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20th Anniversary Edition Annual Report 2006

Transforming Government Through Privatization

Reflections from Pioneers in Government Reform Prime Minister Governor Mitch Daniels Governor Mark Sanford Robert W. Poole, Jr.

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This volume is an excerpt of Reason Foundation’s Annual Privatization Report 2006. In its 20th year of publication, APR helps policy- and opinion-makers understand the fast-moving arena of privatization, , and government reform. The full report is available online at: reason.org/apr2006 Annual Privatization Report 2006

Transforming Government Through Privatization

Introduction...... 1 Privatization in Perspective ...... 3 Reflections from Privatization Pioneers...... 6 1. Rebuilding an Enterprise Society through Privatisation...... 7 by Margaret Thatcher 2. Reforming Government Through Competition ...... 10 by Governor Mitchell E. Daniels 3. Advancing Limited Government, Freedom, and Markets ...... 14 by Governor Mark Sanford 4. Privatizing to Improve Government...... 16 by Stephen Goldsmith 5. Reflections on 30 Years of Promoting Privatization...... 21 by Robert W. Poole, Jr. 6. Privatization: Past, Present, Future ...... 24 by E.S. Savas 7. Privatization: Are We Finally Turning the Corner?...... 29 by Ronald Utt 8. “Q” Privatised? James More Efficient?...... 32 by John Blundell 9. The New Public-Private Landscape...... 35 by William D. Eggers 10. The New Privatization: Applying Old Lessons to New Problems...... 39 by Roger D. Feldman 11. Privatization: Looking Backward, Looking Forward...... 42 by Lawrence L. Martin, Ph.D. 12. Cutting the Government in Half: Three Reforms...... 45 by Grover Norquist

Annual Privatization Report 2006

Introduction By Leonard Gilroy, Editor, Annual Privatization Report 2006

n the two decades since the publication of political ideologies like and IReason’s firstAnnual Privatization Report, spread the belief that society’s governments of all political complexions have needs and problems are best addressed increasingly embraced privatization—shifting through government intervention. Statism the production of a good or the provision even spread to capitalist ; of a service from the government to the for example, the British government private sector—as a strategy to lower the nationalized its coal, gas, rail, , costs of service delivery and achieve higher and steel industries, and the performance and better results. nationalized the facilities of the Tennessee Once considered a radical concept, priva- Electric Power into the Tennessee tization has largely shifted from an ideo- Valley Authority and adopted a number of logical concept to a well-established, proven government-run social welfare programs policy tool. Policymakers (such as Social , Medicare, and from Phoenix to Prague, to , and Medicaid) under the New Deal and Great North America to the Middle East have used Society programs. As governments grew, privatization to better the lives of citizens by they increasingly constrained and offering them higher quality services at lower free enterprise, consumed an ever greater costs, delivering greater choice and more ef- share of personal and income, ficient, effective government. Virtually every and restricted private rights and government service—from local services like personal freedoms. road maintenance, public safety, and water The tide began to turn in the latter to national services like passenger rail, energy half of the century as the folly of this production, and social security systems—has approach became apparent through bloated been successfully privatized somewhere in the , sluggish economies, stifling world. Decades of successful privatization , and failing government programs. policies have proven that private sector in- , policymakers, and citizens novation and initiative can do certain things became increasingly interested in market- better than the . based policy solutions to improve the For much of the 20th century, the trend efficiency and performance of government. was clearly in the opposite direction. This It is in this context that the concept of period saw the rapid expansion of privatization began to flourish. control over the lives of citizens. Prominent

Transforming Government Through Privatization  Annual Privatization Report 2006

Reason’s Annual Privatization Report:

Twenty Years at the Cutting Edge of Privatization and Government Reform

or almost four decades, Reason Foundation Fhas worked to advance a free society by developing, applying, and promoting the principles of individual liberty, free markets, and the . In steadfast pursuit of this mission, Reason works at the forefront of privatization policy through its research, outreach, and publications like the Annual Privatization Report (APR). Reason Founder Robert W. Poole, Jr. with Margaret Now in its 20th year of publication, APR Thatcher has become the world’s longest running and What emerged in early 1987 was Privatization most comprehensive annual report on news, 1986, a report on the status of privatization to developments, and trends in privatization, date and important developments of that year. competition, and government reform. APR helps The publication garnered enough attention policymakers and leaders at all levels of government from policymakers that Messrs. Koch and Poole understand this fast-moving policy arena, determined that it was worth continuing. For highlighting tools and trends to help them improve subsequent editions, the report was re-titled the efficiency and performance of government and Annual Privatization Report. emphasizing best practices, problem Reason owes a of gratitude to David solving, and structural reform. Koch, and APR would not have flourished without APR is the brainchild of Reason his commitment to market-based tools that enable Foundation Trustee , individuals, institutions, and societies to survive executive vice president of the and prosper. It is thanks to Mr. Koch’s vision and nation’s largest privately owned support that the Annual Privatization Report company, Koch Industries, Inc. has become the nation’s foremost publication During a 1986 visit from Robert on privatization, outsourcing, and government W. Poole, Jr., founder of Reason Foundation, reform. Messrs. Poole and Koch engaged in a wide- In addition, the organization that has evolved ranging discussion on how privatization had into Reason Foundation would not exist without grown to become a global issue, largely due to the dedication and vision of Robert Poole. In the innovative, market-based policy programs 1978, Robert launched Reason Foundation to developed under the aegis of U.S. President advance the values of individual freedom and and U.K. Prime Minister Margaret choice, limited government, and market-friendly Thatcher. In that conversation, Mr. Koch proposed policies. He popularized the term “privatization” the idea of an annual report on the status and to refer to contracting-out public services, and his progress of privatization efforts around the globe, book Cutting Back Hall (Universe Books, with a particular emphasis on privatization’s 1980) was the first book-length examination of the impact on U.S. public policy. subject.

 Reason Foundation • www.reason.org Annual Privatization Report 2006

Privatization in Perspective Over the years, privatization has taken Privatization as Societal Transformation many meanings. In its purest form, the term In 1969, famed man- refers to the divestiture of government- agement guru Peter owned assets like airports, rail systems, real Drucker published The estate holdings, and oil production facilities. Age of Discontinuity, As the concept has evolved, privatization in which he foresaw has grown to resemble more of an umbrella the transition from the term to account for greater private sector industrial age to the participation in the delivery of services. For information age. According to Drucker, example, over 1,000 local governments in this transition would be accompanied the United States—including , by profound, transformative change in Seattle, and Beverly Hills—have entered society, business, and government. One into public-private partnerships for water of Drucker’s predictions was that govern- services, contracting out the operations and ments would eventually “reprivatize” the maintenance of water systems to private state-owned industries in Europe, moving . Similarly, multi-billion dollar them back into the private marketplace. public-private highway, bridge, and tunnel The term reprivatize resonated so strongly projects are operating or under construction with Reason Foundation founder Rob- across the United States, in , ert Poole that when he began writing Canada, Italy, France, and other countries. about outsourcing municipal services in Regardless of the specific form it the early 1970s, he popularized the term takes, privatization introduces market- “privatization” to describe the concept. based competition into government where it otherwise does not exist. Competition benefits the public by offering expanded evolution from concept to choices, higher quality services, and lower idea, both in the United States and costs. Adrian Moore, Vice President of internationally. Some examples illustrate this Reason, offers a concise articulation of the point: benefits of privatization: • In 1986, air traffic control (ATC) services Privatization exposes things we were exclusively the province of national otherwise would not see—ideas, processes, governments. Today, over 40 countries in service delivery. Within have “commercialized” their ATC government rarely is success adequately systems since New Zealand launched this rewarded, and and new ideas trend in 1987, shifting the responsibility are often quashed. But when privatization for providing ATC services from the brings competition, accountability, and a national government to an independent chance for customers to have a say, then supported by user fees excellence and innovation are rewarded, and instead of government appropriations. mediocrity and failure are penalized. Benefits of ATC commercialization Since the firstAPR was published two include improved safety, improvements decades ago, privatization has continued its in service quality through increased flight

Transforming Government Through Privatization  Annual Privatization Report 2006

efficiency and delay mitigation, and performing specific functions. President lower costs relative to the United States’ Bush’s competitive sourcing effort is government-run FAA. saving taxpayers ; • According to a 2005 World report, over the last three years alone are 120 developing countries carried out expected to save approximately $5.6 7,860 privatization transactions between billion over the next few years. 1990 and 2003, generating close to • The FAIR Act inspired similar legislation $410 billion in privatization proceeds. in Virginia, and other states use it as a • When Margaret Thatcher was first baseline for determining which services elected prime minister in 1979, the are commercial and which should be British government still owned the coal, contracted out. steel, oil, and electricity industries, • In the last seven years, Florida state several auto companies, the telephone government has launched more than 130 system, and a major , among other government reform and privatization holdings. By the time of her resignation initiatives saving more than $550 in 1990, all had been privatized by million. That focus on management Thatcher. Under her , the excellence has also enabled more than rose from 19th to 2nd $20 billion in tax cuts during that same in the OECD rankings. Further, between time, and the number of state jobs has 1979 and 1997, among fallen from 127,000 to 113,000, an the British population had increased impressive feat that would have been from 7 to 23 percent, the middle class much larger if not for the addition of increased from 33 to 50 percent of the workers in education and public safety. population, and the homeownership rate • According to the National Solid Wastes increased from 53 to 71 percent. Management Association, the percentage of contracted solid waste collection Congress passed the Federal Activities and disposal services increased from 30 Inventory Reform (FAIR) Act in 1998. percent in 1987 to 54 percent by 2000. • According to the National Council for • Congress passed the Federal Activities Public-Private Partnerships, the average Inventory Reform (FAIR) Act in 1998, American city contracts out 23 of its 65 which classifies every federal job basic municipal services—such as road into categories, the most basic being maintenance, solid waste collection, and “inherently governmental” (activities water/wastewater—to the private sector, that can only be provided by government and states contract out approximately employees) and “commercial in nature” 14 percent of their activities. Further, (activities that can and are provided by a 1997 survey of 1,400 and the private sector). FAIR facilitated the counties by the International City/ adoption of “competitive sourcing”—a County Management Association process for determining whether the found that more than 90 percent of the private sector or government is the governments surveyed said they were most efficient and effective source for contracting out services that had been

 Reason Foundation • www.reason.org Annual Privatization Report 2006

done in-house just five years earlier. and many billions of dollars worth • Contract cities—cities that contract with of electromagnetic spectrum. It also outside public or private sector providers conducted competitions for the operation for major municipal services, such as of more than 100 airport control towers police and fire services, public works, and numerous military base functions. and building and safety—have continued It was also Clinton’s Environmental to grow in number since Lakewood, Protection Agency that declared public- —a pioneer contract city—was private partnerships for water and sewer incorporated in 1954. Sandy Springs, systems a “classic win-win.” Georgia, incorporated in late 2005, is • Florida Gov. ’s Republican the latest contract city and the first new administration has opened more than city in Georgia in 50 years. Instead of 138 public services to competition, creating a new municipal , generating cost savings of at least $550 the city opted to contract out nearly all million and improved service delivery. government services. Inspired by Sandy Governor Bush also created the state’s Springs and impressed by its cost savings Center for Efficient Government, which achieved by contracting, citizens in four has developed a centralized process for nearby Fulton County communities evaluating when and where competition will hold elections in the near future on is appropriate, as well as assessing the cityhood, and feasibility studies for at competitions. least three more new Georgia cities are • During his term as mayor of currently underway. Indianapolis, Stephen Goldsmith, a • A LexisNexis search of the keyword Republican, identified $400 million “privatization” showed that the term in savings and opened up over 80 city appeared in 957 articles in major services—including trash collection, U.S. periodicals in 1986. In 2005, the pothole repair, and sewer services—to term appeared in over 20,000 articles, competitive bidding. As a result of suggesting a significantly increased Goldsmith’s leadership, Indianapolis media focus on privatization. is considered the municipal leader in competition and privatization. Privatization is not the domain of any one political party or ideology. In the United • Chicago’s Democratic Mayor Richard States, privatization is used by leaders of Daley has privatized more than 40 both major political parties, and they have services. In fact, he was so satisfied demonstrated that not only can politicians with the $1.8 billion privatization of at all levels successfully privatize public the Chicago Skyway—one of Chicago’s services, but they can get re-elected after major highways—that he is lobbying for doing so. For example: similar deals for city-owned parking lots • Under the Democratic administration of and the Midway airport. Pres. Bill Clinton, the federal government • When Democrat Ed Rendell, governor of sold the Elk Hills Naval Petroleum Pennsylvania, was mayor of Philadelphia, Reserves ($3.6 billion), the U.S. he privatized 49 city services, saving $275 Enrichment Corporation ($3.1 billion), million. The list of services privatized

