PRIVATIZATION EXAMPLES I

ABSTRACT: Currently, privatization of public sector functions is being looked to to generate badly needed immediate cash. First example: the city of Chicago, desperate for cash to cover a budget shortfall, sold its parking meter revenue for the next 75 years for $1.2 billion. Parking rates in some neighborhoods have quadrupled. The city is prohibited from engaging in any activity that could be competition for the parking meters and has to reimburse the private owners for any lost revenue due to a street closing, a meter being out of commission, and free parking provided to the disabled. Chicago has given up the ability to make decisions about parking for 75 years and appears to have in effect guaranteed substantial profits to the private investors.

Second example: Indiana received $3.8 billion in 2006 from an international consortium in exchange for the right to maintain, operate, and collect tolls for 75 years on 157 miles of Interstate 90. The 400 page lease agreement is indicative of both the thought that went into it and the complexity of such an arrangement.

A danger in these high-value, long-term privatization deals is that sophisticated investors will take advantage of government officials desperate for short-term revenue, who often don’t take the time or have the expertise to perform appropriate, long-term, cost-benefit analyses. Because of their significant impact on the public, any privatization deal should require public hearings, and those with a longer time span than the term of office of the person signing it should require super-majority approval (say 2/3) by the relevant legislative body, while those over 10 years should require a voter referendum with a super-majority (say 2/3) needed for approval.

FULL POST: In my previous post (10/16/12), I provided an overview of privatization of public sector functions and evidence that there’s no guarantee of improved performance. Privatization doesn’t always meet its stated goals of saving taxpayers’ money, improving public services, and/or increasing accountability. It only tends to be successful if there is good oversight and regulation, as well as real competition.

Currently, privatization is being looked to, not for those traditional reasons, but to generate badly needed immediate cash. This is occurring because the public sector is being squeezed by falling revenues (largely due to the recession and in some cases due to tax cuts) and rising costs (generally due to inflation). Here are two examples of privatization to raise immediate cash.

First, in 2009, the city of Chicago, desperate for cash to cover a budget shortfall, sold its parking meter revenue for the next 75 years for $1.2 billion. The private consortium of investors was led by the huge Wall Street financial corporation, Morgan Stanley (one of the companies responsible for the collapse of the financial sector and the recession that contributed to Chicago’s severe budget shortfall).

The deal will allow the private owners to increase parking fees substantially and parking rates in some neighborhoods have quadrupled. [1] It prohibits the city from any activity, such as building a new parking garage, that could be competition for the parking meters. The city has to reimburse the private owners for any lost revenue due to a street closing for repairs or a street festival. If a meter is out of commission for six hours, the city must reimburse the owners for a full day’s worth of revenue. In May 2012, the private owners had billed the city for $50 million for reimbursements for out of service meters and free parking provided to the disabled. [2]

Not only will this deal cost Chicago substantial money for 75 years, it also means it has given up the ability to make decisions about parking and its cost for 75 years. Furthermore, it appears to have in effect guaranteed substantial profits to the private investors, as there is no competition and little risk.

Second, Indiana received $3.8 billion in 2006 from an international consortium in exchange for the right to maintain, operate, and collect tolls for 75 years on 157 miles of Interstate 90 as it crosses Indiana. The 400 page lease agreement has limits on toll increases, requires the state to reimburse the private owners if tolls are waived during an emergency (such as a natural disaster), and covers details such as how quickly the consortium must remove dead animals from the highway. While the length of the agreement is indicative of both the thought that went into it and the complexity of such an arrangement, it is hard to imagine that every issue that could come up in 75 years has been identified.

In the short run, with the economy in recession and traffic down on the highway, it appears that Indiana taxpayers are coming out ahead. Indiana wisely used the funds for investments in infrastructure rather than short-term spending. [3] But it’s only six years into a 75 year lease and lots can happen over that time. For example, if traffic levels don’t increase and the consortium of owners goes into bankruptcy or defaults on their debt, what will happen? Could a bankruptcy court throw out the limits on toll increases?

Experiences with highway privatization in California, Virginia, and San Diego have all had significant problems. These privatization contracts are typically long-term, generally limit competition, and, therefore, result in significant limits on future public decisions and policies. [4]

A danger in these high-value, long-term privatization deals is that sophisticated investors and corporations will take advantage of government officials desperate for short-term revenue, who often don’t take the time or have the expertise to perform appropriate, long-term, cost-benefit analyses. A 75 year commitment clearly goes long beyond the longevity in office of the public officials who make the deal and it’s hard to believe that such a deal can be known to be in the public’s best interest over that time span.

“[P]rivatization can undermine good public policy and democratic decision making. Turning tax dollars and control of public services over to companies whose overriding incentive is to maximize profits can lead to long-term costs and sometimes devastating consequences.” (p. 4) [5]

Because of their significant impact on the public – on public services, on public policy and flexibility, on accountability, and on transparency – I would suggest that any privatization deal should require public hearings before (and after) the fact. Furthermore, those with a longer time span than the term of office of the person signing it should require super-majority approval (say 2/3) by the relevant legislative body. Privatization contracts of over 10 years should require a voter referendum with a super-majority (say 2/3) needed for approval.