Ripoff Privatizations-- And Why They Keep Happening

Want to make a deal? Privatization is in the air and the multinational profiteers are circling. And the action is bipartisan and involves big money:

  • The District of Columbia, Illinois and Indiana have all announced that they are looking to hand over their state lotteries to private firms for billions of dollars.
  • Last year, Indiana got $3.8 billion from an Australian-led consortium for a 75-year tollway lease on the same day Virginia signed over its Pocahontas Parkway as a 99-year lease to a private company and Texas approved a $1.3 billion bid by a consortium led by Cintra to build and operate a 40-mile toll road out of Austin.
  • Indiana is also planning to contract out management of part of the state's social services system in a $1.16 billion contract.

Scandalous Headlines: Strangely, this is happening even as headlines are filled with stories of financial corruption and incompetence on existing privatization schemes:

  • At the federal level, privatization in the defense department has bred billions of dollars in corruption by contractors like Halliburton, while the cleanup after Hurricaine Katrina has been crippled by profiteering and malfeasance by private contractors hired in the wake of the disaster.
  • Just last week, Gov. Charlie Crist ordered the Florida Department of Law Enforcement to investigate two companies running private prisons for the state after audits found the state was paying for vacant jobs and other questionable expenses.
  • Most dramatically, as we detailed a few weeks ago, Texas has largely dumped its social services privatization deal with Bermuda-based Accenture after the firm ran-up a massive $100 million budget overrun with an automated system that suffered massive technical failure.

Research Shows...No gain from Privatization: If you think these are anecdotal headlines, broader research has found no net financial advantage for states from handing over work previously done by public servants to profit-seeking contractors. A study by Rand Corporation released last week found that privately-run schools in Philadelphia did no better in raising student test scores than did publicly-run schools, adding to a range of evidence that privatization of schools is no panacea. Despite New Mexico having 43 percent of its prisoners in private prisons, the highest in the nation, there is little evidence that this saves the state money and has left state officials with few experts qualified to monitor the private contracts. As Paul C. Light of New York University, who has long tracked the hidden contractor work force, writes, “We have no data to show that contractors are actually more efficient than the government.”?

Yet deals are being cut and the public has to ask why politicians push for them, despite scandal and lack of evidence that they deliver of promises made by privatization salesmen? The answer is politics, as this Dispatch will detail below, from short-term gains to political corruption.

More Resources

Stealing from the Grandkids for Political Gain

When the state is auctioning off assets, the political payoff is obvious: today's politicians get to spend the money and the economic loss is realized only by taxpayers in the future who will be denied ongoing revenue.

Take the proposal by Illinois Governor Rod Blagojevich to sell the state lottery. Under the plan, the state hopes to get $10 billion as a one-time payment to spend immediately, while the purchaser would receive a monopoly and keep all revenues and profit from the lottery for the next seventy-five years. D.C.'s lottery proposal is similar with a $1 billion payment up-front in exchange for loss of yearly revenue for future budgets for the next twenty years. It's grand theft from the school budgets of the future.

And that political calculation means that today's politicians often offer these assets at fire-sale prices, since the economic losses will show up down the line on someone else's watch. For example, while Indiana got $3.8 billion upfront from leasing 157 miles of I-90, one analyst estimates that the company buying the Indiana Toll Road will reap as much as $11.38 billion from the deal, a loss of $7 billion to taxpayers in the pockets of the private firms.

""That is money that could go to our children, our grandchildren and our great-grandchildren," said Indiana House Democratic leader, Patrick Bauer last year (he's now Speaker). And the criticism is bipartisan; long-time conservative leader Phyllis Schlafly wrote in the rightwing publication Human Events:

State and local governments pocket the money upfront and get to spend it here and now, so politicians can cover their runaway budget deficits and enjoy the political rewards of spending for new facilities. They ignore the fact that U.S. citizens must pay tolls to foreign landlords for the next two or three or even four generations.

More Resources

Bypassing Democratic Accountability

One reason the privatized firms can expect so much money in the future is that they can do things that the politicians might not be able to get away with if the decisions were subject to democratic accountability. They can raise tolls without a political debate or use marketing or employment practices that would be stopped in their tracks if the job was still being done by the public sector.

