National Rush to Privatize Public Works Loses Steam as Citizens Question Safety
By YOCHI DREAZEN and ANDREW CAFFREY Staff Reporters of THE WALL STREET JOURNAL
NEW ORLEANS -- For the past three years, New Orleans has been lurching toward hiring private contractors to upgrade and operate its municipal water and sewer system. The plan was to open bids after Christmas and award a 20-year, $1 billion contract by February.
Until Sept. 11.
Since then, one mayoral candidate has persuaded the City Council to call for delaying privatization because it "may pose a serious threat to the security" of the city water supply. Another is pushing a referendum that would allow voters to veto this and other big outsourcing contracts. "Sept. 11," says Councilman James Singleton, the referendum backer, "caused people to pause and ask themselves, 'Wait! Is this something we want to do now? Turn our water over to private concerns?' "
Over the past 25 years, the pendulum in economies all over the world has swung away from government and toward the market, competition and private operation of what once were deemed "public services." By the end of the 1990s, world governments had sold more than $1 trillion in assets to private investors. And a growing number of state and local governments had turned to private operators to run prisons, parking lots, ambulance services, public schools and social-services operations.
Even before the terrorists struck, the beginnings of a backlash were stirring. Since Sept. 11, the forward march of the market is stalling and, in some places, shifting into reverse.
If the shift endures, that Tuesday may prove to be a turning point in the relationship between business and government, comparable to the elections of Margaret Thatcher and Ronald Reagan that began a wave of privatizations and an ear of market ascendancy. This in turn raises questions about whether the prosperity of the 1990s -- so intertwined with the unleashing of market forces nearly everywhere -- will resume when the global economy recovers. The price of security, in short, may be tolerating more of the inefficiency of government and settling for slightly slower economic growth.
Unfriendly Skies
The clearest sign of change came last week when President Bush acquiesced to those in Congress, many of them Republicans, who argued that air travel would be safer if passengers were screened by 28,000 government employees, instead of private contractors.
This wasn't an isolated event. Talk of turning the U.S. Postal Service and Amtrak into shareholder-owned private corporations appears dead for now. So does the political appeal of expanding New York Mayor Rudolph Giuliani's move to let private ambulance companies respond to more 911 calls.
The Pentagon has temporarily shelved plans to farm out the back-office operations of its high-tech mapping unit. An antiterrorism commission headed by the chairman of the Republican National Committee, Virginia Gov. James Gilmore, says the federal government should build and own a plant to make vaccines for anthrax, smallpox and other diseases. "There's no market for it normally," he says. "Why would a private manufacturer want to go through the expense?"
Redefining National Security
The expansion of market forces into areas once seen as the domain of government was clearly helped along by a thriving economy. But the end of the 1990s expansion alone doesn't explain the public's embrace of a bigger role for government.
In the wake of Sept. 11, the very definition of national security is being expanded. Now, it includes getting to work safely and even shopping at the mall without fear of a terrorist attack. What's more, government workers, once caricatured for inefficiency, are being praised as heroes for their sacrifices on Sept. 11 and during the anthrax mail scare. "People noticed who was going up the stairs when others were going down," says John Donahue, who tracks privatization trends at Harvard's Kennedy School of Government. When President Bush threw the opening pitch at a recent World Series game in New York, he wore a blue New York Fire Department windbreaker.
The economic advantages of competition, privatization and profit-driven management weren't undone when terrorists steered airplanes into the World Trade Center. Several cities and states are proceeding with plans to turn government functions over to the private sector. Nashville, Tenn., which relies on private firms for garbage collection and emergency medical service, is pondering the privatization of emergency communications and maintenance of its 2,500-vehicle fleet. Three years after contracting out drinking-water operations, Atlanta is considering doing the same for waste water. Privatization, says Atlanta Mayor Bill Campbell "is an absolutely essential part of managing a city well."
Even some Democratic politicians scoff at the new attitude. "Have you ever met most government employees?" asks Chicago Mayor Richard Daley. "Just because you're a federal or civil-service employee doesn't mean that you're guaranteed to be a better employee than if you work for a private company."
But Americans, shaken to discover the U.S. is far less safe than it appeared, seem less eager to turn over government functions to business than they were a year ago. Gary, Ind., is still pleased that it turned its water-treatment facilities over to United Water Resources Inc., in 1998, but Mayor Scott King says such a move would be far more difficult today. "It was primarily done on an economic basis. It costs X and we could save Y," he says. "Post the 11th, you now have all of these other issues beyond simply the economics."
Saving money and improving worker productivity aren't as high on the public priority list as they were. If productivity grows more slowly, so too will living standards, as conventionally measured by wages, material possessions and other economic data. That may be offset, though, by the benefits of living with less fear of terrorism, an issue obviously important to ordinary citizens but hard to factor into economic cost-benefit analyses that drive governments to privatize.
The change produced by Sept. 11 came abruptly to the world of national security, where the market has been making slow, steady advances on the periphery.
