Reason Foundation - Authors > Robin A. Johnson

How to Navigate the Politics of Privatization

info@reason.org (Robin A. Johnson) — Mon, 01 Jul 2002 00:00:00 EDT

Executive Summary

As more governments from the halls of Congress to city halls consider private sector delivery of public services, proponents in both the public and private sectors are finding a frustrating wall of obstruction, opposition, and delay—otherwise known as politics—blocking otherwise solid public policy initiatives. For elected officials seeking to privatize services, the role of politics in the governmental process is wellknown. For private sector firms, politics can seem an illogical force that slows and prevents efforts to make government function more efficiently. They often become impatient with a process that is cumbersome and antithetical to normal private-sector procurement methods.

This how-to guide shares lessons learned from both government officials and private firms at the front lines of privatization endeavors. These lessons may help others avoid the political pitfalls that can stymie a worthwhile privatization proposal. Survey data show that most public officials are persuaded of the efficacy of privatization as a policy tool but find the political barriers sometimes too great to overcome.

Political issues can quickly take center stage over technical and economic concerns when privatization is proposed. The dominance of politics often takes even seasoned public and private partners by surprise. We discuss a series of strategies for both sides of the partnership to cope with the politics of privatization.

For the private partners in a privatization endeavor, keys to success include:

Identifying key leaders;
Identifying stakeholders;
Developing a communications strategy with public leaders;
Knowing the political landscape;
Respecting the process;
Providing information;
Answering all questions; and
Being persistent and patient.

For the public officials in a privatization endeavor, keys to success include:

Keeping the process open;
Inviting the news media;
Knowing the private partner;
Developing a public relations strategy with the private partner;
Disarming the opposition;
Involving the opposition, especially employees;
Being ready to compromise; and
Providing information.

Long-term Contracting for Water and Wastewater Services

Wed, 01 May 2002 00:00:00 EDT

Executive Summary

Providing safe and affordable drinking water and wastewater services for citizens is a necessary but costly endeavor. Simply staying apprised of the latest science and regulations takes considerable resources. Implementing changes as needed to provide quality drinking water and treated wastewater requires significant investment, manpower, and expertise.

Cities strive to cope with these challenges through a variety of means, one of which is contracting with private companies. Public-private partnerships (PPPs or P3s) allow local governments to stretch tax dollars by taking advantage of private-sector efficiencies and management approaches that can reduce costs. Recent regulatory changes now enable public-private partnerships on a long-term basis of up to 20 years. Long-term partnerships can create innovative solutions to water infrastructure problems, and in the current regulatory climate, contracting with a private company can provide a community with a long-term partnership that best serves citizen needs.

This how-to guide examines the rapidly growing phenomena of long-term contracts for water and wastewater services and provides lessons learned and best practices gleaned from the experiences of public and private practitioners. The goal is to provide public officials with a guide to long-term contracting so they need not “reinvent the wheel” as they pursue a privatization endeavor.

The reasons for shifting to long-term contracting are dominated by cost savings and improved compliance with environmental standards, but we find other motivations as well. These differing motivations are reflected in the variety of forms that long-term contracts take, from financing to outsourcing management, operations and maintenance.

Finally, we explain the best practices in long-term contracting, starting with the request for proposals and running through the elements of successful partnerships, all the way up to EPA approval of the privatization.

Opening the Floodgates

info@reason.org (Robin A. Johnson) adrian.moore@reason.org (Adrian Moore) — Wed, 01 Aug 2001 00:00:00 EDT

Water and wastewater utilities provide for safe drinking water and clean waterways. Adequate supplies of water are also crucial for economic development, public health, public safety and overall quality of life. Cities across the nation-facing problems of unfunded mandates, crumbling infrastructures, and tight finances-are increasingly looking to the private sector for help in providing needed water services. According to the United States Environmental Protection Agency (EPA), private water utilities currently serve about 15 percent of the U.S. population. City utilities are turning to private firms for technical expertise and management efficiencies as well as for cost savings. Privatization of water and wastewater services is proving to be a cost effective method of service delivery that also enhances quality and performance.

WATER AND WASTEWATER MANAGEMENT CHALLENGES

There are a variety of reasons causing local officials to consider private sector alternatives.

