Privatization Pitfalls
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Privatization Pitfalls Update 2008

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Policymakers at the local, state, and federal government levels often struggle to balance the imperatives of providing necessary public services with the constraints of shrinking funds to pay for services such as transportation, prisons, and human services. Among the many possible solutions public entities may consider is the strategy of privatization, defined as “any process that is aimed at shifting functions and responsibilities, in whole or in part, from the government to the private sector through such activities as contracting out or asset sales.” This briefing paper is an update to an earlier publication by the Bureau of Labor Education on the “pitfalls and problems” of privatization (1998). As with the previous paper, this update will focus primarily on privatization as it concerns the provision of public services by states and localities in the U.S., rather than on federal levels or in other countries. While the complexities of privatization need to be explored in much greater depth by policymakers, this briefing paper explores some major issues, and offers some further resources.

Many state and local governments, the U.S. government, and public sectors such as higher education, turned to various forms of privatizing services over the past two decades, especially during the 1990’s. However, both planning experts and local governments are increasingly questioning the effectiveness of such conventional privatization. In an extraordinary turnaround of policy, many local governments are actually beginning to reverse their privatization experiments, due to the host of problems that have arisen, according to Cornell University’s planning expert Mildred Warner. For all of these reasons, a closer examination of the actual consequences and implications of privatization is critically important before adopting what is increasingly viewed as a failed strategy.

In this briefing paper, we will provide an overview of five important issues in privatization:

1) Costs: Does privatization through contracting out result in lower costs for public services?

2) Accountability and Control: Does contracting out of public services provide adequate accountability and control?

3) Effectiveness and Quality of Services: What issues have arisen regarding the effectiveness and quality of public services provided through contracting out to private sector contractors?

4) Economic and Employment Impacts: What are the economic impacts of contracting out public services to the private sector, particularly regarding impacts on jobs and employment?

5) Constitutional Rights: What are the potential threats to constitutional rights posed by the transfer of public authority to private groups, regarding the provision of public services?