|
White Paper on
Privatization
by Ellen J. Dannin,
Professor of Law
Most of what we hear about
privatizing public services these days carries the same simple
message -- privatizing is good. More sophisticated stories explain
that the reason privatizing is good is that only the private sector
can deliver a quality product at the lowest possible price.
However, like most things in
life, privatization is more complex than this. Whether to have
certain public services and how to deliver them are decisions with
profound impacts on all of us. As San Diego, California, and the
country move towards privatizing, it's time has we members of the
public learn more about this issue or risk forfeiting our role in
this democracy.
This paper takes a look at
some of the most commonly held beliefs about privatizing public
services. Some of what you read here may surprise you or raise
issues you hadn't seen discussed before.
1. Governments are broke
because public services and tax dollars have been mismanaged.
Here are some important
reasons governments are finding themselves with budget problems
these days.
-
One important reason
governments have been struggling with deficits during the past few
years is that they have lost major sources of revenue. One
important source of lost revenues has been ever lower tax rates on
those who earn the most and on corporations. Lowering taxes by a
percentage here or there doesn't mean much for most of us, but
when tax breaks are given to corporations and the very rich the
money lost is enormous. For each 1% a millionaire's tax rate is
lowered, the government can lose $10,000 in taxes.
Over the past 15 years, we
have seen the tax rate on wealthiest lowered again and again. Each
time, revenue is lost. If any of us kept having our incomes
lowered each year, we'd have trouble paying the bills pretty soon.
Governments are having the same problem.
It is estimated that the
richest 1% of the population has received over $80 billion in tax
cuts since 1977. While this has happened the amount of wealth
which has flowed to the richest has increased at enormous rates.
The share of corporate taxes
as a percentage of federal revenues has declined from 23% in 1960
to 9% in 1990. Corporate property taxes show the same decline. The
corporate share of local property tax revenues has dropped from
45% in 1957 to 16% in 1987.
Corporations are not paying
lower taxes because of declining profits. Corporate profits have
soared. An important part of those profits is money that once
would have gone to support government services we all would
benefit from. One important justification for those tax breaks was
to give corporations more money to invest in creating good jobs.
Instead of investing the money to create jobs, corporations have
gone spending sprees to buy each other. Others have taken the
money and used it to finance moving work out of the country.
Corporate mergers and
acquisitions and moving jobs abroad have not benefited the
American public. All too often these days, we open to paper and
read about the layoffs that result. People who are laid off from
good jobs don't have the money to pay taxes. They are transformed
from taxpayers into people who need government services. The tax
breaks for corporations have ended up costing the rest of us a
lot.
-
Tax cuts aren't the only
money governments have given corporations in recent years.
Nowadays, corporations think they have the right to demand huge
subsidies to remain in or come to a city, county, or state.
Governments feel they have no choice but to pay when corporations
threaten to move if they aren't given subsidies. The amounts of
tax dollars being handed over to corporations is no trivial sum.
Kentucky announced a
public-private partnership with a Canadian steel company that
would bring 400 jobs to Gallatin County, near the Indiana border,
in return for an incentive package with up to $140 million in
income-tax credits over 25 years. The tax break equaled $350,000
per direct job created. In addition, the incentive package
included a $4 million state loan to a local water district for
water and sewer improvements, a state grant of $132,000 toward
job-training and an accelerated construction schedule for widening
a major highway in Gallatin County.
Kentucky is not alone. South
Carolina lured a 2,000-employee BMW automobile plant in 1992 with
$130 million in incentives -- or about $65,000 per job. In 1991,
the United Airlines maintenance center in Indianapolis, received
$294.5 million in incentives, or about $42,000 per promised job.
General Motors has received all sorts of welfare assistance from
the State of Michigan and City of Detroit. The list of companies
who have pitted one area of the country against another goes on
and on.
Studies have shown that
these subsidies rarely result in the creation of jobs, and
certainly not the number promised. Unfortunately, job starved
cities and counties feel they have no choice, and the corporations
know it's a seller's market for them.
