Cities, counties, and states have significantly increased their use of privatization
over the past decade. But a great many privatization opportunities remain unrealized due
to federal laws and regulations.
There are four principal types of federal barriers: labor-protection provisions, tax
code provisions, regulatory barriers, and federal grant provisions. Lets look
briefly at the impact of each.
Labor-protection provisions may make privatization cost-prohibitive. The best-known of
these is Section 13(c) of the legislation providing for federal transit operating
subsidies. Administered by the Labor Department (rather than by the Department of
Transportation), it stipulates that public workers associated with federally subsidized
transit may receive upwards of six-years severance pay in the form of combined salary and
benefits. This has the effect of preventing a grant-receiving transit agency from laying
off any current transit worker, thus making it virtually impossible to save money by
contracting out transit service. The Heritage Foundation estimates that inefficiencies
associated with Section 13(c) constitute local government costs of $2 billion to $3
Now that federal transit funding has begun to shrink rather than grow, a number of
transit agencies have started calling for 13(c)s repeal or reform. Similar
provisions apply to federally supported public housing projects, making it very difficult
for them to save money by contracting out maintenance and repair.
The second federal barrier is clearly the tax code.
Consider three otherwise identical infrastructure facilities that serve the
publican airport, a toll bridge, or a water system. If the facility is owned by
investors, it must pay federal corporate income taxes and in most cases it can finance its
operations only with taxable debt.
The identical facility, if owned by a government agency, pays no taxes and can borrow
at tax-exempt rates. The net effect of these policies is that the federal government tells
investors, governors, and mayors: "We prefer that these vital facilities be provided
through municipal government rather than by the marketplace." Making tax-exempt bonds
available to developers of any public-purpose infrastructure, regardless of ownership,
would significantly reduce the antiprivate bias of the tax code (Note: The IRS in January
expanded the availability of tax-exempt debt for certain kinds of privatized
infrastructure projects). So, of course, would taxing government enterprises on the same
basis as investor-owned ones, as Australia and New Zealand are now doing.
The third type of barrier is regulation.
Here again, many federal rules and regulations were written without taking into account
the possibility that investor-owned firms could finance, build, own and operate basic
infrastructure. For example, the Resource Conservation & Recovery Act (RCRA) seeks to
provide less-costly effluent standards for facilities that treat municipal wastewater, as
compared with industrial wastewater. But the way RCRA implements this is to exempt
"Publicly Owned Treatment Works." This ignores the fact that the private sector
can and does own and operate municipal treatment plants. But RCRA subjects them to the
more costly regulations that apply to industrial facilities.
There are many other federal regulations that stand as obstacles to privatization of
infrastructure. In transportation, the Intermodal Surface Transportation Efficiency Act
permits the private redevelopment of certain categories of federally aided highways and
bridgesa welcome step forward. But it specifically exempts the most important and
commercially attractive portions of the nations highway systemthe Interstates.
Its no wonder, then, that hardly any states have taken advantage of these
provisions. The Clinton Administration in March proposed eliminating this obstacle in its
proposed highway reauthorization legislation.
Labor-protection provisions may make privatization cost-prohibitive.
When it comes to airports, the Airport & Airway Improvement Act, at least as
interpreted by the Federal Aviation Administration, requires that not only must any
operating profits of an airport be reinvested in the airport but also that any proceeds
from selling or leasing an airport be reinvested in that airport or airport system. This
removes one of the principal motivations for a city or state to sell an airportthe
desire to shift its resources into core functions, letting the private sector take over
commercial functions. (Fortunately, in its closing days the 104 th Congress enacted a
pilot program under which up to five airports can be privatized via lease or sale,
receiving waivers from this regulation.)
The last major barrier is entanglements imposed by federal grant agreements.
President Bush attempted to deal with these constraints by issuing Executive Order
12803 in 1992. It was intended to gain the cooperation of federal grant-making agencies,
such as the EPA and the FAA, and to eliminate the requirement that grants be repaid if a
city or state privatized an infrastructure facility. But the Office of Management &
Budget objected, resulting in a compromise that calls for repayment of an amount based on
the undepreciated portion of the facilities financed with the grant. Congressman David
McIntosh last year sponsored legislation to remove this repayment requirement and to
codify EO 12803s principles into lawbut it got lost in the election-year
Mayors and governors have become more aware of the crippling impact of these federal
laws and regulations over the past few years. The 105 th Congress presents an opportunity
to clear away some of these obstacles to privatization.