Chapter 5: An Analysis and Comparison of Alternative Arrangements

In chapter 5, Savas summarizes and analyzes the appropriate institutional arrangements for different types of service delivery. His analysis includes an examination of the inherent properties of different types of goods, the arrangements which work best in delivering those goods, and factors to be given careful consideration in evaluating the utilization of different arrangements. He concludes his analysis with a summary of the characteristics of privatization alternatives.

According to Savas, the nature of goods determines which arrangement is most appropriate for their delivery. Private goods can be provided by any arrangement, while toll goods can be provided by any arrangment except self-service. Collective goods can be provided by government, intergovernmental agreement, contract or by voluntary arrangement. Common-Pool goods, although supplied by nature, can be created by government action and then supplied through government service, intergovernmental agreements, contracts, grants or vouchers.

Savas describes, in detail, eleven different attributes and characteristics of goods and the arrangements which are important in determining the suitability of a particular arrangement for supplying a good:

1. Service specificity: How easy is it to specify the services provided and needed? The progress of the services? The success of those provided?

   • Services that can be specified to a great degree can be provided by any arrangement.
   • Services that cannot be specified to a great degree cannot be readily provided by intergovernmental agreement, contract, franchise or grant.

2. Availability of producer
   • If there are many producers to choose from, the most appropriate arrangements are contract, market, and voucher.

3. Efficiency and effectiveness
   The three fundamental criteria of service performance are: efficiency, effectiveness and equity. The degree of competition determines the amount of efficiency and effectiveness: the greater the amount of competition permitted by an arrangement, the greater the efficiency.

   • Market, contract and voucher systems are most conducive to foster competition.
   • Franchising, grants, intergovernmental contracting, governmental vending and voluntary arrangements promote less competition.
   • Self-service yields no competition.

4. Scale: the scale of service affects its efficiency.

   • Government service is likely to be inefficient because the production unit must, by definition, be the same size as the consumer unit without regard to its optimal size.
   • All of the arrangements (except govt. service and self-service) can achieve economies of scale by allowing the size of the producer to be independent of the size of the arranger.
   • Those arrangements most able to take advantage of economies of scale are contracting and franchising. Voucher and inter-governmental service, to some small degree, can realize economies of scale.

5. Relating costs and benefits
   • Efficiency is more likely to be achieved when there is a direct link between paying for the service and realizing its benefits, and the consumer has economic incentive to shop wisely. Such a relationship is only possible for private and toll goods.
   • Those arrangements which allow for a direct link between the paying consumer and service producer are: market, voucher, grant and franchise.

6. Responsiveness to consumers

   • More responsive service is achieved when the consumer is the arranger, as in market, voucher, self-service, and voluntary arrangements, and in arrangements where there exist multiple grantees and franchises.

7. Susceptibility to fraud (types of fraud include bribery, collusion, and extortion.)

   • Each arrangement is susceptible to some degree of fraud.

8. Economic equity: the difference in the ability of each arrangement to provide services in a fair and equitable manner with regard to financial means.

   There are two opposing viewpoints on the relationship between the market mechanism and equity. The first viewpoint says the market mechanism is inherently equitable in that all people are treated equally and everyone pays the same amount of money for the same thing. The second believes the market is inherently inequitable because incomes are distributed unequally and, therefore, rich and poor cannot buy the same things (i.e. ability to obtain services and goods is based on income.)

   Savas believes that opposition to privatization on the grounds that it is unfair to the poor is unfounded, as privatization does not require a pure market arrangement. A combination of arrangements may be employed. In summary, however, the arrangements clearly do differ in their ability to redistribute.

9. Equity for minorities

   • Privatization does not necessarily mean a decrease in the availability of jobs for minorities. The private sector is subject to the same laws and regulations of anti-discriminatory hiring practices as the public sector. Additionally, the public sector has not been without problems in discriminatory hiring. Privatization can also create entrepreneurial opportunities for minorities.
   • Because of the inefficiency of the public sector, contracting can often result in greater efficiency and therefore eliminate the bias in service provision where the quality of services has been worse for minorities. Any arrangement that results in better-quality or more cost-effective public services is likely to benefit minorities more, as they are more dependent on private goods that have been collectivized.

10. Responsiveness to government direction

    • Direct Government service arrangement is not very responsive to public policy, as the elected chief executive or local official has very little control over the agency that is under his or her nominal control.
    • Private firms can actually be more responsive to public policy than government agencies.
    • No arrangement, however, stands out as being significantly more responsive to government direction or control than any other.

11. Size of government

    • The size of government is greatest under government service and least under market, franchise, voluntary and self-service arrangements.
    • Contracts, grants, and vouchers result in smaller number of government employees, but can result in larger government expenditures due to an increase in demand by the consumer and a resultant increase in prices (especially under the arrangements of vouchers or grants.)

Savas compares different arrangements with a chart, which shows that:

• Market system and voucher system have the greatest number of positive attributes.
• Government service, government vending, intergovernmental agreements have the fewest number of positive attributes. (note: These conclusions are influenced heavily by the values that are inherent in the table. Different results can be obtained by weighing each arrangement against a different set of values.)

Characteristics of the Privatization Alternatives

• Contracting

  • Privatization of public services that supply collective goods is most successfully achieved through contracts, voluntary action and vouchers.
  • Privatization of nationalized or state-owned enterprises that supply private and toll goods is most successfully achieved through the market mechanism.
  • Summary of the literature on theoretical differences in motivation and performance of public and private organizations:
    1. There is less incentive to perform in the public than in the private sector (the private sector can use raises, promotions, demotions and firings more readily.
    2. In the public sector, operating and capital budgets are arrived at through two separate processes, and it is therefore difficult to trade-off between them.
    3. The budget in the public sector can grow even if the customer is dissatisfied. Therefore, the public sector lacks motivation for "satisfying the customer."

• Vouchers

  • Conditions under which a voucher system will work well:
    1. There are widespread differences in peoples preferences for the service, and these differences are recognized and accepted by the public as legitimate.
    2. Individuals have incentives to shop aggressively for the service.
    3. Individuals are well informed about market conditions, including the cost and quality of the service and where it may be obtained.
    4. There are many competing suppliers of the service, or else start-up costs are low and additional suppliers can readily enter the market if the demand is there.
    5. The quality of the service is easily determined by the user.
    6. The service is relatively inexpensive and purchased frequently, so the user learns by experience.
  • Good ways to use vouchers: transportation, child care, legal services, health insurance, housing and food.
  • Bad ways to use vouchers: medicaid and medicare

• Voluntary Action

  • Requirements for a voluntary organization to successfully provide services:
    1. the need or demand is clear and enduring
    2. enough individuals are motivated to try to satisfy the need
    3. the service is within the technical and material means of the group
    4. the results are evident to the provider group and provide psychic rewards and re-inforcement.