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Ten Privatization Opportunities for Cleveland

Hopkins Airport, parking facilities and solid waste operations are prime privatization candidates
Policy Brief 88

Leonard Gilroy
March 16, 2010

Cleveland policymakers need all of the policy tools at their disposal as they grapple with the lingering fiscal effects of the recession and the challenge of repositioning the city to better compete in the 21st century economy. Over the last half century, governments of all political complexions have increasingly embraced public-private partnerships and privatization. Cities are getting out of activities or enterprises they don't run efficiently, shifting some, or all, aspects of service delivery to the private sector. This has been a key strategy cities like Chicago, Charlotte and Indianapolis have used to lower the costs of government, achieve higher performance and ensure better outcomes for tax dollars spent.

Recent decades have seen privatization shift from a concept viewed as radical and ideologically based to a well-established, proven policy management tool. Indeed, local policymakers in many jurisdictions in the U.S. and around the world have used privatization to better the lives of citizens by offering them higher quality services at lower costs. Numerous studies have shown privatization saves taxpayers 10 to 25 percent on average, while also delivering more efficient, responsive government.

Privatization isn't new to Cleveland policymakers. For example, former Cleveland Mayor Michael White, a Democrat, launched the "Cleveland Competes" initiative to allow private vendors to bid on contracts for services like pothole repair, downtown trash collection and payroll services, resulting in millions of dollars in savings. Given the fiscal and economic challenges today's generation of Cleveland policymakers are facing, it will be imperative for them to "rediscover" privatization in earnest. The following ten privatization opportunities offer them a few places to start:




1. Cleveland-Hopkins International Airport

Airport privatization became a hot issue in the United States in 2008, as policymakers discovered a phenomenon that has been a major trend globally since 1987. The global airport privatization trend began with the U.K. government's initial public offering of 100 percent of the shares in the British Airports Authority in 1987. Since that time, policymakers across the globe have sold or leased their major airports, including London (Heathrow, Gatwick and Stansted), Rome, Naples, Sydney, Melbourne, Athens, Copenhagen, Frankfurt, Vienna and Auckland. U.S. cities are starting to see the potential for privatization to improve and expand airport facilities, extract value from airports untapped under public operation, and reduce major public debt, pension and post-retirement benefit obligations. Policymakers in Cleveland may be surprised to learn that there is a large, thriving global airport industry with access to global capital markets to finance acquisition and modernization of airports like the Cleveland-Hopkins International Airport (CHIA).

In 1996, Congress enacted the Airport Privatization Pilot Program that allows municipalities to lease airports to private firms and use the proceeds for non-airport purposes, though they must obtain the consent of a supermajority (65 percent) of airlines using the airport. To date, one major U.S. airport has taken the furthest step toward privatization: Chicago's Midway Airport. Amid the financial crisis of 2008-2009, a $2.5 billion, 50-year lease of Midway was scuttled when the winning bidder was unable to complete the necessary financing. However, as economic conditions improve, Chicago is once again indicating interest in reviving the Midway lease.

Airport companies create value by reducing costs and increasing revenues. If a world-class airport firm were to purchase or lease CHIA, it could bring a new level of professional airport management. An Oxford University study found customers are more satisfied at privately operated airports than the government-run facilities. Marketing the airport would take advantage of the firm's breadth of international experience. And the design and timing of major runway and terminal expansions would be determined on the basis of commercial, bottom-line criteria. Given the recent troubles in credit markets worldwide, governments have struggled to secure financing for their projects; private infrastructure firms have a much better track record of raising capital for expansion projects. Depending on the privatization scenario, Cleveland could structure a privatization initiative to receive either annual lease payments or an upfront lump sum, thereby easing its fiscal problems.

The federal privatization pilot program currently allows implementation at only five airports—of which one must be categorized as a "large-hub" (Midway's slot) and one must be a general aviation airport—but there is currently a great deal of interest from several U.S. cities. In addition to a revived Midway lease, both New Orleans's Louis Armstrong International Airport and Puerto Rico's Luis Munoz Marin Airport received FAA permission to enter the pilot program in 2009 and are likely to begin their procurement processes soon. Officials in numerous other cities, including Austin and Kansas City, are considering similar moves.

