Costs Savings from Privatization

Executive Summary

Opponents of privatization and other methods of increasing competition in government-financed services frequently claim that privatization/competition rarely results in cost savings for government or society at large. In fact, some argue that privatization increases costs to the taxpayer.

These claims are refuted by a substantial body of research that has documented significant savings from privatization/competition. More than 100 studies over the course of the last 20 years have demonstrated privatization/competition cost savings in service areas from airport operation to weather forecasting.

The wide variety of reasons for the cost savings include, for example:

better management techniques;
better and more productive equipment;
greater incentives to innovate;
incentive pay structures;
more efficient deployment of workers;
greater use of part-time and temporary employees;
utilization of comparative-cost information; and
more work scheduled for off-peak hours.

All these benefits stem primarily from the introduction of competition into the bidding process to perform the service.

Insulated from competition, most government units have lower incentives to—or are even prohibited form—adapting the productivity-increasing techniques of private firms. When government units compete against private bidders to provide a service, cost savings are significant regardless of who wins the contract because the government unit typically responds by cutting its costs greatly.

The following service-by-service table is a compilation of cost studies that compare the costs of in-house (sole-source) government agencies versus alternative—and mostly private-sector providers. It is derived from my book, Competition in Government Financed Services, published by Quorum Books in 1992. The over 100 independent studies typically found cost reductions of 20 percent to 50 percent that resulted from privatized and, more importantly, increased competition.

I. Introduction

This table updates and expands an earlier 1982 compilation of studies on the effect of competition on the costs of government services.[1] It references over one hundred independent studies of increased competition in specific government services and the cost discrepancies observed. Studies that collected quantitative results usually demonstrated cost savings of 20 percent to 50 percent as a result of increased competition.

The primary method of increasing competition is contracting out public services to private firms. However, this is not the only method of increasing competition examined in the studies presented in the table. Findings from two other methods of increasing competition are also detailed.

One alternative is allowing management and workers of the in-house government unit to bid against private firms. The other method is termed "intergovernmental contracting" and refers to agreements between two or more government jurisdictions to purchase service form another government. Competition takes place between in-house units in all the jurisdictions that might contract with each other.

____________

[1] Borcherding, T., W. Pommerehene, and F. Schneider, "Comparing the Efficiency of Private and Public Production: the Evidence from Five Countries," Journal of Economics (suppl. 2), 1982, 127-56.

II. Elements of an Open/Public Bidding System

Airline Operation - Fire Protection

Updated Cost Savings Research Findings
Arranged by Service Category

1. Airline Operation and Airplane Maintenance

SOURCE	COMPARISON	FINDINGS
Savas 1987	In-house versus contract maintenance support for airforce bases.	Contract maintenance reduced costs by 13% while improving availability of parts and planes. Cost savings were primarily attributable to use of 25% fewer personnel by contractors.
Davies 1971, 1977	Australia/sole private airline versus its lone public counterpart.	Efficiency indices of private airline were 12% to 100% higher.
Domberger and Piggott 1986	Survey article dealing with many services. Focus on Australian Airlines.	Concludes that private firms are generally more efficient, unless the public firms are faced with equivalent competition.

2. Airports

SOURCE	COMPARISON	FINDINGS
Auditor General of Canada, 1985	Tax-supported Canadian airport operations versus comparable U.S. airport authorities that must borrow in capital markets to finance their facilities.	Airports subject to capital market discipline are much more efficient. Work-year requirements are 30% to 40% lower. Canadian government workers have inflexible work assignments and procedures. Canadian airports are overbuilt and neglect many commercial opportunities. Fail to monitor trends in operating costs. Overall savings rate is 40%.
Moore 1987	In-house versus contract air-traffic control.	Government pricing policies for landing rights and other airport services lead to inefficient congestion and inability to finance expansion of facilities.
Roth 1987	Government-managed versus private-managed airports.	Government pricing policies for landing rights and other airport services lead to inefficient congestion and inability to finance expansion of facilities.

3. All Services

SOURCE	COMPARISON	FINDINGS
Deacon 1979	In-house versus intergovernmental production of all services.	Intergovernmental contracting saved 14% relative to in-house production.
David 1987	In-house versus private contracted service	Surveyed local administrators reported that cost savings were achieved in 98% of contracting efforts. The range of operating-cost savings was large: 10% reported more than 40% savings. The weighted average cost saving was 19%.
Savas 1987	Los Angeles county in-house services versus contracted services from 1979 to 1984.	Cost of contracted services averaged 30% less than in-house services.
Moore 1987	In-house versus contract in Miranda, California.	Contracting has 30% lower costs.

4. Assessing Property Tax
(financial administration) also see Payroll and Data Processing (Service Category 28).

SOURCE	COMPARISON	FINDINGS
Stocker 1973	In-house versus private contractors in Ohio.	Private assessments provided 50% cost savings and were found to be more accurate.

5. Banks

SOURCE	COMPARISON	FINDINGS
Davies 1982	Australia/one public versus one private bank.	Sign and magnitude of all indices of productivity, responsiveness to risk, and profitability favor private banks.

6. Bus Service

SOURCE	COMPARISON	FINDINGS
Morlok and Moseley 1986	Municipal in-house agency versus competitive contracts.	Contract winners supplied services at 28% lower costs.
Morlok and Viton 1985	Municipal in-house agency versus contracts awarded in competitive bidding versus noncompetitive contracts.	Contract providers had cost 50% to 60% lower than municipal agencies they replaced. Noncompetitive contracts were similar to municipal agency costs.
Oelert 1976	Municipal in-house versus private bus service in W. Germany	Public bus services have 160% higher costs per kilometer than private equivalents.
Walters 1987	Municipal in-house versus private bus service in various cities.	Private bus services typically charge similar prices, but have 50% to 65% lower costs.
Perry and Babitsky 1986	Private versus cost-plus contract versus municipal in-house versus regional in-house authority bus operators.	Private operators are significantly more efficient. Cost-plus contractors and municipal bus lines are less efficient. Inefficient private operators are sold to government.
Prommerehne and Schneider 1985	In-house versus private firms in W. Germany.	Private costs were 60% lower than public costs for commercial bus operations.
Talley and Anderson 1986	In-house motor bus versus contracted dial-a-ride service.	Substituting dial-a-ride for scheduled service decreased costs by reducing overtime and idle time and utilizing less costly vehicles. It also reduced costs indirectly by encouraging competition with traditional services of the agency.
Teal, Guiliano, and Morlok 1986	In-house versus competitive contract operators.	Competitive contract operations provide cost savings from 10% to 50% (larger fleets). Cost savings are due both to less overhead/greater productivity and lower wages.
Rice Center 1985	In-house versus contract express commuter services.	Contract operators have 30% to 60% lower costs.