Transforming Government Through Privatization  Annual Privatization Report 2006

included golf courses, print shops, • Mitch Daniels, governor of ; parking garages, and prisons. • Mark Sanford, governor of South Looking abroad to number, size, Carolina; and type of being done in • Stephen Goldsmith, former mayor of other countries, it is clear that we have Indianapolis; barely scratched the surface in the United • Robert Poole, Jr., founder and States. Many federal government services transportation studies director of Reason and agencies that are being privatized Foundation; routinely in other countries are still firmly in government hands, such as Amtrak, the • Professor E.S. Savas, former assistant Social Security system, the Tennessee Valley secretary of the U.S. Department of Authority, the U.S. Postal Service, the air Housing and Urban Development and traffic control system, and the nation’s former first deputy city administrator of power marketing authorities. ; At the state and local level, there • Ronald Utt, senior research fellow at the is also tremendous potential for saving Heritage Foundation; taxpayers money and improving the • John Blundell, director general of the delivery of services. More than half of Institute of Economic Affairs in London; the U.S. population still gets its drinking • William Eggers, formerly with Reason, water from government agencies and then now global director for Deloitte gets its wastewater treated by government Research—Public Sector; agencies. There are still large numbers of municipal electric and gas utilities. And the • Roger D. Feldman, partner at Bingham United States has only just begun to tap the McCutchen LLP and former Chair of private sector for airports and highways, the National Council for Public-Private where dozens of other countries are already Partnerships; enjoying the savings and improvements. • Dr. Lawrence Martin, director of the In , the ideas of privatization and Center for Community Partnerships at competition have advanced a way since the University of Central Florida; and Privatization 1986, yet there is still a long • Grover Norquist, president of Americans way to go. for . Reflections from Privatization It is impossible to look back on the Pioneers last 20 years of privatization without In this 20th issue of APR, we present acknowledging the leadership and a series of exclusive articles by the world’s dedication of these individuals in advancing leaders in privatization. Our contributors the idea of competition in government. include pioneering policymakers and Reason Foundation is honored to have researchers at the forefront of privatization them share their expertise and insights on and government reform, including: privatization, competition, and government reform in the 20th anniversary edition of • Margaret Thatcher, prime minister of our Annual Privatization Report. the United Kingdom from 1979-1990;

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Rebuilding an Enterprise Society through Privatisation By Margaret Thatcher, former Prime Minister of the United Kingdom

ll too often the state is tempted into The policies we introduced in the Aactivities to which it is either ill-suited were fiercely opposed. Too many or which are beyond its capabilities. people and industries preferred to rely Perhaps the greatest of these temptations on easy subsidies rather than apply the is government’s desire to concentrate financial discipline necessary to cut their economic power in its own hands. It begins costs and become competitive. Others to believe that it knows how to manage preferred the captive customers that a business. But let me tell you, it doesn’t—as monopoly can command or the secure job we discovered in Britain in the 1970s when in an overmanned , rather than the nationalisation and prices and incomes strenuous life of liberty and enterprise. policy together deprived management of the But we understood that a system of free ability to manage. And when we came to enterprise has a universal truth at its heart: privatise and deregulate in the 1980s it took to create a genuine market in a state you some time before these skills returned. have to take the state out of the market. A system of state control can’t be made For Britain, the 1970s was a decade of good merely because it is run by “clever” decline: even worse than that, our people people who make the arrogant assertion seemed to accept it. Our nationalised that they “know best” and that they are industries were inefficient, overmanned serving the “public interest”—an interest and weakened by restrictive practices. which of course is determined by them. Government had no business being in State control is fundamentally bad because business. it denies people the power to choose and the We tackled privatisation in the way opportunity to bear responsibility for their which best suited us. own actions. First, we had to put the balances of the Conversely, privatisation shrinks the industries we wanted to sell in good order. power of the state and free enterprise Where redundancies had to be made because enlarges the power of the people. of overmanning we were determined to

Transforming Government Through Privatization  “We showed that privatisation worked.” Annual Privatization Report 2006

ensure that those who lost their jobs would necessary redundancies and to help build receive a sum related to the length of a modern effective industry in the private their service. For the first time in their lives sector. This recipe, also applied to other this put capital into their hands and each industries, offered a way forward in the industry helped them to find other jobs or worst cases. to set up of their own. Thus we We faced vociferous opposition, made clear our concern to look after those particularly when we came to privatise the who were losing their livelihoods as well as public utilities, but the facts show that they those who were staying on. too are much more efficient in private hands Second, I saw it as part of my purpose and that they have become some of our most to have a policy which extended ownership successful businesses. of capital more widely. It is most people’s Altogether, through our programme, ambition to have something to pass on to we demonstrated that we could rebuild their children. In doing so, we link the an enterprise society and we showed that generations and create a deep and abiding privatisation worked. It was better for interest in the future. I have already the consumer, better for the taxpayer and outlined how we achieved this goal for those better for the health of an industrial and leaving an industry, but we also wanted commercial country. Many others followed those remaining in the newly privatised our example. industries to have a greater stake. So we Indeed as put it: reserved a block of shares for employees Nationalisation, once all the rage, is out; which they could purchase at a discount. privatisation is in. And the followers of the Third, those companies which could not new are of , the right and all be floated on the were sold to hues in between. companies who were willing to buy them at Baroness Margaret Thatcher, LG, OM, PC, the best possible price. FRS was Prime Minister of the United King- Fourth, some industries were so dom from 1979 to 1990. Baroness Thatcher thoroughly outdated that they would have is widely credited with reviving the British cost too much money to modernize. Others economy, reforming outdated government such as shipbuilding had lost their markets institutions, and reinvigorating the nation’s as business had moved to the Asia Pacific. foreign policy during her term of office. By The subsidies required by our shipyards each successfully shifting British economic and year were equal to their entire wage bill, foreign policy in a free-market direction, her and we were told that we could not stop governments helped to encourage wider them because people would lose their jobs. international trends which broadened and Clearly we could not go on that way. Some deepened during the 1980s and 1990s, as shipyards had to be closed, others were the end of the Cold War, the spread of de- offered for “sale”. mocracy, and the growth of free markets It was an unusual type of sale, buyers strengthened political and were not asked to pay anything for the in every continent. land or for the plant. They were even offered substantial capital sums to cover the

Transforming Government Through Privatization  Annual Privatization Report 2006

Reforming Government Through Competition By Mitchell E. Daniels, Governor of Indiana

n a moment of apparent epiphany, Mario The orthodoxy of Big Government ICuomo is recorded as having said “It was so rigid that it produced some true is not government’s obligation to provide absurdities. Having built a $135 million services, but to see they’re provided.” prison, our bankrupt state government However sensible and straightforward this found it could not afford to open the facility notion seems, it remains heresy in much at the state’s cost of nearly $60/inmate/day. of American public administration. The Rather than accept private service provision Indiana state government our crew inherited within our state, Indiana left its white a year ago was still doggedly cooking its elephant vacant and shipped hundreds of own , cleaning its own buildings, prisoners to a in Kentucky. and running its own power plants. Six When our administration took the obvious departmental print shops sat side by side step of inviting private management to a few blocks from the nearest Kinko’s; the run our paid-for prison, our state reaped state owned one motor vehicle for every multiple pluses: we “brought our boys three employees. Predictably, dysfunction home” and began using the empty facility; and inefficiency were rampant. 300 Hoosiers were hired to replace the More than ineptitude was at work; Kentuckians guarding our offenders; and the shrewd was a central factor. On taxpayers saved $2 million per year. arrival, we found dozens of state employees The case for judicious private spending 100% of their time on public contracting rests, of course, not just on employee union business, zero for the superior efficiency but also on grounds taxpayer. By gubernatorial executive of sound philosophy: anything that order, 25,000 state employees were paying strengthens the private sector vs. the state compulsory union dues of almost 2% of is protective of personal freedom. And in their pay, money faithfully recycled into an economically struggling state like ours, political campaigns of the staunch union channeling more public dollars to private allies running state government. businesses can make a modest contribution

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to a stronger economy. We couple our authorized an immediate competition. privatization initiatives, and all government A well-established food service company procurement, with strong and unapologetic won most of the business, at a cost of 98 preferences for Indiana firms. cents per meal (nutritional quality and But basically our choices are driven by consistency improved, by the way, by the the duty of stewardship. We approach each terms of the contract). But, in one delightful activity with the question, “Assuming this outcome, the employees of one facility service is proper for government at all, what trimmed middle management, reorganized is the best way to deliver it?” Personally, their processes, and won the right to I never use the word “privatization”, continue while cutting a minimum of 30% because it connotes an orthodoxy of its from the previous costs. At this writing, own, a preconception that things should be they are doing even better than that, and done privately as a matter of doctrine, not seem sure to qualify for substantial bonus practicality. checks at the end of the fiscal year. Applying these approaches first at the We have applied the “Yellow Pages” federal level, as Director of OMB, and test (if you can find a service there, maybe now as governor, I’ve labeled our policy government should not try to do it itself) to “Competitive Sourcing,” to indicate that a host of activities, ranging from janitorial it is the cost-reducing, service-enhancing service (annual savings = $500,000) to debt power of competition that we seek to collection of delinquent taxes (achieving a capture for government’s customer, the return of 16:1). Next, we hope to contract taxpayer. Wherever possible, we encourage for the more accurate adjudication of and assist incumbent public employees to entitlement claims—Medicaid, food stamps, submit their own bids, and I confess to a welfare, and so forth—to improve on a special gratification when any such bid is the system where error rates average 25%, and winner. administrative costs are exorbitant while deserving citizens are left stranded in long Specializing in delivering a given product waiting lists. or service and spurred to constant Again and again these reforms improvement by competition and the demonstrate that people specializing in motive, people can achieve their goal better delivering a given product or service, than the best-intentioned administrators and spurred to constant improvement by of the best-organized government competition and the profit motive, can bureaucracies. achieve their goal better than the best- intentioned administrators of the best- Shortly after taking office, our new organized government bureaucracies. Corrections Commissioner asked me “Did To date, the most noteworthy of you know we’re cooking our own food Indiana’s new initiatives involved our in 26 separate kitchens, and we’re paying approach to transportation infrastructure. $1.41 a meal to feed the offenders?” “No,” In a problem almost universal among the I answered, “is that a lot?” “It only cost us states, we faced a shortfall of some $3 95 cents where I worked last” he said, so I billion, equal to ten years of new road

Transforming Government Through Privatization 11 Annual Privatization Report 2006

construction at the current level, between a check in this amount and commence road-building needs and projected revenues. the largest building program in our state’s Meanwhile, a 40-year-old Indiana Toll history, while transferring the burden and Road across the northern part of our state the of running the toll road to the continued losing money and deferring private firm. At one stroke our seemingly maintenance and expansion, while charging insurmountable transportation gap will the lowest tolls of any comparable highway. be closed. Needed projects that have sat Tolls had not been raised in twenty years; around in blueprint stage for years will now at some booths the charge was 15 cents. become reality. The jobs generated by the (As the new governor, I innocently inquired construction alone will be measured in the what it cost us to collect each toll. This tens of thousands, and the permanent payoff being government, no one knew, but after in incremental economic activity should far a few days of study the answer came back: exceed that. “34 cents. We think.” I replied, only half Any will recognize our in jest, that we’d be better off going to the decision here as the freeing of trapped honor system.) With politicians in charge, from an underperforming asset, to neither sensible pricing nor businesslike be redeployed into a better use with higher operational practices were likely, ever.

