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Privatization

 

Francis M. Eubanks and Fred Peccini

Department of Construction Science and Management

Clemson University

Clemson, South Carolina

 

In an increasingly restrictive fiscal climate, governments have turned to creative ways to make the provision of public services avilable and, in some cases, possible. One of the most politically viable methods of service provision is privatization. This report will attempt to offer a brief but thorough understanding of privatization through discussions relating to its: origin; the various forms that it can take; considerations of privatization policies; financial issues and politically opposing views; and specific cases in practice, to illustrate how privatization policies have been implemented. The report concludes with a brief discussion of its importance and relevance in terms of risk and opportunity to the construction contractor.

 

 

Introduction

 

Interest in privatization has gained widespread interest and acceptance by government policy makers as an alternative to the funding, administration and delivery of services by the government itself. The main reasons for considering privatization strategies pertain to increased pressures on public budgets coupled with strong indications that the private sector, having a competitive culture, can function with greater efficiency, at lower cost and enhanced quality.

 

Privatization, as a cost-control measure, is believed to improve economic incentives; attract managerial and technological resources from the private sector; broaden share ownership; and reduce public sector debt and borrowing. (Perotti,1993, p. 84). Further, privatization can be regarded as an alternative form of public financing, to reduce the overwhelming specter of public debt. The public budget customarily benefits from the value-maximization aims of the private enterprise.

 

Functional Transfers: The Origins of Privatization

 

In 1976, the U.S. Advisory Commission on Intergovernmental Relations (ACIR) published a report called Pragmatic Federalism: The Reassignment of Functional Responsibility (McManus, 1990, p.157). This work provided recommendations for and forecasts of the shifting government functions to other tiers. The motivation behind this report was to develop a program for allocating government functions, particularly those that involved health and education, to those jurisdictions that would be able to fund them appropriately.

 

These "functional transfers" were forecasted to occur mainly from local to regional to state jurisdictional responsibility, as a means to cope with budget constraints at the smaller, local levels. Economies of scale would be realized, thereby increasing efficiency and reducing cost. However, federal monetary aid to state and local governments dropped substantially during the 1980s. Reagan and his "New Federalism" policy emphasized a downward shift of functional responsibility, as opposed to the upward movement favored by the local governments. Tax revolt movements spawned by voter referendums such as California's Proposition 13 in 1978 legally prohibited local governments from raising property taxes in order to replace lost federal and state finding. In addition, state legislatures imposed constraints on the local use of state income and sales taxes, since the states themselves were getting pinched by the federal government.

 

This tightening of revenue released primarily by Federal and secondarily, state governments has continued through the 1980's. Under this climate, local governments were forced to look at ways to reduce their expenditures and capital outlays. Coupled with state and federal governments' aversion to consider the transferring of functions from the local level to their levels, local governments had no other option but to turn to the private sector.

 

Cost-cutting measures had to be devised, which would result in various ways of providing increased services of higher quality. Further, these proposals were encouraged by the Reagan Administration's belief that private enterprise has an ability superior to public entities in providing public services. Such was the reasoning and impetus for the creation of privatization', becoming all government's (federal, state and local) primary strategy in meeting increased demand of services in the face of dwindling revenue.

 

Forms of Privatization

 

Privatization, the process whereby the enterprises of the government are transferred to the private sector, can exist in several forms. Commonly, governments maintain fiscal and administrative responsibility for providing the service, where the private entity is responsible only for the actual delivery of it. Various forms of privatization exist, among them:

 

Contracting

 

This is the most common and popular instrument of privatization. Contracting occurs when a government enters into a contractual agreement with a service provider, subjecting both parties to terms and conditions set forth in the agreement. Functional areas where contracting is commonly implemented are: transportation (e.g. tollways, subway systems, marine terminals, and airports), health care, social services, employment training, corrections, fire and police protection, etc.

 

Voucher

 

Government funds the service and issues vouchers to entitled citizens, who then redeem them for the privately provided service. Examples of functional areas include: social services (including food stamps and housing vouchers), education, child care, etc.

 

Franchising

 

This happens when a government grants a private firm monopoly privileges to provide functions in a specified geographic area. Example include: State and national park concessions (e.g. food services, recreation and lodging accommodations) and management services, cable television and other utility services (e.g. water treatment and supply).