Decaying Infrastructures. Many water and wastewater systems include water and sewer infrastructures that date back to the early 1900s. The most recent systems were built with federal funds during the 1970s, and even these now need upgrading or replacing. The EPA recently estimated that the nation's 76,000 drinking water systems alone will require $150 billion in investments over the next 20 years. Wastewater systems will require a similar level of investment.
Mandates. The federal government has reduced its contributions to local water systems over the past 30 years, while at the same time imposing stricter water quality and effluent standards under the Clean Water Act and Safe Drinking Water Act. Unfunded mandates are forcing municipal systems to meet federal regulations through local sources of revenues or state revolving loan funds.
Lack of Political Will. It 's often difficult for local officials to commit to making the necessary investments in community water systems. Water pipes and sewer mains are not visible and not perceived as immediately critical for adequate funding. It is easier for elected officials to ignore them in favor of expenditures for more visible services, such as police and fire. Additionally, water and sewer rates do not adequately cover the actual cost of providing services in many municipalities-but raising water and sewer rates to cover operations and maintenance as well as capital replacement is an unpopular move for elected officials.

According to the U.S. Conference of Mayors, capital expenditures on water and wastewater services are the largest facing local governments today.Thus, this area presents a great opportunity for cost savings.Through privatization,water companies can take advantage of advanced technology, more flexible management practices,and streamlined procurement and construction practices to lower costs and make the critical improvements more quickly.

EXISTING AND FUTURE WATER AND WASTEWATER PRIVATIZATION

While the current extent of privatization of water and wastewater facilities is somewhat limited,recent trends suggest that more cities will be examining private sector alternatives in the future.

Drinking Water. According to the EPA,more than 40 percent of drinking water systems nationwide are private, regulated utility systems. Of the others that are publicly owned, a 1997 International City/County Managers Association (ICMA)survey found that 5.7 percent of the responding cities privatize water distribution and 3.7 percent contract water treatment.
Wastewater. It's difficult to gather precise data for privatization of wastewater services because much of the information is proprietary. According to the EPA, there are 280 small-to mid-size (1 to 10 million gallons per day) facilities and 40 large facilities of more than 10 million gallons per day now contracting with private partners for wastewater operations. In the ICMA survey,6.2 percent of responding cities have privatized wastewater collection and treatment.
Trends. Several recent reports indicate that the amount of privatization is increasing and will continue to grow in the future. A survey of the water industry by Public Works Financing revealed that the municipal contract operations market increased 16 percent in 2000. Although that rate of increase was down from the previous year, the overall trend in water privatization is upward. Last year, Moody's Investor Service also predicted more privatization, saying that "public policymakers will turn to the private sector for financial, technical,and operating assistance when the municipal water system receives reliable and reasonably priced services."

CASE STUDIES

Both critics and supporters of privatization argue that post-privatization analyses are too rare.Therefore,it is encouraging to see a recent series of evaluations of water and wastewater privatizations from some of the nation's largest cities and several small communities as well. As the results of these case studies demonstrate, privatization has succeeded in many ways beyond just improving performance and lowering costs.

A late-1999 report by the city of Indianapolis examined the success of the White River Environmental Partnership (WREP) in running the city's sewer collection system and wastewater treatment plants since 1994. The report measured performance in three crucial areas:

Employee Treatment. Employee wages and benefits have risen between 9 and 28 percent, accident rates have dropped 91 percent,and grievances are down 99 percent.
Environmental Compliance. WREP has improved on the city's record of environmental compliance in exceeded permits and effluent discharges.
Cost Savings. Over five years,privatization saved the city $78 million-surpassing the expected savings of $65 million.

In 1997, after three years of contract performance that exceeded expectations, the city decided to replace the existing five-year contract with a new 10-year contract extending through 2007. Total savings from the contracts from 1994 to 2007 are expected to total $250 million. To date, the city has used most of the savings for capital improvements in the sewer system and treatment facilities and for rate reductions.

