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Fuzzy Privatization Math

Sunday, 20 March 2011 08:28 By Ellen Dannin, Employment Policy Research Network | Op-Ed | name.

Fuzzy Privatization Math
(Photo: Jorge Franganillo)

On May 31, 2010, Governor Chris Christie’s New Jersey Privatization Task Force reported that more than $210 million would be saved by privatizing work that had traditionally been performed by government workers. The report even set out specific figures for some of the cost savings it identified, while others said savings were “TBD” – “To Be Decided”.

Who crunched the numbers to show that private contractors would do a better job or at least the same job for less money than public employees? The Privatization Task Force Report says that no one did. On page 14 the report says it did no analysis “due not only to the fact that the actual cost of a privatized alternative will often not be known until the end of a full fledged competitive bidding process, but also because New Jersey state government agencies have difficulty calculating with precision the full cost of functions currently performed at the state level.” So, the sunny claims of big savings for the people of New Jersey are a guestimate, at best. and “To Be Decided” is the most accurate statement in the report.

Some people take it on faith that the private sector always does a better job for less money than government. But the most of us deciding how to provide public service is not a matter of ideology, not a team sport. We just want to solve our federal, state, and local budget problems and provide good quality services. So, for most of us, it will come as a surprise that in many cases no effort is made to show whether a private company can do government work as well as public employees.

Privatizers have often advocated using the “Yellow Pages” test – if work the government does can be found in the Yellow Pages, they claim it can be privatized. But it’s not that simple.

Just because a government and private service sound similar does not mean they are the same. Take elementary and secondary education. There are private and public schools, so private school tuition could be compared to per student costs at public schools. But the services provided by public and private schools are not the same, and those differences allow private schools to provide less expensive education, not that they all do.

The most important difference is that private schools can cherry pick, because they can chose which students to accept or reject. But, by law, public schools must accept and educate all children. Educating the next generation is of critical importance to a democracy, and achieving that goal is imposed on public – but not private – schools. That includes children whose education is very expensive, including children with disabilities and other serious problems.

If there were no public schools to ensure that all children are provided an education, we all would be the poorer for it. And when children attend private schools, public schools have less money to meet their obligations to educate all children.

So even though the yellow pages test sounds reasonable at first glance, it fails to take into account important differences between public and private services.

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The truth is that in all too many cases work is privatized without any comparison at all of the cost and nature of public versus private work. And, according to studies by the Government Accountability Office and others, even when there is a cost comparison, major costs that the public bears are not taken into account. One study found that costs not included were costs of hiring consultants to conduct the cost comparisons, costs for unemployment benefits when employees are replaced by contractor employees and vice versa when work is contracted back in, declines in productivity associated with the process of deciding whether to contract out work, declines in productivity when new employees are learning how to provide services and operate in a new system, the loss of institutional memory, and accountability oversight to ensure that the contractor is not shirking, to name just a few.

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Before rushing to privatize, we need to remember what math teachers tell their students, “Show your work.”

For example, we need know: Will the work cost less because it is done more efficiently, or because wages are lowered and benefits are eliminated? Paying workers less does not provide better quality. It just impoverishes workers. And having workers unable to get health care for themselves and their families means coming to work too sick to do a good job and being worried sick about medical care for their families. It also means pushing costs off on hospitals, doctors, charities, and, ultimately, on the government and taxpayers.

Although accountability ensures that work is done properly, some have claimed that private sector competition provides all the accountability that is needed. However, most services came to be provided by the government because there was no competition. Lack of accountability led to overcharging, poor or no service, and corruption in the past, and there is no reason to think that we will not have the same problems again.

The only way to protect the public from bad privatization deals is to demand that the private contractor explains in detail and clearly how what it will do is more efficient, how its operations affect costs, and why states and cities can’t use the same methods.

In order to avoid overlooking costs and problems, decision makers must do a careful "walk through" of all the details as to how a service is provided. That walk through must identify costs, especially costs that are often overlooked and which fall on the public. For example, is the cost of unemployment insurance included for any workers who will lose their jobs? Do the costs include taxes lost from the newly unemployed or from the lower paid workers who are replacing them? Are the costs of ensuring accountability and oversight included? Is the quality of services the same or better, or will they be degraded, including by making access more difficult?

The public has a lot to lose when public services are improperly privatized. Unless a bona fide comparison of costs and benefits is performed, all we will get is fuzzy math and being stuck with the bill for poor quality service. 

Ellen Dannin

Ellen Dannin is Fannie Weiss distinguished faculty scholar and professor of law at Penn State Dickinson School of Law and author of "Taking Back the Workers' Law - How to Fight the Assault on Labor Rights."

Last modified on Sunday, 20 March 2011 08:56