 

Grants and Subsidies

 

These are moneys which are given to private enterprises to aid or encourage them in the delivery of a necessary service. These funds are usually funnelled through existing government agencies, for example, for employment training, ambulance services, child care, etc.

 

Volunteerism

 

Governments recruit private individual or enterprise time and personnel to be used in the delivery of a service. This form, along with private donation, is a sort of reverse subsidy of the function; the government still retains control over fiscal and administrative considerations. The most notable example of this form is in the private cleanup of state-owned roads and streets through "adopt-a-highway" programs.

 

A variation of this form of privatization is "self-help". The difference lies in the fact that the volunteers are the beneficiaries of their own efforts and actions. Neighborhood watch groups are an example of a self‑help organization.

 

Private Donation

 

In addition to volunteers, governments solicit money, facilities, technology, or equipment from private enterprises. Noted examples of donations include: computers given to grade schools, bequeathment of land for dedicated purposes, and auxiliary associations dedicated to raising private funds for public entities, such as hospitals and fire protection.

 

Less commonly implemented but gaining in popularity, a few forms of privatization have to do mainly with minimizing the government's fiscal and administrative role in providing services. Those policies that follow are perhaps indicative of the purest form of privatization: decreasing government control of service provision.

 

Asset Sales

 

Usually, when a government consolidates activities or ends programs, surplus real estate and improvements are created. No longer performing their original functions, the government sells these assets to private investors, who develop them at their will. Closed military bases are an example of potential asset sale events.

 

Service Shedding

 

This form occurs when a government entity transfers all its functions, including all risks and responsibilities, to a private business entity. Theoretically, in this scenario of functional transfer, the government is completely out of the fiscal picture immediately after the sale. Realistically however, the degree to which the government retains control can vary widely. Actual cases related to this practice of privatization are discussed below. Asset sales can be included in this form; however, the key difference is that the government's objective is to get out of the business altogether, and therefore no longer has a need for the service-related assets.


 

Public/Private Partnerships

 

Alliance of resources from both the government and a member of the private sector reduces the reliance on employing tax revenue for service provision. The proportions of contributed capital and resources from both sides can vary widely according to many factors, as indicated in the example of a partnership recently formed for the construction and operation of an infrastructure project, presented and discussed below.

 

In addition to the classes of privatization practices already discussed, other policies can exist to foster the growth of privatization.

 

Deregulation

 

When this occurs, regulatory barriers are being removed that formerly restricted private firms from participating in service delivery, or have prohibited federal funds to be attached to any project which has been privately funded or managed. For example, the court-ordered breakup of AT&T and the subsequent creation of "baby bells", which still sustain close regulatory oversight. This allowed the holding company, through reorganization, to venture into areas of competitive enterprise that were formerly prohibited by regulatory statute. Also, through changes in government regulatory posture, an investment house may act as much as a de facto bank, prompting legitimate banks to seek regulatory changes allowing them to diversify into investment markets.

 

Tax Incentives

 

By altering the cost of a service (usually lowering it) through changes in the tax code, tax incentives can encourage the private sector to provide it. These incentives can be applied to any service area. Also, by shifting provisional responsibility for services to the private sector, tax revenues can be generated if the adopting private firm is non-profit, such as can be the case in public housing delivery.

 

Further, privatization can occur in three general areas, which any or a combination of the above forms can serve to

 

accomplish: public asset divestiture, private development of infrastructure facilities-- "project-based" privatization, and private provision of services to the government. These areas are basically delineated by the degree of fiscal, administrative, and operational control allocated to the parties (i.e the government and the private firm) involved in the privatization enterprise.

 

Policy Considerations of Privatization

 

Privatization, or the exercise of functional transfers or divestitures to the private sector, have several potential advantages. These advantages allow for increases in economic efficiency, fiscal equity, political accountability, and administrative effectiveness. Within these four areas, the following objectives of privatization strategies are as follows (McManus, 1990, p.159)2

 

Privatization strategies are expected to:

 

obtain the best possible service at the lowest possible cost, in the most equitable manner possible, while at least protecting, if not enhancing political interests; (economic efficiency).

 

save money (or maximize available money) without being too inequitable or too politically inastute; (economic efficiency, fiscal equity, political accountability).

 

get rid of, or avoid having to deal with day-to day management responsibilities, problem employees, and unions (where they exist), without bogging the jurisdiction down in a legal and/or political quagmire; (administrative effectiveness).

