Tuesday, May 21, 2013

Designing for Privatization Accountability

My new column is up at Forbes.com.  Here is a sample, but I want to make a slightly different point on this blog
The most frequent argument I hear is that "its wrong to make a profit on public lands." Most recently, I heard this from a manager of a large campground and lakefront day use area who works for a federal agency. I was not normally in my usual diplomatic mood, and I snapped "so you work for free?"

If my company operated that park for the federal agency, a park that nets about $300,000 a year in visitor revenue, my company would probably make $15,000 or $20,000 a year in profit doing so, if all goes well, which it seldom does (this is a very low margin business). I have no idea what that park manager makes in salary and benefits, but I would be surprised if it were less than $55,000 plus benefits, and probably more. Why is his $55,000 "clean" but my $15,000 for the same task "dirty"? Particularly when the increase in his and his staff's salaries and their increases in benefits has left the park financially tottering and on the brink of closure?
Towards the end I discuss a topic that I think is really relevant to privatization design.
This employee capture, by the way, is not unique to parks — most government agencies suffer from it. In fact, it is not even a phenomenon limited to the public sector. Private organizations are similarly subject to employee capture of their various departments. The difference between private and public organizations, though, is their accountability mechanisms. In the private world, organizations run primarily for the comfort of their employees will get out-competed and eventually will die at the hands of more vital competitors (unless they get bailed out by the government, as at GM). In the public world, accountability is mostly via elections, but public agency workers have been able to organize and wield outsize power in these elections. As a result, what should be an accountability mechanism on agencies captured by their employees in fact becomes a reinforcing device.

The problem with privatization is one ends up with an accountability mechanism somewhere in between. A privatization can, ideally, bring market or market-like forces to bear on accountability. But it can also be poorly designed where a stultifying public monopoly is replaced with a private monopoly that is no better or even worse.

This is, I think, the key issue in privatization on which I would love to see more discussion. Most privatization discussion is fairly polarized, and consists of articles primarily either publicizing a success or a failure, depending on the author's point of view. I obviously think privatization can work, or I would not be in the business, but being in the business also presses my nose up against some fairly spectacular privatization failures that it would be disingenuous to ignore.

I won't answer these today, because I do not have all the answers, but my sense is that there are two key academic questions that really have not been answered in a satisfactory manner, because everyone involved seems more focused on dismissing privatization altogether or advocating it without reservation.
  • What are the characteristics of a particular government activity that make it more or less amenable to privatization?  My gut feel is that the ability to have consumer choice and competition are critical to the best successes.  For example, in my parks world, I may have the monopoly in operating a single park but there are many competitive recreation opportunities for consumers such that if I do a bad job, I will lose business (and my "pay" in such arrangements is 100% tied to visitor revenue, so no visitors, no pay).  Another example might be the DMV, where one can authorize many private competitors to perform DMV functions who will compete with each other, as in California.  A more difficult situation might be tax collection, where one could be substituting a private monopoly for a public one, and where mismatch of incentives could hurt the public.
  • What is the best way to structure contracts to retain the benefit of private market incentives?  Private workers are not inherently different in any way than public workers.  What makes private action often more efficient and consumer-focused are incentives.  But if a privatization contract substitutes the same bad incentives the public agency had, can there be any improvement?