Private Firms Holding Public Reins

The Rolling Stones. Prince. Frank Sinatra. The Grammy Awards. Arena and convention facilities managers would love to attract glamorous stars and events such as these. Too often, however, they’re stuck with the County Antiques Fair, the Homespun Symphony or the Assn. of Dead Sea Scroll Enthusiasts.

Cities and states expect pizazz, publicity and profits from their arenas and convention centers. But they cannot achieve these goals without creative, aggressive leadership, which is often prevented by the rigid structure of government. One solution to this dilemma privatization: the management of entertainment and recreational public facilities by independent managers.

Privatization is a growing trend.

In North America, where a diverse universe of several thousand public assembly facilities includes stadiums, sports arenas, convention centers, auditoriums, performing arts theaters, ice skating rinks and recreational centers, some 10% of states and cities have chosen private companies to handle the reins of their facilities.

A recent Arthur D. Little survey shows that 60% of science centers, 18% of convention centers, 33% of performing arts centers and 17% of arenas and stadiums are under private management.

Though municipal employees of public authorities still run the majority of facilities, more states and towns are considering private sector management as an aid.

Generally, the private management company has a contract with the city or state. This agreement can take one or a combination of these forms:

* Yearly fee. The independent management company agrees to run the entire business for a set fee. The contract may provide for extra incentive payments if the company meets specified goals, such as cutting a deficit, boosting the number of events or generating a profit.

Incentives might be specified in terms of a percentage of the profits (if any) or a percentage of the loss reduction. Under this kind of arrangement, the independent company is usually free to change the personnel and--more important--to choose the entertainment on its own.

* Lease. The management company essentially rents the building and pays a negotiated percentage of the gross or net receipts to the city or state, depending on the contract.

* Nonprofit corporation or authority. The government may establish either option as a separate entity that is still under its aegis.

This arrangement affords independence from the political system without surrender of control. An authority may, in some cases, select a private management group to operate the facility.

Most agreements allow the government to retain ownership and to sever the relationship with just cause.

One successful example of privatization is the New Orleans Superdome, a spectacular stadium with equally spectacular construction costs and early operating deficits.

The Superdome’s cost soared to $160 million and its deficits to $6 million in 1976, its first year of operation.

In an attempt to reverse the situation, the state turned to a private management company, the first such move for a major facility owned and operated by the government. The result: The budget deficit was reduced by $60 million over the next 10 years.

Private companies usually possess at least two key advantages: greater economies of scale and enhanced marketing clout.

These firms manage buildings throughout the country so they can consolidate their marketing and sales operations. And with the promise of multiple venues, they can gain easier access to star entertainers.

A few words of caution: Privatization is not a panacea.

Some professional management companies may have a “chain theater” approach that may be too impersonal.

The executives, transplanted from other cities or perhaps other careers, may choose profitable events, such as rock concerts and sporting events, and ignore local civil presentations and art shows that the community values greatly. Conventions, similarly, can raise issues.

Although they usually do not generate profits for the facility, they do generate huge revenues for hotels, restaurants, transportation services and other local businesses.

Thus, overly profit-conscious facility managers might forgo them, to the detriment of the community.

To avoid such clashes between private and public needs, the city or state should spell out the company’s obligations in the management contract.

Privatization is far from a cure-all and is subject to many pitfalls.

Yet, for many cities and states burdened with bureaucracy and budget deficits, it may just be the most efficient form of management.