In March 2000, Milwaukee released a second-year evaluation of its 10-year contract with United Water to operate the city's sewage collection system and wastewater treatment plants. For the second year, United Water exceeded the operating standards of the contract. The contract set the permitted effluent discharge levels well below the levels permitted by state regulators, and performance exceeded even those levels, earning the contractor its second annual $50,000 bonus. Meanwhile, workplace injuries, sick days, and grievances remain at levels less than 50 percent of those experienced under city management.

More recently, Atlanta released the results of an audit of the first 18 months of its 20-year contract with United Water to run the city's water utility:

All payments and fees charged so far are warranted,with no evidence that the firm is using change orders or budget manipulation to increase revenues;
The firm is using state-of-the-art technology and environmentally sound practices; and
Costs to the city have been minimized wherever possible.

United Water employed 417 of the 535 employees at the utility when it assumed operations in January 1999. Since then, 49 quit, 14 were terminated for cause, and four were transferred to other cities in the region. The firm signed an agreement with the American Federation of State, County, and Municipal Employees (AFSCME) that unionized 95 percent of the workers-a first in "right-to-work " Georgia..Union members received benefits equal to or better than their former city packages, and a 3 percent initial pay raise.

Privatization has succeeded not just in large cities, but in smaller communities as well. A public-private partnership in Mount Vernon, IL, not only saved money and improved performance, it also led to expanded economic growth for the city of 17,000.

In the mid-1980s,Mount Vernon was under a sewer connection ban because of compliance problems at its wastewater treatment plant, meaning the city could not accept any more sewer customers and was unable to attract or expand industry. The city entered into a 20-year service partnership with Environmental Management Corporation (EMC) to design, build, and operate (DBO) an upgraded and expanded wastewater treatment facility. Sewer restrictions were lifted after the first phase of construction was completed.

The agreement is guaranteed to meet EPA effluent standards and, in fact, led to the wastewater system operating significantly better than all EPA permit limitations. In addition, the agreement saved the city approximately $3 million in tax dollars, and was completed in substantially less time than alternate proposals. The impact on economic development was impressive. Within 18 months of the first phase of construction, the city attracted approximately $300 million in private investment.

Monmouth, IL, a city of 10,000, privatized its water and wastewater services as part of a contract with a firm to operate all public works services. The agreement saved the city approximately $300,000 (nearly 20 percent), improved the quality of services, and was a key factor in the city's recovery from severe financial problems. In addition, union employees endorsed the agreement before final city approval and have benefited from a better compensation package than what would have been available from the city.

CONCLUSION

Water and wastewater management, because it is the costliest portion of a city's budget, is emerging as a critical factor in a city's economic health and competitiveness. While privatization of water and wastewater services is currently limited, evidence strongly suggests that more cities will examine contracting in the future. The benefits through cost savings and increased quality of service are too obvious to ignore. As city officials learn from successful experiences in other municipalities, they will see that water and wastewater privatization also produces important benefits beyond cost savings and improved performance-it's also an attractive policy choice for city officials seeking economic growth and community development.

Robin A.Johnson is director of the Privatization Center at the Reason Public Policy Institute (Reason Public Policy Institute ) and Adrian T.Moore is executive director of Reason Public Policy Institute . They can be reached at robinj@reason.org and adrianm@Reason Public Policy Institute .org .

The Future of Local Emergency Medical Service: Ambulance Wars or Public-Private Truce?

info@reason.org (Robin A. Johnson) — Wed, 01 Aug 2001 00:00:00 EDT

The 1990s were a tumultuous decade for public and private officials seeking to privatize ambulance services. Public officials had hoped that local battles among providers early in the decade would bring greater competition and better services. However, consolidation and changes in reimbursements in the mid-1990s altered the landscape. Now, at the beginning of the 2000s, new models are emerging that offer public officials viable alternatives for achieving market-based solutions.