If it were to take advantage of this privatization opportunity, Cleveland could potentially stand to reap a considerable sum. Even though Midway Airport is unlikely to fetch its former $2.5 billion bid amount in the current financial market climate, a revived Midway lease would still be conservatively expected to fetch between $1 and $2 billion in an upfront payment for Chicago. Overseas, Global Infrastructure Partners' successful $2.47 billion purchase of London Gatwick Airport in fall 2009 sent a strong signal to the capital markets that infrastructure deals, including airport privatizations, can move forward in the current economic climate.

A 2009 Reason Foundation analysis of Milwaukee's General Mitchell International Airport estimated that a potential lease could fetch between $240 million to $1 billion from private investors, depending on how the deal was structured. New Orleans officials believe that a lease of Louis Armstrong International Airport could raise up to $1.25 billion. Notably, with 5.4 million enplanements in 2008, CHIA had more traffic than either Louis Armstrong or General Mitchell airports (3.9 million and 3.8 million enplanements in 2008, respectively). Since enplanements track closely with revenues, the comparative economic advantage of CHIA indicates that it could have a market value on par with, or likely in excess of, the New Orleans and Milwaukee airports.

Of course, estimates are just estimates, and the true market value of any airport will depend heavily on the characteristics of the lease itself. If a privatization proposal were to advance, Cleveland should tap expert legal and financial advisors to undertake the due diligence necessary to shape a workable and viable project that will be attractive to private sector investor/operators. In the end, the true value of Cleveland's airports on the open market will only be revealed through an open, competitive bidding process.

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2. Parking Facilities

Downtown parking meters and city parking facilities—like the garages, surface lots and parking meters owned and operated by the Cleveland Division of Parking Facilities—are viewed by many public officials as an important source of revenue. However, oftentimes they aren't properly managed or aren't being fully maximized and could be improved through privatization. Privatizing parking facilities can take on different forms, from long-term lease agreements of city operations to multiple leases for competition between garages or parking areas.

Though parking privatization is commonplace in Europe and many other countries, Chicago has been the U.S. pioneer in demonstrating that parking operations are not a core function of government. In 2006, the city announced a 99-year, $563 million lease of four underground parking garages located downtown, beneath Grant and Millennium parks. The 9,178 spaces made Chicago's system the largest in the United States. In return for the $563 million upfront payment—primarily used for debt reduction and the establishment of reserve funds—winning bidder Morgan Stanley agreed to rebuild garage infrastructure over the life of the contract.

Chicago was not done yet. In December 2008, Mayor Richard Daley announced the winning $1.15 billion bid for a 75-year concession (lease) of the city's downtown parking meters, marking the first privatization of an urban parking meter system in the United States. With over 36,000 meters generating roughly $19 million per year, Chicago's is among the largest parking meter operations in the country.

In exchange for an upfront $1.15 billion payment, the agreement grants the operator— Chicago Parking Meters, LLC, a consortium led by Morgan Stanley Infrastructure Partners—the right to maintain and operate the meters throughout the life of the contract. The deal also requires the operator to do a wholesale system overhaul, replacing over 30,000 antiquated, coin-based meters with just over 4,000 high-tech, multi-space/multi-pay meters that will facilitate payment via cash, credit and debit cards and potentially other pay systems. Furthermore, the system replacement is occurring at the concessionaire's own expense—separate from the $1.1 billion upfront payment—removing significant future operations, maintenance and capital expenditure costs from the city's books for decades to come.

The city retains full responsibility for rate-setting, parking regulation enforcement and fine collection. The deal also preserves the city council's decision-making authority over the number of meters and hours of operation, as well as the city director of revenue's authority over the length of time a customer can park. Parking rates will be allowed to rise each year for the first five years of the contract, after which any subsequent rate increases over the remainder of the contract term will be subject to city council approval. Increases in any given year would be capped to increases in the consumer price index.