As a faithful Reason subscriber, I was well aware of the growing role around the world of private capital in financing public infrastructure.

As a faithful Reason subscriber, I was well aware of the growing role around the world of private capital in financing public infrastructure. Without knowing what level of interest to expect, we offered to lease our toll road long-term to any interested operator willing to pay for the privilege. Independent estimates of the road’s Indiana Northwest of Times The / Gearhart Gregg Source: net present value in state hands ranged from $1.1 billion to $1.6 billion, the latter figure aggressively presuming that all future politicians, unlike all their predecessors, would raise tolls at least in line with . I had resolved that only a bid far in excess of that range would be worth advocating to my fellow citizens. In the event, we received a best bid of Indiana Toll Road looking west in LaPorte $3.8 billion. Upon closing, we will County.

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state that is home to hundreds of foreign- owned firms was lost on many Hoosiers. Over time, one hopes that a modernized, more customer-friendly toll road, coupled with the highly tangible benefits to our state as the proceeds are reinvested, will overcome misplaced patriotism. I often advocate policies of competitive sourcing as “antitrust for government,” appealing to Americans’ natural suspicion Toll booth on the Chicago Skyway. of bigness, whether in business, labor, or government. But the very best arguments returns. We viewed it as critical that the are usually pragmatic: which approach will

Source: Christopher Smith / The Times of Northwest Indiana Northwest of Times The Smith / Christopher Source: dollars liberated from one capital asset must get the food cooked, the offices cleaned, or all be reinvested into long-term capital uses, the roads built in the most effective way, at and not dribbled away on any short-term the least cost to taxpayers? operating purpose. However obvious from a business and However strong the philosophical case economic standpoint, this proposal touched for freedom and a limited state, it is the off enormous controversy and opposition relentless march of the evidence, through when proposed in the political realm. statism’s many spectacular failures, Many citizens, with a sincere sense of that has discredited Big Government in responsibility, misperceived that value was the minds of our ever-practical fellow simply being pulled forward from future Americans. years. Many have not yet understood that the state is being paid more than $2 billion More than a decade has passed since a more than the road conceivably would president who had just attempted the biggest have been worth in public hands. Far from expansion of American government ever “stealing from our children,” we have acted proclaimed “The era of Big Government is to leave our children billions in new public over.” However strong the philosophical assets—roads, bridges, airports—that they case for freedom and a limited state, it is the would otherwise not have enjoyed. Turning relentless march of the evidence, through down this deal would have been the real statism’s many spectacular failures, that has from the future. discredited Big Government in the minds But we almost did turn it down. The fact of our ever-practical fellow Americans, and that the winning bidder was an Australian- that furnishes the template for progressive Spanish joint venture struck many of my proposals of better ways forward against fellow citizens negatively, and this reaction our common challenges. emboldened a partisan opposition that The Honorable Mitchell E. Daniels is the united to almost defeat the necessary governor of Indiana. He previously served as enabling legislation. The irony of this “anti- the director of the federal Office of Manage- foreigner” argument in an export-dependent ment and Budget from 2001 to 2003.

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Advancing Limited Government, Freedom, and Markets By Mark Sanford, Governor of South Carolina

ny read through history demonstrates leverage in talking about how Thomas Ahow essential limited government Friedman’s new-found and so-called Flat is to preserving freedom and individual World necessitates limits to government. liberty. What life experience shows us is that The point we have made continually over limited government is equally important in the past three-plus years is that for our state both making your economy flourish and in to survive and thrive in this new competition enabling citizens to get the most for their of 6.5 billion people across planet earth, we investment in government. must make changes to our government cost Let me be clear up front that in the structure. long run the only way to make government Business principles trump ideology truly efficient is to make it smaller, and this in advancing limited government: As an seems to me to be the real clarion call in example, many of the successes that were highlighting the importance of privatization built into the $100 million in last year’s efforts. Efficiency and government are budget savings in South Carolina were mutually exclusive in our system, and if our sold by talking about business principles. Founding Fathers had wanted efficiency We argued that in the world of business, I suppose they would have looked more when your business model changes, you closely at totalitarian systems. They wanted change with it. South Carolina used to not efficiency, but checks on power in our institutionalize every mental health patient republic. in the state on a single piece of property, In attempting to advance limited but then the business model changed government, personal freedom and free and the number of patients our state markets over government fiat, here are a few institutionalized dropped from several things we have found in South Carolina: thousand to fewer than 200. Despite the Friedman, not freedom, sells: So much change, we continued to hold on to the of why we should limit government is tied $50 million piece of property. We made the to freedom, but sadly we have found greater business case, and pointed out that if the

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vastly underutilized property were sold, the Great Powers who talked about how there would be three : one to not foreign policy but, ultimately, economic mental health patients, another to taxpayers might was the driver of a nation’s viability and a third to children in the local school in the long run. district because the property would be back Finally, you can go back to the Ten on the rolls. Commandments to see warnings on Similarly, in the business world, you envy—on coveting what someone else has. constantly reshuffle the cards, from low Tragically, envy is part of human nature performers to high performers. Government and in some cases it can be used as a tool in doesn’t. The case in point for us was the attempts to limit government. We frequently port in Port Royal, which does less volume make the point that government shouldn’t in a year than the Port of Charleston does grow faster than the people’s pocketbooks in a week. We said let’s reshuffle the cards and wallets—and what we’ve found is and after a fair amount of consternation, people, when they compare their wallets the sale is now in motion. That’s been with the growth of government, nearly matched by our efforts to maximize always agree! return on investment to taxpayers through Long story short is that it occasionally privatization of things as wide ranging as gets lonely holding our in the the state-owned car fleet, golf courses and struggle between the growth of government even bait and tackle shops once run by state and freedom—and in advancing market- government prior to this administration’s based solutions in areas such as education arrival! or . And, as a consequence, I’ve There is no substitute for time and grown to that much more appreciate fellow focus: once said the soldiers in this greater battle for freedom. ultimate measure of government is what On this front, Reason Foundation has it spends. This is certainly not the only been a great partner in our efforts to infuse measure—but it is a very good place to a business mindset in government through start. As a consequence, we have spent a competition and principles, to lot of time digging into the budget—in fact, improve services and reduce costs—and ours is the first administration in South in our greater efforts to bring change to Carolina history to have ever produced an South Carolina. Congratulations to Reason operational executive branch budget. It is on 20 years of privatization success. The said in Washington that Presidents often 20th anniversary edition of the Annual get diverted and focused on foreign policy Privatization Report clearly establishes because it is seemingly a loftier issue. At the Reason’s role as the world leader in state level, there are a wide variety of things privatization and government reform ideas. to take a chief executive’s eye off budget The Honorable Mark Sanford is the gover- matters, but I think we all need to remember nor of South Carolina. He previously repre- the first real barometer on whether we are sented South Carolina’s 1st Congressional advancing the conservative cause of limited District in the U.S. House of Representatives government is the budget. It was Paul from 1995 to 2001. Kennedy is his book The Rise and Fall of

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Privatizing to Improve Government By Steven Goldsmith, Kennedy School of Government,

he conditions facing the privatization simply implementing privatization. Thus, Tmovement today differ fundamentally the choices seemed more varied: Should I from conditions 30 years ago, when Reason sell the wastewater plants, contract out the Foundation first began documenting and operation of them, or keep the ownership analyzing this important shift in government and management inside government? management and policy. In the United Today, however, a mixture of private, States, local, state, and federal government not-for-profit, and government employees all deliver ever-increasing high-quality works together to produce almost every government services through third-party complex government service. The right and providers. The continuously declining ratio left continue to frame the public/private of government employees to contractors choice as a bilateral one, pitting private provides evidence of the of profiteers against lazy bureaucrats, but these this trend. At the same time, the public opponents miss the point entirely. Whether continues to witness all too frequent the issue involves welfare-to-work, roads, headlines touting examples of poor services, defense, or health, the solution requires corrupt or flawed processes, and personal sectors working together. Government abuses resulting from contractual services. monopolies cannot measure up; nor does This article looks at not only the the private sector provide optimum value inevitable future growth of privatization without the oversight of talented public but also why the term “privatization” is less employees. relevant today and how success should be Neither critics nor advocates should measured and ensured. Thirty years ago, evaluate success based on how much in the wake of the Thatcher initiatives, privatization has occurred; success should privatization often dealt with the ownership be determined by how well government of a public asset. In my tenure as mayor of performs as a result. The real test for those Indianapolis, though, I found that framing who advocate this process must not be the choices was more a matter of inducing whether government is smaller but whether competition for the delivery of services than outsourcing furthers better government,

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enhancing the quality of life and providing the foundation for a robust economy. The defenders of privatization must argue in units of public value: the more units of public value produced per dollar spent, the more successful the trend. Governments of developed countries face hugely complex problems, from providing homeland security to mitigating social ills, and must utilize delivery systems that do more than efficiently deliver antiquated processes. For government to move forward, private and not-for-profit providers need to contribute public value by providing solutions. For example, Mayor Anthony Williams of Washington, D.C. did not privatize the operation of an obsolete public hospital to reduce losses; rather, he worked with private and not-for-profit community health partners in order to achieve the true goal of “making better health” for citizens (Governing by Network, p.58). Governments of developed countries face Fundamentally, privatization will hugely complex problems, from providing increase because government simply cannot homeland security to mitigating social ills. successfully discharge all of its current and future responsibilities by itself. The horizontal problems with vertical solutions. stark reality, for better or worse, is that Inherently, public officials cannot run fast bureaucratic, “progressive” government can enough in their assigned places to deal with no longer produce enough good government these problems. and meet citizen demands with the money In addition to the increasing complexity available. Progressive government (now a of public problems, a rising imbalance misnomer) started 75 years ago as local and between citizen demands and available national reformers imposed bureaucratic resources will strain even the best-run “command-and-control” procedures in an operations. An aging population will attempt to reduce corrupt or patronage- demand health, pension, and nursing home infested governments. Progressives did indeed services that will exceed the most optimistic reduce corruption and abuse of discretion, projections of tax revenues. but they did so by eliminating discretion. Faced with complexity and service This arrangement ensures that as problems demand growth, government officials become complicated, government cannot must figure out how to better manage a keep up. In fact, traditional government government whose role is transforming processes struggle to solve complex from that of service provider to that of

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network facilitator; government is doing less officials apply in order to produce positive itself and more through third parties. Until results? Of course, external factors can government officials adapt and respond to provide momentum or create obstacles, but, this transformation, taxpayers will not get after competing-out 80 public services (and the results they deserve. As suggested in observing or advising dozens of officials Governing by Network, this new generation engaged in privatization), I highlight six of issues requires more than “privatization issues that if managed well will dramatically to save money,” which is worthwhile but increase the chances of success. Despite a not enough. It demands “outsourcing relatively strong foundation, the future of the as part of government transformation.” privatization movement depends on getting Outsourcing an antiquated system in order these issues right. to more efficiently deliver an outdated process skips the threshold question: What 1. Control Results, not Processes is the public value I am trying to add? Officials worry about the wrong things With the goal of adding public value when they focus on control. Public officials in mind, what rules should government stay wary of surrendering control of service delivery to nongovernmental agents and employees because they are painfully aware An Ominous Future? of the ultimate responsibility they have for An aging population will demand health, meeting public expectations. However, this pension, and nursing home services reasonable anxiety should take officials that will exceed the most optimistic down another track, one in which they allow projections of tax revenues. processes to be flexible but retain control over quality outcomes. Put another way, it Workers per Retiree is not so important whose uniform the meter 45 40 reader wears, but whether clean drinking 35 water—a public value—can be secured in 30 25 all parts of town for an affordable price. 20 The private sector produces, in a generally 15 10 agnostic way, what it commits to, so it is the 5 public sector that must impose the values. 0 1930 2004 2050 For example, how can both fairness and efficiency be achieved? How can access and State and Local Expenditures on Nursing Home Care be enhanced? And, how can privacy $45 and transparency be protected? Safeguarding these values is the responsibility of public $30 officials. and requires scrutiny and rule- making at every stage of the process, from $15 initiation to management. Governments that insist on spending all their management talent

$0 on the delivery system and not on larger 1990 1999 2001 2003 2005 2007 2009 2011 2013 values often get both wrong.

