Wednesday, May 27, 2009

Privatizing Local Gov't in six easy steps

Here are two papers supporting privatization. At their site, there are many more.

Posted: May. 15, 1999
Six Steps to Privatizing Local Government Services

If something is worth doing, it’s worth doing right. In the case of privatization, not doing it right could be worse than not doing it at all. Poorly privatized municipal services not only give privatization a bad name, they can cost more than leaving inefficient government services in place. Local officials considering privatization should keep their eyes on the goal: to reinforce and enhance their ability to govern and increase the level and quality of services for their constituents.
Privatization Manual

Reason Foundation/Mackinac Center for Public Policy "how-to" manual, Designing Comprehensive Privatization Programs for Cities, is available from the Mackinac Center for $10.00 postpaid. Call (989) 631-0900.

The nuts and bolts of a comprehensive privatization program should include the following:

Choosing the Privatization Team. Local officials should choose carefully a highly qualified team to design and implement the privatization program.

Team members should understand that for privatization to be successful, vendors and investors must realize a certain level of economic return. They must be able to develop alternative plans that balance a government’s constraints and opportunities with the often rigorous requirements of private investors and the capital market. They should know and have access to vendors for contracting. They should be able to conduct exhaustive financial analyses and develop alternative deal structures from the perspectives of both the government and the private sector. Finally, they should be particularly sensitive and responsive to the participating public, special interests, media, and voters.

Privatization Techniques. Most governments using privatization to generate new revenue or reduce costs typically use only one or two types of privatization. The most common types of privatization are contracting out public services to the private sector and selling off government-owned enterprises in their entirety.

Identifying Privatization Opportunities. There are typically many more opportunities for privatization than local officials realize for solving problems involving government-owned assets, facility operations, services, debt structure, and other facilities and infrastructure. Identifying these involves assembling and organizing data, establishing criteria to qualify each privatization opportunity for implementation, and applying privatization techniques to the fullest possible range of government services and facilities.

Another technique, made famous by Indianapolis, Indiana, Mayor Stephen Goldsmith, is called "competing-out" contracts. Goldsmith allows his public-sector employees to bid on contracts in competition with private vendors. One Indianapolis union local has actually been able to increase its membership by winning the lion’s share of contracts on which it bids.

By applying one or more privatization techniques to the wide range of government assets, facilities, infrastructure, subsidized agencies, and other government activities, a city-wide privatization program could yield 100-200 opportunities.

Evaluating Privatization Opportunities. Once privatization opportunities are identified, they must be evaluated in detail to determine whether they should proceed to implementation. Each privatization opportunity is put through exhaustive financial feasibility, legal review and cost/benefit analyses. These analyses will require additional data. Moreover, each privatization opportunity should be tested against the evaluation criteria established earlier.

Developing Implementation Plans. Plans should be drawn for the privatization opportunities that receive a high ranking. These plans should outline the specific steps required to complete the transaction. They typically include detailed financial analyses and implementation schedules; clearly assign the responsibilities of each party; outline the bid solicitation process; evaluate the bids; specify how negotiation with winning bidder should be conducted; and explain how the required contractual arrangement should be prepared.

Overcoming Obstacles to Privatization. Privatization efforts face many obstacles, including existing legislation and regulations, public employee resistance, misperceptions about privatization, and a general resistance by governments to change. Privatization programs, if they are to be successful, must incorporate innovative strategies to overcome obstacles to privatization early in the program. You can improve your chances of a successful privatization effort by a) doing your homework; b) ensuring that you maintain the desired level of control over the service being bid; c) clearly explaining the performance standards you expect; d) keeping all parties to the transaction informed during the process; and e) establishing and adhering to a strict monitoring process.

Conclusion. Traditional methods of solving budget crises such as tax increases, deep service cuts, or issuing short-term debt have significant economic or political pitfalls. Comprehensive privatization programs offer city governments a way to maximize revenue, cut costs and make greater use of private capital for public services and facilities.

Comprehensive programs offer three main advantages over traditional governing strategies. First, they afford governments greater flexibility by allowing officials to choose between a variety of privatization techniques for solving each problem.

Second, the cumulative economic impact of implementing all, or some portion of, the menu of privatization opportunities is potentially much greater and longer lasting than short-term fixes such as tax increases or bond offerings.

