Thursday, January 17, 2013

Privatization and Cartels

For years I have written that the single most common failure mode of privatization is when it replaces a public agency monopoly with a private cartel.  Private actors are not inherently more efficient or innovative than public ones -- they often are, but that is because they have better incentives imposed on them from the marketplace and particularly from competition.  Replacing a public monopoly with a private one seldom achieves much benefit.

Megan McArdle and the New York Times have a fascinating account of the recent New York school bus strikes.  The whole situation is a complicated mess with multiple failure modes, so its hard to assign one element or another the proper ration of blame.   For example, the way New York handles its exploding population of special ed kids adds a lot of cost to their busing system.

But its pretty clear from the article that bus drivers unions and bus companies have created a cartel to enrich themselves, choke off competition, and raise costs to the city.  It appears that companies pay the unions above-market pay and benefits and guarantee them a closed shop in exchange for the unions creating massively disrupted strikes whenever the city tries to change the status quo.

Sometimes the smallest issues can cause big problems.  This is not discussed in the articles linked, but it appears that the union and cartel hold a lot of its power because the city chooses to renew contracts in January, during the school year.  All the historic efforts to bring in competition or rationalize routes has been in January.

But trying to do this during the school year, rather than in June, is insane.  It gives the companies and unions incredible power, because they can threaten that any change will lead to disruption.  Even switching providers for a single route suddenly becomes risky, because the new provider would have to seamlessly take over the service on the fly.  I operate public campgrounds on contracts awarded through a bidding process.  All the agencies expire contracts and do bidding in December and January when the parks are closed for the winter.  I can't even imagine an agency trying to make this switch in the busy summer.  I could easily see competitors who wanted to game the system scaring agencies into renewing their contracts no-bid in this situation under threats of disruption and chaos.

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