Ini benar menurut Oliver Hart dan Bengt Holmström, kedua pemenang noble ekonomi 
tahun ini “Ada yang bilang yang diprivatisasikan ialah keuntungannya, dan yang 
disosialisasikan ialah kerugiannya.”

Begitulah pendapat kedua orang ini bahwa privat/swasta/non pemerintah bisa 
“cost saving”, tetapi kwalitas bisa turun dalam arti pelayanan terhadap para 


Risetnya menyimpulkan tidak bagus privatization of public services misalnya 
penjara dari pemerintah ke swasta.






From: [] 
Sent: Monday, October 10, 2016 5:20 PM
Subject: Re: [GELORA45] Does Privatization Serve the Public Interest?



Ada yang bilang yang diprivatisasikan ialah keuntungannya, dan yang 
disosialisasikan ialah kerugiannya.



Sent: Monday, October 10, 2016 10:54 PM

To: <>  

Subject: [GELORA45] Does Privatization Serve the Public Interest?



Dari Harvard Business Review, kalau HBR juga dibilang salah dan nggak ngerti 
bisnis ya nggak tahulah.



Does Privatization Serve the Public Interest?

*        <> John B. Goodman 
*        <> Gary W. Loveman


For decades prior to the 1980s, governments around the world increased the 
scope and magnitude of their activities, taking on a variety of tasks that the 
private sector previously had performed. In the United States, the federal 
government built highways and dams, conducted research, increased its 
regulatory authority across an expanding horizon of activities, and gave money 
to state and local governments to support functions ranging from education to 
road building. In Western Europe and Latin America, governments nationalized 
companies, whole industries, banks, and health care systems, and in Eastern 
Europe, communist regimes strove to eliminate the private sector altogether.

Then in the 1980s, the tide of public sector expansion began to turn in many 
parts of the world. In the United States, the Reagan administration issued new 
marching orders: “Don’t just stand there, undo something.” A central tenet of 
the “undoing” has been the privatization of government assets and services.

According to privatization’s supporters, this shift from public to private 
management is so profound that it will produce a panoply of significant 
improvements: boosting the efficiency and quality of remaining government 
activities, reducing taxes, and shrinking the size of government. In the 
functions that are privatized, they argue, the profit-seeking behavior of new, 
private sector managers will undoubtedly lead to cost cutting and greater 
attention to customer satisfaction.

This newfound faith in privatization has spread to become the global economic 
phenomenon of the 1990s. Throughout the world, governments are turning over to 
private managers control of everything from electrical utilities to prisons, 
from railroads to education. By the end of the 1980s, sales of state 
enterprises worldwide had reached a total of over $185 billion—with no signs of 
a slowdown. In 1990 alone, the world’s governments sold off $25 billion in 
state-owned enterprises—with continents vying to see who could claim the 
privatization title. The largest single sale occurred in Britain, where 
investors paid over $10 billion for 12 regional electricity companies. New 
Zealand sold more than 7 state-owned companies, including the government’s 
telecommunications company and printing office, for a price that topped $3 

Developing countries have been quick to jump on the privatization bandwagon, 
sometimes as a matter of political and economic ideology, other times simply to 
raise revenue. Argentina, for example, launched a major privatization program 
that included the sale of its telephone monopoly, national airline, and 
petrochemical company for more than $2.1 billion. Mexico’s aggressive efforts 
to reduce the size and operating cost of the public sector have resulted in 
proceeds of $2.4 billion.

Over the next decade, privatization is likely to be at the top of the economic 
agenda of the newly liberated countries in Eastern Europe, as well. 
Czechoslovakia, Hungary, and Poland are all committed to privatization and are 
in the process of working out the legal details. The most extensive change thus 
far has taken place in what was the German Democratic Republic. In 1990 alone, 
the Treuhandanstalt—the public trust agency charged by the German government 
with the task of privatization arranged the sale of more than 300 companies for 
approximately $1.3 billion. The agency still has more than 5,000 companies on 
its books, all looking for buyers.

