For revenue-strapped state and local governments, contracting with private entities to build or operate public assets like roads and government buildings or provide public services is often proposed as an alternative. House Bill 407—which would set up a framework in Kentucky for a kind of privatization known as public-private partnerships (P3s)—has passed the House with little opposition. But Kentuckians should be wary that privatization measures can increase costs and jeopardize the public interest in accessible, high-quality public goods and services.
Generally, under a P3 contract, a private entity takes over some combination of the financing, creation, operation, and/or maintenance of a public asset in exchange for access to some form of revenue. Proponents of P3s claim that private involvement can improve quality, save costs or make projects possible that scarce public resources may be hindering.
However, there are numerous ways that privatization contracts including P3s turn out to be bad deals, such as the following:
- When contract terms fail to reflect the true value of public assets over time, private companies profit from the state’s losses. For example Chicago’s Inspector General has concluded that the 75-year lease fee a private entity paid the city for its parking meters in 2008 amounted to $974 million less than the meters would have generated in revenue over the contract period.
- Hidden and unexpected costs to state and local bodies such as those from contract monitoring can add up to a fourth of the contract price according to the Government Finance Officers Association.
- Costs also accrue to the public when, to boost the bottom line, private entities increase fees or charges associated with the asset such as tolls, admission and parking fees. If rate hikes disincentivize use, local economies dependent on the asset suffer—for example, retail and restaurant areas rely on affordable public parking. The increases can also be cost-prohibitive for low-income people who rely on affordable infrastructure to get to work or meet other essential functions.
- When private companies increase “efficiency” by decreasing wages and benefits—or by cutting skills and safety training—employees, their families and local economies that rely on decent jobs lose out. Workers may turn to public assistance to fill in the gaps, further increasing costs to the public.
- Private entities may also increase profitability with cost-cutting measures that decrease service quality. In a 2007 survey of local governments, of those who had bought back services previously contracted out to private entities, more than 60 percent cited unsatisfactory quality as a motivation (more than half cited insufficient cost savings).
- When problems such as these lead the government to modify or terminate the contract, litigation can be expensive.
Kentucky need not look to other states for proof that privatization is no panacea for the challenges facing government. For instance, the state’s experiment with private prisons—which ended this summer when the state chose not to renew its contract with the Corrections Corporation of America—saw multiple abuses of inmates and workers. Kentucky’s recent rapid transition to Medicaid managed care is another example of privatization that led to service quality issues such as denied treatments and delayed payments. And Lexington residents pay about 38 percent more for water from the private company that owns the utility than Louisville and 46 percent more than Cincinnati, both of which have publicly-owned water utilities.
While HB 407 makes general provisions for oversight of P3 contracts, it fails to specify protections that would be crucial to prevent similar problems from occurring in public-private partnerships. Labor standards, limits on user fee increases and unfavorable contract clauses, applicability of state transparency laws, maximum contract lengths and options to cancel contracts or buy back assets are examples of protections that are essential, but that may ultimately cost the state more to oversee than to avoid altogether by maintaining public ownership.
The conversation about P3s should recognize these nuanced concerns. But even more importantly, lawmakers should put the conversation in its rightful context: problems affording public services and investments are the result of a tax system that does not generate the revenue needed, and privatization is no answer to that problem.