Privatization is a hot topic in today’s municipal arena, as many governments and government agencies turn to third-party sources to provide public services. Recent examples include the city of Sandy Springs, Georgia, the Chicago Skyway and Indiana Toll Road.

The Reason Foundation, a non-profit public policy organization, recently released its Annual Privatization Report 2006: Transforming Government Through Privatization. This 20th anniversary edition provides an overview and analysis of privatization trends in all levels government.

Leonard Gilroy, Policy Analyst for the Reason Foundation and editor of the Annual Privatization Report, shares his insights on this growing trend in government in the following interview with MuniNet editor, Mardee Alvaro.

MuniNet: Which government sectors have been impacted most by privatization over the past twenty years?

Gilroy: Over the past two decades, we’ve seen the rise of competitive sourcing across all levels of government, covering all manner of government services. The National Council for Public-Private Partnerships has found that the average American city contracts out 23 of its 65 basic municipal services? Such as road maintenance, vehicle fleet maintenance, solid waste collection, and public works? To the private sector.

With regard to local government, one of the best examples would be in the area of water and wastewater services, with over 1,000 local governments in the United States?including such large cities as Indianapolis and Seattle?have entered into public-private partnerships, contracting out the operations and maintenance of water systems to private companies.

At the national level, certainly the commercialization of air traffic control (ATC) services is a great example. Two decades ago, ATC services were exclusively run by national governments. Today, over 40 countries have commercialized their ATC systems, shifting responsibility from the national government to an independent corporation supported by user fees instead of government appropriations. And the research has shown that these countries have benefited from improved safety, higher service quality, and lower costs.

And that’s exactly why we’ve seen the steady trends in privatization-related activities at all levels of government. Regardless of their political persuasion, policy makers and citizens have increasingly embraced privatization as a proven strategy to lower the costs of service delivery and achieve higher performance and better results.

Lastly, another important trend we’re seeing is that more governments at every level are shifting from a piecemeal approach to privatization and competition to a more systematic, enterprise-wide approach across the organization. Florida and Indiana have been leaders in this approach at the state level, and Hamilton County, Ohio’s countywide managed competition program offers a great example at the local level.

MuniNet: Sandy Springs, Georgia has been operating as a city for almost a year now using a public-private partnership to provide municipal services. Are city operations running smoothly using this approach? Do you see the privatization of municipal services emerging as a trend in local government?

Gilroy: The trend in privatizing municipal services has been well-established over the last several decades, but what’s exciting about Sandy Springs is the re-emergence of the “contract city.” California was a leader in this trend in the 1950’s, in which cities contract with outside public or private sector providers for major municipal services, such as police and fire services, public works, and building and safety. Now there are dozens of contract cities in California, as well as others in places like Weston, Florida and Sandy Springs.

When Sandy Springs incorporated in late 2005, becoming the first new city in Georgia in 50 years, the city opted to contract out nearly all government services instead of creating a new municipal bureaucracy. And yes, it has been running smoothly. The $32 million contract they signed with CH2M-Hill for day-to-day city operations represents just over half of what residents were traditionally charged in taxes by Fulton County. Sandy Springs is literally saving its citizens millions of dollars – upwards of 30 percent in the first year alone – while simultaneously improving the efficiency and effectiveness of service provision.

A recent article in the Atlanta Journal-Constitution did a comparison between Sandy Springs and a similarly populated, similarly sized “traditional” city in Georgia, comparing such metrics as permit turnaround time, response time for a pothole report, city employees, and total budget. On every single metric, Sandy Springs either met or far outperformed the traditional city, illustrating their relative cost performance and customer focus.

Now as you’d expect with a new city getting off the ground, there have been a few hiccups along the way, but there’s a good relationship between the contractor and the city, and it’s one where challenges are hammered out amicably as the inevitable unknowns pop up.

