Submission on Local Government Privatisation to NDP

01 April 2012
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National Development Plan: Attachment to chapter 3 submission

 

LOCAL GOVERNMENT PRIVATISATION

(1998)

 

1.         Types of Privatisation & Objections to Contracting Out and Privatisation

2.         Examples of Savings from Privatising (eg Contracting Out) City Services

 

 

TYPES OF PRIVATISATION

 

The monopoly production of services by government has proved a costly and thankless task. Bureaucratic incentives do not operate like profit-and-loss incentives, which powerfully drive an entrepreneur to accomplish a given task with the optimum combination of people, methods and equipment. This is the reason why every type of municipal service can be, and is being, produced cheaper and better by private firms somewhere in the world.

 

Government may reduce its cost of providing a service in three main ways:

 

  1. Disengagement - government simply stops providing the service. This ought to be considered first, as it offers the largest savings. Where a residual real need for such a service remains, private sector entrepreneurs then move in to meet that need.

 

  1. Partial privatisation by contracting out - a local authority establishes with a private organisation a contract to provide a service. The contract regulates the standard of service. The local authority remains responsible and accountable to its constituents for the service that is being provided. The local authority may or may not continue to collect rates, taxes and other fees directly from the community - such collection can also be contracted out.

 

  1. Full privatisation - government transfers a public entity, activity or property permanently to the private sector, but may decide to regulate aspects of service delivery.

 

 


 

OBJECTIONS TO CONTRACTING OUT AND PRIVATISATION

 

To avoid overburdening existing and potential ratepayers, the local authority should constantly aim for the best service at the lowest price.  Although everyone wins, various concerns about privatising / outsourcing are commonly raised and they deserve thoughtful attention.

 

Privatisation destroys jobs

 

This important concern implicitly recognises that municipal agencies are often heavily overstaffed, and that privatisation is a superior approach to delivering a better, cheaper, more efficient service - often with fewer people. It fails to recognise, or deliberately ignores, the longer effects and consequences of privatisation, not merely for one group but for all groups; better service and reduced costs stimulate economic growth and job creation in other areas, benefiting consumers, taxpayers and the workforce including the original employees. The cost saving is not lost but spent elsewhere, and this leads to new and more sustainable jobs which the same workers or others like them will fill instead.

 

A municipality is not a charity for providing jobs for the unemployed at ratepayers’ expense. It may choose to establish a welfare office, or budget to provide charitable relief for the unemployed, or leave this matter to national government. The municipal goal should be to maintain conditions which create jobs that produce wealth - which means private sector jobs. Lower municipal taxes, and support for investors, are the means to attract business, stimulate growth, and get people into productive work.

 

Civil servants have traditionally enjoyed job security, which has fostered inefficiency. Recognising this historical problem, transitional arrangements can guarantee a moratorium on job-shedding for an agreed time, subject to the normal operation of disciplinary and dismissal codes. Provisions to provide retraining and assist job-hunting can be included. The local authority or the private employer can negotiate with employees to relinquish their jobs for generous redundancy payments. Jobs will disappear, but reasonable and humane treatment of those involved are both possible and desirable.

 

Existing municipal workers often have good ideas about how to make savings. To encourage “in-sourcing” (where they win the contract), they can be helped to form a business, or given tender preference in initial years, or simply given the contract in the first year. This allows time for them to seek extra outside work. Everyone wins.

 

Labour aspects of outsourced contracts should conform to societal norms, but not necessarily to civil service norms. Seeking competitive tenders for small chunks of work such as maintenance of a single building enables many small local worker-groups to participate. The spread of modern services and conveniences to outlying areas provides enormous scope and growth potential.

 

Contracting out leads to bribery and corruption

 

Corruption is a general problem of government, not a specific problem of privatisation. Private sector players go to great lengths to avoid corruption when spending their own money, for example by setting traps to test their staff.

 

The solution is to remove the secret, discretionary “rule of man” and introduce to the tendering and contracting-out process the kinds of checks and balances which are used in the private sector.  These should include rational, open bidding procedures and objective selection standards as a matter of public record, as well as opening bids and making other important decisions in public.

 

Private firms will end up costing more

 

In theory, municipal management could indeed discover and adopt any methods and efficiencies available to the private sector, while saving the private sector’s costs of advertising, taxes and profit. In practice the decisive factor is lack of profit-and-loss incentives. Competitive tendering shows that private firms or a formerly-municipal team can do the job for less. This is borne out by thousands of examples throughout virtually every country in the world.

 

Public services should be done as a service, not for profit

 

This emotional objection draws on a false distinction between necessities like water supply and other goods.  Food and specialised medical treatment are no less essential although they have been historically provided for profit by the private sector. Regardless of the service, the profit motive results in savings so big as to allow a profit while charging less and providing improved service, and competition minimises the profit.