.

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2. Manage the Flexibility/ manager must be on-guard against using Accountability Tension extreme amounts of authority and control and mindful of how they are deployed. The new shape of government by network requires the management of 3. Articulate the Case for both flexibility and accountability. Not- Privatization for-profit and for-profit partners produce better results when they are free to use Strangely, often even bold public officials their talents to deliver services. These do not spend enough time making the case private partners should be given substantial for change. A full list of stakeholders, discretion because they are closest to the including the inchoate ones that will benefit problem or client. Micromanaging slows from change but do not yet know or believe down the provider’s ability to be responsive. it, provides a starting point. Usually, the However, private providers must remain immediate benefits fail to inspire, but accountable when they use public dollars. the immediate , including employee Clearly, too little oversight can also lead to displacement, energize opposition. In these problems, namely, cost overruns, services situations, taxpayer savings alone usually failures, and even scandal. Public officials do not carry the day. Documenting poor must allow flexibility in what is delivered customer service and weak infrastructure and how it is delivered, but accountability that will be improved will help garner the in terms of performance outputs and support necessary for privatization. outcomes. We based the Indianapolis privatization/ managed-competition strategy on a pro- growth agenda that was necessary to Fundamentally, privatization will increase generate private-sector jobs. City employees because government simply cannot and citizens came to understand that making successfully discharge all of its current and public units competitive with their private future responsibilities by itself. counterparts was the only way to decrease taxes and still offer better services.

I have observed this tension in my own 4. Establish Benchmarks Early work as chairman of the Corporation for National and Community Service, the quasi- Privatization initiatives often stir government parent of AmeriCorps and controversy. Even if the status quo is other programs. When one organization mediocre, change produces the prospect or out of thousands does something wrong, perception of loss—job layoffs, less human the natural tendency is to enact new interaction with providers (more automated that burden thousands of high- services), or cutbacks in service—and often performing grantees. Government agencies attracts strident critics. A favored media all too frequently act similarly—rather than technique involves finding something targeting the response to the individuals wrong with an outsourcing, even a highly or vendors in the wrong, they place new personal anecdote, and promoting it requirements on all partners, thereby through headlines as an example of failure. restricting flexibility. The innovative public While no approach will inoculate the

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innovator against this attack, an important public services through private-sector mitigation strategy involves carefully and agents requires some degree of aptitude accurately benchmarking the process before in negotiation, mediation, risk analysis, outsourcing: i.e., how long do people wait trust building, collaboration, and project in line to get their welfare checks? How management. Considering these factors in many trips to the motor vehicles registration advance will go a long way in ensuring that department are unnecessary? How much privatization results in public value. does it cost to fill the (proverbial) pothole? These metrics help both the public 6. Treat Public Employees Fairly relations aspect of an outsourcing and An official interested in government by the eventual contract monitoring, as the network can assume that a large percentage government must ensure that the private of government workers will respond provider is meeting the specified service well to appropriate incentives and good requirements. In addition, having accurate management. Indeed, many of these workers cost and performance data is crucial, not operate in very difficult environments with only to guard against low bidding by mediocre management, unclear performance vendors who later wish to modify their standards, and no reward for . contracts for greater profit but also to In a privatization initiative, communication counter understated or overstated in-house must happen early and frequently, and cost estimates. Finally, benchmarking helps affected unions and public employees have a foster realistic expectations about what the right to understand the rationale, direction, vendor can actually deliver. and range of possible outcomes. Clearly explaining options to existing employees, 5. Implement Successful Contract reassuring good employees about their Monitoring futures, and encouraging vendors to be open High-quality contract monitoring to continuity of will help to enables both good vendors and the public ensure success. at large to benefit from privatization. In Over the last two decades, privatization order to carry out this type of monitoring, has grown into a well-respected aspect officials must overcome a number of of government at all levels. But, as serious obstacles: inadequate knowledge outsourcings attempt to solve more complex management tools that restrict information problems and become more complicated to from passing easily from one sector to manage, the stakes will increase. Officials another, poorly conceived quality or service- who pay attention to these six issues will level agreements, too much prescriptive increase their chances of adding public value input oversight, too little output oversight, and garnering public support. and the inability to capture dynamic Stephen Goldsmith is the Daniel Paul changes. Technological tools allow private Professor of Government and director of the In- and government to be merged novations in American Government Program at and managed as a seamless delivery system. Harvard University’s Kennedy School of Gov- The challenge lies in balancing the burden ernment. He also served as the two-term mayor of risk placed on each party. Managing of Indianapolis, Indiana from 1992 to 1999.

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Reflections on 30 Years of Promoting Privatization By Robert W. Poole, Jr., Founder and Transportation Director, Reason Foundation

n the early 1970s I read two books that 1976 Reason article about fire privatization’s Iwould have a profound effect on my success would lead to a very positive “60 career in public policy. In his 1969 book, Minutes” story two years later, the first time The Age of Discontinuity, Peter F. Drucker Reason hit the major networks. used the term “re-privatization” to refer to In the course of my work with cities the eventual return of nationalized industries and states, I encountered case after case of to the private sector. It was an electrifying privatized (or as we say today, “outsourced”) thought to a young libertarian, eager to public services, mostly in fast-growing shrink the state. And then I discovered Sunbelt states. A few political scientists William C. Wooldridge’s 1970 book, Uncle had noticed the phenomenon, and I eagerly Sam, the Monopoly Man. Here was a series snapped up UCLA and Indiana University of chronicles of entrepreneurs who had papers on the California contract-cities developed private-sector alternatives to phenomenon—newly incorporated cities set government services, some unsuccessful (e.g., up without service-delivery departments, ’s private mail company) relying largely or entirely on contracts with and others that were great successes. private firms and larger nearby governments In those (pre-Reason Foundation) years, (e.g., the county sheriff’s department) for I was working for a consulting firm in Santa their public services. Barbara that worked with city and state Yet the world at large seemed almost governments. On assignment in Phoenix, I entirely unaware of this phenomenon, and realized that right next door was Scottsdale, I was itching to make it better known. the largest client of one of the successful So when my friend and colleague Mark privatized services profiled in Wooldridge’s Frazier in 1976 challenged me to document book: Rural/Metro Corporation, a for-profit privatization of municipal services, and fire department company. How could I not provided a publishing opportunity, I pay them a visit? researched and wrote a 46-page handbook, In the course of that visit, I got to know “Cut Local Taxes—without Reducing founder and CEO Louis A. Witzeman, who Essential Services.” It was widely distributed became a good friend over the years. My by the National Taxpayers Union (on

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whose board Mark sat) in hopes of giving credibility to the budding tax revolt movement around the country. The booklet created enough interest that it led to a contract with Universe Books in New York for what became the first-ever book on privatization, my Cutting Back City Hall, published in 1980. Mark also made a deal with NTU to distribute a monthly column by me on these ideas to local newspapers around the country. Beginning in autumn 1976, it was called “Fiscal Watchdog.” It eventually evolved into the Reason Foundation’s Robert W. Poole, Jr. testifies at the United Privatization Watch newsletter. But even in States House of Representatives. its fledgling days as a newspaper column, “Fiscal Watchdog” (and the “Cut Local there was much talk of privatization in Taxes” handbook) had a much wider Reagan’s first term, but it never seemed to impact than I imagined. At some point in lead to any serious policy proposals. the late 1970s, I was contacted by a young After having done a few consulting Conservative Party local council member in assignments for people in the White House England, John Blundell. He’d heard about Office of Policy Development, I finally municipal privatization in the United States made a persuasive case that the second-term and wanted some details. So I sent him the Reagan administration should at least try to assembled “Fiscal Watchdog” columns and develop a Thatcher-type privatization agenda. the handbook, and wished him well. Only So Reason Foundation helped to organize many years later did I learn that the booklet a White House seminar on privatization. he co-authored on the subject, “Reservicing It took place in late July of 1985, and it Britain,” had helped to introduce Margaret laid the groundwork for the creation of the Thatcher to the concept of privatization. President’s Commission on Privatization. Needless to say, watching the Thatcher And during the second term, DOT Secretary revolution of the 1980s dismantle the edifice Elizabeth Dole managed an all-out effort of state-owned industries and utilities in the that privatized Conrail (the northeastern United Kingdom was breathtaking—not freight railroad that the government had only the traditional targets of British Coal, nationalized some years previously) and Britoil, British Steel, British Airways, and divested the two Washington, D.C. airports (autos), but also the airports, from the federal government to a newly seaports, electricity, gas, water, and telephone created local airport authority. monopolies. As this grand strategy was Unfortunately, the federal government put into action, and with great political moves very slowly, so the President’s success, I was increasingly frustrated that no Commission was not appointed until 1987, comparable privatization agenda emerged which meant that its report appeared from the Reagan White House. To be sure, in 1988, at the end of Reagan’s second

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Presidents Who Privatize

epublican and Democratic administrations alike have taken the idea Rof privatization seriously. During his term, Ronald Reagan changed the nature of the debate over the size and scope of the federal government, leading to the establishment of President’s Commission on Privatization, the privatization of Conrail, and the divestiture of the two Washington, DC airports to a new local airport authority. Upon Reagan’s departure from office, privatization was a low priority in George H.W. Bush’s administration, but was subsequently embraced by the Clinton administration. In fact, the Clinton administration’s privatization successes exceeded those of Reagan. Under Clinton, the federal government sold the Elk Hills Naval Petroleum Reserves ($3.6 billion), the U.S. Enrichment Corporation ($3.1 billion), and many billions of dollars worth of electromagnetic spectrum, as well as the competitive contracting of more than 100 airport control towers and numerous military base functions. Further, a 1994 plan by Vice President Al Gore called for air traffic to be converted into a self-supporting government corporation, though the administration’s 1995 proposal to create the U.S. Air Traffic Services Corp. failed to get congressional support. In 2001, the Bush administration adopted the President’s Management Agenda, and one of its elements—competitive sourcing—has had a significant impact. Since 2003, agencies have conducted almost 1,100 public-private competitions for about 41,000 federal positions, generating $5.6 billion in cost savings over the next few years. Fixed costs and expenses to provide central direction and oversight between 2003 and 2005 totaled $211 million—better than a 27 to 1 return on investment; i.e., for every dollar spent on competitive sourcing, 27 were saved.

term. The many recommendations in the Despite the fact that we still have report were not embraced by the new government-owned electric utilities (TVA, Bush administration. Ironically, after Bonneville, and the rest), a government- languishing for more than four years, some monopoly post office, and a whole raft of of them were picked up by the new Clinton other government corporations, the worldwide administration, especially due to the work of embrace of privatization by governments of Vice President Gore’s National Performance all stripes over the past 20 years has been Review. Hence, the Clinton years saw exhilarating to me. If Canada can privatize the privatization of the Naval Petroleum its air traffic control system, France its major Reserve and the Helium Reserve, the U.S. highways, and China its and countless Enrichment Corporation, the Power other state-owned enterprises, I still have Marketing Administration, Sallie Mae, hope for privatization of the many remaining extensive spectrum , and a serious federal enterprises in the USA. effort to create a nonprofit corporation to Robert W. Poole, Jr. is director of transporta- take over air traffic control. tion studies and founder of Reason Foundation.

