Why, What, & How to Privatize City Services


Over the last half century, governments of all political complexions have increasingly embraced privatization-shifting some or all aspects of service delivery to the private sector. This is a strategy to lower the costs of government and achieve higher performance and better outcomes for tax dollars spent. Local policymakers in many jurisdictions in the U.S. and around the world have used privatization to better the lives of citizens by offering them higher quality services at lower costs, delivering greater choice and more efficient, effective government.

The reason for the widespread appeal of privatization is simple: It works. Decades of successful privatization policies have proven that private sector innovation and initiative can do certain things better than the public sector.

[Article continues below video, "Privatize It: Reason Saves Cleveland with Drew Carey, Episode 3]

Why Privatize?

Government managers use privatization to achieve a number of different goals:

Cost Savings. Competition encourages would-be service providers to keep costs to a minimum, lest they lose the contract to a more efficient competitor. As a conservative "rule of thumb," cost savings through privatization typically range between five to 20 percent.

Improved Risk Management. Through contracting and competition, governments may better be able to control costs by building cost containment provisions into contracts.

Quality Improvements. Similarly, a competitive process encourages bidders to offer the best possible service quality to win out over their rivals.

Timeliness. Contracting may be used to speed the delivery of services by seeking additional workers or providing performance bonuses unavailable to in-house staff.

Accommodating Fluctuating Peak Demand. Contracting allows governments to obtain additional help when it is most needed so that services are uninterrupted for residents.

Access to Outside Expertise. Contracting allows governments to obtain staff expertise that they do not have in-house on an as-needed basis.

Innovation. The need for lower-cost, higher-quality services under competition encourages providers to create new, cutting-edge solutions to help win and retain government contracts.

What to Privatize?

Privatization can be applied to most things government does. One privatization expert at the City University of New York identified over 200 city and county services that have been contracted out to private firms (including for-profit and nonprofit). This is a partial list, but some of the most prevalent areas of local government privatization include:

Accounting, financial and legal services;

Administrative human resource functions (e.g., payroll services, recruitment/hiring, training, benefits administration, records management, etc.);

Core IT infrastructure & network, web & data processing;

Risk management (claims processing, loss prevention, etc.);

Planning, building and permitting services;

Printing and graphic design services

Road maintenance;

Building/facilities financing, operations & maintenance;

Park operations and maintenance;

Zoo operations and maintenance;

Stadium and convention center management;

Library services;

Mental health services and facilities;

Animal shelter operations and management;

School construction (including financing), maintenance & non-instructional services;

Revenue-generating assets (garages, parking meters, etc.); and

Major public infrastructure assets (roads, water/wastewater systems, airports, etc.).

How to Privatize?

Privatization must be implemented well for it to work. A successful privatization process will ensure transparency, accountability, and the delivery of high-performance services through a strong, performance-based contract. By utilizing best practices and lessons learned from experiences of other governments the likelihood of achieving those results is greatly enhanced. Among them:

Rethink the status quo, and ask the "make or buy" question. Taking a page from management guru Peter Drucker, every "traditional" service or function should have to prove its worthiness and proper role and place within government.

Think big. The central question on the subject of outsourcing should not be, "What can we privatize?" but, rather, "What can't we privatize?" Outside of public safety services, the courts, and policymaking functions, the private sector has proven repeatedly most things can be privatized.

Bundle services for better value. Local governments may find greater economies of scale, cost savings and/or value for money through bundling several-or even all-services in a given department (e.g., public works) or departmental subdivision (e.g., facility management and maintenance) into an outsourcing initiative, rather than treat individual services or functions separately.

Focus on contract-management expertise. Successful privatization initiatives require good contract negotiation, management and monitoring skills on the part of city managers. The more that local governments use privatization, the greater the degree to which the city manager's role will center on contract administration-monitoring and enforcing contracts to ensure that the contractor's performance lives up to their contractual obligations.

Establish a Centralized Procurement Unit. Governments should maintain an expert team of procurement and competition officials to guide individual departments in developing their privatization initiatives.

Apply the "Yellow Pages Test" through Regular Commercial Activity Inventories.  Local government managers should regularly scour all government agencies, services and activities and classify each as either "inherently governmental" (i.e., should only be performed by public employees) or "commercial" (i.e., services routinely undertaken by private sector vendors) in nature.  This famous "Yellow Pages Test" helps government concentrate on delivering core, "inherently governmental" services while partnering with the private sector for commercial activities.

Utilize Performance-Based Contracting. It is crucial that local governments identify good performance measures to fairly compare competing bids and accurately evaluate provider performance after the contract is awarded. Performance-based contracts should be used as much as possible to place the emphasis on obtaining the results the city wants achieved, rather than focusing merely on inputs and trying to dictate precisely how the service should be performed.

Establish Guidelines for Cost Comparisons. Local governments should establish formal guidelines for cost comparisons to make sure that all costs are included in the "unit cost" of providing a service so that an "apples-to-apples" comparison of competing bidders may be made.

Utilize "Best Value" Contracting. Initiatives that are considered best practices for government procurement and service contracting utilize "best value" techniques where, rather than purchase based on cost or "lowest bid" alone, governments choose the best mix of quality, cost, and other factors in selecting a service vendor.

Ensure Contractor Accountability through Rigorous Monitoring and Performance Evaluation. Regular monitoring and performance evaluations are essential to ensure accountability and transparency, and that the local government's management and the service provider are on the same page.

Len Gilroy is director of government reform at Reason Foundation. This story is part of Reason Saves Cleveland With Drew Carey: How to Fix "The Mistake on The Lake" and Other Once-Great American Cities. Watch the documentary series here. For downloadable iPod, HD, and audio versions of this episode go here.