Defined in the strictest of terms, privatization means the sale of public utilit ies to private concerns.

But as Public Works magazine noted, "in the broader s ense of the term and the definition that applies to most contemporary discussions , privatization is the contract operation of a public utility or service by a pr ivate entity. It most often occurs in solid waste management, water/wastewater t reatment, fleet maintenance, road/bridge building and maintenance, and municipal management." Small businesses that provide services in these and other areas (f or-profit school academies, for instance) have been among the biggest winners in the growing national trend toward privatization. As Public Works commented, " opportunities abound for private concerns to offer to manage public services wit h a close eye on cost and efficiency." Privatization efforts in America today are in large part a reaction to dissatis faction with government performance and/or unhappiness with the level of taxatio n that is levied on individuals and businesses by municipal, state, and federal governments to pay for services. This trend has grassroots origins, with local g overnments in the forefront and state and federal levels of government trailing behind. The purpose of privatization is to take advantage of the perceived cost efficiencies of private firms. Indeed, proponents of the practice say that priva tization results in better performance of needed services at lesser cost. "The g overnment usually allows the firm to choose how it will satisfy the contract," w rote Simon Hakim and Edwin Blackstone in American City and County. "For exampl e, a contract may specify trash removal services for the area residents a certai n number of times per week. The firm is normally allowed to choose the methods i t will use to perform the requirements of the contract, the trash trucks, used, and the number of workers on each trash truck. The profit motive will encourage the firm to produce the services efficiently at the least cost, a motive absent in government provision of services." Even after privatization, however, governm ent monitoring is necessary in order to ensure that satisfactory services are pr ovided to residents. GROWTH OF PRIVATIZATION "Privatization may be a popular buzzword today, but the concept has been around since the first municipality hired Joe and his wagon to pick up the trash inste ad of getting city employee Frank to do it," remarked Public Works. "The diffe rence today is that privatization is encroaching into all areas of public admini stration. And governments are expecting public agencies to compete dollar for doll ar with private operators or surrender management of services. For years, our coun try has supported the idea that a public workforce was the best provider of esse ntial services. Public employees would reliably and efficiently protect the publ ic safety and deliver water and power; maintain roads and bridges; collect refus e and treat sewage . In return, public employees enjoyed a certain job stability a nd a wide range of desirable benefits." But proliferating responsibilities, fisc al belt-tightening, sometimes lackluster performance by workers, and in the cases of larger cities, especially festering problems with infrastructure led increasing numbers of city planners and public policy makers to look to privatization. Today, several of the nation's largest cities, including New York, Indianapolis , Philadelphia, and Phoenix have contracted out a broad spectrum of services tha t were previously attended to exclusively by city employees. Indeed, New York Ci ty opened up bidding from private companies on 40 different municipal services i n 1995alone. Smaller cities and towns have instituted outsourcing philosophies a s well, and many service businesses, both large and small, have garnered signifi cant new contracts as a result. American City and County reported that various analyses indicate that this trend will likely continue. "Cost pressures, both i nternal and external, are rated as the most important reasons that officials dec ided to privatize a service," stated a report on privatization conducted by a co alition of Illinois academic, business, and municipal groups. "The main obstacle is the lack of information or evidence of the benefits of privatization. Many o fficials also report they would like more information on certain aspects of priv

atization. It can be deduced that providing additional information on privatizat ion to city officials will lead to increased acceptance." VARIATIONS IN PRIVATIZATION The term privatization has been applied to three different methods of increasin g the activity of the private sector in providing public services: 1) private se ctor choice, financing, and production of a service;2) public-sector choice and financing with private sector production of the service selected; 3) and deregul ation of private firms providing services. In the first case, the entire respons ibility for a service is transferred from the public sector to the private secto r, and individual consumers select and purchase the amount of services they desi re from private providers. For example, solid-waste collection is provided by pr ivate firms in some communities. The third form of privatization means that gove rnment reduces or eliminates the regulatory restrictions imposed on private firm s providing specific services. The second version of privatization refers to joint activity of the public and private sectors in providing services. In this case, consumers select and pay fo r the quantity and type of service desired through government, which then contra cts with private firms to produce the desired amount and category of service. Al though the government provides for the service, a private firm carries out the a ctual execution of it. The government determines the service level and pays the amount specified in the contract, but leaves decisions about production decision s to the private firm. ADVANTAGES AND DISADVANTAGES OF PRIVATIZATION The merits and drawbacks of privatization have been subjects of considerable de bate among business-people, city leaders, and public employees alike. Indeed, ea ch element of privatization from its apparent cost-saving properties to its possib le negative impact on minority workers provokes strong reaction. About the only th ing that everyone can agree on is that the trend has been enormously beneficial to owners of small- and mid-sized businesses. Following are some privatization i ssues that communities, public providers, and private providers all need to cons ider: COSTS AND PRODUCTIVITY Proponents of privatization argue that whereas government producers have no inc entive to hold down production costs, private producers who contract with the go vernment to provide the service have more at stake, thus encouraging them to per form at a higher level for lower cost. The lower the cost incurred by the firm i n satisfying the contract, the greater profit it makes. On the other hand, the a bsence of competition and profit incentives in the public sector is not likely t o result in cost minimization. Of course, small- and mid-sized companies also ne ed to make sure that they do not sacrifice an acceptable profit margin in their zeal to secure a contract. Although private firms may pay lower wages and fringe benefits than local gover nments, the major cause of the cost differences between the private and governme ntal sectors is employee productivity. Lower labor costs may arise either from l ower wages (which means that the government was paying wages higher than necessa ry for a given skill) or from less labor input (which means that the government retaining more employees than necessary to fulfill need). Private firms have mor e flexibility than governmental units to use part-timers to meet peak periods of activity, to fire unsatisfactory workers, and to allocate workers across a vari ety of tasks. Moreover, critics of municipal governments argue that they are les s likely to reward individual initiatives or punish aberrant behavior when compa red with their private sector counterparts. Finally, supporters of privatization argue that the trend has spurred improveme nts in performance by public service providers. "Evidence shows that public agen

