September 18, 2012 How Much Privatization of City Services is Best?
DOUG MACDONALD, ECONOMIC POLICY ANALYST
How much privatization is good for cities in this recession-strapped century? Have any cities found it cost\beneficial or cost-efficient to load up on contracts to perform city services? A recent article in the New York Times highlights the experiences of two cities: Sandy Springs, GA and Maywood, CA that have taken privatization to high levels.
In economics we teach that “public goods” those that should be provided by government are both 1) non-rival and 2) non-excludable. Non-rival consumption occurs when one person’s consumption does not detract from another person’s consumption. Consider a national defense system or a lighthouse. One additional person using the service does not add to the marginal cost of the defense system and one more ship in the harbor doesn’t detract from the light received by other ships.[i]
The second principle of public goods, non-exclusiveness, occurs when you can’t exclude a consumer from receiving the benefits of the system. If the country is under attack by foreigners, then you protect all of the citizens; you can’t exclude people from the benefit. Similarly, it’s difficult, if not impossible to monitor a single car from using the street system in a modern urban city.[ii] If exclusion is possible, such as charging drivers for using a bridge or a toll road with a GPS transponder, then it is good to use the price system for the benefit provided.
The conclusion is that if goods or services are non-rival and non-exclusive they ought to be produced in the public sector. Alternatively, if the good or service is rival or excludable then it should be produced by the private sector. A pizza, therefore, is both rival and excludable. If you eat one piece, then I can’t eat it (rival). And if I can separate and charge you a price for your pizza the good is “excludable”. We need to consider these two qualities with each function that a city may decide to contract the service out.
A wealthy community of 94,000 in Fulton County, Georgia, Sandy Springs incorporated because its voters were generally dissatisfied with the municipal services provided by the County. In 2005, the first “interim” city manager, Oliver W. Porter did a lot of advance work to contract out most services. Currently, private vendors provide most of the services in Sandy Springs except for John McDonough, the city manager, and six other city employees (and police and fire too as it turns out later in the article):
“Applying for a business license? Speak to a woman with Severn Trent, a multinational company based in Coventry, England. Want to build a new deck on your house? Chat with an employee of the Collaborative, a consulting firm based in Boston. Need a word with people who oversee trash collection? That would be the URS Corporation, based in San Francisco.”
Porter, a retired AT&T engineer, did a lot of the original spadework and wrote contracts that specified the many tasks and duties for private contractors. For the first five years the city only used CH2M Hill, an engineering firm based in Englewood, Colorado (and an office in Salt Lake City), “to handle every service it delivered.” But last year the city “sliced the work into pieces and solicited competitive bids.”
“When the competition was over, the town had spread duties to a handful of corporations and total annual outlays dropped by $7 million. (Representatives of CH2M, which still has a call-center contract, said at the time that they were “deeply disappointed” by the results, but wished the city well, according to a local news report.)”
In the last round of bidding, Sandy Springs began awarding second and third place bidders in case the primary contractor underperforms.
On the negative side, some complain that the new city is a “white-flight suburb that has essentially seceded from Fulton County”. “Will this rich enclave become a gated community walling itself off from areas that are economically distressed?” worries Evan McKenzie, author of “Privatopia: Homeowner Associations and the Rise of Residential Private Government”.
To learn more click on the Times article or check out Oliver Porter’s book: “Creating the New City of Sandy Springs”
[i] Economics of the Public Sector, Joseph E. Stiglitz, 2000, p. 128.
[ii] Public Finance, Harvey Rosen and Ted Gayer, 2010, p. 55.