This paper was prepared at the Urban Institute for U.S. Department of Labor, Office of the Assistant Secretary for Policy, under DOL Contract No. J-9-M-5-0048, #15. Opinions expressed are those of the authors and do not necessarily represent the positions of DOL, the Urban Institute or its sponsors.
The views expressed are those of the author and do not necessarily reflect those of the Urban Institute, its board, its sponsors, or other authors in the series
The purposes of the paper are to provide a general overview of the extent of privatization of
public services in the areas of social services, welfare, and employment; rationales for privatizing
service delivery, and evidence of effectiveness or problems. Examples are included to highlight
specific types of privatization and actual operational experience. The paper is not intended to be a
comprehensive treatment of the overall subject of privatization, but rather a brief review of issues and
experiences specifically related to the delivery of employment and training, welfare, and social
The key points that are drawn from a review of the literature are:
- There is no single definition of privatization. Privatization covers a broad range
of methods and models, including contracting out for services, voucher programs,
and even the sale of public assets to the private sector. But for the purposes of this
paper, privatization refers to the provision of publicly-funded services and activities
by non-governmental entities.
- Privatization is not a new concept. The current rationales for privatization and their
implementation strategies differ very little from earlier privatization initiatives (even
as early as the 1930s). Perhaps the biggest single change in the current privatization
environment in the area of social and human services is the possibility of private
companies being contracted with to administer entire public-funded systems (e.g., all
of welfare, all of child support, all of workforce development).
- The real issue is not so much public vs. private--it is monopoly vs. competition.
A key issue in the current trend towards what is commonly referred to as
"privatization" is the introduction of competition (e.g., public-public competition,
public-private competition, competition between public-private ventures, public-nonprofit competition) to increase efficiency, reduce costs, and improve quality and
- Privatization is not inherently good or bad--the performance or effectiveness
depends on implementation. The little empirical analysis comparing the
effectiveness of public versus private service delivery shows no clear evidence that
private service delivery is inherently more effective or less effective than public service
delivery, although the public, private, and nonprofit sectors each have their own
relative strengths and weaknesses. There are examples of success and failure in both
sectors. Most of the research suggests that the key factor is whether there is clear
accountability for results, clear criteria in contracts, and clear public objectives. The
government is responsible for assuring that public services are effective, whether or
not the services are publicly delivered.
- Privatization does reduce the number of public employees if services formerly
performed in the public sector are shifted to the private sector. But it is not clear
that workers are necessarily worse off in terms of employment, wages, morale, or job
satisfaction. There are many examples of negotiated arrangements for transferring
public employees to private employment or to other public agencies. There is
undoubtedly, though, a clear reduction in public employee members of unions,
although some number of privatized workers may join other unions.
- It is still too soon to know whether the most recent and highly-publicized
privatization efforts will be effective or not. There are, however, many potential
problem areas (e.g., profit motivation to cream and minimize costs) that, if
unaddressed in the public contracts, could reduce service quality. There are many
reasons for cautiously scrutinizing the process.
2. Current State of Privatization
Similar to trends in the private sector, there is some indication that public agencies are
increasingly considering downsizing and outsourcing as ways to address both financial constraints and
a desire to improve performance. The Government Management Reform Act of 1994 (P.L. 103-356)
To be successful in the future, government must, like the private sector, adopt modern
management methods, utilize meaningful program performance measures, increase workforce
incentives and flexibility without sacrificing accountability, provide for humane downsizing
opportunities and harness computers and other technology to strengthen service delivery.
However, privatization is not a new phenomenon. Gurin (1989) notes that privatization of
government social services has, in fact, increased at major watershed points in the history of social
policy (the Progressive era in the late 19th century, New Deal, Great Society, and Reagan years),
both at times of expansion and during contraction of government services. For example, during the
1970s, federal funding for social services increased greatly under Title XX of the Social Security Act,
and for human development and employment services under the Economic Opportunity Act and the
Comprehensive Employment and Training Act (CETA). Nonprofit organizations and for-profit
businesses both emerged to fill the need for government contracted service providers. In contrast,
during the early 1980s when federal funding for social programs was dramatically reduced, there was
also some increase in contracting out services (in some locales) as one way to reduce unit costs and
gain efficiencies despite reduced overall funding.
