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Privatization’s Dismal Track Record of Solid Waste Management

January 6, 2011

In my previous post, I explained that the World Bank, USAID and other lenders of development aid grant loans on the condition that borrowers — governments of low and middle-income nations — privatize public services and infrastructure. One of the public services affected by this is municipal solid waste management.

In India, privatization obstructs efforts by Indian authorities to implement the nation’s decade-old waste management policy because privatization’s incentives and imperatives defeat and override the objectives of the government’s waste management regulations. The lenders’ insistence that services be privatized considerably constrains the options or leeway of India’s leaders in formulating and executing policy.

A disjuncture or rift between the goals of lenders and borrowers is clearly evident. According to USAID, “Various approaches to privatization exist, offering cost savings, new technologies, improvements in efficiency and effectiveness and reduction in the need for permanent sanitation staff. . . . Private sector participation (PSP) in solid waste management offers several advantages, the first of which is cost savings, which are closely related to improvements in the efficiency and effectiveness of services. Privatization can also open the door to introduction of new technologies. Moreover, it can reduce the establishment costs of keeping and managing a full complement of permanent staff.”

These ostensible advantages of privatization do not serve the primary objectives of India’s solid waste management policy, the Municipal Solid Waste (Management and Handling) Rules. According to the Ministry of Urban Development, “the most important aspect in solid waste management (is the) reduction of waste and the segregation of waste at source.” According to the Finance Ministry, “The objective of SWM is to reduce the quantity of solid waste disposed off on land by recovery of materials and energy from solid waste in a cost effective and environment friendly manner.” The Ministry also states, “The goal of any integrated solid waste management (ISWM) plan is the recovery of more valuable products from the waste with the use of less energy and more positive environmental impact.”

This conflict comes as no surprise to those who recognize that the actual paramount objective of privatization is to generate profit for the private sector—particularly for firms of developed nations. Profit is achieved primarily by shifting the service’s cost to labor through layoffs and steep wage cuts. Rather than sharing such savings with the public, the profits are exported. For example, when the government of Puducherry in southern India outsources solid waste management to the Indian firm Kivar Environ, Kivar, which has no experience in solid waste management, forms a lucrative tie-up with the American waste management firm, Waste Connections.

I have been unable to identify any Indian scholar who is studying the evolution, terms and consequences of this trend in India. In the absence of Indian studies, to better understand the track record of privatized waste management we must look to studies from the USA, where privatization of waste management has been failing consistently for over 200 years.

Moshe Adler, an economist at Columbia University, has studied and written about efforts to privatize street sweeping and rubbish removal in nineteenth-century New York City. Adler found that privatization of services, although cheaper than governmental production, routinely resulted in unsatisfactory performance. (The following quotes from Adler’s work are from Adler 1999.)

After reviewing repeated attempts to privatize services between 1823 and 1881, Adler concludes, “contracting failed because enforcement failed. If enforcement did not take place it was because the city government lacked the courage to go beyond protests to impose meaningful penalties on the guilty. Every breach of contract brought about a study of how to fix the system, but rarely did any bring about the punishment of the corrupt. This inaction, which cannot be explained either by a profit motive or by moral feebleness, may be impossible to fix.”

Certainly, in some cases public officials responsible for monitoring the performance of contractors succumbed to the temptation to accept rewards for overlooking shoddy work by the contractors, but Adler insists that corruption was not the norm. Adler reports that: “By the end of the 19th century . . . The realization that every possible improvement to contracting out had been tried led city after city to declare its failure. . . Practically all American cities discarded contracting out at that time and switched to governmental production.” In May 1849, after several unsatisfying attempts to contract out waste management services, the new Mayor, Caleb Woodhull evaluated the performance of the latest round of contracting: “The system of cleaning the streets by contract has signally failed of fulfilling public expectations, and I assume that it is no longer entitled to public favor. At first it seemed to promise important advantages, both as to economy and efficiency, but in its operation it has proved entirely inadequate to accomplish either of these desired results. . . . I would therefore recommend an abandonment, as soon as practicable, of the contract system, and the entrusting of the entire business to the Superintendent of Streets, under the supervision of the proper department.”

In 1860, following yet more unsuccessful contracts, the New York City Inspector concluded that the contract system “has in every instance proved a failure.” Adler reports that other cities had the same experience: the head of the Chicago Board of Health declared in 1892, “there are few if any redeeming qualities attached [to the contract system]. No matter what guards are placed around it, the system remains vicious.” Mayor Pingree of Detroit expressed the same view in 1895: “Most of our troubles can be traced to the temptations which are offered to city officials when franchises are sought by wealthy corporations, or contracts are to be let for public works.”

