Ripoff Privatizations-- And Why They Keep Happening
Want to make a deal? Privatization is in the air and the multinational profiteers are circling. And the action is bipartisan and involves big money:
- The District of Columbia, Illinois and Indiana have all announced that they are looking to hand over their state lotteries to private firms for billions of dollars.
- Last year, Indiana got $3.8 billion from an Australian-led consortium for a 75-year tollway lease on the same day Virginia signed over its Pocahontas Parkway as a 99-year lease to a private company and Texas approved a $1.3 billion bid by a consortium led by Cintra to build and operate a 40-mile toll road out of Austin.
- Indiana is also planning to contract out management of part of the state's social services system in a $1.16 billion contract.
Why do these deals keep happening, despite the contractor scandals in the headlines?
- At the federal level, privatization in the defense department has bred billions of dollars in corruption by contractors like Halliburton, while the cleanup after Hurricaine Katrina has been crippled by profiteering and malfeasance by private contractors hired in the wake of the disaster.
- And at the state level, just last week, Gov. Charlie Crist ordered the Florida Department of Law Enforcement to investigate two companies running private prisons for the state after audits found the state was paying for vacant jobs and other questionable expenses.
- And Texas had to largely dump its social services privatization deal with Bermuda-based Accenture after the firm ran-up a massive $100 million budget overrun with an automated system that suffered massive technical failure.
Research Shows...No gain from Privatization: If you think these are anecdotal headlines, broader research has found no net financial advantage for states from handing over work previously done by public servants to profit-seeking contractors. A study by Rand Corporation released last week found that privately-run schools in Philadelphia did no better in raising student test scores than did publicly-run schools, adding to a range of evidence that privatization of schools is no panacea. Despite New Mexico having 43 percent of its prisoners in private prisons, the highest in the nation, there is little evidence that this saves the state money and has left state officials with few experts qualified to monitor the private contracts. As Paul C. Light of New York University, who has long tracked the hidden contractor work force, writes, “We have no data to show that contractors are actually more efficient than the government.”
Yet deals are being cut and the public has to ask why politicians push for them, despite scandal and lack of evidence that they deliver of promises made by privatization salesmen? The answer is politics from short-term gains to political corruption:
Stealing from the Grandkids: When the state is auctioning off assets, the political payoff is obvious: today's politicians get to spend the money and the economic loss is realized only by taxpayers in the future who will be denied ongoing revenue.
Take the proposal by Illinois Governor Rod Blagojevich to sell the state lottery. Under the plan, the state hopes to get $10 billion as a one-time payment to spend immediately, while the purchaser would receive a monopoly and keep all revenues and profit from the lottery for the next seventy-five years. D.C.'s lottery proposal is similar with a $1 billion payment up-front in exchange for loss of yearly revenue for future budgets for the next twenty years. It's grand theft from the school budgets of the future.
And that political calculation means that today's politicians often offer these assets at fire-sale prices, since the economic losses will show up down the line on someone else's watch. For example, while Indiana got $3.8 billion upfront from leasing 157 miles of I-90, one analyst estimates that the company buying the Indiana Toll Road will reap as much as $11.38 billion from the deal, a loss of $7 billion to taxpayers in the pockets of the private firms.
Bypassing Democratic Accountability: One reason the privatized firms can expect so much money in the future is that they can do things that the politicians might not be able to get away with if the decisions were subject to democratic accountability. They can raise tolls without a political debate or use marketing or employment practices that would be stopped in their tracks if the job was still being done by the public sector.
For example, private lotteries will no longer be subject to present political restraints. Such firms will likely advertise more aggressively, especially among people susceptible to gambling addiction and those who can least afford to lose money on lottery tickets. State governments usually avoid those marketing tactics; Massachusetts, for example, banned almost all lottery advertising in the late 1990s. But privatizing lotteries is a back-door ticket to ending the political debate on such tactics.
Similarly, most toll road privatizations assume sharp increases in tolls in the future under the control of private firms that won't be held politically responsible for those decisions. Instead of a debate on raising the gas tax, which would be cheaper and better for the environment than the projected toll increases, the issue will bypass politics altogether. Writes the Texas Observer, "Taxpayers may well have been receptive to a big, messy debate about future transportation needs and the gasoline tax, but they were never asked."
