(credit: Krahsman)

Nationalization or privatization?

Do private and public organizations (and their employees) make inherently different trade-offs?

Todd Dewey is on his way from Winnipeg, Canada to North Spirit Lake, 500 km to the north east. He is one of the Ice Road Truckers, famous from the eponymous TV show. They are rugged guys (of both genders!) trying to make as much money as possible during the coldest months in Northern North America, by taking vital supplies to remote communities over the winter roads, which often consist of no more than a layer of ice floating on a lake (or even the ocean).

Todd is driving on a bumpy track that is only passable because there is a lot of packed snow on it, behind his truck a trailer with 30 tons of building materials. But his truck is losing power and it struggles to maintain speed on the steep slopes.

Behind him Darrell Ward, also heading for North Spirit Lake, is catching up. Eventually Todd is forced to stop, and Darrell pulls over too. He has got a much lighter load, just a bunch of huge empty plastic tanks. It would make sense for the drivers to swap their loads, but the two drivers work for different transport companies. Normally that might not be a problem, but Darrell, who used to be a colleague of Todd’s, had a falling out with Todd’s boss not so long ago. He left in anger and set up a competing business, so he’s now very much not just a competitor, but a rival.

Things are tough on the winter roads (image: Natalia_Kollegova)

He shares his thought process with the camera. On the one hand, he’s there to make money by delivering loads on time, not to worry about the problems of a competing company. On the other hand, you don’t leave a fellow driver behind to fend for themselves, a hundred miles from civilization, in temperatures of 20 below freezing. And of course you have a duty to bring supplies to people to whom you are literally a lifeline. So without much ado, Darrell makes the trade-off, and swaps loads with Todd. A few hours later they drive into North Spirit Lake in convoy, and make their deliveries as planned.

On 15 January, Carillion, a huge global facilities management and construction company was forced into liquidation, with debts totalling more than £1.5 billion ($2.1B, €1.7B). The implications are significant, not just for the 43,000 employees (of whom nearly half are in the UK), but for the many subcontractors with outstanding invoices that are unlikely ever to get paid, and for the many customers and clients, whose services or building projects are now in jeopardy.

Flipchart Rick has written a comprehensive post about the background of Carillion’s (longstanding) problems. Some are inherent in the low margin, high-volume nature of the business, vulnerable to unexpected mishaps and general uncertainty; others are to do with the mismanagement by company bosses and by the government as the client. One recurring topic in the aftermath of Carillion’s collapse centres on outsourcing of public services and the use of Public Private Partnerships for capital projects. Are these a good way of supplying services to the citizen?

The answer to this question lies in the potentially very different ways trade-offs are made in private companies and in public organizations. As Flipchart Rick’s blog illustrates, there is a strong suspicion among the British general public towards big business (and it is generally big business that is involved in the private provision of public services). The reason behind this is the assumption that the profit motive of private companies affects the trade-offs that are being made, in favour of the shareholders, and to the detriment of the employees, the taxpayer and the citizens.

Suspicious minds (via Flip Chart Fairy Tales)

The trade-offs people make follow from an intricate combination of intrinsic and extrinsic motivation. Say you want me to come and clean your house. I am a friendly kind of guy, but there are other things I’d rather do. My intrinsic motivation is insufficient to get me to spring into action, so you’d need to add some extrinsic incentive: pay me some money. But once I am busy cleaning, my intrinsic motivation will influence the eventual result. If I am inherently driven by doing a good job, or by making you satisfied with my work, I will scrub with great diligence. If I am of a less meticulous disposition and all I am concerned about is getting paid my wage, my performance may leave something to be desired. But I should of course bear in mind that if my work is too sloppy, you could withhold some of my money, or indeed sack me (or not hire me again next time).

My profit motive gives you at least some influence over how well I work, or indeed over how well your house is cleaned. Perhaps a really good cleaner, someone who is intrinsically motivated, costs a bit more, and so if you’re willing to fork out extra, you can make sure your house is really spotless. If I am a slacker with little intrinsic motivation, you can get someone else. But my extrinsic profit motive can also work against you: if I try to boost my margin by using inferior cleaning materials, that might leave you with a smudgy rather than shiny house.

This play between intrinsic and extrinsic motivations also applies within larger organizations, up and down the chain of command — including those delivering public services, and regardless whether they are in private or public ownership. Are the former, providing outsourced services, more likely to make trade-offs that are detrimental to the citizen, whether as a service user or a taxpayer? They can certainly boost profit margins by skimping on materials and labour in a way that reduces the value to the user. And unlike a cleaner you engage yourself, citizens don’t have a simple, straightforward way of sacking the firm that collects the rubbish, or the cleaners and caterers in the municipal swimming pool if they perform poorly.

Does that mean public ownership is guaranteed to deliver better trade-offs? The profit motive is absent, so there is no risk of abuse. But it also means there is no extrinsic motivation, and so citizens rely entirely on the intrinsic motivation of the supplier. If that is lacking and service quality is lousy, you are just as powerless to obtain better rubbish collection, or a better café or better cleaning at the swimming baths as in the case of greedy outsourced private sector suppliers. Arguably, poor outsourcing can be the consequence of the lack of intrinsic motivation on the part of the administration: if those who purchase or oversee the delivery of services to ensure they are adequate and provide value for money don’t do their job properly, it’s the tax payer and the citizen that suffers.

Collective ownership, ahoy! (source: Yougov)

The British public is firmly in favour of public ownership of many sectors, and a majority would want to see buses, utilities and railways renationalized, as a YouGov poll in May 2017 found. A Populus survey in August 2017 found even higher numbers desiring national ownership (Trains 76%, Water 83%, Electricity and Gas 77%, Banks 50%).

But does it matter all that much whether someone is employed by the state or the local district, or by a private firm? As Adam Smith wrote in his Inquiry into the Nature and Causes of the Wealth of Nations (Book 1, chapter 2), “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” That ‘own interest’ is the combination of intrinsic and extrinsic motives for people to perform well in the eyes of those whom they serve.

Darrell Ward was motivated by profit, but that didn’t stop him putting helping out his fellow Ice Road Trucker above securing his income. I once had the occasion of being served superbly by a civil servant in the Belgian Home Affairs Ministry: she was not motivated by profit, and still managed to get me a new passport to replace a faulty one in less than 24 hours.

Ideology is a distraction in the debate on public service provision. What truly matters is the right balance of intrinsic and extrinsic motivation, and that is just as important under private as under public ownership.

Originally published at koenfucius.wordpress.com on January 26, 2018.

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Accidental behavioural economist in search of wisdom. Uses insights from (behavioural) economics in organization development. On Twitter as @koenfucius