In fact, the results have been so impressive that two additional communities in Fulton County have incorporated since then and, impressed by its cost savings achieved through contracting, plan on following the Sandy Springs model as they establish their governments. They will even be using the same contractor as Sandy Springs, indicating the level of success there.

Citizens in several other communities in Georgia are currently either pursuing or studying incorporation. So not only is Sandy Springs providing a better deal for its own citizens, but it’s inspiring other communities to do the same.

MuniNet: What areas you identify as current “hot topics” in the area of privatization – e.g., wireless technology, disaster recovery, etc? What types of privatization efforts are you seeing in these areas?

Undoubtedly, over the last few years the hottest topic has been transportation. We’re seeing a transformation in the way we finance transportation infrastructure, with a greater role for the private sector and private capital, as well as an increasing private sector role in building, maintaining, and operating our highways.

The most visible and popular examples would be the Chicago Skyway and the Indiana Toll Road, both of which involve leasing existing toll roads to private investor/operators. In Indiana’s case, the $3.8 billion concession it signed for the Indiana Toll Road will fully finance the state’s 10-year transportation plan and will prevent the need to raise taxes to fund it, solving a huge funding gap in a way that has caused other state and local governments faced with similar issues to sit up and take notice. Texas is also leading the way, as it is undertaking a massive construction effort largely financed with private capital.

These innovations are inspiring other states to look into similar projects. For example, the Chicago Skyway and Indiana Toll Road deals have opened the door to the possibility of a multi-state toll corridor along I-80/I-90 stretching from New Jersey to Illinois, as states along the route consider similar concession proposals.

These are not “new” ideas, as multi-billion dollar public-private highway, bridge, and tunnel projects have been operating in Australia, Canada, Italy, France, and other countries for years. But they are certainly a fresh and welcome innovation in the United States as we deal with the challenges of modernizing, financing, and expanding our transportation network.

And looking at public-private partnerships more generally, the concept of extracting value from “dead” capital is one that is applicable not just to transportation but other types of public infrastructure, such as water and wastewater systems.

MuniNet: When operating under long-term lease contracts, how do governments protect the public interest when it comes to granting non-competitive agreements that might prohibit additional highways when population or traffic levels exceed long-term expectations?

Gilroy: Non-compete clauses have evolved over the years. The approach has changed from an outright ban on competing facilities to a wider definition of what the state may build – generally, everything in its current long-range transportation plan – without compensating the toll road developer/operator. And for new roadways the state builds that are not in its existing plan and which do fall within a narrowly-defined competition zone, the current approach is to spell out a compensation formula. The idea is to achieve a balance between, on one hand, limiting the risk to toll road finance providers (of potentially unlimited competition from taxpayer-provided “free” roads) and, on the other hand, the public interest.

In the two recent long-term lease transactions, here’s how it was handled. For the Chicago Skyway, there were no protections for the private-sector lessee. For the Indiana Toll Road, the agreement set up a narrow competition zone alongside the toll road. The state may add short, limited-access parallel roads (e.g., local freeways), but if it builds a long-distance road within the competition zone, there’s a formula for compensating the private sector for lost toll revenue.

MuniNet: Given recent state law changes preventing eminent domain for the benefit of private developers, are privatized highways or airports likely to lose their ability to expand when needs arise through eminent domain?

Gilroy: While eminent domain laws vary from state to state, as have the legislative fixes since the Kelo vs. New London decision was issued, I’m not aware of any specific state provisions that would limit their ability to expand. For the most part, these roads and airports are still owned by the public sector, but are built and/or managed through leases. So, technically, these are still public assets and contracts are used to manage them through the private sector. Hence, I would not expect them to be impacted by limitations on the use of eminent domain to transfer property from one private owner to another since the public sector still owns the asset.

Leonard Gilroy, AICP, is a senior policy analyst with the Reason Foundation, specializing in research related to housing, urban growth, privatization and government reform. In addition to serving as editor of Reason’s Annual Privatization Report, he also serves as editor of the well-respected Privatization Watch newsletter.