Wednesday, August 13, 2008

When to hold and when to fold public assets

Last week's annual Governmental Research Association (GRA) conference in Boston brought together dozens of government researchers from across the country to toss around ideas and hear about national public policy trends and innovations. Perhaps the most relevant panel discussion to southeast Wisconsin was one entitled "For Sale: Government Assets".

That relevance, of course, is most related to Milwaukee County's ongoing fiscal challenges. County Executive Walker has pledged that privatization proposals will be a key part of his 2009 recommended budget. Furthermore, he has already proposed selling the property that houses the county's mental health complex and leasing a new complex from a private developer, and he has talked openly of wanting to sell or lease Mitchell International Airport.

As these and other proposals are subjected to emotional rhetoric from both sides during the next several weeks, it may be helpful to keep in mind an unemotional litmus test for considering public asset sales developed by John Foote, senior fellow at the Kennedy School of Government, and presented at the GRA conference. Foote's litmus test consists of four key questions:

  1. Are there real efficiency gains? In other words, by transferring an asset to the private sector, will the services associated with the asset be delivered better and more cost effectively?

  2. Is there a balance between who pays and who benefits? The test here is whether those who may be asked to pay new or higher user fees associated with a privatized asset (e.g. those parking at the airport) benefit from those fees (e.g. airport improvements), or whether instead the proceeds are siphoned off for profit or unrelated functions.

  3. Is there a match between the length of the deal and the use of the proceeds? This speaks to the essential and often ignored budgeting tenet that one-time proceeds should not be used to fill short-term budget holes, but should instead be stretched out over the length of a lease deal.

  4. Is the public compromised in any way? This question asks whether the sale or lease of a major public asset will impact consideration of other worthwhile public policies. The specific reference made by Foote is to the privatization of the Chicago tollway, which has disrupted efforts to consider system-wide congestion pricing for all of Chicago's major highways.

While this set of criteria may be most applicable to the potential sale or lease of Mitchell International, another panelist, Joseph Aiello of Meridiam Infrastructure, made comments that could be relevant to Milwaukee County's decision on how and whether to build a new mental health complex. He cited three advantages to government's use of private development/ownership for public buildings:

  1. When things go wrong with the building - as they inevitably will - the private sector owner is responsible for fixing them.

  2. Public construction contracts are awarded based on the lowest construction bid without regard to life-cycle costs (which are heavily impacted by the quality of construction materials and techniques), while private developers/owners must take both initial construction and long-term life cycle costs into account.

  3. Private building owners don't skimp on ongoing maintenance, while public sector owners are notorious for doing so in light of pressing programmatic needs.

Finally, the third panelist, Hudson institute vice chairman Joseph Giglio, raised a provocative point about a potential third partner in public-private partnerships for transportation projects: the local business community. Giglio argued that local businesses who benefit from highway, transit or airport construction projects should also be viewed as logical investors in such projects who can help make the financing work and create another level of oversight to ensure proper return on investment.

In all, food for thought as Milwaukee County struggles with some major decisions on its financial future.

1 comment:

Tad Johnson said...

A common problem with privatization is that when the going gets tough, the private sector dumps it back on the public. The current mortgage mess is a prime example.

Who is paying for the financial damage caused by irresponsible lending from the private sector? Taxpayers!

Businesses will cry for deregulation and privatization right up until it's no longer profitable for them, at which point they dump the responsibility back on Uncle Sam.

Obviously some deals make sense, but some do not. We need to consider each proposal with a long eye towards the future.