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Is privatization inherently bad or just botched?

I've repeatedly thrown barbs at Chicago's parking privatization plan and LA's proposed garage privatization, but haven't fully explained why these are bad plans. Their flaws aren't necessarily inherent drawbacks of privatization, but rather consequences of the way local governments use them for short-term, and short-sighted, gain by spending all the money up front and limiting options in the future.

"Privatized" Chi. meter. Photo by swanksalot.

Putting parking pricing into the hands of a private entity has a lot of advantages. Parking is a limited and exclusionary resource. Typically, private entities do a better job of matching supply with demand in such cases.

If the good is being underconsumed, a private company is quicker to market it through advertising and other means. If it's overconsumed, they're more able to raise prices than governments, which face political obstacles. Parking management companies do more to price by time of day, vary prices from garage to garage, and otherwise match market demand, at least most of the time.

In theory, therefore, letting a private company set prices and manage parking meters for Chicago should be a smart move. Chicago could get more revenue, and the company could manage the parking systems more efficiently. The same goes for LA's proposed garage privatization, where the winning bidder would manage ten of the city's garages and share the revenue with the city.

But there are two big problems with these deals: the contracts lock the city into existing decisions about parking, and the cities go and spend all the money, further constraining their future choices.

As Stephen Smith argues in Market Urbanism, the LA deal lets the partner manage the garages, but only for the purpose of parking cars. There's considerable additional value in the properties if they're used as housing or offices, perhaps with underground or internal parking, but the contract prohibits it.

LA's contract would last for 50 years. Should the city decide 25 years from now that it would rather use the space for something better, they're stuck. They might be able to renegotiate the contract or include options for termination (details aren't available, or are not yet decided), except for the second big flaw in this privatization plan: they'll spend almost all the money up front.

This isn't a deal where the private operator runs the garages at a greater profit and shares the proceeds with the city. Instead, this deal has the operator paying about $189 million in one lump sum payment, along with small revenue shares in future years. If the city decides it's ready for something other than parking, they'll presumably have to repay the initial payment. Maybe the land would fetch so much money that it could cover the debt, but what if they want to build a school, or affordable housing?

Chicago's 75-year parking meter deal also promised the vendor revenue from all existing parking spaces. If they decide to conduct some construction or hold a street fair, they have to reimburse the vendor, with even greater penalties if they want to remove parking spaces to create a bicycle facility, bike racks, wider sidewalks, bulb-outs, sidewalk cafe space, or anything else.

Chicago's deal also provided a single lump sum, and as you might expect, the city couldn't resist spending it. 2/3 is already gone after the first year. That saddles all future leaders with the debt from the past constraining their choices about their own public space. They can't make choices freely, because officials long dead chose to solve the past's budget problems with the future's money.

Elected leaders seem to find more and more ways to borrow from their children and grandchildren. We finance construction and transportation projects with bonds, transfer preventative maintenance dollars to operating expenses, sell off public facilities and lease them back, and more. Financing actual infrastructure and economic development can make sense because it facilitates greater economic growth in the future to make back the investment. But using future parking meter or garage revenue for today's budget hole doesn't grow the pie one bit. Instead, it just adds new obstacles to making the pie sweeter in the future.

David Alpert is the founder of Greater Greater Washington and its board president. He worked as a Product Manager for Google for six years and has lived in the Boston, San Francisco, and New York metro areas in addition to Washington, DC. He now lives with his wife and two children in Dupont Circle. 


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Completely agree. It's when you lose control over a resources for half a century for a year's worth of spending that it's a problem. You should never lose a revenue source for a lump sum.

