Privatization: Issues in Local and State Service Provision by ELISABETH R

Policy Report Center for Local, State, and Urban Policy Number 1 • February 2004 UNIVERSITY OF MICHIGAN

Privatization: Issues in Local and State Service Provision BY ELISABETH R. GERBER, CHRISTIANNE K. HALL, AND JAMES R. HINES JR.

Summary hile many states and localities are turning to privatization as a way to provide services to their citizens, surprisingly little is known about these choices. Much of the debate over Wprivatization pays little attention to the rationales and consequences of private vs. public service provision. With an eye toward advancing understanding about privatization, the University of Michigan’s Offi ce of Tax Policy Research (OTPR) and Center for Local, State, and Urban Policy (CLOSUP) sponsored a series of studies on privatization. This empirically grounded research can provide policymakers with a sound basis for assessing whether and how privatization should be undertaken. This report begins by providing a historical background of privatization and a discussion of the nature and prevalence of privatization in the United States. Section II provides an overview of the empirical research on cost savings, quality, equity, employment, and political effects of privatization. The fi ndings from the papers commissioned by OTPR and CLOSUP are presented alongside fi ndings from other previously published research. Our review of the literature suggests the following conclusions about privatization: • Private providers may or may not be more effi cient than public providers. Whether privatization leads to greater cost savings depends largely on whether there is competition in service provision. • The quality of privatized services may or may not be higher than publicly provided services. Gov- ernments can play an important quality assurance role by monitoring and evaluating the delivery of privatized services. • In developing and transitional economies, privatization may reduce access to goods and services, particularly for low-income groups. Comparable studies need to be conducted to assess the distributional consequences of privatization programs in the United States. • Privatization might lead to more rational labor market policies. However, the employment effects of privatization are more nuanced than commonly assumed by either proponents or opponents of privatization. Privatization tends to lead to substitution of high-skill for low-skill workers and reduction in total employment levels, but no change in net wages. • Political considerations strongly infl uence both if and how policymakers contract-out services to private providers. Section III addresses some of the unique considerations for state and local governments, to help policymakers and government offi cials understand the potential benefi ts, costs, and risks of privatizing particular government services. The fi nal section of this report identifi es avenues for further research. Privatization research is still in its infancy; questions abound, and there is much empirical ground yet to cover. Center for Local, State, and Urban Policy UNIVERSITY OF MICHIGAN

ment in education, health, pensions, 6.7 percent of the labor force in other I. Introduction unemployment assistance, welfare, and, in developed market economies, but only many countries, direct ownership of in- 1.5 percent in the United States. Histori- HISTORICAL BACKGROUND dustry. Furthermore, certain traditional cally speaking, “America kept private in government activities, such as provision the fi rst place” (Donahue, 1989, p. 6). of national defense, now consume much There are several features of priva- rowth of the government higher fractions of national income than tization in the United States that sector is one of the con- they did in earlier eras. distinguish it from privatization else- spicuous features of industrial G The rapid expansion of the public where. In contracting-out services, economies in the twentieth century. sector raises many important ques- the U.S. government retains control of In 1913, U.S. government spend- tions about the appropriate role of the planning, fi nancing, and monitoring ing represented 7.5 percent of U.S. government in a market economy. functions that allow it to shape how Gross Domestic Product (GDP); by Concern over the cost of excessive gov- these services are provided. Thus, in the 1990, U.S. government spending was ernment ownership of industry led to United States, private providers are sub- 33 percent of GDP. The American the gradual privatization (then known as ject to more government oversight and experience of rapid government growth “de-nationalization”) efforts of the regulation than in other countries where, is common among high-income coun- Adenauer government in Germany in by virtue of their ownership of formerly tries. In 1913, Spanish government the early 1960s and the Thatcher gov- public assets, private entities have more spending was 11 percent of GDP, and by ernment in the United Kingdom in the discretion in service delivery. Another 1990, 42 percent of GDP. Comparable early 1980s. The perceived successes of distinguishing feature of privatization fi gures for Japan are 8 percent in 1913 German and British privatization efforts in the United States is the preeminent and 32 percent in 1990; for France, 17 attracted worldwide attention and en- role of state and local governments (see percent in 1913 and 50 percent in 1990; couraged similar privatizations in France, below). and for the Netherlands, 9 percent in Italy, Spain, Japan, Chile, Mexico, the The private provision of government 1913 and 54 percent in 1990 (Heston, former Soviet Bloc, and elsewhere. services has had a long history in the et al., 2002). United States. In recent years, however, Government growth has been infl u- the breadth of privatization efforts has enced by many political, economic, and PRIVATIZATION IN THE UNITED expanded signifi cantly. Privatization social factors. It has taken the form of STATES initiatives now encompass an unprec- greatly expanded government involve- Privatization in the United States edented range of service areas. Current took a distinct form from that of other privatization proposals in the United countries. Whereas States not only include traditional issues More than 80 percent of in other countries such as trash collection, but many other privatization involved service areas as well, such as elementary American cities currently use selling off public assets, and secondary education and social wel- in the United States fare assistance, areas once considered to some form of privatization. privatization largely be exclusively public-sector domain. consisted of contracting- out public duties to private organizations. The unique nature of privatization in PRIVATIZATION AT THE STATE the United States is due to a scarcity of AND LOCAL GOVERNMENT LEVEL government assets. In the 1970s, state- Although some privatization has oc- owned enterprises claimed on average curred at the national level, state and

