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Other Issues
Privatization and Competition

Like governments in other states and localities, governments in North Carolina are struggling to satisfy two apparently conflicting public demands: lower taxes and better services. Under the traditional model of public sector management, these two goals are diametrically opposed. To lower taxes, a government must reduce the amount or quality of services. To improve programs such as public schools or social services, citizens must be willing to "invest" more tax dollars in government.

But a new generation of leaders in North Carolina and other states is challenging this conventional wisdom. By introducing competition, markets, and volunteer participation into government programs and services, they are serving the public by both reducing cost and increasing quality. And they are doing so without sacrificing the government's role as funder and overseer of core government services.

The Case for Competition

Although the term privatization has come to mean simply transferring tasks previously performed by government employees to private for-profit firms, the concept is much broader than that. It involves applying the discipline of competition to the public sector, but not necessarily moving services to private contractors if government employees and agencies prove to be the lowest-cost, best-quality provider. The appropriate strategy should be to transform the role of government from a monopoly provider of services to a purchaser of services from whatever set of public, business, or nonprofit providers is in the best interest of citizens.

What is it that makes privatization and competition so crucial to reform government? It changes the incentives. For most public managers, the monopoly status of government programs presents a set of incentives not found in private industry. In government, a manager's salary and satisfaction are highly correlated to staff size and budget. If Government Manager "A" underspends her budget or employs workers more productively, she will subsequently receive a smaller budget and staff, with the result that her salary will not rise and her career will be hampered. Alternatively, Government Manager "B", who overspends his budget or inflates his workforce, will find that the costs of wasteful, inefficient spending can be passed on to others — the taxpayers.

Private-sector managers, of course, also like to increase their salaries and status by expanding operations under their control. But unlike their public-sector counterparts, these private managers also face the threat of failure. Unless they reflect increased demand for a firm's goods or services, increases in salary and budgets will cause financial problems over time. So the same managers or employees, with the same skills and talents, will naturally perform their jobs differently. When governments fail to restrain costs and provide good services, the managers and employees are usually not to blame. The system presents them with poor incentives.

North Carolina Cases

While hardly a national leader in privatization and competition (see chart, "How North Carolina Stacks Up in Government Spending"), North Carolina has begun to employ the strategies that governments across the country have used to reform government. Charlotte, Raleigh, Durham, Greensboro, Asheville, and other localities have all debated and in many cases implemented privatization in the past few years. Charlotte, with one of the most extensive privatization programs in the state, had by the mid-1990s contracted out 84 percent of its engineering and property management needs, half of its internal support services, 71 percent of transportation, 17 percent of finance, and 78 percent of airport operations.

Local leaders in North Carolina have contracted out a variety of services. Surry County saved almost $100,000 and improved coverage by seeking private bids for its insurance policies. Chapel Hill-Carrboro contracted out its school system's lunch program in 1995, while the Mount Airy school system has realized significant savings by contracting out maintenance and janitorial services. Charlotte-Mecklenburg found that when almost 100 schools contracted out their grounds maintenance, the process didn't save money but did improve school appearance. Gaston County has contracted out janitorial needs, lawn maintenance, tax billing and collection, a dental clinic, and day care operations (in which there was a savings after privatization of 90 percent).

Health care and social services have been an especially popular area for contracting. Mecklenburg County saved almost half a million dollars by contracting out its food stamp distribution. Onslow County did the same, not only saving money but also making distribution more convenient.

In other areas, privatization efforts by state and local government in North Carolina have not achieved their stated objectives. In many of these cases, however — including a state attempt to use private contractors to improve child-support enforcement — the culprit was not privatization itself but the design of the contract. Because taxpayer dollars are at risk, public officials must structure requests-for-proposals and contracts carefully to ensure that expectations are clearly stated and a truly competitive system is used to select providers.

Recommendations

1. State and local governments should set up permanent privatization and competition offices. This will create an institutional framework for introducing competition to government services. They should allow private firms to submit unsolicited bids to these privatization offices to operate programs or buy assets.

2. Lawmakers should eliminate legislative and administrative barriers to competition. Many state laws and regulations prevent privatization and competition.

   For example, in 1995 Wake County released a study purporting to show that contracting out its school bus operations would actually cost more than keeping it a school-district monopoly. Only later did the public discover the reason privatization would not have saved money: state regulations on insurance and other issues hide the true cost of public-sector provision.

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