PA 315 Government Business Relations

Lecture 7 Critique of Privatization Bargaining

Agenda
Critique of Privatization Bargaining Case Analysis: The City of Winter Park

Critique of Privatization

The Limits of Privatization

Major

argument:

The public and private sectors in the American political and cultural setting are fundamentally different and ultimately distinctive in character. Thus, the criteria for assigning functions between sectors should take into consideration these fundamental distinctions (Moe 1986)

The Limits of Privatization

The single most important characteristic that separates the public and private sectors SOVEREIGNTY (inherently governmental examples):

Power to go to and wage war Set foreign trade agreements; domestic trade rules Coercive power (police powers) Immunity from suit except by their permission Power to disavow debts (rather than bankruptcy) Right to establish the rules for protection and transference of property (eminent domain) Power to coin money Even partial privatizing of these functions needs great care

The Limits of Privatization

General

issues to consider

Sovereignty issues such as national security (e.g., CIA, embassies) and public safety Accountability issues Possibilities of corruption Market imperfections Maintaining some government management capacity

Factors to consider

Inherently governmental functions: the government has to keep certain functions and services under public ownership because of their strategic importance or sensitive nature. Goal diversion (public preference for equity over profit): the profit motive may be subordinated to social objectives. Sometimes equity of service is more important than profit maximization Higher accountability: the government is accountable to the people through the legislature. The public does not have any control or oversight of private companies. There are times when public accountability is better. Profiteering from the public good: Profits from public services end up in private, even foreign, hands instead of being available for the common good.

Factors to consider

Corruption: privatizing reduces transparency, allowing the contractor and elected officials controlling the contract to gain personally, sometimes to an illegal extent. Problems with monopolies: where natural monopolies exist (e.g., military hardware), must decide between privatizing and heavy regulation. Poor private sector performance: sometimes the public sector outperforms the private sector Yardstick competition: some public sector competition can improve market by providing comparative service, especially where there would be none otherwise Losing government capacity: the government may lose the capacity to perform or manage such duties, leading to market distortions or breaches of public security

Bargaining
Government sets up standard business conditions through laws and ordinances and by setting up taxing, zoning, and service provision procedures that apply across the board. But what if business wants special conditions? E.g. in the article, the United Airlines maintenance hub set up competition among state and local governments who offered special packages. Other examples are sports stadiums (providing national recognition, tourism), factories (jobs, taxes in future), stores (especially Big Box stores for sales tax revenue), and headquarters (high paying jobs).
Often government refuses to bargain (especially at national government level), but lets look at reasons why it does ..

Bargaining

Government reasons

Business reasons

tax dollars, jobs, and public relations. [also, jobs for blighted areas, sometimes specialty companies to complement existing businesses, and to redevelop areas.]

tax breaks, zoning variances, land assembly assistance, infrastructure improvements, and special services provided such as education

Bargaining
Public Sector Public interest

Tax revenues Jobs Low income housing Amenities Environment protection

Private Sector Corporate interest

Tax breaks Income streams Business opportunities

Factors Affecting Bargaining

Market Condition Popular Control System Policy Intervention Mechanism

Public Interest

Corporate Interest
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Bargaining

Three major factors affect bargaining relationship (Kantor and Savich)

market conditions

circumstances or forces that make cities more or less appealing to private investors e.g. demand for land, location, amenities the polyarchal processes through which public sector decisions that affect development e.g. ability to influence government policy through political rather than economic means relationships and methods used by government to regulate the marketplace e.g. land assembly assistance, zoning, tax

popular control systems

policy intervention mechanisms

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Characteristics Determining Governmental Bargaining Advantages (Kantor & Savitch)

Market conditions
Poor for gov. Competitive opportunities Nondiversified. E.g., company towns Flexible capital and mobile investment Good for gov. Few alternatives for business Economic diversity Economies of agglomeration Fixed capital and sunk investments

bargaining results
Unfavorable Inducement to business: Cash outlays, tax exemptions, aid to capital projects, loan guarantees, free land, large-scale condemnation
Mixed Negotiations with business: Extent of tax abatements, public-private contributions to capital projects, payments for land, capital improvements to land

Favorable Demands on business: Development fees, public amenities, higher business taxes, stiffer architectural requirements, restrictive zoning requirements

Characteristics Determining Governmental Bargaining Advantages (Kantor & Savitch)

Popular control systems

Poor for government Low party competition Fragmented party organization Few channels for citizen participation Apathetic citizens

bargaining results
Weak Acquiescent, uninvolved publicbargaining takes place exclusively between elites increasing number of side payments, low accountability, exclusionary zoning
Strong Institutionalized land-use review policies, employment concessions for local residents and minorities, contract set-asides for local firms or minority contractors, rent control or stabilization laws, inclusionary zoning

Good for government Competitive parties High ideological cohesion High party discipline Active citizens

Characteristics Determining Governmental Bargaining Advantages (Kantor & Savitch)

Policy intervention mechanisms

Poor for government Decentralized planning leading to more flexibility, but also greater competition Side payments (corruption) Finance: high dependence on private investment Good for government Centralized market regulation Substantial money for spending on infrastructure, subsidies Finance: autonomous investment

bargaining results
Dispersed Absence of zoning or loose zoning laws, tax code enforcement, intense competition between localities, significant sublocal disparities

Integrated Highly restrictive zoning laws, strict code enforcement, extensive infrastructure investments, frequent publicprivate compacts.

The comparison of Amsterdam and Detroit: Market conditions

Amsterdam Center of Hollands economic engine The nations political and financial capital Light industry, tourist and historic center, transportation hub Transformed economy to residential and postindustrial uses Detroit Rustbelt (once USs industrial heartland) Economy revolved around automobile manufacture Deindustrialization and foreign competition Loss of manufacturing jobs Poverty

The comparison of Amsterdam and Detroit: Popular control

Amsterdam Proportionally represented council well organized and easily disciplined by voters Political parties with cohesive programs Reinforced political accountability Councils participation in decentralized services Detroit Elected at large council Long tenure of elected official Singular ethnic composition A tight-knit elite

The comparison of Amsterdam and Detroit: Policy intervention mechanisms

Amsterdam Integrated national planning scheme Three-tier government

Upper level: goals Regional level: master plans Grass roots: implementation

Detroit Standing alone Suburbs resisting central city Failed collaboration Shrinking federal and state aid

Budget by national treasury

The comparison of Amsterdam and Detroit: Results

Amsterdam Bargaining tilted to the public sector

Detroit Bargaining tilted to the private sector

Being able to use infrastructure investment, subsidies, and its capacity to construct housing to extract concessions from investors and enforce development standards

Offering land, money, and tax relief to attract development

Dominated by a tight circle of political and economic elites.

Promoting equity (massive housing subsidies)

Question: Where would you place Winter Park FL, in terms of

bargaining power, in figure 3?

Winter Park is an old and well-known resort town in Central Florida (along with Orlando). It is a very well-off, land-locked city with extremely little available land. Considered a fashionable address. (market conditions) The citizens in Winter Park are extremely active in managing the activities of the city. Displeased with the local electric utility, citizens authorized its purchase.
(popular control mechanisms)

Winter Park is one of 17 cities are in Orange County. Land in the county is available but no longer abundant. Cities compete for businesses and development. (policy
intervention systems)
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Question: Mark how favorable or unfavorable is bargaining to government, using the three factors that Kantor and Savich identify.
Favorable to government Market conditions Unfavorable to government

Popular control systems

Policy intervention systems

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