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May 22, 2009


John Petro, DMI Blog - Facing budget shortfalls, many cities are considering privatizing valuable pieces of their infrastructure or outsourcing government services to private contractors. These deals are meant to give cities a large infusion of cash or to reduce municipal costs. However, privatization is a bad deal, for city governments, for the public they're meant to serve, and for labor standards.

When we speak of municipal privatization, we're talking about two different things. The first is the leasing of infrastructure to private companies. These types of deals involve the private company paying a large sum up front to the municipal government. In return, the private company is responsible for maintaining that piece of infrastructure, such as a toll road or parking meters, and in return the company collects any revenue. Chicago did this with its parking infrastructure, leasing its parking meters and garages to a private company for a one-time payment of $1.2 billion. In return, the company controls the parking rates and collects the revenue for 75 years.

The other type of municipal privatization involves contracting private companies to perform city services. For example, practically the entire child welfare system in Florida is privatized, meaning that services such as foster care were outsourced to the private sector.

Cities pursue these types of arrangements in order to cut costs. The thinking is that competition drives down the cost of providing these services.

However, the reason that outsourcing these services is often less expensive is because private contractors do not have the same type of labor standards that municipal governments often do. A story in the Miami Herald explains how some South Florida municipalities are privatizing city services.

"Leaders in Weston and Southwest Ranches, who also rely heavily on contractors, extol the benefits. They say because contractors perform tasks as needed, they are cheaper to use than full-time workers. And contractors' benefits are often less generous than those of their counterparts in the public sector, allowing governments to hold down costs."

By privatizing these services municipal governments are pushing down wages and benefits for all workers. As benefits such as health insurance are available to fewer and fewer workers, cities may see the demand for social services increase, possibly erasing any cost reductions that were gained by the privatization.

Another problem with privatization is that the quality of services may suffer. After all, private companies are interested in one thing: profit. These companies have incentives to cut costs by cutting corners. Compounding the problem is a lack of accountability on the part of elected officials. It is all too easy for city officials, when trash goes uncollected or a child in the child welfare system is put in unnecessary danger, to point their fingers at the contractor. This was what happened in Chicago after the city leased out its parking infrastructure. According to the Chicago Tribune, the company
"relied heavily on mall security guards and workers from a temporary job-placement agency -- all with no experience in the parking industry -- to reprogram the city's approximately 36,000 meters and change over the decals that provide drivers with rates and rules."

The result has been "outdated fee and violation-enforcement information still posted on many meters, meters that charged the wrong hourly rates, a surge in broken meters, and stepped-up ticket writing for violations." And elected officials have responded by blaming the private contractor.

The privatization of city infrastructure and city services obscures the fact that governments exist in order to provide public goods. Public goods exist not because of a profit motive, but because providing these services creates a better quality of life for all of those in our society.


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