DP Tool Club 24/CD_ASCQ_24_0995.iso/vrac/liberty.zip/24.TXT

Text File | 1995-07-02 | 11KB | 195 lines

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      PRIVATIZATION: PROVIDING BETTER SERVICES WITH LOWER TAXES
                        By Robert Poole, Jr.

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All around the world, government services and enterprises are being
shifted into the private sector via a phenomenon known as privatization.
In Britain, nationalized industries such as British Airways and Jaguar
have been returned to investor-ownership via stock offerings. Similarly,
in Chile, hundreds of firms nationalized by the Allende government have
been returned to private ownership.

But privatization goes further than simply returning once-private firms
to the business sector. Margaret Thatcher's government privatized over
1.5 million council houses -- public housing units which were created by
the public sector. It also privatized the major airports, the gas
utility, and the telephone system -- all of which had always been in the
public sector. Likewise, the Japanese government is privatizing Nippon
Telephone and Japan National Railways, which have been fixtures of the
public sector. So in a very real sense, privatization is actually
dismantling big government, not merely correcting the excesses of
socialist regimes.


THE MOVE TOWARD PRIVATIZATION
Privatization was first identified as a phenomenon in the mid-1970s in
the United States when the trend of municipal governments to purchase
service from private firms under contract was discussed in REASON
magazine. This ultimately led to the creation of the Local Government
Center by Mark Frazier and Robert Poole in 1976 -- the first think-tank
devoted to researching privatization. In the late 1970s, LGC's materials
came to the attention of Ronald Reagan's speechwriters, several of whom
went on to hold Wh ite House domestic policy positions and promote
privatization within his administration. Also in 1977-79, LGC
privatization materials began being used by British local council
members John Blundell and Michael Forsythe. This lead to a wave of
local-service contracting-out which began at Wandsworth. Inspired by
these developments, Eamonn Butler and Madsen Pirie set up the Adam Smith
Institute in London in 1979. They began extending privatization concepts
to state-owned enterprises, and the ir ideas soon began to influence a
newly-elected Margaret Thatcher.

Privatization can take several different forms. A government function
can be partially privatized if some aspects of it are shifted away from
state control. For example, if a service formerly financed by taxation
is shifted onto a user-fee basis (whereby only those who use the service
pay, and in proportion to their use), we can accurately say that the
financing of the service has been privatized. On the other hand, if a
city service such as street-sweeping was formerly offered directly by
the city governme nt (and paid for by taxes) but is now offered by a
private firm, selected competitively for a two-year contract, we can say
that the delivery of the service has been privatized.

Full privatization, then, involves the transfer of both the financing
and production to the private sector. At the municipal level, this can
mean either the withdrawal of government from the field, letting private
firms take over (as in, say, ambulance service or garbage collection) or
the sale of the government operation to private owners (for example, a
municipal hospital, sewage-treatment plant, or transit system). At the
national level, full privatization generally means the divestiture of an
enterprise or asset to private owners.


WHY PRIVATIZATION?
Why did privatization develop in the late `70s and become a worldwide
phenomenon in the `80s? The fundamental reason is that people began to
conclude that government had simply gotten too big, bureaucratic, and
inefficient. The waves of local privatization in the United States were
triggered by the tax revolt at the state level, typified by
citizen-initiated tax-cut measures such as Proposition 13 in California
(1978) and Proposition 2 1/2 in Massachusetts (1980). With their tax
revenues limited, state and local governments were forced to look for
less costly ways of delivering needed services -- and privatization met
that need. Although England did not have a tax revolt as such, its local
government costs were so high, even compared with other European welfare
states, that once privatization slashed costs in Wandsworth, people in
other cities and towns demanded similar economies.

Why does privatization lead to lower costs and more efficient
operations? The fundamental reason is the difference in incentives
between public and private sectors. A tax-funded government agency
differs profoundly from a business. The former has a legally-guaranteed
monopoly on its services (e.g. picking up a city's garbage). It is
guaranteed its revenues, regardless of performance. And its workers are
protected both by unionization and by a civil service system which
virtually guarantees continued employm ent and pay increases, regardless
of performance. In sharp contrast, a private firm in a competitive
market must win over its customers by offering them a superior
combination of performance and price. If it fails to deliver adequately,
its customers can go elsewhere. Like the prospect of being hanged, the
prospect of losing one's customers tends to concentrate the mind.
Private firms producing public services -- even firms which
competitively win exclusive contracts f or a number of years --
therefore opera te far more efficiently than government monopolies.