7. Cleaning Services
(general maintenance of public buildings) also see Security Services (Service Category 37).

SOURCE	COMPARISON	FINDINGS
Bundesrechungshoff 1972	In-house versus private contracting of cleaning services in W. German post offices.	In-house service 40% to 60% more costly.
Hamburger Senat 1974, Fischer-Menshausen 1975	In-house versus private contracting out in W. German public buildings.	Public service 50% more costly than private alternative.
Kaiser 1977	In-house versus contract services in schools.	Contracting saved 13.4% of costs.
Pommerehne and Schneider 1985	In-house versus private sector costs of services in W. Germany.	Private costs were 33% lower than public costs for commercial cleaning services.
U.S. GAO 1981b	In-house staff versus GSA contractors versus private landlords.	Private window cleaning costs averaged 47% lower than GSA staff while contractor costs were 38% lower. Higher costs die to higher wages as well as more workers.
Stevens 1984	In-house versus contract janitorial services.	Contract service had 42% lower costs even after accounting for quality, service levels, and economies of scale.
U.S. GAO 1982b, Fixler and Poole 1987	In-house versus contracted janitorial services in post offices.	Contracted janitorial services were 50% less costly than in-house services.

8. Day Care Centers

SOURCE	COMPARISON	FINDINGS
Bennett and DiLorenzo 1983	In-house versus private providers of equivalent services. Article is based on GAO studies.	Private day care was found to be 45% less costly because of fewer teachers, lower wages, and fewer nonteaching staff.

9. Debt Collection

SOURCE	COMPARISON	FINDINGS
Bennett and DiLorenzo 1983	In-house versus private providers of equivalent services.	Private debt collection procedures were faster and 60% less costly.
Bennett and Johnson 1980	In-house versus privately contracted equivalent services.	Government 200% more costly per dollar of debt pursued.

10. Electric Utilities
(utilities) also see Busy Services and Water Utilities (Service Categories 6 and 43).

SOURCE	COMPARISON	FINDINGS
Bennett and DiLorenzo 1983	In-house federal agencies vs. private hydroelectric plants.	Private utility costs average 17% lower due primarily to federal overstaffing.
Hellman 1972	In-house versus electric utilities that compete versus regulated private monopolies.	Competition produced lower rates than regulation. Government production produced the lowest rates due to tax exemption.
Meyer 1975	In-house versus private firms, sample of sixty to ninety U.S. utilities.	Slightly higher costs of private production. Threat of competition improved cost efficiency somewhat.
Moore 1970	In-house versus private U.S. utilities.	Overcapitalization greater in public firms. Total operating costs of public firms higher.
Primeaux 1975	In-house versus private U.S. utilities.	Municipal utilities facing competition have 11% lower cost on average. Economics of scales offset X-inefficiency at big firms.
Spann 1977	In-house versus private firms in Texas and California.	Private firms, adjusted for scale, are as or more efficient in operation cost and investment.
Atkinson and Halvorsen 1986	U.S. public utilities.	Public Utilities are as efficient as private utilities.
Wallace and Junck 1970	In-house versus private firms by region of the U.S.	Operating costs 40% to 75% higher in public mode. Investment is 40% higher (per kilowatt) in public mode.
Bellamy 1981	Monopoly vs. competing utilities.	Competing utilities had 20% lower prices.

FINANCIAL ADMINISTRATION See Assessment, Property Tax (Service Category 4), and Payroll and Data Processing (Service Category 28).

11. Fire Protection

SOURCE	COMPARISON	FINDINGS
Ahlbrandt 1973, 1974 Moore 1988	In-house (Seattle) versus private (Scottsdale, Arizona).	Municipal fire departments 39% to 88% higher per capita.
Hilke 1986	In-house versus varying degrees of use of volunteers in New York and Pennsylvania cities (not suburbs) with populations between 10,000 and 50,000.	Use of volunteers reduced firefighting costs. Cities in New York with all-volunteer departments had 62% lower costs per capita. Pennsylvania all-volunteer cities saved an average of 79% per capita. A 10% increase in use of volunteers provides a 2.8% decrease in costs.
Kristensen 1983	In-house versus major private provider in Denmark.	The principal private firm provided services at 65% lower costs. Differences in costs due to economies of scale, lower input costs, and especially part-time reservists and lower X- inefficiencies.
McDavid and Butler 1984	In-house versus major private provider in Denmark.	Mixed fire departments average 33% lower costs than purely municipal departments.
Poole 1976, Smith 1983	Private versus contract fire fighting.	Switching to private contract fire fighting reduces costs by 20% to 50%.

Forestry - Military Support

Updated Cost Savings Research Findings
Arranged by Service Category

12. Forestry

SOURCE	COMPARISON	FINDINGS
Bundesregierung Deutschland 1976	In-house versus private in W. Germany.	Annual operating revenues 45 DM peer hectare higher in private forests (approximately $6 per acre).
Pfister 1976	In-house versus private in the state of Baden-Wurttemberg, Germany.	Labor input twice as high per unit of output in public as compared with private firms.

GENERAL MAINTENANCE OF PUBLIC BUILDINGS See Cleaning Services (Service Category 7) and Security Services (Service Category 37).

13. Health Services also see Nursing Homes (Service Category 25).

SOURCE	COMPARISON	FINDINGS
Schlesing, Dorwart, and Pulice 1986	In-house versus contract mental health services.	Nominally competitive-contracting procedures resulted in sole-source supply with little increase in efficiency.
Valente and Manchester 1984	In-house supply of substance abuse programs versus volunteer-based program.	Systematic volunteer program allowed service expansion with cost savings to the community.

