In Baltimore this summer, three asset sale debates surfaced all at once. The Mayor has a longstanding plan to sell at least three city-run parking garages to finance recreation centers. Council President Young has countered it with a proposal to sell the Hilton, the city-funded hotel meant to support the Baltimore Convention Center. Then there is debate about a more hidden asset, a 740-mile long underground conduit system for electric and communication cables. Lastly, the biggest and maybe stealthiest deal involves selling the city’s public housing to private buyers.
Government versus free market?
The subject of debate is neither new nor original. Cities around the world, acting more and more like asset managers and less as advocates of public interest, experiment with selling what previous generations assembled in order to ensure that the public is served, recognizing that private profit-centered interest may not do so. The assets vary, but the debate is the same whether it is public works like water, infrastructure like roads, bridges, or rail, or even housing.
Flush with the quick cash, some cities declared themselves debt free this way. Those who always want to see less government and more free enterprise cheer, advocates for the poor or economists who warn about bad deals or long-term results are cast as socialists, who, as everyone knows, want government to run everything and whose endeavor clearly failed in a long line of experiments reaching from the Soviet Union to Cuba.
US President Ronald Reagan and British Prime Minister Margret Thatcher were especially successful at moving the political discussion quite squarely into these terms.
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| Often times the private side looks rather shaky |
Purpose, outcomes and metrics
The metrics and criteria with which to evaluate and measure the benefits or cost of such transformations are a wild potpourri, "apples and oranges", ranging from economic arguments to social justice reasoning and from bean counting to quality of life arguments.
To bring order to such a cacophony, it is useful to sort out the issues a bit, for example by asking if the sale pertains to an asset of a public interest (water) or one that is typically done by the private sector anyway (a hotel). Another useful question is focus on the original purpose of the asset, and to ask if the sale would further this purpose or is suggested to meet other ends. These simple questions help tremendously in achieving clarity.
For example, if a cash strapped city is desperate to find some money to meet an urgent need for which mayor and council can't find funding (as is the case with Baltimore’s proposed sale of parking garages to build recreation centers), the question posed is quite different from whether or not private ownership is desirable in its own right (private entities may run parking more efficiently) or if the sales price will really offset the annual loss of revenue. In the clutter of anti-government rhetoric, such arguments are often commingled, and reasoning is obscured by the ideological smoke screen that proclaims that the private sector is always more efficient. This we know is hardly true, even if "efficient" is only narrowly defined to mean “cheapest”, let alone if broadly defined as by Paul Starr:
“Democratic politics, unlike the market, is an arena for explicitly articulating, criticizing, and adapting preferences; it pushes participants to make a case for interests larger than their own. Privatization diminishes this public sphere—the sphere of public information, deliberation, and accountability. These are elements of democracy whose value is not reducible to efficiency.”
To summarize: if decision of the sale of an asset makes sense, the metrics could be strictly fiscal, or they could revolve around the effectiveness with which the purpose of an asset is achieved. That purpose may not always be quantifiable.
Success and failure of past asset sales
Luckily, since the selling of public assets has been a widespread strategy at least since Reagan and Thatcher's selling bonanza in the 80s, it is relatively easy to track the long-term results of those sales and measure if they lived up to the expectations.
By 1987, the Thatcher government had shed more than $20 billion in state assets, including British Airways, British Telecom, and British Gas.(HBR)The track record of those transactions is anything but stellar, especially considering the fractured sales of British Rail.
Analysis from The Independent newspaper in 2013 showed that Britain’s privatised railways has led to the most expensive train fares in Europe. These fares are increasing even further as privatised train operators seek higher revenue. Privatisation has not meant the end of taxpayers’ support. Since privatisation the government has subsidised different companies that separately own the track, trains and infrastructure to the tune of £3 billion (€3.4bn) a year. In other words, the state is subsidising private entities to take profits out of the railway system. It is estimated that privatisation has resulted in a cumulative loss of £11 billion (€12.6bn) of public funds, around £1.2 billion (€1.4bn) per year. (Cate Long, Reuters)It is astounding, then, to see the Economist in January 2014 still espousing large scale sale of federal assets. Some may shudder at seeing national lands included in the Economist's argument since obviously the whole point of having those owned by the government is to protect them from exploitation.
America’s federal government owns nearly 1m buildings (of which 45,000 were found to be unneeded or under-used in a 2011 audit) and about a fifth of the country’s land area, beneath which lie vast reserves of oil, gas and other minerals; America’s “fracking” revolution has so far been almost entirely on private land.Clearly, the sale of surplus buildings belongs to a different category than the sale of drilling rights in National Parks. If the Feds were able to sell the abandoned former Social Security complex on Baltimore's Westside to a private entity for redevelopment, that would be a great win-win for public interest (proceeds from the sale, no more operating cost for a vacant facility, a new potentially tax producing use and added activity in the area).