This may sound fine in theory, but what about the evidence? After all,
public-employee union critics make the charge that privatization must
lead to higher costs, since a private firm will have all the same
expenses as the public agency it replaces -- plus the added costs of
advertising and profits.

The evidence shows overwhelmingly that the theory, rather than the
unions' claim, is correct. Every controlled study comparing public
versus private service delivery shows lower costs (for a given level of
performance) for private enterprise. This includes nationwide studies of
garbage collection in the United States (1976) and Canada (1985); of
fire protection (1976 - Arizona); public-works services such as street
sweeping, pavement patching, and traffic signal repair (1984, Southern
California); transit s ervices (1986, U.S.); school bus transportation
(1984, Indiana); airlines (1977, Australia); naval ship repair (1978,
U.S.), and many others. In these statistically valid studies, the cost
of government services is typically 30-40% to as much as 100% higher
than private services.

At the national level, in developed countries such as England, France,
and Japan, privatization of state-owned enterprises has proceeded from a
mixture of ideological and fiscal motives. Conservative political
leaders in those countries concluded that the public sector had grown
far too large and costly to operate (given that most state-owned
industries operate at a loss). Economic analysis, much of it by
libertarian Public-Choice economists, had persuaded them that political
factors would usually force sta te enterprises to operate in wasteful,
non-businesslike ways over the long run (e.g. by preserving obsolete
jobs for political reasons). Thus, rather than try to reform those
industries, it would be far better to get rid of them altogether.

What has made privatization far more attractive, however, even to
socialists such as Spain's prime minister Felipe Gonzalez and David
Lange's Labor government in New Zealand, was the realization that large
one-time cash infusions would be possible from the sale of these
industries. To be sure, there is little market for shares in a large
loss-maker such as British Coal or Japan National Railways. But if a new
management team can be brought in and given a free hand to slash costs
and rationalize operations p rior to privatization (as in the case of
British Airways, Jaguar, and Rolls-Royce), the market value of the
company can be quite significant. As of the end of 1988, the British
government had realized over $40 billion in one-time revenues from
privatization of council houses and state industries. The New Zealand
government realized over $14 billion from its privatizations, and the
Japanese government over $100 billion just from Nippon Telephone and
Japan Air Lines. These are rev enues which help to reduce bu dget
deficits without tax increases.

By 1989 the idea of privatization had been embraced by many other
countries. The Canadian government sold off its two aircraft firms
(DeHavilland and Canadair) and Air Canada. Bangladesh has sold its
textile mills and banking industry. Malaysia and Singapore sold portions
of their state airlines. Turkey has privatized the Bosporus bridge and
is planning to sell off its airline and other state industries.
Argentina, Brazil, Chile, and Mexico have begun to sell numerous
state-owned industries, as a way of cop ing with their foreign debt
problems. Since such sales reduce government expenditures (to cover
operating losses) while also bringing in one-time cash receipts, the
U.S. Agency for International Development, the World Bank, and the
various international development banks have all endorsed privatization
as an important part of debt-reduction strategies.

In short, the privatization revolution is sweeping the world. As
production and services are shifted from inefficient state monopolies to
competitive private enterprises, consumers gain greatly from more
responsive providers offering lower-priced goods and services. And
taxpayers win big --thanks to a shrinking of the size and cost of
government.

ROBERT POOLE, JR. is president of the Reason Foundation, a libertarian
think-tank in Los Angeles, California. He was co-founder of the Local
Government Center (now a division of the Reason Foundation) and the
pioneer privatization researcher in the United States. Poole serves as
publisher of REASON magazine and is editor of numerous public policy
books. He is on the Advisory Board of the International Society for
Individual Liberty.

Reason Foundation, 3415 S. Sepulveda Blvd., Ste 400, Los Angeles,
Angeles, California 90034. Tel: [phone]


                         RECOMMENDED READING

Better Government At Half The Price Bennett ..............  $5.95
Privatization & Development (Hanke) ...................... $12.95


Available through Freedom's Forum Books, 1800 Market St. San Francisco,
CA 94102. (Add $2.50 postage & handling per order for 1st book and $1.00
for each additional item.


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