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local governments are responsible for the Table 1. Percentage of Local Governments (cities and counties) lion’s share of privatization efforts in the United States. Surveys of local government offi cials indicate that more than Most Commonly Contracted-Out Services 80 percent of American cities currently Service 1982 1988 1992 1997 use some form of privatization (Greene, Vehicle towing and service 80 80 86 82 2002, p. 2). Operation of day-care facilities 72 34 88 79 While a signifi cant amount of Operation/management of hospitals 30 24 61 71 Operation of homeless shelters n/a 43 59 66 contracting-out is taking place in local Legal services 51 55 50 53 government, overall levels of privatization have remained somewhat stable since the early 1980s. Survey data from Least Commonly Contracted-Out Services the International City/County Manage- Service 1982 1988 1992 1997 ment Association (ICMA, various years) Crime prevention 10421 “Profi le of Alternative Service Delivery Police/fi re communications 4121 Approaches” show that privatization Fire prevention/suppression 5143 to for-profi t and non-profi t fi rms rose Traffi c control/parking enforcement 2122 only slightly, from 22 percent of all local Prisons/jails n/a113 government services in 1982 to 24 percent in 1997 (Warner and Hefetz, 2001, Note: Data comes from surveys conducted by the International City/County Management Association. Questions p. 2). However, for every eight services about some services were not included in all of the surveys, indicated as n/a in the table. contracted out during that time pe- Source: Greene 2002, pp. 159-162. riod, fi ve were brought back in-house, suggesting that dissatisfaction with privatization has led some cities and counties to reevaluate service delivery mecha- Papers sponsored by the der Galetovic (University of Chile). “Priva- nisms (Warner and Hefetz, 2001, p. 15). University of Michigan, Offi ce tizing Highways in the United States.” One of the neglected but important of Tax Policy Research (OTPR) Feiock, Richard (Florida State University), facets of privatization is that, in practice, and Center for Local, State, and Urban Policy (CLOSUP), Carl Dasse (Florida State University), and it is a dynamic and reversible process. and presented at a research James Clingermayer (Murray State Uni- The use of contracting by local gov- conference “Privatization: versity). “Contractor and Sector Choice ernments varies signifi cantly by service Issues of State and Local Public for Municipal Services Production: A area. According to the ICMA data, in Infrastructure,” November 22, Transaction Cost Approach.” 1997, more than 50 percent of local 2002, Ann Arbor, Michigan. Hines, James R., Jr. (University of Michi- governments contracted out com- Chong, Alberto (Inter-American Develop- gan and National Bureau of Economic mercial solid waste collection; vehicle ment Bank) and Florencio López-de- Research). “Privatization and Fiscal Silanes (Yale University and National towing and storage; legal services; and Health.” the operation of hospitals, day-care Bureau of Economic Research). “Priva- facilities, and homeless shelters. By tization and Labor Force Restructuring Piehl, Anne Morrison (Harvard University Around the World.” contrast, less than 5 percent of local and National Bureau of Economic Research). “Privatizing Prisons.” governments contracted out crime Engel, Eduardo (Yale University), Ronald prevention, police/fi re communica- Fischer (University of Chile), and Alexan- tions, fi re prevention/suppression, traffi c