-
Is it really true that
government mismanages or squanders money. Compare the cost of
government services with what has happened in key areas of the
private sector. Health care is a good example. Those of us have
health coverage -- provided by private sector insurance companies
-- have seen costs increase; less coverage; and less choice as
businesses move to PPOs and HMOs to cut costs. Far more of each
private sector health insurance dollar goes to overhead, such as
advertising, and administration than is the case for government
run programs. A dollar spent on administration is a dollar not
available to spend on health services.
Health insurers compete
against one another, but this does not seem to have meant that
they have been careful with their revenues or provided a service
in a way that most of us would say is satisfactory.
2. Government spending is full
of incompetence, waste and fraud. Privatizing would eliminate this
problem.
-
First, this argument assumes
that the private sector is free from these problems. Ask whether
this belief is based on a private sector which is uniquely
competent, thrifty, and honest or one that has managed to escape
scrutiny. If the same standards of judgment were used, it is
obvious that the private sector does not escape problems of waste
and fraud. The past decade has seen many corporate leaders sent
off to prison for corruption and misusing their positions.
If you have trouble thinking
of any, here is a list to get you started. Beech-Nut sold sugar
water as infant apple juice. E.F. Hutton pled guilty to 2000
felony counts in 1985. The Exxon Valdez spilled 240,000 barrels of
oil into Prince William Sound.
Remember the S&L fiasco --
the one we taxpayers are still paying for. The government has had
to come in to bail out the private sector. General Motors'
mismanagement led it to lose billions each year and to layoff tens
of thousands of employees. Even in the face of the misery
management's failures had cause, it kept paying huge salaries to
the very officers whose decisions brought about this disaster.
There is no reason to think
that these problems will not arise in the case of subcontracted
public services.
-
Robert Monks (Republican
politician) and Nell Minow (a corporate lawyer) begin their book
on problems with the American corporate structure, Power and
Accountability with a story of driving through the woods in Maine
and coming upon industrial discharge which was killing the plants
along the river. They comment:
Who wants this to happen?
Not the owners of the company, the shareholders, not the managers
or employees, not the community, not the government. I could not
think of anyone connected with the company emitting the effluent
who wanted the result I saw. This was an unintended consequence of
the corporate structure. The very aspects of the company's design
that made it so robust, so able to survive changes in leadership,
in the economy, in technology, were the aspects that led to this
result -- pollution that no one wanted, and everyone would pay
for.
They are friends of
corporations and yet they think that American corporate structure
is ill-equipped to stop practices which make profits but which
harm society, even in some cases in which the law is violated.
-
Unfortunately, private
corporate mistakes don't stay private. Hundreds of thousands of
workers found that out when they were laid off. The lucky workers
-- the ones who escaped layoffs are overworked and under stress.
Communities have been hit as local business had to close for lack
of customers. The roads, sewage systems, and other public services
which were built to serve corporations who decided to seek higher
profits elsewhere are now useless. None of these common corporate
actions should make us comfortable with leaving the delivery of
public services to the private sector.
-
Yes, there are a few
well-known examples of government overspending, such as the
military's purchase of toilet seats and wrenches. These examples
are notorious but do not paint an accurate picture of government
spending. In any case, the public sector has a long way to go to
catch up with the private sector in terms of misused funds.
3. Market forces and competition
ensure that the private sector delivers a higher quality service at
a lower cost than the public sector.
-
First, all of us over the
last 15 years have had a chance to see the impact relying on
market forces have. These are the forces which have led to the
devastation of our cities and the failure of the S&Ls. Given their
performance, we can't assume their results are always benign.
-
It's a popular myth that the
private sector can feed multitudes with a few loaves and fish.
Simple logic should tell us it's impossible for the private sector
to deliver the same service for less and make a profit as well. In
fact, there is less of miracles done with loaves and fish and more
of magic acts done with smoke and mirrors.
Most of seem to forget that
private companies owe a legal responsibility to make a profit for
their investors. Even if they are providing a service to the
public they only are doing it as a way to make money for their
investors. This means that when a public service is privatized,
there is you have to subtract the investors' profit from the money
available to provide the service. 2 plus 2 will still be 4 whether
or not it's the private or public sector that does the addition.
Given this simple math, how can a private company pay a profit and
still provide the same level of service and at less cost than the
public sector?
