The Achilles Heel…aka Perils of Privatization

I have previously noted my skepticism of so-called “privatization” of public assets. (I say “so called” because we Americans use the term inaccurately, to mean “contracting out” for goods and services; genuine privatization would involve selling those assets off and letting them succeed or fail in the market.)

Note that the term I use is skepticism, not opposition. There are obviously times and tasks where contracting makes sense. My concern is that government isn’t a very good judge of when and what those are.

A recent post at the Urbanophile illustrates my point (albeit inadvertently). Aaron Renn was an enthusiastic supporter of the Toll Road lease, and an equally ardent opponent of the ill-considered Chicago and Indianapolis parking meter deals. In this post, he uses a considerable amount of data to make a perfectly reasonable point: the devil is in the contracting details. There are good deals and not such good deals.

My skepticism–and that of other critics of “privatization as panacea”–comes from the recognition that contracts with units of government are qualitatively different from contracts between private actors, and those differences make it far more likely that the contracts ultimately negotiated will be unfavorable to taxpayers.

Mayors and Governors who are considering privatization are operating under a different set of incentives than the corporate CEO who is charged with long-term profitability of his business. As the saying goes, long term to a politician means “until the next election.” Typically, the elected official is looking for immediate cash to relieve fiscal stress (and improve his immediate political prospects) and is much less concerned with the extended consequences of the transaction.

Furthermore–although it really pains me as a former Corporation Counsel to admit this–the lawyers who review these deals for government tend to be far less sophisticated than  lawyers acting on behalf of the contractors. That’s not, I hasten to say, because they aren’t good lawyers–many are. But the skills required to advise a municipality or state government aren’t generally the same skills as those whose emphasis is business transaction law.

In addition to the existence of unequal bargaining capacities, there is also—unfortunately—the potential for “crony capitalism,” the temptation to reward a campaign donor or political patron with a lucrative contract at taxpayer expense. (Can we spell Halliburton?)

Ideally, the media will act as a watchdog in these negotiations, alerting the public when a proposed contract is lopsided or otherwise unfavorable. But media has never been very good at providing this sort of scrutiny, because news organizations rarely employ business reporters able to analyze complex transactions. (In today’s media environment, of course, we’re lucky if we even know a deal is in the works.)

So-too often, government contracting pits an officeholder who is focused on short-term gratification and represented by a lawyer unfamiliar with the arcana of business contracting against a savvy contractor looking to lock in long-term advantage who is represented by an experienced lawyer-negotiator.  We shouldn’t be surprised when the resulting transaction is unfavorable to the taxpayer.

Is this lack of parity reason to eliminate government contracting? Of course not. But it is definitely reason to be cautious , and read the fine print, especially when an elected official is trumpeting the great deal s/he just made.

What’s that old saying? If it sounds too good to be true, it probably is.


  1. “Note that the term I use is skepticism, not opposition. There are obviously times and tasks where contracting makes sense. My concern is that government isn’t a very good judge of when and what those are.”

    I copied and pasted the above comments regarding “privatization” because it hits the nail on the head. I was sickened, disgusted and appalled as I watched Goldsmith put the City of Indianapolis on the auction block during his terms as mayor. He gave a new meaning to “insider trading” by hiring some city work out sans Metropolitan Development Commission approval and/or legal contracts. Regarding Sheila’s comments above; I believe government work, paid for by tax dollars, should be primarily done by government employees. It makes sense to contract out such services as solid waste hauling, infrastructure maintenance and other specialized labors requiring numerous employees. They should, of course, be managed and controlled by city employees. Of course this does require competent, knowledgeable, qualified city employees – NOT those hired through nepotism, cronyism and political patronage.

    Goldsmith hired a consultant firm in Cincinnati, Ohio, to provide services to the entire city government for one year at the cost of $3 million; they placed consultants in all departments and watched city employees competently do their jobs. Soon; everyone was looking for a legal copy of this transaction so they could renew it for the second year and another $3 million. As records secretary for the Commission it took me months to figure out what the problem was because it was so stupid I never considered it till a last resort. Everyone at the meeting was given their copy of the this contract, signed it and took it back to their office to file. Hence; no legal copy with all required signatures. I pointed this out to a Deputy Mayor; when I returned to my office in Department of Metropolitan Development the Chief Financial Officer stopped me to ask how to get a legal copy of this contract. This CFO had a Master’s Degree in Personnel Management from the University of India. I explained the basics, the second year contract was approved by the Commission and ALL COPIES of the new contract were returned to me. I put them in my Commission file cabinet and waited – it took weeks before they discovered they again had no legal copy of this contract or where any of the copies had gone. A vice president of the consultant firm was called to Indianapolis from Cincinnati to resolve the problem; they came to me for answers and got them. What Goldsmith began in the 1990’s has been continued and escalated to ridiculous and costly levels.

    This was only one example of the continuing selling of Indianapolis to private businesses; who are in business to make money – not serve the tax payers.

  2. I was a big fan of privatization during the 1990s. Even today, I have the bible of privatization, Reinventing Government, on my shelf. The idea of privatization is to create competition in the delivery of government services. What I did not see happening was the idea of long term contracts, mortgaging future revenue for upfront cash today. I did not see the role political contributions and the revolving door would play in getting contracts steered to particular companies. As an idea, privatization is not bad. It’s been implemented poorly though.

  3. Paul; you, Sheila and I seem to be basically in agreement, just different levels of privatization approval. Had you paid close attention during the 1990’s to the privatization here, even you would have questioned why so much business was contracted out to Ohio firms. The fact that Goldsmith’s chief financial advisor (and campaign contributor) was vice president of a bank in Columbus, Ohio, hired here to study public housing and later illegally appointed (covertly) as interim director of the Department of Metropolitan Development, might have raised questions in your mind.

  4. I like to refer to the sequence of events surrounding the parking meters in indianapolis.
    The american phrase “Bait and Switch” could apply. Remember the mayor’s words “I’m
    not going to raise your taxes”. I am however, going to sell the parking meters to a private
    company for a large amount. To which, the new meter company immediately tripled
    the cost of parking and extended the parking hours that required payment. Also, adding
    Saturday as a pay parking day.

    Anybody out there, want to tell me who got the vaseline on that one ?

  5. Well said Sheila. We need to stop using contracting out or privatization as an ideology and instead use it as a tactic in an overall strategy of more efficient/effective government. Sometimes it makes sense to contract out, sometimes not.

  6. Regulated contracting? ain’t gonna happen. The only reason people go into politics is to get rich on tax money. That is the only source of income for politics be they tarrifs, levies, property, whatever. Government runs on its subjects and taxes tap those subjects. Humans are simply not honorable enough to monitor themselves. So trying to regulate privatization or contracting is like trying to herd cats. Threfore the best solution is to allow locals to steal a little and spread it locally, than to allow big money from France buy up your water, power and infrastructure and give it all to one person. A little privatization is like being a ‘little’ pregnant.

Comments are closed.