Republicans for privatization of traditional and common good governmental services are not republicans in the official meaning of the word from its original Latin meaning and Roman use. The word republic means literally "thing public" from the Latin res or "thing" and "publicae" or "public." According to Black's Law Dictionary, there are distinctions from Roman law between what is republican and reprivitan--if you will--in their respective definitions:
res privatae (rays pri-vay-tee) [Latin "private things"] Roman & civil law. Things that can be owned by individuals.
res publicae (rays paeb-li-see) [Latin "public things"] Roman & civil law. Things that cannot be individually owned because they belong to the public, such as the sea, navigable waters and highways.
The whole concept of early republicanism was to eliminate private control of the government and its services by aristocracy or monarchy. Those who fiercely fight for privatization government of services that traditionally promote the common good or a shared public interest are merely fighting the same dispute of the monarchists and aristocrats of old and are working against republican principles in the philosophical sense of the word. Perhaps they should form a new political party called the Reprivitan party--they may even be able to merge with the Constiution Party which is of itself another oxymoron. But we will leave that discussion for another day.
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The Benefits of Privatization: Evidence From Mexico
Why do some countries cling to state-owned industries, despite compelling evidence that privatization works? The answer often lies in political leaders' fears that the higher profitability of private companies comes at the expense of the rest of society, especially during the difficult transition period.
In The Benefits of Privatization: Evidence From Mexico (NBER Working Paper No. 6215), Rafael La Porta and Florencio Lopez-de-Silanes investigate whether companies become more profitable following privatization, whether privatization leads to significant social losses, and if so by which channels. They conclude that the positive changes in performance of privatized firms are the result of significant restructuring efforts and not of exploitation of market power, or of massive layoffs and lower wages. In other words, firms undergo a harsh restructuring process following privatization and do not simply markup prices and lower wages, as many economists predicted. Deregulation, particularly the removal of price/quantity controls and trade barriers, is associated with faster convergence to industry benchmarks. The authors suggest that the additional revenues the government receives as a result of the privatization auctions, and the increased tax revenues, are probably enough to offset the cost to society of job losses.
Mexico provides the stage for one of the most massive privatization programs in the world. Using data from all 218 nonfinancial privatizations which occurred in Mexico from 1983 to 1991, La Porta and Lopez-de-Silanes document the effects of privatization in seven general areas: profitability, operating efficiency, employment and wages, capital investment, taxes, output, and prices. By including both privately held and public companies, spanning a wide variety of sectors, and using detailed wage data and product-level quantities and prices, they can test competing theories on the effects of privatization.
The authors show that newly privatized firms come up to industry performance standards in the first few years. For example, the companies averaged a 24 percent gain in their operating-income-to-sales ratios, which is one of the four measures of profitability the authors use, each of which were positive. Large increases in operating efficiency accompanied the gains in profitability. As an example, the average cost-per-unit plummeted 21.5 percent, while the average sales-per-employee nearly doubled.
As one would expect, newly privatized firms cut employment, with the rolls of white and blue collar workers nearly halved. These numbers may actually underestimate the effects of privatization, since in the years preceding privatization most companies already had trimmed payrolls to prepare for divestiture. These findings suggest that transfers from workers to shareholders play a role in the success of privatization. However, productivity gains resulted in large increases in real wages in the post-privatization period: real wages increased 114 percent.
La Porta and Lopez-de-Silanes also show that privatized firms increased sales 54.3 percent, despite workforce reductions and only modest increases in capital. Surprisingly, prices rose only 2.9 percent relative to the Producer Price Index.
The authors find that monopoly power does not play an important role in increased profitability. Nor do firms in the noncompetitive sector increase prices in real terms any more than those in the competitive sector. In fact, in virtually every observed category, firms in competitive and non-competitive sectors acted similarly.
Finally, the authors decompose the reported increases in profitability. Approximately 10 percent of that gain was attributable to higher prices and 33 percent to worker layoffs, while productivity gains accounted for the remaining 57 percent. Some of the social effects of higher prices and layoffs were offset by corporate taxes, which absorbed slightly more than half of the gains in operating income.
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Budget & Tax News
November 1, 2006
Governments Increasingly Turning to Competition and Privatization
Privatization is a proven policy management tool
By Leonard C. Gilroy, AICP
In recent decades, governments of all political complexions have increasingly embraced privatization as a strategy to lower the costs of service delivery and achieve higher performance and better results, according to the Reason Foundation's 20th Annual Privatization Report (APR), released in July.
