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Taking cities private.

Whatever the service provided by local government administrators are finding it can be done quicker, better, and cheaper by a private company.

A bridge is rising over the Red River at Fargo, North Dakota, on the promise of a 25cts toll. Built, owned, and operated by the Bridge Company and the Municipal Development Corporation, it will be the first privately built major U.S. bridge in more than 40 years.

A private fire company fights fires in Elk Grove Township, Illinois. A private organization mediates civil disputes in San Francisco. A $1 billion privately built highway may soon encircle Denver. Private schools teach dropouts under state contract in Tacoma, Washington. And the real-estate developer Donald J. Trump became something of a folk hero among New Yorkers in 1986 when he renovated the Wollman Memorial Skating Rink in Central Park ahead of schedule and $750,000 under his $3 million budget. This after the city had spent $12 million and six years trying to get the rink operating, to no avail.

Private firms are now delivering city services ftom school lunches and garbage collection to wastewater treatment and mass transit. Virtually all the country's large engineering firms have expanded into municipal work. New firms, such as Graffiti Removal in Los Angeles, are springing up. By some estimates, spending on privately provided government services is running as high as $100 billion a year.

"I don't think we've reached a quarter of the potential" market, says Irwin T. David, national director of public-sector services for Touche Ross, an accounting firm. Almost 80 percent of the cities responding to a recent Touche Ross survey say privatization will be a primary tool used to provide local government services and facilities over the next decade.

The reason is clear: private firms can deliver public services from 20 to 75 percent more cheaply than cities, studies show. Caught in a fiscal full nelson, cities see privatization as one of the few ways out.

The squeeze is coming from all sides. The federal government no longer doles out billions in revenue sharing. The estimated gap between actual spending and needed spending on infrastructure-highways, sewage plants, mass transit-will reach $450 billion by 2000. Bumping up against their own borrowing capacity and loath to raise local taxes, even as constituents demand more services, cities are running out of places to turn.

"That's how we get into the picture," says John Turner of Rural/Metro Corporation in Scottsdale, Arizona, the nation's largest fire protection company, with revenues expected to top $50 minion this year. Operating with higher productivity and economies of scale, private companies are offering huge savings on fire protection, custodial work, vehicle towing, park maintenance, garbage collection--almost any service a city provides.

Research in economics has uncovered something called the "bureaucratic rule of two," according to Steve H. Hanke, professor of applied economics at Johns Hopkins University. "If you want to find the public cost of doing something, you just find the private cost and then multiply by two, and that'll get you pretty close," he says.

Labor costs are often why. Gary Jensen, the president of American Emergency Services Corporation in Wheaton, Illinois, says in city fire departments fire fighters work 40 to 53 hours a week, which includes time spent sleeping on 24-hour shifts, while private fire companies run on 60 to 72 hours a week. "The cities just give away the store," Jensen says. As a result, private costs are 20 to 50 percent lower.

Rural/Metro's equipment costs are generally lower too. "To quote the founder of the company," Turner says, "'Chrome doesn't put out a fire.' You see these great chrome-decked chariots going down the street-they're very pretty-but you don't need all the excess cost that's built onto those things."

City monopolies on garbage collection or street paving, for example, pose the same problems private monopolies do, economists say. Service declines and prices rise. A monopoly provider does not have to be pleasant to customers. Departments become politicized and patronage-prone. Among private companies, the profit motive tends to drive costs down and to enforce discipline. The more competitive the industry, the more this applies.

Phoenix has been dubbed the "petri dish of privatization" for its long-running experimentation with contracting out services. Since 1978, the city's own sanitation department has competed against private contractors for half of Phoenix's residential garbage collection by submitting its own bids for contracts. It lost the bids at first, but in the past two years it has won. "We went through quite a learning process in doing that," says Ron Jensen, Phoenix's public-works director. "Each time, we analyzed the operations of the private contractor and determined ways to improve methods, technology, operations, whatever it might be, to where we gradually improved our operations. Then we started winning the bids."

City workers' morale has improved. "We have broken the stereotype" of patronage-ridden sanitation departments, Jensen says. "Our employees are not treated as secondclass citizens by the community, because it is recognized that we have high productivity and are very competitive."

City department managers often face perverse incentives: the bigger their budget and the larger their staff, the higher their salary and status. Phoenix, in contrast, bases salaries on productivity. So when contractors lowball bids, quoting rock-bottom prices to get into the market, "instead of us saying that's unfair, we say the taxpayers win," Jensen That's our ultimate goal."

Three years ago, when paying a crushing $600,000 annual subsidy forced South Lake Tahoe out of the bus-line business, the California city donated the use of the line to its employees. Mike Dooley, a former employee and now chief executive of Area Transit Management, says the bus line has operated at a profit ever since, because it has to.