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Privatization: Past, Present, Future By E. S. Savas, City University of New York

rivatization means relying more on the which first appeared in a dictionary in 1983. Pprivate institutions of society—the market, The profound change from the past role of the family, and voluntary groups—and less the private sector in public services was the on government to satisfy people’s needs. deliberate use of privatization to improve Privatization ultimately led to the founding the performance of government and, indeed, of the United States inasmuch as Queen of society by introducing competition and Isabella hired a private Italian contractor to alternatives in the delivery of public services. explore the western ocean instead of relying The first media notice of the idea of on the Spanish navy. But privatization almost which I’m aware was in 1970, when the New thwarted American independence: the British York Times featured a front-page story about hired contract troops, Hessians, to prevent the my plan, as First Deputy City Administrator colonies from breaking away. History is rich of New York, for an experiment in which with such examples, but a significant change in private firms would compete against the privatization took place in the last third of the city agency for garbage and trash collection. Twentieth Century. In 1971 Harper’s Magazine published my article, “Municipal Monopoly,” and in 1977 The Past the first two books on the subject (both by Governments have always used the this author) were published. One of those private sector for public purposes. They books and several research articles showed bought supplies from private firms: horses unambiguously that public garbage collection and trucks, desks and books, food for was 30 percent more costly on average prisoners, uniforms for soldiers. Public than collection by private contractors. infrastructure was also constructed by The National Solid Wastes Management private firms: roads, schools, courthouses, Association picked up these research findings city halls. All this long preceded the concept and heralded them to virtually every city, of privatization. The word “reprivatize” was town, and village in America in the late introduced in 1969 by the management guru 1970s; it played a vital role in arousing Peter Drucker, referring to the need to have interest in privatization by disseminating the private sector resume many functions the information to decision-making public that had been ceded to big government a officials that books and journals did not generation or more earlier. Robert Poole, Jr. reach. In the meantime, in 1976, Bob Poole, seized the term and coined “privatization,” the founder of Reason Foundation, started

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an invaluable newsletter—still published classifying government jobs as either monthly—that keeps readers abreast of commercial in nature, and therefore slated privatization happenings. He authored the for competitive sourcing, or inherently first solo-written book on privatization, governmental and exempt from competition. Cutting Back City Hall, in 1980. After that The Office of Management and Budget came a deluge of books and articles about conducted an inventory of 173,000 jobs in this new concept for improving government. 35 federal agencies in 2003 and found that 51 percent (88,000) were commercial. One The Present wishes that more details about individual Schopenhauer once said, “All great ideas A-76 competitions were readily available, but go through three stages: In the first stage, raw statistics show that 879 competitions they are ridiculed. In the second stage, they were conducted in FY 2003–04. They are strongly opposed. And in the third stage, covered 30,168 full-time positions and they are considered to be self-evident.” resulted in estimated net savings of $2.5 Privatization has reached the third stage. billion over three to five years. As is generally It is now a worldwide practice, adopted in the case, competition forces the in-house unit and dictatorships, developed and to improve its performance or see its jobs developing nations, and communist, socialist, outsourced. In fact the government agency and capitalist countries. In the United States won 90 percent of the competitions but only it is a routine management tool, employed at after it made large efficiency improvements all levels of government by Democrats and under the threat of outsourcing. Contractor Republicans, liberals and conservatives, and associations complain that in-house costs are black, white, and Latino officials. not calculated properly. The changed nature of public A different kind of privatization has administration is called “the New Public emerged at the local level: the private Management,” which recognizes a large role community. More and more of these for civil society and for market principles: private, voluntary, self-governing units are privatization, public-private partnerships, springing up, appealing to those who like choice, competition, , user charges, the features of such neighborhoods. In the and pricing strategies. They are all of a piece: meantime, some newly chartered cities are less reliance on conventional government tools. adopting the Lakewood Plan: private and The bipartisan nature of privatization intergovernmental contracts for most of their is illustrated by President Reagan’s sale of services and only a skeleton workforce. Conrail, the government-owned freight The difficulties of contracting under railroad, and President Clinton’s sale emergency conditions were highlighted by of Teapot Dome, the U.S. Enrichment the experiences in Louisiana after Hurricane Corporation, and a dairy owned by the Katrina and in . Large-scale fraud is easy U.S. Naval Academy. Vice President Gore in hectic circumstances and honest costs headed the National Performance Review, are inevitably high because many layers of in which privatization was prominently subcontractors are necessarily involved. featured. Private security firms in the United States President George W. Bush aggressively perform expedited screening of trusted pursued A-76 competitions, that is, travelers, and other kinds of security firms provide security for individuals and offices

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in dangerous areas, including Iraq. Overall, African-American community has shifted in the 1990 Gulf War there was one contract decisively in favor of school choice, diverging employee for every 50–100 soldiers; in the from its “leaders” who reflexively support Iraq War there are 10 for every 100. teachers’ unions that vigorously oppose it. One can list the imaginative ways that This augers well for continued growth in innovators are privatizing a vast array of charter schools and vouchers, as well as tax public activities, but space does not permit for private-school tuition and even that luxury. One can however, look ahead. home schooling. Mayor Anthony Williams of Washington, D.C., in desperation, provided The Future the breakthrough by endorsing a Republican With respect to social security reform, voucher plan for his city, saying that any President Bush’s plan did not gain enough change had to be better than the status quo. legislative support and neither did Governor Local government privatization seems to Schwarzenegger’s plan for the California be reaching a plateau in terms of outsourcing. system. Nevertheless, I have The average city contracts out about a enormous confidence that government will third of the 70 common city services and make the right decision—but only after it has growth is tapering off. In many cases the exhausted every other conceivable alternative. services like public works have After trying higher social security taxes, later already been extensively outsourced; those retirement, reduced benefits, and increased are services for which it is easy to write taxes of all kinds, a future administration good contract specifications and to monitor must ultimately produce a more privatized and measure contractor performance. But system. Deferred tax plans are already other services are also outsourced, such as proliferating; what remains is to make them emergency ambulances and social services. available to all workers and to displace much The latter are often contracted to nonprofit of the current social security system. agencies although these services pose more Costs are rising for all medical services difficult problems of assuring competition, in today’s malfunctioning health-care system specifying desired outcomes, and monitoring except one: cosmetic surgery—which is the performance. only part that is based purely on market Municipal services are frequently forces with no or government dominated by strong public-employee subsidies. Therefore I see a more privatized unions; therefore stronger political will—so health care system unfolding in the United often in scarce supply—is needed if further States, with medical savings plans, health- progress is to be made. Those unions are insurance vouchers for low-income families, getting very sophisticated in their opposition, and a variation of Governor Romney’s for example, pressuring public-employee compulsory health-insurance plan for retirement systems to disinvest in firms that Massachusetts. Countries proud of their provide privatized services. socialized health care are quietly allowing There is still ample opportunity in city, private medicine to return as their citizens county, and state governments, however, to complain about long delays and rationing of divest government-owned buildings and land medical care. and to form public-private partnerships to Recent opinion surveys show that the finance, design, build, operate, and maintain

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Another well-known example is the Business Improvement District (BID). Property owners, typically in commercial areas, form a corporation and levy a special property tax on all (collected by the state on their behalf) in their defined geographic area. The BIDs provide extra security and cleaning, and beautification through fancy street lighting, well-designed street signs and newspaper vending boxes, Even in liberal bastions like New York, Mayor trees, and plantings. They realize higher Rudolph W. Giuliani outsourced, divested, in their stores and increased property values. and privatized several municipal services. Adopt-a-highway, adopt-a-library, and adopt-a-school programs attract needed infrastructure such as high-occupancy private sponsors who improve services that toll lanes, roads, bridges, tunnels, airports, suffer from government . Cultural water systems, and government buildings. institutions were successfully encouraged, Mayor Rudolph W. Giuliani through a matching grant program, to seek demonstrated that there are many other ways more funds from donors and accept less from to introduce privatization even in a liberal the city; that is, the city partially withdrew bastion like New York. An examination from providing its costly support. of his accomplishments shows, besides These examples from New York might outsourcing and , numerous small profitably be emulated elsewhere. They privatizations carried out by a combination represent an expanded pattern of municipal of methods including municipal withdrawal privatization that goes beyond conventional or default and voluntary organizations outsourcing and . stepping in to take over and provide, in At the federal level, the greatest whole or in part, city services the groups opportunities lie in continuing the A- found wanting. For example, what is perhaps 76 competitions for activities deemed the world’s most famous urban park, Central commercial, and, even more important, Park, was judged by nearby (wealthy) privatizing the numerous federal residents to be poorly maintained and corporations: Amtrak, the United States managed, an example of municipal default. Postal Service, the Tennessee Valley They formed the Central Park Conservancy, Authority (TVA), and the power marketing raised funds for the Park, and soon entered administrations (PMAs) are the most into a contract with the city to manage attractive candidates. the Park; the city pays the contractor, but The large, continuing, and widely the latter raises four times that amount of deplored drain on the public purse by private money and maintains a much higher Amtrak suggests that this might be the standard than the city ever achieved. In first to go. New Zealand, Germany, The effect, the city outsources to a philanthropic Netherlands, France, and Denmark are well organization. This model has been adopted along on privatizing their postal services. In for other selected sites. the United States postal services are partly

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privatized: Federal Express, UPS, and DHL The role of government has evolved from a (which is majority owned by Germany’s hierarchical producer of services to a partner Deutsche Post) provide private mail services, with private organizations—outsourcing, but more privatization can bring large public-private partnerships, “third-party efficiency improvements. TVA and the PMAs government”—and is now becoming a have long outgrown their special status as facilitator, convener, and broker engaging government corporations; they can and the talents of all sectors of society and should be set free to make their way in the often multiple government levels. That is, marketplace. government now addresses many of its The welfare states of Western Europe policy objectives by involving and managing are stumbling toward , but external partners. The authors call this backward-looking economic chauvinism governing by network, because problems remains a force that weak politicians have transcend organizational boundaries. not tackled. Unless the move to free markets One can look ahead with hope to the is accelerated and the remaining state-owned gradual acceptance of Charles Murray’s enterprises are privatized, the countries are revolutionary proposal to transform doomed to continued economic stagnation entitlements. It is breathtaking in its as well as demographic decline. The post- simplicity. Instead of politicians gaining socialist states of , on the votes by dispensing largess through a other hand, emerging from the bleak past to multitude of particular benefits going to which they were consigned for four decades selected segments of the population, an and hardened by that involuntary experience, annual payment would go to every adult. are determined to avoid the errors of their This would be funded by eliminating all western neighbors. current transfer payments. Neither tax Free-market environmentalism can revenue nor total government spending also be expected to grow. It is the proven would decline, but government would be far private alternative to costly and ineffective less powerful in this better-balanced society, command-and-control schemes for protecting and the benefits would be enormous: a civil endangered species and habitats. To avoid society in which individuals live meaningful the tragedy of the , one can look and secure lives in an age of plenty. to the creation of more private, voluntary Both the Goldsmith-Eggers insight arrangements for “property rights” over and Murray’s vision fit the definition of animals, fish, and ecologically sensitive privatization cited at the beginning of lands—via auctions of cleverly designed this essay: Relying more on the private contracts to limit kills and catches and institutions of society and less on government via binding covenants to preserve natural to satisfy people’s needs. lands in perpetuity. Conservation banks, E. S. (Steve) Savas is a professor of public first created in 1995, now number 70 and affairs in Baruch College of the City University represent another approach to environmental of New York. He served under President Reagan protection for endangered birds and animals. as assistant secretary of the U.S. Department of Stephen Goldsmith and Bill Eggers offer Housing and Urban Development, and was first a compelling, expanded view of privatization. deputy city administrator of New York.