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control/parking enforcement, sanitary may turn toward privatization in order on a review of the literature and papers inspection, or prison/jail services (refer to bring performance-based manage- sponsored by OTPR and CLOSUP. The to Table 1). ment to the public sector (Winston, et results presented here are a refl ection of al., 2002, p. 6). what information the authors were able to gather, and do not necessarily capture EXPECTED FUTURE TRENDS all of the empirical fi ndings about priva- There are good reasons to believe that II. Characteristics tization. both states and localities will continue to rely on private contracting to provide of Privatization an array of government services. New EFFICIENCY/COST SAVINGS service responsibilities, together with s governments consider priva- A basic tenet of economic theory is budgetary pressures and a movement to- tization they face numerous that competition leads to the produc- ward performance-based management, A diffi cult tradeoffs. Privatization tion of cheaper and higher quality could provide an impetus for additional has important implications for the effi - goods. Economic theory suggests that privatization initiatives at the state and ciency of, quality of, and access to goods contracting-out services should result local levels. and services. The decision to privatize a in cost savings for governments, as the Some states and localities will con- particular activity can also affect employ- pressures of competition force service front the need to provide new or ment conditions and political support. providers to work more effi ciently. This expanded services, as a result of mandates, In order to provide a framework for is thought to hold true for competition devolution of government responsibili- policymakers and government offi cials broadly, not only for competition by ties (like social welfare assistance), and to think about the potential benefi ts for-profi t organizations (Winston, et al., demographic changes. They may move and risks of privatizing a particular ac- 2002, p. 15). to privatize these new areas of service tivity, this section summarizes the state It is diffi cult to generalize about the responsibility, as a way to tap into the of knowledge about privatization, based effi ciency consequences of privatization, expertise and experience of non-profi t and for-profi t providers. Budgetary pressures, stemming from poor economic conditions and reductions in federal aid, may push other states “Privatizing Prisons” and localities to privatize services as a Anne Morrison Piehl way to reduce costs or mask cutbacks in service provision (Donahue, 1989, Concerns about quality and public accountability make the contracting out p. 136). of certain types of government services Last but not least, national legislation, diffi cult. The perceived risks of delegat- such as the Government Performance ing coercive authority to private entities and Results Act of 1993, the Government make the privatization of prison facilities ating need for prison space. The author Management and Results Act of 1994, and management especially controver- contends that concern about quality and and the National Performance Review’s sial. Using Bureau of Justice statistics, public accountability leads states to favor “reinventing government” initiative of the author analyzes trends in the the privatization of less coercive prison the mid-1990s, could prompt some states management and organization of correc- services (boot camps, substance abuse and localities to rethink the way they de- tional facilities. She fi nds that states are treatment, medical facilities, reception liver services. Some states and localities contracting out custodial confi nement in centers, etc.) for low-risk (minimum- order to accommodate a new or fl uctu- security) inmates.

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“Privatizing Highways in the authors recommend that governments United States” contract out highway construction services through a present value revenue Eduardo Engel, Ronald Fischer, and Alexander Galetovic (PVR) auction, where fi rms compete on the basis of toll revenues in present How the bidding and contracting pro- value terms. The authors contend that cess is managed can infl uence whether PVR auctions allow governments to re- expected quality improvements of priva- duce costs, ensure quality services, and tization play out in practice. Contract minimize demand uncertainty, without design is especially important when ser- sacrifi cing contract fl exibility. The fi nd- vice provision is characterized by a high ings are particularly useful for state and degree of risk or uncertainty, since out- local authorities that want to build new comes may be much more variable. This highway infrastructure. The fi ndings may paper focuses on the lessons learned also be applicable to the privatization about privatizing highways in the United of other government services that are States, based on experiences related to characterized by high investment costs the construction of the Dulles Greenway and demand uncertainty, such as airport, in Virginia and the express lanes on Cali- train, and metro infrastructure. fornia Route 91 in Orange County. The