The answer is that most
often it isn't happening. Either it will provide a different
service or it will provide the service in a way that makes us
uncomfortable or it is given subsidies of public money or services
that are not counted in the total of amounts spent.
The easiest way to do all
this is make more poor people: if wages are reduced and benefits
are eliminated there is money to go towards profit. The company's
profit comes at a huge cost to the public though.
A community is like a tube
of toothpaste. If it's squeezed in one spot, it puts pressure
somewhere else. If the contractor saves by not paying for health
insurance and pockets that money as profit, these workers or their
families are likely to wait to see a doctor or to use emergency
rooms. This is not only more expensive but the public has been
picking up the tab. In other words, the price of the
subcontractor's profit can be very expensive for the community.
-
We want the same level of
services, but what quality of services are we getting when they
are delivered by a workforce willing to work for low wages and no
benefits. Each of us needs to ask if we feel comfortable with a
police force hired at minimum wage and given guns and close
contact with corrupt people offering large temptations. Lots of
government jobs are positions of trust. Government workers have
access to confidential information, assets, and other items of
values. There is no question that money saved in salaries this way
is pennywise and poundfoolish.
-
Many privatizers get special
subsidies or in-kind services from governments. Often these are
not counted when comparing before and after costs. The only fair
way to compare would be to add these items to the cost of
privatizing. Among the added costs that should be added in are
services such as oversight and supervision, use of government-paid
facilities or equipment, or outright subsidies. Also included in
the cost must be lost revenues if the privatizer is allowed to
keep the fees that would otherwise be returned to the government.
A good example of the latter is the way Resolution Trust
Corporation has been allowed to operate, by taking a percentage of
money recouped.
-
The biggest supporters of
privatization are really saying that greed is the strongest and
most reliable of human feelings. Is this a view you endorse?
Should government be promoting greed as a building block of
society?
What is the impact of greed?
EAI lost its contract with the Baltimore School District because
it would not agree to cut its profit when the school needed to
address a budget shortfall. Recently, Warner-Lambert pled guilty
for hiding faulty procedures in making drugs and agreed to a $10
million fine. DuPont was fined $115 million for concealing
evidence in a trial involving its fungicides. Executives recently
were convicted of concealing information on using faulty heart
catheters during surgery. Where there is money to be made there is
temptation, and that temptation is expensive for all of us. Each
year we face the impact of $200 billion of white collar fraud.
We're told that greed as a
motivator is the engine that creates jobs and makes the economy
work. In fact, what we see is greed leading to mergers, a focus on
short term profits, and layoffs of thousands of workers each year.
This year layoffs are up 45%.
Most of us are motivated by
many things other than greed. Who among us would choose money over
the life and happiness of a loved one? Most of us feel emotion
such as love of community and nature and pride in our jobs. These
are the very values that motivate many who go into public service.
If the greed promoters are right in their dismal view of humans,
why does anyone choose to become a teacher or a public health
worker. Ask if we would want a society made up only of Wall Street
traders.
Would we rather have public
services provided by the greedy or by people committed to the
value of public service.
-
People motivated by greed
need to be watched, especially when they have access to public
money, information, and property. Overseeing private contractors
to ensure there is no fraud or waste adds expense and is a very
inefficient way to deliver public services. Yet this expense has
to be borne to ensure that the contractor performs the job and to
avoid being vulnerable to the unscrupulous. Overseeing
subcontractors means having to retain skilled technicians or
managers who can evaluate their actions. Had the services not been
subcontracted, these skills would be used directly in performing
the job.
-
In San Diego, the school bus
service provided by public employees has been so much more
efficient and less expensive than private bus services that all
subcontracted transportation is being taken in-house. This story
is not unique. Public workers can provide better service and get
better wages while costing the public less. Unions have played an
important role in this San Diego success story.
4. It's impossible to get
rid of bad public employees, so they don't care about their jobs.
-
There seems to be an
assumption that public employees are bad workers. It's time this
was corrected. Think about the tragedy of the recent Oklahoma City
bombing. That was a vivid example of public workers -- fire
fighters, police, rescue squads, medical personnel, social
workers, and many, many others -- putting in long hours searching
for victims, caring for the injured, and assisting the bereaved.
