Introduction

Some groups misuse the term privatisation when they mean outsourcing in order to maximise the political affect of their political propaganda. The following posting describes the differences between, and the advantages of privatisation and outsourcing.

Definitions

Privatisation is the selling of state owned assets to the private sector. This traditionally happened for industries that provided a service or product that governments believe should be provided by the market – free from state interference. Examples in the past have been steel production, coal mining, air travel and car production.

Outsourcing on the other hand relates to passing the delivery of functions and services from the state to the private sector whilst maintaining the obligation to provide that service. Examples in the past have been private prisons and security, where the state has a duty to protect us from convicted criminals but doesn’t need to run the prisons to incarcerate them itself.

Outsourcing may involve an element of privatisation however it is not a pre-requisite. It may be necessary to sell the assets associated with the outsourced service to the outsourcing partner but is by no means obligatory. The outsource partner may prefer to invest in their own assets as is the case with private prisons.

Benefits

The new Tory administration at North Lincolnshire Council is looking at outsourcing various local council functions. The reasons for considering outsourcing are listed below:

1. Improved Efficiency – Lower Costs.

The main argument for outsourcing is that private companies have a profit incentive to cut costs and be more efficient. If you work for the state, managers do not usually share in any profits and do not have an incentive to tackle shirking and “Spanish practices”. However, a private firm is interested in making profit and so it is more likely to cut unnecessary costs.

2. Lack of Political Interference.

It is argued that the state is a poor economic manager. National governments and local councils are motivated by political pressures rather than sound economics. For example a state enterprise may employ surplus workers which is inefficient. However, they may be reluctant to get rid of the workers because of the negative publicity. Therefore, state owned enterprises often employ too many workers.

3. Long Term Planning

National governments and local councils many think only in terms of the next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the service provided in the long term.

4. Shareholders and Accountability

It is argued that a private firm has pressure from shareholders to perform. If the firm is inefficient then the firm could be subject to a takeover. A state owned firm doesn’t have this incentive.

5. Increased Competition and Economies of Scale.

Removing the restrictions on limiting the provision of a service to a specific supplier and area allows for increased competition and economies of scale.

6. Revenue Raising

If a function is outsourced it may be possible to sell existing assets to the outsourcing partner, reducing the debt commitments of the state.

Summary

All of these reasons have merits and I hope the council chooses to outsource as many functions as possible to improve council services, reduce annual costs and existing debt levels. Hopefully the Coalition government will learn from local government outsourcing and extend the idea to national services such as healthcare and education.