Free Market

What Privatization Is and Is Not

The newly constituted and funded Free Market Protection and Privatization Board met this past week, still figuring out the best path forward to fulfill its mission. That mission, adopted by the board in Friday’s meeting, is to “study and consider privatization issues related to state agencies and local
entities” and “make recommendations concerning privatization or findings of unfair competition.”

Privatization implies transferring assets or the provision of services from the government to an individual or non-governmental organization. Thus, the issues this board should be focusing on are those that entail terminating government involvement in certain current functions. So far, the board has not approached this topic.

Instead, the board’s conversations have centered around contracting out government work to the private sector. Rather than the state stopping its involvement in X, it continues to tax for X and funnels part of the money for X to private businesses. It retains control, acts as middle manager, and expresses verbal, superficial support for the principles of the free market.

One example of this came from the presentation by Carlos Braceras, newly appointed executive director of the Utah Department of Transportation. “We love competition from the private sector,” Mr. Braceras told the board. “We think that’s where innovation comes from.”

Specifically, Braceras pointed to UDOT’s habit of hiring private contractors, noting that it would be difficult to tell which individuals working inside the department’s facility are government employees, since they share office space with their private company collaborators. To be sure, outsourcing work is marginally better and does allow for competition in bid proposals, but it is not privatization.

Towards the end of his two terms as his administration attempted interventions to buttress a sagging economy, George W. Bush said, “I’ve abandoned free-market principles to save the free market system.” Of course, one cannot save something by violating it. Similarly, one cannot protect the free market and make recommendations on privatization while ignoring and violating the very things that privatization entails.

Further, the board’s conditions upon which privatization might be recommended are misguided. The mission statement notes that the board “shall recommend privatization to an agency if privatization would be a more cost efficient and effective way to perform or provide an activity.” In other words, the metric upon which privatization is considered beneficial is a financial and procedural one.

Privatization requires that the consumers of a good or service absorb the cost, barring some outside investment or funding source obtained by the company to subsidize its prices. In contrast, the taxation power claimed by governments allows them to socialize costs across an entire geographic area, compelling all citizens within the area to help fund an operation. Convention centers, golf courses, recreation centers, parks, UTOPIA, and a host of other government offerings all offer reduced prices to their users because other expenses are paid for through tax revenue.

This means that privatizing something may actually increase the direct cost to the consumer, since under a government price system the full burden is not felt. The proper metric for privatization is a different one, and it poses an uncomfortable question to many policy makers: should the government be doing X at all? The answer to this question lies in a firm understanding of free market principles—not a cost-benefit analysis full of figures and financial data.

Funneling tax dollars through government to private companies is not privatization, and the board should therefore see outsourcing only as the smallest of steps in the direction of privatization.

“It is the policy of the state of Utah,” reads the state’s Constitution, “that a free market system shall govern trade and commerce in this state to promote the dispersion of economic and political power and the general welfare of all the people.” The state has strayed from this foundational mandate, and the Free Market Protection and Privatization Board has a unique opportunity to help bridge the gap. There’s plenty of work to be done, but if we can’t get our definitions and mission statement right, little of worth should be expected in the years to come.