 

Regarding the outsourcing of all operational areas, a municipality is in the same position as a private corporation. If, for example, the latter employs a contractor to wash some windows because it is cheaper to do so then this will also apply to a municipality. Both groups monitor the performance of the contractor.

 

It may work in ... (Los Angeles, Wandsworth, Johannesburg) but it will never work here

 

Every city does have unique problems, and its officials can offer unique reasons why things just cannot be done differently. Resistance to change is a well-known phenomenon. Yet the global wave of privatisation shows an endless variety of creative private-sector solutions to each outsourcing opportunity.

 

Municipal outsourcing may be encouraged by financial pressures or a legislated requirement to seek competitive tenders. Any growth-oriented municipality should do so voluntarily. Councils should decide what should be done, and at what level of service, and then outsource the implementation of their plans except where there is a statutory requirement such as employing a municipal Town Clerk. Councillors’ and officials’ allowances and remuneration should relate, not to the size of departments or budgets, but inversely to the size of the budget per capita (number of citizens).  This provides the incentive to get the city to grow by attracting new investment.

 

The council will lose control

 

“Private companies only care about profit, not service, so standards will fall - planes will crash!.” This view is based on a misunderstanding of the workings of the market, and the connection between service and profit. Loss of council control can only result from inadequate contract preparation and monitoring. Outsourcing should improve service quality and, as part of its contract-control function for ratepayers, the municipality should monitor customer complaints to verify this. If, for example, a contractor’s business collapses, the municipal regulator should auction the contract and assets or put it out to tender again, as specified in the contract. A further precaution that can be implemented is to use more than one contractor where possible.

 

Since the private sector is only concerned with profit, standards will fall

 

In correctly concerning itself about maintaining or improving service standards, the municipality can choose to prepare contracts with scrupulous attention to strict default clauses  including penalties and termination of the contract if necessary. The contractor must then operate under far better and enforceable control of his performance than the previous municipal employees experienced. International experience shows that the private sector can provide services at a higher standard and lower cost than the public sector.

 

The council’s service is already efficient

 

There is no way of validating such a claim in the absence of market testing. But the council’s service may indeed be comparatively efficient, perhaps stimulated by neighbouring or imminent privatisation. This pleasing fact may emerge from the competitive tendering process, when the municipal unit involved wins the contract. Thereafter, the profit motive delivers still greater efficiency, as is apparent during contract periods and at contract renewal.

 

Conclusion

 

Clear thinking about municipal services shows that most or all of them are simply businesses which can  better be provided by private firms and paid for by their customers. They ought to be shifted with all speed back into the private sector as has been happening worldwide with gathering momentum for two decades.

 

It is undeniable that there are some careful transitional trade-offs to be made, but privatisation is a win-win proposition, and in the longer term there are overwhelming and progressive benefits for all involved. Further delay would seem unnecessary.

 

 

 

Examples of savings from privatising (eg. contracting out) city services

 

 

 

 

 

 

 

 

 

 

 

Where

When (ref)

What

    Cost of service

 

Savings

 

 

 

before

after

 

 

 

 

 

 

 

1096 responding U.S. city/county officials, re. contracting out services

 

 

 

 

 

 

1987 (11)

98% of respondees

 

 

>0%

 

 

80% of respondees

 

 

10-40%

UK 'Next Steps' program, introducing competition in the civil service

 

 

 

 

 

 

1997 (2)

75% of civil service, in 'Next Steps' units

 

 

>20%

 

 

 

 

 

 

Garbage and solid waste

 

 

 

 

 

 

 

 

 

 

 

U.S. nationwide study of 1378 communities (pop. 2500 - 750 000)

 

 

 

 

 

 

1975 (1)

kerbside pickup (2/week)

 

 

 av. 40%

Queens (Little Neck & Douglaston, 2/week) vs. nearby Nassau County (Bellerose, 3/week)

 

 

 

 

 

 

1975 (1)

kerbside pickup

$297

$72

76%

             and vs. San Francisco

 

 

 

$40

86%

Atlanta, Georgia

1975 (1)

backyard pickup (weekly)

$150 p.a.

$100 p.a.

33%

Newark, New Jersey

1983 (9)

street sweeping

 

 

>50%

LA county (121 cities)

1984 (8)

street cleaning

 

 

30%

 

 

refuse collection

 

 

30%

Wandsworth, U.K.

1981-5(15)

refuse collection

 

 

45%

 

 

street cleansing

 

 

24%

U.S. 34-state survey of 120 cities/counties/districts

 

 

 

 

 

 

1988 (12)

refuse collect/dispose (/unit)

$158.60

$64.30

60%

 

 

street cleaning (/mile)

$21.10

$13.50

36%

U.S.A.