I think most of us would agree that parking is horribly mismanaged by cities and that private businesses _can_ do good things given a fixed parking supply. The problem is that the contracts fix that parking supply well into the future even if it's not needed. Here's to hoping no city I live in ever does this.

by Fritz on Feb 12, 2010 2:24 pm • linkreport

It's a symptom of a failure of the political leadership to make difficult decisions. Popular things cost money. Money comes from taxation, which is unpopular. Borrowing
and leasing provide an easy route to continue spending (politically popular) while dodging revenue increases (politically unpopular). More people will howl about taxes than will howl about selling off (or leasing off) public assets, so the choice is clear, especially in an election year.
That saddles all future leaders with the debt from the past constraining their choices about their own public space. They can't make choices freely, because officials long dead chose to solve the past's budget problems with the future's money.
Tell that to Congress and the president! It's an interesting philosophical question you raise: is it right for the living to place obligations on future legislatures and citizens who do not even exist yet?

It's legally permissible and all governments do it, e.g. Social Security, deficit spending, capital bonds, judicial legal precedents, etc.

If one rejects the idea that current political powers can constrain the choices of future generations, then we'll have to shut down lots of government programs.

by Eric F. on Feb 12, 2010 2:30 pm • linkreport

hmm. Parking is inherently limited? Really? Even garages? And if the "market" is so micro-efficient, why are all the private garages in dc roughly the same price?

The biggest elephant in the room, of course, is corruption. A private company gets a concession like that after hiring a bunch of local DOT wags with friends. And while I'm sure a more equitable system is possible -- auction it off? -- is it really so bad to ask the government to run their own street parking?

by charlie on Feb 12, 2010 3:37 pm • linkreport

I completely oppose any government outsourcing any of its basic functions. I do not give a rats ass about supposed benefits. They are usually null and void.

The way I look at these things is simple. If something is considered a government task, then the government should do it. In its entirety. If not, then not. Democracy decides what is a government function and what not. End of story.

All hybrid forms eventually go defunct because the private negotiators are always better at their job than their government counterparts, and tax-payers end up paying the bill. Mostly, this outsourcing leads to government protected monopolies, which are a slap in the face of capitalism. See: Chicago parking, HOT lanes, all the same.

If parking is not considered a government function, then do not offer the parking spots. Widen the side walks, paint a bike lane, put an art-project up, whatever. Leave it to the free market to create parking structures. If there's a demand, they will be built, not?

by Jasper on Feb 12, 2010 4:30 pm • linkreport

charlie: Parking is inherently limited? Really? Even garages?

Dunno about you but I've certainly never seen a parking garage that was a portal to another universe with an infinite number of parking spaces inside.

by neff on Feb 12, 2010 4:48 pm • linkreport

I think its incorrect to see the risk/benefit entirely from the perspective of revenue to governments, while ignoring those to local business, people who park etc. For example, parking could be priced so that it is easier to find a spot when you need it.

by SJE on Feb 12, 2010 4:51 pm • linkreport

As a former Chicago resident of more than a decade, my concern would be the rampant corruption that already exists on Chicago's streets.

Tow truck bandits already operate with impunity, stealing cars that are parked legally and often on private property, holding the cars for ransoms of hundreds of dollars. Private patrols are authorized to write parking tickets, and are renowned for making up their own rules and violations (such as 'temporary parking sticker not filled out with felt tip pen').

The liberties these private contractors take is well known by the city government and yet they take no action to stop it. What will happen when private operators can alter meter records and functions to falsely accuse citizens of meter violations?

by ogden on Feb 12, 2010 5:02 pm • linkreport

The big issue to me is accountability. If I as a citizen and tax payer do not like the way governmental services are being run I can vote to throw the bums out and bring in new people who may do the job better. Privatization changes all that - especially 75 year contracts. It is the antithesis of good government

by andy on Feb 12, 2010 6:50 pm • linkreport

Bad idea. Why do liberals oppose privatization of failing government programs like Medicare, Medicaid and Social Security but support privatizing critical municipal assets like parking and liquor? To artificially deflate their revenue stream so cities can raise taxes and further destroy wealth and innovation in America?

by Cyrus on Feb 12, 2010 7:45 pm • linkreport

Liquor is a critical municipal asset?

by Michael Perkins on Feb 12, 2010 8:20 pm • linkreport

I'm all for private parking, but make sure a decent lawyer is involved with the city to write a good contract!

