Well, here's one place to start- a thoughtful analysis of a couple of cases studies where local and state services were privatized. Apparently, privatizing these services turned out to be much more expensive than when government did the work.
How come? First, contracted services can be complex (emph. mine).
For one thing, the tasks that make up the bulk of public service are often more complex than privatization advocates maintain, and the complexity translates into extra costs to administer the contracting process, monitor work, and evaluate performance. These can easily outweigh savings from lower production costs. Private organizations themselves often find that the administrative costs of performing tasks in-house are less than the transaction costs of using the market when key elements of their mission are at stake.
Also, contract purchases are more expensive to administer and monitor than typical purchases.
In contract markets, the choice of sellers is usually more limited. Product quality and prices are not as easily observed and compared. Consequently, decisions to contract out involve specification of the product, negotiation of prices, close monitoring of quality, and anticipation of contingencies. The decision to make or buy involves not only analysis of the comparative production costs typical of spot markets, but also the transaction costs of contract design and monitoring when much relevant information is nonexistent or only available at significant cost.
In conclusion, contracting is expensive. There are better options for reducing government costs.
The appealing simplicity of privatization through competitive contracting should be examined in light of experience and in comparison to alternative methods of improving public sector efficiency. A prominent option is the refashioning of labor-management relations, typified by the Indianapolis story.
Enhancing efficiency in public service provision may be possible without the participation of business firms. Given the transaction costs involved in a change-over to contracting, labor-management consultation could provide an economical shortcut. From this standpoint, it ought to be the option of first resort.
The upshot is that even if ensure the integrity of the process and hold contractors accountable, it can still cost more money to contract out than have government workers do it.
Posted by Matt Lewis
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