This prospect of private corporations owning and operating prisons for adult offenders raises questions of costs and competition. Indeed, private prison operators insist on long-term contracts which buffer them from competition. But, JTPA local officials and training contractors can affect their measured performance by screening applicants. The problem in the JTPA system is not private ownership, but the controls and performance measurements of the private owners.
In addition to the problems of insufficient competition and monitoring, there are broader objections to the no-holds-barred advocacy of privatization.
Starr also attacks the claim that privatization leads to less government. He contends that profit-seeking private enterprises servicing public customers will find it in their interests to lobby for the expansion of public spending with no less vigor than did their public sector predecessors. It is not hard to find examples of undue influence. More generally, a lack of competition for government contracts actually leads to higher costs and creates perceptions of corruption. As part of its consultancy, American Management wrote technical documents that became the basis for bid specification to build and implement the system.
An audit by the New York State Comptroller showed that American Management had missed contract deadlines and that its system had billed millions of dollars in fines to New Yorkers who did not even own cars. The city had hoped to take over management of the system in , but it has been unable to develop the necessary organization.
Current plans anticipate city management in Even in the absence of corruption, however, Starr argues that privatization should not be considered in terms of economic efficiency alone. Less government, he states, is not necessarily better; therefore, just because privatization may reduce the role of government in the economy, it is not necessarily beneficial. Privatization diminishes this public sphere—the sphere of public information, deliberation, and accountability.
These are elements of democracy whose value is not reducible to efficiency. While it is clearly impossible to decouple privatization from the broader social and political issues raised by Butler and Starr, it seems logical that privatization decisions can and should be based primarily on pragmatic analyses of whether agreed-on ends can best be met by public or private providers.
The ends need not be limited to efficiency; they need only be clearly specified in advance. In short, public provision suffers when public managers pursue actions that are not in the interests of the citizenry—for example, the employment of unnecessary workers or the payment of exorbitant wages. Private provision suffers when private managers take action inconsistent with the public interest—for example, performing shoddy work in an effort to boost profits or denying service when costs are unexpectedly high.
These issues, which only now are beginning to emerge in the privatization debate, have been showcased for managers in another context.
They were central to the wave of leveraged buyouts in the late s, which showed that private businesses also often suffer from managerial behavior inconsistent with shareholder interests. Takeover artists like Carl Icahn saw the same excesses in corporations that many people see in governmental entities: high wages, excess staffing, poor quality, and an agenda at odds with the goals of shareholders.
Monitoring of managerial performance needs to occur in both public and private enterprises, and the failure to do so can cause problems whether the employer is public or private. In the late s, a wave of public company buy-outs swept across the previously insulated world of publicly traded corporations, prompted in large part by the failure of internal monitoring and control processes in these companies.
These buyouts provide an important and useful analogy to privatization. In particular, Michael C. The problem has been that managers in many industries, especially those with little long-term growth potential, have wasted company assets on investments with meager, if any, return. And excess cash provides managers with an opportunity to increase the size of the companies they run, through capacity expansion or diversification.
This unwillingness to surrender cash to shareholders is not limited to a few companies. Private managers, it seems, are vulnerable to the same claims levied against government agencies. To monitor these tendencies on the part of public corporation managers, Jensen identifies three forces: product markets, the board of directors, and capital markets. The first two, says Jensen, have been falling short. Even the onslaught of international competition has been insufficient to prevent managers from squandering valuable assets.
In short, managers have been able to make investments that do not maximize shareholder value because the processes assumed to be disciplining their behavior no longer function effectively. In recent years, it has fallen to the capital markets to assume the role of monitor. The privatization of government assets and services has similar potential. The key issue is how the private managers behave and what mechanisms will exist to monitor their actions.
It is significant that the firms that specialize in LBOs have organizational features that differ dramatically from the corporations they acquire. These key criteria—rather than the simple category of ownership—account for the difference in performance and prevent the waste of resources perpetuated by the preceding management. Managerial incentives tie pay closely to performance.
There are higher upper bounds, bonuses are linked to clearly identified performance measures such as cash flow and debt retirement, and managers have significant equity stakes. The organization is more decentralized, as incentives and ownership substitute for direct supervision from headquarters. Managers have well-defined obligations to debt and equity holders. The debt repayments force the distribution of cash flow, and cash cannot be transferred to cross-subsidize divisions. Like the takeovers of public corporations, the privatization of government assets or services is a radical organizational change.
The public seeks both monetary and nonmonetary value, including equal access to services, adherence to performance standards, and a lack of corruption.
But for these goals to be met, privatization will have to learn the same lesson taught by successful LBOs: managers must have effective incentives to act on behalf of the owners. The application of their lessons to privatization will help resolve the conflict between the public and the private providers, and identify cases where continued public provision makes sense. The major criterion is easy to specify: privatization will work best when private managers find it in their interests to serve the public interest.
For this to occur, the government must define the public interest in such a way that private providers can understand it and contract for it. The best way to encourage this alignment between the private sector and the public interest is through competition among potential providers, which may include governmental entities.
Competitors will take it upon themselves to respond to the expressed wishes of the citizens. In , the mayor announced that the city would turn over garbage collection to private firms. The Public Works director insisted that his department be allowed to bid against the private firms, even though the city had promised not to lay off any displaced Public Works employees as a result of contracting out. By , Public Works had won back all five district contracts. Full Terms and Conditions apply to all Subscriptions.
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