Once considered radical, privatization has largely shifted from an ideological concept to a well-established, proven policy management tool. Decades of successful privatization policies have proven private-sector innovation and initiative can do certain things better than the public sector.
For the past 20 years, the APR has chronicled and analyzed the most important developments in privatization and government reform.
This year's 20th anniversary report features special contributions by several pioneering policymakers and researchers at the forefront of privatization and government reform, including Margaret Thatcher, Indiana Gov. Mitch Daniels, South Carolina Gov. Mark Sanford, and former Indianapolis mayor Stephen Goldsmith.
The following sections address some of the many highlights from the 230-page report.
Federal Competitive Sourcing
President George W. Bush's plan to bring more competition to federal programs--competitive sourcing--continued to expand in 2005, though it was used less often than in the previous two years.
In FY 2005 federal agencies completed 181 public-private competitions for a total of 9,979 positions. In addition, competitions for nearly 5,000 other positions have been announced and are moving through the process.
While agencies used competitions for a wide range of services, they focused on logistics, maintenance and property management, and information technology.
Collectively the competitions are expected to generate net savings, or cost avoidance, of approximately $3.1 billion over five to 10 years. When combined with previous years' savings, competitive sourcing is expected to save taxpayers $5.6 billion over the same time period, with annual savings expected to approach $1 billion.
Fixed costs and expenses to provide central direction and oversight between 2003 and 2005 totaled $211 million--better than a 27 to 1 return on investment; for every dollar spent on competitive sourcing, 27 were saved.
Indiana Continues to Lead
Under the leadership of Gov. Mitch Daniels (R), Indiana has continued to be one of the most privatization-active states over the past year.
As Daniels writes in the APR, his privatization reforms "demonstrate that people specializing in delivering a given product or service, and spurred to constant improvement by competition and the profit motive, can achieve their goal better than the best-intentioned administrators of the best-organized government bureaucracies."
In the biggest news, the 75-year lease of the Indiana Toll Road for $3.85 billion has become the talk of 2006 in transportation circles and has encouraged public officials in other states to consider privatization of their toll roads. Other potential partnerships in Indiana are to be examined as this part of the governor's transportation plan unfolds.
Daniels also has employed strategies for cost savings and efficiency inside Indiana's government. In just two years in office Daniels has cut 3,000 state jobs and eliminated seven departments.
The governor also has launched an aggressive review of the size, scope, functions, and budget of each agency. Dubbed PROBE--Program Results: an Outcome Based Evaluation--the review will require each program to justify its work and demonstrate results. It is similar to the federal Performance Assessment Rating Tool (PART) analysis established under Daniels' leadership as federal OMB director.
Florida Formalizes Process
In June 2006, Gov. Jeb Bush (R) signed into law S.B. 2518--known as the "Florida Efficient Government Act"--which codified the state's GATE management process. The GATE process, established by the Governor's Center for Efficient Government, was the result of a review of the state's privatization process focused on establishing firm guidelines to create more transparency, consistency in contracting, and high performance.
The new law requires that a business case be developed for each initiative. It must then be evaluated for feasibility, cost-effectiveness, and efficiency before an agency can sign a contract.
In addition, the legislation establishes a Council for Efficient Government that will play an advisory role and provide additional oversight of privatization initiatives.
The bill also provides some guidance for privatization policy in general. It establishes legislative intent to direct state agencies to focus only on their core mission and to deliver services efficiently and effectively, and requires them to leverage the private sector whenever doing so will reduce costs of government.
Toll Road Privatization Strong
Chicago's 99-year lease of the eight-miles-long Chicago Skyway for $1.8 billion was the talk of 2005 but was topped by the $3.85 billion lease of the Indiana Toll Road.
Unlike the Chicago transaction, the proceeds of which are being used to pay off debt and fund other municipal balance-sheet items, the Indiana lease proceeds are the key to funding a proposed 10-year highway program.
In Virginia, the privately concessioned Dulles Greenway changed hands when Macquarie Infrastructure Group bought an 86.7 percent interest from the original owner for $620 million.
Also, the Virginia DOT announced in May 2006 it had reached an agreement to lease its financially troubled start-up toll road, the Pocahontas Parkway in Richmond, to Australia's Transurban. The company will lease the toll road for 99 years, pay off all its debt, and build the long-sought 1.6-mile connector to the Richmond Airport.
