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Myth 5: The private sector is more efficient than the public sector

Finance
Economics

The abiding myth of mainstream economics is that governments should minimize their role in the economy – or, put another way, get out of the way of the accumulative drive of the rich. It’s an ideological position that suits governing elites and has led, among other things, to a fire sale of public assets and the increasing privatization of what were once public goods and services. The magic of the market and the vigour of private enterprise will make the cream of cost-effectiveness and efficiency rise to the top. At least, that’s how it’s spun.

Increasingly also, sell-offs are seen as a way for governments to ‘cut debt and plug budget deficits’, regardless of common-sense doubts that this may not be for the best as, usually, you can’t sell the same thing twice. Thus The Wall Street Journal applauded Australia and New Zealand/Aotearoa’s record privatizations in 2013, by gushing: ‘Their privatization sprees have injected needed cash into government coffers and freed the governments to focus on their core missions while injecting life into both markets.’1

It’s a view probably shared by George Osborne, Britain’s Chancellor of the Exchequer, who complained, in a 2010 budget speech, of the public sector ‘crowding out’ the private sector, pinning his hopes on the private sector providing ‘a genuine and long-lasting economic recovery’.

But what does privatization in its varied forms – outright sales of companies, public-private partnerships, outsourcing – deliver? Does it lead to greater technical efficiency or effectiveness in providing a service? That privatized businesses will aim for cost efficiencies is a given, but that usually means a lower level of service or pay cuts for workers, job insecurity and job losses, which all have their deadening effects on the wider economy if one is willing to look that far.

By now privatization has been thoroughly scrutinized – there are numerous studies, surveys and, indeed, surveys of surveys of its effects. The consistent conclusion: there is no evidence of greater efficiency.2 So, the best outcome one can hope for is that private-sector ownership or involvement is no worse than what the public sector provides – hardly a turn-up for the books. The largest study of the efficiency of privatized companies looked at all European companies privatized during 1980-2009. It compared their performance with companies that remained public and with their own past performance as public companies. The result? The privatized companies performed worse than those that remained public and continued to do so for up to 10 years after privatization.2

Even in the super-competitive telecoms sector, where customers have benefited from lower costs and increasing variety of services over the years, this result holds. A global survey found that ‘privatized sectors perform significantly worse’ than telecom companies remaining in state hands.2

Healthcare is where this myth is really given the lie. In the US, where healthcare spending is at its peak, with private spending on healthcare exceeding public spending, basic health outcomes are worse than in Cuba – which spends a fraction of the US amount per person in a totally public healthcare system (see table).

Myth 5 table

A 2012 report by the US Institute of Medicine was damning:

‘30 cents of every medical dollar goes to unnecessary healthcare, deceitful paperwork, fraud and other waste. The $750 billion in annual waste is more than the Pentagon budget and more than enough to care for every American who lacks health insurance… Most of the waste came from unnecessary services ($210 billion annually), excess administrative costs ($190 billion) and inefficient delivery of care ($130 billion).’2

That same year government had to step in with the Affordable Care Act (also known as ObamaCare) to try to rectify a bloated system that was clearly failing poor citizens.

In Britain, creeping part-privatization of the National Health Service through outsourcing has led to similar ‘penny wise, pound foolish’ outcomes. One example: in Cornwall, the private contractor Serco, which provided call-centre cover for out-of-hours GP services, decided to economize by replacing clinicians with call-handlers without medical training, who followed a set of computerized cues to make decisions about ambulance call-outs. This resulted in a very expensive four-fold increase in ambulance call-outs with the cost to be borne, of course, by the taxpayer.3

Public healthcare systems are more efficient partly because they provide universal coverage and can benefit from economies of scale. They require proper funding. The very opposite was proposed by the IMF and World Bank for many Majority World countries during the devastating structural-adjustment programmes of the 1980s. Then the mantra was that the state must withdraw, and let patients pay at the point of use. The result has been: the poorest people have been effectively stripped of healthcare while superior services are available, but only to those who can afford them.

To say that the public sector can perform just as well as, and often better than, the private sector is not to argue that it does not need reform in many instances. The public sector can be equally blighted with problems of corruption at the higher levels of management. But active unions and engaged service users can provide a check, and public consultation has a democratic advantage, as in the case of South Africa, where municipal unions have formed alliances with communities in order both to fight the privatization of water and sanitation services and to get greater accountability within the organizations they work for.4

  1. New Zealand/Aotearoa ranked first globally in privatization via share offers that year, raising $3.7 billion, and Australia was second in direct asset sales, $9.65 billion. ‘Privatization raises billions in Australia, New Zealand’, The Wall Street Journal, 5 November 2015, nin.tl/Aus-and-NZ-privatization

  2. PSIRU, Public and private sector efficiency, May 2014, nin.tl/PSIRU-efficiency

  3. Andrew Simms, ‘“The private sector is more efficient than the public sector”’, Mythbusters series from nef and Tax Justice Network, April 2013, nin.tl/nef-report

  4. For a detailed discussion see, Hilary Wainwright, The tragedy of the private, the potential of the public, PSI and TNI, 2014, nin.tl/alternatives-to-privatization