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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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