The Privatization Backlash
The Privatization Backlash
MOLLY BALL, Reuters
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 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
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.
How did this happen? The meter deal passed the city council just four
days after then-Mayor Richard Daley—desperate to fill a
recession-caused budget hole—presented it. There were no public
hearings, and the aldermen never saw the bid documents. Afterward,
some aldermen who voted for it said they wished they'd known more of
the details, but it was too late. "We're stuck with it for the next 71
years," Alderman Roderick Sawyer told me recently.
Sawyer, a South Side Democrat who was not in office when the meter
deal passed, is trying to ensure similar proposals will get more
scrutiny in the future. He has introduced an ordinance that would
require more transparency, including public hearings and a
comprehensive economic analysis, for any proposed city partnership
with a private entity.
"This is just about the process," Sawyer said. "We're not saying all
privatization deals are bad. But if we're going to do this, let's be
honest with the public and let them know what's going to occur: It's
going to save this much money, it's going to cost this many jobs."
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 vogue for privatizing government began in the Reagan years,
experts say, when an ascendant conservative ideology painted the
public sector as a callous and sluggish bureaucracy and the private
sector as inherently more innovative and efficient. The trend
accelerated in the '90s, and today, Cohen estimates that $1 trillion
of America's $6 trillion in annual federal, state, and local
government spending goes to private companies.
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 Healthcare.gov 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? In many cases, Donahue
said, privatization and contracting save governments money not through
increased efficiency but by undercutting public-sector wages and
pensions or, as in the case of the parking meters, by effectively
robbing the future to pay for the needs of the present. (By mid-2011,
the city had spent all but $125 million of the $1.2 billion
These are the kinds of questions policymakers are demanding answers to
as they evaluate government contracts with an eye to getting the most
bang for the taxpayer's buck. In Oregon, the legislature this month
approved by overwhelming margins a bill tightening oversight of
information-technology projects. It was an easy sell in the wake of
the failure of the state's healthcare-exchange website, which was such
a disaster it made Healthcare.gov look successful by comparison. To
this day, Cover Oregon's website cannot accept online applications,
forcing Oregonians to use paper applications or go through an
insurance agent instead.
The new legislation will require third-party reviews of the quality of
IT contractors' work. One of its sponsors, Representative Nancy
Nathanson, a Democrat from Eugene, believes such a requirement might
have prevented the exchange debacle had it been in place while the
site was being developed. "I think it's important when you're spending
public money, whoever is doing the work needs to have their books
open," she told me. "We need to see how the money is spent. We need to
see performance measures to determine whether something is working. We
need accountability." In the next legislature, Nathanson plans to
continue her push on contracting issues, she said.
Most of the privatization skeptics are Democrats, who tend to be
sympathetic to the labor unions fighting to save public-sector jobs.
(In the Public Interest is partly funded by unions, though Cohen said
it has other funding sources, mainly foundations, and operates
independently.) When California Governor Jerry Brown proposed, in his
latest budget plan, to "reduce [the state's] reliance on contractors"
by bringing formerly outsourced functions back in-house, critics
largely saw the move as a sop to labor.
But some Republicans have also turned against privatization out of a
desire for fiscal responsibility. In Ohio, Republican Governor John
Kasich recently abandoned his push to lease the Ohio Turnpike to a
private operator, deciding instead to have the state issue bonds
backed by future toll revenue. The decision may have been influenced
by the experience of nearby Indiana, which leased a 157-mile state
road to an Australian-Spanish consortium and drew public criticism
when toll rates doubled in five years. As with the Chicago meters, the
government quickly spent most of its lump-sum payment and now faces
decades bound by a restrictive contract that gives it little control
over a major roadway.
"Privatization has potential rewards, but a lot of it is really just
about shifting money around for political reasons," said Phineas
Baxandall, a senior analyst at the U.S. Public Interest Research Group
and author of a report on toll roads called Private Roads, Public
Costs. "There are a lot of dangers in terms of loss of control over
public policy, not getting enough revenue for these assets, as well as
a lack of transparency."
Many of the ideological proponents of privatization are libertarian
conservatives who believe tasks like operating roads and schools are
better performed by the private sector. But in Texas, one of the most
prominent activists against private toll roads is a San Antonio Tea
Party activist named Terri Hall. She has started a petition to change
the city charter to require that any toll project be put to a vote,
and she blogs relentlessly on toll-related issues. "If there's
anything Texans hate, it's big government and cronyism, and toll roads
deliver both," she wrote recently.
A worry about handing over American public assets to foreign companies
also crosses partisan lines. Last month, the Republican-dominated
Nebraska legislature passed, and Republican Governor Dave Heineman
signed, a bill to increase transparency in state contracting by
requiring contractors to report where the money was going—whether the
goods and services the state was purchasing were coming from Nebraska,
from other states, or from foreign countries.
"We're spending close to $2 billion on contracts out of a roughly $8
billion budget," said Heath Mello, the Democratic state senator who
authored the bill. "The public and the legislature need to know where
our contracting dollars are going and whether the state of Nebraska is
seeing any economic benefit." Nebraska lawmakers may also be warier of
privatization since the state's effort to privatize its foster-care
system fell apart amid scandal in 2012.
Privatization proponents say contracting horror stories are overblown.
Leonard Gilroy, director of government reform for the free-market
Reason Foundation and editor of its comprehensive Annual Privatization
Report, noted that other cities, such as Indianapolis, followed
Chicago's lead by privatizing their parking meters without a problem.
(On the other hand, other cities, such as Pittsburgh, shied away from
privatizing their meters.) "Is privatization a magic wand? Is it
always going to come in and save you money? No," Gilroy said. "You
have to do this well. You have to do your due diligence. You have to
do a good contract and then you have to monitor and enforce that
In this, Gilroy would seem to be on the same page as advocates of
"responsible contracting." But he suspects that the real agenda of In
the Public Interest and the recent state legislative initiatives isn't
to improve contracting but to make it more difficult by creating
bureaucratic obstacles. He pointed to the group's collaboration with
unions on a resolution that recently passed the California Assembly.
Though nonbinding, the resolution's decree that the body "opposes
outsourcing of public services and assets" drew an outcry from
businesses and local governments, including the California League of
"What seems to be underlying this is an outright hostility to
outsourcing," Gilroy said.
In Chicago, Alderman Sawyer's accountability ordinance has yet to
advance out of the Rules Committee. Emanuel criticized the
parking-meter deal during his mayoral campaign and promised "an era of
reform," but as mayor, with the power to push the bill forward, he has
yet to take a position on it. Sawyer says he has had "fruitful
conversations" with the mayor's administration and is hopeful Emanuel
will back the measure soon. Emanuel's office refused a request for
comment on the ordinance.
Even if the ordinance goes nowhere, Sawyer believes Chicago may have
learned its lesson about privatization. Prior to the meter deal, the
city was one of the country's most enthusiastic proponents of
privatization. Daley leased the Chicago Skyway toll road for $1.8
billion and privatized city functions from towing to lawnmowing. But
in the five years since the parking fiasco, Chicago policymakers have
become more skeptical: A proposal to privatize Midway Airport—which
would have made it the first privately run major airportin the
country—went down after it was subjected to aggressive scrutiny.
"They analyzed the deal themselves," Sawyer said. "And they determined
that it was not worth doing."
MOLLY BALL is a staff writer covering national politics at The Atlantic.
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