Is the Private Sector more efficient?

Private sector dynamism versus Public sector inefficiency has been a dominant political debate over the last few years. Some economic sectors (mostly right ones) often bring up this discussion hinting that all those public companies managed by politicians are less efficient than private ones, where capitalism will do its magic and stimulate the automatic market efficiency.

However, there is a lot of literature around there and it seems this is not clear enough.

According to a UNDP publication, no model of ownership (public, private, or mixed) is intrinsically more efficient than the others, but there are efficiency differences within certain service sectors and specific contexts.

The challenge to compare efficiency between public and private ownership models are the range of models (including hybrids), and variations in defining efficiency. This finding is replicated across high-, middle- and low-income countries. Furthermore, publications usually have bias and their models lack of rigor.

Health sector

At the beginning of 2000’s, Germany carried out a plan of privatisation. Thereby a higher efficiency of private ownership is often assumed as a potential driver.

This study analyzed different studies about hospitals in the USA, Germany, Taiwan, and South Korea. Of these, five studies find that public and PNP hospitals are more efficient than PFP; one concludes the opposite, and two find no significant difference. So they concluded that is not possible to ascertain whether one type or another is more efficient.

When we talk about health systems, it is almost an obligation to talk about the United States. Whereas some of them defend it, the reality is quite devastating, whether we think in an economic or social sense.

Compared to other OECD countries, U.S. healthcare costs are one-third higher or more relative to the size of the economy (GDP), according to OECD stats.

It’s even worst. Because, for example, the USA’s Life Expectancy is incredible low comparing with countries like Spain.

Barack Obama tried to fix this problematic issue with Obamacare project and, although the program is still standing, Trump administration is trying to get rid of it. They are still managing how to run a better system.

Education sector

While evidence from high-income countries is inconclusive, evidence from low and middle-income countries suggests private provision is more efficient than public provision.

The reason could be as private providers often have more recruitment autonomy, lower pay levels, and market-like conditions. These may contribute towards better efficiency. So we would have to discuss what is exactly the meaning of efficiency.

Again, the USA is a (bad) example of how a purely private system could affect a great number of citizens. Students Loans have been raised excessively since the crisis of 2009.

Source: fred.stlouisfed.org

Besides, in only 40 years, the average cost of college, including tuition and room and board, has increased over 150% for both public and private four-year colleges.

The problem sometimes is that students entering college take on huge amounts of debt to fund increasingly expensive college tuition costs with the expectation that their salaries after graduation will be able to cover the loan payments. However, that entry-level salaries are often no match for massive monthly student loan payments, or worse, there’s no job available by the time the first payment comes due.

Water, sanitation and waste sectors

In water, water sanitation and waste sectors, the situation is not quite different. In this study, and in another one of the World Bank, found that private participation in water supply does not systematically have a significant positive effect on efficiency.

So, are privatisation of public companies a good strategy?

There is significant evidence that privatisation can lead to improved efficiency, but improvements in efficiency through it is dependent on a number of additional factors.

Between 1995 and 2005, 134 state-owned firms were privatised in Spain as a part of a huge economic restructuration plan, raising $US 38,401 million between 1990 and 2001. This study found that prior to privatisation there were no significant differences in efficiency between state-owned enterprises and their private counterparts.

In United Kingdom, the government started railway privatisation around 1995. The government chose to break British Rail into three components of the track, rolling, and train operators, and then to sell it in no less than 100 pieces. This led into a controversial debate. Anyway, the cost of running UK’s railways is 40% higher than it is in the rest of Europe.

Conclusion

The reality is that there isn’t exist an academic paper or any literature where it is concluded that nor the private or the public sector is more efficient than the other one. Efficiency depends on factors such as regulation, competition, the country, or the sector.

There are some examples around the world of how good management of a city or a country has contribute to citizen’s improve of life. It could be the case of Medellín, where the municipal administration expanded public transport to the most depressed neighborhood around the city and helped citizens to get jobs at the town, or it could be also the case of Singapur, where they established a highly efficiency public system.

My Conclusion

In my opinion, it all depends of course of the country, the market, and a lot of factors, but I think (and I will always defend) that there some sectors that can’t be private. At least, it should exist a public alternative. I’m talking about, e.g. education, healthcare, water, and energy supplies.

A called development country should help its citizens to have the same opportunities, no matter in what social stratum are they.

If you ask to a liberal, he or she will answer that the State should get rid of every public company, but, as you know (and as it’s evident), a privately owned company will always seek its own profit, and they won’t worry about the improvements of the city. But, in my opinion, there are some services that a government should not rely on a company, as they are crucial to cities’ strategic, like transport.

Of course, a public company should be run in terms of its maximum efficiency, working with total transparency And citizens must be treated as its shareholders.

Additionally, the public sector should attract top executives and top workers. In public companies, wages may not be that attractive in comparison to private sector companies. This is important for the sector to attract the best employees.

Otherwise, there are some sectors or companies that rely on the state infrastructure. Although, it is normal that the government does an investment in infrastructure, but if any company wants to use it, they should pay a fee.

As the cited publications have concluded, there is no exist a perfect system, so every country must use its best option for the prosperity of the country and its citizens.

Autor: Mauricio Ojeda Medina

Ingeniero Industrial. Me gusta escribir de diversos temas. Interesado y apasionado de la tecnología para la mejora de la sociedad y del mundo. Me gusta moverme en la zona entre la tecnología y las ciencias sociales.

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