Budget & Tax News

Governments Increasingly Turning to Competition and Privatization

Privatization is a proven policy management tool

In recent decades, governments of all political complexions have increasingly embraced privatization as a strategy to lower the costs of service delivery and achieve higher performance and better results, according to the Reason Foundation's 20th Annual Privatization Report (APR), released in July.

Once considered radical, privatization has largely shifted from an ideological concept to a well-established, proven policy management tool. Decades of successful privatization policies have proven private-sector innovation and initiative can do certain things better than the public sector.

For the past 20 years, the APR has chronicled and analyzed the most important developments in privatization and government reform.

This year's 20th anniversary report features special contributions by several pioneering policymakers and researchers at the forefront of privatization and government reform, including Margaret Thatcher, Indiana Gov. Mitch Daniels, South Carolina Gov. Mark Sanford, and former Indianapolis mayor Stephen Goldsmith.

The following sections address some of the many highlights from the 230-page report.

Federal Competitive Sourcing

President George W. Bush's plan to bring more competition to federal programs—competitive sourcing—continued to expand in 2005, though it was used less often than in the previous two years.

In FY 2005 federal agencies completed 181 public-private competitions for a total of 9,979 positions. In addition, competitions for nearly 5,000 other positions have been announced and are moving through the process.

While agencies used competitions for a wide range of services, they focused on logistics, maintenance and property management, and information technology.

Collectively the competitions are expected to generate net savings, or cost avoidance, of approximately $3.1 billion over five to 10 years. When combined with previous years' savings, competitive sourcing is expected to save taxpayers $5.6 billion over the same time period, with annual savings expected to approach $1 billion.

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; for every dollar spent on competitive sourcing, 27 were saved.

Indiana Continues to Lead

Under the leadership of Gov. Mitch Daniels (R), Indiana has continued to be one of the most privatization-active states over the past year.

As Daniels writes in the APR, his privatization reforms "demonstrate that people specializing in delivering a given product or service, and spurred to constant improvement by competition and the profit motive, can achieve their goal better than the best-intentioned administrators of the best-organized government bureaucracies."

In the biggest news, the 75-year lease of the Indiana Toll Road for $3.85 billion has become the talk of 2006 in transportation circles and has encouraged public officials in other states to consider privatization of their toll roads. Other potential partnerships in Indiana are to be examined as this part of the governor's transportation plan unfolds.

Daniels also has employed strategies for cost savings and efficiency inside Indiana's government. In just two years in office Daniels has cut 3,000 state jobs and eliminated seven departments.

The governor also has launched an aggressive review of the size, scope, functions, and budget of each agency. Dubbed PROBE--Program Results: an Outcome Based Evaluation--the review will require each program to justify its work and demonstrate results. It is similar to the federal Performance Assessment Rating Tool (PART) analysis established under Daniels' leadership as federal OMB director.

Florida Formalizes Process

In June 2006, Gov. Jeb Bush (R) signed into law S.B. 2518—known as the "Florida Efficient Government Act"--which codified the state's GATE management process. The GATE process, established by the Governor's Center for Efficient Government, was the result of a review of the state's privatization process focused on establishing firm guidelines to create more transparency, consistency in contracting, and high performance.

The new law requires that a business case be developed for each initiative. It must then be evaluated for feasibility, cost-effectiveness, and efficiency before an agency can sign a contract.

In addition, the legislation establishes a Council for Efficient Government that will play an advisory role and provide additional oversight of privatization initiatives.

The bill also provides some guidance for privatization policy in general. It establishes legislative intent to direct state agencies to focus only on their core mission and to deliver services efficiently and effectively, and requires them to leverage the private sector whenever doing so will reduce costs of government.

Toll Road Privatization Strong

Chicago's 99-year lease of the eight-miles-long Chicago Skyway for $1.8 billion was the talk of 2005 but was topped by the $3.85 billion lease of the Indiana Toll Road.

Unlike the Chicago transaction, the proceeds of which are being used to pay off debt and fund other municipal balance-sheet items, the Indiana lease proceeds are the key to funding a proposed 10-year highway program.

In Virginia, the privately concessioned Dulles Greenway changed hands when Macquarie Infrastructure Group bought an 86.7 percent interest from the original owner for $620 million.

Also, the Virginia DOT announced in May 2006 it had reached an agreement to lease its financially troubled start-up toll road, the Pocahontas Parkway in Richmond, to Australia's Transurban. The company will lease the toll road for 99 years, pay off all its debt, and build the long-sought 1.6-mile connector to the Richmond Airport.

In addition, a state legislator has introduced a bill to study potential privatization of the Chesapeake Bay Bridge Tunnel.

In April 2006 Illinois legislators released a request for proposals for a study of the privatization, via long-term lease, of the Illinois State Toll Highway Authority system of toll roads.

In Ohio, Republican gubernatorial candidate and current Secretary of State J. Kenneth Blackwell has proposed a long-term lease of the Ohio Turnpike. Unlike the Indiana lease (where the proceeds are all to be invested in transportation infrastructure), Blackwell's plan calls for using the proceeds to fund non-transportation projects.

Managed Competition in Ohio

Faced with declining revenues and ever-increasing costs, the Hamilton County (Ohio) Board of County Commissioners adopted a resolution establishing a citizen-led task force charged with developing recommendations on cost-saving initiatives through managed competition.

The task force, called the Hamilton County Competition and Efficiency Committee (CEC) was charged with several tasks, including recommending managed competition initiatives, service consolidations, and program eliminations; developing a fair competition process; and setting specific cost-savings goals and monitoring results.

With an initial goal of finding $25 million in immediate savings, the CEC is undertaking several initiatives in areas including fire hydrant repair and maintenance, vehicle fleet maintenance, divestiture of unneeded or underused land or buildings to bring an immediate infusion of cash and long-term savings through reduced maintenance costs, and putting operations and maintenance functions (such as janitorial services) through a managed competition initiative.

In addition, the CEC is reviewing the county's information technology infrastructure with a focus on reducing duplication to generate savings, as well as improving security, and it is conducting two separate reviews to find efficiencies in how the county buys and uses utilities and telecommunications.

For more information ...

Reason Foundation's 20th Annual Privatization Report may be viewed in its entirety online at http://www.reason.org/apr2006.

Leonard C. Gilroy is a senior policy analyst at Reason Foundation. An archive of his work is here and Reason's privatization research and commentary is here.

Leonard Gilroy is Director of Government Reform





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