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COMMENTARY
Prudent Privatization
By Stephen Goldsmith
T
Most of the voices in
the debate surrounding
public-private
partnerships focus on
the wrong issue —
public ownership —
while ignoring the
real issue: public value.
oo often, political rhetoric overshadows careful analysis.
Local and state officials across the
country now face urgent questions concerning how to fund infrastructure
deficits and gaping budget holes. Last
year, for example, New York Governor
David Paterson surprised many with his
announcement that he would consider
leasing state assets (such as bridges
and highways) to private contractors to
fix the budget. This has triggered a
round of arguments for and against the
idea of privatization.
Most of the voices in the debate focus
on the wrong issue — public ownership — while ignoring the real issue:
public value.
The privatization debate is consumed
by political rhetoric taking the place of
careful analysis. Some on the right
argue that private ownership is always
more efficient (i.e., a more efficient
monopoly), and some on the left claim
that corporations are corrupt and that it
is somehow un-American for companies to make a profit delivering public
services, even if they do it better, faster,
and cheaper than government.
In fact,determining whether to sell or
lease a public asset should depend on
the terms of the deal itself and the uses
of the proceeds.But these nuanced and
difficult questions rarely surface in the
public debate. This is partly because
This
column
originally
appeared
on
Governing.com,January 14,2009.Copyright © 2009
The President and Fellows of Harvard College.
few governments, including at the federal level,have a distinct capital budget,
reducing the incentive for long-term
investments and encouraging financial
sleight-of-hand. Furthermore, many
cases show that asset sales are last-ditch
attempts to fill budget gaps rather than
principled efforts to provide public
goods at a better price.
This motivation is understandable.
City,county,and state budgets across the
country are structurally out of balance
as they face falling tax revenues and
promises for public services that far
exceed what taxpayers or the economy
can bear. Over the last 10 years, state
spending on education,health care,welfare, corrections, and trust-fund benefits
increased 100 percent, and many states
are on track to double again between
2000 and 2010. Crisis requires action,
and it may be better to sell an asset than
to allow a government to renege on
promises or lapse into bankruptcy.
However, despite these tough conditions — or perhaps because of them —
glossing over the problem by selling
assets delays disaster rather than preventing it.Those who favor privatization
should not support monetizing a physical asset to fill a budget hole without
dealing with the underlying conditions
that created the hole in the first place.
So when does private financing, ownership, or operation of public infrastructure make the most sense? When it is
part of a broader plan to correct the
poor maintenance of existing infra-
June 2009 | Government Finance Review
95
structure and to build the transportation,energy,and environmental projects
needed to keep our economy healthy
and support our growing population.
The need for a comprehensive plan
to maintain and expand our physical
infrastructure is undeniable. Over a
quarter of the nation’s bridges are rated
as structurally deficient; nearly 50 percent of the 257 waterway locks operated by the Army Corps of Engineers are
functionally obsolete; airport capacity
increased from 1991-2001 by only 1 percent while air traffic grew by 35 percent; and worsening urban highway
congestion is estimated to produce an
annual drain on our economy of $78
billion. In addition, water and waste-
water infrastructure demands are
mounting; the EPA projects that $277
billion in drinking water infrastructure
improvements is needed over the next
20 years to comply with regulations and
ensure a safe water supply.
The good news for states and localities
is that they hold valuable physical assets
that they can leverage to create positive
local change. Monetizing these assets
can play a critical role in resolving their
capital and infrastructure needs.
A few principles might help guide the
debate to determine when such a
transaction makes sense, and how to
structure a sale or lease to ensure the
partnership is engineered to produce
public value efficiently:
■
It rarely makes sense to sell a capital
asset to fund an operational hole.
■
Success should not be measured by
how much privatization has occurred
but by how well government performs as a result. Accountability for
public and private entities is critical.
■
Management efficiencies should
help offset borrowing costs. Better
technology, the benefits of shared
services, or larger-scale providers
often embed solutions into the
financing.
Government Finance Review
Editorial Calendar
August 2009
Funding the Pension Obligation
October 2009
Effective Cash Management
December 2009
Innovations in Local Government
February 2010
Debt Management
April 2010
Budgeting for Sustainability
June 2010
Using Technology to Improve Government
Operations
■
August 2010
Issues in Public-Sector Accounting
October 2010
Economic Development
December 2010
The Role of the Finance Officer
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Government should be clear about
what it wants to control, such as
pricing, access, and equity, and what
risks it wants to shift, such as construction, operations, and financial
responsibilities. But it should be
flexible regarding the process used
to manage the projects.
■ Always
use a transparent and
competitive process with clear
evaluative terms.
■
Government as seller should be
represented by sophisticated and
experienced advisers.
■
Consider the effect on existing workers; they can almost always be incorporated into the solution.The process
should recognize and attempt to
accommodate the existing labor
force if it expresses an interest in
participating in a manner that
increases productivity and efficiency.
Living by these principles can make
or break a deal. Chicago, when arranging its Skyway transaction, handled
these deal points correctly. Similarly,
Indiana approached the lease of its toll
road in exactly the right way. The state
was well advised, controlled the rates,
set the terms for pavement quality, and,
most important, invested the proceeds
to fully fund the state’s infrastructure
deficit. Over a decade ago, however,
Atlanta showed how not to manage a
wastewater infrastructure privatization
with a process driven by politics, inaccurate baseline data, and unclear performance standards. That city’s leaders
chose the same private partner we did
when I was mayor of Indianapolis for a
similarly sized transaction. One worked
and the other did not.
Government can derive enormous
benefit from public partnerships and
asset sales. However, whether to do
them at all and whether they’ll succeed
depend greatly on the process and
the purpose. ❙
STEPHEN GOLDSMITH is a former mayor
of Indianapolis and the director of the
Innovations in American Government
Program at the Harvard Kennedy School.
He is the author of a Governing.com
series highlighting America's innovative
leaders, and he also moderates the
Management Insights column published on
Governing.com.