because of the methodological limita- Stevens, 1977). Several explanations ones (Donahue, 1989, p. 75). Donahue tions of proving a universal assertion for cost savings under privatization are speculates that government regulation, about either public or private institu- suggested, including: economies of scale, in the form of utility price setting, may tions (Donahue, 1989, p. 57). In order to better management techniques, use of undermine effi ciency gains from utility compare the costs of public and private advanced technology, and more effi cient privatization. Private actors may have provision, researchers need to control and fl exible deployment of workers less incentive to reduce service provision for a broad range of variables that af- (Donahue, 1989, pp. 60-64). Other au- costs given the fi nite rate of return to fect service costs, such as the density thors, however, fi nd no effi ciency gains capital in fi xed-price markets. of the service area, and the quality and through private provision of garbage col- Researchers disagree about whether frequency of service. Thus, researchers lection services. When Hirsch controls there are effi ciency gains/cost savings can only infer some general tendencies for a broad range of variables, he fi nds under privatization, and about how from comparing similar tasks performed they explain 76 percent of variation in sizable the gains are. The conclusion that by public and private actors. trash service costs, making the effi ciency can be drawn from the existing empirical The empirical evidence on the cost distinction between public and private research is that private providers are po- savings of contracting-out services tends organizations statistically insignifi cant tentially more effi cient than public ones. to be mixed, although overall it suggests (Hirsch, 1965, p. 91). Whether privatization leads to greater the potential for somewhat lower costs The potential cost savings of privatiza- cost savings depends largely on whether when public services are provided by tion varies considerably by service area. competition exists in service provision private entities. In the area of garbage In a review of major studies about water (Donahue, 1989 p. 78). collection, several researchers fi nd effi - and power utilities, Donahue fi nds that There are several limitations to the ciency gains in the private sector (Savas, there is no tendency for private com- existing research that are important from 1977; Kemper and Quigley, 1976; and panies to be more effi cient than public both an academic and a public policy

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perspective. First, these analyses may “Contractor and Sector vided in-house, while redistributive and be based on nonrepresentative samples, Choice for Municipal allocational services are more likely to because privatization often occurs in Services Production: be contracted out. The authors hypoth- instances where the public sector is par- A Transaction Cost esize that the variance in contracting can ticularly ineffi cient, providing a point of Approach” be partly explained by the anticipated political benefi ts and costs associated comparison that might not be represen- Richard Feiock, Carl Dasse, and James Clingermayer with particular types of services. Gov- tative of public sector provision more ernments usually opt to directly provide broadly (Winston, et al., 2002, p. 17). Using data from the ICMA’s “Profi le of developmental services because these Given this potential for selection bias, Alternative Service Delivery Approaches,” services tend to be politically popular. By one must be careful about extrapolating the Municipal Yearbook, and County and contrast, governments usually contract results to other service areas. Second, City Data Books, the authors analyze out redistributive and allocational ser- many of the studies discussed above how service characteristics affect the vices because these services tend to be assess the effi ciency of public and private likelihood of privatization in local govern- politically unpopular. ments in the United States. The authors provision based purely on direct service fi nd that developmental and regulatory provision costs, and fail to take into ac- services are more likely to be pro- count the administrative costs associated with privatization. During the Reagan administration, two experts estimate that contracting, evaluation, and enforcement absorbed 20 to 40 percent of all driving out underperforming fi rms. critical quality assurance role by carefully procurement spending (Donahue, 1989, Research on the quality of privatized monitoring and evaluating service pro- p. 109). Thus, a more robust cost estima- services is very limited, and like that on vision under privatization. However, the tion methodology could lead to more cost savings, its results are mixed. A num- government’s ability to fulfi ll a quality limited cost savings estimates under ber of researchers assert that different assurance role may vary according to the privatization. Last but not least, existing sectors have different relative strengths, nature of the service provision. Evidence literature has failed to consider how the depending on the primary goal of the suggests that government oversight may effi ciency gains/cost savings of privati- service (Winston, et al., 2002, p. 17). be easier when precise performance zation compare vis-à-vis other policies, On the whole, however, the empirical standards can be specifi ed in advance, the like performance-based incentives, that evidence suggests that the quality of results of service provision are measur- can also be used to enhance economic privatized services might be equivalent or able, and substitution among contractors effi ciency within the public sector. The somewhat higher than publicly provided is possible (Donahue, 1989, pp. 97-98). exclusive focus on privatization might services. However, as noted in the dis- When these conditions do not exist, it paint a misleading picture of the options cussion on effi ciency, selection bias may may be more diffi cult for governments available to governments in restructuring skew the results in favor of privatization, to ensure the quality of privately pro- services. and provide a poor basis for generalizing vided services. about service quality more broadly. Two studies sponsored by OTPR and Other researchers pay less attention to CLOSUP explore how state and local SERVICE QUALITY the question of whether any single sector governments address quality concerns Dissatisfaction with public services has consistently provides the highest quality within two high-risk service areas: prison provided another impetus for privatiza- services, and instead stress the importance management and highway construction. tion. Many supporters of privatization of careful program implementation. The In the case of prisons, researcher Anne believe that marketplace competition General Accounting Offi ce (1997) as- Morrison Piehl fi nds that concern about can lead to higher quality services by serts that the government can play a quality and public accountability leads

