Monday, 15 February 2010

Private ownership, public services - a depressing theory

Robert Peston highlights the Conservatives' idea (I originally wrote 'plan', but it's too vague and too early to be convinced they will actually do it) of moving public service provision into employee-owned, profit-making companies.

He points out a few political constraints, in particular:
If a John Lewis style primary school were a floperoo, would all the teacher-shareholders be sacked, or only the head? A resolution procedure for failing co-ops that didn't harm pupils - or patients of community nursing teams - would plainly be essential.
In fact, this is probably a constraint on all private provision of public services. The co-op structure is not really an issue either way, except that it sounds nicer and less cut-throat than straight privatisation.

I'm a fan of market solutions and have generally been well-disposed towards the idea of private companies bidding to do public work - why shouldn't a company be able to offer medical treatment or training if it can do a good job for less than the public sector?

But what if the inefficiencies of the public sector do not actually originate in the incentives of staff, or the lack of innovation in civil service bureaucracy? What if the high costs of public provision are all down to the need to cover every citizen and every eventuality?

One of the main ways in which private firms make money is by picking the most profitable customers or the most attractive markets. This is why we have universal provision rules in the telecoms, postal and water industries, all of which make much less money as a result. It's relatively easy to cover the first 95%, but covering that last 5% of any market gets really difficult and expensive. Look up 'increasing marginal cost' in your economics textbook - there's a reason the supply curve slopes upwards.

Inevitably any public service will suffer political pressure to cover everyone - including the hard-to-reach, hard-to-service individuals - and to provide enough spare capacity to step in if a particular institution (school, hospital) fails. Perhaps there is no solution - public or private - to provide the level of universality that we demand in our public services without the high costs and low average productivity that we see in the public sector.

How depressing that would be.

Update: Chris Dillow has found some completely different reasons to be cynical about this idea.

2 comments:

Min said...

Isn't part of the idea of privatizing public service that of privatizing profits and socializing costs? It is not that there will not be universal coverage, but that universal coverage will be socialized, subsidized by government? Meanwhile, government loses control over the major part of the service, which exerts monopolistic power? Isn't the prospect of subsidy and monopoly a good part of the appeal for the private firms in the first place?

I know that is cynical, but I have been around the block a couple of times.

Leigh Caldwell said...

I think it is too cynical to say that's part of the idea, but you are certainly right that it's often part of the outcome.

My question is why? Perhaps the reason is that universal coverage makes the last 5% of coverage very expensive (which the private operators avoid paying for by ducking out of that 5%).

In principle, it's possible for privatisation to both create private profits and reduce social costs. The whole discipline of economics is based on the idea of mutually advantageous trades of this kind, and we do see plenty of "good" privatisations. Unfortunately there are various kinds of market failure which mean that the mutual advantage sometimes doesn't happen.