 

identify a service delivery solution that will accommodate opposing, but more or less equally powerful political interests, and at least protect the interests of the decision-maker (or makers); (political accountability, administrative effectiveness).

 

For most local governments, the fiscal benefits of privatization usually outweigh the political ones. As seen in recent campaigns and subsequent elections recently, candidate's platforms indicate that economics and politics, especially in light of the current recession, are inseparable, For example, the current health care debate is more closely associated with ideas about cutting cost through enhanced efficiency, rather than exclusively considering quality.'

 

According to a survey conducted to prove hypotheses on the political acceptability and viability of privatization, functional divestiture strategies are generally given a favorable rating by local governments (McManus, 1991, p.163 ff). Given the financial constraints imposed by the federal government as well as by legal revenue-raising restrictions and vehement voter-taxpayer opposition to any tax hike, results of the survey indicate that:

 

There is still a strong level of support among a sample of county and municipal chief budget officers for public sector divestiture of assets to other levels of government, despite the current focus of privatization as the cost-cutting technique. Instead of implementing privatization schemes like service shedding or asset divestiture, there still exists a practice of shifting responsibilities to other government levels, agencies, or departments. This can be labelled as merely an attempt to "pass the buck".

 

Partial divestiture of functions via privatization is generally more acceptable than full and permanent divestiture.

 

Smaller cities less commonly use privatization strategies than do their larger counterparts.

 

However, among all governments expressing an interest permanently to divest functions to the private sector, privatization strategies were most extensive in smaller cities.

 

Caught in the bind of fiscal restraints brought on by decreasing tax revenues and funding from higher government levels, it is critical to the existence of smaller jurisdictions to be able to access private capital for their necessary functions, if only to deflect taxpayer resentment. Support levels at all tiers of government must be raised so that legislation can be enacted to enable implementation of privatization measures, especially at the local level.

 

Financing Privatization

 

Privatization has become more of a populist idea than has "denationalization", which has been seen as a policy to shift large government programs to proportionately large, corporate firms. Popular resistance to denationalization relies in the idea that with the transfer of functions comes the highly concentrated transfer of funds and with it, disproportionate power and wealth.

 

As opposed the denationalization, privatization is perceived to be more favorable in terms of "equality of equity", in that many privatization plans include asset sales of government function to corporation with large numbers of individual shareholders with more equalized voting rights, For the political viability necessary for privatization strategies to succeed, it must be obvious that shareholder's capital will supplant taxpayer's contributions. Historically, taxes, even though referred to as "revenue", is more precisely "equity" or "contributed capital". Indeed, taxpayers demand a return on their investment in the form of services rendered. However, it is the high cost of these services, financed by the taxpayers, that has led to charges of government waste, abuse, and inefficient use of funds. Privatization is widely espoused by government officials and constituents alike as a solution -­even a panacea-- for all budgetary problems.

 

Privatization of government enterprises, in order to work, requires financing both to create private ownership and to maintain continued activities of the private entity, Financing requirements can vary form company to company, with varying degrees of quality and size of the business. Additionally, other external factors can exist as to: the political and cultural enmity towards admitting foreign private capital, the availability of private domestic capital, and the degree of risk and equity investment that local investors are willing to take and make.

 

During privatization phase-in, funding of the private entity usually is accomplished through a combination of government subsidies (direct payments, guaranteed loans and government guaranteed lines of credit) and capital raised through debt and equity markets. As dependence on government contributions wanes, there is an increased need for long and short term capital for the procurement of new facilities, equipment and technology, as well as for modernization of any existing physical plant which is taken over as part of the privatization plan.

 

One of the most critical components of financing the privatization of government functions is in providing for working capital requirements of the private business entity. Obviously, the best strategy for raising working capital is achieved through the generation of profits, rather than raising current assets (cash) through taking on long-term-debt (notes and bonds) or issuing new equity (stocks). If the need then arises to raise cash through debt-loading, financial institutions are more inclined to risk depositor's funds if it is clear that most of the financing of capital equipment and facilities comes from the periodic difference between revenues and expenses, namely profit.

