Privatization

Privatization is an umbrella term used to describe several techniques that increase competition in the public sector. The primary difference between the public and private sectors is competition. Private sector entrepreneurs must constantly look over their shoulders because the competition might find a way to cut costs and lower prices, putting them at a competitive disadvantage.

The public sector, on the other hand, can be characterized as a monopoly provider. State agencies are often the only service provider or when there is competition with the private sector, the state agency has unfair access to taxpayer funds. State agency personnel secure agency income, not by satisfying customers, but by satisfying special-interest groups who lobby for and legislators who pass their agency budget.

Taxpayers and citizens alike benefit from privatization techniques because increased competition lowers costs and improves the quality of services.

Types of Privatization

Competitive sourcing uses a bidding process that allows private sector service providers to compete with public sector agencies. If, for example, the state wanted to obtain bids for drivers' license processing, the existing state workers would submit a bid in competition with private companies. The lowest bid, public or private, would receive the contract to provide the service.

Public/Private Partnerships (PPPs) are joint ventures between public agencies and private firms to provide some service or perform some function. PPPs are commonly used in constructing buildings or roads. For example, private toll roads can be built according to state specifications with users paying the costs and, after a contractually agreed-upon time, the road would revert to state ownership.

Contracting out involves the public sector contracting with private or nonprofit firms to deliver a service that a government agency previously provided. Taxpayers can benefit because the contracts are open to competitive bidding. The government maintains control through the terms of the contract. Common examples are driver's license testing, food service in schools and prisons, parks management, and wastewater treatment.

Asset sales are a way for governments to increase revenues by shedding nonessential property or commercial-type enterprises. In addition, some governments have sold buildings and then leased back needed space. The budget crisis in California has prompted that state to consider selling the LA Coliseum, San Quentin Prison, and a number of state fairgrounds. Estimates of asset sales (also called divestiture) in California range up to $1 billion (see chart).

State-level comprehensive approaches

The most effective way for North Carolina to save money through privatization is to create a state-level, independent decision-making body to manage privatization efforts. Recent successes in Florida, Virginia, and Utah prove the effectiveness of this approach.

Key Facts

Recommendation

  1. Adopt a comprehensive privatization strategy by creating a Council on Efficient Government similar to those of Arizona and other states in the forefront of the comprehensive privatization movement.


Analyst: Dr. Michael Sanera
Director of Research and Local Government Studies
919-828-3876 • msanera@johnlocke.org