I’ve been tinkering with this column for some time now, but Sunday’s article over at Houston Strategies prompted me to pull it off the back burner and get it ready. Tony appears to be someone who gets it.

I’ve never understood why it’s bad for a company (i.e. “capital”) to abuse monopoly power to increase profits but good for labor to do the same thing.

Neither have I. But here’s where I went “OMG, he really gets it!”

As mayor, Goldsmith championed two ideas, privatization and competition. Privatization alone didn’t work, Goldsmith wrote, because private monopolies weren’t that much more efficient than public ones. So simply turning the water department over to a private company wouldn’t accomplish much. But if you could carve up the city into zones and let a number of providers (including city workers themselves) compete to haul garbage, tow abandoned cars, fix potholes and so on, wonderful and surprising things happened, Goldsmith found. Services improved, work processes were streamlined, productivity soared and costs declined dramatically.

Amazingly, city workers often turned out to be the high-quality, low-cost providers, once they were allowed to compete. “The problem,â€? Goldsmith wrote in his book, “is that [municipal employees] have been trapped in a system that punishes initiative, ignores efficiency and rewards big spenders.â€? A system … well, like San Diego city government.

Or Houston’s.

I have no experience with managed competition, but since Houston Strategies has covered that angle already, I’m going to stick with looking at privatization. It’s the commonly-suggested pancea to “cure” government inefficiency (and get rid of those lazy, porn-surfing civil servants). Privitization! Everyone knows that private businesses are much more efficient than public entities!

Except when they’re not.

Again and again, politicians present privitization to the public as the solution to all the problems in government. And almost every time, the public is disappointed and surprised to find out it doesn’t work. First come the complaints of even worse service than before. Some hand-wringing and posturing happens, and maybe the problems get fixed. Maybe they don’t, or maybe some bandages get applied. Sometimes, the problems only get worse. . . .the stench of corruption in the awarding of the contracts starts to appear. Finally, there is the promise of some “reform” and either a few wrists get slapped, or the whole “experiment” of privitization is ended.

So why does simple privatization have such a hard time succeeding, whereas managed competition seems to rock?

In 1999, Atlanta tried to privitize their water service. In only four years, it became such a disaster that they ended the contract, and took the service back under city control. Houston narrowly avoided the same fate, when Reliant passed on bidding for the city’s water service, and a whiff of suspicion surrounded the Azurix lobbying effort, making the council skittish. There are lessons to be learned from each of those efforts, and why they all failed or weren’t tried.

How is it possible for a private business be more efficient than a government, yet perform as poorly or worse when given the job? When does privitization work, and when does it not work? The answer to those questions is rooted in four basic questions:

1. How is the contractor being paid?
2. What is the contractor being asked to do?
3. How free is the contractor to do it like a private business?
4. Was the contractor the best candidate, or the best-connnected candidate?

In today’s article, we’re going to look at the first question. Later articles will look at the others in turn.

Bluntly, for-profit companies don’t do the work for free; they expect to get paid. This is the biggest single obstacle to improvement through privatization; by definition it’s going to cost more. There are two major ways to pay the company: A % of any savings or revenue increase. A flat fee. A % of the yearly budget.

Of these, the worst is the first: By tying the company’s revenue to savings or revenue increases, the company is motivated to enhance those two items at the expense of all others, including (especially) customer satisfaction. They will perform no better than they must in order to keep the contract.

As I’ve anecdotally noted in earlier articles, one of the places that government sucks is in procurement. Especially procurement of things that have short life cycles, like major electronics. By the time a bid process is completed, the equipment or software being bought may be out of date. Or money is lost due to inefficiency, because some needed upgrades take too long to acquire.

Another area that private industry excels is in hiring flexibility. Hire them, fire them, lay them off; it’s easy if there’s no union or civil service rules in the way. Thus the private company can handle seasonal or emergency surges better.

A third advantage of private business is streamlining proceedures. Small and mid-size businesses are very good at stripping out unnecessary steps while keeping or strengthening necessary ones. Big businesses tended to become almost as bad as governments. (At one time, you could determine someone’s pay at GM by counting ceiling tiles to determine the square footage of their office. They were that bad.)

So there is a natural advantage to privatization where there’s been featherbedding, inefficiency, or procurement waste. The flip side to that is if any of those factors are reversed, privitization becomes a drag, instead of a boon. Where staffing has been stripped to the bone and pay is low, where improving effeciency requires capital investment, or procurement is not a major factor, the power of privatization to improve efficiency is negligible.

And that is as good of a point as any to break, because we’re about to segue’ into the next question: “What is the contractor being asked to do?”