Having migrated around the world, privatization has also changed venue in the 
United States, from the federal government to state and local governments. Over 
11 states are now making use of privately built and operated correctional 
facilities; others plan to privatize roadways. At the local level, communities 
are turning to private operators to run their vehicle fleets, manage sports and 
recreation facilities, and provide transit service. In the past several years, 
more and more state and local governments have adopted privatization as a way 
to balance their budgets, while maintaining at least tolerable levels of 

This growth of privatization has not, of course, gone uncontested. Critics of 
widespread privatization contend that private ownership does not necessarily 
translate into improved efficiency. More important, they argue, private sector 
managers may have no compunction about adopting profit-making strategies or 
corporate practices that make essential services unaffordable or unavailable to 
large segments of the population. A profit-seeking operation may not, for 
example, choose to provide health care to the indigent or extend education to 
poor or learning-disabled children. Efforts to make such activities profitable 
would quite likely mean the reintroduction of government intervention—after the 
fact. The result may be less appealing than if the government had simply 
continued to provide the services in the first place.

Overriding the privatization debate has been a disagreement over the proper 
role of government in a capitalist economy. Proponents view government as an 
unnecessary and costly drag on an otherwise efficient system; critics view 
government as a crucial player in a system in which efficiency can be only one 
of many goals.

There is a third perspective: the issue is not simply whether ownership is 
private or public. Rather, the key question is under what conditions will 
managers be more likely to act in the public’s interest. The debate over 
privatization needs to be viewed in a larger context and recast more in terms 
of the recent argument that has raged in the private sector over mergers and 
acquisitions. Like the mergers and acquisitions issue, privatization involves 
the displacement of one set of managers entrusted by the shareholders—the 
citizens—with another set of managers who may answer to a very different set of 

The wave of mergers and acquisitions that shook the U.S. business community in 
the late 1980s was a stark demonstration that private ownership alone is not 
enough to ensure that managers will invariably act in the shareholders’ best 
interests. The sharp increase in shareholder value generated by most of the 
takeovers was the result of the market’s anticipation of improvements in 
efficiency, customer service, and general managerial effectiveness—gains which 
might, for example, come from the elimination of unnecessary staff, the 
cessation of unprofitable activities, and improvements in incentives for 
managers to maximize shareholder value. In other words, the gains from 
takeovers were the result of the anticipated removal of managerial practices 
commonly thought to characterize public sector management. The lessons from 
this experience are directly applicable to the debate over privatization: 
managerial accountability to the public’s interest is what counts most, not the 
form of ownership.

Refocusing the discussion to analyze the impact of privatization on managerial 
control moves the debate away from the ideological ground of private versus 
public to the more pragmatic ground of managerial behavior and accountability. 
Viewed in that context, the pros and cons of privatization can be measured 
against the standards of good management—regardless of ownership. What emerges 
are three conclusions:

1. Neither public nor private managers will always act in the best interests of 
their shareholders. Privatization will be effective only if private managers 
have incentives to act in the public interest, which includes, but is not 
limited to, efficiency.

2. Profits and the public interest overlap best when the privatized service or 
asset is in a competitive market. It takes competition from other companies to 
discipline managerial behavior.

3. When these conditions are not met, continued governmental involvement will 
likely be necessary. The simple transfer of ownership from public to private 
hands will not necessarily reduce the cost or enhance the quality of services.

The Privatization Debate

Privatization, as it has emerged in public discussion, is not one clear and 
absolute economic proposition. Rather it covers a wide range of different 
activities, all of which imply a transfer of the provision of goods and 
services from the public to the private sector. For example, privatization 
covers the sale of public assets to private owners, the simple cessation of 
government programs, the contracting out of services formerly provided by state 
organizations to private producers, and the entry by private producers into 
markets that were formerly public monopolies. Privatization also means 
different things in different parts of the world—where both the fundamentals of 
the economy and the purpose served by privatization may differ.

One accounting of privatization appears in Raymond Vernon’s The Promise of 
Privatization, a comparative analysis of international privatization activities 
of all sorts. According to Vernon’s figures, by the late 1980s, the growth in 
state-owned enterprises in Africa, Asia, Latin America, and Western Europe had 
generated a nonfinancial state-owned sector accounting for an average of 10% of 
gross domestic product, with much higher shares in France, Italy, New Zealand, 
and elsewhere. In many developing countries, state-owned enterprises operated 
at substantial deficits and were responsible for as much as one-half of all 
outstanding domestic indebtedness. In many instances, Vernon says, 
privatization in these countries was driven purely by the public sector’s sorry 
financial condition. As conditions worsened in the early 1980s and credit 
markets tightened significantly, these governments sold off public assets to 
raise cash.