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states to favor the privatization of less EQUITY/ACCESS of privatization derives from research on coercive prison services (boot camps, privatization in developing and transi- Privatization can have important im- substance abuse treatment, medical tional economies. In a literature review plications for the distribution of goods facilities, reception centers, etc.) for low- of privatization programs, researchers and services in society. Theoretically, risk (minimum-security) inmates. In the Nancy Birdsall and John Nellis ﬁ nd that privatization might improve access to case of highways, researchers Eduardo privatization efforts in developing and products by means of business expansion, Engel, Ronald Fischer, and Alexander transitional economies commonly lead which the investment-constrained public Galetovic discuss how states and lo- to steep price increases in divested net- sector could not carry out. Conversely, calities can structure the bidding and work or infrastructure industries, such private providers could restrict access to contracting process in order to reduce as water, electricity, and sewage (Birdsall goods and services by withdrawing from the risk of cost overruns and address de- and Nellis, 2002, p. 16). In these cases, or ignoring some markets that the public mand uncertainty. These papers ﬁ ll a gap privatization reduced access to goods enterprise was obliged to serve (Birdsall in the existing research by identifying and services, particularly for low-income and Nellis, 2002, p. 16). some of the avenues available to govern- groups. Comparable studies need to be The distributional effects of privatiza- ment entities to ensure quality service conducted to assess whether privatization tion have not received much scholarly and accountability for nontraditional programs in the United States have re- attention to date. What little is known privatized services. sulted in similar distributional outcomes. about the distributional consequences

“Privatization and Labor Force Restructuring Around the World” Alberto Chong and Florencio López-de-Silanes

Proponents of privatization argue that the public sector suffers from a bloated and ineffi cient labor force. Using new data from a random sample of 308 re- cently privatized state-run enterprises in the world, the authors evaluate the effectiveness of government labor force restructuring policies. The authors fi nd that adverse selection undermines the effectiveness of government retrench- ment programs carried out prior to privatization, refl ected by lower net priva- get the least-productive or least-skilled policy make it somewhat impractical. Be- tization prices and higher rehiring rates workers. Although the authors fi nd cause of adverse selection, government after privatization. Adverse selection evidence that compulsory skill-based labor force restructuring policies often problems are greater when voluntary and downsizing is a more effective way to do not lead to cost savings or workforce age-based downsizing mechanisms are carry out labor force restructuring, they quality improvements. used because these policies do not tar- hypothesize that the political costs of this

