Home > Uncategorized > The Privatization Paradox: Deferred Maintenance is “Profitable” for Shareholders… or Taxpayers

The Privatization Paradox: Deferred Maintenance is “Profitable” for Shareholders… or Taxpayers

March 8, 2017

I read two articles in sequence this morning that brought to light a paradox of privatization. One article by Mitch Smith of the NYTimes described the decision of the City of Omaha to “reclaim” a pothole riddled street by converting it into a dirt road. The other article by David Hetherington of the Guardian described the sweeping privatization program underway in Australia.

Here’s the paragraph from the NYTimes article that describes why the city of Omaha decided to “reclaim” some of it’s roads:

Omaha’s most problematic streets were mostly built by developers decades ago who skimped on costs by paving with asphalt instead of concrete, and by forgoing sidewalks and sewers. In other cases, Omaha annexed suburban-looking neighborhoods with roads not built to city standards.

For years, an uneasy truce persisted: Public works crews would fill potholes and perform other maintenance work on those roads, but insisted that residents pay if they wanted repaving. Those streets, labeled “unimproved” by the city, account for about 6 percent of Omaha’s roads.

Then repair costs escalated, and potholes started going unfilled. On particularly troubled blocks, the city converted the asphalt surface into a gravelly dirt, a peculiar sight in middle- and upper-class neighborhoods in the center of a city. Only a small fraction of them, less than 10 miles, have been reclaimed….

Residents have responded with angry phone calls, neighborhood meetings and at least one lawsuit. But Todd Pfitzer, the city’s assistant director of public works, said Omaha’s policy on unimproved roads is a matter of equity. When the houses were built two generations ago with subpar streets, he said, the builder and homeowner saved money.

“Now you’re asking the rest of the citizens to come in and essentially subsidize you and rebuild your road,” Mr. Pfitzer said. Bringing all of Omaha’s unimproved streets up to city code would cost about $300 million, officials estimate.

There is another perspective on this. The City of Omaha’s decision to annex the “…suburban-looking neighborhoods with roads not built to city standards” undoubtedly helped their balance sheet at the time. My guess is the city government either did not take the difference in road construction standards into account or ignored it altogether. It was not a bill they needed to pay at the time, and the added revenues from having the “…suburban-looking neighborhoods” on their tax rolls would enable them to fund things like the “busy downtown with new developments and a glimmering baseball stadium that hosts the College World Series” described later in the article. Fixing infrastructure is expensive and doesn’t “glimmer”. And who wants to pay taxes to fix the road in front of someone else’s house?

David Hetherington’s Guardian article describes Australia’s decision to expand privatization, using the recent decision to privatize public disability support care as well earlier decisions to privatize hospitals and electricity as the lens to view all of the various areas that are being commoditized. Mr. Hetherington notes the many areas Australia is privatizing public services:

These are some of the areas, but not all. Tafe, cleaning services, prisons, CSIRO, the ATO, land titles registry, housing, home care, jobs services: the list of services being privatised or outsourced is far larger than the community would believe.

Many not-for-profit NGOs that participated in the inquiry raised significant concerns about privatisation and the marketisation of services, arguing that competition and contestability do not work in services that involve caring for people. They talked about targeted services being lost, about race-to-the-bottom tendering and a lack of funding making it difficult to provide the services the communities need, of being swamped by the for-profits, and that increasingly they are forced to behave like for-profits to survive.

The hearings also brought out the sense of loss that communities feel when vital services are privatised, when institutions that fulfil a deeply human function: teaching, caring for people at their most vulnerable moments, are forced to behave like businesses, whose primary concern is maximising profit, not focusing on performing tasks that rely fundamentally on empathy. We heard that once these services are privatised, it becomes so much harder for communities to hold anyone to account for the standard of services. The people who end up bearing that responsibility of care are primarily women – and it shouldn’t be theirs to carry alone.

