In February 2009, the City of Chicago and Chicago Parking Meters LLC signed a 75-year concession agreement for the long term lease of Chicago's 36,000 parking meters. The city received an upfront payment of approximately $1.2 billion. The procurement process lacked transparency and was rushed, as the city's Inspector General later concluded. Within months, parking rates soared and many meters were malfunctioning or mislabeled. Chicago residents complained about the difficulty of parking in the city, while business owners watched their retail traffic decline.
Costs
• Higher costs to consumers
• Project cost overruns and other hidden costs to government
• Government costs of managing and monitoring contracts
• Hidden costs to the community
The most popular reason for privatization is the promise of cost savings. This is especially pronounced in difficult economic conditions, when elected officials are faced with serious budget shortfalls. Officials at all levels of government have considered selling off state assets for quick cash or privatizing important services in the hopes of saving money. But communities across the country have found that investors pay low prices for valuable assets to cash-strapped governments, then impose steep fee increases on consumers or other measures to maximize their income from the asset. In many cases, the money received from a 50- to 99-year asset concession lease may fill budget holes for the coming year but fall far short of the actual long-term value.
Likewise, cost overruns in large service contracts can negate any projected savings. The costs of managing and monitoring the contract and hidden transactional costs often are not included in the calculations of projected savings, distorting the true cost of the contract. Increased costs may also appear as hidden cost to the community. For example, government jobs often include health benefits that are lost when the jobs are outsourced to private companies. As a result, more workers may need to rely on the government, thus increasing government costs. Many of the private employees who take these jobs receive lower wages and little or no benefits. Several recent studies have measured the increased use of the Earned Income Tax Credit (EITC) and Medicaid programs when workers are denied living wages and health benefits. The cost saving projections that governments use to justify privatization decisions are often incomplete and erroneous. As numerous examples have confirmed, privatization of assets and services often fails to have the desired budgetary effect that many corporations lead governments to expect.
ITPI recently released a new backgrounder brief that discusses the high costs of privatization. Read it here.
Related Cases
In 2002, one of the nation's biggest privatized toll road projects was introduced in the state of Texas: the Trans-Texas Corridor (TTC) plan. From the beginning, the proposal brought forth heavy criticism from people across party lines around issues of cost, access, transparency, and accountability. All of the contracts involved in the initial development of the TTC Plan were developed and signed without public input and contained many provisions that could be detrimental to the public. Originally envisioned as a series of newly constructed highways connecting major ports, interstate highways, and rail systems, growing public opposition and fiscal constraints have slowed down the development of the TTC. However, supporters of the TTC have recently taken a piecemeal approach in order to pass key legislation that would facilitate the continued development of the TTC and other similar privatization projects.
Faced with a $7 million budget deficit in 2008, the Southfield School District in Michigan contracted out janitorial, food, and busing services. Hundreds of support staff jobs were lost and the community has felt the negative economic impact of the privatization. Schools have encountered numerous problems, including an increase in the cost of meals and services to students and a decline in the quality of food and busing services.
In Milwaukee, a coalition of environmental, community, labor and faith organizations succeeded in convincing the city council to indefinitely shelve plans to privatize the water system and go back to the drawing boards for solutions to the city's budget crisis. The coalition, Keep Public Our Water (KPOW), protested that evidence from other privatized water systems indicated substantial risks of poor water quality, rate increases and lost jobs.
In 2007, Pennsylvania Governor Ed Rendell pushed for the privatization of the Pennsylvania Turnpike as a way to raise money for the state's transportation budget. A consortium led by Spanish company Abertis Infraestructuras and Citi Infrastructure Investors offered $12.8 billion to lease operation of the turnpike for 75 years. As advocates educated the public and lawmakers about the risks involved with the road privatization, the future of the deal became uncertain. The Legislature, which had the responsibility of approving the proposal, effectively killed the deal letting a deadline pass without a vote in September 2008.
In 2007, Florida Governor Charlie Crist proposed the long-term lease of Alligator Alley, a 78-mile stretch of interstate highway, as a way to quickly raise money for budgetary shortfalls. Six teams of bidders expressed interest in the lease, drawn by the potential toll revenue, but when the deadline passed for the submission of proposal, none of them submitted bids. The recessionary economic conditions are thought to have discouraged many of the interested teams from bidding on the lease, but many expect the state to attempt to lease the highway again once economic conditions improve.
Facing repeated rate increases of up to 78%, residents of the small town of Felton, California, organized to buy back their water system from a subsidiary of a huge German corporation. By applying the pressure of an eminent domain lawsuit, the community won local ownership and control of its water.
Indianapolis moves toward parking contract full of hidden and shifted costs
November 2010
Killing a good public service -- for private profit
August 2010
IT contracts: Huge investment buys headaches
August 2010
"In-sourcing": Switching from contracts to staff saves millions for schools
July 2010
Cracks appearing in privately built toll roads
April 2010
Private foster care: Child welfare versus profit
April 2010
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