Consider a Defense Department unit called the National Imagery and Mapping Agency that employs 8,000 workers turning satellite data into maps. To save money, the Pentagon has been planning since 1999 to shift the unit's telecommunications, printing and information technology work to companies owned by Alaskan natives. It planned to sign a 15-year contract by the end of September, cutting about 600 jobs and shifting many government employees onto private payrolls. On Sept. 18, however, the agency said it would delay the deal because of the "current crisis situation."
In the heyday of privatization, Presidents George H.W. Bush and Bill Clinton waved off warnings about national security and agreed to sell the government's uranium-enrichment operation. The business, now a publicly held company called USEC Inc., makes fuel for commercial nuclear power plants. It also acts as the U.S. government's agent for buying uranium from Russia to keep the material from being used for military or terrorism purposes.
Critics -- most loudly Joseph Stiglitz, chairman of Bill Clinton's Council of Economic Advisors -- warned of conflict between the U.S. goal of getting uranium out of Russia quickly and U.S. Enrichment's goal of finding the cheapest source. For the past three months, the current Bush administration has been considering altering the company's status as the government's exclusive agent in buying Russian enriched uranium. The review, which follows pressure from other firms that want a piece of the business, is being led by Harvard University economist Richard Falkenrath, a longtime U.S. Enrichment critic now serving on the National Security Council staff.
To believers in the market, the U.S. Postal Service exemplifies the shortcomings of a government monopoly, and there has been mounting interest in privatizing it. One month before anthrax-laden letters appeared on Capitol Hill, Rep. Dana Rohrabacher, a California Republican, approached the Bush administration with a plan to transfer the post office's assets to its 800,000 employees and require the company to compete with private services. William Henderson, postmaster general from 1998 to 2001, endorsed a similar plan on Sept. 2.
But with postal workers on the front line of the war against terrorism and the postal service seeking new taxpayer subsidies, the plan is all but dead. "It's pretty clear that it would be much, much more difficult to do something as big as privatizing the postal service," the congressman says.
In New Orleans, the lure of privatization was the government's inability to finance $500 million in sorely needed improvements to a water and sewer system that routinely leaks untreated waste into Lake Pontchartrain.
Private water companies say they can cut the cost of operations and maintenance of the 1,225-worker system by between 10% and 40%. The cuts would free funds to pay back new bonds for infrastructure improvements, the companies argue. "There was a fiscal problem before [Sept. 11], and it doesn't get better now," says Andrew Seidel, chief executive of U.S. Filter Corp., one of the likely bidders. "So my view is: Everybody take a deep breath. We need to introduce some big savings into the system. Privatization will free up economic resources to be used in other ways."
The privatization scheme ran into opposition before the terrorist strike, even though the alternative is likely to be a major reorganization of the utility and possibly a rate increase. Two city council members seeking to succeed Mayor Marc Morial say they oppose the "process," though not the concept. The pair complain that the mayor rushed to award a contract before he leaves office next year. Mayor Morial rejects the accusation. "We've been looking at this for two years," he says. "I don't know what clock they're looking at."
One issue with political punch: Three likely bidders are affiliates of foreign companies. U.S. Filter is owned by Vivendi Environnement, a New York Stock Exchange-listed company that is 63% owned by France's Vivendi Universal. Another bidder, United Water Resources, is wholly owned by French conglomerate Suez. A third is a joint venture between the British unit of a German utility, RWE AG, and a U.S. engineering firm, CH2M HILL Cos. of Greenwood, Colo.
The foreign-ownership issue adds resonance to the appeal of a group of city employees who are offering their own bid to run the utility. The foreign companies "have other allegiances," says John Wilson, chairman of the employee group. "These companies are being bought up by other companies. We are not going to know who we're dealing with one month to the next."
A recent Monday night found Mr. Wilson before a gathering of local pastors and churchwomen in the low-ceilinged sanctuary of the First Evangelist Missionary Baptist Church, a humble wooden structure in a worn-down neighborhood west of downtown. After an hour of prayer and gospel singing, Mr. Wilson delivered a simple message: "We're looking at maintaining local control," he said.
Private water companies take umbrage at the questioning of their loyalty. Nearly all of the 2,300 employees of Suez's U.S. operations are American, James Creedon, vice president of United Water Resources, says in an interview. "I think they would be a little bit insulted by the questioning of their patriotism, just because we're owned by a French company." The ownership issue, he says, is "thrown out by people who don't want to debate the issue: Can you have a private company do this better?'"
But Mr. Wilson's message strikes a chord. "I think government ought to be involved, especially now," says Rev. Warren Taylor Sr., First Evangelist's pastor. "We want things to be here at home -- not owned by somebody outside making money off of us."
Standing in the back of the church in a blue, one-piece worker's jumpsuit was Kerry Watson, a quality-control specialist for a local engineering firm and a Sunday-school teacher. He said he knows that the private sector can deliver services more efficiently than government. But he worried that private companies may not place as high a priority on public safety.
"They have shareholders. Is it going to cut into their profit margins?" he wondered aloud. "Before, Sept. 11, I wouldn't have given that a second thought."