The matter becomes much less clear, for example, if one wants to judge the potential sale of the city's public conduit system under Baltimore's streets to BGE, the former municipal utility company, itself a past subject of privatization and now owned by Constellation/Exelon. Currently, the city builds, maintains, and owns hundreds of miles of concrete channels as part of the public utility system. Instead of direct burial, cables for telephone, communication, and TV run in these pipes that allow for the adding or replacing of lines from manholes without digging up the streets. In an age in which communication infrastructure is a valued asset, the City stands to have a steady source of revenue from those who depend on running their lines under the street, since overhead lines are prohibited and wireless technology still doesn't offer the same bandwidth, speed, or reliability as copper or fiber optic lines. As a commentary in the Baltimore Business Journal correctly observes, "BGE's $100 million offer may be a bad deal for Baltimore". W
After Baltimore City wrested its water and sewage system away from the private Baltimore Water Company in 1854, the municipal system expanded and made improvements, so much so that by 1914 the city crowed about its “finest in the world” new sewer system in a brag book aimed at tourists and business owners. (Begin of a story in the Baltimore City Paper about privatization)In the case of conduits or parking meters, the matter is mostly one of comparing long-term cost and benefits with the short-term proceeds from a sale. Much more vital interests are at stake, when it comes to essential public goods like water or electricity. It is now typical that electricity is made and distributed by private corporations, there has been considerable debate about whether the "liberation" of the California electricity market was the cause of the brown-outs that followed. European cities in particular went on a selling spree that included even their waterworks. Water is not only a vital resource that each household needs on a daily basis, its abundance is also increasingly threatened. Each house has only one pipe and one system where water is prepared and distributed for public use, i.e. there is no real opportunity for competition. This is also true to some extent for electricity, only one service comes to the house, only one meter per household and only one distribution network. So while energy companies can compete in the production of electric power that gets fed into the system, somebody is stranded with the upkeep of the system itself. Just like in the case of British Rail where one company owned the tracks and the other the trains, the one holding the bag of the fixed asset is stuck with the bad end of the deal. The result is all too easy negligence in the maintenance of the system, an accusation loudly made by BGE and Pepco customers who suffer from frequent power outages due to downed lines.
As Cate Long describes, these are the reasons why
Water privatization in Europe is actually going in reverse as France and other nations are remunicipalizing their water systems as they return the systems to public control:The special case of housing
In Paris, the transfer of water services from private companies to municipal authorities was a major success, resulting in savings of €35 million in the first year and improved service delivery. Similar trends of ‘re-municipalisation’ have taken place in Germany, Finland and the UK (where privatisation has failed); as local public authorities re-establish control over energy, forests, water, transport, refuse and recycling sectors.
Maybe the most complicated issue is housing. Would Baltimore public housing residents be better off if the city's housing authority, one of the largest in the country, would sell their city owned "projects" to private enterprises with a forty year commitment to make them only available to qualifying low-income tenants? No doubt, this public landlord doesn't take good care of their housing stock, and one has to wonder if the rents are ever even reinvested into the buildings. So after years of such neglect, the authority is now in a pickle because repair needs and upgrades have accumulated to levels that the agency cannot afford without a major shot in the arm. This condition is somewhat surprising since Baltimore Housing has divested itself from a large amount of public housing before the turn of the century when it imploded five large scale high-rise buildings with hundreds of units in each development and replaced them with mixed income, low-rise communities designed, constructed and paid for by private developers. Many consider these HOPE VI federally supported projects as a success fiscally as well as socially, even though the total number of affordable units has been reduced while the demand for affordable housing has generally increased.
Like New York, cities across the country are losing affordable housing at a faster clip than they can reasonably hope to preserve or build it. If one of the most ambitious housing plans in the U.S. can’t create even a fraction of the affordable housing a city needs, that doesn’t bode well for places like San Francisco, Austin, and anywhere else where housing demand is outpacing supply. And it exposes why, for reasons largely outside of local officials’ control, shrinking affordable housing in American cities remains an almost impossible problem to solve, at least without something that may be utterly impossible right now: an ambitious national housing policy. (Slate)However one wants to judge HOPE VI, it clearly reduced the number of available affordable housing units in the cities were public housing was demolished. The next step, selling public housing outright under a policy named "Rental Assistance Demonstration" (RAD) is therefore somewhat vexing as a policy coming out of HUD under a Democratic President with liberal leaning. Baltimore and San Francisco are testing grounds for this policy that sells public housing to private for profit developers who commit in two 20 year contracts to renting to qualifying low income renters. Instead owning and managing publicly-owned apartments and renting them to low income families for a low rent, the RAD system shifts the building stock and management to private entities which charge market rate rents. A low income renter pays 30% of his or her income as rent, the rest comes from the local housing agency and goes directly to the private management company as part of a comprehensive strategy of converting public housing to vouchers. Montgomery County, MD is selling all its public housing this way. As described by HUD in its case studies, the solutions seems outright magical.