The common thread between the Omaha experience and Australia’s movement toward privatization is this: in both cases the politicians are looking for solutions to long term problems that do not require any immediate financial sacrifice on the part of citizens or the businesses, neither of whom want to see any tax increases whatsoever. In short, both taxpayers and profiteers receive a financial benefit when public services are privatized. Before they were annexed by Omaha, the nearby sprawling communities with “…suburban-looking neighborhoods” used their relatively lax standards to entice developers to build home on “roads not built to city standards“. And, as a result, as Mr. Smith noted, these subpar streets built two generations ago saved the individual builder and individual homeowner money. Now the taxpayers collectively have to cover the costs of these lax regulations or… they can ask individuals to pay for them if they have the wherewithal to do so. And in Omaha, here’s the result:

Bruce Simon, the president of Omaha Steaks, a major employer here, sued the mayor and the city last year after finding out that the asphalt road in front of his $2.3 million house was scheduled to be pulverized into gravel. He dropped the lawsuit after Ms. Stothert helped negotiate the 50-50 payment deal.

“I got a road,” said Mr. Simon, who paid $5,200 to cover his share of the smooth new asphalt surface. “Did I like chucking out the five grand? No. Did I like spending the money with an attorney to deal with it? No.”

About a mile away, on Leavenworth Street, Ms. Amoura and her neighbors are waiting to hear from City Hall about whether they will get a deal similar to Mr. Simon’s. But on other reclaimed streets, residents have scoffed at the notion that they should have to choose between living on gravel and paying for new pavement.

Omaha’s experience is a classic case of what happens when the attitude of privatization prevails over the attitude of communitarianism: the wealthy get paved roads, everyone else lives on a dirt road.

I keep waiting for some politician to explain to voters that government provides a means of collective gain and collective cost-sharing. Didn’t the Omaha taxpayers collectively benefit for two generations from the additional tax base that the annexation provided? If so, why shouldn’t the Omaha taxpayers expect to absorb the costs to improve the infrastructure of the communities they annexed?

One other “selling point” of privatization is the notion that businesses can operate more efficiently than the government, especially if the business does not have to face the regulatory hurdles. One of the primary reason business can deliver goods more cheaply is what Mr. Hetherington referred to as “race-to-the-bottom tendering”, that is paying the lowest wages and offering the fewest benefits possible to workers. When governments require fair labor wages and governments compensate their employees well and provide them with decent benefits and pensions, many taxpayers complain. Those same taxpayers are silent, though, when a corporation like Walmart intentionally underpays employees and advises them to seek government benefits, benefits that are paid with the same dollars that COULD have gone in the pockets of one of their neighbors who worked for the local government. Low bidders who operate with the Walmart mentality often under compensate their workers at the expense of taxpayers but get away with it because it is an indirect cost. And here’s what is particularly vexing: if a bidder does NOT operate with the Walmart mentality they will find themselves without work. And so we have job market full of temporary workers taking whatever work is available at whatever wage a company is willing to pay: a race-to-the-bottom tendering that undercuts employees faith in their employer and the financial well-being of the community.

The solution to all of this is more government regulation, larger government work forces, and higher compensation for every able bodied individual willing and able to work. People who complain about private sector compensation packages often overlook one fact: the agreements negotiated in the 1960s and 1970s that serve as the baseline for bargaining today reflected the corporate compensation routinely offered to employees when the contracts were written. One consequence of the race-to-the-bottom tendering is that today’s compensation for public employees is often superior to the packages offered in the private sector… and that feeds the anti-government resentment. The best way to stop the cycle of resentment is to restore the tax structures that were in place at that time, tax structures that required high wage earners to pay higher taxes and had regulations in place that prevented the off-shoring of corporations in order to avoid taxes. A shift in that direction will require a major shift in the public’s thinking, a shift that will take time. But one benefit of observing the impact of privatization on Australia and, to a lesser degree, Omaha is that we can learn frothier mistakes. Let’s hope we do so!


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