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Lecture #261 on Regulation

June 1, 1990

Avoiding the Pitfalls of Privatizing Social Services

By


(Archived document, may contain errors)

Avoiding the Pitfalls of Privatizing Social Services

By Stuart M. Butler, Ph. D. The extensive analysis of privatization undertaken in recent years indicates clearly that different methods of privatization are required for different situations. While high-quality and economical services may be delivered using one method, another method may lead to disappoi n ting results - or even to more costly and poorer quality services than those of gov- ernment provision. For example, the British experiment with selling public housing to ten- ants has been highly successful in social as well as in economic terms. By cont r ast, the U.S. experience with contracting out the management of public housing to private firms has in many instances led to high costs, corruption, and dismal conditions in housing projects. Sim- ply turning over functions to the private sector is not en o ugh: the method of privatization must be carefully chosen if the expected results are to be realized. The U.S. experience provides an important case study in the pitfalls of using the private sector to deliver social services. In particular, it highlights the problems associated with the strategy of contracts between the government and private bodies for the delivery of social services to low-income individuals. Ile experience also indicates that any government in- tending to use the private sector to repl a ce pure government provision needs to give close attention to the political and social dynamics involved. Social Services in the United States The U.S. has a long history of providing basic social services through private sector orga- nizations. These org a nizations take various forms, some being purely groups of volunteers. Quite often they are associated with a church. Many churches in the U.S., for instance, oper- ate food and shelter programs for the homeless. In other cases they are nonprofit organiza- tions operating under contract with the government to serve certain categories of individu- als. For example, most employment training and special education programs for disadvan- taged people are run by nonprofits under contracts with the government. In o ther instances private profitmaking companies deliver the services under contract. Some educational and training services are delivered in this way, as is most subsidized low-income housing. And in other cases the consumer of services receives a voucher e a rmarked for certain services, and he or she may use that voucher to purchase services from the private sector. The largest voucher program in the U.S. is the Food Stamp program. In this program families receive coupons which can be cashed in for food at m ost food retailers.

Stuart M. Butler, Ph. D., is Director of Domestic Policy Studies at The Heritage Foundation. He spoke at the 1990 International Privatization Congress, Saskatoon, Saskatchewan, Canada, May 15, 1990. ISSN 0272-W5. 01990 by The Heritage Foundation.

Problems with Contracting Most of today's largest social service programs delivered by contractors were established in the 1960s, under the so-called Great Society programs created under the presidency of Lyndon Johnson. Ile basic mechanism of the Great Society was to raise finance at the fed- eral (i.e., national) and state (i.e., provincial) levels and use this money to fund services de- livered by private professional organizations at the local level. The regulations for determin- ing the s e rvices to be provided, and the obligation for monitoring the providers, rested with bureaucracies at each level of the government - federal, state, and local. The same basic structure continues today. In recent years there has been rising concern among pr i vatization experts in the U.S. re- garding the dynamics associated with contracting for social services. The general point is made that although spending on services has risen dramatically, the U.S. poverty rate has changed little during the last 25 years - with variations seemingly dependent far more on the ebb and flow of the national economy than on the expansion or contraction of social ser- vice programs. It is also noted that the U.S. currently spends about $150 billion on anti-pov- erty programs for about 30 million poor Americans, or $20,000 per year in income support and services for each family of four below the poverty line. If the money had simply been given to each family, rather than fannelled through the social service system, the income of t h at family of four would be more than $5,OW above the poverty line. Yet poverty persists. The reason this spending on services has not substantially improved the condition of the poor is that the growth of contracting since the 1960s has led to the develop m ent of a huge professional social service industry. 11is, industry "crowds out" less costly alternatives, dis- torts the traditional mission of America's nonprofit organizations, and uses political pres- sure to expand programs that enrich the industry it s elf rather than serve the best interests of the poor. Government Requirements. 11is, happened, paradoxically, because the government sought to use the contracting process to assure the highest quality, professional services for the poor. To achieve this w o rthy goal, the government generally made the allocation of grants dependent on an organization indicating a real need for services and showing that it had a qualified staff to provide the services. But such apparently reasonable conditions have had a prof o und effect on the delivery of social services in the U.S. Most important, once-in- dependent and community-based social service organizations have become creatures of the government. By 1980, according to Lester Salamon and Alan Abramson of the Urban Inst i - tute in Washington, D.C., some 58 percent of the revenues of America's nonprofit social ser- vice organizations was coming from the governinent.1 Salamon and Abramson note, as have other scholars, that this close relationship with government has caused m ost groups to alter their activities to comply with the funding requirements of government programs. In addition, the Urban Institute scholars explain, the regulations accompanying contracts has led nonprofit organizations to professionalize their staff, shedding many "un- credentialled" volunteers and replacing them with paid and "credentialled" professional