Add in the political corruption of "pay to play" campaign contributions-- think Halliburton at the federal level or the notorious Coingate scandal in Ohio -- and you have a recipe where government handing out public contracts and privatization deals is bound to be a taxpayer ripoff.
There may be exceptions, but despite even some neoliberal, DLCish promotion of contracting out in the past, many state leaders at least are challenging the logic of privatization.
In Indiana, where the privatization action is especially hot and heavy, lawmakers have launched hearings to examine a $1.16 state contract to privatize state social services. Other lawmakers have filed bills to hold the executive branch accountable for privatization deals. Rep. Joe Micon, D-West Lafayette, wants to create a special commitee to review any state contract worth more than $15 million, including the costs to employees already performing the work. And no contract could extend beyond a governor's term of office, which would eliminate multi-decade leases of the lottery or toll road privatization -- a nice principle to prevent the financial robbery from our grandkids involved in many of the privatization deals.
Patronage. It is simple. Since the 1940s, it has been hard to use public employees for patronage. This has not stopped the patronage machine. It has simply reoriented it to "privatization." Scratch any of these deals and you will find patronage. We are in one of the most corrupt eras our country has ever seen. New York City is, in some ways, still paying off the corruption of the 1870s through 1950s. Soon the entire US will be still paying off the corruption of the current era.
February 5, 2007 6:35 PM | Reply | Permalink
Nathan, I am assuming that you omitted any reference to immediate personal benefits to the politicians selling off the farm because there are none? Hmmm. Somehow that just doesn't ring true. The Congressmen who provide the votes to "privatize" things do it just to gain a one time benefit for their voters? The State legislators who do the same, also do it just for a one time benefit to the voters? And, the local city councils who do the same, likewise are thinking only of the benefit to the voters? Sorry, try as hard as I can, I just can't swallow that.
Hoppy in Sacramento
February 5, 2007 6:37 PM | Reply | Permalink
Amen. And it won't even be Honest Graft
aMike
February 5, 2007 6:39 PM | Reply | Permalink
I once had occasion to try to trace Plunkitt's descendants into the modern era. One of McManus' descendant worked as a staffer for the New York City Council within the last decade. However, Plunkitt's descendants seem to have moved out of the City in the 1960s or so.
February 5, 2007 7:07 PM | Reply | Permalink
Nathan-
Privatization in and of itself is not as bad as the deals that you rightly point out.
In a properly structured public-private partnership, the state maintains "ownership" of the asset, accountability and transparency are keystone principles of the deal, and the state doesn't look to gain a one-time windfall. Capital (tax revenue) is freed up for other ongoing uses.
Many of the deals you list are the public face of "insider trading" in the dirtiest sense of the term. Lawmakers voting for any such deals should be charged under RICO statutes. Tom Noe, Ken Blackwell and Coingate were just the ones that got caught, but they were indicative of the political money laundering and shakedown that was Tom DeLay.
USDOT estimates that a 1-2 cent increase in the federal gasoline tax could fix most of what ails the national road system. Instead, federal funds are cut to the states which are left ill equipped to deal with crumbling infrastructure. With the price of gas spiking in 10-20 cents at a time, what could a piddling 1-2 cent increase do to an oil addicted populace that the profiteering of Exxon hasn't already done?
Most of the privatization moves in the past six years have come from the 5 layer deep political appointees in every federal agency. They are here in DC to make people rich by looting the government and passing the swag to their peeps at home, so when they're out they have some cush to fall back on.
Wanna stop this Gordon Gecko/Grover Norquist dismantling of the governments for fun and profit?
Eliminate the "Plum Book" and fire every political appointee in town.
Alphonse ( Al ) Kada
Iranians are fighting the Americans in Iraq so they don't have to fight them on the streets of Tehran
February 5, 2007 7:13 PM | Reply | Permalink
The Republicans, always the party of big business, have turned the United States of America into the biggest business of all. It's not a country to them, it's a closely-held corporation, certainly not publicly traded. And they are hiring their friends. What's hard about that?
What we need now is a legal theory to seize back all those assets when the time comes.
February 5, 2007 8:09 PM | Reply | Permalink
Read the most recent issue of Mother Jones to see how Goldman Sachs is raking in the fees for public infrastructure sellouts. There is nothing for the public in these deals. The politicians and the investment bankers are the main beneficiaries. All the public gets is higher tolls.
