High Time to Rethink Privatizing

But there’s another angle that you probably haven’t seen: The flight service is being performed by a startup company that now will try to sell similar services to other cities looking for an eye in the sky to support their police and firefighters. After all, the spy plane service will be a bargain compared with what a city may be paying now or might pay in the future for similar work.

Let’s add another angle to this story: Lancaster’s spy plane experiment is a great example for California’s budget-stressed cities. Cities might escape their financial troubles and keep service levels high if they look at what Lancaster is doing and repeat it themselves.

The airplane service in Lancaster, named Aero View, charges the city $297 an hour to do its surveillance, according to an article in the Sept. 10 issue of the Los Angeles Business Journal. That’s way cheaper than the $500 to $900 an hour that law enforcement agencies estimate it costs them to provide similar services.

Why? Well, Aero View uses an inexpensive plane instead of a pricey helicopter, for one. And its contract pilots probably earn $50 to $80 an hour, way less than the $140 an hour that the Los Angeles County Fire Department pays some of its pilots.

That’s not a surprising difference, really. The private sector is driven – maybe obsessed – with driving down costs. Cities aren’t. They’ll gladly pay other people’s money to keep constituents from grumbling.

An old rule of thumb is that the private sector can do the same job for 5 percent to 20 percent less. But as I said, that’s an old rule of thumb. That was before we knew the full extent of public-sector pension obligations. Every time a city privatizes a service today, it also lifts from taxpayers the crushing weight of future pension payouts associated with the task. That probably makes the final savings closer to 30 percent or more.

And just think of the possibilities for privatizing. Not only can zoo and park operations be done by the private sector, but so can payroll and accounting services, street repair and even – are you listening, city of Los Angeles? – business permitting. Another old rule of thumb: Any service you could find in the Yellow Pages could be easily privatized. That rule is so old that we had Yellow Pages then.

Oh, and better yet, a city can put in the contract that customer service standards must be high. You know, those contract employees should smile and say, “May I help you?” Are you listening, DMV?

Of course, the main attraction for California’s soon-to-be bankrupt cities is that contracting out such services would save big money while keeping or even increasing service levels. But saving money is only the beginning. There are other advantages to privatizing. For example, the city gets more predictable costs over the life of a contract. The city can more flexibly staff up or down, and it can tap into expertise and specialization in the private sector.

But there’s one more aspect that’s particularly interesting about the Lancaster experiment: the city, in effect, became an equity investor in the company.

According to the article, in exchange for startup money the city gave Aero View, Lancaster not only gets one year of free service but it gets rewarded if the business is able to expand. Every new customer that Aero View signs up means a $5 an hour discount for Lancaster.

So if Aero View gets 10 additional customers, Lancaster will pay $247 an hour instead of $297. If it signs up 60 new customers, it appears Lancaster would start getting paid by Aero View. (The contract calls for the deal to stop at 60 customers.)

Just think if other cities could be entrepreneurial like Lancaster, especially if they would privatize many services. They could escape their financial troubles and keep service levels high. Maybe higher.

(Charles Crumpley is editor of the Los Angeles Business Journal. He can be reached at [email protected]. This column appeared first at foxandhoundsdaily.com) –cw



CityWatch
Vol 10 Issue 74
Pub: Sept 14, 2012