Managed Competition Development

Privatizations surged to a total value in excess of $100 billion in 1998 and are estimated to accelerate in future years. One of the primary driving forces behind privatizations is the desire to provide cost-effective and less intrusive governmental services. In some cases, removing special tax advantages given government-owned utilities and cooperatives would increase state and local tax revenues by $2 billion annually. In other cases communities have purchased everything from minor league baseball teams to hotels as “investments” in economic development and have lost millions on the “investments.”

Successful government reforms focus on defining the core missions of government and developing methods to perform those missions. Successful reform plans seek to eliminate or privatize functions that are not essential. Such actions allow cities to better balance budgets, undertake large infrastructure development programs, and increase staffing for critical functions like fire and police protection. The advantages the private sector provide can include financing, transfer of risks, efficiency savings, specialized services not available in the public sector, higher quality services, faster and more efficient construction, and shorter implementation periods.

Numerous impediments exist which, if not adequately and objectively addressed, can make privatization initiatives disadvantageous. From ERG’s experience, some of the issues which must be dealt with in order to successfully accomplish an asset privatization follow:

• Implementation may require regulatory or statutory action
• Loss of control over utilities
• Need to develop new procurement policies
• Quality is under control of new owner
• Difficulties in evaluating performance-based sales
• Employee resistance to transfer/change
• New owner may be unable to perform due to bankruptcy
• Compliance with IRS regulations
• New owner ability or willingness to assume risk
• Policy requirements may be difficult to transfer to private sector
• Rate increases may be controlled by new owner's efficiencies.

ERG offers comprehensive capability in assisting municipal entities regarding the financing, procurement and management of asset privatizations. ERG can provide assistance to define the right goals; select the assets to be privatized for those goals; develop procurement documents consistent with goals; develop public policy, and design programs statutory requirements; identify the best contractors; implement the privatization; and monitor performance.

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