State lotteries are the latest item to be privatised. The lotteries would be sold to casino corporations. I have always thought that the rationale for lotteries as funding apparati for education was a bogus idea because lotteries always cost the poor mor than the well-off. The well-off dont buy lottey tickets nearly as much as the poor and hopeless. The success of a lottery depends on player losses. Same as the casinos. The Bellagio wasn't built with players' winnings. The house always wins. As public policy, it stinks. The shell game we were given was that lotteries paid for schools but the public funds were cut by the same amount, so it was a zero-sum game.
Unfortunately, Illinois' Governor is a Dem. but governs like a Repub. in almost every way, from crony corrution to privatization to negative campaigns. He was the first out of the gate to go Rove on his opponent in last years election. He blitzed the airwaves early and often with nasty commercials. She was no prize either with her connections to disgraced Governor George Ryan and other sleazy connections, but Blagojevich is a crook from top to bottom. Like Bush, his loyalty to his political friends is puddle-shallow. It's all short-term. He'll kick anyone to the curb who's not useful to him anymore.
Democrat Mayor Daley also sold out the future for short term gain by selling the Chicago Skyway to investors. It's a quicker route to Indiana and Michigan than the perpetually-under-construction interstate 80-94.
Bush and his cronies have taken the prize for crony capitalism with their handling of Iraq but selling out our grandchildren's future is an equal-opportunity game.
Former Illinois gubernatorial candidate Dawn Clark Netsch said recently that politicians can't resist short term gains that undermine long-term income for the states.
I don't see any end to this either.
February 5, 2007 10:13 PM | Reply | Permalink
In California, there's been experience with a couple of private toll roads, built with privately-raised funds, but using the State's power of eminent domain.
The State had to agree to, among other things, refrain from relieving traffic congestion on certain key public roads and intersections, to avoid reducing demand for the toll road service.
Eventually, I believe, the State bought at least one of the toll roads, just to regain its freedom to administer the roadnet.
There are reasons why these things become government functions. The historical record on proprietary schools and tollroads and these other things goes back not just a few years or decades, but centuries, and we keep rediscovering the same thing.
You could have extended this post with some examples of things, which have proven, in recent years, to be better handled through government-owned entities. One of them is electric power generation. Let's regulate carbon dioxide emissions heavily, and then pick up the power companies at a discount! There's the capitalist spirit!
February 5, 2007 10:22 PM | Reply | Permalink
One of the more serious consequences of this practice is that the people are no longer citizens building a community, they are customers purchasing services. Without that shared responsiblity there is no reason to build a community. If the consumer can buy the deluxe fire/protection services why should he care if the neighbor's house down the street burns down because he can only afford the economy plan? There's no shared risk and therefore no reason to maintain the same standards for all citizens of the community.
February 6, 2007 8:06 AM | Reply | Permalink
I think what's happening here, beneath all the corruption and inefficiency, and what most of us at here at TPM Cafe are attempting to resist, is a fundamental shift in the nature of the state. One of the hallmarks of the modern nation-state has been its ability to build, maintain, and above all control its transportation infrastructure; it's the reason the early centralising monarchs, like Henry II in England or Phillip Augustus in France, found ready allies in the commercial burghers of the towns, who didn't want their roads being controlled by baronial warlords who proved little better than bandits. Now, we're seeing a kind of shift away from this centralisation, and towards what might be usefully understood as a sort of corporate feudalism. I remember the first (and, as far as I know, only) private toll-road I've driven on, with my then-girlfriend, in Houston. I was astounded. Aren't roads supposed to be one of the fundamental obligations of any functioning modern government? She was somewhat of a Texan, and thought my concern quaint. But it's not; its modern in the true sense of modernity.
The privatization barons are attempting to feudalise our economy and divide it into various fiefdoms. They have to be stopped.
