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Privatizing in the Dark: The Pitfalls of Privatization & Why Budget Disclosure is Needed
Nathan Newman on December 10, 2007 - 11:18am
Periodically, we hear elected leaders promoting what seems like a free lunch: hand-over control of government services or government assets to private industry and services will improve at a lower cost. Like most promises of a free lunch, privatization of government services ”“ also known as "contracting out" or "public-private partnerships"”“ has rarely delivered on its promises, with most studies showing little gain and often substantial losses for the public.
Some privatization failures are spectacular flameouts but others are quieter and happen out of the public eye. One of the largest problems is that states systematically fail to collect reliable data on the benefits of costs of privatization and don't generally even track what percentage of their state budgets are going to contracting out services, a theme highlighted in a new report by the Progressive States Network:
The report emphasizes that what is especially missing is state data that allows state leaders and researchers to compare the degree of privatization in similar sectors among different states to assess best practices in providing public services. The limited data available should encourage states to enact laws creating greater transparency over how much of their state budgets go to outside contractors and for which programs.
In our report, we use the imperfect data available to briefly survey the broad trends in state privatization and highlight the problems many opponents see in that process. The report also uses available multi-state data to note some of the comparative information we do have about state privatization programs.
The Pitfalls of Privatization
As our report details, problems in the contracting-out process range from lost quality to potential corruption to undermining democratic accountability over public services.
Lost Money and Quality for Taxpayers: There is little doubt that the poster child for the failure of privatization was Texas' attempt to hand over management of its social services system to Accenture, the Bermuda-based consulting firm. The promise was that business expertise would put government bureaucrats to shame with their efficiency. Instead, computer systems failed, costs mounted and 30,000 children ended up being dropped from the children's health insurance program (CHIP) because of administrative bungling.
The results were so bad that the Republican State Comptroller, Carole Keeton Strayhorn, investigated the deal and declared:
The Accenture contract appears to be the perfect storm of wasted tax dollars, reduced access to services for our most vulnerable Texans, and profiteering at the expense of our Texas taxpayers.
Weak Oversight and Lost Expertise: A number of states have contracted out so much that they have lost the internal expertise to even evaluate the quality of the companies bidding on government projects, leading to more ripoffs of the public but also even deadly results, as with the Big Dig construction project in Boston.
Selling Off Public Assets for Short Term Gains: When public assets are in the mix, the other worry is that sharp bargaining by private interests will mean a bad deal with long-term economic losses for the taxpayer. When Indiana agreed to hand over a 75-year lease of its toll highway to an Australian-Spanish consortium for $3.8 billion, many analysts complained that this deal was trading up-front money for the loss of toll income for multiple generations. "That is money that could go to our children, our grandchildren and our great-grandchildren," said Indiana House Democratic leader Patrick Bauer last year, who is now Speaker partly because of protests over the deal.
Lost Democratic Accountability: One reason, it is argued, that privatized services can make money is that they do things that elected officials might not be able to get away with if decisions were subject to direct democratic accountability. Privatized roads can raise tolls with no political debate and private contractors can use marketing or employment practices that would be stopped in their tracks if done by the public sector.
Corruption of the Political Process: A significant worry is that the "revolving door" between private contractors and the government offices where those contracts are awarded creates a nexus for corruption that a strong civil service ethic among government workers was originally created to prevent. Such revolving door corruption has played a role in recent high-profile privatization scandals, from Texas to the notorious "Coingate" scandal in Ohio which led to investigations of the whole Ohio political elite in 2005 and 2006.
Lack of Evidence of Savings from Privatization for Taxpayers
As at least one analysis of privatization of state and local services over the last 20 years found the majority of such projects failed because of deteriorating quality of service. And in more than half the cases, the projects did not save taxpayers dollars. As Paul C. Light of New York University, who has long tracked the hidden contractor work force at the federal level, has argued, "We have no data to show that contractors are actually more efficient than the government."
While some conservative scholars will cite their studies showing the gains from privatization, the most intellectually honest statement is that, especially in analysis of privatization at the state level, there is such a lack of broad-based data on the privatization process that all studies have been narrow and nearly anecdotal due to the lack of good multi-state data to compare results.
Little Data on Privatization: Because states do not collect and publish good data on their contracting practices, well-respected scholars on privatization such as Cornell Professor Mildred Warner say flatly, "I am not aware of a consistent data set at the state level to make academically relevant statements on the level of contracting in the states."
Echoing Warner, the most recent report from the American State Administrators Project, which surveys privatization in the states, argues "Apart from selected surveys at the local (municipal) level, most public administrative experiences and research involving contracting are anecdotal, case-specific, or otherwise narrowly focused." Meanwhile, the Council on State Governments report on state contracting states, "There appears to be no consensus as to the effectiveness of privatization in part due to the lack of empirical data as well as the complexity of the issue."
States Fail to Collect Privatization Information: What is lacking is publicly accessible accounting in each state of noting what percentage of each agency's budget is being spent through public employees and what percentage is going to contractors. In the course of writing this report, we contacted state budget and procurement offices in all of the states. Of those who replied, none had good data on their overall state contracting.
The Need for Privatization Transparency Legislation
There is actually broad agreement across the political spectrum on the need for greater transparency in government contracting. As Geoffrey Segal of the pro-privatization Reason Foundation argued earlier this year:
It's well established that there is a need for greater transparency. Web-based information would make government more transparent by allowing taxpayers access to spending information and clarity on where their tax dollars are being spent.
Progressive States Network recommends that such accountability legislation should take a number of forms, including:
- Measuring the Costs of Privatization: Laws should prohibit private contracting of government services unless private companies prove they can perform those functions more efficiently than government workers .
- Budget Accounting for Privatization: Every state budget should include a line item listing the percentage of each agency's budget that is going to private contractors.
- Online Disclosure of Privatization Data: Budget data on privatization should be disclosed in an accessible way on the Internet.
- Banning Pay to Play Contributions: Laws should bar companies bidding on contracts from making campaign contributions to government officials.
A Few Trends in Privatization
With the imperfect data that exists, we can say a few things about broad trends in privatization. While a number of states reported increased use of contracting out in recent years, any increase in privatization was down from the 1990s. And while there have been a few highly publicized privatization efforts in some states in recent years, broad trends in continuing high rates of public employment do indicate that this is happening within a context of broader stability in levels of contracting -- and what scholar Mildred Warner indicates is quite a bit of "contracting back in" previously privatized services after failed privatizations.
In the recent PSN report, we did compare all fifty states on a number of measures of privatization. The comparison added in a few measures about the progress of energy and telecom deregulation in the states, since many of those pushing those deregulation policies reflect the same ideological underpinnings of those promoting privatization.
One thing that did stand out is that states with strong tendencies to use contracting out do not fall into simple geographic or ideological groupings, since while Texas makes large use of contracting out, so do does New Jersey. And many states may rank strong in privatization in one area, while being far lower-ranked in another sector.
The key conclusion of the report is that states need to collect better data on what percentage of each agency's budget is going to outside contracting, establish better measures of the costs and benefits from privatization, and create public disclosure of that information, preferably on the web in an accessible form.
Given the lack of real evidence of savings to the taxpayer from privatization, it is actually a wonder that so many leaders promote privatization as a "solution" based largely on ideological fervor. Instead of such theoretical rhetoric, states need to promote evidence-based measures of quality in public contracting and use better data to promote best practices in contracting out across the states.