More recent interest in privatization of public social services is stimulated by both expansion
and contraction of publicly funded programs. Federal funding for employment and training declined
during the early 1990s, and this was one motivation for workforce development system redesign,
which includes considering new ways to deliver services. At the same time, the 1996 welfare reform
legislation increases the responsibility states have for redesigning their welfare systems and, at least
in the short run, provides more federal funding for both income support and programs that promote
employment. Privatization is one of the various welfare system redesigns that are being considered.
The recent dramatic emergence of large private corporations into the welfare field (discussed
below) has raised many concerns about the appropriateness of this degree of privatization. The
traditional approach to contracting in social services had been noncompetitive, quasi-grant
arrangements, primarily with non-profit organizations (Hatry and Durman 1985). The increased
emphasis on competition and performance contracting for the delivery of social services is consistent
with private sector initiatives focusing on efficiency and customer service. Some organizations, such
as the Reason Foundation, have been promoting the benefits of privatization for decades, and recently
their efforts are gaining new momentum, providing technical advice and guidance to businesses and
public officials on how to develop business ventures and effective public/private partnerships. In
addition to welfare reform, several other recent federal initiatives also encourage more privatization,
most notably in one-stop career centers and child support enforcement.
One-Stop Career Centers
The federal One-Stop Career Center initiative encourages an expanded use of vouchers and
competitive selection of administrative entities (e.g., for one-stop centers). Although national
regulations do not specifically endorse privatization of services, they do encourage expanded
competitiveness for the selection of center administrative and service delivery agents, allowing public
and nonprofit organizations as well as private for-profit companies to compete openly for one-stop
The Massachusetts' One-Stop Career Center Initiative is a current example of the trend
toward privatization in the one-stop and workforce development area. The state plan allows private
firms to compete with public agencies for contracts to manage career centers, which serve as
gateways to the states's new workforce development system. However, the initiative has run into
opposition on several fronts due to competition for funds among rival employment and training
agencies, high demand for services at the career centers, and concerns expressed by public employee
unions (Boston Globe, 2/11/97).
Child Support Enforcement
Federal child support enforcement legislation also supports an expanded role for non-profit
and private contractors. The 1986 child support legislation specifically encourages states to consider
contracts with private companies for technical activities such as locating absent parents and
maintaining tracking and payment systems. The Reason Foundation reports that, in 1995, there were
twenty states and dozens of local governments that had privatized one or more child support services,
and that five more states were planning to do so in 1996. These states contract out for activities such
as location, collection, payment processing, distribution of payments, and fully privatized offices.
Georgia and Virginia give full caseload responsibility to private providers.
The success of the private sector in increasing collections of child support payments is
attributed to several factors: first private firms can bring technology and equipment to the tasks that
governments typically cannot afford; second, private firms can expand or contract operations quickly
as they are not bound by government personnel systems; and private firms use performance
incentives, such as bonus pay, to increase collections per employee. (Reason Foundation pp 45-46)
A 1996 General Accounting Office Report (GAO, October 1996) found that in the fifteen
states with some privatization of child support, there was a tendency to especially contract out
collections of child support payment from hard to locate absent parents and parents with past-due
support.1 Many contractors receive payment only if they collect, often retaining a percentage of the
collection (ranging from 8 to 24 percent). In general, GAO found that both the federal and state
governments benefitted financially (net) from contracts that were targeted on cases that might not
otherwise be worked--in effect, the private contracting supplemented what the public agency could
do. The net benefit is derived from collections on AFDC cases and from federal performance
incentives attached to child support collections for both AFDC and non-AFDC collections.
Increased requirements under welfare reform, coupled with spending restrictions that limit the
amount of hiring that can occur in public agencies, have led some states to more seriously consider
outside service contractors for welfare service delivery functions. For example, welfare officials in
Nebraska and Arizona plan to increase their use of outside contractors (both for-profit and non-profit) to deliver services such as job placement and parenting skills training. (ETR 11/27/96) Other
states may make similar decisions. "Private industry buzzwords such as 'streamlining' and 'cost-containment' have spilled over to the public sector, and welfare officials are moving to share risk and
cut costs." (ETR 10/9/96)
The recent welfare reform law, The Personal Responsibility and Work Opportunity
Reconciliation Act of 1996, is the latest federal policy that contributes to the privatization trend. The
1996 law removes previous restrictions that essentially prohibited states from contracting out initial
welfare (AFDC) intake and eligibility determination functions. This has apparently opened a new
market for private companies. In the past, service delivery contracting in the social welfare arena was
mainly for direct service delivery such as job training, job search instruction, and day care provision;
and service providers were mostly non-profit, although some for-profit companies have provided job
training or other employment services. Large for-profit companies were mainly involved as
contractors for data systems. Intake and eligibility determination for welfare programs remained with
Now that welfare agencies can contract out the entire welfare system, including intake and
eligibility determination, large for-profit companies are moving into the welfare service delivery
market (e.g., EDS, Lockeed Martin, IBM). States are also more seriously considering privatization
options because of concerns over cost and the need to meet specific federal goals fairly quickly.