1994 (5)

solid waste collection

 

 

10-13%

S.Korea

1994 (5)

solid waste collection

 

 

up to 50%

Kuala Lumpur, Malaysia

1994 (5)

load per vehicle per day

5.7t

8.5t

33%

U.K. DOE study

1993 (5)

solid waste collection

 

 

7%

 

 

 

 

 

 

Fire protection

 

 

 

 

 

 

 

 

 

 

 

Scottsdale, Arizona vs. Glendale/Mesa/Tempe

 

 

 

 

 

 

1971-5(13)

Rural/Metro Inc.(per cap p.a.)

$11.58

$6.48

44%

U.S. national average city fire protection cost (for average house)

 

 

 

 

 

 

1977 (1)

 

$103 p.a.

 

 

Arizona, 1979 (1), Rural/Metro Fire Dept Inc. (50 000 subscribers)

 

 

 

$23

78%

Oregon, 1979 (1), Grants Pass Rural Fire Dept., Josephine County (10 000)

 

 

 

$35

66%

Montana, 1979 (1), O'Donnell Fire Service, Billings (5000)

 

 

 

$42

59%

Tenessee, 1979 (1), East Ridge (6500)

 

 

 

$15

85%

Georgia, 1979 (1), Southside Fire Dept., Savannah (8000)

 

 

 

$35

66%

American Emergency Services Corp., Elk Grove (pop. 20 000)

 

 

 

 

 

Illinois

1979 (1)

(per capita rates)

$29

$15

48%

 

 

 

 

 

 

Emergency ambulance service

 

 

 

 

 

 

 

 

 

 

 

Glendale, Calif.

1975 (1)

3 paramedic units

$519 000

$146 000

72%

Greencastle, Indiana

1976 (1)

Operation Life

$120 000

$30 000

75%

El Monte/San Mateo, CA.

1976 (1)

paramedic program

$1875 000

$562 000

70%

 

 

 

 

 

 

Leisure & recreational services

 

 

 

 

 

 

 

 

 

 

 

Fullerton, Calif.

1974 (1)

golf course maintenance

 

 

21%

Newark & El Cerrito, CA

1979 (1)

recreation program

 

 

100%

Santa Barbara, Calif.

1979 (1)

Parks Department

 

 

100%

Lynwood, Calif.

1979 (1)

tree-trimming

$125 000

$87 000

30%

Downey, Calif.

1979 (1)

golf course upkeep

 

 

20%

Ventura Co., Calif.

1979 (1)

park maintenance

 

 

20%

San Jose, Calif.

1979 (1)

parks maintenance (p.m.)

$12 500

$4 800

62%

LA county (121 cities)

1984 (8)

grass maintenance

 

 

29%

Clifton Forge, VA

1996 (10)

cemetery/park maintenance

 

 

25%

 

 

 

 

 

 

Transit systems

 

 

 

 

 

 

 

 

 

 

 

Pomona-Santa Monica, CA.

1977 (1)

rural transit bus (/passenger)

$65

$32

51%

Fairfax, Virginia

1979 (1)

Gray Line buses

$287 000

$93 500

67%

California survey

1980-6 (17)

14 private bus firms

 

 

32%

Atlanta, Georgia

1986 (11)

Flight International (60 jets)

 

 

 

 

 

USAF pilot training(/flight hour)

$8,000

$2,500

70%

San Gabriel valley, CA.

1987 (11)

commuter buses

 

 

50-60%

U.S. Urban Mass Transportation Administration (UMTA) study

 

 

 

 

 

Cincinnati, Ohio

1989 (16)

commuter buses

 

 

>45%

Seattle, Washington

1989 (16)

commuter buses

 

 

30%

Los Angeles (city)

1989 (16)

commuter buses

 

 

22%

Los Angeles (county)

1989 (16)

commuter buses

 

 

45%

 

 

 

 

 

40%

Social services & health care

 

 

 

 

 

 

 

 

 

 

 

Hennepin Co., Minnesota

1972 (1)

homemaker services

 

 

78%

U.S. nationwide

1977 (1)

Humana hospitals (/patient)

$1,447

$1,073

26%

LA, Calif.

1978 (1)

alcoholism outpatient program

$62/h

$22/h

64%

Salt Lake City & Provo, Utah

1979 (1)

ICH hospitals

 

 

78%

Wandsworth, U.K.

1981-5(15)

Social Services - catering

 

 

13%

Wandsworth, U.K.

