Major privatization breakthroughs will likely occur in transportation in the 1990s. Already, state transportation officials are exploring privatization's potential for modernizing and developing airports, roads, high-speed rail, and other infrastructure. A number of innovative uses of privatization are being implemented under the direction of state transportation departments. These include: contracting out, asset sales, and build-operate-transfer (or build-transfer-operate) arrangements for new infrastructure.

Because the privatization opportunities in transportation are so substantial, states may want to consider setting up special privatization task forces or units within the transportation departments themselves. In Massachusetts, for example, an executive-branch transportation task force identified dozens of privatization opportunities in a report released in December 1991, some of which have since been implemented.[42]

The role of the transportation privatization task force would be to:

  1. Draw up an inventory of all infrastructure assets managed by the department;

  2. Identify possibilities for asset sales, leases, and contracting out;

  3. Determine whether savings or revenues from different privatizations accrue to the general fund or directly to the transportation department;

  4. Identify legal restrictions to privatization; and

  5. Explore opportunities and obstacles to public/private partnerships in developing new infrastructure.

ROAD AND REST AREA MAINTENANCE.

In a number of the largest states, most highway maintenance and construction is contracted out. Hawaii, Florida, Pennsylvania and Texas all contract out the majority of their road maintenance work (see Table 7).

Table 7

EXTENT OF CONTRACTING FOR STATE ROAD MIANTENANCE: LARGE URBAN STATE

State

Maintenance Services Contracted

California

Some

Florida

All Except signs

Illinois

None except some signs

Michigan

Very little

New Jersey

Some -- increasing

New York

Some

Pennsylvania

Most

Texas

Most

Source: Adapted from The Private Sector in State Service Delivery: Examples of Innovative Practice, Allen, et al., The Council of State Governments and the Urban Institute, Washington, D.C., 1989.

Cost savings for highway maintenance can range anywhere from 10 to 106 percent, depending on the service.[43] A Reason Foundation study, for instance, found that asphalt resurfacing performed by in-house units from the City of Los Angeles cost 106 percent more per mile than the same work done by contractors for the County of Los Angeles. Another study, by Robert Deacon of the University of California, found that contracting out street maintenance services resulted in a 30 percent cost savings for cities.[44]

States can also reduce costs by turning over some highway rest areas to private businesses to operate and maintain in exchange for letting the businesses (usually fast food chains) locate on part of the land. Another option is simply contracting with a private firm to maintain and operate the rest areas.

PUBLIC TRANSIT

Over 300 public agencies at the local level contract for transit service in the United States.[45] Direct cost savings have averaged 30 percent.[46] Some states also contract with the private sector for bus service. These include: California, Illinois, Texas, Virginia, and Washington.

Colorado provides a useful model for a state looking to contract out public transit. A 1988 Colorado law passed by the state legislature requiring the Denver Regional Transportation District to contract out 20 percent of bus operations has resulted in cost savings totaling $29 million, with no decline in service quality.[47] According to a November 1991 report by KPMG Peat Marwick, the performance of the private contractors was as good or better than that of the Rapid Transit Department.

MOTOR VEHICLE REGISTRY

More prompt, convenient, and cost-effective service can be obtained by contracting out a multitude of driver's and vehicle-license services. Driver's license and vehicle-license renewal and inspection, for example, could be turned over to private firms through a competitive-bidding process.

In order to encourage the private firm to provide prompt service to customers, the firm could be paid according to how many clients they served per hour.[48] The state could also make greater use of customer questionnaires in order to carefully monitor the performance of the contractor.

Some states also contract out centralized vehicle emissions checking facilities. Another approach is to license service stations to undertake vehicle emissions. Such a system, which is more flexible and decentralized, is more likely to spur innovations in customer service.

FLEET OPERATIONS AND MAINTENANCE

Most states and counties still maintain and repair vehicle fleets in-house. This, however, is likely to change in the 1990s. According to a 1990 Mercer Group survey, fleet maintenance is one of the most frequently cited targets for privatization by counties.[49]

States seeking to privatize fleet maintenance can employ several privatization techniques, including: contracting out; selling the state's fleet, and then leasing vehicles and maintenance from a private company; or giving state employees vouchers in exchange for using their own vehicles for state business.[50]

Most common is to contract with private firms to repair and maintain government fleets. Prior to contracting out fleet maintenance, a thorough review of the costs and quality of the present government service should be undertaken so that the private contractor and state officials know in advance precisely what the job entails. Los Angeles County's initial experience with fleet maintenance, for example, provides a good example of how not to privatize this function.

Los Angeles County had not kept accurate records of its previous in-house fleet maintenance service and of the condition of the fleet. The actual work required of the private contractor, Holmes and Narver, was underestimated in the request for proposal and contract. Holmes and Narver faced a backlog of 850 vehicles when it began its contract—two times what was expected. Holmes and Narver eventually brought the backlog down and 88 percent of users rated their service excellent, but the mistakes the County made earlier created a contract dispute and the contract was terminated.

AIRPORTS

Most U.S. airports are owned by cities and counties. However, a few states—Hawaii and Maryland, for instance—do own and operate airports. For such states, a number of privatization options are available. The operation of the airport can be contracted out to a private company. Private firms manage major airports in the United States and worldwide. By introducing private business practices into airport operations, they typically are able to increase airport revenues, attract greater private investment into airport-related facilities, and cut the costs of airport operation.

Airports can also be sold outright or leased to private firms. Many countries around the world are now in the process of privatizing airports or are studying the concept including Austria, Australia, Belgium, Denmark, Malaysia, and New Zealand.[51] In addition to producing one-time revenue windfalls, privatization generates a steady stream of new property and business tax revenues from the private owner.