Large companies had already gained a foothold into some of the human service agencies, primarily
through health care and child support enforcement, for data systems and, more recently in child
support, for service delivery functions. "Before the new welfare law, moving people from welfare to
work was the domain of nonprofit organizations and three relatively small businesses (America
Works, Curtis and Associates, and Maximus). Now, some large companies see a potentially
multibillion-dollar industry that could run entire welfare programs for states and counties."
The three small for-profit companies referred to in the New York Times article (Bernstein,
- America Works: $7 million in contracts in New York City, Albany NY and
Indianapolis; provides supportive services for the first four months a welfare client is
on a job. The client receives minimum wage, but the employer pays America Works
a higher wage, similar to the arrangement with temporary employment agencies. In
addition, the government agency pays America Works $5000 per successful
placement (defined as one that lasts 4 months).
- Curtis & Associates: $9.2 million in business last year in selected sites in 11 states,
including California, New Jersey, Indiana, Vermont and Wisconsin; provides a job
club model for agency clients; sells training manuals and materials.
- Maximus, Inc.: $100 million total government contracts, much but not all in the
welfare area; has contracts for child support enforcement activities in 6 states, a $10
million contract in California to recruit recipients into HMOs, and welfare-to-work
contracts in selected sites in California, Massachusetts, and Virginia; has also had
many contracts for data systems development in the human services area.
The most recent development, in fact, is a dramatic increase in the extent to which larger
companies are seeking out welfare business on a major scale, going beyond their traditional contracts
related to information systems and technology to work preparation, and now possibly including
contracts for entire welfare systems including intake and eligibility determination as well as
employment and social services.2 "Big companies are concentrating on lucrative contracts that
require ...large scale participation." (ETR 10/9/96) The New York Times article (Bernstein, 1996)
offers the following information about these "giant" private corporations now seeking welfare
- Andersen Consulting: $4.2 billion global management and technology consulting
company that is an affiliate of the big accounting firm; now has contracts in 14 states,
mostly for child support and child welfare activities. Marketing a profit-sharing
approach to welfare, and recently won contracts for running welfare in two Canadian
- Electronic Data Systems: $12.4 billion information technology services company.
Began with computerization of Medicaid billing and welfare reporting systems. Now
has contracts in 20 states. EDS was recently awarded a new contract by the state of
Texas which focusses on reengineering eligibility determination and service delivery
for health and human services programs and securing a new computer system for the
- Lockheed Martin Information Management Services: a nonmilitary division of the
$30 billion dollar Lockheed Martin Corporation; has child support enforcement
contracts in 16 states plus the District of Columbia; also has contracts in 20 states to
convert various welfare benefits to an electronic debit card system. Now launching
a major new "welfare reform/self-sufficiency line of business." (Bernstein 1996).
Wisconsin and Texas are the most prominent examples today of the privatization trend in
Wisconsin's latest major welfare reform effort, called W-2 (Wisconsin Works), for example,
is based on market competition for delivery of services. Public, private and non-profit entities can
compete for contracts to deliver the entire welfare system in specific localities. In the initial round
of competition, proposals were submitted not by individual companies or agencies, but by consortia.
Four (or five) consortia were formed to bid on the W-2 contracts and each consortium included at
least one major private company, and public or non-profit agencies. The initial round did not produce
many proposals, though, in part because of the very complex and inflexible criteria and requirements
included in the state solicitation. Nonetheless, four contract consortia have been selected, and each
will be responsible for the entire welfare administration in the four geographic areas within
It is still unclear whether there will be a sharp increase in private companies assuming major
responsibilities for work-welfare programs though, even in a state like Wisconsin. Wisconsin had,
even before the latest reforms, already moved more towards privatization of welfare services,
especially for work-related activities. In Milwaukee, for example, Manpower Temporaries, Inc. was,
until recently, a primary contractor for administering a Welfare Job Center, delivering job placement
services and coordinating services provided by other, mainly non-profit and public contractors. While
the nature of the work was similar to Manpower's traditional business, the private firm's role has
gradually shrunk in part because of the difficulty it had working with clients with serious
employability barriers and collaborating with a disparate network of public and private organizations.