Contrary to the skeptics’ assertion that governments won’t sell the winners and 
can’t sell the losers, governments sold off many prized assets in the 1980s. 
The most notable example is in the United Kingdom, where by 1987, the Thatcher 
government had shed more than $20 billion in state assets, including British 
Airways, British Telecom, and British Gas. Sales also ran into the billions of 
dollars in France and Italy, and many less developed countries sold off a large 
portion of their interests in public enterprises.

The story in the United States has been somewhat different, largely because the 
U.S. government has never had as many assets to privatize. Compare, for 
example, the concentration of public sector employment in other nations to that 
in the United States. In the late 1970s, nearly 7% of employees in other 
developed market economies worked in state-owned enterprises; the comparable 
figure for the United States was less than 2%. Unlike other industrialized 
countries where many of the utilities and basic industries are state-owned—and 
thus ripe targets for privatization—in the United States, the 
telecommunications, railroad, electrical power generation and transmission, gas 
distribution, oil, coal, and steel industries are entirely or almost entirely 
privately owned.

If there is a similar privatization phenomenon in the United States to the one 
Vernon describes in developing countries, it is in state and local governments 
where financial conditions in recent years have reached crisis proportions. 
Budgetary shortfalls have induced administrators to consider privatization as a 
means to avoid higher taxes or large cuts in services. Touche Ross surveys of 
state comptrollers in 1989 and city managers and county executives in 1987 show 
that the vast majority of state and local governments contract out some 
services to private providers. The most often cited motivation for contracting 
out was to achieve operating cost savings; survey results from city and county 
administrators suggest that, in nearly every case, some cost savings were 
achieved. The second most often cited reason for contracting out was to solve 
labor problems with unionized government employees. Asset sales, on the other 
hand, were uncommon: only 5 state governments of the 31 that responded to the 
survey had used that approach.

A second impetus for privatization emerged in the United States in the 1980s. 
Privatization was a central piece of the Reagan administration’s efforts to 
reduce the size of government and balance the budget. A book by former Reagan 
staffer Stuart Butler, Privatizing Federal Spending: A Strategy to Eliminate 
the Deficit, provides an intellectual rallying point for conservative efforts 
to reduce the federal government payroll and put a brake on the growth in 
government spending. Butler argues that private enterprises will cut costs and 
improve quality in an effort to gain profits and compete for more government 
contracts. Government providers, on the other hand, will pursue other 
objectives, such as increased employment or improved working conditions for 
government employees—initiatives that only result in higher costs, poorer 
quality, or both.

But most important, Butler contends, is that privatization can simply reduce 
the size of government. Fewer government workers and fewer people supporting a 
larger role for government means less of a drain on the nation’s budget and 
overall economic efficiency.

Butler’s arguments for privatization find sympathetic ears at the 
California-based Reason Foundation, which has been advocating privatization of 
both public assets and public services since the late 1970s. Using language 
designed to push the hot button of the average taxpayer, the foundation claims: 
“If your city is not taking full advantage of privatization, your cost of local 
government may be 30% to 50% higher than it need be. The costs of state and 
federal government are also greater without privatization.”

To the Reason Foundation, the benefits of privatization are clear and nearly 
universal; there seem to be no limits to the type of government activities that 
would benefit from privatization. Its annual report, Privatization 1991, 
considers privatization activities of all sorts around the world, always with a 
uniformly optimistic perspective. The message is clear: the shift in ownership 
or control from public to private hands will necessarily lead to cheaper, 
better services for the citizenry. As its press release states: “No service is 
immune from privatization.”

