the Wisdom of the Trans Texas Corridor.
White Paper on Privatization
[ HOME ]
Then there were two... Indiana Toll Road vs. Chicago Skyway:
Analytical Review of Two Public/Private Partnerships, A Story
of Courage and Lost Opportunity (11/01/06) [NW Financial Group]
White Paper on
by Ellen J. Dannin,
Professor of Law
of what we hear about privatizing public services these days carries
the same simple message -- privatizing is good. More sophisticated
stories explain that the reason privatizing is good is that only the
private sector can deliver a quality product at the lowest possible
However, like most things in
life, privatization is more complex than this. Whether to have
certain public services and how to deliver them are decisions with
profound impacts on all of us. As San Diego, California, and the
country move towards privatizing, it's time has we members of the
public learn more about this issue or risk forfeiting our role in
This paper takes a look at
some of the most commonly held beliefs about privatizing public
services. Some of what you read here may surprise you or raise
issues you hadn't seen discussed before.
1. Governments are broke
because public services and tax dollars have been mismanaged.
Here are some
important reasons governments are finding themselves with budget
problems these days.
reason governments have been struggling with deficits during the
past few years is that they have lost major sources of revenue.
One important source of lost revenues has been ever lower tax
rates on those who earn the most and on corporations. Lowering
taxes by a percentage here or there doesn't mean much for most
of us, but when tax breaks are given to corporations and the
very rich the money lost is enormous. For each 1% a
millionaire's tax rate is lowered, the government can lose
$10,000 in taxes.
RPA: Proceed with Caution on Public-Private
Everyone Will Have a Say
Toll Roads: Joe Mysak
Buy U.S. Roads, Bridges
testifies to the Highways, Transit and Pipelines Subcommittee of the
House Transportation and Infrastructure Committee
party-crash cosy electioneering
A cop-out or good sense?
Unaccountable PPPs offer uneasy money
Exposed: Bracks' secret deals
06.11.03 Good deal or
bad, secrecy keeps voters in the dark
Brumby vows less secrecy on big projects
Courting controversy over PPP report
Over the past 15
years, we have seen the tax rate on wealthiest lowered again and
again. Each time, revenue is lost. If any of us kept having our
incomes lowered each year, we'd have trouble paying the bills
pretty soon. Governments are having the same problem.
It is estimated
that the richest 1% of the population has received over $80
billion in tax cuts since 1977. While this has happened the
amount of wealth which has flowed to the richest has increased
at enormous rates.
The share of
corporate taxes as a percentage of federal revenues has declined
from 23% in 1960 to 9% in 1990. Corporate property taxes show
the same decline. The corporate share of local property tax
revenues has dropped from 45% in 1957 to 16% in 1987.
not paying lower taxes because of declining profits. Corporate
profits have soared. An important part of those profits is money
that once would have gone to support government services we all
would benefit from. One important justification for those tax
breaks was to give corporations more money to invest in creating
good jobs. Instead of investing the money to create jobs,
corporations have gone spending sprees to buy each other. Others
have taken the money and used it to finance moving work out of
and acquisitions and moving jobs abroad have not benefited the
American public. All too often these days, we open to paper and
read about the layoffs that result. People who are laid off from
good jobs don't have the money to pay taxes. They are
transformed from taxpayers into people who need government
services. The tax breaks for corporations have ended up costing
the rest of us a lot.
Tax cuts aren't the
only money governments have given corporations in recent years.
Nowadays, corporations think they have the right to demand huge
subsidies to remain in or come to a city, county, or state.
Governments feel they have no choice but to pay when
corporations threaten to move if they aren't given subsidies.
The amounts of tax dollars being handed over to corporations is
no trivial sum.
a public-private partnership with a Canadian steel company that
would bring 400 jobs to Gallatin County, near the Indiana
border, in return for an incentive package with up to $140
million in income-tax credits over 25 years. The tax break
equaled $350,000 per direct job created. In addition, the
incentive package included a $4 million state loan to a local
water district for water and sewer improvements, a state grant
of $132,000 toward job-training and an accelerated construction
schedule for widening a major highway in Gallatin County.