Ben Cronin
February 6, 2007 8:31 AM | Reply | Permalink
i am having a difficult time understanding how indiana, who recieved $3.8 billion, and CHicago who recieved $1.8 billion, got ripped off. the use of these performance based contracts stipulate that a certain level of upgrades and quality assurance investments are required throughout the length of the contract. furthermore, the toll fees are previously determined and are adjusted to estimated futture personal affluence and inflation levels; companies are not allowed to go over more than a dollar or so then the projected toll. and when the contract is finished, the road must be returned in the manner in which it was given.
the funds the government has seen, the large principle payments, have had major impacts on the current debt service of both chicago and indiana.
while there is no direct environmental gain though, if the private sector can begin to innovate the way it historically does in so many other sectors, there can be great advancement. the biggest problem is that there will be a HUGE learning curve for these projects as there is little in the way of expertise in the private sector to develop these billion dollar infrastructure deals.
it is too early to determine wether or not this is a good thing. we probably won't know for atleast 30 years or so. though, the sheer idea that the private sector is pickin up large parts of teh tab offsets any critics assumptions that there will be no gains in efficiency and that this will spark large levels of corruption.
February 6, 2007 10:40 AM | Reply | Permalink
If we can't know for 30 years, why hand over a monopoly at what many people calculate is a bad financial deal?
If states need to raise money, there is no reason they can't issue bonds for current improvements. The only logic of these privatization deals is political-- enrich corporate friends for short-term political gains,the losers being government budgets in the future that will not be receiving any revenue from these assets.
February 6, 2007 10:48 AM | Reply | Permalink
the revenue that they could get their hands on they are not taking, they are preferebly taking the principle payments
February 6, 2007 10:54 AM | Reply | Permalink
im not explaining myself clearly, the public sector has options here. they can take the full value in one payment, this is what chicago and indiana did, or they can take a smaller payment and recieve royalties on the toll revenues, but this requires that the government maintain some financial responsibility during the term of the contract.
also, the asset itself, the highway, will most likely gain in value considering the improvements the private companies will put on them (better pavement, electronic toll facilities, better safety guards) all of which the government will recieve for free when the contract is up. this was done perfectly for ORange COuntyies 91 Expressway. if it wasn't for a contract error (noncompete clause) the freeway itself was doing great. genereating some $40 million a year, something like 15% a year goign to Orange County. CHicago chose to recieve the whole thing upfront becuase of the major debt issues they were have, $1.8 by the way paid off almost half the entire cities debt. Will there be some profiteering? probably. will there be a level of corruption? probably. But the FHWA willsave an estimate $50 billion over the next 5 years alone from private equity, all of which can be directed towards more needy areas.
besides what the heck are they gonna do about the "gas tax" with cars becoming so gas efficient and the spike in public transportation use?? its loosing its purchasing power, we need to find alternatives, this is one of many promising ideas, we must try it
February 6, 2007 11:06 AM | Reply | Permalink
I was talking with some guys and they were telling me about the privatization of the DMV in Missouri (maybe it was just Springfield) and how it runs much faster and more efficiently now.
I've been trying to find more information on it but have struck out so far.
February 6, 2007 11:08 AM | Reply | Permalink
I just had a thought
(It happens occasionally). If the folks who study, worry about, and prognosticate upon peak oil are right, and the result is going to be the New Urbanism, a sharp decline in travel by private conveyances and a new emphasis on living locally in high-density areas, (see here, too) then it could be that the interstate highway system is becoming antique and obsolete under our eyes (or tires, for those of you who drive).
And if, as reader Kenneth Vincent states:
Then this might be just the time to unload these potential "white elephants." Less use means less tolls, and less tolls mean less income and profits, and the cities have their cash "up front".
This doesn't negate the rest of Mr. Newman's argument, however. I don't much like privatizing labor-intensive service oriented public enterprises like schools (publicly funded in Massachusetts since the mid 17th century) or turning correctional institutions over to private companies which not only have to incarcerate people, but make a competitive return on their investments.
aMike
February 6, 2007 11:51 AM | Reply | Permalink
Have you seen the "marketing video" now being shown to inmates (I believe in CA, still looking for the link) to get them to request transfer out to an out of state facility?
This to me is the worst. The most sober function of government is to provide for the safety of citizens. When government incarcerates, it should not set the punishment in the private sector as a "business" concern.
Could you imagine "calmative" agents in the water to enable staff cutbacks? Could you imagine a criminal enterprise burgeoning from within a captive telemarketing labor force (think Texas, only nationwide like the parent corporation).
Some things lend themselves easily to privatization, some do not. Many times we are not given a choice in the transaction, but every state now has an "office of privatization" or equivalent vehicle that should be required to shine some light on what projects are being considered.
If anybody thinks that private necessarily means more efficient, check out Kucinich's old fight for Muny Light in Cleveland.
