Privatization and Public Management
KeywordsPublic Sector Service Quality Public Management Privatization Strategy Public Service Delivery
- New public management
Process in which business principles and private sector management techniques are transferred into the public sector in correspondence with, and based on, a neoliberal understanding of the economy and the State (Drechsler 2005, p. 95).
Any action that transfers some or all of the ownership and/or control of state-owned enterprises to the private sector (Zahra et al. 2000, p. 511).
- Public management
The merger of a normative orientation of traditional public administration and the instrumental orientation of general management (Perry and Kraemer 1983, p. x).
Since the late 1970s early 1980s, Western governments have made attempts to reform the organization and management of the public sector. They do so by adopting a business-like approach as promoted by reform movements such as New Public Management (NPM). NPM postulates the neoliberal idea of business-like government which implies the transfer of private sector values and private sector management techniques into the public sector
Supporters of NPM argue that Western governments have become too big, costly, inefficient, ineffective, overly bureaucratic, and too little responsive to public needs (Osborne and Gaebler 1992). In order to overcome these problems, and to enhance the efficiency, effectiveness, and legitimacy of the public sector, roughly two solutions are suggested. The first solution consists of a closer involvement of the private sector within the process of public service delivery via the application of privatization strategies. The second solution concerns the reform of the management and organization of the public sector and consists of the incorporation of private sector values and private sector management techniques and approached into the public sector.
The term privatization gained popularity between the late 1970s and 1990s with the rise of conservative governments in, amongst other countries, the United Kingdom, Australia, and the United States. Privatization can be considered as an organizational manifestation of the NPM that has been ascribed the potential to impede or even reverse the growth of government. Although Anglo-Saxon countries like Australia and New Zealand were first in embracing the privatization strategy, other Western countries like Sweden, the Netherlands, and France have adopted privatization strategies too as a “centerpiece of their national policies” (Zahra et al. 2000, p. 509). Privatization strategies have even been applied in developing countries since they are suggested to have “the potential to transform national economies, industries and organizations by infusing a spirit of entrepreneurial risk taking” and to support social progress and economic renewal and development (Zahra et al. 2000, p. 509). International comparative research demonstrates that differences between countries with respect to the degree, pace, and exact content of the privatization strategy are significant and that these differences reflect different political preferences, development stages, national cultures, and long-term development plans (Pollitt and Bouckaert 2011; Zahra et al. 2000).
Despite its worldwide application and its importance for public policy, the question of what privatization exactly refers to is not an easy one to answer given the concepts’ ambiguousness. In academic literature, for example, privatization has been defined in both a narrow and a broad sense. Narrow definitions understand privatization as the transfer of ownership, decision-making authority, and control of state-owned enterprises from federal, state, or municipal governments to the private sector and private investors (Zahra et al. 2000, p. 511. Practical examples of privatization in the narrow sense are the transfer of ownership, decision-making authority, and control of public transportation, education, hospital health care, water and energy supply, and mail delivery. On the contrary, when privatization is defined in a broad sense, it entails much more than solely the transfer of ownership, decision-making authority, and control from the public to the private sector. In a broad sense, privatization entails any action that helps to increase the role of the private sector in the economy such as the sale of public assets, contracting-out, the provision of public services by private firms, deregulation, the implementation of public-private partnerships (PPPs), and the reduction of subsidies.
Critics argue that the term privatization is far too often used as a synonym for contracting-out and PPPs and that differences are neglected. They suggest it is important to take these differences into account since what is true for privatization, does not need to be true for contracting-out or PPPs. Despite the fact that all three structures entail some sort of private sector influence, their institutional logic differs substantially. Contracting-out, for example, involves a temporary and singular principal-agent relation in which the public partner defines what, how, and by whom something must be done. In contrast to privatization in the narrow sense, asset ownership usually remains with the public sector that, as a consequence, remains in control by monitoring performance and replacing the contractor if necessary.
