Challenging issues in local privatization

Introduction Analysis of local privatization is giving increasing relevance to the insights provided by transaction costs and industrial organization theories. These theories point to the importance of a sector's market structure and incentives as the key factors explaining differences between sectors and dynamics within sectors. By focusing on incentives we see how contracting creates pressure on managers to benchmark costs and production practices with private actors. It also encourages managers to consider other innovations that could increase efficiency. These include mixed public and private production which is growing in the US (Warner and Hefetz, 2007), and inter-municipal cooperation to gain economies of scale (Bel and Costas, 2006; Warner and Hefetz, 2003). Local privatization is not ideological; it has been shown to be primarily pragmatic, as local governments must manage political interests in both the market and policy arenas (Bel and Fageda, 2007; Bel and Miralles, 2003; Hefetz and Warner, 2004; 2007; Warner and Hebdon, 2001). In this editorial we present evidence on lack of cost savings with privatization and show the importance of managing markets, policy, and political interests to ensure benefits from privatization.We draw on our own work and that of papers presented by members of the Scientific Committee at the Barcelona International Workshop on `̀ Local Government Reform: Privatization and Public ^ Private Collaboration'', which we organized in June 2006 at the University of Barcelona, Spain.We give critical attention to the challenges of managing costs, structuring the market, and managing political interests.We argue that the debate on local government reform is moving beyond the èither/or' dichotomy of public or private and now must focus on synergy between the public and private sectors. The challenges of a dynamic market-management approach are the focus of this theme issue.