Mounting revenue shortfalls are forcing state and local governments to find creative ways to cut costs, while at the same time, continue to provide core services to residents.

According to the Reason Foundation’s Annual Privatization Report 2009, public-private partnerships, outsourcing and performance-based government are becoming increasingly visible strategies on the radar of state and local government, particularly in these trying economic times.

The economic downturn has definitely fueled a push toward privatization at both state and local government levels, according to Leonard Gilroy, editor of the report and director of government reform at Reason Foundation. “Over the past year,” he says, “we have seen a dramatic increase in the number of policymakers looking at – or moving forward to implement – opportunities for public private partnerships as a way to achieve cost savings and improve service delivery to residents.”

But, Gilroy makes it clear that cost-cutting is just one reason that privatization can offer many other advantages to state and local governments. In many cases, privatization can provide:

  • More value for the same dollar;
  • A transfer of risk from the public to the private sector;
  • An efficient way to deliver services that fluctuate in demand over time (e.g., snow plow services – do we really need to hire employees – and/or buy, manage fleet of snow plows if we might only need them for five months out of the year?); and
  • The ability to tap expertise and current research and development in specific fields or industries without a huge investment in training.

The state of Florida continues to lead the pack in terms of public private partnerships. The state had over 550 contracts with private firms – roughly $8 billion in outsourced projects – this past year, compared to just 16 outsourcing contracts nine years ago. Privatization projects include information technology, highway maintenance, prison administration, mental health services, and human resources.

Florida has been – and continues to be – a model state for its comprehensive structured framework for privatization. The state’s Council on Efficient Government has been a front runner in the development of policy based on careful analysis of public private partnership and outsourcing options.

One particularly notable trend over the past year has been the creation of similar commissions in other states. Louisiana’s new Commission on Streamlining Government will take an enterprise-wide approach to finding ways to cut state spending through privatization, streamlining and agency/program consolidation or elimination strategies.

California’s Public Infrastructure Advisory Commission and New York’s Commission on State Asset Maximization are examples of two state entities created over the past year to assist policy makers evaluate public private infrastructure partnership opportunities and formulate recommendations to state leaders. Michigan also has a similar state agency in place.

“Privatization can be done well, or it can be done poorly,” says Gilroy. “When done properly, privatization can produce great benefits. Having a comprehensive structure in place to drive the process can be instrumental in ensuring its success.”

Despite recent rumblings about the privatization of its parking meter system, Chicago remains a leader in public private partnerships. As Gilroy explains, the City of Chicago certainly ran into its share of challenges during the early transition phase, but turning the parking meter system over to the concessionaire has produced positive results for the city.

He emphasizes the importance of separating myths from truths. People may complain about the increase in parking meter rates – after all, nobody wants to pay more for any services if they don’t have to – but it wasn’t the concessionaire who raised the rates; the city still retains the power over such decisions.

And while it used to take an average of two days to repair a broken meter when the system was under the city’s management, the turnaround time jumped to as many as eight days when it was first turned over to the concessionaire. But now, the average repair time is down to less than one day.

Once the initial kinks were ironed out, Chicago not only received a $1.15 billion influx of cash, but is also going to have a brand new, more efficient parking meter system. According to Gilroy, “While glitches in the early implementation have drawn significant public scrutiny, the turbulence seems to be subsiding as operational improvements have taken hold in recent months. And people seem to forget that in any large-scale initiative like Chicago’s – whether public sector or private – all of the planning in the world will not prevent hiccups along the way in implementation.

It’s all in how you respond, and both the City and the concessionaire in Chicago have done a good job in dramatically improving the performance over the last few months. On a number of metrics, the operator is now performing at a higher level relative to what the City had been able to do in-house.”

We are likely to see increasing levels of participation in the near future, according to the report. “All levels of government are experiencing a prolonged fiscal crisis with the ongoing recession, which is helping to drive increasing interest in privatization,” says Gilroy. “Policymakers are recognizing the need to re-evaluate their priorities, re-examine what are really core government functions, and consider strategically tapping the private sector’s expertise in areas where they can save taxpayer money, leverage government assets, and do more with less.”