Whereas contracting-out implies “simple contracting” (i.e., one service is contracted out for a relatively short period to a single private party), PPPs imply “complex contracting” (i.e., an integrated contract for a relatively long period (between 15 and 30 years) is signed with a multiheaded consortium). Ownership, control, and decision-making authority remain with the public procurer in PPPs as well as the responsibility for service supply and service quality goes. In contrast, privatization entails that private firms make their own decisions on service supply and service quality. It is suggested that PPPs enable governments to control private sector performance to a far greater extent than is the case with privatization. In that respect, some argue that PPPs are not a manifestation of NPM but rather form an alternative to it. Some, however, consider that the term PPPs is nothing more than a language tool used as a substitute for the neoliberal or “Thatcherite” use of the word privatization that helps to neutralize the negative connotations of privatization.
With respect to these negative connotations, various scholars argue that despite the supposed benefits of privatization for public service delivery in terms of efficiency and effectiveness as articulated by proponents of NPM, privatization and related manifestations or actions might not be beneficial for the public interest at all and actually harm values such as transparency and service quality given the profit motive of private companies and their loyalty towards their shareholders.
In relation to transparency, for example, it is argued that privatization implies a switch from inefficient but transparent public property to not very efficient and less transparent public property and that privatization fails in terms of transparency because of a lack of regulatory oversight, inadequate ways of collecting data, and the absence of quantitative models that help governments to compare and measure private performance. In relation to service quality, some suggest that in the search for financial optimization, private firms will only provide minimum levels of quality. This quality-shading hypothesis assumes that private firms strive for financial optimization rather than service quality and that although market-like reforms might have increased efficiency, concerns with respect to the quality of service delivery remain.
With respect to the impact of privatization and related manifestations on public values and the overall contribution for public policy and public service delivery, it has been suggested that the bulk claims expressed in academic studies are based on normative ideas about NPM rather than on convincing empirical evidence of the actual functioning of organizational manifestations of the NPM reform. The little empirical evidence that is available provides contradictory claims. With respect to service quality, for example, several studies indicate it is maintained or even improved under privatization, whereas other studies provide indications for a loss of service quality. Hence, a definite answer to the question of whether privatization is beneficial for public policy remains out.
A second strategy postulated by supporters of the NPM that supposedly allows for the increase of governments’ effectiveness, efficiency, and legitimacy concerns the reform of public sector management. Public management or, more specific, public managers are considered to be the center of organizational performance (Lynn et al. 2000). Public management reforms, the, are suggested to be a “force of progress” as they intent to optimize public managers performance and, as such, the efficiency and effectiveness of public service delivery.
Public management reforms merge “the normative orientation of traditional public administration and the instrumental orientation of general management” (Perry and Kraemer 1983, p. x). The normative orientation of traditional public administration refers to the classical Weberian bureaucratic model of public administration. One of its main features is its hierarchical structure which means that the highest level of authority is located at the top of the organization. Subordinate offices are controlled by higher offices that give orders and expect subordinate levels to report on and account for their activities. Politics and policy implementation are strictly separated, and it is suggested that professionally trained civil servants loyally implement political decisions. Behavior is controlled and laid down in strict rules and standardized procedures. Critics argue that due to its inflexibility, the focus on procedures instead of output, and the high level of red tape, the bureaucratic administrative model is no longer able to respond adequately to current issues.
The merge of the traditional model with general or generic management is considered to be the appropriate solution to this problem. It refers to management approaches, values, techniques and instruments that are applied by commercial, private sector enterprises and is supposedly about “getting things done as quickly, as cheaply, and as effective as possible.” In practice, administrations and public sector organizations implement management techniques such as performance contracts, performance monitoring, and performance-related pay (Hood 1991; Pollitt and Bouckaert 2011) and place a greater emphasis on values such as efficiency, effectiveness, and flexibility. Public management reforms thus “summarize a way of reorganizing public sector bodies, and to bring their management, reporting, and accounting approaches closer to (a particular perception of) business methods” (Dunleavy and Hood 1994, p. 9) and imply a shift from a focus on process to a focus on output, from inflexible hierarchies to flexibility and competition, from preoccupation with structure to preoccupation with improvements of process, from fixed pay to variable pay, and from the stability of government agencies and budgets to market-style competition (Kettl 1997, p. 447). As a result, loyal and controlled civil servants become active, entrepreneurial managers that, rather than following rules and obeying hierarchy, seek for quick and efficient solutions via alternative ways.