14. Highways

SOURCE	COMPARISON	FINDINGS
Deacon 1979	In-house (local) versus intergovernmental provision of street repair.	Intergovernmental contracting saved 30%.
Stevens 1984	In-house versus contract provision of asphalt overlay and traffic light maintenance.	Contracting out was half as costly with equivalent quality. Contractors used more experienced staff and more equipment. Cost savings in traffic light maintenance average 36%.

15. Hospitals

SOURCE	COMPARISON	FINDINGS
Lindsay 1975	In-house Veterans Administration (VA) versus private.	VA hospitals have lower costs and lower quality. Resource use is distorted towards outputs that are easily monitored by Congress. Actual costs per medically necessary hospital stay may be higher in VA hospitals after controlling for length of stay.
Robinson and Luft 1988	Investor-owned versus public hospitals using a sample of 5,490 hospitals.	Cost increases at public hospitals were 15% lower than those in investor-owned hospitals from 1982-1986 after controlling for various demand and cost factors.
Becker and Sloan 1985	Investor-owned versus non-federal government hospitals.	Government hospitals had no higher costs per admission.
Shortell and Hughes 1988	Investor-owned versus non-federal government versus nonprofit private hospitals.	No differences in quality, measured in death rates between different types of hospitals.
Register and Bruning 1987	Investor-owned versus thirty-six nonfederal state and local government owned and operated hospitals.	No significant efficiency differences between types after controlling for size and other factors that should affect efficiency.
Grannemann, Brown, and Pauly 1986	Investor-owned versus non-federal government hospitals using a national sample of short-term hospitals.	Investor-owned hospitals had 24% higher costs than nonfederal government hospitals.
Noether 1987	Investor-owned versus nonprofit hospitals including nonfederal government hospitals sampled from 223 metropolitan areas.	Investor-owned hospitals are significantly more efficient once tax payments are taken into consideration.
Lindsay 1976	In-house Veterans Administration versus private.	Cost per patient per day less in VA hospital, unadjusted for type of care and quality. Less "serious" cases and longer patient stays were observed in the VA facilities. The VA had a higher proportion of minority group professionals compared to proprietary hospitals.
Benton 1979	In-house vs. private home care.	Government had 43% lower cost. No controls for quality were made in the study.
Wilson and Jadlow 1978	In-house vs. private in 1,200 U.S. hospitals providing nuclear medicine services.	Proprietary hospitals more efficient than public.
Hatry 1983	In-house management vs. contract management.	Experience with contract management has varied. Seven out of fifteen large California public hospitals signing new contracts with private management firms between 1973 and 1980 terminated the contracts. The hospitals noted small savings, service problems, and the hospital's ability to learn and the duplicate the cost-saving management techniques of private contractors.

16. Housing and Community Development

SOURCE	COMPARISON	FINDINGS
Muth 1973	In-house vs. private construction costs in U.S. cities.	Public agencies 20% more costly per constant quality housing unit.
Rechnungshof Rheinland Pfalz 1972	In-house vs. private cost of supplying large public projects in W. Germany.	Public agencies 20% more costly than private contracting.
Schneider and Schuppener 1971	In-house vs. private construction in W. Germany.	Public firms significantly more expensive than suppliers.
Pommerehne and Schneider 1985	In-house vs. private costs in W. Germany.	Private costs were lower than public costs for commercial services generally, 17% for construction.
President's Commission on Privatization 1988	Publicly constructed vs. various privatization alternatives.	Public housing costs per unit over 20 years total $69,863 versus $27,892 to obtain private units through housing subsidies to individual need families.
Weicher 1980	Government-financed vs. private construction.	Government-financed construction 25% more costly. Government management is also more costly.

17. Insurance Claims Processing

SOURCE	COMPARISON	FINDINGS
Hsiao 1978	In-house versus private.	Equivalent claims processing costs of private insurers were between 15% and 26% lower. Most of the differences were attributable to compensation and organizational differences. Some cost differences were attributable to efforts by public insurance programs to control medical costs generally.

18. Insurance Sales and Servicing

SOURCE	COMPARISON	FINDINGS
Finsinger 1981	In-house (5 firms) vs. private (77 firms) liability and life coverage in W. Germany.	Competition between public and private firms prompted equivalent efficiency.
Kennedy and Mehr 1977	In-house (Manitoba) vs. Private (Alberta).	Private insurance quality and service higher than those of the public insurance with equivalent costs.

19. Laundry Service

SOURCE	COMPARISON	FINDINGS
Pommerehne and Schneider 1985	In-house vs. private in W. Germany	Private costs were 46% lower than public costs for commercial services in laundry services.

20. Legal Services

SOURCE	COMPARISON	FINDINGS
Houlden and Balkin 1985	Ordered assigned counsel vs. contract counsel for indigents.	Contract counsel had at least 50% lower costs. Contract counsel processed cases in half the time of assigned counsel. The authors note that since fees per hour are roughly equal, the primary difference is due to less attorney time per case under the contract system. This may imply a lower quality of service with contracts, but this does not affect the average jail term.

21. Libraries

SOURCE	COMPARISON	FINDINGS
White 1983	In-house libraries before and after federal aid.	After federal aid started in 1960s, productivity slowed as libraries added federally sponsored programs with lower marginal impact on output and fewer volunteers. Total factor productivity was at least 27% lower as a result.

22. Liquor Stores

SOURCE	COMPARISON	FINDINGS
Simon and Simon 1987	In-house versus private.	State stores have higher compensation rates, but higher sales per hour. If hours of operation (quality) are considered, private stores have lower costs.

23. Military Support Services

SOURCE	COMPARISON	FINDINGS
Bennett and DiLorenzo 1983	In-house vs. private providers of equivalent services.	Average cost savings in base support services were 15%.
U.S. GAO 1985b	Precontract bids vs. post-contract costs for competitive Department of Defense contracts.	Most post-contract prices were in accord with bids. Some unsatisfactory performance seen in 33% of the contracts. Personnel turnover and low staffing were main problems. Contract price increases due largely to contract changes and Davis-Bacon wage regulations.
U.S. GAO 1981a	In-house vs. contract.	Savings from both higher employee productivity and lower wages.
U.S. GAO 1985b	Contract bids vs. actual contract experience.	Contract costs increased over time in 95% of sample. In 89%, increases were too small to eliminate the net savings from contracting. (Contracts were rebid in 35% of the cases due to failures of the initial contractor.) Main causes of the cost increases were general wage increases, rebidding of contracts, contract errors, or additional requirements not originally included.