This may sound extreme, but there is a practical experience to support its 
ideologically driven claim. Within the United States, an impressive array of 
cities and local governments has made effective use of privatization to improve 
efficiency, increase competition, and reduce expenditures. Consider the case of 
Chicago. City towing crews could not keep up with abandoned vehicles that 
littered the streets, so in 1989, the city government turned to a number of 
neighborhood companies. The private sector operators paid the city $25 per 
vehicle, which they then sold for scrap. What had been a drain on Chicago’s 
resources turned into a $1.2 million bonanza. In addition, city crews were 
freed up to focus their efforts on illegal downtown parking.

Chicago also found that competition from the private sector could create 
incentives for public managers to be more effective. In 1990, city 
street-paving crews in Chicago were inspired to improve their performance when 
the city government decided to hire private contractors to pave adjacent wards. 
According to Mayor Richard M. Daley, both sets of crews began to compete “to 
see who could do the job faster and better.”

Of course, all of the evidence is not on one side of the privatization debate. 
The expansion of the private sector into prisons, for example, has generated 
considerable controversy. As John Donahue reports in The Privatization 
Decision: Public Ends, Private Means, corrections departments in all but a few 
states have contracted with private firms to build prisons. And over two-thirds 
of all facilities for juvenile offenders are privately run, albeit most on a 
not-for-profit basis.

But in recent years, several large corporations have sought to extend the role 
of the private sector to the incarceration of adult criminals. This prospect of 
private corporations owning and operating prisons for adult offenders raises 
questions of costs and competition. As Donahue writes in a separate report on 
prisons: “Even if corrections entrepreneurs somehow succeed in cutting 
incarceration costs through improved management, there is unlikely to be enough 
competition, in any given community, to ensure that cost savings are passed on 
to the taxpayers, particularly after private contractors have become 
entrenched. Indeed, private prison operators insist on long-term contracts 
which buffer them from competition.”

Often privatization’s promises vastly exceed its results. In the Job Training 
Partnership Act (JTPA), for example, the federal government decided to 
relinquish most direct responsibility for job training. On the surface, the 
JTPA appears a resounding success: two-thirds of the adult trainees found jobs, 
and over 60% of youth trainees had positive experiences. But, JTPA local 
officials and training contractors can affect their measured performance by 
screening applicants.

The problem in the JTPA system is not private ownership, but the controls and 
performance measurements of the private owners. With only short-term 
performance measurements and no enforced imperative to create long-term value, 
JTPA’s statistics give the impression that privatization has made much more 
difference for the employment, earnings, and productive capacity of American 
workers than it actually has.

As Donahue notes: “It is as if Medicaid physicians were presented with a 
population of patients suffering from complaints ranging from tendinitis to 
brain tumors, were asked to choose two or three percent for treatment, and then 
were paid on the basis of how many were still breathing when they left the 

In addition to the problems of insufficient competition and monitoring, there 
are broader objections to the no-holds-barred advocacy of privatization. While 
acknowledging that privatization may make sense on economic grounds, Paul Starr 
argues in his paper, “The Limits of Privatization,” that privatization will not 
always work best. “‘Best’ cannot mean only the cheapest or most efficient,” he 
writes, “for a reasonable appraisal of alternatives needs to weigh concerns of 
justice, security, and citizenship.”

Starr also attacks the claim that privatization leads to less government. He 
contends that profit-seeking private enterprises servicing public customers 
will find it in their interests to lobby for the expansion of public spending 
with no less vigor than did their public sector predecessors. In other words, 
privatization introduces a feedback effect in which influence on government now 
comes from the “enlarged class of private contractors and other providers 
dependent on public money.” This influence is especially dangerous if private 
companies skim off only the most lucrative services, leaving public 
institutions as service providers of last resort for the highest cost 
population or operations.

