Twenty Myths about Privatization

By Beecher, Janice A. | Government Finance Review, June 1998 | Go to article overview

Twenty Myths about Privatization


Beecher, Janice A., Government Finance Review


Few issues are as polarizing as privatization. The disagreement is made worse by the many myths and stereotypes about privatization. Some myths exaggerate the promises of privatization (for example, privatization is a panacea for the water industry). More often, however, the myths about privatization have negative connotations (for example, privatization is antigovernment). Like all myths, the myths about privatization usually are founded on some grains of truth. But some myths about privatization are myths simply because they need not be accepted as truth. That is, specific strategies can be used to ensure that the myth does not become reality.

Myths present a problem if they interfere with meaningful dialog, preclude empirical analysis, or guide decision making. Privatization should not be dismissed on the basis of myth; nor should privatization be implemented for the wrong reasons. Some of the common myths or stereotypes about privatization are summarized here.

1. Privatization is a new idea. Privatization is an idea at least as old as the times of Adam Smith, who espoused the virtues of capitalism and the idea of privatizing the King's assets in The Wealth of Nations. Governments long have used the private sector to provide goods and services. Privatization has gained popularity in recent years because of a variety of pragmatic and political reasons, the high visibility of a few privatization entrepreneurs, and the growing number of privatization cases. Investor-owned utilities were prominent in the early history of the U.S. water industry and continue to play an important role today.

2. Privatization involves absolute changes in ownership. Transferring ownership and operations from the public to the private sectors is the only absolute form of privatization. Full privatization offers certain advantages, especially in terms of access to private capital and long-term infrastructure planning. A broader definition of privatization recognizes a full range of options that involve the public and the private sectors as partners in assuring the provision of services. In other words, privatization may not be an all-or-nothing proposition. Marketization and competitivization are terms that are used in the privatization movement to shift the focus from ownership to the more salient issue of operational efficiency.

3. Privatization is the divestiture of public responsibilities. Privatization redefines roles and responsibilities in the public and private sectors. However, transferring certain functional responsibilities to the private sector does not divest public agencies of accountability for public safety and health, environmental protection, and oversight of monopolistic enterprises. Inherently public functions must be maintained at the governmental level in order to preserve the public trust. Although competition is affecting all of the utility industries, including the water industry, competition cannot supplant government oversight as long as monopoly power persists.

4. Privatization is antigovernment. When it works well, privatization can help fulfill governmental mandates more effectively and efficiently. These mandates include the federal Safe Drinking Water Act (SDWA) and the Clean Water Act (CWA), as well as a host of state and local governmental mandates, regulations, and standards that apply to all service providers (public or private). Government policies and regulations can foster markets, while ensuring accountability. Government also can provide a social safety net to mitigate undesirable market outcomes.

5. Privatization reduces government. Privatization is not self-implementing. With the possible exception of the total transfer of a system from the public to the private sector, privatization arrangements generally cause local governments to incur additional administrative responsibilities in the areas of contract development, competitive bidding, and performance monitoring. …

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