cies should be allowed to bid on contracts along with private operators," wrote Blackstone and Hakim, "since this exposure to competition has led many public ag encies to improve their service delivery and significantly reduce costs." Service. Expected quality of service varies from community to community, depen ding on a wide range of factors such as historical service levels, local taxatio n, and possible changes in service requirements. Moreover, Public Works observ ed that good service is sometimes defined differently by citizens, public servic e providers, and private service providers. "Response time and public confidence need to be taken into account when judging the pros and cons of private/public, " stated Public Works. "Stability may be a concern in the eyes of the public; a government agency cannot walk away at the end of a contract period." Operating Philosophies. Proponents of privatization state that private firms m ay be more likely to experiment with different and creative approaches to servic e provision, whereas government tends to stick with the current approach since c hanges often create political difficulties for elected officials. In addition, p rivate firms may use retained earnings to finance research or to purchase new ca pital equipment that lowers unit production costs. On the other hand, government may not be able or willing to allocate tax revenues to these purposes as easily , given the many competing demands on the government's budget. Regulatory Realities. In some cases, local, state, and federal regulations may determine whether a service can even be handed over to a private provider. More over, "the ultimate responsibility (in the eyes of the public, if not the courts ) rests with the public agency that assigns operating rights to a private concer n," stated Public Works. "The local government will still be held responsible for the cost and quality of the service under contract." Competition. Supporters of privatization often cite the competitive environmen t that is nourished by the practice as a key to its success. Private owners have a strong incentive to operate efficiently, they argue, while this incentive is lacking under public ownership. If private firms spend more money and employ mor e people to do the same amount of work, competition will lead to lower margins, lost customers, and decreased profits. The disciplining effect of competition do es not occur in the public sector. Still, even advocates of privatization agree that private ownership produces the public benefits of lower costs and high qual ity only in the presence of a competitive environment. Privatization cannot be e xpected to produce these same benefits if competition is absent. Given this real ity, analysts strongly encourage municipal governments to make sure that the bid ding process is an ethical one. Monitoring and Enforcement. Critics of privatization of government services co ntend that problems sometimes arise in various aspects of the process, including the bidding process, the precise specification of the contract, and the monitor ing and enforcement of the contract. For example, some observers have raised con cerns that potential suppliers may initially offer a price to the government tha t is less than actual production costs to induce the government to transfer the service to the private sector or to win the contract. Subsequently, the contract or would then demand a higher price after the government has dismantled its own production system. Such "low-balling" in the bidding process may be reduced if t he local government requires relatively long-term contracts, or constructs contr acts that give them flexibility in hiring and firing outside firms. Public Personnel Management magazine also noted that governments need to take several important precautions before handing out a contract in order to avoid li tigation and legal liability. These precautions include detailed performance spe cifications for service providers, guidelines for the evaluation of competitive bids, and labor relations strategies. For their part, private bidders need to ma ke certain that these precautions are reasonable ones that will not unduly impac

t their ability to perform both profitably and professionally. Commonly utilized methods of contract monitoring, meanwhile, include performanc e appraisals, tracking complaints, citizen satisfaction surveys, reports from co ntractors, field observations, and ongoing cost comparisons. Employment. Privatization is understandably viewed as an alarming trend by pub lic employee groups. In some cases, privatization results in layoffs of public s ector employees, although governments often reassign them to other government jo bs, place them with private contractors, or offer them early retirement programs . These possibilities have been particularly upsetting to public employee unions , which have been at the forefront of efforts to block privatization. Indeed, on e of the principal objections to privatization is that it replaces positions tha t featured compensation that could be used to support a family with private sect or spots that offer modest compensation. Indeed, critics such as the Journal of Commerce and Commercial 's David Morris contend that private companies are onl y able to promise meaningful financial savings over public agencies because of t he comparatively low salaries they pay their workers. Another charge leveled at privatization initiatives is that they too often have a disproportionate impact on minorities. "Governments often hire minorities in larger proportions than oth er workers," wrote Blackstone and Hakim. "Thus, if government size is reduced, r elatively more minority workers are likely to lose their jobs." In recognition o f these fears, some service contracts now require private contractors to hire af fected public employees or give them hiring preference. Demographic and Geographic Factors. Smaller municipalities may incur relativel y high unit costs if they operate their own services as a result of not being ab le to achieve economies of scale. These localities may benefit from turning to a contractor that serves multiple communities. Privatization is also more accepta ble in fast-growing communities. If services are being expanded to cover new res idents, private contractors are less likely to displace existing public sector e mployees. Finally, contracting out varies with the number of services provided t o residents. As the number of services increases, differences in the cost and ef fectiveness with which they are provided become more apparent. Therefore, munici palities providing diverse services may be more open to exploring private sector options than those localities where services are more limited.