Is privatization waning?

January 6, 2014

For thirty years there has been an ideological pressure for the U.S. government to sell public infrastructure, assets and services. Prisons and schools have been privatized. Toll roads, like the Indiana Toll Road, have been sold to private consortiums. Many of these assets were created by earlier generations who regarded their obligations to citizens as important. Now there is a bigger commitment to an economic philosophy that insists government is the most expensive and least efficient provider of services. Somewhere along the line, with little economic or financial validation, privatization was accepted as the best approach for public assets.

Recent events suggest that the tide may be turning. Idaho’s governor, a privatization advocate, has announced that he is ending private contracting for the state’s correctional facility. The Idaho Statesmen-Review’s Betsy Russell reports:

[Idaho] Gov. Butch Otter just announced that he’s ordering the state Board of Correction to halt its ongoing effort to get new bids from private firms to run the privately operated state prison, the Idaho Correctional Center, south of Boise, and instead move to have the state take over operating the scandal-plagued lockup.

‘It’s disappointing, and it’s disappointing because I am a champion of privatization,’ Otter told reporters at the AP Legislative Preview. ‘It’s disappointing, but I think it also recognizes what has been happening, what has happened – it’s necessary. I think it’s the right thing to do. Is it the desirable thing to do for me? Not necessarily, because we had better hopes for outcomes in privatization.’

What happened? The AP reported that Corrections Corp. of America (CCA), the nation’s largest private prison operator, had run into some problems overseeing the Idaho Correctional Center:

The CCA prison has been the subject of multiple lawsuits alleging rampant violence, understaffing, gang activity and contract fraud by CCA.

CCA acknowledged last year that falsified staffing reports were given to the state showing thousands of hours were staffed by CCA workers when the positions were actually vacant. And the Idaho State Police is investigating the operation of the facility for possible criminal activity.

In Pennsylvania, Republican governor Tom Corbett announced that he was ending his effort to give the contract to run the Pennsylvania lottery to a private British firm. has the background:

Lawmakers and lottery employees had objected to the [lottery privatization] plan when they learned Camelot was the sole bidder and that the deal included provisions to add keno to the lottery.

On Monday, Senate Minority Leader Jay Costa, D-Forest Hills, said he’d be willing to reconsider privatizing the lottery, provided the proposal involved multiple bidders, required transparency and accountability in operations, and protected the jobs of lottery employees. ‘The governor flew solo on that the last time. Now we need to get the General Assembly in on the conversation,’ Costa said.

I wrote about Corbett’s lottery deal last February:

It was a fatal mistake for Corbett to take a public asset, with expected cash flows of $70 billion over the next 20 years, and give its control to a British firm with no legislative oversight. It was crony politics and it failed.

If public assets are to be given to private interests, it must happen by daylight. These deals that often last decades must be thoroughly examined. The rule of law must prevail.

After seeking the project costs for the new Tappan Zee Bridge, New York Governor Andrew Cuomo chose not to privatize its construction and operation. Financial analysis concluded that outsourcing the design and construction of the bridge would save several billion dollars for the state, rather than privatizing the construction and operation of the bridge. Infrainsightblog reported:

Tappan Zee Constructors, LLC provided the lowest price and fastest completion schedule for the replacement bridge. The $3.14 billion price tag is well below initial forecasted estimates for the project, which ranged from $5 to $6 billion. The unexpectedly low bid reduces the financial pressure on NYSTA by lowering the cost of financing the project (e.g., a lower bid allows for lower leverage and lower debt service).

The biggest problem in the privatization of public assets is often the lack of cost benefit analysis and legislative oversight. The idea has been that privatizing saves money and it is more efficient than the government providing the same service. For many projects, it is often difficult to find evidence that proves this idea. When a thorough examination is done, it often shows that privatization is not the most economically efficient choice. The winds may be changing with America’s privatization push.

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