Chapter 8: How to Privatize

In this chapter, Savas lays out the ways in which government can undertake privatization of services. The first and most basic strategy for privatization is "load shedding," the partial or complete withdrawal of government from an activity, in favor of this activity being provided by the for-profit, nonprofit, or voluntary sector. He offers examples of how load shedding has been occurring for some time, resulting in both improved services and lowered costs, even as government itself has grown. One major method of load shedding is divestiture, or the selling of state-owned enterprises, such as bus services or utilities.

Other options for privatization include limited-government arrangements. These involve limiting the role of government to making grants or supplying vouchers to facilitate the provision of a service through the private market, or devolving responsibility to a lower level of government, closer to the people being served. Savas believes this method may be appropriate for services that are paid for collectively.

User charges are a third strategy, one that can be applied to goods and services provided directly by government, by intergovernmental agreement, or by contract arrangement. Although this is not strictly "privatization," it reveals hidden subsidies and requires users to pay the true cost of services.

Finally, competition must be introduced and government monopolies must be broken up. Savas believes that despite the many efforts to improve government services, as long as they remain monopolies, they will continue to perform poorly. With competition, citizens can and will express their choices, and as a result, ineffective, expensive, or unneeded services will be revealed and discontinued.

In the final section of this chapter, Savas discusses the requirements for effective contracting out of government services. He argues that the costs for government provision of services are greatly underestimated, in part because governments often do not include capital expenditures, overhead costs, supplies, and other items in the cost of a particular service, but rather in the operating budget of the agency. When actual costs are measured, government's cost for providing a service rarely compare favorably to costs in the private market. The existence of multiple suppliers leads to better performance and provides a yardstick for measuring government's performance in providing that same service. Contracting must be undertaken carefully, however, with clear specifications, a fair bidding process, and monitoring to ensure satisfactory performance once a contract is in effect. Savas makes no mention, however, of how fiscal resources can restrain citizen choice and impact social equity.