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EMPLOYMENT CONDITIONS evidence of labor market ineffi ciencies of less expensive workers are replaced in the public sector. The authors con- with a smaller number of more expen- Privatization can also lead to changes clude that adverse selection problems sive monitoring personnel. Due to the in employment, wages, and benefi ts for undermine the effectiveness of public reduction in labor force size, total labor particular groups of individuals. Pro- sector labor force restructuring policies, costs decline, but the per-worker wage ponents of privatization assert that leading to the fi ring of more produc- increases because the composition of privatization leads to a more effi cient tive and skilled workers. These fi ndings the labor force is skewed toward more and cost-effective allocation of labor. provide some empirical support for the expensive administrative and managerial Opponents of privatization argue notion that privatization can lead to workers, responsible for overseeing and that privatization harms public sector cost savings and workforce quality im- monitoring contract performance (Stein, employees because of employment provements through more rational labor 1990, p. 179). Stein’s fi ndings suggest that reductions, lower wages, and less job secu- market policies. the employment outcomes are more nu- rity. Several state and local governments Other research addresses the employ- anced than commonly assumed by either have faced considerable opposition to ment consequences of privatization. proponents or opponents of privatiza- privatization from public sector unions, In Urban Alternatives: Public and Private tion. such as the American Federation of Markets in the Provision of Local Services, Much of the research conducted State, County, and Municipal Employees researcher Robert Stein fi nds no evi- to date focuses on the economic impli- (AFSCME). In many cases, expected dence that increasing the proportion cations of employment changes under employment effects are closely related of contractual services has a negative privatization. Additional research is to the political feasibility of privatization effect on wage rates. However, increas- needed to explore the qualitative aspects initiatives (refer to discussion of ‘politi- ing privatization is associated with lower of employment conditions in the public cal considerations’). levels of public employment. When ser- and private sector, an area that has been In a paper sponsored by OTPR and vices are contracted out to private and overlooked in the existing literature, as CLOSUP, researchers Alberto Chong non-profi t providers, a larger number well as the possible relationship between and Florencio López-de-Silanes fi nd

“Privatization and Fiscal palities and counties in “good” health Health” (those with bond ratings “A” and above). James R. Hines Jr. Contrary to capital cost theory, this evidence indicates that governments don’t This paper analyzes the effect of a base service provision decisions solely community’s fi scal health on privatization on expected cost savings or effi ciency decisions by comparing bond ratings gains. Political considerations, such as and Census data for roughly 4,000 the desire to use public sector employ- municipal and county governments in ment as a form of political patronage, the United States. The author fi nds that may infl uence whether governments opt municipalities and counties in “bad” fi scal to provide services in-house or to con- health (those with bond ratings “Baa1” tract them out to private providers. and below) are signifi cantly less likely to privatize their services than are munici-

