Select Committee Briefing: Public Private Partnerships
House Select Committee on Public Private Partnerships
Tuesday, January 9, 2012
North Carolina Context
Fergus Hodgson
Thank you to the committee and my fellow presenters for participating in this gathering. Len laid out an excellent overview, and I commend his work and that of the Reason Foundation.
I’m a new member of the John Locke Foundation team, and I’m available for an ongoing dialogue regarding public private partnerships (P3s). Today, though, I would like to complement Len’s presentation with a few North Carolina contextual considerations and areas to consider first, so as to motivate legislators to pursue P3s.
Firstly, I want to echo Len’s point that the P3 prospect is not a matter of partisanship. Rather, it is a question of how to harness competition to cost-effectively and accurately serve constituent needs. Presumably only insiders who benefit from waste would oppose the provision of higher quality services at lower costs to taxpayers. That’s why there is a need to fill the education gap, to make people aware of the opportunity presented by the P3 shift.
Before I get into the meat of what state legislators can do in this realm of streamlining and asset sales, though, I would like to clarify this term “public-private partnership,” since I see it generating confusion.
The fact is that, to some degree, all government activity is a P3. In other words, government officials must contract with either private individuals—that is, hire people—or private firms to get anything done. So that public-private partnership is always there.
Within our frame of discussion, though, we have two questions. First, what needs to be retained in the government realm at all? Second, of what we consider to be legitimate government activities and the properties associated with them, how high up along the chain can we go in delegating these activities to competing, privately held firms?
In addressing those questions, we also do well to keep in mind our context, one of an urgent fiscal condition. The State Budget Solutions Project has noted North Carolina’s total debt at nearly $100 billion or $30,000 per private sector employee. Yet, contrary to public perception and despite limited tax revenues, North Carolina’s state-level government spending has continued to increase. Even after we discount for inflation, in total it increased by 4 percent between fiscal years 2009 and 2011.
This problem is not going away. Even leading into this fiscal year, as many of you will be well aware, the state faced a $2.6 billion shortfall that had to be closed. And this struggle to cover spending means North Carolina is becoming more subservient to federal officials. It now relies on federal aid for 33 percent of total spending.
P3s and the return of assets to the private sector are proven, powerful tools to address the state’s fiscal dilemma. So, where to start?
Keep in mind that many state activities or properties, those that have neither economic nor constitutional basis, would be better off simply sold to private entities. In these instances, P3 mechanics are not the issue, rather it is political will to let go of wasteful albatrosses. Examples are plentiful, from the state’s parking complexes to its aquariums.
The three aquariums, for example, already generate enough revenue to cover half of their expenses, and there seems little doubt they would thrive under private operation. It’s time to let them and their $40 million worth of properties go, but they are just one example.
In fact, the state auditor, Beth Wood, has noted that North Carolina has approximately 15,000 properties, but a comprehensive list does not exist. And the preliminary lists that do exist do not match. When the executive branch can’t even work out how many properties it has, let alone the level to which they are all insured, it’s time for a clean up—be that in the form of private sale or consolidation under private management.
On the other hand, there are many state activities and properties that do fit comfortably within a broad understanding of the legitimate role of government, and these components of government would benefit from greater delegation to non-governmental firms. The state corrections system, which costs $1.4 billion each year, is perhaps the best example that would benefit from P3, and easily so.
In the case of prisons, a private contractor already operates three in North Carolina, but that is only three out of the approximately 70 in total. Numerous studies affirm that these privately run prisons save money for taxpayers in the range of 10 to 15 percent.
Not only could this be expanded, but a peculiar legal interpretation bars sheriffs from contracting out their jail operations. So, in this instance, legislators could expand P3s to both include more privately operated prisons and tweak the relevant law to allow for private jail activities as well.
Between the corrections and the aquarium spectrum, though, there is an array of alternatives for which greater P3 delegation can be utilized. For more evidence, I recommend people see the John Locke Foundation’s annual survey of privatization at the county level. It documents that counties from all across the state are already engaged in a whole host of P3 activities, from lawn care to tax collection.
County willingness to use P3s testifies to both its political feasibility and the win-win outcome: competition brings lower costs and superior quality. If it’s good enough for the counties, it’s good enough for the state.
Fergus Hodgson
Director of Fiscal Policy Studies
John Locke Foundation
fhodgson@johnlocke.org
919 828 3876