"We couldn't operate the system at a profit if we had taken it over exactly as the city was operating it," he says. "They had service that was, I'm sure, for the convenience of the public, but there were routes that were losers."

The city had discounted its $1 fare. "Hardly anyone actually paid $I," Dooley says. "Seniors paid 25cts, juniors paid 50 cts. Now everybody pays their fair share."

All employees took cuts in paid vacation and wages, although Dooley says wages remain competitive in the local market. The city is now saving itself the $600,000 and it gets bus service.

"The city, being a government body, has certain handicaps in running a business, even at break-even," Dooley says. It could not make quick purchase decisions, for example. "Nobody would say that private enterprise can't do it more efficiently than the city did, and even the city will agree with that."

Volunteer groups, such as Community Board Program, have privatized even justice. Based in San Francisco and funded by corporate and foundation grants, the organization serves as a consultant in some 40 cities around the country. Citizens volunteer to be trained in neighborhood mediation, after which they donate time each month to hear disputes. Users pay nothing. Individuals and groups-say, homeowners versus teenagers using a local park-go before the board to talk through their conflict, says the founder, Raymond Shonholtz: "Tensions are reduced dramatically. People get to disgorge their hostile emotions in a neutral and safe setting, rather than on the street, where it may escalate."

Shonholtz says the program has proved succe"It's very clear that it's quite possible to set up a whole other justice system at a fraction of the cost" of city courts. Early resolution of disputes reduces police intervention and cuts the number of court cases filed. If it does not work, disputants are free to turn to the formal legal system.

In exchange for limited ownership rights and either user or service fees, private companies are also financing, building, and operating dozens of wastewater treatment plants, cogeneration plants, and even major highways, without government funds.

By offering a share of profits, cities draw private capital into public projects and spread risks to the private firms. A firm can own the facility under a franchise arrangement. For example, a city will put a wastewater treatment plant up for bid. Private companies then bid on the fee they will accept in return for providing wastewater treatment. On the basis of that fee, the company can then finance the facility. The city can also sign a long-term contract for the service without giving up ownership.

"We'll take the risk of construction, we'll take the risk on operation, we'll find the technology, we'll guarantee that we'll treat all of your city's sludge for that amount of time," says Ralph Stanley, the vice chairman of Municipal Development Corporation, which financed the Fargo bridge. "The city doesn't have to raise a bond issue to do it, and the city keeps policy control."

Parsons Municipal Services Inc. is helping to design and construct a major beltway around Denver, using no state or federal money, says Robert M. Davidson, executive vice president. Tolls will contribute more than 70 percent of the cost of the highway; seed money will come ftom landowners, developers, and residents who stand to benefit from the road. A similar project is proposed near Washington Dulles International Airport outside the nation's capital.

User fees such as tolls make those who use government services pay for them. Funding projects with general tax revenues, by contrast, forces everyonc to pay the same amount regardless of how much a service is used. The further removed the source of money is ftom the user, the greater the potential for waste. "Instead of [Washington] saying City A or City B should receive this or that kind of plant," Davidson says, "the cities themselves determine what their needs are, and only the real needy ones are going to spend their own money."

Cities can avoid granting private monopolies even on large projects by setting fees and performance standards. If the firm fails to perform or otherwise violates the contract, the city can pull its franchise.

Likewise in city services. Phoenix contracts out for no more than half its trash collection and other essential services and so maintains the option to step in if a contractor fails to perform. Many Rural/Metro clients maintain full or part ownership of their fire stations and equipment. "There is no need to disband the department," Turner says. But in 40 years of operation, he says, Rural/Metro has never been fired from a contract and has lost contracts only to other private firms.

Unions, particularly the American Federation of State, County and Municipal Employees and the International Association of Fire Fighters, hotly oppose privatization, arguing that cities lose control over and accountability for their services. They say it breeds corruption as well. AFSCME runs national ads that Phoenix erroneous."

Proponents agree that abuses will arise if a city trades its own monopoly for a private monopoly. Safeguards, such as open bidding and sealed bids, are essential, particularly in cities where corruption has been the rule. Contracts must be carefully monitored. They say that union concerns over layoffs can be addressed and that privatization hardly relieves politicians of accountability. In fact, economists maintain that most problems with privatization can be overcome either through the contract procedure or by introducing competition at various stages in the provision of a service.

Competition tends to spread. "Some cities are going to have to privatize whether they like it or not," says Hanke at Johns Hopkins, because as more cities cut costs and improve service through privatization, they begin attracting people and businesses away from other cities. The business potential, everyone seems to agree, is huge.
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Title Annotation:public services provided by private companies
Author:Lochhead, Carolyn
Publication:Saturday Evening Post
Date:May 1, 1988
Words:1931
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