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employment conditions and service of privatization on displaced public Conference of State Legislatures, all quality. employees rose from 8.7 percent to states (with the exception of Vermont) 12.9 percent over the same time period and Puerto Rico have a statutory or (Warner and Hefetz, 2001, p. 6). These constitutional requirement of a bal- POLITICAL CONSIDERATIONS trends show that local government of- anced budget (NCSL, 1996, p.1). These Much of the existing research on fi cials are particularly attentive to the balanced budget requirements generally privatization focuses on cost-savings political ramifi cations of employment force state and local governments to rationales for contracting-out govern- conditions under privatization. keep expenditures in line with revenues ment services to private organizations. for a given fi scal period, and could make By contrast, little research has been con- cost-effectiveness a paramount concern ducted to date that explores the political III. Unique in evaluating different modes of service environment which shapes service pro- provision. However, in some cases, states vision decisions. Two papers sponsored Considerations are able to use accounting methods to by OTPR and CLOSUP highlight how for State maintain real economic defi cits in spite political considerations infl uence both if of balanced budget requirements. Thus, and how policymakers contract-out ser- and Local the effects of balanced budget require- vices to private providers. Researchers ments might vary state by state. Richard Feiock, Carl Dasse, and James Governments Clingermayer fi nd that cities and localities tend to contract out the service areas INTERJURISDICTIONAL n making decisions about service COMPETITION that traditionally have the least political provision, all policymakers and support. Researcher James Hines fi nds government offi cials are confronted Interjurisdictional competition has that the political benefi ts of public sector I important implications for both if and with the task of weighing competing employment might discourage the use goals such as effi ciency/cost savings, how state and local governments pro- of privatization by local govern- service quality, and equity/access, along vide particular government services. ment entities. Together, these papers with other important considerations Interjurisdictional competition can be highlight the central importance of po- such as employment effects and political defi ned as the rivalry among state or litical considerations in service provision feasibility. There are, in addition, some local units of government for tax base. decision-making. unique considerations for state and local Within a competitive environment, Research conducted by Mildred War- governments. In particular, balanced government services are one mechanism ner and Amir Hefetz shows that political budget requirements, interjurisdictional used by states and localities to attract considerations also infl uence how local competition, and market size have im- or retain potentially mobile goods, ser- governments structure privatization ef- portant implications for state and local vices, and residents. Interjurisdictional forts. Based on data from the ICMA service provision. competition can lead governments to “Profi le of Alternative Service Delivery believe they cannot raise taxes too high Approaches,” the authors fi nd that be- without risking the out-migration of tween 1988 and 1997, the percentage BALANCED BUDGET high-income taxpayers and busi- of local governments allowing competi- REQUIREMENTS nesses (Kenyon, 1997, p. 14). Thus, like tive bidding between public employees Balanced budget requirements balanced budget requirements, interjuris- and private providers increased from may increase the importance of dictional competition may push states 10.9 percent to 16.5 percent. The cost-saving and effi ciency considerations and localities to place greater emphasis percentage of local governments of- in state and local government service on effi ciency considerations in making fering programs to minimize the effect provision. According to the National service provision decisions.

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MARKET CONDITIONS academic and public policy concern. Ad- generally. Additional research is needed ditional research is needed to understand Market conditions also infl uence how to reconcile the confl icting results gen- if, and how, balanced budget require- states and localities provide public ser- erated to date and to improve research ments and interjurisdictional competition vices. A limited number of suppliers that methodologies. Additional research is affect service provision decisions at the can provide particular public services can also needed to address questions about state and local level (refer to text box). constrain the ability of small cities and the effi ciency, service quality, and Another aim of future research should rural governments to engage in alterna- equity/access effects of privatization, not be to improve understanding about the tive forms of service delivery (Warner covered in the existing literature (see consequences of privatization more and Hefetz, 2001, p. 7). Communities table below). that have a small pool of alternative providers may elect not to privatize services, Questions for Further Questions for Further either because of a lack of competent Research about State and Research about the providers or due to concerns that limited Local Considerations Consequences of Privatization competition may undermine potential BALANCED BUDGET COST SAVINGS effi ciency gains. Researcher Rob- REQUIREMENTS • What are the hidden costs of privatiza- ert Stein fi nds that when small cities • Do balanced budget requirements in- tion in terms of monitoring/evaluation contract-out service provision, they tend crease the importance of and substitution costs? to contract with county government or cost effectiveness in service delivery? • Does privatization lead to cost sav- other public sector actors due to limited • Do states with more stringent bal- ings? If so, what accounts for the cost availability of private sector contractor anced budget requirements engage reduction effects of privatization? in higher levels of privatization? options (Stein, 1990, p. 57). • How does the cost of service provision INTERJURISDICTIONAL vary over time? Are initial effi ciency COMPETITION gains of privatization sustainable over IV. Avenues for • Do jurisdictions compete with each the long run? other in service provision? • How do effi ciency gains under privati- Further Research • Do the service provision decisions of zation compare to other policies, like one jurisdiction impact other jurisdic- performance-based incentives? tions? If so, how? y exploring effi ciency/cost SERVICE QUALITY savings, service quality, equity/ • What have been the consequences of access, employment conditions, contracting-out services on quality-of- B service provision? and political feasibility, existing empirical research has provided some insight into • How prevalent is opportunistic behav- the potential advantages and disadvan- ior in contracting? tages of privatizing government services. • Is there a relationship between employ- However, in many cases, results are mixed ment conditions and service quality? or inconclusive. EQUITY/ACCESS Our reading of the literature identifi es • What have been the consequences three broad avenues for further research of contracting-out services on the about privatization. Given the preva- equity-of-service provision? Does lence of privatization among states and privatization lead to cuts in services for localities, ongoing research in this area is hard-to-serve populations or areas? especially important as a matter of