One of the biggest complaints I hear about chicago is "the private company has doubled prices and the city isnt getting a cent".

Im ok with that. Because if the meters stayed in the hands of the city....they never would have gone up in price! What's the easiest way for a politician to ponder for votes? "Defend small business" by keeping parking cheap or free.

So, Id be ok with a contract that says the city gets a lump sum and 1/10 of future parking revenue.

The problem is, chicago forgot that streets change. The fact that the city cant close a street for a day is madness.

by J on Feb 12, 2010 9:03 pm • linkreport

The overarching problem with privatizing use of public space is, as GGW and others point out, the loss of public control over public space, foreclosing or severely restricting the ability of that public space (and other public and private space) to adapt to changing circumstances. One could argue that there's no change at all -- the government has gotten a benefit from the transaction, and if circumstances change and its important enough to get that space back, the government can negotiate and buy back the rights to use it. The difference between doing that, and a typical case of eminent domain, is mostly in form, and in how the cost are spread.

Two big problems with privatizing would seem to be (1) the efficiency benefits that a private entity might be able to achieve aren't fully realized by the government, because of the usual public choice problems. The contractor has great incentive to get the price right, and the municipality, not so much. (2) The public-space parking we're talking about isn't in a vacuum -- it's part of a system that involves public streets and sidewalks and private businesses and parks, and of course people and vehicles. The contractor has the incentive to maximize the revenues on that public space, which in many cases is a good thing (i.e. private ownership of land generally leading to most profitable use of it), but the contractor is constrained by maximizing its value through *parking revenue* and it doesn't share in the city's incentives to, say, keep traffic moving smoothly, or make a block more walkable. And it's hard to negotiate a contract that aligns those incentives. (And yes, in the absence of transaction costs, this could all be worked out easily down the road, but the real world transaction costs of negotiating those rights back from a private contractor are massive.)

Michael Perkins wrote:
Liquor is a critical municipal asset?

It is in my town. But I'm all for privatizing it.

by Pilgrim on Feb 12, 2010 9:37 pm • linkreport

Liquor sales (which 28% of Americans are required to buy from their state, and in several cases, local governments) and parking are the only profitable assets of government. Everything else is revenue neutral or must be heavily subsidized, transit especially. Privatize core assets and you leave local government further reliant on property taxes to fund the part of government that must be subsidized. Higher property taxes results in unaffordable housing and decreased personal wealth and thus less consumption. Lets focus privatizion efforts on public housing and social security, two fundamentally flawed government programs, that award ignorance and laziness.

by Cyrus on Feb 12, 2010 10:06 pm • linkreport

@ Cyrus: Everything else is revenue neutral or must be heavily subsidized, transit especially.

I'd like to see you back that up with numbers. And please go further than just saying that transit costs a lot, because roads do too.

If you can't back this up, than stop selling hot air.

by Jasper on Feb 13, 2010 10:19 am • linkreport

Charlie: "And if the "market" is so micro-efficient, why are all the private garages in dc roughly the same price?"

That's actually exactly what you'd expect to see. The market has hit the equilibrium point where supply and demand are equal. Real markets are always more complicated than the straight, Econ 101 supply-demand model, but it's accurate enough to be useful. You're seeing that behavior at work with parking garages.

by Distantantennas on Feb 13, 2010 10:36 am • linkreport

Is privatization inherently bad?


This has been another edition of Simple Answers To Simple Questions.

by Peter Smith on Feb 15, 2010 1:06 pm • linkreport

Peter Smith hate privatization because he likes government programs that benefit himself while being paid for by other people's money.

by MPC on Feb 15, 2010 1:58 pm • linkreport

Economics has a specific definition of a "public good".

Privatization of public goods is bad. Privatization of private goods, like parking, is fine... Unfortunately the *street space* which the parking is on is a public good, and Chicago just privatized its ability to use that space for better uses like fairs. :-(

by Nathanael on Feb 16, 2010 1:59 am • linkreport

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