February 7, 2013
One of the promises of privatisation was that it reduces the costs of public delivery. Governments may have various reasons to contract out their service deliveries to the private sector. Private contractors possess advantages over public organisations as they have a stronger focus on results because of the competition among suppliers, the necessity to earn at least an average return on investment, fewer procedural constraints and a more powerful incentive structure for managers. In addition, private companies can profit from economies of scale as they can distribute their fixed costs across more than one municipality. Some of these advantages are also valid for public organisations such as inter-municipal corporations, as they achieve similar results by creating a market for service provision beyond a single jurisdiction. In the nineties, studies support the efficiency claims for contracting out public activities such as refuse collection, fire protection and cleaning services. Overview studies have indicated cost savings of about 20%, without sacrificing the quality of services provided.
However, the current evidence for cost savings from private delivery is more mixed. Recent meta-studies, especially for refuse collection, show that there is no unambiguous evidence for obtaining significant cost savings from private production. As an explanation, there was some indication that competitive tendering is more important than the ownership issue. In the Netherlands, also municipality owned firms join such tender procedures. However, also recently, doubts were raised that tendering will cause significant differences in costs compared with a non tendering case. Therefore, the literature has increasingly turned its attention to factors that might undermine savings from contracting out, such as hefty transaction costs and market concentration.
In a recent paper, Elbert Dijkgraaf of the Erasmus University Rotterdam and I investigate refuse collection cost differences between different modes of production such as private enterprises, intermunicipal cooperations, municipality-owned enterprises and in-house collection. Hereby, we can rely on a very large data set for almost all Dutch municipalities between 1998 and 2010. Our conclusion is that the cost advantage of intermunicipal cooperation is now larger than that for privatisation. At the same time the difference between collection via intermunicipal cooperation and collection by the municipality itself as a benchmark is small at -4%. We show that there are some indications for market concentration for the Dutch refuse collection market. This might induce fewer cost savings for private collection in the future. Therefore, when dealing with increasing returns to scale, cooperations can be an alternative to privatisation.