The question of whether to privatize or outsource municipal services is inextricably linked to the fundamental difference between the services provided by municipalities and those generally provided by private companies.
The nature of the service also changes the performance assessment. Some municipal programs are nearly identical to what private businesses offer. Others exist because the market cannot provide them effectively or equitably.
Market-provided private goods
Municipalities offer a wide range of services already provided by the private sector. Municipal tennis courts and golf clubs are examples of this kind.
These services may be referred to as “private goods”, which are generally characterized by three properties: excludability, rivalry and rejectability.
Excludability refers to the ability to prevent consumers from using a service if they are unwilling or unable to pay for it. For example, a theater ticket lets the provider restrict access. Services that can be provided on a pay-per-use, subscription or similar payment basis are thus suitable for provision by the private sector.
Rivalry means that the consumption of one person reduces what is left for consumption by someone else. This creates scarcity . Scarcity creates demand .
Rejectability means consumers must be able to say ‘no’ to the good or service. It must be non-essential ( like a specialty television channel ) or have a substitute available .
But the essential municipal services do not commonly meet this last condition. In a modern city, for instance, people cannot realistically deny access to clean water, proper sewage systems or waste disposal.
However, most of the municipal programs are nothing like the private sector programs, although some services are offered by the municipalities in a similar way to private goods.
It is not easy to leave to the market to provide public goods
City streets , public parks . These services are examples of public goods . By “public” we do not mean that they are necessarily good for the public, but they are typically non-excludable and non-depletable.
These services can also be of help to people who do not use them directly.
Public goods tend to be not supplied in a traditional fee-for-use market model as access to them cannot be easily restricted to paying customers. This gives people an incentive to use the service and enjoy its benefits without paying for it, which is called the free-rider problem.
Therefore, services of this kind cannot simply be dispensed with; nor is it generally possible to construct an outsourcing contract around them as you would a normal private service.
Some city services fall somewhere between private and public.
Other municipal services have a different problem: they are not rejectable because residents have few or no realistic alternatives.
One clear example is the municipal water systems. Most communities can’t afford the luxury of picking a different provider of city water. The same is true of municipal sewer systems.
Policing also illustrates the challenge of establishing a sharp distinction between public and private services.
Core policing functions, including law enforcement and maintaining public order, generally meet the characteristics of public goods.
But greater security levels intended to protect certain private facilities — like shopping centers, office buildings or entertainment venues — can place extra pressure on community policing resources.
Instead, those specialized services may be provided on an excludable basis.
Private security guards and private detectives, for example, operate as providers of private goods. Their services are available to anyone who will pay for them and may be accepted or rejected by individual customers.
Some customers may also be willing to pay a premium for extra protection beyond that provided by municipal policing, because businesses and individuals may have specific security needs.
Merit goods need a different approach
Municipalities also provide services that are in a third category merit goods.
These are services that could technically be offered to certain members of the public on a user-pay basis and could therefore potentially be supplied by private sector providers. But governments might decide that other public-policy objectives call for universal access.
Examples of municipal services include on-the-job training programs, public libraries, citizens’ advice bureaus and flu inoculation programs.
These services are often subsidized by the public rather than relying solely on users’ fees, so that they can be maintained available to the wider population.
Outsourcing still relies on accountability
Ultimately, however, the difference between public and private or outsourced provision is not simply whether a service can be provided by a private company.
The main problem is the set of rules governing the provider.
A private or outsourced provider is a private entity contracted to provide services and is usually subject to commercial and profit-making pressures. A municipal provider, conversely, is a member of the public sector and is answerable through democratic institutions and civil-service systems.
Municipalities that are considering outsourcing must understand the differences. Strategic targets and performance measures should be indicative of the nature of the service being delivered. Contracts should recognize whether the service is a private good, a public good or a merit good.
Thus, the effectiveness of outsourcing depends not only on who provides the service, but also on whether the selected delivery model corresponds to the public purpose and accountability needs of the service.