While glitches in the early implementation of the Chicago parking meter lease prompted significant scrutiny of the transaction from local officials and media, the turbulence of the early rollout now seems to have subsided as operational improvements have taken hold in recent months. In fact, the concessionaire has reduced the average repair time for broken meters from two days (under city operation) to less than two hours, and the full replacement of the 36,000 parking meters is nearly completed, roughly one year ahead of schedule. Given Chicago's powerful example of extracting major value from leveraging parking assets, cities like Los Angeles, Las Vegas, Pittsburgh and Indianapolis are contemplating similar deals in 2010.

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3. Solid Waste Collection

Cleveland's Department of Public Service provides solid waste collection and disposal services in the city, but more than half of all U.S. cities contract out all, or part of, their solid waste collection services. The many reasons for this include cost savings (competitive delivery of solid waste services typically generates cost savings on the order of 20 to 40 percent), enhanced risk management, efficiency or technology improvements, and debt reduction.

In the late 1970s, a looming fiscal crisis prompted the city of Phoenix, Arizona to apply competition to residential solid waste collection. The city's Public Works Department bids alongside private firms for the right to serve each of six geographic sectors, with collection services in each sector being put out to bid on a rotating schedule every seven years. Over the first 15 years of competition, the inflation adjusted costs of solid waste collection declined by 38 percent citywide. When combined with the cost savings from competitions for landfill operation and solid waste transfer hauling, Phoenix saved nearly $39 million competitively bidding for waste-related services.

Competition for solid waste collection services in Charlotte, North Carolina produced $14 million in cost savings over the first five years of the program. A 2004 statewide study of 15 North Carolina cities found that Charlotte consistently outperforms other cities in cost and efficiency for garbage, recyclables and yard waste collection. Charlotte's collection costs per ton for garbage were 45 percent less than the statewide average, while it spent 41 percent less per household to collect garbage.

Facing poor performance and soaring overtime, the city of Buffalo, New York signed a five-year, $1.57 million contract for its curbside recycling program in 2002. Under the agreement—estimated to save $758,000 without eliminating any permanent full-time jobs—the contractor continued to use city recycling trucks, but picked up all fuel, maintenance and insurance costs.

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4. Building Maintenance

Cost savings from competitively contracting building maintenance and janitorial services typically range from 30 to 40 percent. Contracting also helps governments address the chronic problem of deferred maintenance, which places strain on existing infrastructure, shortens the useful life of assets, and increases life-cycle asset costs.

Current best-practice techniques in outsourcing rely on longer-term (3+ year) performance-based maintenance contracts. Under this type of arrangement, the contracting agency defines an end outcome goal (for example, the grass outside City Hall shall never exceed 3 inches in height) and the contractor decides how best to achieve the desired outcome. The contract creates clearly defined performance measures, clearly defined outcomes and timetables, and allows for new and innovative methods, opportunities for value engineering, and improved efficiencies. A performance contract may tie at least a portion of a contractor's payment, as well as any contract extension or renewal, to his achievement.

Los Angeles County achieved savings of 51 percent from contracting with private providers for these services when compared to previous in-house operating costs. The U.S. Government Accountability Office reported on a large-scale study of maintenance of federal General Services Administration buildings and found a 25 percent cost reduction through contracting. Georgia's Department of Juvenile Justice (DJJ) began outsourcing facility maintenance at 30 of its 35 facilities in 2001, marking the first successful state correctional system maintenance outsourcing to a private firm. After privatization, DJJ found significant improvement in the condition of facilities and resolution of lingering maintenance needs, all while holding the budget flat. This initiative was viewed as so successful that the DJJ teamed with the Georgia Department of Corrections and Georgia Bureau of Investigation to undertake a similar contract for secure-site facility maintenance across multiple properties.

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5. Transit Operations

Cities like San Diego, Denver, Los Angeles, San Francisco and Boston, as well as many foreign cities, such as Tokyo, have successfully embraced "competitive contracting" of transit services, in which private contractors take over the operation of transit services through a contract with the transit authority. According to a 2001 Transportation Research Board (TRB) survey, over 90 percent of transit system managers in the United States that have embraced competitive contracting report that their expectations have been either fully or partially realized through contracting, with nearly all reporting cost savings. In addition to cost savings, other important reasons cited for contracting include increasing cost-efficiency, introducing new services and a desire to create a more competitive and flexible environment.

