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Productivity through privatization.

The elected supervisors of Los Angeles County may be excused for moaning, "Sometimes I Feel Like a Motherless Child." The State of California is planning to keep $858 million in property taxes that would normally go to the county and its special districts, leaving the county with an overall shortfall of $1.4 billion and the prospect of cutting expenses by as much as 25 percent. The state itself plans a deficit for the next year after trimming its budget by $4.8 billion from the previous year. But it is not only in California where budgets are being squeezed: many state and local governments are having great difficulty in making ends meet. To name a few, Rhode Island, Connecticut and Michigan are coping with deficits of 10 percent or more. The conundrum is to do more with less--or, if forced to do less, do as much and as well as possible. Business is not as usual. More effectiveness and efficiency, productivity in other words, are demanded from government.

Measures are being taken. The productivity improvement program of Los Angeles County has accounted for $400 million in first year savings since its inception a decade ago. David Osborne and Ted Gaebler in their book, Reinventing Government, describe many stratagems such as the "millions of dollars" saved by the total quality management program of Madison, Wisconsin.

The Big Three

As beneficial and commendable as these and other programs are, getting really serious about productivity means taking the ultimate step. That step is privatization, coupled with benchmarking and competition.

It is no longer news that privatization is taking place in countries all over the world--in Latin America, in Russia, in the former East Bloc countries, and in Western Europe. In just 1991 the governments of the world sold off $25 billion in state-owned enterprises. The massive privatization in Argentina contributed to 6 percent growth in 1992. President Carlos Menem says, "Never in the whole world has there been a swifter and more complete process of privatization." A world bank study found that privatization increased investment and improved productivity.


Privatization of government functions also works in the United States; there are abundant examples of government functions being either sold or contracted to private firms. Newark, New Jersey now contracts for $1 of every $2 spent on services. Indianapolis, Philadelphia and Phoenix are among the many cities that have privatized operations. Through improved equipment and privatization the total number of municipal sanitation and garbage collection workers in the nation decreased by 50 percent between 1975 and 1983. Newark Mayor Sharpe James observes, "When contracting of street sweeping began in November, 1983, a remarkable improvement was noticed in street cleanliness." Privatization in Los Angeles County realized an estimated $53 million in annual hard dollar savings, meaning without it, $53 million more would be spent. Turning over parking lots to private operation flipped a $200,000 loss into a $800,000 profit for Columbus, Ohio.


Benchmarking is a process for comparing the measured performance of a function in an organization with the same or similar function in another organization which is known to perform that function exceedingly well. The process has been adopted by some well-known corporations and has been instrumental in making vast improvements. Examples frequently cited are Xerox's gain in market share, Ford's success with the Taurus, and Motorola's astounding achievements in quality. With the many opportunities for making comparisons, benchmarking should be standard procedure in government. Its use is especially vital and apropos when a private firm operates as a monopoly under government contract. Since these services are a government responsibility regardless of who performs them, the quality and the cost of the operation must bc measured and controlled.

However, the formula for productivity improvement is incomplete without competition. In the words of Stephen Goldsmith, mayor of Indianapolis, "If we were simply to privatize without first creating a competitive environment, the benefits would be minimal." Competition can be achieved in a variety of ways, e.g., competitive bidding, but it is most severe when organizations have to go head to head. When Chicago used both private and city street paving units they then tried to outdo each other. This and a similar experience in Phoenix show that the instincts of government workers will become competitive and productive when they are pitted against private firms, and the results can be measured or benchmarked. It also demonstrates how privatizing some units improves the productivity of others still under government operation.

Employee Opposition

Although competitive privatization is a winner for taxpayers, government employees can lose. Very likely, when a government operation is turned over to private hands, the ex-government employees will be hired by the private concern. But the work ethic will not be the same; salaries and benefits may change. The prospect of being cut off from government's apron strings is enough to cause apoplexy among some government employees. It is not surprising that the biggest opponents of privatization are the public employee unions, and according to a survey of cities they are a major obstacle. So privatizing government functions will never be easy even though the opportunities are plentiful. The Reason Foundation says that cities and states could sell off $227 billion in profit making assets, such as airports and utilities, netting a one time gain along with the potential for reduced operating costs. Elected officials are getting the message, but there is still a long way to go.

WILLIAM C. WADDELL, D.B.A., is professor emeritus at California State University, Los Angeles.
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Title Annotation:Commentary
Author:Waddell, Bill
Publication:Business Forum
Date:Jun 22, 1993
Previous Article:Economic lessons from Campaign 1992.
Next Article:How to translate strategy into operational results.

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