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The Myth of Privatization

Politicians, particularly Republicans, have long overstated the virtues of handing over government services to the free market.



If you've been trying to renew your driver's license in recent days, you can't. If you're due a state tax refund, you'll have to wait. And if you want to file a complaint about polluters, well, take a number.

Why? Northrop Grumman's statewide computer system has crapped out again. Under former Democratic Gov. Mark Warner, the company entered into the biggest-ever state contract worth $2.3 billion in 2005 to pull together the state's mishmash of computer systems and transform them into a seamless, smooth-running whole.

The result has been a disaster. In its most recent in a series of crashes, some circuit boards fried on Aug. 25, shutting down computer service at 26 state agencies. Service crawled back last week. Gov. Robert F. McDonnell, who got $75,000 from Northrop Grumman in campaign contributions, has announced an investigation.

The system's flopping raises other important questions. Ever since the days of Margaret Thatcher and Ronald Reagan, Richmond and the rest of Virginia have been enamored with the idea of privatization. The possibility of farming out what typically are government services to for-profit companies is like catnip for many of the state's conservative politicians. Like Thomas Jefferson, they lap up limited government, low taxes, private enterprise and the free market. There's even talk of taking the University of Virginia, TJ's school, private.

Back in the 1980s, with Reagan applauding, Thatcher started selling off Britain's biggest state-owned industries. As European Communism fell, Poland, Czechoslovakia and the former Soviet Union followed suit. In Virginia in the 1990s, Republican Gov. George Allen was star-struck by the idea. The Old Dominion passed the Public Private Transportation Act in 1995, a pioneering law in the country that set up ways to draw in private money directly into road and bridge projects and share or transfer ownership and operations.

The first project to get money from the act was the Pocahontas Parkway, State Route 895, which built a structurally challenging bridge across the James River and a superhighway connecting interstates 95 with 295 and 64 east of Richmond.

But things didn't work out as planned. In 2002, traffic was so light on the toll road that Moody's Investor Services and Standard & Poor's ratings agencies soon downgraded Pocahontas bonds to junk status. By 2004 the state's pristine AAA bond rating was in jeopardy. The then governor, Warner, quickly worked out a rescue plan worth $324 million with Transurban, an Australian company, and DEPFA Bank of Dublin, which took over operation of the parkway and set new tolls.

A year later, Warner, a former businessman who had made hundreds of millions trading radio bandwith for cell phones and financing high-tech startups, entered into the ill-fated contract with Northrop Grumman. (Warner, it should also be noted, received $50,000 in campaign contributions from the company.) The troubles started shortly afterward, forcing musical-chairs shifts with the Virginia Information Technologies Agency, which coordinates the contract.

Throughout the past decade, privatization of traditional government services has been in vogue with both political parties. The war in Iraq was largely outsourced — to the regret of many military officers — giving rise to such companies as Xe Services, formerly known as Blackwater, just across the state line in Moyock, N.C.

That company has been accused of many transgressions for its mercenary and guard service in Iraq. The firm settled a $42 million lawsuit with the federal government for a long list of problems including allegations of fraud. Blackwater was no bargain, either. A study found that companies such as Blackwater were charging the Pentagon $1,000 a day per man to do the work enlisted troops could do for five times less.

In Virginia, the push continues to privatize government, which is difficult to keep tabs on publicly. The Freedom of Information Act, the law that grants people the right to know how the government is spending their tax dollars, often doesn't apply when it comes to the mysterious world of privatization. The huge shipping complex in Hampton Roads funded by taxpayer money over dozens of years and operated by the Virginia Port Authority is on the block to be privatized. Several proposals from private companies and investors are afoot.

This raises a key question in selling off public facilities: How much are they worth? The Virginian-Pilot was turned down when it sought release of a publicly funded study evaluating the dollar value of Virginia Port Authority facilities by KPMG Corporate Finance LLC.

Corporate power has shown its clout in other ways. When he was campaigning for office last year, McDonnell started to criticize the Northrop Grumman mess. But then he piped down. Why? It could be that state officials were trying to beat out Maryland and the District of Columbia to snare the company's headquarters. Virginia won out, but only after agreeing to cough up relocation incentives worth $13 million, and that doesn't include millions in additional incentives from Fairfax County.

Richard G. Little, director of the Keston Institute for Public Finance and Infrastructure in Los Angeles, says that the term privatization has come to mean various things. He says that the Northrop Grumman deal is actually more of an outsourcing deal than true privatization. Selling off the port authority is more like true privatization. While Little says that it may be unwise to disclose financial details while privatizing, “as a member of the public, I'd like to know what the facilities are worth.”

The truest “privatization,” he says, could involve completely selling off state properties and staying out. What McDonnell is now busy trying to do with the Alcoholic Beverage Control system fits that definition.

The governor is due to come out with a specific proposal in a week or so of how he'd sell more than 300 state-owned ABC stores and use the proceeds to help fund transportation. True, many states have private liquor stores. But given the way privatizing IT has meant drivers can't get licenses renewed, one has to wonder about the ABC business. If there's a glitch interrupting liquor sales, the myth of privatization as a cure-all will become a sobering reality.

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