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Chicago's parking meters are no longer under public control. (AP)

Ask the right questions before privatizing, not after

ASK THIS | July 08, 2011

Public officials are succumbing to the promise of easy money and privatizing services and infrastructure -- at great long-term cost to the public and to democracy. The head of a new resource center on privatization writes that if our leaders won't do it then it's up to the media to ask tough questions, before it's too late.

By Donald Cohen

Elected officials, conservative think tanks and industry consulting groups are proposing to privatize a wide range of public services and infrastructure in cities and states across the country. State and local officials scrambling to fill budget shortfalls are hoping to cut costs by outsourcing services. They are selling off major public assets such as parking lots, roads and government buildings for a quick infusion of cash – sometimes in the billions. Conservative politicians and think tanks describe privatization as an antidote to ineffective government. And private companies are looking for steady revenue streams that come along with long-term government contracts and leases.

But too often, a mayor, governor or other official proposing to sell off a public facility, privatize a public good or contract out a vital service, fails to raise basic questions that they themselves -- and the public -- need answered, to fully determine whether what they have in mind is actually a good idea and in the public’s short and long-term interest.

In 2008, for example, former Chicago Mayor Richard Daley rushed the proposal to lease the city’s parking meters for 75 years through the city council in just a few days after they (and the public) were given the details of the deal. Daley made the hard sell, promising a buyer with $1.15 billion to fill Chicago’s budget hole if the council acted quickly. Only after the deal was done and the dust settled did they learn that they sold nearly $1 billion too cheaply and that they had also given away their rights to manage the city’s traffic and land use to investment giants Morgan Stanley, Abu Dhabi Investment Authority and Allianz Capital Partners -- for 75 years. [Note: Daley just joined Katten Muchin Rosenman LLP, the law firm that negotiated the deal to privatize Chicago's parking meters.]

Such leases and contracts can also have important and long-term impacts on democracy and public policy making. For example, Chicago’s parking meter deal contractually obligated the city to reimburse the private investors – for the next 75 years – for any decisions that could impact their bottom line. And the investors have to be paid for lost revenue if roads are temporarily closed for street fairs or if a street is converted permanently into a walking mall as New York Mayor Bloomberg did in Times Square. Likewise, proposals to contract out public services – whether it’s trash pick-up, public libraries or park maintenance –often overlook or ignore significant impacts on jobs, the quality of public services and public accountability and transparency.

With public officials routinely failing to do due diligence, it's up to the media to ask these simple questions – and demand the answers – before any final privatization decision.

Q. Does the contract restrict democratic rights to influence public policy?

So-called “non-compete” clauses and “compensation clauses,” frequently buried deep in the contracts and long-term leases, limit or eliminate the public's ability -- for decades – to make critical decisions necessary to improve our cities, our transportation systems and many other public services.

For example, according to Penn State Law professor Ellen Dannin, the contract for the now-bankrupt San Diego South Bay Expressway (SR 125) gives the private contractor the right to compensation if the state legislature, CalTrans, any administrative body, or voters create a law that negatively affects the private contractor’s rights, or regulates or interferes with its right to collect tolls. This means that a new mass transit project that competes with the private road would require compensating payments to the private operator.

Q. Are there perverse incentives that could work against our public policy goals?

Private companies are focused on growing revenue, increasing market share and healthy “return on investment” for owners or shareholders. That’s appropriate for companies producing consumer goods, but privatization can result in the goals of private interests taking precedence over the public good. For example, prison contracts are based on the number of full prison beds. According to the Corrections Corporation of America, a leading private prison operator, “reductions in crime rates” and “ lower minimum sentences for some non-violent crimes and making more inmates eligible for early release based on good behavior” are described as business risks. So more people in prison is good for business – but may not be good for society.

Q. How will we hold the contractors accountable to the public?

When public agencies don’t have enough staff to regularly monitor the contracts, the public loses. Anyone who contracts for services – whether it's Boeing subcontracting the manufacture of jet components, a city contracting for tree trimming in public parks or a family hiring someone to expand the size of their kitchen – knows that if you don’t watch the contractor closely, you get cost overruns, missed deadlines and mistakes. Local governments are cutting monitoring staff, reducing the number of audits and increasingly relying on self-reporting by contractors.

Q. Do we have a Plan B? Is the public protected if the contractor fails?

Contractors that fail to deliver cost taxpayers millions when contracts have to be cancelled. Legal fees and overtime for public workers or back-up contractors to fix problems add up. And, once a public agency downsizes the front line workers who know how to do the work, it takes time to re-create an in-house team with experience and expertise. An audit of Virginia’s failed $2 billion information technology outsourcing found that cancelling the contract would cost the state hundreds of millions of dollars.

Q. Will all the outsourced jobs pay living wages and have health care benefits?

Privatization proponents frequently promise cost savings for taxpayers. In many cases those promised savings actually become cost overruns. But the financial models that private companies use to predict savings typically come from turning middle class jobs with health benefits into low wage jobs that don’t have health care. The economic hit by the loss of these jobs is a double whammy. On one hand, middle class workers lose purchasing power essential for broad economic recovery. On the other hand, there is greater demand for taxpayer-funded programs such as Medicaid, food stamps and housing subsidies. A recent proposal to replace New Jersey’s toll takers with contracted workers set starting wages at $25,000 with no benefits.

Q. If a private company thinks they can make money owning our parking lots, why can’t the public agency?

Desperate for cash, cities and states are selling off assets and programs that are actually money makers. Former California Governor Schwarzenegger proposed selling and leasing back state buildings that were free of debt and local governments are selling landfills and privatizing recycling programs that generate revenue for cash strapped cities and counties. Contracts usually allow private companies to raise rates. The result is that we pay higher fees, and the private company gets the additional revenue rather than generating addition funds for libraries or parks. Public agencies should be asked to evaluate a public financing model.

Q. Do 50- or 75-year contracts adequately consider possible demographic, political, social and economic changes? Have multiple scenarios been considered?

Indiana received $3.8 billion in 2006 from a consortium made up of the Spanish construction firm Cintra and Macquarie Atlas Roads (MQA) of Australia in exchange for the right to maintain, operate and collect tolls for the next 75 years. That’s a long time and a lot could change – from where we live and work, to how much we drive and much more – all of which could significantly impact revenues and profits. Is this the next generation’s bubble and bailout? Beware of financial projections that predict an unknowable future.

Q. Are the contract terms easily available and accessible for journalists and watchdogs to scrutinize long before decisions are finalized?

Contracts often have provisions that impact things we all care about – from environmental protection to neighborhood services. Do local and state governments make the contracts available through transparency websites and do they hold public meetings where residents and journalists have the opportunity to understand the contract and how it may impact their communities. Too often, elected officials and others don’t take time to read the contract before making final decisions. The analysis that uncovered flawed contract provisions in the Chicago parking meter deal occurred only after it was signed. Now it’s too late to change.

Q. Are there adequate transparency protections during the bidding process and once the contract is signed that gives the public the “Right To Know”?

The key bid documents – the RFQ, RFP and the contractor bid responses – need to be made publicly available with enough information to evaluate cost assumptions, contract deliverables and decision making authority.

After a contract is signed and private contractor takes over, the public often loses the right to know important details about public services.

The public records and open meetings laws that the press relies on provide much less access to information when private contractors take over. That can make it nearly impossible for the media to provide oversight of important public services and report on how taxpayer money is being spent.

The promise of privatization is always oversold – cost overruns instead of cost savings, information no longer available to the public, and corners cut that impact services. Asking the right questions is the first step to ensuring greater transparency, accountability and sound public decision making that protects and advances the public interest.

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