HOC (the Montgomery County housing agency) is now converting its entire public housing stock to long-term Section 8 assistance under RAD. To preserve access to affordable housing, HOC needed a way to leverage the value of its current assets—namely, the value of its land, which has increased substantially over the last several decades.[...] Altogether, HOC expects to raise $108.6 million in private debt and equity through its RAD conversions – a ratio of $14 dollars in non-public housing funds to every dollar in public housing funds. When the RAD conversion is complete, the agency will preserve 877 public housing units (converted to Section 8 project-based assistance) and will have developed about twice that number of new affordable and market units. By combining substantial rehab of some properties with new construction and transfers of assistance, HOC is able to take advantage of the underlying value of the land and reposition its public housing portfolio under RAD.While RAD is a new policy name, the idea of having private entities manage low income housing certainly is not (just think "slumlord") and the track record of many management companies is not any better than that of the public housing agencies with the main difference, that the private companies are frequently even less accountable.
One of the more spectacular cases in Baltimore may be the nearly 1000 unit Uplands Development which entirely owned and managed by Maryland Properties, a private company owned by a fraudster who had to serve time in the federal penitentiary in Allenwood for skimming money from several housing complexes he managed. Once the company failed to pay their mortgage the three story garden apartments situated in a pleasant park like setting went to HUD receivership and were slowly emptied and boarded up, greatly reducing the availability of affordable units in the area and stressing the already ailing nearby shopping center further. After HUD disposed of the units and gave them in a "reverse privatization" back to the city , another lawsuit ensued between HUD and City about the replacement of the 50% project based section 8 units in the development. Today, the area is partly redeveloped with the same formula as the HOPE VI redevelopments. The end result: Only a tiny fraction of the previous number of affordable units.
Who owns the city?
After doing all the accounting and all the cashflow calculations, after discussing efficiency and cost we come to this last big set of questions: Who owns the city? Who controls what and who has a say over what happens to the people? What is a city for?
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| The municipal Hagerstown utility is better for its customers than the big corporate utilities around |
These questions matter, for each time an asset, be it conduits or be it public housing, has been removed from the ledger of a city, it has been removed from the control of the mayor and the city council, i.e., the representatives of the people. Instead, oversight and control is now given to some type of agency. Even if the agency is controlled by elected officials, that control is at least one step further away from the people.
Cities are not companies, their purpose is neither profit nor production; their purpose is much bigger. The City's purpose is to be for all those that decided to select it as their home, workplace or destination a decent place where each resident can be the most they can be. Or, in the words of Aristotle as quoted by Joel Kotkin in his essay "What is a City For?"
“A city comes into being for the sake of life, but exists for the sake of living well” (Aristotle)Quadrennially all get to say if they agreed with the way it was done or if better methods would be in order. This manner of people control maybe imperfect and fraught with inevitable failures, but is is far more preferable to no control at all.
Somewhere along the way most have forgotten the fundamental purpose of cities to be quality places for people and have taken refuge in much less encompassing concepts such as the city as an assortment of good buildings, or of good transportation, lucrative businesses or good entertainment. All this exhibits no more aspiration than one would have towards an automobile or a bicycle, that it is a well oiled machine that functions without breaking down. That basic concept is essential, but it is not good enough! To enable "living well" more aspiration, excitement and hope is needed. For residents to really care, to have "skin in the game" it is vital that there are public assets and goods for which citizens care and for which they are responsible.
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| Demonstrators in front of Baltimore's City Hall acting on a rumor that the waterworks may be sold to the private multinational Veolia (August 2014) |
The small town of Hagerstown, MD has its own municipal water, gas and electric companies (Hagerstown Light Department, HLD, 17,500 customers), a self-supported City of Hagerstown Enterprise Fund utility, with total costs for operation derived through rate structures. Being publicly owned means being publicly aware. Customers are the owners. If the power goes out, as it inevitably sometimes does, the folks who can fix it are your neighbors, you may stand next to them in the grocery store. The electric rates are not only lower than any other supplier in the region, the municipal grid is also more reliable. Residents in Hagerstown love their utility company, imagine that!
Selling any public asset except the most rotten ones tends to hollow out this urban compact and the very core of the city as a protective and enabling system for people.
Klaus Philipsen, FAIA
edited by Ben Groff
Links and Resources
Does Privatization serve the Public Interest? (Harvard Business Review 1991)
Europe's Privatization isn't a Model for the US (Reuters Blog)
The Private Sector is the Answer to America's Transportation [...]
The right way to sell public assets (Urban Institute)
The return of the Private Toll Road
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