March 04, 2004

Richmond – City In Crisis

Maybe Privatization Is The Answer?
By Fred H. Arm & Robert Poole, Jr., Reason Foundation
Now that the word is out about Richmond’s $35 million dollar “Black Hole”, perhaps it is time to do something more effective than simply bellyaching about how awful it is. Has anyone ever entertained the radical remedy of Privatization? Around the world, government services and enterprises are being shifted into the private sector via a phenomenon known as privatization. In Britain, nationalized industries such as British Airways and Jaguar have been returned to investor-ownership via stock offerings. Similarly, in Chile, hundreds of firms nationalized by the Allende government have been returned to private ownership. Not only is there a dramatic decrease in costs, there is a windfall, one-time cash infusion without having to raise any extra taxes.

However, privatization goes further than simply returning once-private firms to the business sector. Margaret Thatcher's government privatized over 1.5 million council houses - public housing units that were created by the public sector. It also privatized the major airports, the gas utility, and the telephone system - all of which had always been in the public sector. Similarly, the Japanese government is privatizing Nippon Telephone and Japan National Railways, which have been long-term fixtures of the public sector. Essentially, privatization is actually dismantling big government, not merely correcting the excesses of socialist regimes.

Since the City has naively “given away the store” in pension benefits, health care, salaries, and political patronage, perhaps privatization is the only reasonable way out of this mess. Frankly, I do not need all those bureaucrats running around essentially being non-productive while they draw such extraordinary benefits.

Full privatization, then, involves the transfer of both the financing and production to the private sector. At the municipal level, this can mean either the withdrawal of government from the field, letting private firms take over (as in, say, police, fire, ambulance service, or garbage collection) or the sale of the government operation to private owners (for example, road maintenance, sewage-treatment plant, engineering, and/or planning). Full privatization generally means the divestiture of an enterprise or asset to private owners.

The evidence shows overwhelmingly that the theory, rather than the bureaucrat’s and unions' claim, is correct. Every controlled study comparing public versus private service delivery shows lower costs (for a given level of performance) for private enterprise. This includes nationwide studies of garbage collection in the United States (1976) and Canada (1985); of fire protection (1976, Arizona); public-works services such as street sweeping, pavement patching, and traffic signal repair (1984, Southern California); transit services (1986, US); school bus transportation (1984, Indiana); airlines (1977, Australia); naval ship repair (1978, US), and many others. In these statistically valid studies, the cost of government services is typically 30-40% to as much as 100% higher than private services.

What has made privatization far more attractive, however, even to socialists such as Spain's Prime Minister Felipe Gonzalez and David Lange's Labor government in New Zealand, was the realization that large one-time cash infusions would be possible from the sale of these industries. To be sure, there is little market for shares in a large loss-maker such as British Coal or Japan National Railways. However, if a new management team can be brought in and given a free hand to slash costs and rationalize operations prior to privatization (as in the case of British Airways, Jaguar, and Rolls-Royce), the market value of the company can be quite significant. As of the end of 1988, the British government had realized over $40 billion in one-time revenues from privatization of council houses and state industries. The New Zealand government realized over $14 billion from its privatizations, and the Japanese government over $100 billion just from Nippon Telephone and Japan Air Lines. These revenues help to reduce budget deficits without tax increases.

So wake up citizens of Richmond. There is a light at the end of the tunnel. There are also many capable, civic-minded individuals that would gladly volunteer their time to make this all happen. Let’s give it a go!

Posted by fredarm at March 4, 2004 03:16 PM
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