Competitive contracting has produced positive results for American cities and should be considered by the Greater Cleveland Transit Authority. For example, Colorado's legislature enacted a law mandating competitive contracting in 1988. Between 1988 and 2002, Denver's Regional Transportation District (RTD) achieved unit cost savings of 30 percent (over $100 million dollars in savings) and a 90 percent increase in service levels—in marked contrast to the 33 percent cost increase and 13 percent decline in service levels for the 10 years prior to contracting. And, for many measures of safety and quality of service, the contractors performed as well as or better than RTD.

As former RTD Chief Executive Officer Cal Marsella explained in a 2008 Reason Foundation interview:

At the RTD we have 46 percent of our fixed route service operated through competitive contracting and all of our door-to-door service for the disabled […] Our private contractors provide the same service as we do internally at a cost that is approximately $17.20 per hour less than our fairly compared internal costs when we do not consider the cost of savings on transit-maintenance facilities. When we add in the costs the RTD avoids by not having to build and maintain additional facilities the cost differential is approximately $29.50 less per hour.

In another example, Las Vegas is home to the largest U.S. bus transit system that has been fully contracted out. Costs per service hour are among the lowest in the nation—approximately 30 percent below the average of systems of similar size. Further, approximately 15 percent of commuter rail services in the United States are competitively tendered, including systems in Baltimore, Boston, Los Angeles, San Diego, San Francisco and Washington. The 2001 TRB survey notes that—when asked if they had to do it over again—roughly 80 percent of transit managers who chose contracting say they would stick with it a second time.

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6. Parks Operation and Maintenance

Cleveland's Department of Parks, Recreation and Properties manages over 150 parks, playgrounds and green spaces, and Cleveland Metroparks operates additional recreation facilities. Because many recreation-related functions—including maintenance, horticultural work and the operation of concessions, to name a few—are widely available in the commercial marketplace, private management and maintenance of municipal parks and recreation facilities are commonplace, with nearly 40 percent of cities in America contracting out for various recreation services (as do national and state parks systems). Cost savings from outsourcing recreation facilities operation and management typically range from 20 to 50 percent, and cost savings from outsourcing park landscaping and maintenance generally range from 10 to 30 percent.

Various approaches could be established in Cleveland for turning over park and recreation center management to private firms. The city or Metroparks could, for example, simply outsource the maintenance of one or more public parks through competitive bidding to attain cost savings. This is the simplest action, though taxpayers are still footing the bill. Policymakers could also lease concessions stands at public parks in a long-term agreement or user fee/rate schedule agreement that would generate money while not incurring operating costs. A full divestiture could generate money for the sponsoring government entity, such as leasing park space to private firms or organizations in the form of a Business Investment District or transferring park operations to a non-profit firm.

In fact, turning over partial ownership or management of city parks to non-profit groups and neighborhood associations often is the best way to ensure they remain a public asset. New York City's Neighborhood Open Space Coalition has assumed control from the city of hundreds of abandoned lots and parks in this way, turning many dangerous eyesores into gardens. Nearly one-fourth of the city's nearly 1,500 public parks are now cared for by community associations.

Even one of the most famous parks in the country is run by a non-profit and was only cleaned up when it was spun off from the city government. The nonprofit Central Park Conservancy has raised more than $100 million for New York City's Central Park since its founding in 1980, taking over the care of trees, lawns and plants, and providing more than half the Park's operating costs. By 1989, 72 percent of Central Park users said the park felt safer after the Conservancy got involved. Conservancy leaders have called for outsourcing the management of all of the city's parks, for it would bring competition, accountability and marketplace discipline. Other cities have seen similar improvements—after competitively contracting for lawn trimming at more than 45 neighborhood parks, Indianapolis found that mowing complaints fell by 95 percent, freeing up Parks Department employees to concentrate on the needs of the city's large regional parks.