This behavior by public servants is far from unique. A recent
outbreak of a plague of encephalitis in California was held in
check by dedicated public health workers and the Center for
Disease Control.
Despite this many believe
that public employees don't work hard or are incompetent. The
evidence does not support this. Every day the papers are full of
stories of ordinary public servants doing their jobs effectively
and under great stress.
-
If public workers don't do
their jobs they can be fired. Tenure or civil service don't keep
bad people in good jobs. What they do is require an employer to
prove that it isn't discharging based on whim, that it has good
reason to discharge; that the employee is given notice of the
reasons for discharge and an opportunity to defend himself or
herself; and that the final decision is made by a fair process. If
an employee remains on the job but can't perform it, this means
that management has not done its job of assembling evidence that
would support the decision to discharge.
-
Recently both Los Angeles'
Mayor and the Orange County trustee -- people from the private
sector business communities not noted as fans of the government --
made public statements that they had found the public employees
they had dealt with to be dedicated, competent and hard working.
If anything, they said, they had been disappointed by the quality
of management in the public sector -- not the workers.
-
Attacks on public workers
are one way to make assaults on public services. Privatizing may
be the first step in eliminating a service completely. If the
legislature wants this, it should face the issue squarely whether
or not to provide a service.
5. Private corporations make more
efficient use of funds and eliminate waste.
-
This view has become almost
gospel. However, if it is examined carefully, there is strong
evidence that it is not accurate.
Think about IBM and General
Motors. They are struggling to stay alive because they indulged in
wasteful practices that went unnoticed and uncorrected for
decades.
-
The law requires that
private contractors have, as their number one responsibility,
making a profit for their shareholders. This has been interpreted
by many to mean short term profits on share prices. Educational
Alternatives, Inc. (EAI), is a good example. This company has been
trying to get contracts to run public school systems. It released
false information about student test scores as a way to bid up its
share prices. Others who play the stockmarket and who had sold
short on EAI stocks (that is, betting that on a certain date the
stock prices would decline), released information that was
damaging to EAI. The stock prices declined so precipitously that
the company was in danger of failing.
None of this was in the
public interest. Had EAI failed, the schools would have been left
with no one to manage them in the short term. Public services are
too important to be left to this sort of danger. The EAI story,
however, is not an aberration. This is the normal way American
companies and the free enterprise system operate.
-
Stock market manipulation is
not the only private sector problem that could endanger providing
public services. The rate of corporate bankruptcies has been high
over the past few years. If a company that is supposed to be
providing public services goes bankrupt, how will the service be
maintained?
-
Many public sector workers
have lost their jobs as federal, state and local governments have
tried to cope with the lost revenues. Cutting jobs has not meant
cutting out the work those people once did. Those who have
remained have seen their workloads increase. For some the increase
has been so great they are unable to perform all their new duties
and suffer from burnout and frustration.
For the public this may
appear to be incompetence or a bad attitude. Unfortunately this
feeds the impression that the public sector is incompetent. The
root causes, however, are insufficient support, and this will
remain whether or not the public or private is the provider.
-
Privatized public services
may also be shut down by strikes. Private sector employees have a
right to strike.
-
All too often the discussion
about privatization comes down to dollars paid or saved. Price is
not the only consideration where public services are concerned.
Other public values may be more important, such as quality of
service, reliable availability and wide access.
To put it more concretely,
think of the CDC stepping in to stop a potential epidemic of
Hantavirus or encephalitis. None of us would have wanted the CDC
not to investigate or provide services designed to stop the
diseases from spreading to those too poor to pay. We all
benefitted by having a stable service available quickly and
without regard to price. Who could put a price on stopping an
epidemic quickly? Other public services are similarly difficult to
put a price tag on.
When it comes to mailing a
letter, if I live in a city and can get a private contractor to
deliver all my in-city mail at less than first class postage, I
might think that's a pretty good deal. I may think less of it if I
have to pay the full cost of delivery to my mother who lives
across the country up a mountain down a dirt road. By paying more
for my letters in the city, it's true I subsidize other letters.
On the other hand, the system works well when provided on this
large national scale. With public service, the whole is greater
than the sum of its parts.