As goes for privatization, the exact content, intensity, pace, and form of the implementation of public sector reforms differ per country. In that respect, a distinction can be made between countries that either empower or control public managers. Public management reforms in countries such as Sweden and Australia aim to empower the manager by breaking down restrictions in order to “let the manager manage.” Following the assumption that public managers know what to do and that they will not take advantage of their discretionary power, public management reforms intend to create space and to remove existing rules and procedures that provide unnecessary barriers (Kettl 1997, p. 449).
Other countries, such as New Zealand and the United Kingdom, implement reforms in order to “make the managers manage.” Given that most government agencies are monopolies and, as such, have little incentives to perform better, reforms are targeted at increasing or improving their performance. In order to do so, market-like incentives such as performance-related pay or the requirements to reach specific targets are introduced (Kettl 1997).
Various studies indicate that the supposed benefits from these reforms are not materialized in practice given the lack of capacity of those that are suggested to act as public managers. They demonstrate that being an efficient and effective public manager is not that easy given that they operate under high political pressure, that they are often supposed to do things they do not have any experience with, and that they must act much quicker while at the same time having less resources to spend (Kettl 1997, p. 454). As such is has been suggested that, in order to fully enjoy the potential benefits of public management reforms, governments should invest in the capacity of public manager to actually act as managers.
As goes for privatization, public management reforms are subject to intense scientific debate too. The debate focuses mainly on the “hollowing out of the state” and on the appropriateness of a general private sector-based management model for the public sector. With respect to the first, scholars suggest that the dominant neoliberal agenda might contribute to the “hollowing out of the state,” implying that politicians are no longer in control when it comes to influencing and constructing public policy (Rhodes 1994). In that respect, it is argued that NPM intentionally separates politics from administration and that it allows managers to manage according to economic rationality rather than in accordance with the political and public opinion. As a result, politicians fear that they lose control over public service management and policy making. The perception of a loss of responsiveness in the context of NPM has grown even stronger because of the importance of external advisors for public policy and public service delivery. In relation to that, Drechsler (2005, p. 98) describes “NPM specifically returns decision making to the allegedly expert bureaucrat, under the cloak of efficiency, therefore removing political control, and that also means political responsibility, from the political sphere.”
This debate focuses mainly on the appropriateness of a general private sector-based management model for the public sector. In contrast to the suggestions made by generic management supporters who argue that a universal management approach is applicable independently of the organizations context, critics question to what extent private sector management techniques are compatible with and appropriate for the specific context of public organizations. In that respect, it is suggested that the public sector, public organizations, and public managers are confronted with a different organizational environment and structure and with different goals and managerial values that require management approaches that fit this specific context.
As a result, some consider the incorporation of private sector values and private sector management techniques into the public sector problematic given the assumed differences between public and private organizations in terms of their publicness which can be defined as “a characteristic of an organization which reflects the extent the organization is influenced by political authority” (Bozeman and Bretschneider 1994, p. 197). Various empirical studies have indeed tried to assess to what extent public and private organizations are different and whether the incorporation of private sector management techniques and values indeed is undesirable. It has been concluded that “there is no clear support for the view that public and private management are fundamentally dissimilar” and that convincing proof for rejecting the incorporation of private sector values or management techniques does not (yet) exist (Boyne 2002, pp. 116–118).
Empirical studies on both the appropriateness and benefits of public sector management reforms do not provide a definite verdict given that it appears to be very difficult to establish the exact effect of large and complex reform programs on specific dimensions. Besides, many governments have not implemented credible evaluation procedures that allow for measuring the result of public sector management reforms. Finally, it is argued that the little empirical evidence that is available does not provide convincing evidence given that they mostly concern disaggregated studies (Pollitt and Bouckaert 2011, p. 215).
Ever since the 1970s, governments undertake attempts to reform the traditional bureaucratic public administration model that is suggested to become too big, costly, inefficient, ineffective, overly bureaucratic, and too little responsive to public needs. The business-like approach to government as suggested by supporters of the NPM aims at increasing private sector involvement through privatization and at optimizing public sector management through the incorporation of private sector values and private sector management techniques. The exact content, intensity, pace, and form of the implementation of public sector reforms differ per country. Although convincing empirical evidence on the contribution of privatization and public management is scarce, the academic, societal, and political debate on NPM reforms are vibrant.
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