LYCOS RETRIEVER 
Privatization: Costs
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Critics of privatization claim that there are no true efficiency gains from privatization, arguing that comparative studies of efficiency often ignore a number of key factors, by looking only at the operational costs (per diem rates). In 1996 the US General Accounting Office brought into question a number of the key assumptions that the proponents of privatization claim. Ultimately, the GAO found that there was no evidence conclusively demonstrating efficiency gains from privatization (GAO Reports, GAO/GGD-96-158). The GAO pointed out flaws in many of the studies touting efficiency gains from prison privatization. They found virtually no reliable multi-year studies. Those that they did find suffered from flaws including: failinure to compare similar institutions, failure to account for both cost and quality, or lack of a nuanced account of hidden costs.
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Proponents of privatization argue that government providers have no real incentive to hold down costs or to provide quality service. Private firms, on the other hand, are motivated by a profit motive that depends on holding costs down. The lower the cost incurred by the firm in satisfying the contract, the greater the realized profit. Private providers are ... motivated by competition from other potential service providers. Competition between potential private suppliers to win a contract generally results in the lowest cost to the government and the taxpayer for the specified level of service. "Competitive markets are rooted in private property, and there is no way to stimulate competitive conditions under conditions of government financing or government production," Pasour wrote.
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According to DoL records, in-house workforces have beaten contractors 21 out of 23 times in privatization reviews conducted since FY04. Despite this formidable record, DoL will not allow federal employees to compete for new work or outsourced work; nor will DoD allow for the use of less costly and less controversial alternatives to the A-76 circular. Instead, DoL will subject even larger numbers of federal employees to privatization reviews, including twice as many federal employees in 2010 than in any other previous year.
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[N]one of this takes into account the substantial cost of preparing for privatization. Public Citizen estimates that the minimum cost of feasibility studies, evaluating bids, negotiating contracts, and severance pay to municipal workers was $4.9 million between 2000 and the start of the contract in 2003. This does not include the thousands of hours that city staff spent on the issue, nor does it include the costs of negotiations with disgruntled public employee unions facing privatization of their jobs.
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Hatry and Durman agree that the key to successful privatization comes from careful public administration and understanding the potential problems inherent with contracting to a profit-motivated private business. "An agency that is capable of sophisticated administration, and explicitly addresses service quality issues, can minimize the difficulties of implementing a competitive contracting process. In none of the examples [of successful cases] of competitive contracting examined did contracting agencies report deterioration of service quality. The contracting agencies were sensitive to the issue and took specific steps to prevent it. Carefully implemented competitive contracting can achieve modest cost saving or a slowing of cost increases."
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Literature reviews [4][5] find that in competitive industries with well-informed consumers, privatization consistently improves efficiency. Such efficiency gains mean a one-off increase in GDP, but through improved incentives to innovate and reduce costs ... tend to raise the rate of economic growth. The type of industries to which this generally applies include manufacturing and retailing. Although typically there are social costs associated with these efficiency gains[6], many economists argue that these can be dealt with by appropriate government support through redistribution and perhaps retraining.
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