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The Economics of Public-Private Partnerships
By:
M C
Zach Weiner writes what has been my favorite online comic for some time, Saturday Morning Breakfast Cereal. He's a seriously smart guy, but on Twitter recently he seemed puzzled: @ZachWeiner: "Can someone explain to me the desirability of 'public-private partnership'? To my brain that means private company minus risk." This brought to my mind a New York Times article I read over the summer discussing the case of Sandy Springs, Georgia and other municipalities that have outsourced the provision of services to private companies. Under the careful stewardship of a single patriotic citizen, Sandy Springs has had a good show of its first decade of experience. Meanwhile, other munis â€" like Chicago in its now famous dispute over parking meters â€" are reported to have felt swindled by contractors. This brings us to the question of what the goals of these reforms are, and whether they are likely to meet them given what we know about economic incentives.
Surely the overarching goal of the well-intentioned souls pushing these measures is to introduce some of the efficiency of the marketplace into those sectors controlled by the local municipality. In short, they wish to make city hall run like a business. In support of this contention, I note that the architect of Sandy Springs' transformation cites Hayek as an inspiration.
This line of thinking makes sense insofar as one believes the common refrain that government provides services, as firms do in the free market. Unfortunately, this assumption proves problematic. The key feature of a marketplace is the recognition and enforcement of a system of equitable property rights. This prevents firms from simply forcing customers to use their services, which thereby enables choice and competition.
Municipalities are subject to competition, but at a level nowhere near that of the marketplace. Think about how easy it is to switch which café you frequent for lunch versus how difficult it would be for a taxpayer to relocate his home or business to another town. Voting with your feet, as they say, is really the only constraint that municipalities face (short of riots in the streets). And since all neighboring territory is also claimed by government monopolies, the prevailing standards are kept low.
Therefore, there are few functional similarities between a public-private partnership â€" which is still a monopoly â€" and firms on the free market â€" which must provide a better service than their customers' other options. As Ludwig Von Mises explained in his book Socialism (free download here), monopolies cannot exist for long on their own, and only persist insofar as they mimic market mechanisms. In a sense, all government programs mimic the market to survive. They judge acceptable costs for everything from pencils to office space based on prevailing market rates. But because they are monopolies, they are unable to discover prices on their own. A public-private partnership, which maintains this monopoly, is in this way no closer to a private business than the public agency it is meant to replace.
That said, there are advantages to this approach.
Firstly, through trial-and-error with a system of incentives favoring service to others, the marketplace cultivates certain behaviors in its participants. They are more likely to be goal-oriented, productive, efficient, and professional. By drawing these people into the poorly incentivized government sector, one can expect a halo period of increased service to the public. Inevitably, the incentives of monopoly will take over and either change the behavior of these businessman-bureaucrats or drive them back to the marketplace.
Secondly, public sector workers have built a suite of legal exceptions and subsidies around themselves that private sector workers do not enjoy. It makes one wonder who is truly serving whom. But it also makes public-private contractor relationships more profitable, as the contractor can hire, fire, and employ workers without dealing with powerful and entrenched government-worker unions. With a monopoly provider of "services" and a monopoly supplier of "labor," it doesn't take much for municipal unions to paralyze an entire sector of their local economy (for example, the Toronto transit system). That is one reason it is so easy for government workers to extract exorbitant compensation for menial jobs. The public-private partnership introduces a layer of decentralization â€" first between firms competing for the contract and second between workers competing to remain employed by the winning contractor.
In the end, though, Mr. Weiner has grabbed an elephant by the tail. Yes, these "partnerships" do maintain a monopoly on service while granting the profit to a private company. But what may be worse than the inequity of these arrangement is the fact that they cannot succeed at their stated goal of making city hall run like a business. Where free competition is absent or certain firms are subsidized by the public purse, the market ceases to function. Despite certain behavioral or legal advantages, the economic incentives faced by participating firms can be easily summed up in two proverbs: you can't fight city hall, and if you can't beat 'em, join 'em. Michael Finger is principal of Centinel Consulting, a marketing and economic consultancy based in Portsmouth, NH. Michael has worked in real estate development and on Wall Street, through which he developed a keen understanding of economic forecasting, direct marketing, and public relations. Centinel combines these disciplines to identify growing markets and help businesses effectively target them. Michael's media credits include Al Jazeera English, LewRockwell.com, the Portsmouth Herald and the Tulane Hullabaloo. He graduated with honors from Tulane University with a BA in Philosophy.
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