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7. Libraries

The Cleveland Public Library system operates 28 local libraries in the region. Municipalities across the country have increasingly looked to privatization of library operations to not only reduce costs, but also to maintain or even expand the quality and quantity of their library services. Privatization and innovative public-nonprofit partnerships have been used to keep branches open when municipal budgets would otherwise demand cutbacks. Lack of funding is hardly the only motivation for contracting library services, however; other reasons include improving the quality of management, improving service levels, acquiring expertise that is lacking in-house, and meeting time constraints.

In 1997, Riverside County, California became the first county in the nation to privatize its library operations in a $5.3 million, 1-year renewable contract to run its 25-branch, 85-year-old library system. The contractor was required to increase library hours by 25 percent, increase the annual book purchasing budget and retain current employees at their existing salaries. According to Deputy County Executive Officer Tom Desantis, "Cutbacks left the library system in a shambles; many of our libraries were barely open. Now [through contracting], we are able to be open more hours and we can add staff. The result has been a win-win situation for everyone involved."

In other examples, Chicago Mayor Richard Daley claimed that the city saved $3.7 million by contracting out management of the city's Harold Washington Library. And in 2009, the Brooklyn (New York) Public Library became one of first libraries in the country to use UPS, rather than a local or internal courier system, to reduce costs and move materials more efficiently throughout its 60 branches. The library's former internal delivery system was frequently backed up, with turnaround times reaching between 7 to 14 days. Under the UPS contract, turnaround time has reduced to 24 hours, taking advantage of the company's overnight service focus, and former library staffers and truck drivers now work as full-time sorters.

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8. Public Works and Community Development Services

Public works and community development services—currently provided in Cleveland by various city departments, including Public Service, Building and Housing, Community Development and the City Planning Commission—are commonly outsourced functions within municipal governments. And because of the interrelated nature of these services, cities may find greater economies of scale and cost savings through bundling several, or even all, services in a given department (e.g., public works) or departmental subdivision (e.g., planning and zoning) into an outsourcing initiative, rather than treating individual services or functions separately.

Over 100 "contract cities" in states like California, Georgia and Florida have taken this approach, and there have been several instances of governments moving toward this approach in recent years. Centennial, Colorado privatized all of its public works functions in 2008 in what was one the largest conversions to a private sector public works contract in the country. Under the five-year contract, worth approximately $8.6 million in 2009, contractor CH2M HILL OMI and partners DMJM Harris and American Civil Constructors manage all public works functions for the city, including traffic engineering, permit processing, inspections, administrative services, road maintenance and snow removal. The city reviews and re-approves the contract annually, offering regular opportunities to review the contractor's performance and revise the annual budget appropriation, if necessary, to adjust to revenue shortfalls or variations in service demand.

In 2008, Bonita Springs, Florida privatized all of its community development services (planning, zoning, permitting, inspections and code enforcement), and Pembroke Pines, Florida privatized its entire building and planning department in June 2009. As with public works, community development services are provided by a wide range of private sector vendors, and privatization can bring similar benefits—cost savings, service quality improvements and the ability for policymakers to "dial up" or "dial down" contracts to match the level of services with anticipated revenues.

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9. Vehicle Fleet Maintenance/Management

Many cities own and operate their own vehicle fleets, storage yards and maintenance facilities, with public employees responsible for handling routine repairs, oil changes and other types of vehicle-related services. Because these same services are widely available in the private sector, they cannot be considered a core function of government.

Outsourcing vehicle fleet maintenance services allows the private sector to focus on the fleet itself, and government agencies to focus on the services that fleet provides. Private vehicle fleet maintenance is widespread among county and municipal governments that have found that contracting out offers the potential for significant financial savings, improved quality, and greater timeliness of service. Cost savings through privatization typically range from 10 percent to 25 percent, and governments can also achieve other important goals, such as inventory consolidation and divestiture, implementation of a vehicle fleet management system, or minimizing government's capital and long-term operations and maintenance risk exposure.