It is not hard to find examples of undue influence. Michael Willrich’s 
Washington Monthly article, “Department of Self-Services,” describes corrupt 
contracting practices in Mayor Marion Barry’s Washington D.C. administration 
that led to several investigations, trials, and convictions. Willrich claims 
that Rasheeda Moore, Barry’s former girlfriend, received $180,000 worth of 
contracts to run summer youth programs. In 1987, Alphonse Hill, a deputy mayor, 
was convicted of steering $300,000 in city contracts to a friend’s auditing 

More generally, a lack of competition for government contracts actually leads 
to higher costs and creates perceptions of corruption. A New York Times special 
report, “The Contract Game: How New York Loses,” provides several examples. New 
York City’s Parking Violations Bureau hired American Management to help it 
design a system to bill for parking tickets and to record payment. As part of 
its consultancy, American Management wrote technical documents that became the 
basis for bid specification to build and implement the system. In 1987, the 
city awarded the $11 million contract to build and run the system to American 
Management, despite claims of impropriety from competing bidders. An audit by 
the New York State Comptroller showed that American Management had missed 
contract deadlines and that its system had billed millions of dollars in fines 
to New Yorkers who did not even own cars. The city had hoped to take over 
management of the system in 1990, but it has been unable to develop the 
necessary organization. Current plans anticipate city management in 1994. 
American Management has received a $10 million contract to run the system until 

The New York Times report shows that noncompetitive bidding is commonplace in 
New York City. In fiscal years 1989 and 1990, 1,349 of 22,418 contracts 
recorded by the City Comptroller’s Office attracted only single bids; several 
of the single-bid contracts were for multimillion dollar projects. Thousands of 
other contracts had two or three bidders, a circumstance conducive to “high 
cost, collusion, and corruption.”

Even in the absence of corruption, however, Starr argues that privatization 
should not be considered in terms of economic efficiency alone. Less 
government, he states, is not necessarily better; therefore, just because 
privatization may reduce the role of government in the economy, it is not 
necessarily beneficial. The voter and consumer, Starr argues, are also 
interested in access, community participation, and distributive justice: 
“Democratic politics, unlike the market, is an arena for explicitly 
articulating, criticizing, and adapting preferences; it pushes participants to 
make a case for interests larger than their own. Privatization diminishes this 
public sphere—the sphere of public information, deliberation, and 
accountability. These are elements of democracy whose value is not reducible to 

While it is clearly impossible to decouple privatization from the broader 
social and political issues raised by Butler and Starr, it seems logical that 
privatization decisions can and should be based primarily on pragmatic analyses 
of whether agreed-on ends can best be met by public or private providers. The 
ends need not be limited to efficiency; they need only be clearly specified in 

John Vickers and George Yarrow’s recent article, “Economic Perspectives on 
Privatization,” uses economic theory to show that there are flaws endemic in 
both private and public ownership: private ownership is not free of its own set 
of problems. In short, public provision suffers when public managers pursue 
actions that are not in the interests of the citizenry—for example, the 
employment of unnecessary workers or the payment of exorbitant wages. Private 
provision suffers when private managers take action inconsistent with the 
public interest—for example, performing shoddy work in an effort to boost 
profits or denying service when costs are unexpectedly high.

These issues, which only now are beginning to emerge in the privatization 
debate, have been showcased for managers in another context. They were central 
to the wave of leveraged buyouts in the late 1980s, which showed that private 
businesses also often suffer from managerial behavior inconsistent with 
shareholder interests. Takeover artists like Carl Icahn saw the same excesses 
in corporations that many people see in governmental entities: high wages, 
excess staffing, poor quality, and an agenda at odds with the goals of 
shareholders. Monitoring of managerial performance needs to occur in both 
public and private enterprises, and the failure to do so can cause problems 
whether the employer is public or private.

Managerial Control and Privatization

In the late 1980s, a wave of public company buy-outs swept across the 
previously insulated world of publicly traded corporations, prompted in large 
part by the failure of internal monitoring and control processes in these 
companies. These buyouts provide an important and useful analogy to 
privatization. In particular, Michael C. Jensen’s analysis of these buyouts 
makes it clear why privatization alone is insufficient to guarantee that 
providers of important services will act in the public’s interest.

In his HBR article, “Eclipse of the Public Corporation,” Jensen argues that a 
variety of innovative organizational forms that reduce the conflict between the 
interests of owners and managers are replacing the publicly held corporation. 
The problem has been that managers in many industries, especially those with 
little long-term growth potential, have wasted company assets on investments 
with meager, if any, return. Managers have been consistently unwilling to 
return surplus cash to their shareholders, preferring to hold on to it for a 
number of reasons: excess cash provides managers with autonomy vis-à-vis the 
capital markets, reducing their need to undergo the scrutiny of potential 
creditors or shareholders. And excess cash provides managers with an 
opportunity to increase the size of the companies they run, through capacity 
expansion or diversification.