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Privatization: Are We Finally Turning the Corner? By Ronald Utt, Senior Research Fellow, The Heritage Foundation

ow odd it is that the United States , Japan, Britain, Australia, and Hcontinues to lag most other nations in others have all turned—with great success— privatization of government activities—the to the private sector to own, operate or process of shifting commercial activities from manage their passenger rail systems, the U.S. government ownership and operation to remains committed to the kind of socialist private sector providers. With government business model that Russia and other former involvement in our economy lower than most communist countries have been abandoning other advanced nations (36 percent of GDP since 1990. in U.S. compared to 55 percent in France Although the reasons for America’s slow and 45 percent in the United Kingdom in progress in shifting government commercial 2005), and where the virtues of operations to the private sector are many and competitive markets are openly endorsed and varied, chief among them is America’s by both political parties, the U.S. has yet to comparatively greater and embrace the concept to the extent that other that has allowed us to avoid making tough nations have. financial choices for the sake of budgetary Where Britain, Canada and 38 other savings that many other countries have had to countries have privatized or commercialized adopt and endure. So what if Amtrak loses their air traffic control systems, the U.S. $1.2 billion per year serving a tiny fraction maintains an inefficient and high cost of the traveling public? Unlimited access to government monopoly, whose overpaid global capital markets allows us to borrow worker force is now lobbying Congress for the money to pay the subsidy and avoid a a compensation package that would average rate hike for passengers, thereby burdening more than $200,000 per year per controller. future generations with the irresponsible self- Even worse is our warm and generous indulgence of those now in power. embrace of a socialist passenger rail system But are things changing for the better? (Amtrak) whose losses nearly match the Twenty years ago I had the good fortune to revenues it earns from ticket sales. Whereas be appointed by OMB Director Jim Miller

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to be the federal government’s first (and less than Reagan’s. Nonetheless, a few of last!) director of privatization at the U. S. the Reagan ideas quietly progressed—the Office of Management and Budget. With Naval Petroleum Reserve and the uranium the full support of President Ronald Reagan, enrichment program—and these were we proposed a bold agenda that included the ultimately privatized during the Clinton privatization of federal lands, Coast Guard Administration. rescue responsibilities, adjudication of But with the exception of a renewed federal tax disputes, the U.S. Postal Service, commitment to competitive contracting the Naval Petroleum Reserves, the U.S. within the federal bureaucracy (and Helium Reserves, the uranium enrichment some notable achievements including the program, and many others. I would like contracting out of FAA’s flight service to say that but for an obstinate, left-wing stations), the Bush II administration has Congress we would have quickly prevailed not pursued the kind of privatization and put the nation on a course of money- opportunities that have been proven saving, service-enhancing privatization; in successes in other advanced countries, point of fact, the most serious opposition to particularly in air and surface transportation our bold privatization agenda mostly came programs. Nor has the president revived from the people President Reagan appointed the position that I held—OMB Associate to run the many departments that comprise Director of Privatization—to ensure that the federal government. at least one federal official has full time Worried about congressional reaction responsibility for the program. Instead, and opposition from the civil servants responsibility is diffused throughout the who were opposed to any change in their government, and privatization becomes jobs, and who saw privatization as a threat everybody’s secondary concern, and not to their power and status, many of the much happens. president’s political appointees opted to protect their workforce from the competitive Indiana’s $3.8 billion windfall got the pressures that President Reagan wanted to nation’s attention, and many states are now incorporate into the federal bureaucracy. looking for ways to cash-in on the bonanza. Indeed, had it not been for OMB Director Jim Miller’s success in getting the president Although federal enthusiasm for to agree to devote time at one of his cabinet privatization has waxed and waned over the meetings to review each agency’s progress past 25 years, support for the concept has on privatization—thereby forcing action to been picking up steam at the state level— avoid embarrassment—the outcome would especially in highways where a number have been even less impressive. Despite this of states have embarked on ambitious clever gambit, agency opposition and foot programs in partnership with private sector dragging persisted and limited our progress, , builders and operators. Virginia, and much of what was accomplished Georgia and have enacted legislation during the 1980s was undone during the to encourage private contractors and subsequent Bush I administration, whose investors to build new roads in their states enthusiasm for privatization was markedly in partnership with the state’s department of

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Because the user fees/taxes that fund most state transportation programs have been growing slowly in recent years, and voters and motorists have been reluctant to support an increase in taxes, many state (and federal) transportation programs have been experiencing funding shortfalls in comparison to their building and maintenance needs. With their traditional Texas has already received an offer of about options for new revenues shrinking or $7 billion for a new toll road. closing, more and more state transportation programs are adopting, or seriously transportation. Virginia’s program has been considering, different forms of privatization in operation for more than a decade, and in as a substitute for traditional construction recent years the state has received proposals and . from major corporations that, combined, Whether the growing interest in would provide more than $10 billion in privatized roads will spill over into other private money for new roads in the state. public programs and infrastructure remains Texas enacted a similar law a few years ago, to be seen. State transportation systems are and it has already received an offer of about generally self-funded with dedicated taxes $7 billion for a new toll road, while another and operate independent of a state’s overall group of investors has proposed a billion budget. As a result, financial shortfalls dollars for a new road in Georgia. confronting the transportation sector may Once some states became comfortable extend no further, in which case the pressure working with private investors to fund and to privatize may be isolated just on roads. operate new roads, the selling or leasing of Still, some of the recent successes existing roads to private investors was less are hard to ignore, and more and more controversial than would have been the case states will likely begin looking to convert had these transfers occurred in isolation. other tangible assets to cash that can be Thanks to this growing acceptance, both redeployed to meet public needs. Indiana’s the city of Chicago and the state of Indiana $3.8 billion windfall got the nation’s were able to lease existing toll roads to attention, and many states are now looking private /operators for a combined for ways to cash-in on the bonanza. sum in excess of $5 billion. As a result of Advocates of privatization should be these successes, a number of other states prepared to help them meet that goal. with potentially valuable toll facilities are Ronald Utt is a senior research fellow taking a closer look at converting their for the Thomas A. Roe Institute for Economic roads to cash to fund other public needs. Policy Studies at The Heritage Foundation. One reason these recent road Utt also served as former associate director privatizations and partnerships have of the U.S. Office of Management and Budget succeeded where others have failed has been during the Reagan administration. the financial necessity of such transactions.

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“Q” Privatised? James Bond More Efficient? By John Blundell, Director General, Institute of Economic Affairs

iven the British was the fans of the James Bond books and movies. Gprimary architect of the nationalisation Nobody doubted the scientific ingenuity of of so much of the UK economy, it is worth these units but it had not occurred to any remarking how the tide of privatisation has Tory Minister they could be brought to the risen so high the reinvented New Labour market. Given a radical overhaul, Quiniteq Party has not blocked further privatisations plc was floated on the stock market to and indeed has gone to areas where others acclaim. feared to tread. It has been bold where the As I write Mr. Blair is in a tussle with Tories were diffident. It has also adapted the producer groups to open up the state’s regulatory regimes to open previously closed near monopoly of hospitals and schools. markets. New Labour is trying to devolve decision- The UK Air Traffic Controllers were an taking down to local clinicians and break agency of the state that the Conservatives the hierarchical system of the National had funked reforming. Where Ronald Health Service. The Government is bringing Reagan had had in 1981 one of his in private companies to supplement or greatest victories, Mrs. Thatcher and her displace NHS units now deemed expensive team were reluctant to privatise these and slothful. The arrival of alternatives is functions. I think they were intimidated by impressive in its ability to confound long- the synthetic but real fears that air safety standing assumptions. might be compromised or even perhaps By a subtle process the dental profession sabotaged by militant unionists. Prime has been discreetly privatised by changing Minister Blair insisted that the tentative the contract of dentists with the NHS. proposals were conducted through to full Most British dentists are ceasing to be civil privatisation. servants and becoming private practitioners, Another remarkable New Labour sell off both screening services and specialist was the diverse Research and Development operations. I think it fair to say this is laboratories of the UK Ministry of Defence. something Mrs. Thatcher would not have These were the “Q” figures familiar to dared to attempt—nor .

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Technical innovations have changed much of the British commercial landscape. The British Broadcasting Corporation, a state body often “lovingly” called Big Bunch of Communists, has seen its superior status challenged and dissolved as first satellite then broadband and other “platforms” were Source:http://www.g8.gov.uk allowed to transmit. The BBC still exists, cozy in its protective cocoons, but it is now just another broadcaster amongst many albeit tax financed. There is no shortage of candidates for market principles to be applied afresh in Britain. The brilliant Macquarie Infrastructure Group of Australia constructed and now runs a significant chunk of the M6 Motorway, a prime British trunk route. The road system of the UK is Mr. Blair is in a tussle with the producer run by the state and impervious to price groups to open up the state’s near information...or rather pricing and timing. monopoly of hospitals and schools. The nominally hard Leftist regional regime in London, led by Mr. Ken Livingstone has imposed a “Congestion Charge” in Central Tony Blair is investing much of his London. This is a relatively crude innovation political capital in creating a network of but it has shown that something rare and semi-private schools which will be no part precious—road space—can be priced. of the local authority schools, which seem Central London’s roads flow much more to be as flawed as U.S. public schools. This freely and as soon as you leave the zone the is inviting the vehement hostility from the difference is startling. The Conservatives, for National Union of Teachers but the schools rather short-sighted tactical reason opposed that have opted out of municipal control road pricing throughout its birth but have seem to be prospering. Parents are clear— suddenly welcomed it on environmental they value them. We are still however far grounds. In my view it will be applied short of creating a true schools market. extensively after the next election. How odd The very first act of the new that we should be told to “Vote Green Vote government in 1997 was not quite to Conservative” while “Red” Ken delivers privatise the but to road pricing. instruct it to act autonomously. This was The Labour Government has not sold as bold and radical as Mrs. Thatcher’s off the Royal Mail, the state’s delivery very early decision to abolish exchange system akin to the U.S. Mail. It has not been controls. The setting of interest rates and privatised but its privileges have been lifted. other policy matters are no longer done on Rival postal services are entering a market command from the UK Treasury.

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property portfolio of the Royal Family, owns all the marine foreshore and estuarial acres of the country. The pace is slow but Defence, Commission, and Crown Estate are

Source: HM Treasury HM Source: selling off or leasing their vast estates. It would be false to depict New Labour as disciples of Mrs. Thatcher. Yet they do invoke the mantra word “reform.” Tony Blair seems to regard the public services as slothful and expensive and slow to experiment. For three successive elections, the once emboldened Conservatives have been as frozen as a popsicle when it comes to innovation. Perhaps a significant sign is the acclaim and respect afforded to by the heir apparent to Mr. Blair, the Chancellor of the Exchequer, Mr. Gordon Brown. He is particularly clear about the need for and is an unyielding critic of the with its protectionist and interventionist instincts. In a sense I fear more for the British Gordon Brown is particularly clear about Conservative Party’s attachment to liberal the need for free trade and is an unyielding economics. Its new leader has spoken out critic of the European Commission with its against “Big Business,” whatever that is. protectionist and interventionist instincts. He is adopting all the nostrums of Global Warming and prescriptions that I fear will handicap the market’s price signaling. He has from which they have been barred since an uncanny ability to latch onto every crazy 1660. My assumption is that a slimmed- green notion and bit of junk science going. down Post Office will be converted to a Perhaps an occasional appointment with company before the decade reality is the best ploy to teach politicians is out with a heavy bias towards shares what their options truly are. being given or sold at knock down prices There is no shortage of opportunities for to their staff. It is about the last place we liberalising British institutions but the pace of ever see strikes and they too will disappear. reform since 1979 has created a phenomenon We will be a no-strike country soon. that seems unstoppable and other nations are The British State is still a holder of now following. a vast portfolio of land. The Ministry of John Blundell is the director general of the Defence is the single biggest landowner Institute of Economic Affairs. He is a former followed by the Forestry Commission. In president of the Atlas Economic Research Foun- addition Estate, nominally the dation and the Institute for Humane Studies.

