Privatization in the United States

State, county and city economies are constantly challenged in running government operations. A government-run sector may transfer to the private sector the responsibility for carrying out the service and/or resource management activities and responsibilities.

Privatization can be a solution to dealing with particularly problematic aspects within a government's administration. Often municipalities will turn to privatization to solve an issue. A city or county may, for example, have vehicle maintenance cost increases that exceed revenues consistently and look to privatization as a means of controlling increasing costs. It may not, however, address other factors that are contributing to the cost increases or revenue shortfalls, such as regulation. Overtime compensation, for instance, could be a problem that also applies to other aspects of the government.^[1]

Definition of privatization

Privatization is the process of transferring ownership of a business, enterprise, agency, charity or public service from the public sector (the state or government) or common use to the private sector (businesses that operate for a private profit) or to private non-profit organizations. In a broader sense, privatization refers to transfer of any government function to the private sector - including governmental functions like revenue collection and law enforcement.^[2]

The term "privatization" also has been used to describe two unrelated transactions. The first is a buyout, by the majority owner, of all shares of a public corporation or holding company's stock, privatizing a publicly traded stock, and often described as private equity. The second is a demutualization of a mutual organization or cooperative to form a joint stock company.^[3]

Privatization has also been defined as the sale of public assets to private companies who then provide that service back to the community or municipality at a competitive price. The whole idea behind the privatization issue is that the new provider will be able to provide the same service but at a reduce cost to the public. The municipality and the community will be able to benefit from the reduce cost that was associated with operating the public facility.

Criticism of privatization

Historically, governments have at times turned government-run institutions into privately held corporations or simply abolished the publicly run institution in order for privately owned competition to enter and compete in the market in question. However critics often point out that historical methods of privatization were quite different than modern methods. For example, in the United States in the 19th century, a corporation might be chartered by a public entity, such as a municipality, for a very specific purpose (for example, constructing New York's Central Park) with significant constraints on its purpose, task and duration. Such a corporation would then often cease to exist after its purpose had been fulfilled. This kind of public-private partnership differs in significant ways from a common modern form, where publicly held services or resources might be handed over to a private company with few stipulations and for an indefinite period of time.

Critics of privatization also charge that lucrative contracts may be given to political allies, relatives or friends of public officials and that subsequently, these contractors may not qualified to do the work and/or may provide less quality to the general public. For example, in 2006 the LA Times reported on this pattern in an article stating that for "Indianapolis, New Orleans, Atlanta and other cities, privatization has been accompanied by corruption scandals, environmental violations and a torrent of customer complaints."^[4]

Another criticism of privatization, particularly in regard to municipal services such as water utilities, is that some municipalities have seen unacceptable increases in prices of services while seeing also a decrease in the quality of service and level of maintenance of the utility. For example, in Jacksonville, Florida, a company called United Water Resources owned and operated the municipal water system. After monthly bills increased in 1997 by almost $10 per month, and further requests for rate hikes later as well. The municipality's public utility, JEA, decided to buy the water system for $219 million, projecting that this would actually save customers 25% on monthly bills.^[5] On the other hand, publicly managed utilities have occasionally reported trouble as well. The New York Times reported in 2004 that a consortium of citizen's groups had won a suit against the city of Los Angeles to repair 488 miles of sewer lines and conduct other maintenance.^[6]

Those skeptical of privatization efforts also charge that in the event of the sale of a previously public enterprise in the form of an auction to existing privately owned contracting firms, contractors may attempt to carry out fraudulent and/or illegal practices, including:

• bid-rigging (arranging bids between firms to split up the market and limit real competition);
• low-ball bidding (setting bids artificially low to win contracts and subsequently raising fees);
• over-billing (charging too much, or charging for work not done).

These practices may be difficult to prove or investigate. Critics argue that the need to regulate these practices could lead to state and local governments creating new bureaucracies or building onto existing ones to take on these new responsibilities.

Some critics also are concerned about the motives of privately owned firms to make money, which they argue often run against the societal goals of government-run institutions. For example, some people believe access to running drinking water in one's house is a fundamental human right, consequently, denial of access to running water regardless of the reason is a violation of this right. These individuals often argue that running drinking water should be a service provided by government, regardless of an individual's ability to pay for the service and would be opposed to letting private business provide this service primarily because of the belief that a profit-seeking entity would ultimately cut off water service for those who refuse to pay for the service.

Four major classifications of privatization

The four major classes of privatization options can be characterized as (1) private provision of various services and supplies such as laboratory work, meter reading, and supplying chemicals; (2) private contracting for water utility plant operation and maintenance (both 1 and 2 are often referred to as “outsourcing”); (3) negotiating a contract with a private firm for the design, construction, and operation of new facilities (this option is referred to as design, build, and operate, or DBO); and (4) outright sale of water utility assets to a private company. In the United States, the contracting of management and operations to a private provider (outsourcing) has been more common than the sale of utility assets to private companies. No major U.S. city has sold its utility assets in recent decades, although some smaller water utilities have done so.^[7]

Factors that lead to privatization

There are several leading factors that contribute to municipal or county governments outsourcing. Many prominent researchers have debated the reasons why but I think it was best said this way "the privatization theory as I call it is based primarily on economics" 1.^[8]

Economics in the format that governments can operate in a more manageable and effective manner. Public administrations have been criticized for their lack of effective service. The quality of service may be slow and employees may not be held accountable for their responsibilities. The view by the public is that public organizations are not friendly, and removed from high quality public service, the lack of public relations, and training show in the inability of their personnel to deal with the public.

Privatization is widely thought to be a valuable policy instrument that leads to a greater good. Privatization of public resources injects new value into public assets and increases the privately held capital base of a country. Governments that implement privatization as part of their reforms use it as a mechanism to pursue a variety of objectives, both macroeconomic and fiscal. Governments undertaking privatization have pursued a variety of objectives. In some cases, privatization is a means of achieving gains in economic efficiency, given the extensive prevalence of poor economic performance of public enterprises in many countries and limited success with their reform. Privatization can also be a mechanism for improving the fiscal position, particularly in cases where governments have been unwilling or unable to continue to finance deficits in the public enterprise sector.^[9]

The decision as to whether to transfer ownership or operations of a public water utility to a private firm is complex. Immediate economic questions such as “Won't privatization increase customers’ monthly water bills?” are accompanied by larger and longer-term questions relating to public health, employment, political control, environmental issues, and relations to other city services.^[10]

Effects of privatization in public works

The effects in local government is immediate and an awareness factor is critical. Most likely municipalities would have public hearings or town meetings between the potential new provider of services and its constituents, along with city council. Most residents that may have relied on prompt quick response by city employees may see an increase in the amount of response time by the new provider. . The municipality will have to communicate to its residents that services will no longer be provided by the city. An attempt to reach and educate the public must be made. In larger markets television and newspapers should be used. In much smaller markets the need to reach those that tend not to read newspapers or watch TV should be made. Smaller community newspaper should be utilized, and eve door to door flyers should be considered. The last thing any community leader, city councilmen or women, or city manager wants to see is an uneducated community. No one wants to see residents stand up at city council meeting complaining about the lack of publication of an event such as the sale of community assets without the public knowing. An immediate reduction in the city's budget will be felt due to the municipality no longer paying the cost of service. Such as the cost of electricity associated with the operation of water and waste water plants. Also, there will be revenue associated from the sale of assets that will affect the city's general fund and give at boost to the organization's finances.

For a municipality a vote by the city council will take place.

References