(Employment and Training Reporter, 9/18/96)
Texas has received considerable attention recently because of its proposed privatization of
the Texas Integrated Enrollment System (TIES). The TIES system was intended to integrate and
streamline eligibility determination for fifteen programs, including AFDC/TANF, Food Stamps, and
Medicaid. Officials in Texas emphasized that their objective was not to contract out government
functions arbitrarily, but rather to improve efficiency and customer service in government through
increased competition. Contracting with private, for-profit companies for Medicaid claims
processing, child support payment tracking, and other information systems requirements are already
accepted practices in Texas government.
The proposed privatization of TIES differed from other privatization initiatives because the
eligibility determination functions to be contracted out were traditionally carried out by state
employees. This change raised two concerns: the potential loss of jobs for state employees; and the
appropriateness of having private rather than public employees make decisions related to program
eligibility. The TIES privatization was strongly opposed by public employee unions, which launched
a major public relations campaign to gain public support to oppose the state's plan ( Houston
Chronicle, April 14, 1997 ). The potentially large size (estimated at $2.8 billion over 7 years) of the
TIES privatization contract attracted major private corporations such as EDS and Lockheed-Martin,
each in partnership with state agencies as part of the bidders' teams (Texas Department of Human
Services [TDHS] with EDS and Texas Workforce Commission [TWC] with Lockheed-Martin).
Implementation of the contracting process for TIES was delayed for nine months pending
federal approval of the state's draft "Request for Offers." The 1996 federal welfare reform did not
prohibit non-government employees from determining eligibility for TANF, as had been the case for
AFDC. However, the historic restriction still remained for other federal assistance programs,
particularly Food Stamps and Medicaid, which were unaffected by the 1996 legislation. The state
privatization plan, therefore, required special federal approval as an exception to policy. In May
1997, the Clinton administration ruled that privatization of Food Stamp and Medicaid eligibility was
not allowable under federal law.
At about the same time as the federal administration's decision, the Texas legislature was
reshaping the TIES project. HB 2777, which was enacted in June 1997, directed the Texas Health
and Human Services Commission to coordinate the TIES effort in consultation with TDHS and
TWC. As a result, these state agencies have terminated their teaming arrangements with private
sector vendors. Recommendations developed by TDHS in partnership with EDS during the bidding
process will serve as a starting point for the reengineering efforts required in the $3.7 million 15-month contract awarded to EDS (Kinsey, 1997). Thus, Texas has turned to an incremental approach
for integrating and improving eligibility systems, and will build upon lessons learned and innovations
proposed during planning of the TIES procurement.
Employment and Training
Throughout the history of employment and training programs, contracting has been a common
model for delivering services, often including intake and eligibility determination as well as training,
job placement and other employment-related services. MDTA, CETA, YEDPA, Job Corps, and now
JTPA all involve extensive contracting for service delivery--Job Corps is totally contracted, and
Center operators include some small and large for-profit companies (e.g., ITT Industries; BDM
International/Vinnell; ResCare, Inc.). In fact, the majority of federally-funded E&T services since
the 1960s have been contracted out by the administering public agency. Most of the E&T service
contractors have been non-profit or public entities (e.g., community colleges, public school districts,
vocational schools, employment service). In some localities, for-profit companies have also provided
services under contract (e.g., proprietary training institutions and schools, for-profit companies
operating job clubs or job placement services). The best-known for-profit companies today that have
contracts to provide job placement services to welfare recipients are America Works and Curtis and
Ironically, Job Corps is the only major federally-administered E&T program and the only one
that is totally contracted out. It has also been found to be among the more effective programs. In
part the success of Job Corps is attributed to its mix of public direction, oversight, monitoring, and
clear competitive contracting with performance expectations (Gurin 1989). The government role in
policy development, planning, monitoring and oversight is a critical factor in the Job Corps success.
Job Corps centers can't affect their performance measures by screening applicants (i.e., "creaming")
or by securing jobs for applicants because they have no control over this (Donahue 1989).