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The New Public-Private Landscape By William D. Eggers, Global Director, Deloitte Research, Public Sector

can’t say I was around for the Annual to develop and deliver all manner of IPrivatization Report’s inaugural issue but infrastructure, from schools and hospitals to I had the opportunity to help pull together roads and defense facilities. More than 100 the third one—and many more after that. new schools and 130 new hospital projects The world has changed dramatically since have been developed using private finance those early issues—the fall of the Berlin since the mid-1990s. Wall, end of the Cold War, rise of China The United Kingdom’s creative use and India—and so not surprisingly has of PPPs has produced a bevy of benefits: the privatization landscape. Four trends in faster construction, big gains in on-time particular define the new environment. and on-budget delivery, reduced lifecycle costs, better value for money, and a vastly Dramatic Growth in Public-Private improved overall investment climate for Partnerships infrastructure. When Tony Blair first became prime Prior to the PPP push, decades of minister, many analysts wondered whether neglect had resulted in deteriorated schools, or not the first Labor party prime minister hospitals and other public assets. The since the 1970s would undo much of introduction of private finance reversed the Thatcher reforms. was this trend, with £50B invested in capital rampant that many of the newly privatized infrastructure projects over the last decade, enterprises would be renationalized. These and a £26B expansion of Private Finance fears thankfully proved unfounded. Initiative (PFI) deals pledged this year. Prime Minister Blair surprised many Moreover, a 2002 U.K. audit office survey by building upon the Thatcher successes found that 78 percent of PPP projects to bring—for the first time really—private- were delivered on budget (compared to sector finance and innovation to bear on 27 percent of public projects), and cost the core businesses of government. Over overruns were far less frequent. the past decade, the United Kingdom has To be sure, there have been failures— become the world’s undisputed leader in both big and small—over the course of the using public-private partnerships (PPPs) hundreds of PPP projects delivered in the

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United Kingdom. In the face of these, many otherwise be unable to offer.” governments would have backtracked or Across the pond, in British Columbia, abandoned the enterprise completely. The 20 percent of all new infrastructure is now Blair/Brown government, however, didn’t designed, built and operated by the private “go wobbly.” They instead learned from sector. The United States has been slower each failure and used them as an opportunity to this party. However, with about half to continually innovate in the PPP models the states passing PPP-enabling legislation employed, developing more creative and in recent years and huge PPP projects flexible approaches. underway or planned in Texas, Florida, and elsewhere, some analysts predict the Traditional PFI states could soon become the world’s largest Projects over budget 73% 20% market for PPPs. Projects late 70% 24% Post Ideological Just as the Thatcher privatization program stirred governments around the Back in the mid-1980s when the APR world to sell off state-owned enterprises, the was first published, the concept of turning success of the Blair PPP program has inspired over public services or infrastructure to imitators the world over. In India, for the private sector was strongly associated example, the once-socialist Congress party with center-right parties and politicians like government has targeted $30 billion in new Ronald Reagan and Margaret Thatcher. infrastructure to be done through PPPs over the next five years. In Europe, the volume of PPP deals is doubling, tripling and even quadrupling year to year in many countries. One hotbed is Ireland where over 100 water and wastewater PPP projects are either operational or in construction and planning. Meanwhile in the emerging democracies of Central Europe, public-private partnerships are becoming the delivery model of choice for new infrastructure, with governments viewing PPPs both as a way to complete projects on time and on budget, and as a means to attract foreign investment. Explains Prime Minister Jiri Paroubek: “Just like any other , we are trying to multiply the economic potential of the Czech Republic and implement projects for which the public sector alone has neither the strength nor the Center-right parties and politicians like Ronald resources. We are striving to make services Reagan led the charge for greater private accessible to taxpayers that we would sector provision of government services.

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Not anymore. Since then center-left levers of public value inside the web of (often Labor) governments in Australia, multi-organizational, multi-governmental New Zealand and the United Kingdom and multi-sectoral relationships that now have championed far-reaching PPP and constitute modern government. The issue privatization programs. Meanwhile, in the is how to conceptualize, configure, and United States, Democratic politicians such manage a network of public, private and as former Virginia Gov. Mark Warner and nonprofit providers in a way that produces Chicago Mayor Richard Daley outsourced more value for citizens for each dollar spent. major areas of government and pioneered Government by network has become partnership approaches for infrastructure. a fixture at every level of government in All in all, private provision of public services nearly every area of the public sector, from has been increasing relative to government —where a network of nonprofit and delivery for decades in every region of the for-profit providers delivers all foster care world regardless of which party is in charge and adoption services—to the battlefield at the time. in Iraq—where the U.S. military relied on The result: a far more pragmatic and thousands of contractors to do everything sophisticated view of private involvement from maintain computer systems to set up in public services has come to the fore. The base camps. polarized and simplistic debates about the The U.S. Department of Interior’s pros and cons of privatization or contracting new partnership model illustrates the out government services haven’t completely networked governance trend. Deputy gone away, but thankfully they’re becoming Secretary Lynn Scarlett, a former Reason increasingly rare. Foundation president, has spearheaded a major transformation in the agency Emergence of “Governing by toward a heavy reliance on partnerships, a Network” philosophy of leveraging non-governmental The post-ideological phase we’ve entered organizations to enhance public value, and means that the important question is no varied and innovative business relationships. longer whether a service should be delivered At the 76,000-acre Golden Gate National by a private or a public player. The question Recreational Area (GGNRA), for example, now is how the sectors, including nonprofit partnerships are so extensive that National groups, should be arrayed and managed Park Service employees constitute only to produce the best public services. In a 18 percent of the workforce; partners, book I co-authored in 2004 with Stephen concessionaires, contractors, cooperative Goldsmith, we term this development associations, and volunteers compose the “Governing by Network.” other 82 percent. GGNRA’s partners have In this model, government executives contributed more than $100 million in redefine their core responsibilities from capital improvements to the park. managing people to coordinating resources for producing public value. Government Choice Movement agencies, bureaus, divisions, units and Governing by network represents the offices become less important as direct confluence of several important trends; one service providers and more important as is the growing number of governments that

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are injecting choice into public services. The services by itself is no panacea. Newspaper provincial government in Alberta, Canada headlines reveal the serious difficulties now offers parents a wide range of publicly governments often have getting this right. funded schooling options including online, In Iraq, private-sector involvement has public, charter, and private. Meanwhile, been critical but also at times controversial. state governments in the United States are Atlanta’s effort to outsource wastewater beginning to shift job training, elder care, treatment failed miserably. And in mental health, education, and other services Kansas, two large, venerable nonprofits to choice-based approaches. South Carolina’s went bankrupt as a result of too much new Personal Choice proposal establishes risk-shifting in the state’s child welfare personal health accounts for most of the privatization. state’s 850,000 Medicaid recipients, allowing Figuring out how to avoid such failures beneficiaries to customize the healthcare they and better manage a government to do less receive to suit their individual health needs. of the work itself has become one of the Across the pond, the U.K. National Health central public management issues of our Service, public schools and social services time. Management must move to center are offering increased consumer choice, stage. Holding providers accountable and along with more diversity and competition measuring and tracking their performance among service providers. Propelling these has to become a core government initiatives forward is the belief that letting responsibility that is as, or perhaps even people choose encourages a greater diversity more, important than managing public of providers, which in turn allows for a employees. better match between citizen preferences and The government’s ability to meet the services received. Choice can also help its obligations depends on both sides improve service quality by weeding out poor understanding that a profound change is performers and driving competitors to deliver occurring in how governments fulfill policy a consistently higher standard of care. goals. If this change is managed well, we’ll The choice movement builds on a have a new model of government that steadily emerging post-World War II protects the public better but produces less trend: government funds and sets the rules itself, focuses on goals instead of processes, for safety nets while injecting market- and harnesses the dynamism, efficiency, and based creativity and freedom into the flexibility of the private sector. And that, delivery of those services. Instead of inputs ultimately, can only lead to greater public and processes, government focuses on good. accountability, rule setting, and outcomes, William D. Eggers is the global director such as a quality education. Watch for for Deloitte Research—Public Sector. He is continued growth and innovation in this the author of Governing by Network: The New area. Shape of the Public Sector (Brookings, 2004) and Government 2.0: Using Technology to Lastly, a Cautionary Note Improve Education, Cut Red Tape, Reduce Reformers need to acknowledge that Gridlock, and Enhance (Rowman greater private provision of government and Littlefield, 2005).

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The New Privatization: Applying Old Lessons to New Problems By Roger D. Feldman, Partner, Bingham McCutchen LLP

rivatization’s most important future role exchange for finely tuned governmentally Pis in the national energy and security negotiated project acceptance and fields. The basis of this New Privatization performance risks. challenge lies in its evolution over the past Privatization/public-private partnerships two decades. continue to emerge throughout the Twenty years ago, “privatization” infrastructure world, albeit glacially. was about dismantling or “reinventing” The rearguard defensive action of public government, depending on whom you employees has been supplemented by the asked. In either case, it involved letting determined defense of the public treasury privately performed personnel or businesses and dogged efforts to shift public risk to the relieve government of its growing pseudo- private sector through the efforts of public commercial role, in such key agencies officials guided by very diligent counsel. as national defense. Privatization was Some efforts to achieve public/private philosophically linked with deregulation: partnerships expired or lumbered into it too involved removal of “unnatural” limbo. We are now seeing a resurgence in government constraints on the operation of fields like transportation where project costs markets in areas like energy. The resulting exceed public budgets and the will to tax “city on a hill” would be better, because directly. whatever was done by it would be operated Today, the national challenge has shifted: more efficiently and its resources would be in a physical security sense and in terms of more productively allocated. the sustainability of our energy resources, Privatization then moved into a “public- we are a nation at risk. We are all suddenly private partnership” phase, particularly in a maelstrom together. And when that in the infrastructure development and happens, throughout history, there is always operation sphere. This has proved to a cry for stronger central government. involve an on-going struggle to entice Confidence in private marketplace solutions private developers to accept the carrot of to serve the commonweal, as opposed to government-compensated concessions in private providers’ interests, tends to wane

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When systems fail, if only because of the technical complexity involved, and the eggshell is broken, the yolk is on us. Only Katrina isn’t laughing.

rapidly. The need for dramatic innovation Nowhere is the need for effective seems to cry out for the risk-taker or collaboration clearer than in the areas of regulator who will go where no single profit- introduction of “distributed generation” and driven enterprise can independently take “renewable resources.” . The significant unremarked The nervous system of our nation is problem is created of the headstrong “public made up of many “critical nodes” that flip entrepreneur” who sees insufficient longer- on and off in response to predefined decision term danger in the suspension of markets. roles and user commands. It is ultimately Therefore now, more than ever, in the energy-driven. Not only do we have mas- nation’s most critical areas—security and sive national grid and pipeline networks, we energy—we need public-private partnerships have hyper-reliability-sensitive computers that link the capabilities of government to and communications switches. That system affirmatively provide governance effectively in America is to a large extent serviced, at and of private entities to achieve the the macro level, by our oldest public-private performance levels identified by government. partnership, “public” utilities regulated by