Motor Vehicle Maintenance - Refuse Collection

Updated Cost Savings Research Findings
Arranged by Service Category

24. Motor Vehicle Maintenance

SOURCE	COMPARISON	FINDINGS
Campbell 1988	In-house vs. contract services.	Contractor costs are 1 °lo to 38°Io below municipal costs for equivalent or higher levels of service. In conversions to contracting, wage levels generally remain similar, but the number of operating and overhead employees is reduced because of greater productivity.
Pommerehne and Schneider 1985	In-house vs. private costs in W. Germany.	Private costs were 50% lower than public costs for automobile motor maintenance repairs.
Stolzenberg and Berry 1985	Noncompetitive in-house vs. competitive contract vs. competitive in-house.	Competition resulted in lower costs through large reductions in personnel. Contracting saved approximately 17°Io. The lowest costs occurred where an in-house operator won competitive contracts. Costs averaged over 40°Io lower at these bases. Quality of maintenance was similar, but slightly better in government operations operating under competitive conditions. Higher government costs came from staffing for peak-load demand, higher government fringe benefits and difficulties in hiring and firing.

25. Nursing Homes
(health service) also see Health Service (Service Category 13).

SOURCE	COMPARISON	FINDINGS
Lindsay 1975	In-house (VA) vs. contract.	Contract operated homes had 45% lower per day costs.

26. Parking

SOURCE

COMPARISON

FINDINGS

Caponiti and Booher 1986

In-house vs. contract parking meter and parking restrictions enforcement.

Contracting is less costly, primarily because of lower fringe benefits and greater flexibility in meeting

staffing requirements. Productivity (violations ticketed) improves as much as 10%, averaging 5%.

27. Parks and Recreation

SOURCE	COMPARISON	FINDINGS
Stevens 1984	In-house vs. contract park turf maintenance.	Contract service had 28% lower costs and equivalent quality of service.
Savas 1987	Government vs. privately constructed sports facilities.	Costs of privately constructed sports arenas averaged 31% less than those of public arenas.
Holmes 1985	In-house vs. contract recreation program.	Cost savings of 20% obtained by privatizing. Savings come from use of more volunteers and better use of employees.
Poole 1980	In-house vs. private facilities operations and programs.	Cost savings of 20% obtained by privatizing. Savings come from use of more volunteers and better use of employees.
Fixler and Poole 1987; Valente and Manchester 1984	In-house vs. contracted profit and nonprofit organizations.	Contracting allowed maintenance of quality recreation services. even though budgets were reduced under California's Proposition 13 by as much as 50%.

28. Payroll and Data Processing
(financial administration) also see Assessment, Property Tax (Service Category 4).

SOURCE	COMPARISON	FINDINGS
Valente and Manchester 1984	In-house vs. private competitive contractors.	Contractor performed higher quality data processing service with cost savings of 151%.
Stevens 1984	In-house versus private contractors.	No cost differences found after accounting for quality and other factors.

29. Police

SOURCE	COMPARISON	FINDINGS
Deacon 1979	In-house (local) vs. intergovernmental.	Intergovernmental contracting saved 42%.
Mehay 1979	In-house (local) vs. contract with county (Lakewood Plan).	Contract costs were lower due to fewer police officers per capita. However, contract cities experienced higher rates of violent and property crime. Net effects were probably negative for contract cities. Problem attributable to inability of contract cities to specify quality of service and monitor performance.
Mehay and Gonzalez 1985	In-house monopoly vs. in-house production with competition to serve additional jurisdictions.	Costs in counties that sell their police services to other jurisdictions are estimated to be 9% to 20°Io lower. The authors conclude that competition encourages police departments to keep their costs down.

30. Postal Service

SOURCE	COMPARISON	FINDINGS
U.S. GAO 1982a	In-house vs. contracted routes.	Contracted delivery routes save up to 66% on delivery costs.
Hanke 1985a	In-house vs. contracted window service.	Contractors (retail stores with postal services) provided window service at 88°Io lower cost than USPS operated.
Savas 1987	In-house vs. private parcel delivery services.	Private firms have lower rates, faster delivery, lower losses from damage, better tracking systems, wider variety of services, and lower costs.

31. Printing

SOURCE	COMPARISON	FINDINGS
Pommerhehne and Schneider 1985	In-house vs. private in W. Germany.	Private costs were 33% lower than public costs for commercial printing services.

32. Prisons

SOURCE

COMPARISON

FINDINGS

Grant and Bast 1987

In-house vs. private contract facilities and services.

Contractor prison construction costs are at least 45% lower than government averages. Service contracts for

prison operations are at least 35% below average per prisoner costs in recent cases.

33. Public Welfare

SOURCE	COMPARISON	FINDINGS
Poole 1980	In-house vs. private variety of welfare services.	Privately supplied programs operating under competitive bidding saved 20% to over 60%.
Hatry 1983, Wedel, Katz, and Weick 1979	In-house vs. private contracting for vocational rehabilitation, childrens' protective services, and programs for the elderly.	Competitive contracting efforts have often devolved into single source contracting with little evidence of efficiency gains. Nonprofit firms are the predominate suppliers. Improved program characteristics are the primary objective of contracting, but no quantifiable quality information is available.

34. Railroads

SOURCE	COMPARISON	FINDINGS
Bennett and DiLorenzo 1983	In-house vs. private providers of equivalent tract repair. Article is based on GAO studies.	Private railroads repaired ties, replaced track, and surfaced rails at least 70% more efficiently.
Caves and Christensen 1980	In-house (Canadian National) vs. private (Canadian Pacific) costs and productivity differences.	No current productivity differences. The public firm substantially increased its efficiency after competition increased in 1965.