The Job Corps program operates through a partnership of government, labor and the private
sector, at 111 Job Corps Centers in 46 states, D.C. and Puerto Rico. Private corporations and private
nonprofit organizations-- including Teledyne, ITT, Vinnell, Management and Training Corporation,
Career Systems Development Corporation, Res-Care, and MINACT--operate 81 Job Corps centers
under contracts with the U.S. Department of Labor (DOL). An additional 30 Job Corp Centers are
operated by the U.S. Departments of Agriculture and Interior--called civilian conservation centers--on
public lands throughout the country under interagency agreements with the U.S. DOL. A nationwide
network of other public, private, nonprofit, business, and labor union subcontractors provide services
for Job Corps, ranging from intake and application to occupational training, job placement and post-program support services.
Child Welfare privatization of service delivery also expanded greatly in the 1970s and 1980s
as caseloads of child abuse and neglect rose, budgets were increasingly constrained, and public
agencies' flexibility in staffing up was severely limited by personnel policies and state or local
restrictions on spending. Agencies contract for various services from investigation to substitute care
and therapeutic services. For example, in New York City, contract agencies take care of 70 percent
of the city's children in foster care (Giuliani 1996). In fact, the majority of publicly financed social
services programs in New York City are delivered through contracts. These private suppliers, mostly
well-established non-profit service agencies, both secular and religiously affiliated, have provided an
ongoing source of political support for the city's human service activities (Bendick 1989).
3. Models of Privatization
As the brief discussions above suggest, there is no single definition of privatization. But for
the purposes of this paper, privatization refers to the provision of publicly-funded services and
activities by non-governmental entities. There are also various methods by which services can be
privatized, including contracts, formal agreements, vouchers, grants, subsidies, public/private
partnerships, and collaborative service delivery. In general, though, the common use of the term
privatization refers to formal contracting out of services by the government to the private for-profit
or non-profit sector. One way to think about privatization is to consider two separate but related
(1) degree of market competition--ranging, for example, from open competition for all
or public services, to government contracting for specific services; and
(2) role of the public sector vis a vis other sectors--for example, government oversight
of private services versus separate systems of services operated by government, for-profit and/or non-profit entities, versus public-private partnerships.
Market Competition. Osborne and Gaebler in Reinventing Government (1992) quote Gov.
Mario Cuomo, who stated that (p. 30) "It is not government's obligation to provide services, but to
see that they're provided." Their conception of a reinvented government would involve broader
service options, including using a competitive process for selecting deliverers of public services.
"Competition will not solve all our problems. But perhaps...it holds the key that will unlock the
bureaucratic gridlock that hamstrings so many public agencies," by encouraging innovation, flexibility,
efficiency and performance. This would mean ending the tradition that certain public agencies be
presumptive deliverers of services. Public agencies would have to compete against each other and
against non-profit and for-profit providers for a particular services market. Even within the public
sector, competition can be introduced through the establishment of franchise funds which provide
certain administrative services to "customers" within the public agency.
Some of the most recent examples of privatization in the welfare and workforce development
area, such as in Texas, Wisconsin and Massachusetts have adopted versions of such a broad-based
competitive model where public-private teams compete for contracts. In Indianapolis, public
employees are required to compete against privately owned businesses for contracts to deliver all
services with the exception of police, fire, and zoning operations. Initially, city employees and their
union opposed the privatization initiative and feared losing their jobs. After negotiating changes to
"level the playing field," such as consulting assistance to prepare bids and streamlining the city
workforce by reducing middle management, unionized employees have gone on to win 37 of the 86
contracts put out for bid by the city (Jeter 1997).
Sectoral Roles. A second dimension of the privatization concept relates to activities or
functions performed by the governmental and non-governmental sectors, regardless of whether funds
actually are exchanged and regardless of whether there is a formal contract or agreement. Much of
the current discussion about privatization refers to for-profit businesses, but as Starr (1989) explains,
there are actually four types of "private" providers: (1) personal, informal, mutual aid; (2) voluntary
non-profit sector; (3) small businesses, entrepreneurial companies; and (4) corporate for-profit sector.
The responsibilities and services of each may or may not result from contractual arrangements or
exchange of funds.
For example, the welfare reform law of 1986 included strong language that would encourage
community-based and faith-based organizations to be formal providers of services, presumably with
government contracts. But underlying welfare reform's focus on individual and family responsibility
is that the informal community, charities, and neighbors are also an important source of support for
persons in times of need.