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“ commissions” and our newest goals (taking into account national policy federal effort of regionalizing electric system requirements) can be set. Private action, operations, so-called “Regional Transmission overseen by enlightened public Organizations.” In the event of natural or and an emphasis on civic cooperation, is the man-made emergencies, all the king’s horses necessary combination to perpetuate these and men cannot hold this thin-shelled sys- aspects of American security. tem together. And when systems fail, if only So looking back at privatization over because of the technical complexity involved, the past 20 years, I come to the following and the eggshell is broken, the yolk is on us. conclusions: Only Katrina isn’t laughing. • It was good the battle was fought; it The technology to enhance operating broke the ground for ideas for future energy security exists. It needs to be es- action; tablished on a distributed basis that corre- • We face a new and stronger struggle sponds to our modern - with a higher ticket: national survival linked (and vulnerable) society. Government (perhaps the way Margaret Thatcher needs to respond to this fact by finding saw privatization in the 1980s for the ways to tap from the private sector the new U.K.); technologies (some of which, happily, can also be lower polluting and many of which • To fight that struggle requires learning do not use foreign fuels) to deal with this from our recent history, saving the best problem. of government but making sure it guides In addition to taking up this physical private innovation into new markets, vulnerability challenge, government needs thereby reducing the vulnerability of help to reduce reliance on insecure fuel our systems or making possible needed supplies. Under the Energy Policy Act, changes and improvements to national Congress sought to direct public capital and fuel consumption patterns. resources to stimulate private solutions to In short, the privatization we helped public problems through use of bio- and build over the past 20 years will have earned coal-based fuels. Less emphasized was the its place in American history if it provides need to open up regulatory bottlenecks and the foundation for an enlightened New private inertial resistance to the national Privatization effort which responsively and consumption of these fuels. blends public and private initiatives. That, New public-private interstate networks vital I believe, is the challenge for those of us to the American future need to be fostered. who were present at the first “birth” of In short, new public-private partnership privatization. formats to foster distributed power and Roger D. Feldman, a partner in the law domestic renewable energy use are needed. firm of Bingham McCutchen LLP in Wash- Policy innovations can draw from the ington, D.C., was one of the founders of The lessons learned—some better from the Privatization Council and long time Chair of trying experience over the last 20 years— its successor, The National Council for Public- both as they relate to the question of who Private Partnerships. should do things and how performance

Transforming Government Through Privatization 41 Annual Privatization Report 2006

Privatization: Looking Backward, Looking Forward By Lawrence L. Martin, Ph.D., University of Central Florida

an this really be the 20th anniversary to this special 20th anniversary issue and Cof Reason Foundation’s Annual that privatization will be addressed from Privatization Report? It seems like only a number of perspectives, I would like to yesterday that Reason Foundation began its focus my comments around three specific quest to bring research and policy analysis areas. First is the general acceptance of to bear on the then still relatively new privatization by public managers today. phenomenon of privatization. Twenty years Second is the continued equivocation of ago was also just about the time the term academics and scholars on the question: “privatization” first entered the popular Does privatization work? And third is the lexicon. While the concept of privatization issue of privatization and partnerships. had bounced around for a few years, it was the increased public attention created The General Acceptance of Privatiza- first by Prime Minister Margaret Thatcher tion by Public Managers (1979-1990) in the United Kingdom and Two indicators of the general then by President Ronald Reagan (1981- acceptance of privatization by public 1989) that put it firmly on the public policy managers today are the decline in anti- agenda. privatization rhetoric and the actual use of In the same year (1986) that Reason privatization at the federal, state and local Foundation published its first Annual government levels. Privatization Report, I defended my How the term “privatization” has doctoral dissertation on privatization. been viewed over the last 20 years tells Since that time, I have continued to observe us much about its growing acceptance. with keen interest the progress of both In 1989, the National Academy of Public privatization and Reason Foundation. This Administration (NAPA) released a report 20th anniversary provides an opportunity as entitled, Privatization: The Challenge to well as the motivation to pause and reflect Public Management. The report could just on the past and future of privatization. as easily have been called, Privatization: the Realizing that others are also contributing Challenge for Public Management. Perhaps

42 Reason Foundation • www.reason.org Annual Privatization Report 2006

At the federal level, an estimated $400 billion is now being spent annually on the purchase of and services from the private sector.

never in the history of public management unclear that anyone today take this research has a preposition contained more policy seriously. significance. The general view 20 years Additional evidence of the general ago was that privatization constituted an acceptance of privatization by public assault on public management, an assault managers today is provided by the that had to be repulsed. A few enlightened International City/County Managers individuals, primarily at the state and Association (ICMA). In a series of five local government levels, recognized that studies conducted between the years 1982 privatization was actually a new tool that and 2003, the ICMA documents the increase public managers needed to master, but this in the number, as well as the proportion, view was in the minority. of local governments utilizing privatization Fast forwarding to the present strategies. For some specific services day... Lester Salamon, of Johns Hopkins (e. g., solid waste collection), the most recent University and one of the principal ICMA data suggest that some slowing down authors of the 1989 NAPA report, now may be occurring. However, this leveling off sees privatization in its many forms is more in keeping with the normal S-shaped (e. g., contracting, vouchers, public-private growth curve that would be expected of any competition, public-private partnerships) as mature public policy. part of the basic tools of government. Much At the federal level, an estimated of the literature on privatization today is no $400 billion is now being spent annually longer ideologically driven, but rather seeks on the purchase of to better understand this tool, its uses and from the private sector. And the Office of limitations. Of course there are exceptions Management & Budget (OMB) Circular to this statement. The American Federation A-76 continues to mandate public-private of State, County and Municipal Employees competition as the official privatization (AFSCME), for example, continues to policy of the federal government. publish anti-privatization studies, but it is

Transforming Government Through Privatization 43 Annual Privatization Report 2006

Does Privatization Work? be made that the research is less clear. Why The bottom line for privatization, or academics continue to cling to the standard any public policy, is the basic issue: Does it of beyond a reasonable doubt says more work? To the question “Does privatization about social science “niceties” than it does work?,” the unequivocal answer is YES! about the realities of the complex world in I am amazed, and sometimes appalled, which public policy plays out. by many of my learned academic colleagues Privatization & Partnerships who continue to equivocate when it comes to addressing the question: Does The comedian Mort Sahl was found of privatization work? The most frequently saying that “The future lies ahead.” While heard response is that the “data conflict” somewhat of a tautology, his comment or that “no clear pattern has emerged.” nevertheless reminds us that the future Nothing could be further from the truth. is always just out of reach and therefore What exactly do the data say? our crystal ball will always be just a little In a forthcoming book Contracting bit cloudy. What then can be said or for Public Sector Services being published ventured about the future of privatization? by the National Institute of Government My crystal ball is probably as cloudy as Purchasing, I make the following any. However, one bright point of light statement: “the preponderance of the does shine through clearly: partnerships. creditable evidence from domestic as well My crystal ball says that in the future, as international experience suggests that privatization will be concerned less with privatization generally results in lower competition and market forces and more service delivery costs and equal or better concerned with creating partnerships service quality.” Now, in the spirit of between the public and private sectors. transparency, I am referring specifically to In support of this contention, I refer to contracting out and outsourcing. How do the pragmatic words of the Copenhagen I come to this conclusion? By reviewing Institute, “No single actor, public or private, hundreds of research reports and case has the all-encompassing knowledge, studies compiled over the last 20 years. overview, information, and resources to What then accounts for the academic solve complex and diversified problems.” equivocation when the question is posed: I can also point to recent domestic and Does privatization work? I suggest that the international research that supports this answer lies in the standard of proof utilized. contention. In this future of privatization Borrowing terminology from the legal field, and partnerships, trust will become the basic if one uses the preponderance of the credible building block. Consequently, we will need evidence from domestic and international to understand better the role trust plays in experience as the standard of evidence, then public-private partnerships and how best to there is no doubt that privatization results develop and maintain it. in lower service delivery costs and equal Lawrence L. Martin, Ph.D. is a professor or better service quality. However, if one and director of the Center for Community insists on using beyond a reasonable doubt Partnerships at the University of Central as the standard of proof, then a case can Florida in Orlando, Florida.

44 Reason Foundation • www.reason.org Annual Privatization Report 2006

Cutting the Government in Half: Three Reforms By Grover Norquist, President, Americans for Tax Reform

he goal of the modern conservative movement all grumble. They would all like Tmovement is to cut the cost of government less spending. But there is no organized anti- as a percentage of the economy in half over the spending NRA equivalent. Thus overspending next twenty-five years—one generation. is the issue that gets ignored. Why then has federal spending as a Second, this administration has targeted percentage of national income increased the wrong metric by announcing that its from 19 percent in 2000 to 23 percent in goal is to “cut the deficit in half.” The real 2006 during a period of Republican control measure of success is reducing spending of the House, Senate, and Presidency? And as a percentage of the economy. This can this after federal spending as a percentage of be accomplished by slowing the growth of national income had fallen from 23 percent spending and by having pro-growth tax cuts to 19 percent from 1992 to 2000—with (like cutting capital taxes) create a larger Clinton facing a Republican Congress? economy. Both are issues conservatives dominate: spending cuts and pro-growth Three Reasons tax cuts. Focusing on the deficit suggests First, the modern conservative that tax cuts are part of the problem, not movement consists of the “leave us alone part of the solution. And tax hikes are the coalition” of groups where concerning economic equivalent of spending cuts if you their primary, vote-moving issue, what are targeting the deficit. they want from the government is to be Lastly, it is politically difficult to “cut” the left alone. This includes gun owners, small budget. Even reducing the growth of spending businessmen, taxpayers, property owners, in Washington is considered a “cut.” and homeschoolers. Within this context, three major areas Raise taxes as Bush 41 did and taxpayers of government spending for our federal, leave the room. Challenge gun rights and state, and local governments exist. The first National Rifle Association (NRA) members area of reform is retirement security such as leave the room. But no constituency walks out Social Security, and federal, state, and local of the room when government spending creeps government worker pensions. The second too high. The moving parts of the conservative area of reform is health care costs, such as

Transforming Government Through Privatization 45 Annual Privatization Report 2006

Medicaid, Medicare, and Veterans Affairs Today it is more than 50 percent of hospitals. And the third reform is education, households and two out of three voters in K-12 and state universities. One never cuts the 2004 election. That number grows as education, pensions, or health care. all new companies use defined contribution The solution to the spending problem retirement systems rather than defined is to replace politically suicidal, or at best benefit plans. And the old-line defined difficult, efforts to “cut” spending with benefit plans are ebbing in the airline, auto, politically profitable “reforms” of programs and steel industries. Even government that will reduce their long-term costs. pensions are moving to defined contribution The best example of this is “privatizing” plans in a number of states. Eight of the or “personalizing” social security, moving last 10 changes to state pension plans over the system from the pay-as-you-go, the past decade have been towards defined unfunded, Ponzi scheme to a fully funded, contribution. independently held personal savings account Health Savings Accounts (HSAs) have system. When fully phased in, every jumped from one million in 2004 to three American will be required to save, say, 10 million in 2005 and Forrester Research percent of their income and accumulate real predicts 24 percent of all Americans will be resources to buy an annuity at retirement covered by a consumer health plan by 2010. that will keep one out of poverty and Education choice is within spitting allow one to keep all savings beyond that distance in New Hampshire, Florida, Texas, minimum to be spent as one wishes. Social Wisconsin and steps have been made in Security can be reformed to cost not its Pennsylvania, Arizona, and Minnesota. A present 20 percent of the federal budget breakthrough in one or two states is the from rather remove it from the budget. breach of the dam we need. Scare tactics Medicare can be similarly financed against school choice (they will sell your through allowing Americans to save their kids to the Arabs or harvest their organs) Medicare tax payments. Health savings will fall apart with a major state’s experience accounts can give Medicare and Medicaid for all to see. programs real competitive pressures to Other reforms with real savings include reduce costs without voting for any “cuts.” expanding competitive sourcing, where On education the only reform worth the private sector competes regularly to enacting is real parental school choice. With provide the services now done by 800,000 private schools costing half of government government employees whose work can be schools, over time public schools will have found in the yellow pages—food services, to become as cost efficient and effective as lawn care, fixing eyeglasses, etc. private schools. Cutting small spending programs like Pipe dream? No. We are on track to the National Endowment for the Arts is make all three key reforms a reality in the satisfying. But real reduction in the cost and next decade. The case for Social Security scope of government flows from reforming reform is politically strengthened as more government spending towards zero rather and more Americans own shares of stock than nicking it. directly through mutual funds, IRAs, and Grover Norquist is president of Americans 40lKs. When Reagan was elected only 17 for Tax Reform. percent of adults owned stock directly.

46 Reason Foundation • www.reason.org Reason’s archive of privatization and government reform research and commentary is available at www.reason.org/privatization

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