I Lester Salmon and Alan Abramson, 77je Federal Budget and the Nonproft Sector (Washington D.C.,: The Urban Institute, 1982), p. 44.

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service providers. Thus the net effect in many instances is that the government now pays for services that were once provided by volunteers or by organizations funded by voluntary con- tributions - the antithesis of privatization. Were this professionaliz a tion of social services to have produced better services it might be said to be good value for money expended. But there are many reasons to conclude that services may have, on the whole, fallen in quality while rising rapidly in cost. Erecting Barriers. O ne reason is that. the professional private social service providers are not passive in the process of drawing up regulations to determine who is qualified to pro- vide services. Like most professions and guilds, social service providers have a financial i n- terest in convincing the public that they alone are capable of delivering a service, and that lower cost, "unqualified" alternatives are unsuitable. To reduce even the possibility that nonprofessionals might be selected, professional organizations pres s the government at all levels to erect licensing barriers against their competitors. As sociologists Peter Berger and Richard Neuhaus expl Through organizations and lobbies, professionals increasingly persuade the state to legislate standards and certific a tions that hit voluntary organizations hard, especially those given to employing volunteers. The end result is that the trend toward professional monopoly operates in tandem with the trend toward professional monopoly over social services. Ile connection b etween such monopoly control and the actual quality of services delivered is doubtful indeed. 2 Moreover, this pattern has a disturbing effect on the population supposedly being served. For one thing, community institutions that once bound low-income neig h borhoods together become pushed aside by professional groups with few real links to the community. This weakens the fabric of the neighborhood, making it more likely that poverty and blight will spread. For another, the financial incentive of the professi o nals is to convince people that they need services and that these cannot be provided from within the community itsel@ and then to lobby the government for more money for professional groups to deliver these "es- sential" services. The result is that low-i n come people are persuaded that they are unable to function independently and are persuaded instead to become increasingly dependent on government-funded services for their daily existence. Worse still, the professional social service industry and its acad e mic offshoots have be- come the primary source of research to indicate the alleged need for services and by which to evaluate the services provided. The political process relies heavily on this research to de- sign programs. The thrust of this industry-ge n erated research is predictably monotonous: there are always more problems that need to be solved than were ever imagined; if pro- grams have failed it is because more money is needed; and the only way to solve a problem is to contract with a professional organization.

2 Peter Berger and Richard Neuhaus, To Empower People (Washington, D.C.,: The American Enterprise Institute, 1977), pp. 36-37.