4. Effectiveness and Potential of Privatization
There are strong and vocal advocates and opponents of privatization, but little empirical
evidence about whether the public sector or the private sector is more effective.
Arguments For and Against Privatization
Arguments for Privatization.
There are major advantages generally put forth for contracting
for services with private (non-profit and for-profit) organizations, as indicated in Exhibit 1
general, the strongest arguments for privatization of public services are:
1. Increased flexibility resulting from a reduction of bureaucratic complexity and
2. Reduced costs resulting from improved efficiency, especially if there is a truly
competitive process with clear performance criteria.
Public decisions to privatize have in fact been motivated by a number of factors, (Hatry and
Durman 1985) such as:
- discontent with the performance of the public sector;
- desire for more flexibility (e.g., personnel, operations, innovations);
- desire to reduce costs; and
- desire to "empower" service intermediaries (e.g., CBOs).
GAO (1996), for example, found that the primary reason state and local child support
enforcement agencies contract out services is because of general state fiscal pressure that makes it
difficult to hire more agency staff despite growing caseloads and sometimes even despite increased
program funding. Motivation of public officials to privatize resulted from (1) "a desire to improve
child support services," (2) "need to serve soaring caseloads," and (3) "inability to deploy additional staff." (p. 6) Some states also wanted to expand child support services in areas not well-covered in
the past, or to assume operations when a public agency withdrew (usually district attorney's office).
The increasing speed with which computer equipment and information systems require
upgrading also provides an incentive for privatization. Equipment provided by a private contractor
is not budgeted as a capital expenditure for the public agency. Contractors that provide similar
equipment and software to several public agencies or state administrations can spread their costs over
several projects and achieve economies of scale, which may enable them provide the service to each
client at a lower cost.
Reasons for Using the Private Sector
- To obtain special skills or supplement staff for short periods
- To meet demands beyond current government capacity
- To reduce costs
- To improve service quality
- To provide clients with more choice of providers and levels of
- Ideology--less government is better.
Source: Adapted from Allen, et al, The Private Sector in State Service Delivery.
Washington, D.C. The Urban Institute Press, 1989
Arguments Against Privatization. The major concerns, summarized in Exhibit 2, voiced in
opposition to privatization in the social services area relate mainly to quality of service and the impact
on public sector jobs. In terms of service delivery, there are concerns that the profit motive of private
companies will result in a reduction in services and a propensity to "cream," or serve those who are
most easily served and most likely to succeed. Every contract has the problem of unintended adverse
impacts on individuals, especially if payment is based on a fixed cost per client. The more vulnerable
the client and the more involuntary the client's participation (e.g., hospitals, prisons, child welfare),
the higher the risk; but a well-structured contract can cover these issues and protect those who are
to be served (Hatry 1989).
The strongest opposition to privatization comes from public employees and unions
representing public employees, stemming essentially from a fear that public sector jobs will be lost.
The prospect of massive layoffs of government workers is one of the barriers that "keeps
governments from moving into a more catalytic mode regarding privatization," according to Osborne
and Gaebler (1992)--a fear, they note, that is "legitimate." The federal Office of Personnel Management (OPM) recently reported that executive branch employees covered by union agreements
dropped by 13 percent between 1992 and 1997. Almost all of the decline in union representation can
be attributed to the government's downsizing, particularly base closings and cutbacks at the Defense
Department (Barr and McAllister 1997).
Major Arguments for Opposing Privatization
- Major loss of public employee jobs
- Relinquishes public responsibility for public funds. "Private business has
no business allocating public funds...or monitoring the use of public
funds." "Threatens fiscal accountability"
- Weakens community ability to assert collective interests; decreases citizen
participation in government
- High potential for fraud, financial conflicts-of-interest and cost-overruns
- Any resulting cost savings are directed away from taxpayers and towards
- Threatens confidentiality of private information
- Financial conflicts of interest
- Increases temptation to reduce quality of services and "cream" the best
clients to reduce costs and maximize profit.