Privatization and Layoffs

info@reason.org (Robin A. Johnson) — Thu, 01 Mar 2001 00:00:00 EST

The perception exists across the United States that privatization of public services results in massive layoffs as private companies get rid of highly-compensated public employees and replace them with lower paid, non-union workers with fewer benefits to perform the same services. This has generated intense opposition to privatization from public employee unions at all levels of government. However, there is much evidence to show that privatization has resulted in few, if any, layoffs and that public employees can actually benefit in the long term from private-sector management. Several studies demonstrate that the fears of many have been overblown:

A 1985 General Accounting Office (GAO) study of job displacement as a result of Department of Defense downsizing revealed that, of the 9,650 employees affected by privatization, 94 percent were placed in other government jobs or retired voluntarily. Half of the remaining six percent were employed with the private contractor. Only three percent were laid off.
In 1989, the National Commission on Employment Policy (NCEP), a research division of the U.S. Department of Labor, studied the effects of privatization on employees from a variety of jurisdictions across the nation over a five-year period. The report, regarded as the most comprehensive examination of privatization's impact on government employees, found that, of the more than 2,000 workers in 34 privatized city and county services, only seven percent were laid off. More than 50 percent of the affected workers were hired by private contractors, approximately one-fourth (24 percent) of the employees transferred to other government positions, and seven percent retired. In conclusion, the study found that "in the majority of cases, cities and counties have done a commendable job of protecting the jobs of public employees."
A 1995 study of privatization in Illinois municipalities found that only three percent of the 516 responding cities reported layoffs due to contracting. Nearly two-thirds (64.9 percent) of the cities reported no displacement of affected employees, while 10.8 percent transferred workers to other government jobs, 5.4 percent reported that employees were hired by the private contractors, 5.1 percent said the affected employees retired, and 9.8 percent reported a combination of these results. In late 1999, a follow-up survey of 220 Illinois cities of more than 5,000 in population found roughly the same percentage (only 3.8 percent) of cities reporting that employees were laid off as a result of privatization.

In fact, strategies to lessen the impact of privatization on public employees are now the rule, not the exception, among governments that contract services. Recent long-term contracts that privatized water and wastewater services in Atlanta, Buffalo, Milwaukee, and Indianapolis included provisions that all existing public employees would be hired by the private firm at comparable wages and with comparable benefits. In these examples, employees were unionized and the private contractor bargained in good faith with the union.

Reductions in force (RIFs) are usually accomplished through attrition instead of layoffs. Private contractors and public officials are aware of the intense opposition privatization can create, and have developed effective strategies to soften, if not overcome, such objections. Reducing the workforce through attrition to an efficient level allows private contractors time to win over employees and establish a level of trust.

Multiple sources exist that can assist public officials with employee transition strategies. For example, a 1997 General Accounting Office (GAO) report recommended employee involvement in the privatization decision-making process, training to provide skills for either competing against the private sector or monitoring contractor performance, and the creation of a safety net for displaced employees. The strategies will vary depending on local political factors and the relationship between political leaders and employees. Most officials said that the strategies were designed to bolster support for privatization as well as to mitigate employee concerns.

A 1997 International City/County Management Association (ICMA) survey confirmed the movement among municipalities to more employee-friendly policies. The number that adopted measures to overcome employee opposition and smooth the transition to privatization increased during the previous five years. Among the policies that cities increasingly use are:

Involving line employees in the evaluation process to determine the feasibility of a privatization initiative;
Adopting formal programs and policies to lessen the impact of privatization on public employees — such as requiring private contractors hire the existing workforce, or reducing public employment only through attrition; and
Managed competition wherein public employees can bid for public contracts with private firms.

Philadelphia provides an excellent example of the kinds of measures that can be taken to minimize job displacement effects. As part of former mayor Ed Rendell's Competitive Contracting Program (CCP), introduced in 1992, the city implemented several programs deigned to assist public workers in the transition required by privatization and public-private competitions. The city created new job classifications and established a Redeployment Office to match the skills of displaced employees to position openings in other departments. It also gave displaced employees preferential consideration for other city jobs, and required private contractors to give first right of refusal to affected city workers. In one case, the city invited displaced prison food service workers to participate in special training for newly created correctional officer trainee jobs.

Layoffs are a very real concern to public employees when the issue of privatization is raised. However, there is little evidence to suggest that privatization results in massive layoffs and hardship for public employees. As recent research demonstrates, the trends in government are, in fact, just the opposite. Few governments report widespread layoffs due to privatization. Most governments that enter into privatization agreements require that contractors hire the existing workforce and reduce the number of employees only through attrition or cause. Innovative officials from both the public and private sectors are showing that privatization can produce a win-win-win outcome for government, employees, and taxpayers.