Privatization May Be Worsening Inequality

A new study suggests outsourcing government services can disproportionately impact low-income users' finances, health and safety.
by | October 13, 2016
Many drivers for the private company that runs Washington, D.C.'s paratransit service live in poverty and are on public assistance. (WMATA)

As state and local governments grapple with fewer resources for things like infrastructure or social services, many of them have opted to contract those responsibilities out to the private sector. But a new report warns that doing so may be widening the gap between the haves and the have-nots.

Privatizing services like foster care or highway toll collection can disproportionately impact low-income users, according to the study, which was published by In the Public Interest, a policy center on privatization and responsible contracting. That impact can occur directly, through higher fees for privatized services, or indirectly, if a service provider cuts costs by offering low-pay jobs.

Donald Cohen, the nonprofit’s executive director, is quick to note that the group is not against privatization or outsourcing in general. But, he says, the report shows that there’s a tendency to shift responsibility for the service outcome to the individual rather than the service provider.

This shift to the individual, he says, goes against the notion that governments provide services for the public good. Take public education, for example.

“If you reduce it to a transaction, that means it’s only in the parents’ interest to have good schools. That’s blatantly false,” he said. Good schools also attract good employers, increase home values, and lead to a more educated workforce and higher-paying jobs.

“That’s true of every public service," he said. "We get more out of it than just the transaction between the agency and the user.”

Still, some say the report defines privatization too broadly and casts all contracting in too much of a negative light.

Lester Salamon, director of Johns Hopkins University’s Center for Civil Society Studies, noted that there are typically big differences between how nonprofit and for-profit entities contract with government since nonprofits simply need their costs covered by the contract while for-profit enterprises also have an obligation to return profits to investors.

For instance, previous research by In the Public Interest found that positions contracted by for-profit companies tend to offer lower wages, reduced benefits and little or no retirement security. To keep prices low, the private company that runs Washington, D.C.'s paratransit service, which provides transportation for the disabled and elderly, tends to skimp on wages and benefits -- so much that many (if not most) paratransit drivers live in poverty and are on public assistance.

But this conclusion isn’t true for nonprofit contractors, said Salamon, because they tend to have comparable salaries and benefits to the public sector. “I would not tar [contracting] with all the negative brush that this report seems to tar it with,” he said.

Salamon does, however, agree with the report’s conclusion that fees are having an adverse impact. The study points to numerous instances of fees-gone-wild when handled by for-profit companies.

In Texas, a driver’s failure to pay $7.50 in highway tolls quickly ballooned to a $157.50 bill in just a few months, thanks to administrative fees and other charges from the debt collections contractor.

In Dillon Beach, Calif., residents’ water bills from the investor-owned utility Cal Water were up to six times as expensive in 2013 when compared with neighboring towns billed by the public water district, according to the report. “Older residents on fixed incomes reported extreme water conservation efforts such as only bathing once a week, capturing and reusing water from the shower to wash dishes, and wearing dark clothes to avoid having to wash out stains,” the report says.

Lastly, the report found even graver concerns when governments outsource social services and safety net programs.

In California, where a large percentage of foster care is privatized, children living in homes run by private agencies are one-third more likely to be victims of abuse than children in state supervised homes.

One year after Kansas privatized its child support collection system, data showed that the state collected more child support money per dollar spent -- but the percentage of child support collected fell to a 14-year low, ultimately to the detriment of families relying on those payments.

One area upon which Cohen and others agree is that government contracting works best when it’s done with a forward-thinking approach to ensure that outsourcing services or management won’t result in a greater burden for those least able to afford it.

That takes time and expertise, which is why Washington, D.C., launched a new agency this year entirely devoted to public-private-partnership contracting. Its deputy director, Judah Gluckman, said many of the issues raised in the report can be addressed during the contracting process.

“You really just have to set clear policy goals on the front end,” he said. That can include paying certain wages, hiring local companies, setting limits on fees and determining what outcomes the contractor is responsible for. “When that’s established,” said Gluckman, “then you get the benefit of the private sector’s innovation, access to capital and their flexibility to think in longer terms [than government budget cycles].”

The report suggests things like conducting an economic impact analysis to find potential outsourcing impacts on users, workers, residents and businesses. It also recommends requiring that contractors show costs savings aren’t coming from cutting wages or employees and building contract monitoring costs into government budgets.

“When a private company says they can do it better, faster, cheaper,” said Cohen, “there should be two questions: One, what are you going to spend less money on? And two, how much is being diverted to profit that’s not being spent on the service?”

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