Privatization, first propagated by Margaret Thatcher in 1970, predicted market competition would allow for greater cost-efficiency, increased consumer voice, and enable service integration in the delivery of urban services. In her article, Warner examines these promises of privatization and whether or not they are supported by the empirical evidence. She concludes the article by examining the implications of privatization’s actual results for local governance.

Efficiency

The first promise of privatization was to increase efficiency in service provision through what Warner terms contracting out. Contracting out of public service delivery such as transportation or water to private purveyors ideally provides the dual advantage of market development as well as government savings due to the cost reducing nature of competition. Warner examines the empirical evidence and shows that privatization generally does not promote market development nor save costs, at least in the long run.

In a 2012 study, Warner & Hefetz found that only 1/3 of 67 services measured had competition levels greater than 2 options, undermining the potential for cost savings. In fact, Warner argues that the transaction costs of contracting out services are actually quite high, especially when city managers have to “chase contracts” in these privatized markets with few options. Thus, privatization not only fails to stimulate market development in service delivery, but also fails to cut costs as promised. Warner states that putting service delivery into the hands of the market only cuts costs if innovation through competition leads to improved efficiency in the delivery process. However, studies show that over time competition erodes and so do the associated innovations and cost savings. While privatization may stimulate the market and cut costs in the short-term, it does not maintain these benefits in the long run.

Warner argues that this disconnect is felt at the local level, where decisions made by city managers are guided by pragmatism, not national or international political ideology such as privatization. Studies reveal that the natural citizen scrutiny and accountability found at the local level forces managers to eventually discard reforms promoted at national or international levels that fail to provide appropriate services to the local populace.

Voice

The second advantage promised by privatization according to Warner was increased consumer voice; the ability to select the amount, timing, and mode of service delivery. Diversified market providers should better provide for communities with diverse needs. This made privatization particularly attractive in terms of providing for heterogeneous urban communities.

However, the studies analyzed by Warner shows that in fact homogenous communities, i.e. suburbs, see the greatest diversity of private services because the heterogeneity of the city makes it a less attractive market for private purveyors. Accordingly consumer voice is not increased in the area where it is most varied. Warner uses this opportunity to make an important distinction between consumer voice and citizen voice. She argues that while privatization may better represent consumer voice than a monopoly of public provision, it fails to take into account citizen voice, or public values of quality and integration. Thus current market solutions that solely speak to consumer voice require balancing by citizen voice that will instill values of quality and service integration.

Economies of Scale and Service Integration

The third promise of privatization was to promote better service integration by taking advantage of economies of scale. Warner explains that the service provision cost curve is generally U-shaped, with high costs of provision at low densities and extremely high densities because of the complications associated with sparse settlement and congestion.

Warner goes on to state that Europe and US governments are characterized by extreme fragmentation at the local level, which provided a major impetus for private solutions to service provisions. How did governments overcome this fragmentation to achieve the economies of scale to afford service integration? Warner argues that because political consolidation was difficult, pragmatic local governments were supposed to turn towards private markets to act as the provider of an integrated service. However studies show that these private firms are more likely to be found in urban consolidated areas than in sparsely settled or fragmented areas where integration is actually necessary. She points out that inter-governmental contracting is a practiced solution in some places, however transaction costs can lead to uneven results depending on the wealth and managerial capacity of the municipalities involved. This can result in the urban splintering or unequal provision of basic public services.

Implications for the Future of Governance

Over the course of the article, Warner identifies that privatization has not fulfilled any of its promises in terms of increased efficiency, voice, or service integration. However she also acknowledges that cities, as sites of innovation, are providing new technology in social networking and other services that may improve the equity of private service provision. The question then becomes, how do we harness this to promote integration instead of “splintering urbanisms,” generating a differential of communities that can and cannot afford to implement these technologies? Additionally, how do we coordinate service provision in the 21st century, where resource constraints and climate change will require long-term sustainable thinking?

Warner answers that the private sector will continue to play a role in creating innovative solutions to service provision, but governments must look to solutions beyond “contracting out.”

Traditional solutions such as public-private partnerships, club service delivery, and improvement districts tend to either have high transaction costs, splinter the landscape, or are only sustainable in the short-term. A new generation of solutions must be found that incorporates citizen voice and its associated attributes into the consumer driven privatization.