Kentucky is not
alone. South Carolina lured a 2,000-employee BMW automobile
plant in 1992 with $130 million in incentives -- or about
$65,000 per job. In 1991, the United Airlines maintenance center
in Indianapolis, received $294.5 million in incentives, or about
$42,000 per promised job. General Motors has received all sorts
of welfare assistance from the State of Michigan and City of
Detroit. The list of companies who have pitted one area of the
country against another goes on and on.
Studies have shown
that these subsidies rarely result in the creation of jobs, and
certainly not the number promised. Unfortunately, job starved
cities and counties feel they have no choice, and the
corporations know it's a seller's market for them.
Is it really true
that government mismanages or squanders money. Compare the cost
of government services with what has happened in key areas of
the private sector. Health care is a good example. Those of us
have health coverage -- provided by private sector insurance
companies -- have seen costs increase; less coverage; and less
choice as businesses move to PPOs and HMOs to cut costs. Far
more of each private sector health insurance dollar goes to
overhead, such as advertising, and administration than is the
case for government run programs. A dollar spent on
administration is a dollar not available to spend on health
compete against one another, but this does not seem to have
meant that they have been careful with their revenues or
provided a service in a way that most of us would say is
2. Government spending is full
of incompetence, waste and fraud. Privatizing would eliminate this
First, this argument assumes that
the private sector is free from these problems. Ask whether this
belief is based on a private sector which is uniquely competent,
thrifty, and honest or one that has managed to escape scrutiny.
If the same standards of judgment were used, it is obvious that
the private sector does not escape problems of waste and fraud.
The past decade has seen many corporate leaders sent off to
prison for corruption and misusing their positions.
If you have trouble thinking of any,
here is a list to get you started. Beech-Nut sold sugar water as
infant apple juice. E.F. Hutton pled guilty to 2000 felony
counts in 1985. The Exxon Valdez spilled 240,000 barrels of oil
into Prince William Sound.
Remember the S&L fiasco -- the one
we taxpayers are still paying for. The government has had to
come in to bail out the private sector. General Motors'
mismanagement led it to lose billions each year and to layoff
tens of thousands of employees. Even in the face of the misery
management's failures had cause, it kept paying huge salaries to
the very officers whose decisions brought about this disaster.
There is no reason to think that
these problems will not arise in the case of subcontracted
Robert Monks (Republican politician)
and Nell Minow (a corporate lawyer) begin their book on problems
with the American corporate structure, Power and Accountability
with a story of driving through the woods in Maine and coming
upon industrial discharge which was killing the plants along the
river. They comment:
Who wants this to happen? Not the
owners of the company, the shareholders, not the managers or
employees, not the community, not the government. I could not
think of anyone connected with the company emitting the effluent
who wanted the result I saw. This was an unintended consequence
of the corporate structure. The very aspects of the company's
design that made it so robust, so able to survive changes in
leadership, in the economy, in technology, were the aspects that
led to this result -- pollution that no one wanted, and everyone
would pay for.
They are friends of corporations and
yet they think that American corporate structure is ill-equipped
to stop practices which make profits but which harm society,
even in some cases in which the law is violated.
Unfortunately, private corporate
mistakes don't stay private. Hundreds of thousands of workers
found that out when they were laid off. The lucky workers -- the
ones who escaped layoffs are overworked and under stress.
Communities have been hit as local business had to close for
lack of customers. The roads, sewage systems, and other public
services which were built to serve corporations who decided to
seek higher profits elsewhere are now useless. None of these
common corporate actions should make us comfortable with leaving
the delivery of public services to the private sector.
Yes, there are a few well-known
examples of government overspending, such as the military's
purchase of toilet seats and wrenches. These examples are
notorious but do not paint an accurate picture of government
spending. In any case, the public sector has a long way to go to
catch up with the private sector in terms of misused funds.
3. Market forces and competition
ensure that the private sector delivers a higher quality service at
a lower cost than the public sector.
First, all of us over the last 15
years have had a chance to see the impact relying on market
forces have. These are the forces which have led to the
devastation of our cities and the failure of the S&Ls. Given
their performance, we can't assume their results are always
It's a popular myth that the private
sector can feed multitudes with a few loaves and fish. Simple
logic should tell us it's impossible for the private sector to
deliver the same service for less and make a profit as well. In
fact, there is less of miracles done with loaves and fish and
more of magic acts done with smoke and mirrors.
