The Comprehensive Privatization Program for the City of Philadelphia
In 1992, the author designed a comprehensive privatization plan for the city of Philadelphia. The primary objective of the plan was to generate non-tax revenue and reduce the cost of government. The city could not support its $2.1 billion budget and taxes could not be increased without causing a furor. The citizens of Philadelphia are taxed at one of the highest rates in the nation. These problems were compounded by the fact that the city had recently experienced difficulty in securing debt financing.
During the first step of the CPP process, 35 evaluation criteria were identified, in conjunction with the city, and used as a means to qualify the privatization opportunities. Applying nine types of privatization to the city's real estate assets, existing facilities, transit and bus systems, and city-operated facilities and services, 71 privatization opportunities were identified. The wide array of privatization opportunities included projects small and large in scope, and projects which could be implemented in time to affect the city's bottom line prior to the end of the fiscal year.
In conjunction with city officials, twenty of the most viable privatization opportunities were selected for further financial analysis and refinement of each of the proposed privatization plans. Some of the more important criteria used to select the twenty projects included:
Projected Economic Return;
Marketability (the anticipated level of interest of the private sector);
Cost of Implementation;
Schedule Required to Implement; and
Level of Sensitivity of Various Public and Private Groups.
Drawing on the results of the comprehensive analyses of each privatization opportunity, five of the twenty opportunities were recommended for priority implementation. The final step of the comprehensive privatization program was to prepare detailed implementation plans for each of the priority projects.
The five privatization projects recommended for priority implementation and the estimated proceeds to the city were:
n Philadelphia International Airport — $490 million. It was recommended the city establish an airport authority and enhance the economic performance of the airport, then transfer the operation of the airport to a private management company. After the true annual income stream was determined, it would then be the appropriate time to structure the disposition of the airport to the private sector.
n Philadelphia Gas Works — $400 million. It was recommended that the city structure the disposition of this city-owned and operated company. Three different methods of valuation were used to determine the value of this asset.
n Veterans Stadium — $153 million. At the time the privatization program was being prepared, the owners of the Philadelphia Phillies were proposing to purchase the stadium. Our team recommended, since the stadium was currently underperforming asset, to stop negotiations and proceed with a three-phase privatization plan. The first-phase plan included ways to enhance the economic performance of the stadium. In the second phase, a solicitation would be distributed to private operators to manage the stadium. In the third phase, a solicitation would be distributed to the private sector for competitive offers to acquire the facility.
n Real Estate Asset Management Board — $125 million. The city owns over 10,000 properties valued at $2.4 billion. It was recommended to establish a management group to proactively manage these assets and dispose of at least 5 percent of the properties, which would generate $120 million, and an additional $5 million annually by placing the selected properties back on the tax roll.
n Philadelphia Computing Center — $2 million. It was recommended to introduce competition into the operation of this facility, which had become a government monopoly.
The total value of these five privatizations is $1.2 billion.
The total amount of non-tax and tax revenue, and cost savings, which the city could realize from implementing all 71 of the privatization opportunities is difficult to assess, but a conservative estimate would be $3 to $5 billion over the next 3 to 5 years.