The May 1992 Executive Order on Infrastructure Privatization issued by President Bush greatly enhances the prospects for airport privatization.[52] The order officially directs the Federal Aviation Administration and other government agencies to approve requests from state and local governments to sell or lease infrastructure enterprises such as airports. Furthermore, states that choose to sell their airports may now realize the lion's share of the proceeds from the sale. (see Table 8)

Table 8

STATE CONTRACTING FOR FLEET MAINTENANCE

State

Known Extent of Contracting

Progress on Developing Management Information System

AK

Preventative maintenance, minor repairs on 300 passenger cars.

Prototype mainframe. Heavy vehicles.

AZ

Preventative maintenance on 1,500 vehicles, including 400 passenger cars.

Prototype: PC.

CO

All maintenance for 1,000 passenger and other vehicles.

Customized package, AT&T PC.

HI

Maintenance of body, fender, glass and upholstery on central fleet of 200 cars.

In-house program, IBM and Xerox, personal computers.

IL

All maintenance on 11,000 vehicles.

Looking into it.

MI

Agreement with McCullagh Leasing to provide some preventative and routine  maintenance on passenger vehicles; vehicle operator’s choice to use authorized dealer, local repair facility, McCullagh, or state-operated garages.

In-house, Burroughs mainframe.

NE

Some contracting for certain vehicle parts.

In-house, IBM hardware, mainframe.

NY

All maintenance on 6,000 passenger vehicles; agency choice to use in-house repair facilities.

In-house, mainframe.

OH

Preventative and routine maintenance only on passenger vehicles; major repairs done by specialized vendors; limited use of state garages.

Implementing MIS

PA

Agreements with 400 private vendors for performance.  Also has one small state garage.

In-house software, mainframe, IBM System 3G Implementing system.  In-house, IBM mainframe, personal computers.

WA

Preventative maintenance and minor repairs on 1,100 cars, vans, and light trucks.

Informational, mainframe.

Source: Adapted from The Private Sector in State Service Delivery: Examples of Innovative Practices, Allen, et al., The Council of State Governments and The Urban institute, Washington, D.C. 1989.

HIGHWAYS AND BRIDGES

The federal government's Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) gives states the right to grant long-term franchises to private companies to rebuild and manage existing highways, tunnels, and bridges or to build and operate new ones. A bridge in need of repair, for example, could be sold to a private firm that would rebuild and modernize it. The private firm's original investment, as well as subsequent capital investment, would be returned through the collection of tolls. States and the private sector can both gain from this arrangement. The bridge is refurbished entirely with private financing and states receive revenue from the sale of the bridge, which can then be used to invest in new infrastructure.

Under ISTEA, federal highway funds may be used to draw private investment, on a matching basis. The maximum federal share for highways is 50 percent; for bridges, it is 80 percent. The lower the share of federal funds that is used, the greater amount of private investment is possible.[53] A hypothetical state, for instance, could increase its total highway investment by 50 percent using a 49 percent federal/51 percent private formula. If all states took advantage of ISTEA's privatization conditions, it could mean $19 billion per year of new private investment in highways and bridges.

Selling infrastructure assets is beginning to catch on in the United States. In August 1992, the Michigan Department of Management and Budget proposed that the state evaluate the feasibility of selling the state's Bluewater Bridge.

States can also realize revenue from leasing or selling surplus real estate holdings of state highway agencies.

Engaging the private sector to actually build and operate new infrastructure such as roads, tunnels, and bridges is another concept which is quickly taking hold.[54] Five states have enacted private tollway laws: Arizona, California, Florida, Texas, and Virginia. Four private tollway projects were approved in 1990 in California.

TURNPIKES

Most of the major turnpikes in the eastern region of the United States were financed primarily by states via tax-exempt bonds. Little or no federal money was involved.[55] Most of these bonds are now paid off, thus making turnpikes prime candidates for sale to the private sector. These eight eastern turnpikes have been conservatively valued at $7.4 billion.[56](see Table 9)

Table 9

ESTIMATED TURNPIKE VALUATIONS

Facility

Length

Estimated Value (Billions of $)

Massachusetts Turnpike

135

0.5

New York Thruway

512

1.9

Ohio Turnpike

241

0.9

Indiana Turnpike

157

0.6

Kansas Turnpike

237

0.9

New Jersey Turnpike

80

0.3

Pennsylvania Turnpike

359

1.3

Florida Turnpike

270

1.0

Total

1991

$7.4

Source: Reason Foundation, “Mining the Government Balance Sheet: What Cities and States Have to Sell,” April 1992.

The private sector has shown interest in purchasing turnpikes. In the winter of 1992, the American Trucking Associations, Inc. and two other investors made offers to purchase the Massachusetts Turnpike in response to press reports that Governor Weld was considering selling it.

PORTS

Privatizing shipping ports offers another privatization opportunity. Thirty-six governments around the world are privatizing ports or considering doing so. Britain has already sold three ports and is in the process of selling its remaining fifteen.

A recent Reason Foundation study estimated that the 45 largest ports in the United States have a net value of between $9.6 and $13.2 billion. Most of these ports have been turned into quasi-independent authorities that are supposed to operate like private entities. Nevertheless, many of these ports fail to meet the ultimate test of a successful private enterprise—to operate at a profit.[57]

Selling ports could bring in substantial one-time revenues to state governments in addition t-- creating a new source of steady tax revenues. For unprofitable ports, states could consider selling them to private entities and allowing private investors to redevelop parts of the ports into more profitable uses.