The Other Side of Privatization

Between April and June of this year, more than 2,000 immigrant children were sent to internment camps without due process because their parent or parents purportedly entered the country illegally, which, by the way, is a misdemeanor. Some of the camps were hastily constructed by private-sector firms, which has again raised the question of whether some government services—no matter how reprehensible—should be outsourced to for-profit corporations.

The justification for outsourcing, typically made from the right side of the aisle, is that capitalism is inherently more efficient than bureaucracy, therefore less costly. That’s exactly the sort of general, overarching claim that we on The Other Side are compelled to question.

Fair warning: We believe that capitalism is more than just a good thing; it’s essential to the well-being of the planet and its inhabitants. Before those of you on the left collapse into foaming-at-the-mouth fits of apoplexy, here’s the but: We doubt that capitalism is good for everything, just as we doubt that everything tastes better with ketchup.

To the extent that we can, let’s apply our collective intellect to examining (in five easy steps) the claim that outsourcing government services to privately-owned companies is more cost efficient than continuing down the old-school, “deep state” bureaucratic path.

Step 1: The classic motive for creating profitable companies is maximization of shareholder wealth. Profits vary from industry to industry, but, in our (lengthy) experience, a pretax profit of 15% per annum is generally considered healthy, therefore a workable assumption.

For those of you who forgot to take accounting in college, that means that fifteen cents out of every dollar a private company makes are set aside for profit and taxes.  Government agencies don’t make profits and don’t pay taxes.

Step 2: By definition, efficient markets are competitive, which in turn requires privately-owned companies to promote and sell their services. The cost varies from as little 10% of revenue to as much as 30%, again depending on the industry. Since we’re a conservative bunch, let’s assume that the average cost of promoting and selling services in competitive markets is circa 15% of revenues on an ongoing basis.

In other words, fifteen cents of every dollar a private company earns are used to pay for a sales force, advertising, media relations, and similar functions. Some government offices, the US Army for instance, also advertise, and they have sales forces (called recruiting offices), but the cost in minuscule in comparison. As far as we know, no one in Washington is considering the privatization of the US Army, although mercenaries were used in Iraq—at a cost of as much as $1,500 per day.  In comparison, an Army captain makes about $180 per day.

Step 3: Outsourcing isn’t free. In order to ensure delivery of quality, low-cost services to the public, government agencies are required to manage their for-profit service providers. Since government management is inefficient, let’s assume for our purposes that the cost of oversight is about 5% of the overall cost to the taxpayer.

To summarize: We’ve estimated so far that private service providers have to be about 35% more efficient (15% + 15% + 5% = 35%) than government agencies, just to break even on a cost basis. We can argue about the numbers all day. We argued about the numbers among ourselves, but the logic is indisputable.

Step 4: Since private companies exist to maximize shareholder returns, the provision of services can be no more than a means to an end. In other words, the act of privatization subordinates the provision of service to the production of wealth. Government agencies are intended to make service provision their top priority, and the conscientious, well-managed ones do.

Step 5: Over the course of our career, we worked with or directly for twelve high-tech CEOs. Half were corrupt, meaning they manipulated the books for personal gain. Despite our experience, we have no data from credible sources which suggests that private-sector companies are more corrupt than public-sector agencies. So let’s call it a tie.

By definition, the act of outsourcing means that two entities are involved in service provision, which doubles the odds that at least one of them is corrupt. Case in point: The reconstruction of Puerto Rico’s electrical grid after Hurricane Maria was originally outsourced to a one-horse company from Montana.

We on The Other Side are left with four questions:

1) Who wins when provision of services is subordinated to profit? Hint: It’s a three-syllable synonym for owners that starts and ends with the letter “s.”

2) If some private-sector service providers are indeed 35% (or so) more efficient than their public-sector counterparts, is it a structural problem or a management problem? Hint: It can’t be a structural problem. See the above.

3) Does the probability of corruption increase or decrease with outsourcing? Hint: One plus one cannot equal one. See the Principia Mathematica.

4) Where do we draw the line? Should education, diplomacy, law enforcement, and tax collection be privatized, too? Hint: The answer isn’t “yes.”

The bottom line: Privatization of public-sector services is a structurally inefficient and counterproductive way to put tax dollars in the pockets of private-sector shareholders. There may be exceptions, but they’re few and far between.

Full disclosure: As of this writing, we own shares or equivalents in seven for-profit companies and partnerships. We think privatization is a dumb idea anyway.


1) We’re fully aware of the contention that for-profit companies provide higher-quality services than their public-sector counterparts. In the absence of relevant surveys of customer satisfaction, however, service quality is wholly subjective.

2) We’re also aware that service quality is correlated with funding. If, in their collective wisdom, Congress and the president elect to underfund government services, then that act alone may be responsible for perceived quality deficits.

It’s possible, therefore, that irresponsible governments could create service-quality deficits by underfunding agency providers—for the sole purpose of (eventually) outsourcing those services to “more efficient” for-profit corporations. But our government would never contemplate such a thing, right?


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