 

Planning is absolutely necessary in financing privatization. Internal and external factors, some of which are noted above, must be considered. The phasing-in process of privatization occurs simultaneously with its financing; it must begin before functions are transferred and followed through to the point where the private enterprise can stand on its own financial footing. Again, it is a generally accepted notion that a private company, since it is more effective in attaining the noble goals of high quality and public service, is more likely to exceed in its endeavors to provide traditional government-provided services. Also, direct accountability of management to shareholders is a much more effective means of ensuring the success of the private entity, In government-owned enterprises, managers are not accountable to taxpayers. They must only answer to government bureaucrats at best and their own agendas at worst, both actions or inactions resulting in the kind of gross inefficiencies that government enterprises are perceived to practice.

 

Indeed, it is the ability of privatization plans to attract private capital that makes the transfer of functions to the private sector possible. For example, privatizing the operation of existing airports provides access to private capital markets for construction. Combined with federal grants and passenger facility charges, the bond markets enable the airports in this country to pay for improvements. (Merwin, 1991, p 27.)

 

Pros and Cons of Privatization

 

Governments at all levels in this country have always relied on the private sector for the delivery of public services, as opposed to foreign governments which solely rely on the direct employment of its citizens to carry out its functions. Other industrialized democracies, such as those found in Europe, still have nationalized mega-industries, most notably in telecommunications and transportation. In the U.S. however, there has been a trend toward limiting government intervention, since the deregulation movement in the late 1970s. Further, under a sky of conservatism, tax revenues have dropped and costs have risen, moving governments to use the instruments of privatization in pursuit of public policy goals.

 

Among the arguments expressed in favor of privatization are those which have an emphasis on efficiency and effectiveness, responsiveness, and political ideology.

 

Greater efficiencies and cost containment can be realized in the private sector

 

Private firms can respond more quickly than can government agencies to changing conditions.

 

There is a strong ideological undercurrent that supports private over public action (State of SC, 1991, p. 7-8).

 

Taking the opposite point of view, critics of privatization allege that the various forms do not live up to expectations; measurements of the performance of cost-containment measures, for example, indicate that taxpayers are not benefitting from the program. Therefore, critics believe that reliance on private sector delivery should be kept to a minimum. It is contended that so little can be known about the real costs, benefits, and impacts of privatization that it should be implemented with the highest degree of prudence. Basically, the argument against privatization is the question of control and dominion, in addition to whether or not privatization of a particular service results in a substantial cost savings to the taxpayer.

 

Privatization undermines the public commitment to ensure the efficient, effective, and equitable distribution and availability of public services.

 

Privatization reduces service quality, fails to contain costs, and may, in fact, lead to higher costs for service delivery and benefit distribution.

 

Privatization undermines government's role as the ultimate focus of accountability and need to insure access to and availability of public services and benefits (State of SC, 1991, p. 9-10).

 

In addition, proponents and detractors have made their respective cases for and against contracting, the most common and popular instrument of privatization. Following are sample statements (after Peters, 1991, p. 58-59), supporting the opposing arguments.

 

For:

 

Competition between contract bidders results in re­duced cost or enhanced quality or both.

 

The growth of government, mainly in terms of employment, is contained.

 

Specifically skilled workers can be obtained as needed, without regulatory constraints imposed as part of civil service requirements.

 

The size of a program can be adjusted without employee layoffs or negotiations.

 

The entire cost of a service is more visible, thereby allowing for cost comparison among various contractors' services.

 

Government managers can concentrate on planning and monitoring activities rather than administering day-to-day operations. This situation would tend to allow better management and objectivity in evaluating the progress of operations.

 

The private service provider is more likely to be held more closely accountable than the former government provider, especially because costs cannot as easily be passed on to the taxpayer

 

The need to define the scope of services clearly, as well as to monitor the performance of the contractor, produces meaningful management information that is often otherwise available.

 

Against:

 

Demoralization of public employees may develop, along with possible consequent job actions and costly legal challenges of privatization measures.

 

Governmental accountability and control is reduced.

 

Public policy objectives may be breached, such as equal opportunity employment and veteran's preference programs.

 

Competition may not exist in a particular service area, and once a company is awarded a contract it may be renewed almost automatically, thus limiting competition.

 

Responding quickly to emergencies or major changes in service needs may be difficult because of contract constraints.

 

Close monitoring of the contractor's activities is needed to ensure contract compliance.

 

Contractor's may acquire undue political power.