This unwillingness to surrender cash to shareholders is not limited to a few 
companies. Jensen reports that, in 1988, the 1,000 largest public companies 
(ranked in terms of sales) generated a total cash flow of $1.6 trillion. Less 
than 10% of these funds were distributed to shareholders as dividends or share 
repurchases. Private managers, it seems, are vulnerable to the same claims 
levied against government agencies.

To monitor these tendencies on the part of public corporation managers, Jensen 
identifies three forces: product markets, the board of directors, and capital 
markets. The first two, says Jensen, have been falling short. Even the 
onslaught of international competition has been insufficient to prevent 
managers from squandering valuable assets. Moreover, boards of directors, 
consisting largely of outsiders selected by management who lack a large 
financial stake in the company’s performance, are often unwilling or unable to 
prevent managerial initiatives that do not enhance shareholder value.

In short, managers have been able to make investments that do not maximize 
shareholder value because the processes assumed to be disciplining their 
behavior no longer function effectively. In recent years, it has fallen to the 
capital markets to assume the role of monitor. Jensen writes, “The absence of 
effective monitoring led to such large inefficiencies that the new generation 
of active investors arose to capture the lost value… Indeed, the fact that 
takeover and LBO premiums average 50% above market price illustrates how much 
value public company managers can destroy before they face a serious threat of 

The privatization of government assets and services has similar potential. But 
it should be clear from Jensen’s finding that private ownership alone is not 
enough to make the difference. The key issue is how the private managers behave 
and what mechanisms will exist to monitor their actions.

It is significant that the firms that specialize in LBOs have organizational 
features that differ dramatically from the corporations they acquire. These key 
criteria—rather than the simple category of ownership—account for the 
difference in performance and prevent the waste of resources perpetuated by the 
preceding management.

1. Managerial incentives tie pay closely to performance. There are higher upper 
bounds, bonuses are linked to clearly identified performance measures such as 
cash flow and debt retirement, and managers have significant equity stakes.

2. The organization is more decentralized, as incentives and ownership 
substitute for direct supervision from headquarters.

3. Managers have well-defined obligations to debt and equity holders. The debt 
repayments force the distribution of cash flow, and cash cannot be transferred 
to cross-subsidize divisions.

The LBO firms, in sum, differ radically from most public corporations; it is 
the installation of these changes that created the value associated with the 
“reprivatization.” Had no such organizational changes been clear to the capital 
markets, the share prices of target corporations would not have risen as a 
consequence of takeover activity.

Monopoly vs. Competition

Like the takeovers of public corporations, the privatization of government 
assets or services is a radical organizational change. The public seeks both 
monetary and nonmonetary value, including equal access to services, adherence 
to performance standards, and a lack of corruption. The public’s goals for 
private garbage collection, for example, might include serving all members of 
the community (no matter how inconveniently located) at equal cost, disposing 
of waste in environmentally sound ways, and conducting honest bidding with city 
officials. But for these goals to be met, privatization will have to learn the 
same lesson taught by successful LBOs: managers must have effective incentives 
to act on behalf of the owners. The application of their lessons to 
privatization will help resolve the conflict between the public and the private 
providers, and identify cases where continued public provision makes sense.

The major criterion is easy to specify: privatization will work best when 
private managers find it in their interests to serve the public interest. For 
this to occur, the government must define the public interest in such a way 
that private providers can understand it and contract for it. The best way to 
encourage this alignment between the private sector and the public interest is 
through competition among potential providers, which may include governmental 
entities. Competitors will take it upon themselves to respond to the expressed 
wishes of the citizens.

The city of Phoenix’s experience with garbage collection, described by David 
Osborne and Ted Gaebler in their forthcoming book, Reinventing Government, 
illustrates the crucial role played by competition. In 1978, the mayor 
announced that the city would turn over garbage collection to private firms. 
The Public Works director insisted that his department be allowed to bid 
against the private firms, even though the city had promised not to lay off any 
displaced Public Works employees as a result of contracting out. After losing 
in four successive bidding opportunities, in 1984, Public Works employees 
introduced a series of innovations that resulted in costs well below those of 
private firms; and the Public Works department won a seven-year contract for 
the city’s largest district. By 1988, Public Works had won back all five 
district contracts. The central lesson from this experience, says Phoenix city 
auditor Jim Flanagan, is that the important distinction is not public versus 
private—it is monopoly versus competition.

