APRIL-MAY 2010                     Issue #1

Welcome to a new resource center & newsletter!

From states to school boards, governments are grasping at privatization to balance their budgets.  But the track record shows they are taking a big gamble -- risking higher costs, degradation of vital services, and lost accountability.

This newsletter and resource center, InThePublicInterest.org, aim to shed light on the true consequences of privatization, and on better options for responsible contracting and revitalized public structures.

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Goldman Sachs finds gold in privatizing roads

While Goldman Sachs is in the national spotlight for its part in the mortgage crisis, much less attention has been paid to the investment bank's role in the privatization of toll roads.

As a financial advisor to governments, Goldman Sachs helped structure the first two deals in the US to privatize existing public toll roads, the Chicago Skyway bridge in 2005 and the Indiana Toll Road in 2006. Paid millions as a consultant helping create a new toll road market, Goldman began playing both sides. Through a subsidiary, it invested in the international consortium that won the long-term lease of the Indiana Toll Road.

Seeing a golden "opportunity in the privatization and infrastructure businesses that … will give us entirely new products," as one Goldman Sachs official said, the bank set up a multi-billion-dollar infrastructure fund in 2006. It also changed its management structure to prioritize road privatization. 

Goldman Sachs and other investment banks also have their eyes on the "trapped value" in other public infrastructure, such as airports. In a move Chicago rejected as a conflict of interest, Goldman bid for the consulting contract to help privatize Midway Airport while also trying to buy a British airport company expected to bid for the Midway lease.

In the toll road deals, local and state governments receive big upfront payments for leases lasting 50 to 99 years that give companies control over the roads and the toll receipts. With toll increases and often tax waivers, the investors expect to make back that investment within the first couple of decades, and then continue to collect revenue from the previously public assets.

These deals outsource the politically tough decision to raise tolls, and often subvert transportation planning. Many of the leases even include non-compete clauses prohibiting construction of alternate roads, and private highway operators can drastically increase tolls or even close roads. The results include traffic overload and added cost in neighboring communities.

Some public officials have considered the risks of infrastructure privatization and decided to find other funding solutions. In 2008, the Pennsylvania legislature rejected the governor's plan to privatize the Pennsylvania Turnpike. However, investors and contractors aren't giving up: The Philadelphia Inquirer reported in early May that lobbyists are lining up to propose public-private partnerships to Pennsylvania and other states as a way to privatize toll roads.

The quick cash from privatization is tempting to state and local governments facing tough budget decisions.  But careful scrutiny is needed of whose interests are served by privatizing vital public infrastructure and what long-term costs and consequences can be expected.

Cracks appearing in privately built toll roads

Even toll roads originally built as private businesses are failing to demonstrate promised cost efficiency.

In San Diego County, California, the South Bay Expressway filed for bankruptcy in March, three years after it opened late and over budget. The for-profit company running the toll road blames the recession for its low traffic, but drivers have publicly blamed the company's steep toll increases.

The South Bay Expressway deal in 1991 was the first US road-building project by Macquarie, the Australian investment consortium.  It also was the first to receive a federal loan through the Transportation Infrastructure Finance and Innovation Act, and now owes US taxpayers $170 million.

As one planning expert told the San Diego Union-Tribune, "The idea was to see if the private sector could succeed in building highways. But … history is teaching us that it is more complicated than we thought."

The Texas transportation department, for years an eager road privatizer, now faces a funding crisis and admits that private roads are more expensive to build and operate than public roads. At a state legislative hearing in February, Texas DOT Executive Director Armando Saenz acknowledged that the need for profit raises costs.

State Rep. Jim Dunnam (D-Waco):  "Overall, it's cheaper to do it (build toll roads) with public money than with private sector financing, because nobody's making profit."
Saenz:  "Correct."

Private foster care: Child welfare versus profit

Nebraska's recently privatized child welfare system was in disarray in April, when two contracted companies dropped out because they found the work unprofitable.

The withdrawal of two of the state's five foster care contractors has disrupted the already-troubled lives of many children, causing missed therapy, missed visitation time with parents, changes in home placements and repeated changes in caseworkers, according to advocates from the Nebraska Appleseed law project.

This case and experiences in other states illustrate a recurring theme in the privatization of services like foster care and child welfare:  Such programs for vulnerable populations are essential to communities, but often don't turn a profit without fraud or dangerous corner-cutting. 

• In Kansas, the first state to privatize foster care, lawmakers held hearings in March to investigate complaints that contractors have boosted their profits by keeping children in state custody longer than necessary.
• An investigation by the Denver Post found that private foster care businesses charged the State of Colorado three times as much per child as equivalent county services, while many of the private agencies had records of child abuse and molestation in the homes where they placed children.
  
• In Florida, a private contractor sent abused and neglected children to sleep in conference rooms in an office building, sometimes for weeks, a state judge found.   
  

In Nebraska, state administrators have declared they will proceed with statewide privatization of child welfare services.  Advocates say much more state oversight is needed to adequately manage the contracts - which research shows is an added cost of privatization.

Recent Research

Contracting that Works: A Toolkit for State and Local Governments
Center for American Progress and National Employment Law Project, March 2010

Are Florida's Private Prisons Keeping their Promise?
Florida Center for Fiscal and Economic Policy, April 2010

A Bad Deal: An Analysis of the Pending California State Office Building Sale/Leaseback Program
Beacon Economics, April 13, 2010

Following the Money: How the 50 States Rate in Providing Online Access to Government Spending Data
U.S. PIRG Education Fund, April 2010

Hard to Swallow: Do Private Food Service Contractors Shortchange New Jersey Schools?
Clarion Group, for Service Employees International Union Local 32BJ

Out of Balance? Comparing Public and Private Sector Compensation over 20 Years
Center for State and Local Government Excellence and the National Institute on Retirement Security, April 27, 2010