Source: Adapted from materials prepared by the AFL-CIO, Public Employee Department
Evidence of Effectiveness
Thus, there are strong reasons for privatization and some equally-strong concerns and fears
(see Exhibit 3
). Most analysts, though, concur that each sector may actually have certain relative
strengths, and private sector delivery of services is not inherently better or worse than public service
delivery. "Business does some things better than government, but government does some things
better than business. The public sector tends to be better, for instance, at policy management,
regulation, ensuring equity, preventing discrimination or exploitation, ensuring continuity and stability
of services, and ensuring social cohesion... Business tends to be better at performing economic tasks,
innovating, replicating successful experiments, adapting to rapid change, abandoning unsuccessful
or obsolete activities, and performing complex or technical tasks. The [non-profit] sector tends to
be best at performing tasks that generate little or no profit, demand compassion and commitment to
individuals, require extensive trust on the part of customers or clients, need hands-on, personal
attention..., and involve the enforcement of moral codes and individual responsibility for behavior."
(Osborne and Gaebler 1992)
Bendick (1989) agrees, noting that private contractors are well-suited for straightforward or
specialized services such as refuse collection, processing payments, data processing, and computer
systems design. But, as one moves to "more complex, undefinable long-range, and 'subjective' services characteristic of the social welfare field, the record of successful experience rapidly thins."
(e.g., training ex-offenders, drug addicts, mentally ill, least employable welfare recipients) (p. 15) He
attributes this mainly to the "limited ability of privatized systems to tackle the most difficult cases or
to pursue the most complex objectives." (p. 16) Bendick further notes the nonprofit sector is better
able than the for-profit sector to deal with complex and high risk cases, mainly because it is less
motivated by profit. But nonprofit deliverers are not noticeably better or worse than the public sector
(p. 18) because of high risk and/or high cost associated with complex cases.
Major Potential Advantages and Problems with Delivery of Public
Services by For-Profit Companies
- Less red tape and
- More competition
- Lower unit costs,
especially if operating in
| Higher potential for
Incentives to reduce
Increased chance of service
Possible reduced access to
service for the
Source: Adapted from Allen, et al. The Private Sector in State Service Delivery,
Washington, D.C.: The Urban Institute Press, 1989.
Unfortunately, there is very little empirical research on the relative effectiveness of the private
sector versus the public or nonprofit sector in the delivery of services. Hatry conducted one of the
few studies comparing public and private delivery of services, based on matched pairs of public and
privately administered prisons as a case study. He found that while quality was somewhat higher in
the private systems, cost results were mixed. He explains that research findings on the relative costs
and quality of services between public and private systems may be biased in favor of private sector
delivery. The primary reasons governments decide to privatize services relate to less than satisfactory
performance by the public sector. In general, if there are no perceived problems with the public
sector (e.g., high cost and/or low performance), there is usually little incentive for public officials to
consider privatization. Furthermore, whenever there is a shift, either from the public sector to the
private sector or vice versa, there is improvement. Therefore, studies that compare a newly
privatized system to the pre-existing suboptimal public system will be biased in favor of privatization.
The only other study identified that compared public systems to private systems was
conducted by the General Accounting Office and had similar findings. A December 1996 GAO report
examined state contracting of full-service child support enforcement operations in selected local sites
in 15 states. "In the three comparisons of performance we conducted, fully privatized officers
performed at least as well as or, in some instances, better than public child support programs in
locating noncustodial parents, establishing paternity and support orders, and collecting support
owed." However, the cost-effectiveness results were more mixed for the periods reviewed.
A separate issue concerns the impact privatization has on public employees. The most vocal
opposition to privatization comes from public employee unions and their concern about the
dislocation of public workers (and, presumably--although unstated--the reduction in union
membership). A report by the National Commission for Employment Policy (1989) found:
- Contracting out public services has caused a shrinkage in the rate of growth of the
public sector work force since the mid-1970s.
- Job loss in the government is generally offset by job gains in the private sector--for
every 10 jobs lost in that state and local government sector due to privatization, about
eight or nine new jobs were created in that same occupational field in the private
- Layoffs of public employees due to privatization are uncommon; most affected
workers take jobs with contractors or transition to jobs in other public agencies,
usually through an agreement initiated by the government. Moving from the public
sector to the private sector generally means a reduction in employee benefits, but a
modest increase in wages.