Most of seem to forget that private
companies owe a legal responsibility to make a profit for their
investors. Even if they are providing a service to the public
they only are doing it as a way to make money for their
investors. This means that when a public service is privatized,
there is you have to subtract the investors' profit from the
money available to provide the service. 2 plus 2 will still be 4
whether or not it's the private or public sector that does the
addition. Given this simple math, how can a private company pay
a profit and still provide the same level of service and at less
cost than the public sector?
The answer is that most often it
isn't happening. Either it will provide a different service or
it will provide the service in a way that makes us uncomfortable
or it is given subsidies of public money or services that are
not counted in the total of amounts spent.
The easiest way to do all this is
make more poor people: if wages are reduced and benefits are
eliminated there is money to go towards profit. The company's
profit comes at a huge cost to the public though.
A community is like a tube of
toothpaste. If it's squeezed in one spot, it puts pressure
somewhere else. If the contractor saves by not paying for health
insurance and pockets that money as profit, these workers or
their families are likely to wait to see a doctor or to use
emergency rooms. This is not only more expensive but the public
has been picking up the tab. In other words, the price of the
subcontractor's profit can be very expensive for the community.
We want the same level of services,
but what quality of services are we getting when they are
delivered by a workforce willing to work for low wages and no
benefits. Each of us needs to ask if we feel comfortable with a
police force hired at minimum wage and given guns and close
contact with corrupt people offering large temptations. Lots of
government jobs are positions of trust. Government workers have
access to confidential information, assets, and other items of
values. There is no question that money saved in salaries this
way is pennywise and pound-foolish.
Many privatizers get special
subsidies or in-kind services from governments. Often these are
not counted when comparing before and after costs. The only fair
way to compare would be to add these items to the cost of
privatizing. Among the added costs that should be added in are
services such as oversight and supervision, use of
government-paid facilities or equipment, or outright subsidies.
Also included in the cost must be lost revenues if the
privatizer is allowed to keep the fees that would otherwise be
returned to the government. A good example of the latter is the
way Resolution Trust Corporation has been allowed to operate, by
taking a percentage of money recouped.
The biggest supporters of
privatization are really saying that greed is the strongest and
most reliable of human feelings. Is this a view you endorse?
Should government be promoting greed as a building block of
What is the impact of greed? EAI
lost its contract with the Baltimore School District because it
would not agree to cut its profit when the school needed to
address a budget shortfall. Recently, Warner-Lambert pled guilty
for hiding faulty procedures in making drugs and agreed to a $10
million fine. DuPont was fined $115 million for concealing
evidence in a trial involving its fungicides. Executives
recently were convicted of concealing information on using
faulty heart catheters during surgery. Where there is money to
be made there is temptation, and that temptation is expensive
for all of us. Each year we face the impact of $200 billion of
white collar fraud.
We're told that greed as a motivator
is the engine that creates jobs and makes the economy work. In
fact, what we see is greed leading to mergers, a focus on short
term profits, and layoffs of thousands of workers each year.
This year layoffs are up 45%.
Most of us are motivated by many
things other than greed. Who among us would choose money over
the life and happiness of a loved one? Most of us feel emotion
such as love of community and nature and pride in our jobs.
These are the very values that motivate many who go into public
service. If the greed promoters are right in their dismal view
of humans, why does anyone choose to become a teacher or a
public health worker. Ask if we would want a society made up
only of Wall Street traders.
Would we rather have public services
provided by the greedy or by people committed to the value of
People motivated by greed need to be
watched, especially when they have access to public money,
information, and property. Overseeing private contractors to
ensure there is no fraud or waste adds expense and is a very
inefficient way to deliver public services. Yet this expense has
to be borne to ensure that the contractor performs the job and
to avoid being vulnerable to the unscrupulous. Overseeing
subcontractors means having to retain skilled technicians or
managers who can evaluate their actions. Had the services not
been subcontracted, these skills would be used directly in
performing the job.
In San Diego, the school bus service
provided by public employees has been so much more efficient and
less expensive than private bus services that all subcontracted
transportation is being taken in-house. This story is not
unique. Public workers can provide better service and get better
wages while costing the public less. Unions have played an
important role in this San Diego success story.