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Stifling Local Groups. The incestuous and monopolistic nature of the social service in- dustry, observes neighb orhood expert Robert Woodson, has been to suffocate indigenous organizations in poor communities - organizations that routinely outperform the profes- sionals in cost, quality, and appropriateness because they are part of the community itself and thus hav e the incentive to provide the best possible services at the lowest cost. By con- trast, the nonprofit and for-profit professional organizations funded under contract by the government, constitute .... a seller's market in that professionals themselves dec i de when, to whom, and how to serve. The result too often is the paradox of careless care .... Since it is the professionals who control the criteria of professional success and the definition of its category of clients and their needs, professional servic e s can survive any malfeasance and continue in business, unlike a friendship, a family, or even a true market enterprise. Professionals themselves determine whether they 3 have succeeded or failed and, if the latter, what the remedy should be. This dynamic is seen continually in the U.S. One example is day care. For many years the professional day care industry - nonprofit and for-profit organizations - has persuaded state and local governments to introduce a stream of measures to regulate the provision of d ay care services. Ile ostensible aim is to protect children and improve quality. But in many instances the impact is not to improve care in any measurable way but simply to increase the number of providers for each group of children and to require more ex t ravagant and costly facilities. The net result has been that less formal neighborhood day care centers are being driven out because they lack the funds or the paper qualifications to comply with reg- ulations. Ile professional day care providers took the n ext step along a now-familiar road a few years ago by publishing surveys alleging a shortage of day care in the U.S. (by which they meant, of course, a shortage of regulated professional care) and a supposedly shocking amount of unlicensed care (that is, c are by neighbors, relatives, and the like). IMeir solu- tion? An enormous new federal program to distribute money to state and local govern- ments for them to contract with licensed day care centers to provide services. Shutting Out Competition. The same p attern can be seen in many other examples, from job training to health care, and from education to housing. In each case the contracting mechanism is taken over by the profession under contract and becomes a device to shut out competition and secure a reg u lar source of revenue. The customer is not the consumer of the service but the government, and so it is the latter, not the former, who must be satisfied. Social service contractors also have become masters of the political process, building public suppor t to expand programs when money is plentiful and new problems are identified, and to block legislative efforts to end programs when money is scarce or results are disappoint- ing.

3 Robert Woodson, "Helping the Poor HelpThemselves," Policy ReWew, No. 21 (Summer 1982), pp. 85-86.

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A Checklist for Successful Privatization of Social Services The sorry history of contracting for social services in the U.S. should cause would-be privatizers to pause before assuming that simply turning over services to the pri vate sector is a guarantee of success. Officials or legislators considering such a move should recognize that social services really are no different from commercial services in that they exhibit the same consequences of monopoly and other forms of provid e r control. Yet officials who in- stinctively would -turn down a commercial firm requesting a regulation to restrict competi- tion routinely assume it must be in the public interest to "improve quality" by reducing com- petition in social services. Officia l s who champion the consumer in the commercial sector routinely ignore consumer choice in social services. It is only by recognizing that the dynam- ics are essentially the same whatever the sector that an effective privatization strategy can be developed f or social services. Fortunately the U.S. experience indicates how to design such a strategy. While the simple contracting model has serious deficiencies, other forms of privatizition, and variations of contracting, have been highly successful. It is possi b le, in fact, to assemble a checklist, based on the U.S. experience, to guide national or local levels of government in other countries considering the privatization of social services. 1) Wherever possible, use vouchers rather than contracting as the prim a ry tool of privatization. Vouchers place the control of services into the hands of the consumer. The provider of a social service therefore, is forced to pay close attention to the desires of the consumer, and to compete for his "business," rather than to satisfy the desires of the government. Food Stamps (vouchers for food) have been highly successful in the U.S. Imey are a very efficient method of providing the poor with the financial power to buy food in the open market. liere is no vast professional so c ial service industry to deliver food to the poor, and hence no lobby to press for regulations to micromanage the meals of poor Americans. Low-in- come Americans buy food in the same retail outlets as anyone else, at the same prices, and they have the same incentive as anyone else to demand the best quality at the best price. Needless to say, vouchers are strongly opposed by the social service providers who rely on government contracts. Vouchers for food in the U.S. were a part of the Great Society pro- gra m s of the 1960s, and so were introduced before the growth of the professional organiza- tions spawned by other Great Society programs. But vouchers for day care services have been bitterly fought by the professional day care providers, just as housing vouc h ers are op- posed by housing contractors and education vouchers by teachers and administrators in the U.S. public school system. Of course that very opposition from monopoly providers is pre- cisely why consumer-empowering vouchers are so important as a p r ivatization tool. Vouchers also are surprisingly versatile. Despite opposition, they are used in the U.S., usually at the state or local level, for such services as job training, special education services for children with learning disabilities, housing, day care and even technical assistance for community groups engaged in economic redevelopment. In each case the consumer of the service receives funds that can only be used for a certain purpose, and is relatively free to "shop around" for the best combin ation of quality and price.

