Saturday, October 25, 2014

Steve Lafleur from Canada: “Privatization is Not Inherently Good or Bad”


“Privatization is not inherently good or bad – the performance or effectiveness depends on implementation.” That isn’t the type of rhetoric one might expect to hear when describing something as polarizing as privatization, but it is one of the conclusions from the Urban Institute. 

Variants of that same phrase have been written by Leonard Gilroy of the Reason Foundation and Harvard privatization expert John Donahue. Despite the divide among politicians and activists, scholars who investigate the nuts and bolts of privatization recognize that, like any tool, privatization can make a mess if used for the wrong job. It can also help provide better and more efficient services when used for the right job. 

As we further our understanding of when and how privatization and public-private partnerships are succeed, we will see less and less failure if we have the right institutions.

Chicago provides some useful lessons in how privatization can succeed or fail depending on implementation and context. Chicago has experimented with privatization more than most cities. One can debate why that might be, but it provides us with examples of success, failure, and everything between.

The most notable failure was the City’s attempt to privatize municipal parking meters. The agreement was pushed through City Council hastily, and it was later determined that the contractor underpaid by a factor of 10. The terms of the contract are completely unreasonable. The City guaranteed the contractor daily revenue for each stall even if they remain unoccupied. During major events that require shutting down streets, the City must issue significant compensation to the contractor. This example highlights the perils of a poor tendering process.

By contrast, the City’s “street furniture” agreement has been quite successful. The 20 year agreement required the contractor to install thousands of modern bus shelters, newsstands, and kiosks, while paying the city $307 million over the term. In exchange, the contractor is able to use those shelters for advertising and the kiosks to sell concessions. This agreement turned the City’s sidewalks into a revenue stream rather than a cost while actually increasing the available amenities. This is an example of a well-conceived and executed privatization plan.

Policy experimentation such as privatization can also have spillover benefits for other municipalities by establishing best practices. The street furniture agreement has been so successful that Washington, Philadelphia, Albuquerque, and San Diego have followed suit. By the same token, the examples of failures can show other cities what types of projects to avoid, or what specific types of approaches.

Several provincial governments, recognizing the potential benefits and pitfalls of increasing private involvement in infrastructure, have established specific departments tasked with evaluating projects for potential public-private partnerships. P3s aren’t quite the same as privatization, but the level of due diligence required is similar. Organizations such as Partnerships BC have the expertise to identify opportunities and avoid pitfalls. Experts have observed that these institutions have learned lessons from previous P3s and have successfully refined their processes to harness best practices. While municipalities might not have the capacity to create such units, provincial governments should all have similar departments to help municipalities navigate the complexities of tendering.

Some politicians who are ideologically opposed to privatization might balk at creating such institutions, doing so would actually be a strategic means of preventing municipalities from entering into ill-conceived privatization or public-private partnership arrangements. It would also likely lead them to enter into more successful arrangements. That might irk some ideologues, but providing better services more efficiently to residents should be a top priority for politicians. Most residents care more about the quality and cost of services than how they are financed.

Rather than latching onto specific instances in an attempt to boost or discredit privatization, we should see privatization for what it is: a tool that is appropriate in certain situations. The debate shouldn’t be over whether to use privatization or P3s, but when and how.

Steve Lafleur is a public policy analyst with the Canadian Frontier Centre for Public Policy at www.fcpp.org.

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