New Report: Best Practices for Long-Term Privatization Deals

Governments considering major privatizations should learn from the experiences of Indiana and Chicago.

NEW YORK, NY — Across the country, cash-strapped cities and states are selling or leasing government assets in order to raise funds. Done right, privatization can be a big win for the public, but the cost of failure can be high. A new report by Manhattan Institute Senior Fellow Aaron M. Renn examines two examples of long-term privatization in Chicago and Indiana to produce a set of best practices.

In 2008, Chicago approved a long-term lease of its parking meters, a decision widely regarded as a disaster. Indiana, on the other hand, leased out its Indiana Toll Road, and former governor Mitch Daniels was largely justified in calling it “the best deal since Manhattan for the beads.” The difference, Renn finds, was a misunderstanding of optimal types of assets for privatization and the correct way to structure a privatization deal.

Getting long-term privatization right starts with choosing the right asset. Renn breaks down the criteria that should be considered by governments looking to privatize, producing a shorthand guide to long-term asset privatization.

Indiana’s successes, and Chicago’s mistakes, also provide instruction on how to negotiate deals most likely to benefit cities and states. Renn details five major lessons:

1. Public review matters. A rushed approval process creates a public perception of illegitimacy, while review and debate create an opportunity to catch troublesome provisions.
2. Carefully manage the transition from public to private operation.
3. Don’t blow the up-front payment. One-time revenues should be used on one-time expenses, not on recurring ones.
4. Watch out for all the budget implications of privatization. Governments should not impair future revenue streams in privatization transactions, and they should be skeptical of the long-term viability of revenue replacement reserve funds as a mitigation tool.
5. Beware of compensation payments. Governments should be skeptical of privatization deals that involve regularly recurring compensation payments.

Click here to read the full report.