In principle, privatization means selling off public corporations owned by the government to the private sector. However, there are many ways that the government can employ in order to improve quality of public services in provides in the country.
A variety of alternative service delivery techniques related to privatization can be employed to maximize efficiency and increase service quality.
Some methods will be more appropriate than others depending on the service.
How privatization can help to improve public services?
In searching for ways of cutting costs and increasing delivery, consider using a combination of these techniques:
- Contracting Out (or ‘Outsourcing’). The government competitively contracts with a private organization, for-profit or non-profit, to provide a service or part of a service.
- Management Contracts. The operation of a facility is contracted out to a private company. Facilities where the management is frequently contracted out include airports, wastewater plants, arenas and convention centers.
- Public-Private Competition (also called ‘managed competition’ or ‘market testing’). When public services are opened up to competition, in-house public organizations are allowed to participate in the bidding process.
- Franchise. A private firm is given the exclusive right to provide a service within a certain geographical area.
- Internal Markets. Departments are allowed to purchase support services such as printing, maintenance, computer repair and training from in-house providers or outside suppliers. In-house providers of support services are required to operate as independent business units competing against outside contractors for departments’ business. Under such a system, market forces are brought to bear within an organization. Internal customers can reject the offerings of internal service providers if they don’t like their quality or if they cost too much.
- Vouchers. Government pays for the service, however, individuals are given redeemable certificates to purchase the service on the open market. These subsidize the consumer of the service, but services are provided by the private sector. In addition to providing greater freedom of choice, vouchers bring consumer pressure to bear, creating incentives for consumers to shop around for services and for service providers to supply high-quality, low-cost services.
- Commercialization (also referred to as ‘service shedding’). Government stops providing a service and lets the private sector assume the function.
- Self-Help (also referred to as ‘transfer to non-profit organization’). Community groups and neighborhood organizations take over a service or government asset such as a local park. The new providers of the service also are directly benefiting from the service. Governments increasingly are discovering that by turning some non-core services – such as zoos, museums, fairs, remote parks and some recreational programs – over to non-profit organizations, they are able to ensure that these institutions do not drain the budget.
- Volunteers. Volunteers are used to provide all or part of a government service. Volunteer activities are conducted through a government volunteer program or through a non-profit organization.
- Corporatization. Government organizations are reorganized along business lines. Typically they are required to pay TAXes, raise capital on the market (with no government backing – explicit or implicit), and operate according to commercial principles. Government corporations focus on maximizing profits and achieving a favorable return on investment. They are freed from government procurement, personnel and budget systems.
- Asset Sale or Long-Term Lease. Government sells or enters into long-term leases for assets such as airports, gas utilities or real estate to private firms, thus turning physical capital into financial capital. In a sale-leaseback arrangement, government sells the asset to a private sector entity and then leases it back. Another asset sale technique is the employee buyout. Existing public managers and employees take the public unit private, typically purchasing the company through an Employee Stock Ownership Plan (ESOP).
- Private Infrastructure Development and Operation. The private sector builds, finances and operates public infrastructure such as roads and airports, recovering costs through user charges. Several techniques commonly are used for privately building and operating infrastructure.
- With Build-Operate-Transfer (BOT) arrangements, the private sector designs, finances, builds, and operates the facility over the life of the contract. At the end of this period, ownership reverts to the government.
- A variation of this is the Build-Transfer-Operate (BTO) model, under which title transfers to the government at the time construction is completed.
- Finally, with Build-Own-Operate (BOO) arrangements, the private sector retains permanent ownership and operates the facility on contract.
In fact, privatization can improve efficiency. It is because businesses in the private sector are more efficient as their main objective is make profit, therefore costs must be strictly controlled.
Privatization also helps with finding new sources of finance as new owners invest more capital in the business than the government can afford.
Finally, customers end up with having more choices as competition helps to improve product quality and availability.
However, is privatization always good?
