PRIVATE: Businesses Doing Public Tasks : Cost-Saving Effort : More Private Firms Doing Public Tasks

Max Boyer and his three buddies weren’t exactly pleased when President Reagan fired them and other striking air traffic controllers in 1981, but today they salute him for creating new careers in a business that’s awkwardly called “privatization.”

The four are principals in a Georgia company formed to operate the small airport control towers that the government is increasingly turning over to private hands as a way of saving money. The company has already won two such contracts, plans to bid on dozens more this year and sees clear skies ahead.

“As Reagan knows, private firms have an incentive to operate as cheaply as possible, and they don’t have all those levels of management to drive up their costs,” Boyer says. “It seems like common sense that the government should turn over jobs like this wherever they can.”

Began in 1970s

Such entrepreneurial zeal is a driving force behind a new nationwide spurt of “privatization”--the turning over to private firms of government programs, assets and functions. The first round began in the late 1970s, when a wave of revenue-limiting measures such as California’s Proposition 13 forced governments to search for cost-cutting measures.

In this latest round, cost-cutting pressures are also a factor, along with the ambitions of entrepreneurs like Boyer, and the apparently growing appeal of the conservative notion that almost any public task can be better performed in private hands.

Now, profit-making firms are handling not only the “housekeeping” tasks that have long been contracted by government--such as garbage collection and road repair--but also such functions that touch directly on matters of civil liberties, life and death, such as corrections, firefighting and air traffic control.

Corporations Involved

And the firms involved in this business are no longer only small companies, but in some cases sprawling publicly owned corporations, with financial assistance from major Wall Street institutions. They are eager with anticipation as they watch the Reagan Administration accelerate federal privatization efforts, and cut federal aid to state and local governments in a way that will force them to turn to private firms to reduce costs.

The most vigorous promoters of privatization are such conservative research centers as the Reason Foundation and the Heritage Foundation, where some analysts contend state and local governments could cut spending 75% by a full delegation of public programs. They say the federal government could cut spending by 40% by delegating to the private sector Medicare and Social Security--in fact, most programs but defense and those that distribute money directly to the poor.

In Ronald Reagan’s conservative revolution, “it’s the next wave,” asserts Peter J. Ferrara, a former White House policy analyst and Heritage Foundation theoretician.

But liberals, too, have been smitten by the appeal of private-sector efficiencies. New York Democratic Sen. Daniel Patrick Moynihan has proposed legislation to turn over the federal direct-loan programs to private hands, because, he says, the U.S. government has neither the skill nor the will to dun delinquent debtors. Among these are loans to farmers, students and small businessmen.

Critics, meanwhile, worry that such steps mean an abdication of government responsibility that can reduce services for the society’s wards, take jobs from public employees, and open the door to abuses by private firms. For example, complaints are rising from civil liberty and minority groups that profit-making corrections firms are cutting corners in their handling of prisoners and alien detainees.

Critics, notably including public employee unions, contend also that private firms can do the job cheaper only because they pay low wages, offer services in select, profitable areas and do not strive for other social goals, such as minority hiring or small business contracting. They assert that companies may go out of business and leave government in the lurch.

Despite such objections, ever more public functions are proposed for private operation. “Today, almost everything’s up for grabs,” says Harry P. Hatry, an analyst with the Urban Institute in Washington, who estimates that as much as 10% of what were traditionally public activities currently may be handled by private firms.

The trend is strikingly illustrated in the proliferation of companies since 1980 that offer to provide services that have been long been the exclusive province of government.

Companies Increasing

Since that year, 11 private corrections companies and more than two dozen private firefighting companies have begun operations, say industry groups; in 1980, there were almost none in either category. At least eight private companies operate air traffic control towers, up from four in 1980, according to industry officials.

More than a dozen companies have signed or proposed deals to build, own and operate municipal waste water treatment plants, all in the last year and a half. Six such contracts have been signed, at least 10 more are in negotiations, and many other cities are considering such moves.

In areas where local government has relied for years on private contracting, such reliance has increased. The share of U.S. cities contracting for garbage services grew to 33% in 1983, from 22% in 1976, according to a National Science Foundation study.