For example, private lotteries will no longer be subject to present political restraints. “A private operator is not bound by any duty of care,”? explains Rachel Volberg, director of Gemini Research. Such firms will likely advertise more aggressively, especially among people susceptible to gambling addiction and those who can least afford to lose money on lottery tickets. State governments usually avoid those marketing tactics; Massachusetts, for example, banned almost all lottery advertising in the late 1990s. But privatizing lotteries is a back-door ticket to ending the political debate on such tactics.

Similarly, most toll road privatizations assume sharp increases in tolls in the future under the control of private firms that won't be held politically responsible for those decisions. Instead of a debate on raising the gas tax, which would be cheaper and better for the environment than the projected toll increases, the issue will bypass politics altogether. Writes the Texas Observer, "Taxpayers may well have been receptive to a big, messy debate about future transportation needs and the gasoline tax, but they were never asked." Instead, techical sounding constitutional amendments were snuck onto the Texas ballot in a low-turnout 2001 election and now privatization is proceeding apace.

Similarly, private contractors can profit from lower wages and poor treatment of employees in a way the public sector generally cannot. One recent study of 500 city and county governments found that private sector contracting results in full-time employees being replaced by more part-time workers.

And when that privatization involves prisons and private police units, many analysts worry that the profiteering comes at the expense of constitutional safeguards and democratic oversight. But that's the beauty of privatization-- out of sight, out of mind, except for the contractor's profit sheets.

More Resources

"Pay to Play" Corruption by Contractors

What keeps these deals going across the country is that the money to be made by private contractors means they'll continue greasing the political wheels to keep the deals coming:

  • In New Mexico, The GEO Group, the main private prison company formerly known as Wackenhut, contributed about $80,000 to candidates running for state office in New Mexico, and donated $30,000 to the Democratic Governors Association and $95,000 to the Republican Governors Association last year.
  • When Ohio melted down in corruption, the scandal was linked to campaign contributors profiting from private contracts, from legal contracts to the notorious Coingate scandal.
  • Political connections and political money have helped giant Bechtel land construction contracts like the Boston "Big Dig" from around the country-- with campaign contributions a small price to pay for a firm that, despite multiple scandals, has landed government contracts worth $18 billion in profits last year alone.
  • Financial firm Goldman Sachs, which handed out $16 billion in bonuses or an average of $600,000 per employee, has been lobbying at more than 35 statehouses for privatization. And those Goldman Sachs bonuses end up in big money political contributions. The firm has been hired by Indiana to design its Toll Road deal, worked for Texas on the state's privatization projects, and now is ready to jump to the other side of the negotiating table to bid on deals it helped design-- a sweet setup for any firm.

And if corruption of our political system due to privatization is not enough, how about subverting the free press? Local criticism of Texas toll road privatization had been appearing in local newspapers, so the Australian toll road giant Macquarie addressed that problem by buying a chain of forty local newspapers to shut them up-- one more example of an undemocratic tool used by private contractors unavailable to elected officials.

More Resources

Fighting Privatization

Luckily, not all political leaders are sitting back and letting the public get ripped off by these privatization deals.

In Texas last week, State Rep. David Leibowitz, a San Antonio-area lawmaker, filed HB857 and HB719, bills which which would restrict the state from turning a highway into a toll road or transferring a highway to a private entity for the purpose of letting it become a toll road.

In Indiana, where the privatization action is especially hot and heavy, lawmakers have launched hearings to examine the $1.16 state contract to privatize state social services. Other lawmakers have filed bills to hold the executive branch accountable for privatization deals. Rep. Joe Micon, D-West Lafayette, wants to create a special commitee to review any state contract worth more than $15 million, including the costs to employees already performing the work. And no contract could extend beyond a governor's term of office, which would eliminate multi-decade leases of the lottery or toll road privatization -- a nice principle to prevent the financial robbery from our grandkids involved in many of the privatization deals.

Stopping "Pay to Play": State leaders in multiple states are working to pass laws to ban companies bidding on contracts from making "pay to play" campaign contributions to government officials.

However, the core reform we need is a broad public recognition that these big-ticket privatization deals are taxpayer ripoffs that benefit only the private contractors and the short-term interests of a few present-day politicians-- all at the expense of the public. Hopefully, more state leaders will get that message from their constituents before too much of our future is put on the auction block.

More Resources