35. Refuse Collection (Sanitation other than Sewage) also see Street Cleaning (Service Category 41).

SOURCE	COMPARISON	FINDINGS
Collins and Downes 1977	In-house vs. private contracting-out in St. Louis area.	No significant cost differences. Private firms lost density economies because several firms served the same areas. Public suppliers had monopoly status.
Savas 1974, 1977a,b, 1980; Stevens and Savas 1978; Edwards and Stevens 1979	In-house vs. private monopoly franchise vs. private nonfranchise firms.	Public supply was 40% to 60°Io more expensive than private. Private monopoly price was only slightly 5% higher than price of private nonfranchised collectors. Density economies offset otherwise higher costs.
Stevens 1984	In-house vs. competitive contract.	Cost savings of 22%, were found, controlling for quality.
Hirsch 1965	In-house (St. Louis City-County area) vs. private firms.	No significant cost differences. Private competing suppliers lost density economies.
Kemper and Quigiey 1976	In-house vs. private monopoly contract vs. private nonfranchise vs. municipal firms in Connecticut.	Municipal collection costs were 14% to 43% higher, but private nonfranchise costs were 25% to 36% higher than municipal collection. Loss of density economies increased costs of nonfranchise suppliers.
Kitchen 1976	In-house vs. private firms in forty-eight Canadian cities.	Municipal suppliers were more costly than proprietary firms.
Petrovic and Jaffee 1977	In-house vs. private contracting in mid-western cities.	Cost of city collection was 15% higher than the price of private contract collectors.
Pier, Vernon, and Wicks 1974	In-house vs. private firms in Montana.	Municipal suppliers appear to be more efficient, not controlling, for quality and community characteristics.
Savas 1977a	In-house vs. private firms in Minneapolis.	No significant cost differences if suppliers compete through tight control of municipal costs imposed by legislature using private costs as a comparison.
Savas 1981	In-house and franchise contractors in a single district jurisdiction vs. contractors and in-house in a multi-district setting.	The average number of bids per area increases when cities are divided into small districts. Competitive bidding leads to lower costs for contractor service. Cities that actively monitor municipal agencies using private sector contractor costs have. lower average costs. No benefits are obtained without these policies.
Spann 1977	In-house vs. private firms. (Survey of literature.)	Public firms were 45% more costly.

Schools - Weather Forecasting

Updated Cost Savings Research Findings
Arranged by Service Category

36. Schools

SOURCE	COMPARISON	FINDINGS
Peterson 1981	In-house vs. private contractor-operated public schools.	Private contracting prompted small gains in math and reading and losses in other subjects. No cost savings.

37. Security Services general maintenance of public buildings) also see Cleaning Services (Service Category 7).

SOURCE	COMPARISON	FINDINGS
Hanke 1985a	In-house vs. private security guards.	Private security services save 50% or more.

38. Sewage/Wastewater Treatment

SOURCE	COMPARISON	FINDINGS
Hanke 1985a	In-house vs. contractor-built and operated treatment facilities.	Contractor costs averaged 20% to 50% less due to shorter construction lags and lower construction costs. Competition also reduces operating costs 20% to 50%.
Savas 1987; Moore 1988	In-house vs. outside contracts.	Contracted wastewater service is 20% to 50% less costly because federally financed projects involve higher construction (Davis-Bacon Act) and design costs.

39. Ship Repair and Maintenance

SOURCE	COMPARISON	FINDINGS
Bennett and Johnson 1980	In-house vs. commercial tankers and oilers.	U.S. GAO reports that the private ship repair costs averaged 80% less than the U.S. Navy's costs.

40. Slaughterhouses

SOURCE	COMPARISON	FINDINGS
Pausch 1976	In-house vs. private firms in 5 major W. German cities.	Public firms were significantly more costly because of overcapacity and overstaffing.

41. Street Cleaning (refuse collection) also see Refuse Collection (Service Category 35).

SOURCE	COMPARISON	FINDINGS
Stevens 1984	In-house vs. competitively contracted.	Contract cities have 43% lower costs after accounting for quality and other factors.

42. Towing

SOURCE	COMPARISON	FINDINGS
Kaiser 1976	In-house vs. contractors in New York.	Contract towing bids provided cost savings of more than 40%.

TRANSIT See Bus Service (Service Category 6).

UTILITIES See Bus Service (Service Category 6), Electric Utilities (Service Category 10), and Water Utilities (Service Category 43).

43. Water Utilities
(utilities) also see Bus Services and Electric Utilities (Service Categories 6 and 10).

SOURCE	COMPARISON	FINDINGS
Crain and Zardkoohi 1978	In-house vs. private suppliers; comparisons of 112 firms and detailed case study of 2 firms that switched type of ownership.	Public firms were 40% less productive. Private firms had 25% lower costs. Public firms going private had 25% increase in output per employee. Private firms going public had an output per employee decrease of 40%.
Feigenbaum and Teeples 1982	In-house vs. private water companies.	No cost differences were found after controlling for other cost factors.
Mann and Mikesell 1976	In-house vs. private suppliers.	Found public modes were 20% more expensive after adjusting for input prices.
Morgan 1977	In-house vs. private suppliers covering 143 firms in six states.	Costs 15% higher for public firms.

44. Weather Forecasting

SOURCE	COMPARISON	FINDINGS
Bennett and DiLorenzo 1983	In-house vs. private. Based on U.S. GAO studies.	Private weather forecasting contractors provided equivalent weather forecasting with 35% lower cost.

About the Author

John C. Hilke is a Staff Economist in the Federal Trade Commission's Bureau of Economics, specializing in issues relating the role of competition to improved economic performance. He is also the co-author of U.S. International Competitiveness: Evolution or Revolution?

Bibliography

Ahlbrandt, R. 1974. "Implications of Contracting for Public Service." Urban Affairs Quarterly 9:337-58.

Ahlbrandt, R. 1973. "Efficiency in the Provision of Fire Services." Public Choice 16:1-15.

Atkinson, S., and R. Halvorsen. 1986. "The Relative Efficiency of Public and Private Firms in a Regulated Environment: The Case of U.S. Electric Utilities." Journal of Public Economics 20:281-94. (April).

Becker, E., and F. Sloan. 1985. "Hospital Ownership and Performance." Economic Inquiry 23:21-36.

Bellamy, J. 1981. "Two Utilities are Better than One."Reason 12 (October).