Lastly, if governments properly manage the privatization process and carefully monitor the implemented privatization projects, government spending can be held in check and high quality can be achieved.
Publication: Michigan Privatization Report
Next page: Is There Gold in Garbage?
This text is part of the larger publication:
Privatizationville: Privatization at the Local Level

Is There Gold in Garbage?
By Mr. Michael D. LaFaive / Posted: May. 15, 1999
Landfill Graph

In Flint's 1995 Fiscal Year the appropriations made for the city's sanitary landfill and refuse collection dropped by 31% from the previous Fiscal Year. Since then city spending on the sanitary landfill and refuse collection have increased faster than the rate of inflation.

City mayors are often scrounging around in their budgets, looking for that gold nugget of savings that will make the city richer. Sometimes that nugget even shows up in the garbage. That was the story in Flint in the early months of 1994.

Flint’s mayor, Woodrow Stanley, had long been frustrated by the cost of collecting garbage in his city. In the hope of driving these costs down, Stanley solicited bids from five private companies. The bid numbers returned to him confirmed his suspicion: Privatization could cut the city’s total cost by a whopping $2 million.

Flint’s city employee unions knew the mayor was serious, and to their credit, worked with him to develop a plan that would shave about $1.4 million from the budget. Specifics of the proposal included offers to: a) increase the number of stops on each route from 665 to 775; b) reduce the number of shifts from two to one; 3) cut the sanitation staff from 47 to 35; 4) pick up bulk items along with regular garbage instead of doing that on overtime; and 5) require workers to work a full eight-hour day instead of going home early as they often had done in the past.

These concessions were enough to convince the mayor to keep the service in-house. It has now been five years since the mayor decided to retain the work of city employees for refuse hauling, instead of opening up the process to private companies. How much have things changed?

The results have been mixed. In 1995, the year the reforms took effect, total spending for waste collection alone dropped by 31% from the previous year, from $3,491,000 to $2,399,000. The cost of maintaining the sanitary landfill dropped by 30%, from $1.3 million to just over $970,000. Bulk waste, which had cost the city nearly $400,000 in 1994, was eliminated as a separate line item in the budget. Such collections are now made during regular waste pick-up hours and factored into waste collection spending. After five years, the city of Flint still is operating its refuse collection and landfill service for less than it was in 1994.

The bad news is that the proposed Fiscal Year 2000 budget signals a five-year climb in operational expenses for refuse collection and sanitary landfill operations of 17% and 34%, respectively. If present trends continue, the total growth in Flint’s refuse budget (collection and landfill) will have outpaced inflation of 15.7% since 1995. In addition, these figures do not include the cost of employee fringe benefits. Health, vision, and dental costs alone may run as high as $7,039.08 per employee per year.

The increased costs come as Flint loses population. The 1990 U. S. Census indicated that Flint had 140,761 citizens. By 1993 that number had dropped to 137,901 and by 1996 stood at 134,881. From 1993-1996 the city lost an average of 755 residents per year. If those trends continue, by the end of 1999 the city will have 4,227 fewer citizens than it did when Mayor Stanley collected bids on refuse hauling. That is 4,227 people from whom it no longer needs to collect refuse. Fewer people should mean less garbage. Less garbage should mean fewer workers. Does it?

In 1995, the city of Flint maintained a full-time sanitation staff of 35 and a part-time complement of 10. By 1998, that figure had risen to 40 full-time and 6 part-time staff. By the year 2000 the city of Flint estimates that it will require 40 full-time employees and 10 part-time employees to handle its sanitation work.

The mayor should consider another look at privatization. It has been five years since the mayor solicited bids from private contractors for refuse collection. The mayor should again ask for bids from firms to do the collection work of city employees. This time the lowest bidder who can meet the city’s standards should win outright.

Another idea is to shed the responsibility of garbage collection and landfill work altogether and eliminate the city tax on property (currently 3 mills) that is used for those purposes. Flint citizens could hire their own garbage collectors, just as it is been done in Traverse City for businesses and people since 1986 and 1990, respectively.

While this idea may sound bold to some, the fact of the matter is that different neighborhoods have different requirements for garbage collection, just as they do for other services. One-size-fits-all programs are notoriously inefficient, and once the various neighborhoods had their own garbage collection programs in place, citizens would probably be amazed at how much better their services are. And the city would be amazed that it held on to this headache for so long.

Mayor Stanley should consider mining Flint’s balance sheet for savings. The last time he went digging Flint shaved a $1.4 million gold nugget from its refuse collection tab. Issuing another bid for proposals from private-sector firms wouldn’t take much effort, and the returns to the city from privatization would be impressive.
Publication: Michigan Privatization Report
Next page: Local Economic Development: Public or Private?
This text is part of the larger publication:
Privatizationville: Privatization at the Local Level

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