Myth Sold as Truth: Privatization
Posted Friday, Feb. 04, 2011
By Ed Wallace
Special to the Star-Telegram
"There is little doubt [Morgan Stanley Infrastructures Partners] will recoup their investment in a relatively short period of time." - Investment Banker Dennis Enright, discussing the privatization of Chicago's parking meters in the New York Times
The public is so deluged with Big Myths that it's almost impossible to deal with all of them - much less disprove the untruths they're built on. That's probably the idea. These Big Myth premises, successfully foisted onto a gullible public incapable of critical thinking, serve only to enlarge the wealth of those spreading the disinformation.
Privatization of publicly owned assets, sold to us wrapped in the shiny myth that "private companies can always do the job better than inefficient governments" is one of the most effective sales job. It is quickly altering the lives and draining the pocketbooks of all Americans.
First, maybe it's true that private industry is more efficient at some things than government is. But it is equally true that these companies are not buying public assets for anything as altruistic as lowering the costs of using these assets for the public good. They have little incentive to provide more efficient services; the reason they buy the assets that we all paid for is a simple investment/profit motive. Once the new owners control the asset, their only mission statement reads, "To maximize investors' return on their investment."
Your Taxes at Work-In India
This really struck home a week ago. ABC News did a story about Florida's privatizing its food stamp operations to J.P Morgan - which in turn contracted a call center in India to process the claims. Imagine that. Florida gives taxpayers' money to J.P. Morgan, which to make a greater profit uses that money to hire people in India, putting Floridians out of a job. Then out-of-work Floridians have to call India to get approved for food stamps. Now that's ironic.
The best place to see how privatization really affects average Americans may be in Chicago. Like many cities, Chicago has had a hard time living within its budgetary means, even while collecting one of America's highest city sales taxes: 10.25 percent. So two years ago Chicago decided to sell the city's parking meters.
According to Associated Content, William Blair is a close associate of Chicago Mayor Richard Daley. Selling off the city's 36,000 parking meters to a private investment group was his idea, but Blair also was instrumental in getting Daley to sell off the city-owned downtown parking garages back in 2006. And for his clever suggestions for taking revenue-producing, publicly owned assets and privatizing them (and for being a member of Daley's Kitchen Cabinet), Blair has received payments totaling $6.5 million.
Analysis After the Sale
Morgan Stanley eventually took majority ownership of the city's parking meters for 75 years, in exchange for a one-time payment to Chicago of just under $1.2 billion. According to Chicago Sun Times political columnist Carol Marin, almost immediately the cost of using a parking meter inside the Loop jumped to 28 quarters ($7) for a two-hour period.
But quickly increasing the cost of parking wasn't the only pain inflicted by the new owners. Many parking meters couldn't handle that much loose change in one day, and once full the meters would accept no more change; anyone who parked by one was doing so illegally. Yes, the number of parking tickets jumped so much they had to stop writing them while new meters that would accept credit cards were installed. Even more interesting is that LAZ Parking - also owned by Morgan Stanley - was responsible for collecting the coins out of the meters and issuing the parking tickets.
The meters were set to demand payment 24 hours a day and seven days a week, ending the free parking that enticed many families to downtown Chicago on Sundays.
Chicago's Inspector General analyzed the deal only after it was done; and on June 1, 2009, his report on the sale said officially that Chicago had gotten the short end of the stick. The report faulted William Blair's calculations of the 36,000 parking meters' present and future value: they were worth not a mere $1.2 billion, but more in the neighborhood of $2 billion. Seems Blair wrote the entire report from the investors' perspective, not from that of the real owners, the people of Chicago. The Inspector General concluded that the entire deal was "dubious."
It should be noted that Daley's friend Blair wasn't the only one who profited by suggesting and promoting this deal. The Mayor's former spokeswoman, Avis LaVelle, emerged from it with a new job - spokeswoman for Morgan Stanley's parking meter entity.
The Modern Highwaymen
By November the New York Times had shown the deal to numerous financial experts, who unanimously said, "Chicago could have made out much better in the long run had it just kept the meters."
Here's the net effect of that sale. Parking meter rates have quadrupled, and that was just in the first year after the sale went through. The lease still has 74 years to run. Chicago drivers are (and their great-grandkids will be) paying through the nose for the sins of those voters elected to govern the city's finances wisely.
Meanwhile, just a few miles away in Indiana, the state's major toll road was privatized a few years back. According to The Times of Northwest Indiana, "A combination of toll increases ... have [sic] marked the Toll Road's first three and a half years under private operation." That comment came out of a column published a year ago, reminding readers that tolls would increase by another 8.2 percent last summer. The rationale? The recession lowered the number of drivers using the toll road, so keeping profits constant meant that everyone still using it had to pay more.
And when summer came, it brought another surprise for the users of the Indiana Toll Road: a lawsuit against its new owner, ITR Concession, brought by a woman whose accident she blamed on their highway's poorly maintained condition.
The merits of her lawsuit notwithstanding, it's interesting that ITR Concession tried to get the lawsuit thrown out under the legal concept of government immunity from such legal actions. Really. A private, for-profit company buys up a publicly owned highway and then wants the same protection against lawsuits that government enjoys.
Principles vs. Profiteering
When Charlie Wilson left his job as head of General Motors in the early 50s to become our Secretary of Defense in the Eisenhower Cabinet, he had to divest of his stock in GM over conflict of interest rules. It cost Wilson over a million dollars in tax liabilities to accept the President's offer. But Wilson, like so many other wealthy Americans in those days doing public service after a long and successful business career, paid the price willingly.
Wilson said that America had been so good to him that giving back to the country that gave him everything was the right thing to do, including service to the country as a public servant. The long and impressive list of car men in this country who did the same thing for the betterment of America includes men like Big Bill Knudsen. He too lost millions when he left GM to run our weapons procurement during World War II.
Yet, in the early 70s - just two decades after Charlie Wilson forfeited millions to do public service at the end of his career - the system changed and no one noticed. Suddenly everyone was doing their so-called public service early in their careers, then jumping ship to private industry and making the big bucks because they were "government connected."
For example, look at the political career of Donald Rumsfeld in the 70s. After he left government he made a fortune in private industry because of his political connections, then returned to Washington. Open Secrets put his 2004 net worth at between $64 and $210 million. Being White House Chief of Staff in the Ford Administration just didn't pay that kind of money.
Government as a Business Piggybank
So, if you wonder why we pay so much for electricity, or why so many toll roads are now being built, or why no one in authority can put sanity back into the commodities markets - leaving us to pay far more for food and energy than market conditions justify - it's not just the Democrats' or the Republicans' fault. And it's not because we don't pay enough in taxes to offset our deficits.
It's because the political system now is geared toward insiders' using their influence to take over government's duties and responsibilities (parking meters, highways or even basic legislation) for their own or their clients' financial gain.
The reason so many publicly owned assets are being sold is not that private industry is more efficient than government. It's because repeating that Big Myth is a sure fire way to get the public to sign off on deals that any intelligent person can see don't serve citizens' long-term economic interest. In fact, typically it only takes months for the taxpayer to realize just how costly these deals will be.
Then again, we're a long way from the days of Ike and businessmen who felt it was their duty to serve our country. But they made their fortunes first, and often gave a great deal of it back in order to serve the country they loved so much.
© 2010 Ed Wallace
Ed Wallace has received the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Association. He reviews new cars every Friday morning at 7:15 on Fox Four's Good Day, frequently contributes articles to BusinessWeek Online and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF. E-mail: