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Perils of Privatization

By Sheila Suess Kennedy

I have often written about my skepticism of so-called “privatization” of public assets. I say “so called” because 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. When governments contract, they remain ultimately responsible for providing the goods or services involved.

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 usually a very good judge of when and what those are.

Aaron Renn’s recent post at the Urbanophile illustrates this point (albeit inadvertently). He 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, Renn 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.

contract 3My 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. 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.

As a former corporation counsel, it really pains me to admit that the lawyers who review government deals are far less sophisticated than those lawyers who act on behalf of the contractors. That is not because they are not 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 the potential for “crony capitalism,” the temptation to reward a campaign donor or political patron with a lucrative contract. (Can we spell Halliburton?)

Ideally, the media will act as a watchdog in negotiations between public and private entities and will blow the whistle when a proposed contract is lopsided, corrupt or otherwise unfavorable. However, the 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, reporters are stretched so thin that we are lucky if we even know a deal is in the works.

contract 1

The bottom line is 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 and 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 all government contracting? Of course not. But it is definitely reason to be cautious and to read the fine print, especially when a political crony is party to the contract or 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.

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The American Society for Public Administration is the largest and most prominent professional association for public administration. It is dedicated to advancing the art, science, teaching and practice of public and non-profit administration.

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