Contracting has been particularly pronounced in the South and West, in part because there are fewer unions to resist the trend. Los Angeles County, despite union membership of most public employees, signed 442 new contracts worth $118 million between 1980 and the end of March. The county maintains the contracts have saved $62.1 million since 1980, a small sum compared to the county’s current $6.2 billion budget.

The Reagan Administration seemed to retreat from its early enthusiasm for privatization in 1982, after public opposition stymied plans to sell off federal weather satellites, and a vast inventory of government lands and buildings. Congress feared that private firms might jeopardize international weather agreements, and the prospective sale of lands and buildings drew criticism from ranchers and environmentalists. But if the Administration’s efforts since received less publicity, they have been substantial, and are increasing.

Federal Contracting Up

Between 1980 and 1984, federal contracting for commercial services grew to $183 billion from $110 billion, or 66%. (In the same period, the federal budget grew 45%.)

Federal officials last fall adopted new rules that make it easier to replace government functions with contract services, and predict contracting and other privatization efforts will save $200 million a year by the end of the decade.

Meanwhile, the federal government is negotiating to sell Conrail, the rail freight line, and Landsat, the weather mapping satellite. It has contracted for the detention of illegal aliens, pushed to put veterans in non-VA hospitals to cut costs, and is experimenting with plans to sell public housing apartments to tenants in hopes that private ownership will improve the projects’ maintenance.

The federal government began turning over control tower operations at small airports in 1981 under a program in which federal funds are provided to local governments or airport authorities, which in turn contract for the companies’ services. Already, 13 contracts have been let, and officials expect to bring the number to 130 within the decade.

The average cost of a one-year private contract is about $150,000, compared to an average of about $220,000 for Federal Aviation Administration operation, say officials. The chief reason for the savings are the private firms’ lower salaries, in some cases below $10,000 a year for controllers; FAA salaries begin at $17,000 and top out at $32,000.

Part-Time Controllers

Private firms are also free to hire controllers for part-time work that would be prohibited under federal regulations, FAA officials note.

In such contract operations, “we’ve done a lot already, but we’d like to do a lot more,” says Joseph R. Wright Jr., deputy director of the Office of Management and Budget. “We would prefer to compete with the private sector as little as possible.”

Among the most fervent supporters of the trend are businessmen to whom privatization carries the strong aroma of opportunity. After a recent news report about the government’s privatization drive “we literally had businessmen flying out here from California, expecting to leave Washington with the keys to Yellowstone,” said a budget office spokesman.

In addition to asset sales and the contracting of services, the federal government is leading the drive to privatization with government aid cuts that have forced state and local officials to turn to private firms to save money. Many observers expect future cuts in federal aid will speed this trend.

For example, the private waste water treatment industry was born two years ago after the federal government began phasing out its huge program of grants for plant construction. Already, the program has been pared from a peak funding of $4.5 billion a year to $2.4 billion.

Variety of Savings

Despite the cuts, federal clean water rules have not been eased, and thousands of U.S. towns and cities are expected to consider the private plants because of the variety of savings they offer. Capital is relatively cheap, because the municipality provides the contractor’s funds by floating industrial development bonds at favorable rates.

Advocates assert that private firms can take advantage of investment tax credits and accelerated depreciation, do not need to comply with federal minimum wage or minority hiring and contracting rules, and can cut construction time in half, to two years.

“We’re seeing the blossoming of a real industry here,” said Harvey Goldman, partner at the Arthur Young & Co. accounting firm in New York, which has acted as a consultant on several such deals. Goldman acknowledges that private plant deals are attractive partly because of the federal tax breaks, but notes that the plants pay local property taxes, unlike government-owned facilities.

Among the active promoters of the new industry, as well as the major accounting firms, are such municipal bond underwriters as Shearson Lehman Bros./American Express, E.F. Hutton and Smith Barney, Harris Upham & Co.

Likewise, private mass transit companies have been buoyed by cutbacks in federal mass transit operating aid, which the Administration dropped to $870 million this year from $1.1 billion in 1980, and intends to eliminate altogether. The federal mass transit agency opened a new Office of Private Sector Initiatives, and last December adopted a rule requiring transit agencies receiving public operating funds to accept bids from private firms for new or reorganized routes.

