The justification for privatisation is that private companies are able to do the job better, cheaper and more effectively than the government. In this context, the idea of privatising public goods and services to reduce costs makes sense. By privatising highways and postal services, large expenses will be eliminated from the government’s budget, therefore reducing deficits.
Outsourcing public goods and services will encourage competition and thus, drive prices down. However, this is not always the case. It is important to note that a private company’s main motivation is not serving the public interest, but profit.
As corporate profits are the measurement of corporate success, privatised companies are likely to abuse their market power to maximise profits for themselves. This profit motive can reduce service quality or even burden the public if charges are raised.
When the government decides to outsource a function or service, it is not without risk. More often than not, the risk of corruption and fraud exists. In addition to these risks, privatisation and outsourcing include giving up the government’s control while relying on private companies, which could potentially result in wasting large amounts of money instead of cost savings.
In most cases, privatisation may worsen the fiscal situation due to loss of revenue from privatised state-owned enterprises, or tax evasion by the privatised entity. Privatisation requires a significant amount of administrative resources to monitor and oversee, or they run the risk of poor contractor performance and costly disasters.
Privatisation also could burden the public when charges or fees are not reduced, or when services provided are not up to par. Instead of trying to provide a public good for all, many are excluded because it is considered not commercially viable. Therefore, privatisation may worsen overall enterprise performance.
Before governments decide to privatise or outsource, it is best to first perform a thorough cost-benefit check to see if a third-party can effectively deliver services better or cheaper. Choosing the lowest bid in a bidding war could backfire, when cost savings are unrealistic and are unable to be done, paired with underperformance and inadequate monitoring and oversight.
In this situation, the cost of privatising goods or services would be more expensive than in-house services for governments.
