Strategies for Best Practice – Potential Disadvantages of Privatization

Opponents of Privatization Often Cite the Following as Reasons to Oppose Privatization:

Reduced Service Quality

  • A decrease in service quality may occur because government loses control over service delivery.
  • For profit businesses will be tempted to cut corners (e.g., hire inexperienced staff, ignore contract requirements, use cheap equipment and materials) to increase profitability.

Higher Cost and Illusory Cost Savings

  • Reasons why private enterprises can be more costly than government include:
  • Corruption;
  • Lack of competition in the private sector;
  • Certain types of contracts (e.g., cost plus fixed fee)provide no incentive for savings; and
  • Unemployment benefits are a cost to the taxpayer when employees are laid off.
  • Financial benefits of privatization are often exaggerated due to hidden costs associated with contract preparation, contract administration, privatization transition cost, and increased oversight cost.

Increased Service Interruptions

  • Unlike government, private vendors are subjected to influences (e.g., low profitability, bankruptcy, labor strikes) that can lead to service interruptions.

Loss of Flexibility

  • Government contracts for services must be written in very specific terms. This could result in less flexibility for public officials who are restricted by contract requirements when responding to unforeseen circumstances.

Loss of Capital

  • Capital investments in equipment and training are often lost when they are subject to privatization.

Less Control and Accountability

  • Government officials are able to respond to citizens when government is in total control of a service.
  • In contrast, the response by government officials is subject to contractual limitations when a service is outsourced to a private contractor.

Dual System

  • Privatization creates government inefficiency by creating a dual system government; one in which public workers are subject to strict procedural regulations, pay and benefit schedules and another system where outsourced labor is working on behalf of the government but are subject primarily to rules established by their private employers.

Increased Potential for Corruption

  • When large sums of money are involved, there is a temptation for government workers to accept or demand offers of kickbacks for awarding a contract to a private business.
  • When large sums of money are involved, there is a temptation for private entities to offer patronage if awarded a government contract.

Increased Potential for Discrimination

  • Private enterprises often do not have a policy for hiring minority and disadvantaged populations.
  • Private businesses may avoid serving clients who are minority or disadvantaged or perceived to be less profitable clients.

Displaces Public Employees

  • If displaced, government employees may lose their jobs and/or benefits and/or collective bargaining rights.
  • There may be a decline in morale among the remaining government employees.
  • Civil service policies and merit principles are weakened.

Lack of Competition in the Private Sector

  • The advantages of privatization will be lost if there is little or no competition in the private sector for outsourced services.

Weakened Policies and Values

  • Important values such as worker safety, quality, and integrity will be diminished or lost when government services are entrusted to corporations that are obligated to maximize profitability for stock holders or private owners of the company.

Mark J. Rosen, Researcher, “Privatization in Hawaii,” p27-30 (Honolulu: Legislative Reference Bureau, December 2007).

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