4. It's impossible to get
rid of bad public employees, so they don't care about their jobs.
There seems to be an assumption that
public employees are bad workers. It's time this was corrected.
Think about the tragedy of the recent Oklahoma City bombing.
That was a vivid example of public workers -- fire fighters,
police, rescue squads, medical personnel, social workers, and
many, many others -- putting in long hours searching for
victims, caring for the injured, and assisting the bereaved.
This behavior by public servants is far from unique. A recent
outbreak of a plague of encephalitis in California was held in
check by dedicated public health workers and the Center for
Despite this many believe that
public employees don't work hard or are incompetent. The
evidence does not support this. Every day the papers are full of
stories of ordinary public servants doing their jobs effectively
and under great stress.
If public workers don't do their
jobs they can be fired. Tenure or civil service don't keep bad
people in good jobs. What they do is require an employer to
prove that it isn't discharging based on whim, that it has good
reason to discharge; that the employee is given notice of the
reasons for discharge and an opportunity to defend himself or
herself; and that the final decision is made by a fair process.
If an employee remains on the job but can't perform it, this
means that management has not done its job of assembling
evidence that would support the decision to discharge.
Recently both Los Angeles' Mayor and
the Orange County trustee -- people from the private sector
business communities not noted as fans of the government -- made
public statements that they had found the public employees they
had dealt with to be dedicated, competent and hard working. If
anything, they said, they had been disappointed by the quality
of management in the public sector -- not the workers.
Attacks on public workers are one
way to make assaults on public services. Privatizing may be the
first step in eliminating a service completely. If the
legislature wants this, it should face the issue squarely
whether or not to provide a service.
5. Private corporations make more
efficient use of funds and eliminate waste.
This view has become almost gospel.
However, if it is examined carefully, there is strong evidence
that it is not accurate.
Think about IBM and General Motors.
They are struggling to stay alive because they indulged in
wasteful practices that went unnoticed and uncorrected for
The law requires that private
contractors have, as their number one responsibility, making a
profit for their shareholders. This has been interpreted by many
to mean short term profits on share prices. Educational
Alternatives, Inc. (EAI), is a good example. This company has
been trying to get contracts to run public school systems. It
released false information about student test scores as a way to
bid up its share prices. Others who play the stock market and
who had sold short on EAI stocks (that is, betting that on a
certain date the stock prices would decline), released
information that was damaging to EAI. The stock prices declined
so precipitously that the company was in danger of failing.
None of this was in the public
interest. Had EAI failed, the schools would have been left with
no one to manage them in the short term. Public services are too
important to be left to this sort of danger. The EAI story,
however, is not an aberration. This is the normal way American
companies and the free enterprise system operate.
Stock market manipulation is not the
only private sector problem that could endanger providing public
services. The rate of corporate bankruptcies has been high over
the past few years. If a company that is supposed to be
providing public services goes bankrupt, how will the service be
Many public sector workers have lost
their jobs as federal, state and local governments have tried to
cope with the lost revenues. Cutting jobs has not meant cutting
out the work those people once did. Those who have remained have
seen their workloads increase. For some the increase has been so
great they are unable to perform all their new duties and suffer
from burnout and frustration.
For the public this may appear to be
incompetence or a bad attitude. Unfortunately this feeds the
impression that the public sector is incompetent. The root
causes, however, are insufficient support, and this will remain
whether or not the public or private is the provider.
Privatized public services may also
be shut down by strikes. Private sector employees have a right
All too often the discussion about
privatization comes down to dollars paid or saved. Price is not
the only consideration where public services are concerned.
Other public values may be more important, such as quality of
service, reliable availability and wide access.
To put it more concretely, think of
the CDC stepping in to stop a potential epidemic of Hantavirus
or encephalitis. None of us would have wanted the CDC not to
investigate or provide services designed to stop the diseases
from spreading to those too poor to pay. We all benefited by
having a stable service available quickly and without regard to
price. Who could put a price on stopping an epidemic quickly?
