Ten Principles of Privatization

Published July 2, 2010

Privatization means shifting some or all aspects of service delivery from government to private-sector providers. It is a strategy to lower the costs of government and achieve higher performance and better outcomes for tax dollars spent.

A Widely Used Tool

Policymakers in many jurisdictions in the U.S. and around the world use privatization to better the lives of citizens by producing higher-quality services at lower costs, delivering greater choice, and ultimately providing more efficient and effective government.

In recent decades, privatization has gone from a concept viewed as radical and ideologically based to a popular and well-proven public management tool. Thousands of national, state, and local government agencies in the United States have successfully privatized scores of services. Researchers have documented the successful privatization of airports, electric and telecommunications utilities, prisons, schools, transportation, and many other services.

Why Privatize?

As this is written in 2010, a recession is causing fiscal trauma in many states. The 50 states face a combined budget gap of approximately $200 billion. Many local governments are in desperate straits due in part to declining property tax revenues. “Creative budgeting” is no longer sufficient to hide the need to cut spending.

Government managers and concerned citizens can use privatization to achieve a number of other goals:

  • Cost Savings: A Reason Foundation review of more than 100 privatization studies found savings ranging from 20 percent to 50 percent.
  • Access to Expertise: Contracting gives governments access to expertise they do not have in-house on an as-needed basis. It is cheaper to retain architects, engineers, and lawyers on an as-needed basis than to hire them as full-time employees.
  • Better Quality: Competition brings out the best in competitors, whether it is in sports or in the business of providing public services. Bidders have incentives to offer the best possible combination of price and service quality to beat their rivals.
  • Improved Risk Management: Contractors, rather than the government, are responsible for cost overruns, strikes, delays, and other risks.
  • Innovation: Competition to win and retain contracts spurs the discovery of new, cutting-edge solutions. Without competition, even top-notch employees may stop looking for ways to improve how they meet customers’ needs.
  • Meeting Peak Demand: The cost of providing a public service can be raised considerably by the capital and manpower needed to satisfy demand at peak periods, even though those peaks may last only for a few hours a day, a few days a week, or a few months a year. Contracting allows governments to obtain additional help when it is needed so that services are uninterrupted for residents.
  • Timeliness: “Time is money” if you are a contractor footing the bill, or if your contract with the city or state includes penalties for delays. Contractors can recruit additional workers or provide performance bonuses to meet or beat deadlines, options that often are unavailable to in-house staff.

If badly executed, privatization like any other policy can fail. Taxpayers are no better off, and may be worse off, if a service is moved from a government agency to an incompetent or inefficient private business. But we have the experiences of governments in the United States and around the world to learn from. The 10 principles of privatization that follow capture the best practices that have emerged from those experiences.