If mail service gets divided
up by competing subcontractors, the advantages of a national
service -- a service that helps knit us together as a people --
will be lost. Here, cost is not the most important value; equity
and access to service on a national basis is.
-
Information is a public
service we don't often think about. The government collects and
maintains a great deal of information. Some of it is confidential.
Should a subcontractor or a series of subcontractors have access
to this information? Under these circumstances, isn't it likely
that some of it might leak or be used in ways we are not
comfortable with?
We all know that knowledge
is power. Should we subsidize a private company to amass
information which it then can sell back to us.
-
There have been notable
instances in which private companies have been subcontracted to
collect, provide or maintain information created at public
expense. In some cases, they have refused to return the underlying
data or documents to the government at the termination of their
contract, thus depriving the government and the taxpayers of
materials they paid to create. Lawsuits and other efforts to
recover the government's property only add to the costs. These
problems can make a cheap service very expensive.
6. Money paid in taxes would make
us all richer if spent in the private sector.
-
This has been a popular
belief since the 1980's. However, to see its effects all we have
to do is look around us. More than 180,000 fulltime state jobs
have been eliminated in this time. Most of us do not feel richer
or more secure as a result. Why is this the case?
When good jobs are lost the
people who had those jobs don't have money to spend in their
communities. Most jobs created in recent years have been lower
paid. Slowly the grocery stores, gas stations, clothing stores,
restaurants, and other businesses are pinched for customers and
close.
A 1992 study by the
Corporation for Enterprise Development found that creating new
jobs has only a very loose connection with a state's overall
economic performance. Creating large numbers of low wage jobs with
low job security often results in poor economic performance. The
study found that states cannot thrive by creating new jobs that
don't pay well enough to support a family, that offer few
benefits, and that are so loosely tied to the community that the
jobs are likely to be moved. Privatized jobs are often a tradeoff
of good jobs for bad jobs.
It's easy to lose sight of
the fact that public employees pay taxes too. Each time we see
that a public sector jobs is eliminated we should see tax revenues
lost.
The bottom line on all of
this is that practices that were supposed to enhance industry have
been destructive to all of us. After years of pursuing them it's
easy to see that none of this has made us any richer. Experience
living under a system based on the theory that private sector
dollars are better spent should tell us it's time to discard it.
-
The truth is that all of us
would rather keep money than have to pay it. None of us especially
likes to pay taxes.
But the truth also is that
we get a lot of services for those tax dollars. We accept them as
natural and almost don't realize how much we receive each day.
Look around and count them
up. It's easy to think of street cleaning, sanitation, police and
fire protection. Even if we have no children, public schools
benefit all of us by educating the citizens of tomorrow -- the
people who will care for us as we age. Add to this animal control
and public parks and zoos.
Every time we take an
elevator, buy food, or eat a meal in a restaurant we can feel
safer because we know that government experts have inspected what
goes on behind the scenes that we can't see. The state makes
certain that people who provide important services, such as our
car mechanics, are licensed and competent to do their jobs.
We receive weather reports
and know that disaster relief is available if needed. We have
roads to drive on thanks to public services. Airplanes are guided
in by air traffic controllers.
It's hard to imagine how
each of us as an individual could afford to buy these things. It's
also easy to see that we each benefit just by having these
available, even if we never use them. Only by pooling our tax
dollars are we able to provide for our collective good.
-
There are well-known cases
in which the government has contracted out certain services only
to find that when the contract ends, the contractor refuses to
return the government resources they were allowed to use in the
first place.
7. All the studies show
that privatization is better.
-
First, the facts of life.
Where do studies come from? Who are the experts who made these
findings?
If you look behind the
surface you'll see that a lot of what we "know" about
privatization is mere puffery. Groups such as the Reason
Foundation and the National Council for Public Private
Partnerships (formerly the Privatization Council) have spent a lot
of time and money convincing the public that privatization is
better. When they issue their reports or sit on panels or are
quoted by the news media they are basically just making
commercials for their product: private takeover of community
services.