Indianapolis's competitive contracting for fleet services is widely regarded as a model for cities and states nationwide. In 1995, Indianapolis Fleet Services (IFS)—the city's fleet divisions—was selected in a competition with three of the largest private-sector vehicle maintenance providers for the fleet services contract. Competition prompted IFS to streamline and make other operational and structural changes, allowing it to simultaneously shrink its workforce and improve quality. Competitive contracting in Indianapolis generated an estimated cost savings of 21 percent over prior government provision and increased productivity-per-mechanic by roughly the same amount.

In 2005, the city of Dallas awarded a five-year, $16 million contract for heavy sanitation vehicle maintenance and repair, which the city estimates will produce an annual savings of approximately $910,000 relative to city operation. Virginia's Department of General Services saved 25 percent opening vehicle maintenance to competition in the late 1990s and subsequently expanded the program to include contracting out for a new maintenance information management system that has reduced preventative maintenance costs 16 percent, as well as strategically contracting with Enterprise Rent-A-Car to provide short-term rentals as needed to state employees.

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10. Cleveland Metroparks Zoo Operations and Management

Cleveland Metroparks currently operates the Cleveland Metroparks Zoo and receives supplemental funding through its nonprofit partner, the Cleveland Zoological Society. However, with the ongoing budget challenges that local government entities are facing, privatization is one policy option local leaders can apply to ensure that zoos thrive during the current fiscal crunch.

Over half of the major urban zoos in the country—including zoos in Chicago, Dallas, Houston, San Diego and New York City—are run by nonprofits, often the zoological societies providing supplemental financial support to zoos when they were under public operation. When done properly, the privatization of public zoos can bring a number of benefits, including lowered operations and maintenance costs, improved fundraising and capital investment and better marketing and concessions.

The 2009 privatization of the Dallas Zoo offers the most recent example. To address a large city budget shortfall, city leaders turned over operations of the zoo to the Dallas Zoological Society in October 2009, saving the city $1.5 million the first year and millions more over time. The city turned over all zoo operations and management—and the animals themselves—to the society at no cost and required that the zoo be operated at or above current standards. The city retained ownership of the zoo's land and physical assets.

Dallas Zoological Society president Michael Meadows told the Dallas Morning News in January 2010 that privatization is making the enterprise more entrepreneurial and responsive: "When it was a city operation, it was difficult to make changes in staff; it was a kind of a tenured-faculty situation […] Now that it's privately managed and, say, there's someone at the front gate that's taking tickets and not greeting people with a smile, we can say, 'This might not be the best job for you.' " Also, one of the primary reasons Meadows and other city policymakers embraced privatization was that fundraising was likely to be easier for a privately run zoo. Indeed, four donors had already pledged $2.25 million less than three months into the privatization.

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Conclusion

The reason privatization works is simple: it introduces competition into an otherwise monopolistic system of public service delivery and more focus goes toward serving customers. Governments operate free from competitive forces and without a bottom line. Thus, program structures and approaches often stagnate, and success is not always visible and is hard to replicate. Worse, since budgets are not linked to performance in a positive way, too often poor performers in government get rewarded as budget increases follow failure.

By contrast, applying competition and privatization drives down costs and incentivizes performance. Private firms operating under government contracts have strong incentives to deliver on performance—after all, their bottom line would be negatively impacted by the cancellation of an existing contract or losing out to a competitor when that contract is subsequently re-bid. At its root competition promotes innovation, efficiency and greater effectiveness in serving the shifting demands of customers.

The 10 opportunities described within would be important steps for Cleveland policymakers to take to improve the city's fiscal health and economic climate. But they are just a start. If applied to a range of these and other city services and functions—such as information technology, road maintenance and traffic operations, backend administrative support services and dozens of other commonly outsourced government activities—the cost savings and service quality improvements for Cleveland would be significant. Applying competition to non-core government activities would be a major and overdue step towards "right-sizing" government and providing the greatest value to Cleveland taxpayers.

Leonard C. Gilroy is director of government reform at Reason Foundation.


Leonard Gilroy is Director of Government Reform


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