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Article Summary

Sclar, Elliot 2000. What is the Public Buying? Identifying the Contracted Public Good. Chapter 2 of You Dont Always Get What You Pay For: The Economics of Privatization. Ithaca, NY: Cornell University Press.

In the second chapter of his 2000 book entitled You Dont Always Get What You Pay For: The Economics of Privatization, Elliot Sclar examines the characteristics of public services that may complicate their privatization and develops criteria that should govern contracts extended by the public sector to provide public services through private suppliers. Sclar argues that accurately quantifying the complete public service to be privatized is very difficult. Most publicly provided services generate externalities, which reverberate beyond the direct buyers and sellers. Furthermore, the complexity of many of the government provided services makes a true cost accounting nearly impossible. He illustrates his theoretical points through case studies.

Sclar offers the example of a low-cost, reliable postal system. Sclar argues that our market economy and democratic society derive important benefits that private niche players, such as FedEx, could not duplicate. Sclar argues that private providers could not offer the range, price, and security of the post offices services without a public subsidy.

Sclar also examines highway privatization efforts in Massachusetts in order to illustrate the problems that arise when contracting out a complex service. Although isolated road projects are routinely bid out, Sclar maintains that efforts to privatize the coordination and administration of highway maintenance fell far short of the proclaimed successes. Most importantly, policymakers never understood, or accurately accounted for, everything that the Massachusetts highway department had done. For example, public road workers routinely sealed road cracks because it helps roads last longer, thus keeping long-term repair and capital improvement budgets under control. On the other hand, while private contractors had to fill potholes, they were not responsible for the less noticeable road cracks.

Sclar notes that this privatization effort was ideologically conceived. Subsequent reviews found that state contracts were written to hide or defer many of the contractors expenses, making privatization seem cheaper. Investigators also found that policy makers overstated the costs of the original service provided by public workers, while unfairly criticizing the quality of their work. Policymakers moreover failed to realize that the Massachusetts Highway department had a lot of experience taking care of its roads whereas outside contractors faced a steep and expensive learning curve.

In his conclusions, Sclar proposes three preconditions to successful public contracting:

1) Carefully specify and delineate the services to be privatized.

2) Conduct a thorough pre-privatization cost accounting of the work to be contracted out to ensure that privatization makes economic sense not just political sense.

3) Consider the learning curve costs of privatization by accounting for the expertise already developed in the public sector but not necessarily held by potential private providers.