Other public services are similarly difficult to put a price tag
When it comes to mailing a letter,
if I live in a city and can get a private contractor to deliver
all my in-city mail at less than first class postage, I might
think that's a pretty good deal. I may think less of it if I
have to pay the full cost of delivery to my mother who lives
across the country up a mountain down a dirt road. By paying
more for my letters in the city, it's true I subsidize other
letters. On the other hand, the system works well when provided
on this large national scale. With public service, the whole is
greater than the sum of its parts.
If mail service gets divided up by
competing subcontractors, the advantages of a national service
-- a service that helps knit us together as a people -- will be
lost. Here, cost is not the most important value; equity and
access to service on a national basis is.
Information is a public service we
don't often think about. The government collects and maintains a
great deal of information. Some of it is confidential. Should a
subcontractor or a series of subcontractors have access to this
information? Under these circumstances, isn't it likely that
some of it might leak or be used in ways we are not comfortable
We all know that knowledge is power.
Should we subsidize a private company to amass information which
it then can sell back to us.
There have been notable instances in
which private companies have been subcontracted to collect,
provide or maintain information created at public expense. In
some cases, they have refused to return the underlying data or
documents to the government at the termination of their
contract, thus depriving the government and the taxpayers of
materials they paid to create. Lawsuits and other efforts to
recover the government's property only add to the costs. These
problems can make a cheap service very expensive.
6. Money paid in taxes would make
us all richer if spent in the private sector.
This has been a popular belief since
the 1980's. However, to see its effects all we have to do is
look around us. More than 180,000 fulltime state jobs have been
eliminated in this time. Most of us do not feel richer or more
secure as a result. Why is this the case?
When good jobs are lost the people
who had those jobs don't have money to spend in their
communities. Most jobs created in recent years have been lower
paid. Slowly the grocery stores, gas stations, clothing stores,
restaurants, and other businesses are pinched for customers and
A 1992 study by the Corporation for
Enterprise Development found that creating new jobs has only a
very loose connection with a state's overall economic
performance. Creating large numbers of low wage jobs with low
job security often results in poor economic performance. The
study found that states cannot thrive by creating new jobs that
don't pay well enough to support a family, that offer few
benefits, and that are so loosely tied to the community that the
jobs are likely to be moved. Privatized jobs are often a
tradeoff of good jobs for bad jobs.
It's easy to lose sight of the fact
that public employees pay taxes too. Each time we see that a
public sector jobs is eliminated we should see tax revenues
The bottom line on all of this is
that practices that were supposed to enhance industry have been
destructive to all of us. After years of pursuing them it's easy
to see that none of this has made us any richer. Experience
living under a system based on the theory that private sector
dollars are better spent should tell us it's time to discard it.
The truth is that all of us would
rather keep money than have to pay it. None of us especially
likes to pay taxes.
But the truth also is that we get a
lot of services for those tax dollars. We accept them as natural
and almost don't realize how much we receive each day.
Look around and count them up. It's
easy to think of street cleaning, sanitation, police and fire
protection. Even if we have no children, public schools benefit
all of us by educating the citizens of tomorrow -- the people
who will care for us as we age. Add to this animal control and
public parks and zoos.
Every time we take an elevator, buy
food, or eat a meal in a restaurant we can feel safer because we
know that government experts have inspected what goes on behind
the scenes that we can't see. The state makes certain that
people who provide important services, such as our car
mechanics, are licensed and competent to do their jobs.
We receive weather reports and know
that disaster relief is available if needed. We have roads to
drive on thanks to public services. Airplanes are guided in by
air traffic controllers.
It's hard to imagine how each of us
as an individual could afford to buy these things. It's also
easy to see that we each benefit just by having these available,
even if we never use them. Only by pooling our tax dollars are
we able to provide for our collective good.
There are well-known cases in which
the government has contracted out certain services only to find
that when the contract ends, the contractor refuses to return
the government resources they were allowed to use in the first
7. All the studies show
that privatization is better.
First, the facts of life. Where do
studies come from? Who are the experts who made these findings?
If you look behind the surface
you'll see that a lot of what we "know" about privatization is
mere puffery. Groups such as the Reason Foundation and the
National Council for Public Private Partnerships (formerly the
Privatization Council) have spent a lot of time and money
convincing the public that privatization is better. When they
issue their reports or sit on panels or are quoted by the news
media they are basically just making commercials for their
product: private takeover of community services.