Alphonse ( Al ) Kada
Iranians are fighting the Americans in Iraq so they don't have to fight them on the streets of Tehran
February 6, 2007 12:14 PM | Reply | Permalink
.> I've been trying to find more
> information on it but have struck
> out so far.
For the last 30 years or so the State of Missouri operated about a dozen full DMV offices staffed by state employees. All other DMV offices (~75 IIRC) were called "fee offices" and were operated by private contractors who hired private employees (including drivers license examiners) and added a percentage fee on top of the standard state fees for transactions. These fee offices were specifically considered patronage operations and the contractor was changed (and the offices moved) whenever the governorship changed hands.
Two things changed when the current Gov. Blunt took office: essentially all the state-owned offices were closed. And the fee offices were turned over to a corporation formed specifically for the purpose by a group of Blunt's largest campaign contributors and former staffers.
The Kansas City Democrats filed a complaint with the Justice Dept, who appointed the Federal Prosecutor for northern Arkansas as a special prosecutor to investigate. He returned a report of no indictable offense.
sPh
February 6, 2007 12:41 PM | Reply | Permalink
Another area of major privatization is water. Check out United Water, a subsidiary of Suez. Check out what those guys are up to world wide.
February 6, 2007 2:41 PM | Reply | Permalink
I was in grad school in Cleveland when Kucinich was the youngest alderman (I think the youngest ever) and Carl Stokes was the first Black Mayor. Cleveland was trailblazing before it got the Rock 'n Roll Hall of Fame. Thanks for reminding me of my misspent youth. I've been reading about the Muny Light battle over at Truth Dig. Have you got a link for the "Marketing Video"? I'd like to look at it. Thanks.
aMike
February 6, 2007 2:48 PM | Reply | Permalink
Learn to capitalize, it's a basic courtesy, especially in light of the annoying and inexplicable desire of the text editor here to allow only one period at the end of a sentence.
February 6, 2007 3:22 PM | Reply | Permalink
aMike-
Here's the story from LA Times with a clip from the video.
http://www.latimes.com/
Ahh yess, the burning Cuyahoga, the Harbor Inn in the Flats, and Imus stumbling around in a coke induced haze at the Tavern on the Green.
However, I liked Kelly's more then than now, the same for Cedar Point.
Alphonse ( Al ) Kada
Iranians are fighting the Americans in Iraq so they don't have to fight them on the streets of Tehran
February 6, 2007 7:06 PM | Reply | Permalink
Thames is also a monster, but they are all being bought up. From WiKi-
In the US, Atlanta was the poster child for privatization gone wrong. Bad contracts with no oversight or transparency- run by United Water.
Alphonse ( Al ) Kada
Iranians are fighting the Americans in Iraq so they don't have to fight them on the streets of Tehran
February 6, 2007 7:15 PM | Reply | Permalink
Mayor Ralph J. Perk (we called him Ralph P. Jerk) setting his hair afire while cutting steel ribbon with an acetylene torch at the opening of a new rolling mill. Ahhhh memories, memories. When I was in Cleveburg the Harbor Inn used to boast carrying more brands of beer than any other joint in the country--a free bottle if you could name a legitimate brand they couldn't produce. Thanks for the link.
aMike
February 7, 2007 10:59 AM | Reply | Permalink
So does that mean that privatization costs more but works better?
Now that's something we can have a debate on! Is the trade-off worth it or not.
February 7, 2007 11:37 AM | Reply | Permalink
Everyone loves to complain about their state's DMV. Which means if you travel around the US you hear a lot of complaints. Whether or not they are fair or even accurate is another question.
With that in mind, people I know who deal with the Missouri DMV say it is one of the worst in the United States. Those who lived close to a state-operated DMV office preferred to go there. Overall they thought the service was bad before the change and as bad or worse after.
sPh
February 7, 2007 12:34 PM | Reply | Permalink
Don't think of this as a complaint (at least not entirely) but as an anecdote. I'm about the last pedestrian in the world. In my state of Rhode Island...alternative identifications are available for those who don't drive...a real necessity for cashing checks and the like. The Department of Motor Vehicles issues those non-driver IDs. Guess what? One can't get to the location without a car. :-)
I have to add that this might have changed...these IDs have no expiration date, and the person whose picture stares out from mine looks a LOT younger.
aMike
February 8, 2007 12:18 PM | Reply | Permalink