States Lead New Privatization Efforts, Report Says

States Lead New Privatization Efforts, Report Says
October 1, 2005

Several states have led the charge to introduce competition into their government activities in the past year, among them Florida, which has been a front-runner in this effort for years, according to the 19th Annual Privatization Report of Reason Foundation, released in August.

Information about Florida's efforts is one of dozens of highlights in the nearly 150-page report.



Florida Presses On

The report notes some high-profile privatization projects in Florida recently have been criticized for less-than-perfect results. Despite the criticism, Florida has pressed forward with new initiatives.

In March the state finished a major contract turning over all foster care and adoption programs in Miami-Dade and Monroe counties to private administrators, in what is probably the largest child welfare privatization project in the nation. In a prepared statement, Florida Department of Children & Families (DCF) Secretary Lucy Hadi said, "This agreement brings to reality the prospect of improved outcomes and services for children in Miami-Dade and Monroe Counties. The entire state will now benefit from qualified experts that are equipped to know and meet the needs of their communities."

The 14-month $75 million contract makes Florida the first state in the nation to fully privatize its child welfare programs. DCF hopes the move will dramatically improve a foster care system often described as one of the worst in the United States.

Miami's child welfare system has, through the years, spawned heartbreaking scandals, including the disappearance--police now say murder--of Rilya Wilson from the home of a department-approved caregiver, and the alleged killing last year of Angel Hope Herrera by her mother, herself a former foster child.



Indiana Becomes Privatization Leader

In Indiana, former U.S. Office of Management and Budget (OMB) Director Mitch Daniels (R) was elected last year and sworn in this year as governor. One of his first executive orders was the creation of a state OMB. An early task included a top-to-bottom review of competition and privatization opportunities. In addition, Indiana's OMB is reviewing the state's procurement procedures and asset portfolio to find cost-saving opportunities.

One of Daniels' early moves was to privatize the state's Commerce Department. The Indiana Economic Development Corp., a public-private body, was established when Daniels signed HB1003 in May 2005. Daniels said the new corporation will be a "much more nimble and effective enterprise" than the now-defunct Indiana Department of Commerce, which was hampered by some state rules and regulations the new corporation will not have to follow.



Competitive Sourcing Emphasized

As he did during his tenure at the federal OMB, Daniels has instituted a competitive sourcing initiative. Several projects are already underway, with many more to come in the near future.

For example, the dietary department at Logansport State Hospital was forced to compete. The employees were given an equal opportunity to participate. The employee team was able to identify enough savings to win the bid and save the state about $1 million a year.

Food service at the Department of Corrections was also put out to bid. The state was able to cut meal costs from $1.41 apiece to only 99 cents by contracting with Aramark to operate the food service, saving nearly $12 million a year.

The Department of Corrections also issued a request for proposal (RFP) for operating the New Castle Correctional Facility. The facility is currently underused, and a funding shortage has prevented full use. The corrections commissioner hopes the RFP will bring significant interest from the private sector and that a partnership could lead to full use of the facility.



More than $150 Million Saved

Daniels and his team are also considering leasing the 157-mile Indiana Toll Road, which runs east-west across northern Indiana. It is a westward extension of the Ohio Turnpike and leads into the Chicago Skyway, which was recently leased to a private firm by the city of Chicago, netting $1.8 billion.

Daniels recently released a status report of his initiatives. After just six months in office, his administration's efforts to improve efficiency and effectiveness have led to more than $150 million in savings, according to the report.



Virginia Continues Efforts

For the second straight year, the Virginia General Assembly was a leader in the privatization movement. Under the leadership of Delegate Chris Saxman (R-Staunton), the Cost Cutting Caucus offered several bills aimed at making Virginia's government less obstructive and more transparent, efficient, and effective. Working with the Reason Foundation, Saxman and the caucus saw passage of several key bills while forcing the debate on a few unsuccessful initiatives.

Two victories emerge as most significant. First, HB 1948, the Administrative Process Act, requires the state to periodically review regulations and eliminate overly burdensome and costly regulations, to minimize the economic impact on small businesses. Both the National Federation of Independent Business and U.S. Small Business Administration have advocated similar legislation across the country.