What do these statements and
studies say. If you read the paper -- what they release to the
public -- you hear stories about the future impact of
privatization. They talk about how much money they think
government will save if it privatizes particular projects and how
much better the services will be. You see very few follow-up
stories on what has really happened.
There's at least some reason
to wonder how certain they feel about their own data. Recently
many of these privatizers fought vigorously against legislation in
the District of Columbia, which required that, before any public
service was subcontracted, there had to be proof that there would
be at least 10% savings. Why did they fight so hard? Surely if
they believe what they say they would not object. Ten percent is
such a small amount that it should be easy to prove. Despite this,
the pro-privatizers have fought vigorously against the law and for
a system requiring no proof to back up whatever they want to
claim.
This is not the only gap
between what they say and what they do. If you read what these
groups send out to their constituents -- companies thinking of
going into the privatization business -- you don't see talk about
the public interest. The focus is on Profit. When the word
"Profit" appears in their publications, you see it in boldface and
large type.
They try to create a sense
that privatizing is something good. The National Council for
Public-Private Partnerships even gives out its own awards for
people who help the cause of privatization.
When we realize that these
are just commercials, it's easier to see that we should take them
with the same grain of salt we use when we're told that some
shampoo will make us eternally happy. If the American public were
given a more complete picture of the story of privatization, we'd
see that they these folks think they can sell us a bill of goods.
When we buy the shampoo thinking it would make our lives perfect,
all we end up with is a bottle of shampoo and less money and,
hopefully, clean hair. When we buy privatization, all we end up
with is privatization, more money in the privatizer's pocket, and
hopefully, the same level of services.
But even that may not be the
case.
-
Privatization failures are
never publicized. Yet they exist.
An example is the
subcontracting of garbage collection services. In some cases,
garbage and toxic waste has been improperly disposed of. The
public had to pay to clean up, while the original contractor
pocketed the money for services not received. Waste Management,
Inc. is an example of a disposal company convicted for financial
improprieties. It is well known that organized crime has
infiltrated the waste industry.
The Challenger shuttle blew
up because private subcontractor Morton Thiokol did not want to
delay the launch. It also ignored internal warnings that its
product was defective.
New York City subcontracted
its Parking Violation Bureau to Datacom Systems Corp., a
subsidiary of Lockheed. In 1987, evidence of bribes, extortion,
and stealing were uncovered. When the work was returned to the
public sector, stealing stopped and the cost of the service was
20% lower.
-
In New York state it was
found that $12.5 million was paid to 22 crime related companies
engaged in providing mental health services, police protection,
construction, and services to the mentally disabled. Principals of
many of these companies have been convicted of various crimes in
performing their jobs.
-
If privatization is
efficient because of competition, then it follows there is no
reason to subcontract services that cannot be subdivided among
many competing providers. Merely being in the private sector is
not what is supposed to create efficiency and improvements; it's
competition. Where there's no competition, then the services might
as well stay in-house.
-
Here are some impacts the
Cornell University Hebdon Report found that result from
privatization:
-
diminished quality and
access to services
-
lower employee morale,
productivity and training
-
worker exploitation
through lower wages and benefits
-
increased discrimination
against minorities and women
-
loss of government control
and sovereignty
-
lost constitutional and
other legal rights
-
decreased efficiency as a
result of difficulty monitoring and administrating contracts
-
loss of accountability and
control
-
lost infrastructure
-
increased corruption,
bribery, kickbacks, bid-rigging, campaign donations, low-ball
bids, and contractor bankruptcy
-
higher direct costs or
hidden costs to pay for the loss of pensions and benefits of
public employees
-
increased conflict,
strikes, grievances, and arbitrations
The Hebdon report found:
In conclusion, we found
privatization to be, at best, a disruptive, socially destabilizing,
and ultimately harmful method of cost saving. At its worst,
privatization can actually increase costs, lower the quality of
services, reduce public accountability, and marginalize citizen
involvement in the democratic process. ... The rational solution is
to seek creative alternatives to the way services are currently
provided by improving the utilization of the existing workforce. The
practical answer, we believe, can be found in fundamental reform of
pubic sector work process through dialogue, discussion, and
negotiations. This is the challenge for politicians, management
officials in the public sector, public employee unions, and
employees.
Reprinted with
permission. |
