The Private Efficiency Myth

The idea of private efficiency is deeply ingrained in global economic thinking. Since the 1980s, Thatcher, Reagan and their institutional accomplices at the World Bank and International Monetary Fund (IMF) have advocated for privatization through this argument — that private services are implicitly more efficient than public services. A Reagan administration memo recommended privatization in order “to take advantage of the efficiencies that normally result when services are provided through the competitive marketplace.” Citing this supposed efficiency, countries, provinces and municipalities have delegated critical tasks, like water management or electricity generation, to private companies.

But the whole idea is a myth, an accepted “fact” based on shakier foundations than a sandcastle at high tide. Even within the popular conception of efficiency — based on cost and time — it’s unclear whether private companies have an edge. In Paris, for instance, renewed public control of water led to massive cost-savings. The re-municipalization of London’s underground metro saved the city billions of pounds.

Empirical evidence confirms these anecdotes. A wide-ranging review of existing literature by the European Public Service Union found the cost-savings of publicly owned services to be similar or greater than their private sector counterparts. Even the IMF, one of the largest proponents of private-sector led development, admitted to peddling the efficiency myth in a 2004 paper , saying “While there is an extensive literature on [relative efficiency in the private sector], the theory is ambiguous and the empirical evidence is mixed.”

The World Bank made similar concessions when discussing water utilities in 2005, concluding that, “There is no statistically significant difference between the efficiency performance of public and private operators in this sector.”

And when we look past this narrow definition and view efficiency through a social lens — considering accessibility and overall societal costs — some public services have a clear advantage.

Healthcare, for instance, should be accessible and affordable to everyone, but privately run healthcare excludes a large chunk of the populace. In America, the quality of care you receive is directly correlated to wealth. Americans spend more on healthcare than other developed nations, but have consistently worse outcomes. Public healthcare systems, like Britain’s National Health Service, provide more people with quality care at a lower overall cost.

In the name of efficiency, privatized water systems treat water as a commodity, instead of a public good. And when something as essential as water is a commodity, poor people’s lives are impacted negatively. Private water utilities charge far higher rates than publicly owned water utilities — and often withhold service from low-income neighborhoods which use less water and have bill-collection issues.

The central motive of private companies — profit — is often socially inefficient. Think of a power utility which utilizes a fossil-fuel plant. Because of their profit motive, the company benefits from higher consumption rates. Unfortunately, consumers suffer from the short-term effects of higher energy bills and the long-term effects of climate change. A publicly owned utility has vastly different priorities; namely, reducing consumption, investing in renewable energies (to reduce air pollution and stave off climate change) and improving consumer habits. The public utility may not profit, but it serves the people rather than shareholders.

The efficiency myth can be particularly harmful to developing economies. The IMF and World Bank are famous for attaching privatization and liberalization “conditionalities” to debt relief, loans and other measures which are ostensibly designed for the benefit of recipient nations. But these privatization mandates encourage corruption, disrupt democracy and have little impact on economic or social efficiency.

Let me be clear: I am not advocating for full-scale, communist-style public ownership — just a consideration of all factors. When a municipality or province or state or country thinks about privatizing a service, they should consider more than cost efficiency, which is likely negligible in the first place, and take a holistic approach. They should take into account the social costs of privatization — whether from overconsumption, lack of democratic control or restricted access for low-income groups. It’s particularly important to apply this thinking to services which deal with public goods, like water or the environment.

Despite what the privatization hawks want us to believe, efficiency can be measured by degree of democratic control, social benefits and accessibility. Their narrow definition of efficiency is, to put it simply, malarkey.

Harry Zehner is a staff columnist for The Daily Campus. He can be reached via email at harry.zehner@uconn.edu.