Thursday, April 11, 2019

More thoughts on privatisation of public goods

FT appears to have thrown in the towel on privatisation or outsourcing of prison services,
In prisons, the government needs to shake off a single-minded focus on cost savings and unyielding faith in private sector efficiency... Proponents of prison privatisation argue that competition keeps costs down, introduces innovation and brings market discipline through strict performance targets. Since there is only a handful of providers, however, competition is limited. Innovation is also difficult given the tight rules the government sets for prisons. Cost savings have not always been delivered, or have come at a price... The government should also accept that there are limits to the innovation and efficiency gains alternative providers can bring to prisons. Some of the same issues affecting the sector will persist whether facilities are run by the public or private sector. The UK’s prisons are overcrowded and underfunded. Running them will severely test any operator.
A more concise summary of the failings of privatisation of prisons could not have been possible. 

But even as these things play itself out across the world, the folks at Marginal Revolution are not convinced, drawing attention to "private" roads in some parts of Scandinavia. This is fascinating and a great example of the value of community management.
Two-thirds of roads in Sweden are privately operated and managed by local Private Road Associations (PRAs). These road associations are composed of homeowners who live along private roads. An estimated 140,000 kilometers (about 87,000 miles) of roads are the responsibility of 60,000 PRAs. While most Swedish private roads do not experience a high level of traffic, the delegation of roads to the private sector helps the government offset costs. Government works in conjunction with road owners and associations to subsidize the costs of repair and maintenance. Around 24,000 PRAs receive government subsidies. The costs of upkeep are divided among members of the association. PRAs that do not accept government subsidies can prohibit traffic at their discretion. Those that receive subsidies must allow all vehicles to travel on their roads. Regardless of whether they receive funding, however, the associations may not ban horses, bicycles, and pedestrians from using the roads. Private ownership by PRAs has proven to be a cost-effective measure for operating roads according to the the Swedish government. In 2001, a government-commissioned evaluation found PRAs could run their roads at about half the cost as for the national.

Finland employs a similar system. Many private roads are managed by local cooperatives. Finland has 78,000 kilometers (about 48,500 miles) of public roads and 280,000 kilometers (about 174,000 miles) of private roads. Of the 5 million people who live in Finland, around 700,000 of them reside near a private road. Like Swedish PRAs, Finnish cooperatives are made up of homeowners who live proximate to private roads. These homeowners collectively maintain their local roads and are eligible to receive subsidies from the federal government to cover a portion of their expenses. The Finnish government determines the subsidy amount based on the amount of traffic that a road bears and the number of houses it serves. The geographic location and average income of the area also figure into its consideration. The shift in road management to the community ensures that roads are taken care of on a regular basis. This makes for a more efficient and democratic system of road maintenance because community members, unlike government officials from far away, are distinctly aware of the needs of their roads.
In a classic case of transplanting best-practices, they suggest implementing the Scandinavian model in the US. Several issues here. For a start, there is a world of difference between "community" roads and (so-called) "private" roads. The incentives and other factors that drive "community management" are far superior (in realising desired outcomes) to the incentive incompatibilities that are rife with the conventional PPPs. Second, management of community assets by co-operative associations has a long history and is widely followed in several parts of the world. Most of them are sui generis, having emerged over a long period due to their unique circumstances. Third, therefore the replication of these models which draw on social capital and community co-operation have rarely been successful. In fact, highly individualised rural communities in the US are as far as it can get culturally and politically from the cohesive and collectivist communities of rural Scandinavia.

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