That is the topic of my latest Bloomberg column, here is one bit:
But Poles did not privatize everything. They generally left water companies and electricity providers in the public sector, for example. This is the second category of privatizations: those that are uncertain in their impact.
Water and electricity are two essential services where there is no easy way to get privatization exactly right. It is simply impractical to have many firms selling the product to a single group of households — not in the same way that, say, many cow farmers can produce and sell cheese. It costs too much to lay the basic piping or wires.
One option is to have a private entity with monopoly privileges but regulated prices. Another is to have a set of “common carrier” wires and allow multiple producers to use the network on regulated terms of access. A third is just to have the government own and run the company.
Involving the private sector may give better incentives for cost reduction as well as innovation, since profit maximization is a strong impetus for those kinds of improvements. The efficiency of the private company, however, is also a source of problems. A private company may be efficient at lobbying the government for cronyist privileges. That may lead to higher prices, overly generous reimbursement for cost increases, tougher barriers to entry, or entrenched technologies that favor the incumbent.
In other words: If embedded in an imperfect system, corporate efficiency is not always a pure virtue.
In the US, privately owned and publicly owned water utilities show, on average, roughly equal performance. Perhaps that is a disappointing result, but it is consistent with the “public choice” theories favored by many free-market economists.
A third kind of privatization is when business adds a layer of activity to a preexisting government function. For instance, some states have “privatized” their Medicaid services by outsourcing Medicaid provision to private health insurers. The Medicaid program has not gone away or been turned over to the private sector — rather, companies have a role in administering the system.
This kind of “layered” privatization, like the second kind of privatization, can work out either for the better or for the worse. One recent study shows this privatization increased the costs of Medicaid significantly without providing offsetting benefits. The private companies have done a good job — for themselves — of extracting more revenue from the system. Yet Medicare Cost Advantage, which creates a private layer of service on top of Medicare, run by insurance companies, does offer significant benefits to those who opt for it.
The lesson here is that talk of “privatization” per se is meaningless without elucidating which kind of privatization is under consideration.
Worth a ponder. Overall I think postal service privatization cannot be too closely tied to crony capitalism if it is going to work.
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