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Myth: The Public Service Sector is Inefficient and Much Too Expensive

Privatizations do not usually lead to lower prices. Privatizations often entail hidden costs. If a business saves by investing less in training, the state has to invest more. Privatizations have cost public budgets more money than they brought in. Privatizations also represent a loss of control for the state. For employees, they mostly mean staff reductions, lower wages and increasing work pressure.

By Sven Hergovich

[This blog article published on March 4, 2014, is translated from the German on the Internet,  http://blog.arbeit-wirtschaft.at/. Sven Hergovich is an Austrian economist who urges rethinking prosperity and the relation of the economy and ecology.]

The public service sector is inefficient and costs too much money. That is the neoliberal credo. But what is really the quality of the public service sector? Could privatizations really help organize the sector more efficiently and reduce the budget deficit?

The public service sector that includes public administration, the educational system, the health system, the waste disposal- and sewage system, postal service and telecommunications, the whole energy- and water supply as well as public transportation is very important quantitatively and qualitatively. Besides directly created jobs, the public service sector ensures many (often regional) jobs through its investments. Crafts-persons or artisans profit from repairs in sewage treatment plants and schools while industry profits from new contracts for rails and trains.

Jobs in the public service sector are very important qualitatively and quantitatively. Working conditions and job security are better or higher than in the private sector.

The comparatively good working conditions and the good training in the public service sector have effects on the structure of the whole Austrian economy and are not only vital for those employed there. The public (service) sector can give a good professional training to many persons that will still have positive effects on the labor market chances of the concerned decades later.

In addition, the public service sector can also be used as an anti-cyclical employment instrument in that new co-workers can be hired in times of very high unemployment.


In 2012 the Sora survey showed Austrians are very satisfied with the quality of vital necessities. Customer rights, information, problems in service and supply security are regarded as good or very good for the investigated areas (water supply, telecommunications, urban public transportation, postal services, energy supply and rail possibilities). Since public services are mostly available to everyone, they also have a positive distribution effect. Analyses show that the wage differential in the public service sector is less than in the private sector.

The high quality of vital necessities is an important location factor for businesses and contributes to the economic prosperity of a country. That high quality enjoys high acceptance in the population and helps reach social and ecological goals of society.


Nevertheless, there are loud calls to privatize more enterprises of the public service sector and take further liberalization steps. The following arguments are often heard:

Public service sectors are inefficient and only private businesses can remove these inefficiencies on genuine competitive markets. Removing inefficiencies could then reduce the prices of public services. It is even argued that privatizations could lead to more innovations in the public service sector. Then it is claimed that privatizations could help reduce the budget deficit.

Are these arguments true? The first argument is very dubious since the fact that private businesses want to make profits and usually, have high expenses for advertising is studiously concealed. If a privatization can really lead to lower prices, the efficiency gains caused by the privatizations must turn out to be greater than the decreased gains and additional advertising expenses. This is not usually the case. In addition, privatizations and liberalizations do not lead automatically to intensively competitive markets. In some cases, intensified business concentration and less competition occur after privatizations and liberalizations.

The question whether the public service sector acts more inefficiently than the private service sector is unexplained. Businesses in competitive markets can compete in two ways. On one hand, they can try to force down labor costs as much as possible (through work concentration in individual employees, personnel cuts, and/or wage costs) or they can reveal which business is more innovative and provides better quality. Strong wage regulations that are usually the rule in public enterprises prevent competition over labor costs and encourage competition over quality and therefore have an innovation-promoting effect increasing productivity.

Thus privatizations do not usually lead to lower prices. Privatizations often entail hidden costs because public enterprises stop social or ecological spending that they previously assumed for cost reasons after privatization. If a business saves by investing less in training, the state has to invest more in training. For the business, this may be a gain and involves a zero-sum game from an aggregate economic perspective.

The statement that privatizations could help lower the budget deficit is very dubious. If one considers the privatizations of the last years, these privatizations have cost public budgets more money than they brought in.

Besides these financial considerations, there are even more basic considerations why privatizations in the public service sector had negative consequences. Many vital necessities are in the public authority because a market-conforming organization would not even be possible since a natural monopoly is involved. This is the case with power supply networks, water supply facilities and a country's rail possibilities. In addition, privatizations also represent a loss of control for the state so the state has fewer possibilities of implementing its policies. State enterprises could be used to pursue social and ecological goals.


For employees, privatizations mostly mean staff reductions, lower wages and increasing work pressure. For example, employment in Austria's electricity economy declined 25% between 1995 and 2006 and 29% in postal and private courier service. The degree of union organization is clearly lower in the private service sector than in the public service sector.

There are many arguments against privatizations in public services from a social, ecological and economic perspective. Privatization results are not encouraging either regarding the price or the quality of the services. The effects for the impacted employees who must pay for the privatizations with dismissals, lower wages, and increasing pressure are dramatic.

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