 

Contracting may "commercialize" non-profit social service agencies, causing them to diminish their role as a social conscience.

 

Case Studies: Toronto Airport, Dulles Highway and Puerto Rico Bridge

 

Currently, there is a crisis in meeting the needs of our national infrastructure; this nation's highways, bridges, water supply and sewer treatment systems, etc. are rapidly degrading to the point of being unsafe. In addition to the need for replacement of existing infrastructure, the needs of an ever-increasing population place increasing demands on an already user-saturated system. Augmentation of the system, as well as its needed restoration, will require a substantial capital investment. For example, in a recently completed study, New Jersey identified required investment in transportation, water, solid waste, energy, and telecommunications infrastructure of $95 billion over the next 10 years (David, 1992, p.50). Keep in mind that this figure reflects the capital expenditures of just one state. Although different states have various infrastructure needs, imagine the staggering sum that must be raised to satisfy future infrastructure needs. As has been noted previously, taxpayers will continue to resist any revenue-raising maneuvers by the government, especially those that result in new taxes. Privatization is commonly seen by politicians (especially those who may want to gain reelection) as the last refuge for obtaining infrastructure funds.

 

Specifically, the majority of transportation infrastructure is literally crumbling. Current maintenance programs and procedures can no longer patch up the system. Private capital must be used for transportation infrastructure improvement and expansion. According to the Privatization Council, a non-profit consortium of private firms and government agencies interested in the advancement of public-private partnerships, transportation is particularly well-suited to private participation. In order to attract private capital, tollroads and toll bridges, airports and rail systems can generate enough revenue from user fees and integrated commercial development.

 

To foster support for the raising of private capital, recent federal legislation promotes private participation in surface transportation. While providing for increasing levels of federal funding of state and local transportation projects, The Intermodal Surface Transportation Efficiency Act of 1991, commonly referred to as ISTEA, allows states to integrate federal, state, and private funds in a privately owned tollway. This cross-pollination of capital had never been legal prior to the passage of ISTEA. Also, ISTEA enables states to establish Transportation Revolving Loan Funds to support private tollway owners. One of the most important elements of ISTEA is that it permits the Secretary of Transportation to waive restrictions placed on asset sales of surface transportation facilities that had been previously funded by federal monies. This had formerly been one of the greatest hindrances to privatization: asset sales of state-owned enterprises had been halted under the specter of litigation and revenue‑withholding by the federal government. The federal government would often seek the return of all funds, funneled into the enterprise over its life, as a condition of the asset sale to a private entity. After the declaration of privatization policy as promulgated in ISTEA, the federal government is no longer likely to exercise such action.

 

Theoretically, privatization's strength exists in its ability to access and tap into the private capital markets to replace public funds which simply no longer exist. The central core of the argument for privatization is that greater efficiency and therefore lower costs can be realized, resulting in a higher ratio of service returns per tax dollar (or more precisely, "taxpayer capital"). In order to see how privatization is currently working in this regard, one must look to the record of recent privatized projects. To investigate the use of privatization and private capital and its current degree of success, several actual cases are presented below, specifically regarding transportation infrastructure projects.

 

The Tollroad

 

The Dulles Tollroad Extension, linking Dulles International Airport with Leesburg, Va., a suburb of Washington D.C., could be held as a model for privately-owned, for profit highways, designed to provide badly needed infrastructure. Scheduled to be opened in late 1993, the Dulles Extension will cost $180 million for design and construction and an equal amount to cover costs in its early years of service. Operation and maintenance costs, as well as the costs of capital (e.g. legal and brokerage fees) and interest expenses will be covered by tolls, which are "user fees". Ordinarily, for non-toll highways, these costs are directly borne by tax revenue. Only those who actually use the tollroad will pay all costs from capitalization to maintenance. In the case of the Dulles Extension, user fees will also generate profits, forecasted to be upwards of 30 percent of equity over 40 years. Also, the project is expected to generate $550 million in taxes over the same period. Without accounting for the time value of money, this represents $900 million that will be retained in government treasuries. At least in theory, this money can be applied to a number of areas, such as income tax abatement or deficit reduction.

