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Municipal outsourcing goes back to the 1920s but the modern version began with the information technology explosion of the 1990s. It rapidly expanded again, beyond software into more actual services after the 2008 financial crisis when local governments were struggling.
In 2023 the global outsourcing industry was estimated at $731 billion and is projected to reach $5.6 trillion by 2027.
From 2008 to 2024 public sector outsourcing in the US significantly increased, affecting a wider array of government activities.
This farming-out of services is now visible at all levels of federal, state, and local government. (e.g. Federally outsourced temp staff spending more than doubled during the Trump administration).
Outsourcing bureaucracies to non-state organizations can also be used to build a “shadow” state capacity and effectively avoid accountability.
Since its inception, public sector privatization has been touted as a cost saving measure that brings the efficiencies of capitalism to government bureaucracies. However after decades of research none of the data definitively supports this claim. The more conclusive evidence indicates that outsourcing tends to be less efficient and more expensive.
For example, two separate studies (a library management study and a National Academies of Sciences, Engineering, and Medicine report) noted outsourcing raised costs through additional overhead, contract administration, private sector profit margins, reduced efficiency from the loss of public oversight and the deterioration of institutional knowledge from the increased employee churn rate. The National Academy report found nurse turnover reduced proficiency with hospital procedures, equipment, and personnel, which decreased productivity and increased medical errors in patient care.
The long range outcome of these programs where transparency, accountability, and the public interest are parceled out to for-profit firms, is typically that large corporations end up the winners and taxpayers the losers.
The examples of outsourcing corruption are countless, here are a few of the more notorious instances from the governor-based programs of the last decades.
- Michigan Gov. Rick Snyder (R) outsourced prison food to contractor Aramark
- Pennsylvania Gov. Tom Wolf (D) outsourced legal representation
- Ohio Gov. John Kasich (R) outsourced economic development
- Florida Gov. Rick Scott (R) outsourced drug testing
- Maine Gov. Paul LePage (R) outsourced Medicaid consulting
Other kinds of privately lucrative municipal outsourcing include local traffic and parking enforcement.
LAZ Parking Ltd. LLC operates in hundreds of municipalities across the country and had a stated revenue of $2 billion in 2023.
ATS Traffic Control LLC has more than 3,000 red-light and speeding cameras in nearly 300 communities in 21 states and has estimated revenues between $100 million and $1 billion.
Traffic and parking enforcement outsourcing has a history of malfeasance and it has cost taxpayers billions of dollars in lost municipal revenues.
Between 2017 and 2021 Los Angeles lost $192 million on parking enforcement. On May 7, 2021, LA’s outsourced parking enforcement operator, LAZ, expanded operations in the city.
Chicago has one of the biggest financial outsourcing failures on record. On December 4, 2008, it sold parking enforcement to Chicago Parking Meters LLC, which is owned by the Abu Dhabi Investment Authority and a shadowy company called Redoma. As of 2023, CPM LLC has recouped the entire $1 billion purchase price plus $500 million, and still has 60 years left on the deal.
There are many cases where public sector efficiencies need to be improved. But the majority of data indicates outsourcing is not the best option because it removes public accountability and prioritizes profit over services, with some rare and questionable exceptions:
- Prison Management: Generates some savings but sacrifices ethics and quality of care.
- Waste Management: Creates some savings at the expense of recycled waste production.
- Public Transportation: Bus services have sometimes led to savings and increased efficiency but typically only for school line service.
- IT Services: In government agencies resulted in operational efficiencies, often with lower costs compared to maintaining in-house capabilities.
- Child Welfare Services: Led to nominal savings and improved outcomes in some states in certain areas, such as foster care placement and adoption rates.
This list is not long or strong and it gets shorter and weaker when you factor in the calculus that municipal services are, by definition, part of the social contract — and not intended to be a profit center.
It is no surprise that the term privatization (aka outsourcing) first appeared in America (The New York Times, April 1923) during the roaring 20s in reference to selling off the German state railway system to US companies. But it was never the great panacea it was proclaimed to be.
Improving public sector efficiency is vital but it requires a careful evaluation of all the options which include: expanding oversight and accountability as well as internal infrastructure investment.
Outsourcing can be an option when it is truly beneficial, when it prioritizes service over profit, and crucially, when oversight remains in the public’s control.
Slash and Burn: Is Private Equity Out of Control?
The author writes, “Preschools and funeral homes, car washes and copper mines, dermatologists and data centers — private equity is anywhere and everywhere that money changes hands. If it can in any way be marketed or monetized, private equity firms have bought it — from municipal water supplies to European football clubs to the music catalog of the rock group Queen. By some estimates, these firms now control more than $13 trillion invested in more than 50,000 companies worldwide.”
How Privatization Robs Us of Our Most Precious Assets
From Current Affairs: “[Donald] Cohen, the founder and executive director of In The Public Interest, [takes] us through case studies of privatization in action, like Chicago’s disastrous deal to sell its parking meters. Cohen shows us that when we privatize, we are turning our own assets over to someone else who will sell them back to us and pocket our money. He explains why privatization is a bad deal and why public goods and services should remain in public hands.”
ITPI Report: Corporations Play the Long Game to Privatize Water
From In the Public Interest: “The long story of water privatization efforts and the public fight against them — is told in In the Public Interest’s new research report, ‘Water Wars in Pennsylvania: How Corporations Play the Long Game,’ a look at the methods and manners by which those corporations first took hold of legislatures and utility commissions to pass legislation and regulations that cleared the way for taking hold of the water source. The fact that Pennsylvania went from a commonwealth so dedicated to the protection of water that it embedded it in its constitution, to ground zero in privatization efforts, makes it both a case study and a cautionary tale.”
How Communities Lose Out With Privatization
The author writes, “While not a common occurrence, utilities do change ownership. Since 1980, 88 public power utilities have been bought out by private counterparts, including both to cooperative (private not-for-profit) and investor-owned (private for-profit) utilities. For the people in these communities, the sale is not simply a change of the logo on their monthly bill. It can have wide-ranging effects on everything from local employment opportunities, local tax and general services revenue, quality and reliability of electric service, safety of employees, and more.”
2024 Outsourcing Boom: A Global Shift or Troubling Trend?
From HelpSquad: “Outsourcing is a universal trend, which has an enormous effect on the local economies. Outsourcing has become a concern as to whether it is a long-term solution, making an analysis of what drives it a necessity. Further, an ethical perspective is to be brought up when analyzing the outsourcing and how business manages to combine profit and social responsibility.”
The Harms of Infrastructure Privatization: A Step Backward in Progressive Policymaking
The author writes, “It turns out that in many areas, the public sector is remarkably efficient and innovative — more than it is given credit for — and the private sector is less efficient than is commonly recognized. It is rife with what economists refer to as ‘agency problems,’ where conflicts of interests and misguided incentives lead to outcomes that are far from socially desirable — as we saw in the financial crisis.”
