Privatization: Old wine in new bottles?

Privatization, or public-private partnerships, is an arrangement under which the private sector becomes involved in the financing, design, construction, ownership, and/or operation of public facilities or services. The underlying concept is that both the public and private sectors can benefit from cooperating to provide services and/or facilities.

The concept is a valid one, as long as public officials consider privatization’s impact on tomorrow’s taxpayers, not just what the effect will be during their own terms in office.

Privatization is more common than most people realize. Governments routinely use private firms to prepare engineering and architectural designs for public facilities. Essential public services such as electricity, gas and telecommunications have traditionally been provided by private firms that function as regulated monopolies. Public-private partnerships are as American as handguns.

But the concept of private firms operating public libraries, prisons, sanitation services, toll roads or other functions normally associated with public agencies is newer. Contemporary privatization represents a collaborative effort, with the public and private sectors sharing risks, rewards and responsibilities.

Interest in privatization is increasing, partially driven by fiscal challenges. The assumption is that private firms can often deliver these services for less, even though they must pay taxes and make a profit ­ expenses that public agencies do not have.

How is this possible? There are at least five factors that can work in a private firm’s favor:

Higher salary and incentives: A public agency’s salary structure and inability to offer things like stock options may make it impossible to attract a sufficient number of talented managers.

Faster procurement: Public purchasing processes are often constrained by regulations originally implemented to prevent fraud. Purchases can take an inordinately long time to complete.

Economies of scale: By providing the same service to a number of public entities, a private firm can develop both market power and specialized expertise. This can be particularly critical for high-technology services.

Less restrictive work rules: Public sector collective bargaining agreements often saddle public agencies with work rules that prevent implementation of new and more efficient procedures. Private firms are often in a better position to negotiate rules that promote efficiency.

Availability of tax deduction: Finally, private firms have access to two federal subsidies that are not available to public agencies: tax deductions for accelerated depreciation on capital equipment and interest payments on borrowed funds.

Sadly, the nation’s most restrictive anti-privatization law all but prevents Massachusetts taxpayers from reaping benefits from public-private partnerships. Under the so-called Pacheco law, named after its author, State Sen. Marc Pacheco, state managers must overcome virtually insurmountable obstacles before contracting out any service currently delivered by state employees. As a result, few privatizations have even been attempted during the two decades the law has been in effect.

The privatization debate has waxed and waned since 13 colonies became the United States of America. Should we let government take care of our problems or should we rely on private enterprise? As governments struggle to figure out how to handle mega-problems created by a stagnant economy, the prudent use of privatization is more important than ever.

originally published: August 3, 2013

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