Competition is the first factor to help privatization; a second, also learned 
from LBOs, is linking the compensation of private managers directly to their 
achievement of mutually recognized goals that represent the public interest, 
goals which may include a variety of criteria like those Starr associates with 
the traditional role of government.

Osborne and Gaebler describe the extensive set of performance measurements used 
in Sunnyvale, California. City managers there are evaluated on the basis of 
service measures which include the quality of road surfaces, the crime rate and 
police expenditures per capita, the number of days when the air quality 
violates ozone standards, and the number of citizens below the poverty line. 
Departmental managers who exceed their “service objectives” receive annual 
bonuses that can be as much as 10 percent of their salary.

There is another reason why goals and performance measures are critical 
elements in making privatization work: the failure to hold private managers to 
agreed-on results can be very costly. In 1963, President Kennedy established 
Community Mental Health Centers to serve the mentally ill outside of large 
institutional settings. Osborne and Gaebler report that the National Institute 
of Mental Health gave millions of dollars to private firms to build and staff 
the centers—but established no monitoring process to track the results. A 
Government Accounting Office investigation in the late 1980s revealed that many 
centers had converted to for-profit status and served only those who could pay. 
Others provided psychotherapy to patients without serious mental illnesses. 
Meanwhile, write Osborne and Gaebler, “Perhaps a million mentally ill Americans 
wandered the streets sleeping in cardboard boxes or homeless shelters.”

Pragmatic Privatization

As these and countless other examples make clear, there is a pragmatic way to 
view privatization. It is one arrow in government’s quiver, but it is simply 
the wrong starting point for a wider discussion of the role of government. 
Ownership of a good or service, whether it is public or private, is far less 
important than the dynamics of the market or institution that produces it.

Strikingly, these issues of managerial control have first emerged in Eastern 
Europe. The question there is less what to privatize than how to privatize. And 
the new governments realize that a privatization scheme is only as efficient as 
it is politically palatable. In Poland, the recently adopted method for 
privatizing the massive state industrial sector involves issuing shares in 
newly privatized companies and putting all the shares of many companies into a 
mutual fund. A number of mutual funds would then control the shares of all the 
companies. Citizens would receive shares in the mutual funds that would not be 
tradable for, say, one year.

This plan is appealing because it provides equal access to the ownership of 
state assets and it offers citizens diversification against the tremendous risk 
of holding shares in any one or two companies. The shortcoming of the plan lies 
in its lack of control mechanisms. The fund managers must monitor the 
performance of many companies whose transitional problems are enormous. At the 
same time, there are no explicit incentives (other than reputation and 
patriotism) to ensure that fund managers act in the interests of shareholders. 
The short-term prohibition on trading shares between mutual funds further 
shields the managers from the immediate discipline of the financial markets. 
While these problems appear to be easy to anticipate, they have only recently 
come to light in Poland as politicians and economists begin to work through the 
details of the privatization program.

If the LBO experience teaches anything, it is that the focus of the 
privatization debate should be on the nature of organizational changes, not on 
a broad ideological debate over the role and efficacy of government. The 
replacement of public with private management does not of and by itself serve 
the public good, just as private ownership alone was not sufficient to maximize 
value to the shareholders of many large corporations.

Accountability and consonance with the public’s interests should be the guiding 
lights. They will be found where competition and organizational mechanisms 
ensure that managers do what we, the owners, want them to do.

A version of this article appeared in the  <> 
November-December 1991 issue of Harvard Business Review.


John B. Goodman is assistant professor at the Harvard Business School, where he 
specializes in business-government relations. He is the author of Monetary 
Sovereignty: The Politics of Central Banking in Western Europe(Cornell 
University Press, forthcoming in 1992).


Gary W. Loveman is the CEO of Harrah’s Entertainment, in Las Vegas.




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