Critics’ Concerns

As these efforts continue, critics worry about how well the private firms will perform in handling their new and sensitive roles in corrections, medicine and social services. While the private role is too new to have been exhaustively studied, critics contend some evidence suggests concerns may be justified.

For example, the Florida Justice Institute Inc., a corrections advocacy group set up by the state bar association, has sued a Pennsylvania jail health services firm for allegedly declining to provide costly treatment to a prisoner with cancer who subsequently died. The group is also suing a company that trucks inmates from prison to prison, alleging that it harmed prisoners’ health by keeping them shackled in trucks for weeks-long cross-country trips.

“The 19th Century was a time when private companies handled mental health, prisons, schools--and it abounds with examples of the way profit-making firms cut corners to save money,” said Michael Walzer, of the Institute for Advanced Studies in Princeton, N.J.

Close regulation of such enterprises should ensure that they provide necessary services, but critics note it also drives up the costs that private operation is designed to reduce.

Savings Amount Disputed

While few critics would argue that private firms cannot perform some tasks more cheaply than public agencies, many dispute the advocates’ contentions that private control generally cuts costs one-third to one-half.

Officials of public mass transit agencies, for example, ask how private bus and van companies will make profits now when so many went bankrupt in the 1950s and 1960s.

“Public agencies took over precisely because private companies couldn’t compete against the automobile,” said Jack R. Gilstrap, executive vice president of the American Public Transit Assn. and one-time head of the Southern California Rapid Transit District. Large-scale privatization of mass transit would bring “rounds of service cuts, increased fares, and lost ridership, until we’re back where we were,” he predicted.

There is also skepticism in the financial world about the profitability of many of the companies that have dived into some of the newly privatized areas, such as corrections and firefighting. If the recently spawned firms find profits elusive and go bankrupt, governments may regret that they have delegated such public functions, the skeptics point out.

Among the companies offering correctional services are such heavyweights as RCA Corp. and Control Data Corp. The new firefighting companies include Wackenhut Corp., a $280-million-a-year security services firm, while Parsons Corp., the Pasadena industrial construction firm with $840 million in annual revenues, pioneered the business of private waste water treatment plants.

Profitability Uncertain

But despite such impressive entries, it will take years to establish that these industries can be consistently profitable, said William Glastris, of the Chicago venture capital firm of Golder, Thoma & Cressey.

“We’ve looked at this as close as anybody, and we’re not sure how much money there is to be made,” he said.

Legal liability is among the risks, since the courts have yet to rule on such points as who should be sued if a privately employed guard hurts a prisoner, Glastris said.

The vulnerability of the private waste water treatment industry was demonstrated in 1984 changes in U.S. tax laws that set limits on the amount of federal tax-exempt industrial development bonds that municipalities can issue.

Critics, such as those at the public employee unions, also like to point to cases of contractors who have abused the public trust. For example, they point to the well-publicized overcharges by defense contractors and the conviction of road building contractors after the U.S. Justice Department’s 1983 uncovering of a nationwide bid-rigging scheme.

Displacing Employees

Union critics, such as those at the American Federation of State, County and Municipal Employees, also charge that much of the savings from contracting result from displacing public employees with lower-paid private ones.

The wage gap was illustrated in a recent study by Ecodata Inc., a New York research firm, that compared equivalent public and private services in 10 Los Angeles County cities. The study found cities paying janitors an average $1,234 a month, and contractors paying them an average $881.

The study, one of the few rigorous case studies of contracting, generally bore out the contentions of private services advocates. Ecodata found contractors did the job cheaper in seven of eight services, and concluded there was no significant difference in the quality of work.

While the debate continues, few expect a pause in the move to greater private services. “Too many things are moving us in the opposite direction,” said Rep. Ed Zschau, R-Los Altos, who is sponsor of the bill to further open postal operations to private competition. This year’s search for ways to cut the federal budget, for instance, “is making everybody look harder for savings-which means looking harder for areas where private companies can do the job,” Zschau said.