Qualified Endorsement

The Privatization Decision: Public Ends, Private Means, by John D. Donahue, New York: Basic Books, 264 pages, $22.95

Privatization has been hotly debated ever since American scholars and local government officials (including this reviewer) started advocating the concept as early as 1969. In the wake of empirical studies, proponents of privatization argued that the private sector could more efficiently provide some services typically offered by the government. Since that time, privatization has been widely implemented in the United States at the local level and has become a prominent feature of the Thatcher government in Great Britain.

Now John D. Donahue, professor of government at Harvard University, joins the debate with The Privatization Decision, which focuses on one form of privatization in the United States: government contracting for goods and services from the private sector. Although he gets off to a wobbly start with a narrow definition of privatization and an erroneous account of its history—he mistakenly claims that the United States imported the concept from Britain during the Reagan era—Donahue has added a thoughtful and well-written book to the growing library of useful works on privatization. He avoids the rhetoric that has characterized some earlier discussions, both pro and con.

In the end, Donahue gives cautious endorsement to the concept. He argues that privatization can work, but that successful contracting requires clear goals, highly specific contracts, sustainable competition among private providers of public services, good monitoring, and proper contract enforcement. While hardly new, this conclusion, presented objectively and coming from one who clearly values public purposes, may be especially persuasive to those who might otherwise instinctively reject privatization.

Donahue elaborates at great length—repetitively but usefully—on the well-known pitfalls in successful contracting. For example, ensuring competition may not be easy: "Private contractors may control land, machinery, or other assets that are essential to providing some service. Or intangible proprietary assets—inside information, specific expertise, or even camaraderie with their government counterparts—can give incumbent contractors advantages that entrench them against replacement. Or performance may not be sufficiently measurable to inspire real competition on the basis of value for money. Finally, corruption, cronyism, indolence, or incompetence on the part of government officials could mean that competition will not exist even when it is technically practicable."

Summarizing these difficulties, he notes, "Public versus private matters, but competitive versus noncompetitive usually matters more."

Donahue concludes, anticlimactically, that "a substantial portion" of state and local services can be contracted successfully. While this is ground often covered elsewhere, his lucid writing makes his presentation worthwhile.

He dismisses the theoretical basis for deciding when (that is, for which goods and services) a government role may be necessary, instead concluding that politics, not theory, rules. He provides excellent discussions of military procurement and job training that could easily stand alone.

Donahue is at his best in his articulate political-science treatment of voting, representative government, and interest groups, and in his discussion of the problems of principals and their agents. Unfortunately, he contrasts civil servants pejoratively with private-sector "profit seekers," when "rent seekers" might more fairly be used for the former or "contractors" for the latter. Nevertheless, he offers an excellent discussion of civil service bureaucracies and why government agencies perform poorly.

He expresses concern that the political effectiveness of private interests "imperils the integrity of the spending agenda." What or whose spending agenda? one can legitimately ask, and even, What integrity? Donahue cites the corrupt awarding of contracts for processing parking tickets in New York City. Although he notes the absence of competitive bidding in this case, he doesn't make enough of this lapse. The absence of competitive bidding violates every tenet of contracting, and no responsible advocate of privatization would condone it. And Donahue is probably unaware of the little-known fact that New York is collecting more revenue through the corrupt contract, despite the kickbacks, than it was when a municipal agency was handling the activity; this is no justification, of course, but it is ironic.

Also problematic is Donahue's ambiguous discussion of sometimes-high civil service pay scales. He implies that overpaying—or having too many—civil servants to collect solid waste may be good public policy (as a welfare program). Yet finally he shies away from such an assertion. He seems ambivalent about the fact that lower labor costs account for much of the observed difference in efficiency between government agencies and contractors, as though the fact that contractors can control these costs better than politicians should not be counted as an indisputable advantage of privatization by contract. Ultimately, Donahue does accept this as a virtue of contracting.

At times, Donahue succumbs too readily to the assumption that only the private sector is motivated by self-interest that might compromise service. For example, he raises the usual fear that private prison firms may push for more and longer prison sentences. Why not also assume such behavior from the unions that represent public corrections officers? Do private street-sweeping contractors encourage littering, and do waste-collection firms promote throwaway packaging and oppose recycling? On the other hand, Donahue properly dismisses the absurd but oft-cited argument that a company badge on a guard's uniform will somehow confuse a prisoner about the fact that it is society that is punishing him for his criminal behavior.

Sensitive readers will detect occasionally derisive asides aimed at privatization advocates, and the author indulges in a bit of Reagan bashing. Generally, however, Donahue is as objective and free of rhetoric as this charged subject allows. Nonetheless, he deserves a stern rebuke for at least one passage that borders on the scurrilous. He speculates idly and with no basis whatsoever that a respected researcher, Barbara Stevens, was pressured by Reagan administration officials to modify her study findings so as not to antagonize municipal labor groups. There is no truth to that mischievous concoction, Stevens asserts indignantly, and I believe her. (Why didn't Donahue ask her?) And anyone familiar with the Reagan administration would find the charge laughable. (Remember the air-traffic controllers?)

Donahue's book offers one basic message: Contracting requires prudence and pays off only in special circumstances. The author is right, but many services satisfy these conditions. One can therefore debate how "special" and just how limiting these circumstances really are.

Donahue stresses the difficulties of contracting wisely and well, but he doesn't stress the counterpoint that government agencies also find it difficult to manage their own forces well. He warns that it is impossible to contract a service properly if government does not specify what it wants; but if it cannot so specify, how in the world can it do the work in-house either? Nevertheless, despite the limitations of his discussion, Donahue covers previously explored territory well, in depth, and from a fresh perspective.

E.S. Savas, director of the Privatization Research Organization, Baruch College, at the City University of New York, is the author of Privatization: The Key to Better Government.