Second, HB 1945 expands the definition of a qualifying project under the existing Public-Private Education Facilities and Infrastructure Act to include any undeveloped or unused ("surplus") state-owned land, thereby allowing for expanded asset divestiture or public-private development projects throughout the state.



Private Roads Get Boost

Due in part to continued fiscal pressures and in part to encouragement from the U.S. Department of Transportation, more state legislatures took action on public-private partnership (PPP) laws regarding roads during the past year.

The only completely new law was enacted in Washington State. HB 1541, the Transportation Innovative Partnerships Act, repeals the 1995 law under which a number of franchises were issued but the projects were not built due to later amendments to the law that made them unattractive to the private sector.

The new law provides for both solicited and unsolicited proposals, as well as a mix of public and private capital, as in Texas and Virginia. The Washington legislature also enacted SB 6091, which allocated $1.5 million for a comprehensive tolling study, as called for by HB 1541.



PPP Laws Revised

Several state legislatures enacted revisions to existing highway PPP laws.

In Georgia, SB 270 allows the state to issue RFPs for such projects, instead of dealing only with unsolicited proposals. In addition, in the case of the latter, it increases to 135 days (from 90 days) the time during which potential competitors can respond to an unsolicited proposal.

The Texas legislature took up revisions to its landmark HB 3588, enacted in 2003. The main point of contention has been the law's provision allowing the conversion of existing free lanes or highways to tolled operation as part of tolled and/or PPP projects. That prospect set off a huge political backlash, inspiring amendments in both houses of the legislature.

The House version (HB 2702) at press time had passed both houses. It would require a popular vote for any such conversion from free to toll. The bill limits toll franchises to 50 years.

The Virginia legislature enacted the first revisions in 10 years to that state's Public Private Transportation Act (PPTA). The revised version clarifies the point that any "responsible public entity," not just the Virginia Department of Transportation, may authorize PPTA projects. Also, it permits both RFPs and unsolicited proposals to be used by such entities. In addition, if permitted by other federal and state laws, a private partner may toll existing free lanes under revised language that no longer requires expansion of capacity to accompany tolling.



Colorado Updates Toll Laws

Colorado also saw legislative action. The legislature passed two bills dealing with the proposed private Front Range Toll Road, which would parallel congested I-25 to the east of Denver International Airport.

The project has been proposed under a nineteenth century Colorado law, still on the books, under which some 80 pre-auto-era private toll roads were developed. But under that law, county governments regulate the toll rates, and there are seven of them along the Front Range's planned route.

HB 1342 would modernize the law, including a shift to the state of control over toll rates. It passed both houses in May, and Gov. Bill Owens (R) has indicated he will sign it. He also said he will veto SB 230, which would have repealed the old law's utility-like powers to acquire right of way.



New York, California Also Act

In New York, Gov. George Pataki (R) proposed legislation that would permit tolls and PPPs for existing and new transportation infrastructure. It would apply to both state and New York City entities, would permit the sale or lease of existing projects, and provides for RFPs and unsolicited proposals.

Finally, considerable interest has followed the progress of a bill to enable tolling and public-private partnerships in California, AB 850. The bill was introduced in February 2005, with bipartisan support and the backing of Gov. Arnold Schwarzenegger (R) as part of his Go California transportation package. At press time, the bill had cleared the transportation committees of both houses.

The Senate committee version would remove a 35-year limit on the length of franchise agreements, thereby permitting longer terms that can lead to significant equity investments in projects. California currently has no enabling legislation for tolls or highway PPPs, due to the repeal of the previous pilot program law, AB 680, at the end of 2002.

Reason Foundation's Annual Privatization Report is the world's longest-running and most comprehensive report on privatization news, developments, and trends. APR covers more than privatization, encapsulating all of Reason's policy work including transportation, education, and land use policy.


Geoffrey F. Segal (geoffrey.segal@reason.org) is director of government reform at Reason Foundation.


For more information ...

The 19th Annual Privatization Report may be viewed in its entirety online at http://www.reason.org/apr2005.

The report on Indiana Gov. Mitch Daniels' privatization initiatives is available online at http://www.in.gov/gov/media/performance.html.