What do these statements and studies
say. If you read the paper -- what they release to the public --
you hear stories about the future impact of privatization. They
talk about how much money they think government will save if it
privatizes particular projects and how much better the services
will be. You see very few follow-up stories on what has really
There's at least some reason to
wonder how certain they feel about their own data. Recently many
of these privatizers fought vigorously against legislation in
the District of Columbia, which required that, before any public
service was subcontracted, there had to be proof that there
would be at least 10% savings. Why did they fight so hard?
Surely if they believe what they say they would not object. Ten
percent is such a small amount that it should be easy to prove.
Despite this, the pro-privatizers have fought vigorously against
the law and for a system requiring no proof to back up whatever
they want to claim.
This is not the only gap between
what they say and what they do. If you read what these groups
send out to their constituents -- companies thinking of going
into the privatization business -- you don't see talk about the
public interest. The focus is on Profit. When the word "Profit"
appears in their publications, you see it in boldface and large
They try to create a sense that
privatizing is something good. The National Council for
Public-Private Partnerships even gives out its own awards for
people who help the cause of privatization.
When we realize that these are just
commercials, it's easier to see that we should take them with
the same grain of salt we use when we're told that some shampoo
will make us eternally happy. If the American public were given
a more complete picture of the story of privatization, we'd see
that they these folks think they can sell us a bill of goods.
When we buy the shampoo thinking it would make our lives
perfect, all we end up with is a bottle of shampoo and less
money and, hopefully, clean hair. When we buy privatization, all
we end up with is privatization, more money in the privatizer's
pocket, and hopefully, the same level of services.
But even that may not be the case.
Privatization failures are never
publicized. Yet they exist.
An example is the subcontracting of
garbage collection services. In some cases, garbage and toxic
waste has been improperly disposed of. The public had to pay to
clean up, while the original contractor pocketed the money for
services not received. Waste Management, Inc. is an example of a
disposal company convicted for financial improprieties. It is
well known that organized crime has infiltrated the waste
The Challenger shuttle blew up
because private subcontractor Morton Thiokol did not want to
delay the launch. It also ignored internal warnings that its
product was defective.
New York City subcontracted its
Parking Violation Bureau to Datacom Systems Corp., a subsidiary
of Lockheed. In 1987, evidence of bribes, extortion, and
stealing were uncovered. When the work was returned to the
public sector, stealing stopped and the cost of the service was
In New York state it was found that
$12.5 million was paid to 22 crime related companies engaged in
providing mental health services, police protection,
construction, and services to the mentally disabled. Principals
of many of these companies have been convicted of various crimes
in performing their jobs.
If privatization is efficient
because of competition, then it follows there is no reason to
subcontract services that cannot be subdivided among many
competing providers. Merely being in the private sector is not
what is supposed to create efficiency and improvements; it's
competition. Where there's no competition, then the services
might as well stay in-house.
Here are some impacts the
Cornell University Hebdon Report found that result from
diminished quality and access to
lower employee morale, productivity
worker exploitation through lower
wages and benefits
increased discrimination against
minorities and women
loss of government control and
lost constitutional and other legal
decreased efficiency as a result of
difficulty monitoring and administrating contracts
loss of accountability and control
increased corruption, bribery,
kickbacks, bid-rigging, campaign donations, low-ball bids, and
higher direct costs or hidden costs
to pay for the loss of pensions and benefits of public employees
increased conflict, strikes,
grievances, and arbitrations
The Hebdon report found:
In conclusion, we found privatization to
be, at best, a disruptive, socially destabilizing, and ultimately
harmful method of cost saving. At its worst, privatization can
actually increase costs, lower the quality of services, reduce
public accountability, and marginalize citizen involvement in the
democratic process. ... The rational solution is to seek creative
alternatives to the way services are currently provided by improving
the utilization of the existing workforce. The practical answer, we
believe, can be found in fundamental reform of pubic sector work
process through dialogue, discussion, and negotiations. This is the
challenge for politicians, management officials in the public
sector, public employee unions, and employees.
Reprinted with permission.
Ellen J. Dannin, Professor of
Wayne State University
Detroit, Michigan 48202
Phone: (313) 577-3941
This Page Last
Friday January 26, 2007