In addition, a state legislator has introduced a bill to study potential privatization of the Chesapeake Bay Bridge Tunnel.
In April 2006 Illinois legislators released a request for proposals for a study of the privatization, via long-term lease, of the Illinois State Toll Highway Authority system of toll roads.
In Ohio, Republican gubernatorial candidate and current Secretary of State J. Kenneth Blackwell has proposed a long-term lease of the Ohio Turnpike. Unlike the Indiana lease (where the proceeds are all to be invested in transportation infrastructure), Blackwell's plan calls for using the proceeds to fund non-transportation projects.
Managed Competition in Ohio
Faced with declining revenues and ever-increasing costs, the Hamilton County (Ohio) Board of County Commissioners adopted a resolution establishing a citizen-led task force charged with developing recommendations on cost-saving initiatives through managed competition.
The task force, called the Hamilton County Competition and Efficiency Committee (CEC) was charged with several tasks, including recommending managed competition initiatives, service consolidations, and program eliminations; developing a fair competition process; and setting specific cost-savings goals and monitoring results.
With an initial goal of finding $25 million in immediate savings, the CEC is undertaking several initiatives in areas including fire hydrant repair and maintenance, vehicle fleet maintenance, divestiture of unneeded or underused land or buildings to bring an immediate infusion of cash and long-term savings through reduced maintenance costs, and putting operations and maintenance functions (such as janitorial services) through a managed competition initiative.
In addition, the CEC is reviewing the county's information technology infrastructure with a focus on reducing duplication to generate savings, as well as improving security, and it is conducting two separate reviews to find efficiencies in how the county buys and uses utilities and telecommunications.
For more information ...
Reason Foundation's 20th Annual Privatization Report may be viewed in its entirety online at http://www.reason.org/apr2006.
Leonard C. Gilroy is a senior policy analyst at Reason Foundation. An archive of his work is here and Reason's privatization research and commentary is here.
Amicus Crew,
You must really be hitting some nerves to be receiving the comments that you are.
BTW, Old Fashioned Democrat, You are no Democrat, old fashioned or current.
Keep up the good fight Amicus!
Paul,
Looks to me like the Parents for Choice are out in full force, disguising themselves as democrats, anonymous posters, and single parents.
Privatization = screwed over public.
When you put things in the hands of the "for profit" folks, you better watch out.
Ever notice how the quality of certain products keeps going down, but the price keeps going up? It's all those executives cooking up ways to reduce expenses and clear more profits so that they get bigger bonuses and salaries.
I don't trust "for profits" any further than I can throw them -- they don't have the public welfare in mind, just their wallets. End privatization!!
Paul Hansen, I totally agree you. Most of us have known for awhile that the "old fashioned democrat" is really a republican. Privatization is one of the Republican core issues.
By the way, I went on a mission to Mexico and I can tell you that the article about Mexico is total garbage. Although Mexico has improved over the years, it is still a very poor country. Social programs in Mexico are for the most part, nonexistent. Privatization is more of a power grab for a few wealthy businessmen. Also, for three quarters of a century, the government was ruled by one political party and corruption was common for government and businesses. Which should be an example of what happens when "one-party" government rules for any extended length of time. Mexico claims to be a democratic country, but they still have a long way to go to govern the way the people want.
An interesting note about Mexico's education system...there is little or no public education which means most kids have to go to private schools. Still think public schools should disappear?
The Desert News reports today that, “Meanwhile, state leaders will allow a special subcommittee to meet up to six times this year. The group will study privatizing various Utah operations and look at areas where the state is now unfairly competing with private industry.”
I hope that public education is investigated and looked as a monopoly. Perhaps, it would be better if they were privatized.
I find it amusing when conservatives and Republicans use the word "monopoly" when referring to public education.
The definition of monopoly means that public schools would have control of the revenue. As it is now, the Legislature controls the revenue(taxes) as well as some control from the local school districts.
Teachers have no control whatsoever.
Why can't conservatives and Repubs see that? or perhaps they are trying to mislead everyone and hoping if they repeat the word monopoly over and over, so that some people will actually believe it.
How is the Constitution Party an oxymoron?
If you didn't get Christian's tough-in-cheek joke go listen to these guys some time. The Constitution Party picks and chooses what parts of the Constitution it interprets is important and ignores the parts it doesn't like. They believe anyone can become an expert on the Constituion in 90 minutes. There are many oxymoronic features of the party.
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