 

The Bridge

 

The San Jose Lagoon Bridge, linking Puerto Rico's Marin International Airport with San Juan's financial district is setting a precedent for similar projects in the U.S. In effect, a public/private partnership was formed with the melding of public and private financing. While private capital is scarce in Puerto Rico, it was still possible for the public and private enterprises to join forces. Laws enabling the issuance of tax-free government-guaranteed revenue bonds for private projects were specifically repealed in the 1986 Tax Reform Act'. However, Puerto was exempt since it is considered a separate tax jurisdiction by the IRS. $117 million in bonds were issued in this manner and combined with the private organization's $9.4 million. Autopistas de Puerto Rico (APR), the private entity formed as a general partnership specifically for the development of this bridge, will manage the construction of the bridge, operate it, and receive most of the toll revenues. Under the agreement struck with the Commonwealth, control of the bridge will revert back to the government after 35 years.

 

Controversy has been raised over whether APR is assuming a proportional share of the risk in the investment. Also included in the agreement was a guarantee that, in the event that traffic flows do not come close to projections in the first six years, APR has the right to terminate the contract. Effectively, the government is insuring the private entity against its greatest risk: suffering a return on equity below acceptable returns. It is somewhat odd that APR, being a more efficient, private entity, would need such special guarantees. However, it is expected that efficiencies, with the recognized savings that can be expected, will be realized over the course of operations. In the absence of substantial private capital, public funding can enhance whatever amount of private capital that is available.

 

The political environment can also affect the terms which are reached in these public/private partnerships, which are effectively quasi-public arrangements. A balance had to be found in the level of state-provided capital. The government knew that an expensive arrangement would cost it votes; on the other hand, if the government were too conservative in their funding, their miserly approach could table the project. The terms of the agreement finally ratified by both parties included contingencies that if the internal rate of returns exceeded 19 percent, profits would be split 40/60, with the government getting 60 percent. Above 22 percent, the split would be 15/85, with APR getting the smaller piece (Reingold,, 1993, p.39). APR receives the right to exercise the termination option in return for having their profits limited. However, it is also somewhat of an anomaly for the government to agree to a contract where the party who has most control over profit maximization (i.e. cost minimization) has no incentive to do so. The greater the internal rate of return on this project, the lower the profits are to be retained for the private company.

 

The Airport Terminal

 

By the mid-1980s, Toronto's Lester B. Pearson International Airport had evolved into an embarrassment of grave proportions for the Canadian government. Its inefficiencies, resulting in high costs and travel delays, forced the federal government in Ottawa to seek ways to improve the airport's facilities and functions. However, the government was experiencing a low supply of cash, with no viable public alternatives for funding.

 

In 1987, still faced with budget woes, and prior to relinquishing control of airports to independent regional authorities, the Canada Ministry of Transportation elicited bids from private business concerns interested in building a new terminal at Pearson International. The contract was eventually awarded to a joint venture headed up by Lockheed Airline Terminal. In February 1991, just three years after construction was begun, Pearson's third international terminal, called Trillium, was opened. Since then, it has become a shining example of what privatization can accomplish. It was built in less than half the estimated time and is run by 65% fewer people than comparable facilities in the U.S.

 

Although its opening coincided with the Gulf War and its private owner has been affected by Canada's still present recession, Lockheed reports that it has had a positive cash flow since opening day. According to the Canadian government, the project has been highly profitable, therefore generating a substantial amount of tax revenue.

 

However, not everyone is happy about the precedent set in Canada. Airlines are afraid that the lessor of their real estate, another private company like themselves, would immediately raise landing and gate fees to cover its debt service on the purchase of airport infrastructure. They argue that they will be unable to pass these higher costs onto the flying public, since they are still involved in heated fare wars with other airlines. Also objectionable to the airlines is the inclusion of retail areas in the development of airport terminals. The anxiety is that private concerns will pass the extra costs of development onto the already overburdened airlines. More realistically, retail space can provide a revenue enhancement to the project, leading to a greater capacity to cover investment costs and interest expenses.

 

To answer these concerns, governments respond that they are simply trying to sell assets as a means of raising sorely needed cash. Private entities who take over government functions must protect these assets by maintaining efficiency, while controlling their costs, enhancing their revenue opportunities, and maximizing their returns. It is clear in their resistance of privatization that the airline lobby sees the privatization of airline terminals as a subterfuge to undermine their power.

 

Conclusion

 

What does it all mean to the construction contractor?