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Admittedly, vouchers do not preclude manipulation of regulations by the social service providers. Normally there are some regulations governing the standard of service or quality of product that can be purchased with a vouch er. Day care vouchers normally carry the re- striction that only licensed services can be purchased. Housing vouchers can only be used for units where a certain level of quality is maintained. Nevertheless, the experience with vouchers is that such regula t ion is less severe. There are two chief reasons for this. First, voucher holders tend to resist being denied the same range of choices as other individuals when the providers are the same. And second, because the providers in a voucher program are not rou t inely dealing with the government, or dependent (usually) on the government for the bulk of their income, they have less opportunity or incentive to press for exclusion- ary regulation. 2) When contracting for social services, wherever possible contract w i th an organization from within the community being served. Vouchers are not always an available option. In some cases the client or the type of ser- vice makes vouchers technically unattractive. For instance, a pure voucher program may not make sense in p r oviding shelter and medical services to a seriously mentally ill homeless person. But officials still should be skeptical in general of the argument that the consumer is incapable of making an informed choice - the supposed ignorance of the consumer is a r outine argument advanced by all professions seeking to secure a monopoly. Vouchers may also be politically impossible to introduce, at least as a first choice, in fully privatizing a service already dominated by contracting. In this case the wiser strateg y might be to propose modifications in the contracting process. A key strategy to reform contracting in the U.S. has been for the government to contract with organizations within the communi- ties being served. Ile logic is simple. An organization from the neighborhood being served or, better still, formed of those being served by a government program has a clear interest in seeing the best possible services delivered at the best price (so that the same funds can serve more people). The U.S. experience sugg e sts that local organizations tend to be more creative and adaptive to the local situation, rather than to stick to the government contract rule book, and that in very many instances they provide better services. Of course a similar objection can be, and i s , made against community-basedservice con- tractors as against vouchers: how can the low-income people be expected to have sufficient expertise to provide essential social services? And once again, as in the case of vouchers, this often turns out to be th e argument that poor people are ignorant and incompetent. But in areas as diverse as adoption services, rehabilitation of young offenders, management of housing, day care, and education, non-professional community organizations often have dra- matically ou t performed professional service organizations. Even when community organiza- tions lack essential technical expertise, a contract can allow them to obtain training or to as- semble their own choice of technical talent - as the catchphrase goes among inner c ity groups, to "keep the experts on tap, not on top." Although contracting with local community organizations, as well as using vouchers, nor- mally incurs the wrath of the professionals, contracting is often easier to introduce politi- cally than voucher s are. This is because such contracting appeals to organized groups within the affected community, while vouchers target individuals. By appealing to groups, commu- nity contracting builds a political base to organize public and political support for the r e-

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form. In the U.S. case, virtually every example of a switch from contracting with profession- als to contracting with community-based organizations has been preceded by a political struggle in which the community groups have played a decisive role. 3) Dereplate social services. As described earlier, regulations determining who can legally provide social services have been a device used by professional social service contractors to block competition from other providers. Thus steps to deregulate soci a l services are crucial to assuring that a privatization policy, operating though vouchers or contracting with professional and/or com- munity organizations, does not lead to an excessive reduction in competition. This does not imply no regulation, but sim p ly that a government engaged in the privatization of social ser- vices should recognize that the pressure for anti-competitive regulation by powerful provid- ers is just as intense, and possibly more intense, in social services as in commercial. munici- p al services.

Conclusion There is now overwhelming evidence that privatization can lead to considerable improve- ments in the quality and economic efficiency of delivering services to people. But as many privatization experts have pointed out, if privatizat ion leads to private monopoly, whether it be through the sale of a telephone system or through a contract to collect garbage, the re- sult actually may be a deterioration of service. The experience of social services contracting in the United States provi des supporting evidence for this concern. Thus if other countries contemplate the privatization of their social services, they would be wise to take steps to in- sure that competition and consumer control is built into the privatization strategy.

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