• Higher costs to consumers
• Project cost overruns and other hidden costs to government
• Government costs of managing and monitoring contracts
• Hidden costs to the community
The most popular reason for privatization is the promise of cost savings. This is especially pronounced in difficult economic conditions, when elected officials are faced with serious budget shortfalls. Officials at all levels of government have considered selling off state assets for quick cash or privatizing important services in the hopes of saving money. But communities across the country have found that investors pay low prices for valuable assets to cash-strapped governments, then impose steep fee increases on consumers or other measures to maximize their income from the asset. In many cases, the money received from a 50- to 99-year asset concession lease may fill budget holes for the coming year but fall far short of the actual long-term value.
Likewise, cost overruns in large service contracts can negate any projected savings. The costs of managing and monitoring the contract and hidden transactional costs often are not included in the calculations of projected savings, distorting the true cost of the contract. Increased costs may also appear as hidden cost to the community. For example, government jobs often include health benefits that are lost when the jobs are outsourced to private companies. As a result, more workers may need to rely on the government, thus increasing government costs. Many of the private employees who take these jobs receive lower wages and little or no benefits. Several recent studies have measured the increased use of the Earned Income Tax Credit (EITC) and Medicaid programs when workers are denied living wages and health benefits. The cost saving projections that governments use to justify privatization decisions are often incomplete and erroneous. As numerous examples have confirmed, privatization of assets and services often fails to have the desired budgetary effect that many corporations lead governments to expect.
ITPI recently released a new backgrounder brief that discusses the high costs of privatization. Read it here.
Even toll roads originally built as private businesses are failing to demonstrate promised cost efficiency.
In San Diego County, California, the South Bay Expressway filed for bankruptcy in March, three years after it opened late and over budget. The for-profit company running the toll road blames the recession for its low traffic, but drivers have publicly blamed the company's steep toll increases.Read more »
As local politicians bluster about saving money with outsourcing, two San Diego education districts have quietly achieved real savings by doing the opposite - bringing contracted services back in-house.
San Diego Unified School District, the second largest school district in California, ended its bus services contract in January and will save an estimated $1 million per year by bringing the routes in-house. Additionally, in December 2009, the district "in-sourced" the warehousing and distribution of copier paper, at a savings of $153,000 per year.Read more »
As states grapple with serious damage from contracting out information technology systems, the federal government is reconsidering the risks of outsourcing IT. Texas is cancelling its $863 million contract with IBM because of repeated failures, just as Indiana did last year.Read more »