Bennett, J., and M. Johnson. 1980. "Tax Reduction Without Sacrifice: Private Sector Production of Public Services." Public Finance Quarterly 8:363-96.

Bennett, J., and T. DiLorenzo. 1983. "Public Employee Unions and the Privatization of Public Services." Journal of Labor Research 4 (1):33-45 (Winter).

Benton, W, Jr. 1979. "Questions for Research and Development." In K. Wedel, A. Katz, and A. Weick, eds. Social Services by Government Contract: a Policy Analysis, 81-91. New York: Praeger.

Borcherding, T., W Pommerehne, and F. Schneider. 1982. "Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries." Journal of Economics (suppl. 2):127-56.

Bundesrechnungshof. 1972. "Bemerkungen des Bundesrechnungshofs zur Bundeshaushaltsrechnung (einschliesslich Bundesvermogensrechnung) fuer das Haushaltsjahr." Bundestagsdrucksache 7/2709:110-111. Cited in T. Borcherding, W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries." Journal of Economics (suppl. 2):127-56.

Bundesregierung Deutschland. 1976. "Agrarbericht 1976." Bundestagsdrucksache (7/4680): 63-65, and Bundestag sdrucksache (7/4681):146. Cited in T. Borcherding, W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries." Journal of Economics (suppl. 2):127-56.

Campbell, A. 1988. "Private Delivery of Public Services: Sorting Out the Policy and Management Issues." Public Management 68(12)3:5 (December).

Canada, Auditor General of, Report of 1985. Ottawa: Office of the Auditor General, Section 13.

Caponiti, F., and E. Booher. 1986. "An Enforcement Alternative." The Parking Professional (November): 16-22.

Caves. D., and L. Christensen. 1980. "The Relative Efficiency of Public and Private Firms in a Competitive Environment: The Case of Canadian Railroads." Journal of Political Economy 88:958-76.

Collins, J., and B. Downes. 1977. "The Effect of Size on the Provision of Public Services: The Case of Solid Waste Collection in Smaller Cities." Urban Affairs Quarterly 12:333-34.

Crain, W., and A. Zardkoohi. 1978. "A Test of the Property Rights Theory of the Firm: Water Utilities in the United States." Journal of Law and Economics 21:395-408.

David, I. 1987. Privatization in America. Washington, D.C.: Touche Ross.

Davies, D. 1982. "Property Rights and Economic Behavior in Private and Government Enterprises: The Case of Australia's Banking System." Research in Law and Economics 3:111-42.

Davies, D. 1977. "Property Rights and Economic Efficiency: The Australian Airlines Revisited." Journal of Law and Economics 20:223-26.

Davies, D. 1971. "The Efficiency of Public versus Private Firms: The Case of Australia's Two Airlines." Journal of Law and Economics 14:149-65.

Deacon, R. 1979. "The Expenditure Effects of Alternative Public Supply Institutions." Public Choice 34(3-4):381-97.

Domberger, S., and J. Piggott. 1986. "Privatization Policies and Public Enterprise: A Survey." Economic Record 62:145-62 (June).

Edwards, F., and B. Stevens. 1979. "Relative Efficiency of Alternative Institutional Arrangements for Collecting Refuse: Collective Action vs. the Free Market." New York: Columbia University. Mimeo.

Feigenbaum, S., and R. Teeples. 1982. "Public Versus Private Water Delivery: a Hedonic Cost Approach." Claremont, California: Claremont Graduate School (June). Cited in E. Savas, Privatization: The Key to Better Government, 149-150. Chatham, New Jersey: Chatham House Publishers, Inc.

Finsinger, J. 1981. "Competition, Ownership and Control in Markets with Imperfect Information: The Case of the German Liability and Life Insurance Markets." Berlin: International Institute of Management, Berlin. Mimeo. Cited in T. Borcherding, W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries." Journal of Economics (suppl. 2):127-56.

Fischer-Menshausen, H. 1975. "Entlastung des Staates durch Privatisierung von Aufgaben." (Wirtschaftsdienst 55:545-52. Cited in T. Borcherding, W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production in Five Countries." Journal of Economics (suppl.2):127-56.

Fixler, P., Jr., and R. W. Poole. 1987. "Status of State and Local Privatization." in S. Hanke, ed., Prospects for Privatization, Proceedings ofthe Academy of Political Science 36(3):164-78.

Grannemann, T.R. Brown, and M. Pauly. 1986. "Estimating Hospital Costs: a Multiple Output Analysis." Journal of Health Economics 5:107-27.

Grant, J., and D. Bast. 1987. "Corrections and the Private Sector: a Guide for Public Officials." Chicago: Heartland Institute (May).

Hamburger Senat. 1974. Abschlussbericht des Beauftragten zur Gebaudereinigung. Hamburg: Hamburger Senat. Cited in T. Borcherding, W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries."Journal of Economics (suppl.2):127-56.

Hanke, S. 1985a. "The Literature on Privatization." In S. Butler, ed., The Privatization Option, 83-97. Washington, D.C.: The Heritage Foundation.

Hatry, H. 1983. A Review of Private Approaches for Delivery ofPublic Services. Washington, D.C.: Urban Institute.

Hellman, R. 1972. Government Competition in the Electric Utility Industry.New York: Praeger.

Privatization Cost Savings

Hilke, J. 1986. "The Impact of Volunteer Firefighters on Local Government Spending and Taxation." Municipal Finance Journal 7(1):33-44 (Winter).

Hirsch, W. 1965. "Cost Functions of Urban Government Services: Refuse Collection." Review of Economics and Statistics 47:87-92. Cited in T. Borcherdino, W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries." Journal of Economics (suppl.2):127-56.

Holmes, P. 1985. "Taking Services Private." Nation's Business (August):20-25.

Houlden, P., and S. Balkin. 1985. "Quality and Cost Comparisons of Private Bare Indigent Defense Systems: Contract vs. Ordered Assigned Counsel." Journal of Criminal Law and Criminology 76(1):176-200.

Kaiser, C. 1977. "Custodial Services in Schools Termed Wasteful by Goldin." New York Times (January):45.

Kaiser, C. 1976. "Private Tollways." New York Times (September 4).

Kemper, P., and J. Quigley. 1976. The Economics of Refuse Collection. Cambridge, Mass.: Ballinger.