 

It is the ultimate goal of privatization, at least from a political point of view, to see that services and facilities are rendered at the most efficient and effective level for the citizenry. It may at first seem that implementation of privatization would cause a downward shift in the volume of services needed, due to the generally recognized efficiencies of private industry provision. Under this scenario, private entities who have efficient service delivery programs may not require the level of facility usage that the government formally needed. However, opportunities will exist for the construction contractor if and when broad privatization policies are promulgated and implemented. This may come from the potential opening up of capital markets to public investments, especially in the area of infrastructure construction and repair. Inducements for this release of capital may come through reforms in the tax code, as well as through changes in governmental policy toward facility procurement.

 

In light of these changes and reforms, construction contractors may see a dramatic shift towards providing services for owners of functions which were formally contracted by the government. Risks are present-risks exist as to the degree of financial stability of a private, as opposed to government, owner. Since many governments on the state and local levels have, from time to time, sustained budget shortfalls-even to the brink of bankruptcy--they generally have the power to raise funds to continue projects. Governments will always be in business. Lenders are loathe were allowed to foreclose on government properties; if they did, the entire economy would suffer, including the lenders themselves. The lack of "solvency" of the federal government, coupled with its ability to expand the deficit with increasing debt loading, illustrates this point. In the alternative, private companies who take over the responsibility for infrastructure improvements are subject to bankruptcy laws. The difference in this case arises out of the type of risk of the particular enterprise, that risk is deemed commercial, rather than that of the sheltered sovereign variety. As such, the construction contractor who provides services to the private provider runs the risk of suffering work stoppages due to the absence of cash flow that may arise when a private entity seeks protection from its creditors.

 

If as much as they are interested, a construction contractor can use its financial resources to invest in an equity participation in an infrastructure project. In these cases, the contractor can act as developer: funding and overseeing the project, as well as building it. Risks can be greater in this situation, since the lack of separation of responsibilities can expose the contractor-developer to a broader spectrum of liability. Nevertheless, the returns can be correspondingly high. The degree to which the contractor seeks involvement in a project depends on its willingness to accept a certain level of risk. To reduce risk, a smaller equity involvement could be considered, in that the exposure to unacceptable risk may be eradicated.

 

A construction contractor can also use the "turnkey" approach to contracting. In this approach, the contractor provides financing for the project, as well as design and construction services. After the project is complete and ready for delivery, payment is rendered, and the key is "turned over" to the owner. This owner can either be the government who needs the project in order to provide the public service, or the private entity which has partially or fully taken over the service that was formally provided by the government enterprise.

 

A further approach to take advantage of opportunities arising out of privatization policies can be realized through joint-ventures. Fiscal partnerships can be created with facility operators for the design and construction of public service-facilities. After completion of the project, the joint-venture would be dissolved, leaving the facility operator to contract with the government for service provision.

 

References

 

Castillo, Rosendo J. (1987), "Financing Privatization", in Hanke, Stephen H., (ed.), Privatization and Development (International Center for Economic Growth, San Francisco, California), pp. 119-126.

 

David, Irwin T. (1992), "Privatization: Solving the Infrastructure Crisis", Construction Business

 

Review (May/June), pp. 50-55.

 

Hass, Nancy (1993), "Cleared for Takeoff", Financial World (August 3), pp. 40-41. (1993), "Psst, Wanna Buy a Bridge?", Financial World (August 3), pp. 30-35.

 

McManus, Susan A. (1990), "Decentralizing Expenditures and Responsibilities", in Bennett, Robert J., (ed.), Decentralization, Local Governments, and Markets (Oxford University Press, New York), pp. 157-171.

 

Merwin, Donald P. (1991), "Privatization Hits the Roads", Highway and Heavy Construction (November), pp. 26-27. Perotti, Enrico C., and Guney, Serhat E. (1993), "The Structure of Privatization Plans", Financial Management (Spring), pp. 84‑98.

 

Peters, Terry (1991), "Public Services and the Private Sector", in Kemp, Roger L., (ed.), Privatization: The Provision of Public Services by the Private Sector (McFarland & Company, Jefferson, North Carolina), pp. 53-59.

 

Reingold, Jennifer (1993), "A Bridge Too Far?", Financial World (August 3), pp. 38-39.

 

State of South Carolina (1991), Privatization: An Alternative Approach to Public Policy Implementation (State Reorganization Commission, Columbia, South Carolina).