The rationale for contracting out municipal services is to be found in public choice theory, which argues if public officials monopolize service delivery, the result will be oversupply and inefficiency.
It is further argued if services are contracted out, then the pressures of a competitive market lead to improved performance.
However, as I will explain below, a shift from government supply to provide results is a paradigm shift that complicates any effort to evaluate the package of service delivered through private supply.
The differences related to performance assessment in relation to the privatization and outsourcing grow out of the fundamental differences that exist among the kinds of services that a municipality is called upon to provide, in contrast to those that are provided by the private sector.
Municipalities provide a wide range of different programs and services, some of which are indistinguishable from those that are provided by the private sector (e.g., municipal tennis and golf clubs).
Programs or services of this kind are described as “private goods,” and they have three main characteristics:
- Excludability: Consumers of private goods can be excluded from consuming the product if they are not willing or able to pay for it (as, for instance is done by selling a ticket to the theatre). When payment can be structured on a pay-per-use or subscription basis, or otherwise, then potentially the private sector can provide such services.
- Rivalry: Private goods are also characterized by rivalry. Rivalry means a consumption of the good by one person reduces the amount left for others to consume. Rivalry creates scarcity and it is scarcity that creates demand.
- Rejectability: Private goods and services must involve an offer that the consumer can refuse. Either the good must be non-essential (e.g., specialty cable television channels), or there must be some substitute. Clean water, proper sewage and waste disposal clearly are not rejectable in modern urban conditions.
While municipalities do provide some private good type programs and services to their residents, most municipal programs and services are very different in nature from what the private sector can provide.
For instance, some municipal services (e.g., city streets and parks) constitute public goods, meaning not that they are good for the public, but rather they are non-excludable and non-depletable.
Often goods of this character are even of benefit to non-users. Goods of this nature cannot be provided by the market on a fee- for-use basis because they are non-exclusive and thus everyone has incentive to a free ride on others.
As a practical matter, services of this kind cannot be dispensed with, nor is it practical to attempt to contract around them. Other municipal suppliers lack the element of rejectability. For the most part, there is no practical alternative to the municipal water supply; there is no alternative to city sewers.
Some municipal programs or services straddle the line between public and private goods. Policing serves as a case in point. Basic policing services, law enforcement and the maintenance of public order appear to meet the test of public goods.
However, increased security levels that protect only specific private facilities (e.g., shopping malls, office buildings and entertainment areas) place an excessive drain on community policing and can be serviced on an excludable basis.
So, for instance, private protection services, such as private security guards and even detectives, are supplied as private goods. The service offered is excludable, rejectable, as described above.
Nevertheless, due to their own particular needs, some consumers are often prepared to pay a high price for such services.
Municipalities also provide some programs and services that constitute merit goods. These are goods that could be provided to a segment of the public on a user-pay basis.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
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