Kennedy, K., and R. Mehr. 1977. "A Case Study in Private versus Public Enterprise: The Manitoba Experience with Automobile Insurance." Journal of Risk and Insurance 4:595-621.

Kitchen, H. 1976. "A Statistical Estimation of an Operating Cost Function for Municipal Refuse Collection." Public Finance Quarterly 4:56-76.

Kristensen, O. 1983. "Public Versus Private Provision of Governmental Services: The Case of Danish Fire Protection Services." Urban Studies 20:1-9.

Lindsay, C. 1976. "A Theory of Government Enterprise."Journal of Political Economy 84(2):1061-77.

Lindsay, C. 1975. Veterans Administration Hospitals. Washington, D.C.: American Enterprise Institute.

McDavid, J., and E. Butler. 1984. Fire Services in Canadian Municipalities. Victoria, B.C., Canada: University of Victoria. Cited in E. Savas, Privatization: The Key to Better Government. Chatham, New Jersey: Chatham House.

Mann, P., and J. Mikesell. 1976. "Ownership and Water Systems Operations." Water Resources Bulletin 12:995-1004.

Mehay, S. 1979. "Intergovernmental Contracting for Municipal Police Services: An Empirical Analysis." Land Economics 55(1):59-72 (February).

Mehay, S., and R. Gonzalez. 1985. "Economic Incentives Under Contract Supply of Local Government Services." Public Choice 46:79-86.

Meyer, R. 1975. "Publicly Owned versus Privately Owned Utilities: A Policy Choice." Review of Economics and Statistics 57:391-99.

Moore, S. 1988. "Privatization in America's Cities: Lessons for Washington, Part 1." Heritage Foundation Backgrounder- #652 (May 31).

Moore, S. 1987. "Contracting Out: A Painless Alternative to the Budget Cutter's Knife." Cited in S. Hanke, ed., Prospects for Privatization, Proceedings of the Academyof Political Science 36(3):60-73.

Moore, T. 1970. "The Effectiveness of Regulation of Electric Utility Prices." Southern Economic Journal 36:365-75.

Morgan, W. 1977. "Investor Owned vs. Publicly Owned Water Agencies: An Evaluation of the Property Rights Theory of the Firm." Water Resources Bulletin 13;775-82.

Morlok, E., and F. Moseley. 1986. "Potential Savings from Competitive Contracting of Bus Transit." Report R-UP9951-86-1, University of Pennsylvania Civil Engineering Department (April).

Morlok, E., and P. Viton. 1985. "The Comparative Costs of Public and Private Providers of Mass Transit." in C. Lave, ed., Urban Transit. 233-54. San Francisco: Pacific Institute. Cited in E. Savas, Privatization. The Key to Better- Government. Chatham, New Jersey: Chatham House.

Muth, F., 1973. Public Housing: An Economic Evaluation. Washington, D.C. Cited in T. Borcherding, W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries." Journal of Economics (suppl. 2):127-56.

Noether, M. 1987. Competition Among Hospitals. Washington, D.C.: Federal Trade Commission.

Oelert, W. 1976. "Reprivatiaierung des offentlichen Personal verkehrs, wo und wie?" Der Personenverkehr 4:108-14. Cited in T. Borcherding, W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries." Journal of Economics (suppl. 2):127-56.

Pausch, R. 1976. Moglichkeiten einer Privatisierung offentlicher Unternehmen. Gottingen: Schwartz. Cited in T. Borcherding, W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production: Evidence from Five Countries." Journal of Economics (suppl. 2);127-56.

Perry, J., and T. Babitsky. 1986. "Comparative Performance in Urban Transit: Assessing Privatization Strategies." Public Administration Review (January/February):57-66.

Peterson, G. 1951. "Pricing and Privatization of Public Services." Urban Institute Project Report (July).

Petrovic, W., and B. Jaffee. 1977. "Aspects of the Generation and Collection of Household Refuse in Urban Areas." Bloomington: Indiana University. Mimeo. Cited in T. Borcherding, W. Pommerehne, and F. Schneider. "Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries." Journal of Economics (suppl.2):127-56.

Pfister, W. 1976. "Steigende Millionenverluste der Bayerischen Staatsforstverwaltung: Ein Dauerzustand'?: Mitteilungsblatt des Bayerischen Waldbesitzerverbandes," 2:1-9. Cited in T. Borcherding. W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries." Journal of Economics (suppl.2):127-56.

Pier. W., R. Vemon, and J. Wicks. 1974. "An Empirical Comparison of Government and Private Production Efficiency." National Tax Journal 27:653-56.

Pommerehne, W., and F. Schneider. 1985. Private or Public Prndractiorr: A Europeart Perspective. Aarhus, Denmark: University of Aarhus.

Poole, R. W., Jr. 1980. Cutting Back City Hall. New York: Universe Books.

Poole, R. W., Jr. 1976. "Fighting Fires for Profit." Reason 8(1):6-11 (May).

President's Commission on Privatization. 1988. "Privatization: Toward More Effective Government." Washington, D.C.: President's Commission on Privatization.

Primeaux, W. 1975, "A Reexamination of the Monopoly Market Structure for Electric Utilities." In A. Philips, ed., Promoting Competition in Regulated Markets, 175-200. Washington, D.C.: Brookings Institution.

Rechnungshof Rheinland-Pfalz. 1972. "Jahresbericht uber die Prufung der Haushaltsund Wirtschaftsfuhrung sowie der Landeshaushaltsrechnung 1977." LandtagsDrucksache Rheinland-Pfalz 7/1750:81-84. Cited in T. Borcherding, W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production: Evidence from Five Countries." Journal of Economics (suppl.2):127-56.

Register, C., and E. Bruning. 1987. "Profit Incentives and Technical Efficiency in the Production of Hospital Care." Southern Economic Journal 53:899-914.

Rice Center for Urban Mobility Research. 1985. New Directions in Urban Transportation: Public/Private Partnerships. Washington, D.C.; U.S. Department of Transportation, Urban Mass Transportation Administration.

Robinson, J., and H. Luft. 1988. "Competition. Regulation, and Hospital Costs, 1982-1986." Journal of the American Medical Association 260:2676-81.