Adler concludes, “Contracting out creates a conflict of interest for the government officials who are in charge of it, and this fact cannot be changed. The picture that emerges from the record is that contracting out failed because enforcement failed. . . . If enforcement did not take place it was because the city government lacked the courage to go beyond protests to impose meaningful penalties on the guilty. Every breach of contract brought about a study of how to fix the system, but rarely did any bring about the punishment of the corrupt. This inaction, which cannot be explained either by a profit motive or by moral feebleness, may be impossible to fix.” Adler points out that efforts to contract out the work failed despite the presence of all the safeguards and principles that economists today prescribe for successful privatization.

Privatization fails to deliver improved performance, and it also often fails to achieve cost control. Elliott Sclar, an economist at Columbia University, has studied the performance of privatized social services. A study of privatization by Elliott Sclar, K. H. Schaeffer, and Robert Brandwein concluded, “Competitive contracting is appealing in theory but less so in practice. Our actual experience with such arrangements from defense procurement to scandals in school bus contracts must make us aware that this approach to goods and services procurement is imperfect at best.” (Quotes in this section are taken from Sclar, Schaeffer and Brandwein 1989)

Advocates of privatization “seldom take into account the real-world market strategies of public contracting in which establishing monopolies, influencing public officials, and obtaining hidden subsidies are commonly used to enrich private investors at public expense. When contracting is examined against these real world constraints, the evidence indicates that the market for contracted services operates less like textbook competition and more like textbook monopoly or oligopoly, in which prices are driven as much by relative bargaining power and political considerations as by underlying production cost. Contrary to the claim that privatization will lessen the political factor in operating urban transportation systems, developing experience suggests the opposite is true.” (Sclar, Schaeffer and Brandwein p. 2) The empirical record indicates several counterintuitive outcomes from privatization. For example, the cost to the tax payer goes up (Sclar, Schaeffer and Brandwein p. 3), not down. More political influence occurs, not less. (Sclar, Schaeffer and Brandwein p. 2) “

Available evidence indicates that true cost comparisons would show that privatization has not been successful as a general strategy to contain costs, and may actually force increased cost onto the public.” (Sclar, Schaeffer and Brandwein p. 2)

“Privatization establishes the wrong priority for urban transportation systems.” (Sclar, Schaeffer and Brandwein p. 1)

“We are moving forward with a policy favored for its ideological purity, rather than its practical content and realism.” (Sclar, Schaeffer and Brandwein. p. 19)

“There are two fundamental problems with the model of competitive bidding as a cost-containment strategy: it ignores political and economic realities, and it takes a myopic view of efficiency.” “The textbook model of competition is devoid of politics and social constraints; the real world is crammed with them. In the world of textbook economics, prices and quality are the outcome of noncoercive, competitive market forces. In the world of real actors, competitors do not simply win or lose on the basis of product and price. They use any and every social and political advantage at their command to maintain market share.” (Sclar, Schaeffer and Brandwein Pp. 22-23)

“Efficient expenditure of public money should always be an important policy objective, but such considerations should not be allowed to distort our focus from the purpose of the expenditures.” (Sclar, Schaeffer and Brandwein p. 4)

It’s important to note that the privatization agenda shifts the purpose or primary aim of policy execution from providing waste management services that protect public health and the environment, to cost control. Under a privatization regime, cost control takes precedence over public health and environmental protection. Concerns about efficiency and cost control are valid, but should not become primary policy objectives. “Efficient expenditure of public money should always be an important policy objective, but such considerations should not be allowed to distort our focus from the purpose of the expenditures.” (Sclar, Schaeffer and Brandwein p. 4) “The issue is not public service versus private service but maximization of broader public policy goals. We must recognize that the public versus private question should not be decided on the basis of ideology but according to what works best for broader public policy goals of safe, efficient, cost-effective, and convenient movement of people in the service of enhanced economic productivity.” (Sclar, Schaeffer and Brandwein p. 33)

“It is far better to allow those charged with providing the transport service to make their own decisions and hold them accountable for the outcomes, not the inputs.” (Sclar, Schaeffer and Brandwein p. 32)

Privatization is misguided because it is based on false theories about how people behave and about biophysical reality. The real world is more complicated and corrupt than economists believe it to be. A good example or economists’ simplemindedness is the remark by the 2005 Nobel economist, Thomas Shelling, who said that climate change is not much of a threat to society. His reasoning for this assertion was that climate change will impact mainly agriculture and forestry, which represent only three percent of gross domestic product.

Privatization fails to deliver proper solid waste management because it never really intends to do so.

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4 Comments leave one →
  1. January 9, 2011 4:14 am

    Thank you very much for the post, I actually learned something from it. Really good content on this blog. Always looking forward to new entry.

    • Brooks Anderson permalink*
      January 10, 2011 5:51 am

      Thanks for visiting the blog and leaving your comment.

  2. January 29, 2011 11:24 am

    What you wrote here is simply enjoyable. Ok, i’m a little overreacting, but you can’t blame a guy for being impressed by a well written article 🙂

  3. February 24, 2011 9:47 am

    I actually learned something from it. Really good content on this blog. Always looking forward to new entry.
    Solid Waste Removal

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