10 Center for Local, State, and Urban Policy UNIVERSITY OF MICHIGAN

Warner, Mildred, and Amir Hefetz. 2001. “Privati- Bibliography zation and the Market Role of Local Government: Birdsall, Nancy, and John Nellis. 2002. “Winners Small Growth in Contracting Underscores Domi- and Losers: Assessing the Distributional Impact nance of Service Provision by Public Employees.” of Privatization.” Center for Global Development, Economic Policy Institute Briefi ng Paper. Avail- Working Paper # 6. Available online at www. able online at www.cce.cornell.edu/restructur- cgdev.org/pubs/workingpapers.html. ing/warner/papers.asp. Donahue, John. 1989. The Privatization Decision: Winston, Pamela, Andrew Burwick, Sheena Public Ends, Private Means. New York: Basic McConnell, and Richard Roper. May 2002. Books, Inc. “Privatization of Welfare Services: A Review of the Literature.” Mathematica Policy Research, General Accounting Offi ce. 1997. “Privatiza- Inc. Available online at www.mathematica-mpr. tion: Lessons Learned by State and Local com/PDFs/privatization.pdf. Governments.” Report to the Chairman, House Republican Task Force on Privatization, GAO/ GGD-97-48. Greene, Jeffrey. 2002. Cities and Privatization: Prospects for the New Century. Upper Saddle River, NJ: Pearson Education, Inc. Heston, Alan, Robert Summers, and Bettina Aten. 2002. Penn World Table Version 6.1. Cen- ter for International Comparisons at the University of Pennsylvania (CICUP). Hirsch, Warner Z. 1965. “Cost Functions of an Urban Government Service: Refuse Collection.” Review of Economics and Statistics 47 (Febru- ary): 87-92. International City/County Management Asso- ciation. 1982, 1988, 1992, 1997. “Profi le of Alternative Service Delivery Approaches.” Wash- ington, DC. Kemper, Peter, and John M. Quigley. 1976. The Economics of Refuse Collection. Cambridge, Contact Information MA: Ballinger Publishing. Kenyon, Daphne A. 1997. “Theories of Interjuris- Center for Local, State, and dictional Competition.” New England Economic Urban Policy Review (March/April):13-28. University of Michigan National Conference of State Legislatures, Fiscal Gerald R. Ford School of Public Policy Affairs Program. 1996. “The Nature of State Bal- anced Budget Requirements,” in State Balanced Elisabeth R. Gerber, Director Budget Requirements: Provisions and Practice, 735 S. State St., Suite 5310 by Robert K. Snell. Available online at www.ncsl. org/public/balbud2.htm. Ann Arbor, MI 48109-3091 Savas, E. S. 1977. “Policy Analysis for Local 734-647-4091 Government: Public vs. Private Refuse Collec- fax: 734-998-6688 tion.” Policy Analysis 3 (Winter): 54-55. http://closup.umich.edu Stein, Robert. 1990. Urban Alternatives: Public and Private Markets in the Provision of Local Ser- Regents of the University of Michigan Offi ce of Tax Policy Research vices. Pittsburgh: University of Pittsburgh Press. David A. Brandon, Ann Arbor; Laurence B. University of Michigan Business School Stevens, Barbara J. 1977. “Scale, Market Deitch, Bingham Farms; Olivia P. Maynard, James R. Hines Jr., Research Director Structure, and the Cost of Refuse Collection.” Goodrich; Rebecca McGowan, Ann Arbor; Review of Economics and Statistics 60 (March): Andrea Fischer Newman, Ann Arbor; Andrew 701 Tappan Street, Room A2120 438-448. C. Richner, Grosse Pointe Park; S. Martin Tay- Ann Arbor, MI 48109-1234 lor, Grosse Pointe Farms; Katherine E. White, 734-763-3068 Ann Arbor; Mary Sue Coleman, ex offi cio fax: 734-763-4032 http://www.otpr.org

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