While it is clear that public employee unions are unequivocally opposed to privatization, it is
not as clear whether the workers themselves are opposed, in large part because employment
arrangements are often part of the privatization package. (Reason, 1996) A study of privatization
cases in Britain similarly found that there had been opposition from union leaders, but not necessarily union members, mainly because workers have been offered alternative and often better deals from
private contractors. (Pirie, 1985)
Finally, one of the strongest messages that can be drawn from the analytic literature is that
there are successes and failures in all three sectors--public, for-profit, and non-profit. "The
determining factors have to do with the incentives that drive those within the system. Are they
motivated to excel? Are they accountable for their results? Are they free from overly restrictive rules
and regulations? Is authority decentralized enough to permit adequate flexibility? Do rewards reflect
the quality of their performance?" (Osborne and Gaebler, 1992)
Hatry and Durman agree that the key to successful privatization comes from careful public
administration and understanding the potential problems inherent with contracting to a profit-motivated private business. "An agency that is capable of sophisticated administration, and explicitly
addresses service quality issues, can minimize the difficulties of implementing a competitive
contracting process. In none of the examples [of successful cases] of competitive contracting
examined did contracting agencies report deterioration of service quality. The contracting agencies
were sensitive to the issue and took specific steps to prevent it. Carefully implemented competitive
contracting can achieve modest cost saving or a slowing of cost increases."
Privatization is encouraged in Reinventing Government, but Osborne and Gaebler, like other
analysts, caution that "[p]rivatization is one answer, not the answer...Services can be contracted out
or turned over to the private sector. But governance cannot..." (Osborne and Gaebler, 1992, p. 45)
"There is no inherent reason why for-profit firms could not compete for most, if not all, social service
delivery activities." (Hatry and Durman, 1985) But the government is responsible for assuring that
public services are effective, whether or not the services are publicly delivered. Public decisionmakers
need to look at the long-term capacity of government agencies to monitor and the costs of
monitoring. They need an objective way to assign criteria to determine appropriate cost--the public
sector does not know how to determine cost and does not understand well how the concept of risk
relates to the private sector's incentives and disincentives in business ventures.
The limited empirical research comparing the effectiveness of service provision by the public
and private sectors suggests a few conclusions:
- There is no empirical evidence that the service provided by private contractors is
- There is some evidence from research studies that the quality of services may be
higher in private service delivery systems than in public systems, but very mixed
evidence on whether the private sector is more cost-efficient. However, for many
reasons, the findings may be biased in favor of the private sector.
- When public services are privatized, there is a reduction in the number of public
employees, but there is not necessarily a reduction in total employment nor are
workers always worse off.
- There are success stories and examples of failure in all sectors--public, non-profit, and
private. No one model is inherently "better" than another. The key factor is whether
there is clear accountability for results, clear criteria for performance, and clear public
Privatization is a way to bring the advantages of competition and flexibility to the delivery of
public services. These advantages include greater efficiency, increased responsiveness to the needs
of customers, and encouraging innovation. These advantages are more difficult (but not impossible)
to achieve within government due to restrictions on hiring public employees and budgeting issues
related to capital expenditures. As Rainey (1991) points out, "The nature of public organizations,
their public character, often subjects them to more external intervention and constraint. In turn, this
often imposes on them greater challenges in trying to perform efficiently and effectively."
While there is clear potential for improved efficiency, privatization also involves risk and
requires careful management on the part of the public agency. The research reviewed emphasizes the
importance of clear goals and accountability. Some of the highly visible problems recently
encountered in large system-wide contracts probably at least partly reflect lack of accountability and
performance criteria . Effectiveness tends to be very situational--it depends on the implementation
of the contracting process, the contract itself, performance criteria, and ongoing monitoring.
To achieve the potential benefits of privatization, public agencies will need to clearly specify
the roles of contractors, determine appropriate costs, and develop performance criteria that are
tailored to the client population being addressed. Public agencies will need to consider their long-term capacity to structure and monitor privatization initiatives in order assure cost effectiveness and
quality in the delivery of publicly funded social services.
AFL-CIO, Fax Communication, April 1997
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1. GAO reported that in 1996, 15 states had contracted out for full service child support collection
services in one or more localities: AZ, AK, CO, GA, IA, MD, MS, NE, OH, OK, SC, TN, VA, WV, WY)
2. There is some evidence of problems with most of these (large and small) private companies (with
the exception of Curtiss & Associates), including several newspaper articles chronicling various cost-overruns, delays, or poor performance. One must be cautious, however, in assuming that such problems
are unique to the private sector or that they imply the private sector is ineffective. Issues of effectiveness
and problems in the public and private sector are discussed in a later section.
3. Kinsey, Marcia. September 1997. Privatization. Center for Public Policy Priorities, Austin, TX.