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Article Summary

Sclar, Elliot, 2000. The Privatization of Public Service: Economic Limits of the Contract State, Chapter 7 of You Dont Always Get What You Pay For: The Economics of Privatization. Ithaca, NY: Cornell University Press.

The concluding chapter of his 2000 book entitled You Dont Always Get What You Pay For: The Economics of Privatization, opens with examples of privatization form New York to illustrate the limitations of private contracting out public services. Sclar then offers a list of eight rules to improve the public sector. The brief history of New York City corruption dating from the Boss Tweed days of the 1850s to Gulianis administration, Sclar notes, serves to illustrate that while a wide variety of reforms have followed these abuses of public money and trust, no one [has] found a way not to pay the contractors when the work was shoddy or nonexistent(154). One of the main problems in contracting remains the inability to ensure public accountability through the terms of a contract.

Sclar, in this chapter briefly outlines his critiques of the standard economic model, on which the arguments of privatization proponents rest. Advocates of privatization, he notes, make several unrealistic assumptions: 1) existence of a competitive market for a given service, 2) presence of a large number of buyers and sellers with equal access to information and expertise to use this, 3) zero transaction costs, and 4) a social, economic and institutional environment that does not cause friction. Contracting, as the case-studies in this book illustrate, occurs in environments characterized by a high degree of uncertainty in which actors (buyers and sellers) have differential access to information and in which a competitive market for the service has not and may not form.

Sclar, furthermore, argues that privatization advocates are often ideologically blinded and therefore dismiss the possibility of public sector reform. Sclar, however, hones in precisely on this option in his conclusions. He offers eight rules to restructure and improve public sector contracting, rules that do not foreclose the option of public sector provision.

1. Carefully specify the product and the service rendered. Many public sector products have social components to them. The post office in small towns serves a much greater purpose than the simple delivering of the mail.

  1. Use activity based accounting when figuring the actual cost of providing a service. There can be no comparison between in house work and outsourced work unless there is a reliable accounting of what it costs to provide a service.

  2. For the actual cost comparisons use avoidable cost accounting because it does not include overhead and direct operating costs.

  3. Transaction costs are not zero and must be addressed when figuring the costs of privatization. There will always be public management of the private provider.

  4. Acknowledge that public contracting is different from private contracting. Public contracts have different standards of accountability, flexibility, and are often more problematic.

  5. Review more than simply all private or all public alternatives when judging the merits of either system. Sometimes governments find other permutations or rearrangements that work well.

  6. Allow employees to make contributions to the process of reorganizing the provisions of services.

  7. Remove politics from contracting.