Friday, April 25, 2014

The Atlantic Discusses the Backlash Against Privatization, Focuses on Symptoms of Failure While Overlooking the Causes

Aaron Renn author of the  Urbanophile blog recently shared on Twitter an article from The Atlantic entitled "The Privatization Backlash:"
A few years ago, Chicago residents accustomed to parking on the street got a rude shock. Parking-meter rates had suddenly gone up as much as fourfold. Some meters jammed and overflowed when they couldn't hold enough change for the new prices. In other areas, new electronic meters had been installed, but many of them didn't give receipts or failed to work entirely. And free parking on Sundays was a thing of the past.
The new meter regime sparked mass outrage. People held protests and threatened to boycott. But there was little recourse: The city had leased its 36,000 meters to a private Morgan Stanley-led consortium in exchange for $1.2 billion in up-front revenue. The
length of the lease: 75 years.
If the meter situation seemed like a bad deal for Chicago's parkers, it would soon become clear that it was an even worse one for the city's taxpayers.    
An inspector general's report found that the deal was worth at least $974 million more than the city had gotten for it. Not only would the city never have a chance to recoup that money or reap new meter revenue for three-quarters of a century, clauses buried in the contract required it to reimburse the company for lost meter revenue. The city was billed for allowing construction of new parking garages, for handing out disabled parking placards, for closing the streets for festivals. The current bill stands at $61 million, though Mayor Rahm Emanuel has refused to pay and taken the case to arbitration instead.
 The article then proceeds to talk about the efforts to reforms to the privatization that are underway:
Sawyer is not alone. In states and cities across the country, lawmakers are expressing new skepticism about privatization, imposing new conditions on government contracting, and demanding more oversight. Laws to rein in contractors have been introduced in 18 states this year, and three—Maryland, Oregon, and Nebraska—have passed legislation, according to In the Public Interest, a group that advocates what it calls "responsible contracting."   
"We're not against contracting, but it needs to be done right," said the group's executive director, a former AFL-CIO official named Donald Cohen. "It needs to be accountable, transparent, and held to high standards for quality of work and quality of service." Cohen's organization, a national clearinghouse exclusively devoted to privatization issues, is the first advocacy group of its kind.   
Doing it right, according to Cohen, means ensuring that contractors are subject to standards of transparency and accountability. Private companies doing government work and their contracts should be subject to open-records laws: In 2011, the city of Truth or Consequences, New Mexico, hired a contractor to videotape city meetings, then claimed the tapes weren't public records. (A state appeals court eventually ruled otherwise.) Companies should be held responsible for cost overruns, and governments should be making sure they're actually saving money: Many private prisons cost more to operate than public ones, the group claims.   
"We are definitely seeing a wave of states and some cities passing laws to get control of contracting," Cohen said. "There's still a lot of pressure to outsource, but the trend we see is people trying to fix the process and do it better, because of some of the high-profile failures at the federal and state levels."   
The article also discusses the re-evaluation of the purpose of privatization:
Yet the public impression of privatization as a panacea for the inherent inefficiency of government has been tarnished in the intervening years. From Halliburton to to private prisons and welfare systems, contracting has often proved problematic. Perhaps mindful of these high-profile debacles, lawmakers are now more likely to view privatization and contracting proposals with skepticism. "The ideological fervor for privatization has ebbed," according to John D. Donahue, an expert on privatization at Harvard's Kennedy School of Government.   
Donahue, who has studied the issue since 1988, sees privatization as inherently neither good nor bad. Academic studies paint a mixed picture, he said. The private sector can deliver efficiencies when the task being sought is well defined, easy to measure, and subject to competition—mowing public parks, perhaps, or collecting trash. 
But when the goals are fuzzier or competition is lacking, the picture gets cloudier. Is the purpose of municipal parking meters to maximize revenue, or is it to provide a low-cost amenity to citizens and the businesses they patronize? How do you value the various objectives of a prison system—justice, rehabilitation, social order—when the financial incentive is to lock more people up? ...
By way of background, I was a big advocate of privatization beginning in the early 1990s.  I read a number of books on the subject, including the bible of privatization, Reinventing Government, which I have on my shelves today.  I attended seminars at which the concept was discussed.  In the two decades that followed I have been proven wrong, not about the merit of the concept, but how it would be implemented.   That is why I conclude that, while The Atlantic article does an excellent job outlining the symptoms of privatization's failure, it completely omits the causes.

Privatization is about using the forces of market competition to lower prices and improve the quality of services provided by government to the people.  What I missed, and what the authors of Reinventing Government missed, is that politicians would be more interested in doing what is best for the government contractors than their constituents.  Contractors demand to be insulated from market competition by long-term contracts of 15, 30, 50 and 75 years.  Even though that would remove market competition from privatization, politicians, plied with large campaign contributions from companies pursuing privatization contracts, eagerly have gone along. 

I, too, missed the lure of jobs for politicians and their friends offered by these companies as well as the revolving door between those government contractors and the politicians from whom those companies are seeking privatization contracts.  There is a reason why virtually every Indianapolis deputy mayor and high-ranking administration official eventually ends up with a company or law firm doing business with the city.

Finally, I missed the newest tactic, politicians using privatization to borrow from future generations by getting contractors to pay upfront for a future revenue source.

Although The Atlantic offers privatization reforms, the reforms amount to giving a patient a lozenge for his cough, while ignoring the fact the person has bronchitis.  The question is how do you stop long-term contracts that create monopolies which are unresponsive to the market and the public?  Also, how do you stop the influence of campaign contributions and lucrative jobs on the selection of the winner of the privatization contract?  Finally, how do you convince today's politicians that they should not mortgage the future for upfront cash today?   Perhaps those causes of privatizations' failure can be addressed by legislation, but I am not optimistic.


Rob K said...

I don't see how you can call what's described there "privatization". It's simply sub-contracting the government's monopoly on something to an even less accountable sub-contractor. It's still a government controlled and enforced monopoly.

Paul K. Ogden said...

Rob K, it's actually worse. With government the public has some protection via elected and appointed government officials who work for the public. With a government provided and irreversible business monopoly they have none.

Indy Rob said...

The main issues with government privatization of almost any government service (schools, trash pickup, parking, road upkeep, etc) is that the various government officials end up distancing themselves from having any responsibility for the outcome while the contractors are going to focus on doing less and charging more; the outcome does not matter to the contractor, just his profit. The city can say it is not my fault and we can't do anything because we signed a 50 year contract.

Pete Boggs said...

Privatization is a code word to mask the half pregnant "logic" of public / private partnerships; monopolistic, crony capitalism.