YOU DECIDE: IS PRIVATIZATION A WAY TO INCREASE GOVERNMENT EFFICIENCY?

Government at all levels now spends over one-third of the income in the country. Many people think this is too high, and "privatization" has been suggested as a way to make government more efficient and reduce its costs.

What is privatization? Does it mean that government stops performing an activity and instead turns that activity over to private businesses? In some cases this is true, as government may decide it should not be performing some functions. For example, some European governments once owned and operated their airline and steel industries, but have subsequently decided these functions are best performed under private ownership and operation.

However, privatization can still result in government retaining control of a function. In this case, privatization separates the financing of an activity from the providing of that activity. With privatization, government may continue financing an activity, but it can turn over the provision of that activity to the private sector.

Here's an example. In most cities, garbage collection is currently a government activity. Cities collect tax revenues from citizens to pay for the garbage collection, and cities buy trucks and hire permanent employees to collect the garbage. That is, cities both finance the garbage collection and cities actually collect and dispose of the garbage.

With privatization, the payment for, and the actual performance of, garbage collection are separated. Citizens still pay for garbage collection with their local taxes. But instead of buying the trucks and hiring the workers, the city takes bids from private garbage collection companies and selects the one with the best combination of service and price. Periodically, the city reopens the bidding in order to always contract with the best company.

Why would using a private company to collect garbage be cheaper than having the city do it? Advocates of privatization say the reason is competition. Competition forces businesses and workers to constantly evaluate their services and costs to make sure they are providing the service at a price and performance level comparable to other companies. If businesses don't do this, they know customers will turn to a competitor.

In the case of our garbage collection example, companies first compete to obtain the contract from the city. Second, the company that gets the contract must compete again each time its contract comes up for renewal. If it's not the "best" company at renewal time, the city can select a competitor.

This is the theory of privatization, but does it work in practice? Several cities around the country have privatized, or "contracted-out," some services and have reduced costs 20 to 40 percent. But, interestingly, many cities have found that providing the service themselves was still cheaper than contracting with private companies.

That is, these cities found their employees were already working at efficiency levels comparable to the private sector.

In those cities that can provide the service at lower cost than private companies, privatization advocates argue it's still a useful concept because periodically comparing city costs to private company costs will help keep public employees "on their toes" and ensure that public services are, indeed, provided most efficiently.

Are there any drawbacks involved in the privatization of selected public services? Thereare at least three potential disadvantages. First, a private company which is hired to perform a public service may simply not do its job. In this case, the contract with the company would presumably be terminated at some point; in the meantime, citizens could suffer from the poor service. Citizens could also face some upheaval and adjustments as service provision is switched from the government to private companies, and then, potentially, from one private company to another. Last, public employees could lose their jobs or have their pay dramatically affected if service provision is shifted to the private sector.

There's one other question that's vitally important in the debate about privatization. Are there any government services which shouldn't be considered for privatization? Although everyone will have their own opinion, many experts argue that the police function should probably always be directly provided by government. They believe the authorized application and use of force requires the constant supervision of officials elected by the people.

Privatization is an idea that's increasingly being examined as a way to bring savings and efficiency to government. You decide if it's a good idea.

Dr. Walden is a professor and North Carolina Cooperative Extension Service specialist at North Carolina State University.You Decide endeavors to provide a balanced look at a variety of economic, public policy and personal finance issues. This feature is provided every two weeks by Dr. Walden and the Department of Agricultural Communications at NC State University.