The Pitfalls of Privatization: Contracting without Competition

Abstract

Most authorities agree that privatization works best with vigorous competition among alternative service providers. Such competition may be difficult to achieve for certain services such as public utilities, for which a limited number of private firms exist to bid. This research first considers the theoretical issues surrounding the use of private companies in natural monopolies. Then it provides an extensive examination of the problems that confronted one large city in its efforts to privatize its wastewater treatment system. Beset by lack of competitive bidding and growing costs, Oklahoma City eventually was forced to make major changes in its procedures for handling its sewage disposal plants. The city did not return to municipal operation, however, and the city is now satisfied with the current arrangement under which a private firm operates all four of its wastewater treatment plants.