Roth, G. 1987. "Airport Privatization." In S. Hanke. ed., Prospects .for Privatization, Proceedings of the Academy of Political Science 36(3):74-82.

Savas, E. 1987. Privatization: The Key to Better Government. Chatham, New Jersey: Chatham House Publishers.

Savas, E. 1981. "Intracity Competition Between Public and Private Service Delivery." Public Administration Review 41:46-52 (January/February).

Savas, E. 1980. "Comparative Costs of Public and Private Enterprise." In W. Baumol, ed., Public and Private Enterprise in a Mixed Economy, 234-94. New York and London: St. Martin's Press.

Savas, E. 1977a. "An Empirical Study of Competition in Municipal Service Delivery." Public Administration Review 37:717-24.

Savas, E. 1977b. Evaluating the Organization and Efficiency of Solid Waste Collection. Lexington, Mass.: Lexington Books.

Savas, E. 1974. "Municipal Monopolies vs. Competition in Delivering Urban Services." In W. Hawley and D. Rogers, eds., Improving the Quality of Urban Management, 437-500. Beverly Hills, California: Sage Publications.

Schlesinger, M., R. Dorwart, and R. Pulice. 1986. "Competitive Bidding and States' Purchase of Services: The Case of Mental Health Care in Massachusetts." Journal of Policy Analysis and Management 5(2):245-63 (1986).

Schneider H., and C. Schuppener. 1971. Soziale Absicherung der Wohnungsmarkwirtschaft durch Individualsubventionen. Gottingen: Vandenhoeck and Ruprecht. Cited in T. Borcherding, W. Pommerehne, and F. Schneider, "Comparing the Efficiency of Private and Public Production: Evidence from Five Countries." Journal of Economics (suppl.2):127-56.

Shortell, S., and E. Hughes. 1988. "The Effects of Regulation, Competition, and Ownership on Mortality Rates Among Hospital Inpatients." New England Journal of Medicine 318(17):1100-07.

Simon, J., and D. Simon. 1987. "Socialism Versus RPM Versus Free Enterprise: State Liquor Distribution Systems Revisited." Unpublished.

Smith, R. 1983. "Feet to the Fire." Reason 14:23-29 (March). Cited in K. Clarkson and P. Fixler, Jr.,The Role of Privatization in Florida's Growth. Tallahassee, Fla.: Florida Chamber of Commerce Foundation.

Spann, R. 1977. "Public versus Private Provision of Governmental Services." In T. Borcherding, ed., Budgets and Bureaucrats: The Sources ofGovernment Growth, 71-89. Durham, N.C.: Duke University Press.

Stevens, B. 1984.Delivering Municipal Services Efficiently: A Comparison ofMunicipal Services Efficiently: A Comparison of Municipal and Private Service Delivery. Washington, D.C.; U.S. Department of Housing and Urban Development.

Stocker, F. 1973. "Value Determination: The Assessor's Staff vs. the Private Appraisal Firm." In Property Tax Reform: The Role ofthe Property Tax in the Nation's Revenue System. Chicago: International Association of Assessing Officers. Cited in R. W. Poole, Jr., Cutting Back City Hall. New York: Universe Books.

Stolzenberg, R., and S. Berry. 1985. A Pilot Study of the Impact of' OMB Circular A-7h on Motor Vehicle Maintenance Cost and Quality in the U.S. Air Force. Santa Barbara. California: Rand Corporation.

Talley, W., and E. Anderson. 1986. "Urban Transit Firms Providing Transit, Paratransit. and Contracted-Out Services." Journal of Transport Economics and Policy 20(3):353-68 (September).

Teal, R., G. Guiliano, and E. Morlok. 1986. "Public Transit Service Contracting. Washington, D.C.: U.S. Urban Mass Transportation Administration (March).

U.S. General Accounting Office. 1985b. DOD Functions Contracted Out Under OMB Circular A-76: Contract Cost Increases and the Effects on Federal Employees. Washington, D.C.: GAO (April IS).

U.S. General Accounting Office. 1982a. Replacing Post Offices With Alternative Services: A Debated But Unresolved Issue. Washington, D.C.: U.S. GAO (September 2).

U.S. General Accounting Office. 1982b. The Postal Service Can Substantiall1v Reduce Its Cleaning Costs.Washington, D.C.: U.S. GAO (December 28).

U.S. General Accounting Office. 1981a. Review of DOD Contracts Awarded Under OMB Circular A-76. Washington, D.C.: U.S. GAO (August 26).

U.S. General Accounting Office. 1981b. GSA's Cleaning Costs are Needlessly Higher than in the Private Sector Washington, D.C.: U.S. GAO (August 24).

Valente, C., and L. Manchester. 1984. Rethinking Local Services: Examining Alternative Delivery Approaches. Management Information Service Special Report #!2. Washington. D.C.: International City Management Association.

Wallace. R., and P. Junck. 1974. "Implications of Contracting for Public Service." Urban Affairs Quarterly 9:337-58.

Walters, A. 1987. "Ownership and Efficiency in Urban Buses." In S. Hanke, ed., Prospects for Privatization, Proceedingsof the Academy of Political Science 36(3):83-92.

Wedel, K., A. Katz, and A. Weick, eds. 1979. Social Services by Government Contract:A Policy Analysis. New York: Praeger.

Weicher, J. 1980. Housing. Washington, D.C.: American Enterprise Institute.

White, L., 1983. The Public Library in the 1980's: The Problems of Choice.Lexington, Massachusetts: Lexington Books.

Wilson, G.. and J. Jadlow. 1982. "Competition, Profit Incentives, and Technical Efficiency in the Nuclear Medicine Industry." Indiana University, Bloomington. Mimeo. Cited in T. Borcherding, W. Pommerehne. and F. Schneider, "Comparing the Efficiency of Private and Public Production: Evidence from Five Countries." Journal of Economics (suppl. 2):127-56.

Costs Savings from Privatization

A Compilation of Study Findings

Contents

Executive Summary

I. Introduction

II. Elements of an Open/Public Bidding System

Airline Operation - Fire Protection

Forestry - Military Support

Motor Vehicle Maintenance - Refuse Collection

Schools - Weather Forecasting

About the Author

Bibliography