In the news

Central Penn Business Journal
Tim Stuhldreher

Sometime toward the end of the month, Gov. Tom Corbett's newly appointed privatization council is expected to convene for its first meeting.
When it does, it will have a broad mandate. Members will look across "the entire spectrum of state functions" to find potential savings, Corbett spokesman Kevin Harley said.

The intent isn't to privatize essential operations of government, such as prisons, but to find elements — such as medical services within prisons — for which outsourcing could improve efficiency and quality, he said.

Across the country, cities and states are looking to privatization in an era of tight budgets and fierce opposition to tax increases. The conservative American Legislative Exchange Council made privatization a key part of its "State Budget Reform Toolkit," released earlier this year.

In May, the Commonwealth Foundation, Harrisburg-based right-leaning think tank, released a report strongly advocating privatization, titled "Privatizing 'Yellow Pages' Government."

Privatization during Gov. Jeb Bush's administration saved Florida $550 million directly and $1 billion in future costs, according to the report, prepared in cooperation with the Los Angeles-based libertarian think tank the Reason Foundation. Any service found in the Yellow Pages should be a potential candidate for privatization, it said.

Commonwealth Foundation President and CEO Matt Brouillette is among the 24 members of Corbett's council.

"Let's make sure that government focuses on its core functions," he said.

Privatization isn't a panacea, but it can be a valuable tool to improve government service, he said.

ALEC's "Toolkit" referenced the "Yellow Pages" criterion. So did the Corbett administration in an Aug. 11 memo to state agencies, advising them to put privatization possibilities in their 2012-13 budget requests.

"Agencies should identify opportunities for functional outsourcing or consolidations. … If a product or service that state government is currently providing can be found in the Yellow Pages and can be done less expensively by the private sector, then the commonwealth should consider offering that product or service in a different manner," it said.

Critics, however, charge that privatization is often mishandled, leading to sweetheart deals for favored companies at the expense of public welfare.

"We see, over and over again, privatization projects gone bad," said Shahrzad Habibi, director of In the Public Interest, a left-leaning public policy research group based in Washington, D.C.

Experience shows that putting private interests in charge of providing government services carries inherent risks, said Ellen Dannin, a professor of law at Penn State University who has published several analyses of the practice.

Unlike businesses operating in the market, government tends to operate in areas with little or no competition, she said. That's why democracies have rules and systems to promote bureaucratic accountability, such as public meetings laws and budget disclosure.

When government work is privatized, companies have been able to obtain monopoly-like franchises that free them from both market and bureaucratic accountability, Dannin said.

"If you don't have accountability, you are just opening up a door to corruption, graft and not giving people value for money," she said.

Dannin described the "Privatizing 'Yellow Pages' Government" report as thinly researched, with no support for many of its assertions.

In a recent paper, "Crumbling Infrastructure, Crumbling Democracy," Dannin highlighted contract provisions companies have used to stack the deck in their favor, including noncompetition clauses and "compensation events": the right to be paid when government actions adversely impact a privatized operation.

A contract privatizing a highway in Denver allowed its owners to object to improvements on "competing" nearby roads that might divert drivers and reduce toll revenue, Dannin wrote.

The lease that turned over Chicago's parking meters to a private consortium for 75 years includes a noncompetition clause and clauses requiring the city to compensate the consortium for revenue lost when streets are closed for maintenance or public events, she wrote.

That consortium, led by Morgan Stanley, hiked meter rates sharply and is earning a profit of 80 cents on the dollar, far above the industry average, according to a 2010 Businessweek article. The consortium itself, in the prospectus for a bond issue, predicted earnings of $9.58 billion on the $1.15 billion deal, Businessweek said.

Well-structured privatization deals require accurate cost-benefit analysis, Dannin said. Too often, analyses have been done too narrowly, failing to take important corollary costs into account, and have been aimed at justifying a preordained conclusion, Dannin said. Highly complex deals have been negotiated in back rooms with limited public scrutiny or transparency, she said.

Privatization has had failures as well as successes, and it's essential to learn from past mistakes, Brouillette said. Noncompete clauses and compensation events have been misused, he said.

"You can do it right or do it wrong," he said. "Public sector management has truly had to shift in knowing how to put these together."

The 24 politicians, attorneys, executives and organization leaders making up the governor's council — formally, the Advisory Council on Privatization and Innovation — will serve voluntarily and without pay. Some observers question whether they will have the motivation and expertise to "do it right."

The council's makeup is "disappointing," said Alana Miller, program associate with the Pennsylvania Public Interest Research Group, based in Philadelphia.

Pro-privatization advocates dominate the panel, Miller said. Several members have business dealings with the state and 17 of them contributed to Corbett's campaign, according to published reports.

"This panel … lacks viewpoints from the public sector or those that are critical of privatization's shortcomings," Miller said, adding that the preponderance of campaign contributors suggests "the members were chosen for political loyalty."

Harley dismissed the criticism as partisan sniping by state Democrats, and said the commission should be judged on its results.

"All we have to say to our critics is, the proof is in the pudding," he said.

He likewise dismissed suggestions the panel lacks balance or academic expertise.

"I don't know that we need a bunch of college professors telling us how to run state government," he said.

Council members have been advised to comply with laws and guidelines on conflict of interest, he said.

Under those rules, "they should abstain from any council business in which they have any financial or personal interest," according to a statement from the governor's office.

Council member Jonathan Newman, a former Liquor Control Board chairman who now heads wine buyer Newman Wine & Spirits, said it's incumbent on him and his colleagues to abide by that standard.

"There's no way what I'm doing would be any kind of conflict for me personally," he said.

Ultimately, it's incumbent on government officials to guard the public interest when negotiation privatization contracts, and they have the power to do so, Brouillette said.

"All of the cards are in the hands of the public sector," he said.

"We're interested in making sure this is done in a manner that is above board and holds the private sector accountable while making sure the taxpayers are the primary beneficiaries."

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