1981-5(15*)

Social Services transport

 

 

26%

Green Bay, Wisconsin

1987 (17)

general relief program

$411,800

$226,000

45%

Virginia

1996 (10)

Lockheed Martin IMS collections

 

 

 

 

 

child welfare support payment

 

 

50%

Carolina

1996 (3)

Joyce Gregory Co. care of mentally ill patients

 

 

 

 

 

State facilities

$300/day

$50/day

83%

 

 

 

 

 

 

Planning and zoning

 

 

 

 

 

 

 

 

 

 

 

Salem, Oregon

1978 (1)

centralised permit applications

$74 000

$56 000

24%

Houston,Texas(no zoning)

1979

planning dept. expenditures (/head)

 

 

 

 

 

vs. other 20 largest U.S. cities

$1.09

26c

76%

Glenorchy, Tasmania

1980s (5)

road sealing

 

 

10%

 

 

mechanical sweeping/cleaning

 

 

15%

 

 

 

 

 

 

City management

 

 

 

 

 

 

 

 

 

 

 

Ohio

1974 (1)

property tax assessment

 

 

50%

LA county (121 cities)

1984 (8)

janitorial services

 

 

42%

 

 

traffic signal maintenance

 

 

36%

 

 

asphalt overlay

 

 

49%

 

 

street maintenance

 

 

27%

Wandsworth, U.K.

1981-5(15)

mobile maintenance unit

 

 

25%

 

 

agency punching

 

 

40%

 

 

Battersea Arts Centre

 

 

57%

 

 

estate managt. (contractors)

 

 

14%

 

 

cleaning/attending public halls

 

 

41%

 

 

litter picking

 

 

27%

 

 

mechanical workshop

 

 

42%

 

 

public conveniences

 

 

27%

 

 

housing caretakers

 

 

18%

 

 

cleaning

 

 

41%

 

 

office cleaning

 

 

44%

 

 

libraries cleaning & attending

 

 

41%

Wandsworth, U.K.

1981-5(15*)

mechanical workshop

 

 

29%

 

 

Latchmere Leisure Centre

 

 

9%

 

 

street lighting

 

 

42%

 

 

estate mgt.(bldg. works maint)

 

 

15%

 

 

gully cleansing

 

 

15%

 

 

print unit

 

 

11%

 

 

skips and abandoned vehicles

 

 

7%

U.S. 34-state survey of 120 cities/counties/districts

 

 

 

 

 

 

1988 (12)

asphalt resurfacing (/mile)

$203.20

$98.50

52%

 

 

building security (/guardpost)

$40.50

$24.60

39%

U.S. Office of Personnel Management investigation unit

 

 

 

 

 

 

1997 (4)

employee-owned company

$118.4m

$85.4m

28%

 

 

 

 

 

 

Schools

 

 

 

 

 

 

 

 

 

 

 

U.S. nationwide survey, cost per pupil (p.a.)

 

 

 

 

 

 

1978 (1)

public vs. private

$1,740

$600-1000

42-65%

 

 

 

 

 

 

Police

 

 

 

 

 

 

 

 

 

 

 

Burbank, Illinois

1979 (1)

31-officer force

$1200 000

$800 000

33%

 

 

 

 

 

 

Prisons

 

 

 

 

 

 

 

 

 

 

 

Hamilton co., Tennessee

1989 (17)

Corrections Corporation

 

 

5-15%

 

 

 

 

 

 

Water and sanitation

 

 

 

 

 

 

 

 

 

 

 

Oklahoma City

1987 (2)

waste water facilities

 

 

35%

Wilmington, Delaware

1996 (10)

20-year concession (/p.a.)

$11.2m

$8.2m

27%

Franklin, Ohio

1996 (10)

water (5 mgd)

 

 

30%

Atlanta

1998 (4)

water and waste (sewers)

$120m

$80-85m

29-33%

 

 

 

 

 

 

     S.A. examples of savings from contracting out city services

 

 

 

 

 

 

 

 

 

 

 

Benoni Fire and Emergency Services (5-year concession)

 

 

 

 

 

 

1992 (6)

 

R11m p.a.

 

29%

Springs Bus Service

1994 (6)

year 1

R2.3m p.a.

R0.6m

74%

 

 

by year 5

 

NIL

100%

Sandton Cleaning Services Division (8-year concession)

 

 

 

 

 

 

1994 (6)

feasibility study - year 1

R22m p.a.

 

42%

 

 

                       - total

 

 

27%

Sandton Parks and Recreation (8-year concession)

 

 

 

 

 

 

1994 (6)

feasibility study - year 1

R20m p.a.

 

45%

 

 

                       - total

 

 

40%

Stilfontein

1995 (5)

engineering dept. operating costs

 

 

 

 

 

Civil Town Services (Pty) Ltd

 

 

20-25%

Pretoria Fire & Ambulance Service (10-year concession)

 

 

 

 

 

 

1995 (6)

feasibility study - year 1

R85m p.a.

 

37%

 

 

                        - total

 

 

37%

Queenstown TLC

1996 (14)

water and sanitation

 

 

17%

East Rand (9 councils)

 

East Rand Water Care Co. (ERWAT)

 

 

 

 

1997 (7)

waste water services

>30c/kl

27c/kl

>10%

 


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