1. Definition

2. Classes of privatization

3. Criticism

4. Factors that lead to privatization

5. See also

6. References

7. Literature

State, county, and city economies are constantly challenged in running government operations. A government-run sector may transfer the responsibility for carrying out the service and/or resource management activities and responsibilities to the private sector.

Definition

The term "privatization" has also been used to describe two unrelated transactions. The first is a buyout, by the majority owner, of all shares of a public corporation or holding company's stock, privatizing a publicly traded stock, and often described as private equity. The second is a demutualization of a mutual organization or cooperative to form a joint stock company.^[3]

Privatization has also been defined as the sale of public assets to private companies who then provide that service back to the community or municipality at a competitive price. The whole idea behind the privatization issue is that the new provider will be able to provide the same service but at a reduce cost to the public. The municipality and the community is thought to benefit from the reduce cost that was associated with operating the public facility.

Classes of privatization

The four major classes of privatization options can be characterized as

1. private provision of various services and supplies such as laboratory work, meter reading, and supplying chemicals;
2. private contracting for water utility plant operation and maintenance (both 1 and 2 are often referred to as “outsourcing”);
3. negotiating a contract with a private firm for the design, construction, and operation of new facilities (this option is referred to as design, build, and operate, or DBO); and
4. outright sale of water utility assets to a private company.

In the United States, the contracting of management and operations to a private provider (outsourcing) has been more common than the sale of utility assets to private companies. No major U.S. city has sold its utility assets in recent decades, although some smaller water utilities have done so.^[4]

Criticism

Historically, governments have at times turned government-run institutions into privately held corporations or simply abolished the publicly run institution in order for privately owned competition to enter and compete in the market in question. However, critics often point out that historical methods of privatization were quite different than modern methods. For example, in the United States in the 19th century, a corporation might be chartered by a public entity, such as a municipality, for a very specific purpose (for example, constructing New York's Central Park) with significant constraints on its purpose, task, and duration. Such a corporation would then often cease to exist after its purpose had been fulfilled. This kind of public-private partnership differs in significant ways from a common modern form, where publicly held services or resources might be handed over to a private company with few stipulations and for an indefinite period of time.

Critics of privatization also charge that lucrative contracts may be given to political allies, relatives or friends of public officials and that subsequently, these contractors may not qualified to do the work and/or may provide less quality to the general public. For example, in 2006 the LA Times reported on this pattern in an article stating that for "Indianapolis, New Orleans, Atlanta and other cities, privatization has been accompanied by corruption scandals, environmental violations and a torrent of customer complaints."^[5]

Another criticism of privatization, particularly in regard to municipal services such as water utilities, is that some municipalities have seen unacceptable increases in prices of services while seeing also a decrease in the quality of service and level of maintenance of the utility. For example, in Jacksonville, Florida, a company called United Water Resources owned and operated the municipal water system. After monthly bills increased in 1997 by almost $10 per month, and further requests for rate hikes later as well. The municipality's public utility, JEA, decided to buy the water system for $219 million, projecting that this would actually save customers 25% on monthly bills.^[6] On the other hand, publicly managed utilities have occasionally reported trouble as well. The New York Times reported in 2004 that a consortium of citizen's groups had won a suit against the city of Los Angeles to repair 488 miles of sewer lines and conduct other maintenance.^[7]

Factors that lead to privatization

There are several leading factors that contribute to municipal or county governments outsourcing. Economics in the format that governments can operate in a more manageable and effective manner. Public administrations have been criticized for their lack of effective service. The quality of service may be slow and employees may not be held accountable for their responsibilities. The view by the public is that public organizations are not friendly, and removed from high-quality public service, the lack of public relations, and training show in the inability of their personnel to deal with the public.

Privatization is widely thought to be a valuable policy instrument that leads to a greater good. Privatization of public resources injects new value into public assets and increases the privately held capital base of a country. Governments that implement privatization as part of their reforms use it as a mechanism to pursue a variety of objectives, both macroeconomic and fiscal. Governments undertaking privatization have pursued a variety of objectives. In some cases, privatization is a means of achieving gains in economic efficiency, given the extensive prevalence of poor economic performance of public enterprises in many countries and limited success with their reform. Privatization can also be a mechanism for improving the fiscal position, particularly in cases where governments have been unwilling or unable to continue to finance deficits in the public enterprise sector.^[8]

The decision as to whether to transfer ownership or operations of a public water utility to a private firm is complex. Immediate economic questions such as “Won't privatization increase customers’ monthly water bills?” are accompanied by larger and longer-term questions relating to public health, employment, political control, environmental issues, and relations with other city services.^[4]

See also

• Water privatization in the United States
• Private police in the United States
• Private school#United States
• Social Security debate in the United States

References

Literature

• How Conservatives Rule

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