Annual Privatization Report: Reason Foundation

R e a s o n F o u n d a t i o n
Annual Privatization Report
Edited by Leonard C. Gilroy

Reason Foundation
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Copyright © 2007 Reason Foundation. All rights reserved.

Authors
Editor Contributing Authors
• Leonard C. Gilroy • William D. Eggers is the global director
for Deloitte Research—Public Sector.
Principal Authors
• Jerry Ellig, Ph.D. is the acting director
• Ted Balaker of the Regulatory Studies Program at
• Shikha Dalmia the Mercatus Center at George Mason
• Leonard C. Gilroy University.
• Amanda Kathryn Hydro • David T. Hartgen, Ph.D., P.E. is a

professor of transportation studies at
• Adrian T. Moore
the University of North Carolina at
• Amy Pelletier Charlotte.
• Robert W. Poole, Jr. • Patrick R. Mullen, Ph.D. is an assistant
• Geoffrey F. Segal professor of public administration and
• Skaidra Smith-Heisters policy, with a joint appointment with the
Institute for State Leadership and Policy,
• Lisa Snell
at the University of Illinois at Springfield.
• Samuel R. Staley
• Adam B. Summers
• Steven Titch
A n n u a l P r i v a t i z a t i o n R e p o r t 2 0 0 7
Letter from the Editor

By Leonard C. Gilroy
W elcome to Reason Foundation’s

Annual Privatization Report 2007.
Now in its 21st year of publication, APR
Chicago, managed competition in San
Diego, and Georgia’s new and innovative
contract cities.
is the world’s longest running and most As always, this year’s APR provides
comprehensive report on privatization news, a comprehensive overview of domestic
developments, and trends. and international developments in air
APR 2007 details the latest on and surface transportation, including a
privatization and government reform summary of Reason’s groundbreaking
initiatives at all levels of government. In 2006 study, Building Roads to Reduce
addition to the latest news on President Traffic Congestion in America’s Cities:
Bush’s continuing efforts to bring more How Much and at What Cost?, which
competition to federal programs and provides a detailed analysis of the looming
save billions of taxpayer dollars, this national congestion crisis and quantifies the
issue includes an expanded section on the investments needed to remedy it.
federal Performance Assessment Rating You’ll also find the latest news on
Tool (PART), used by the administration highway tolling and public-private
to rate programs and determine budget partnerships (PPPs) in the “Surface
priorities. Dr. Patrick Mullen, professor Transportation” section. For instance,
at the University of Illinois at Springfield, we offer readers a detailed overview of
offers readers a detailed assessment of the long-term toll road concessions, which
PART process, its successes to date, and can mobilize large new sums of capital
implementation challenges that still remain. investment to meet a significant share of
The “Local and State Update” section the need for new highway capacity. And
offers a wide-ranging review of the latest given the controversy generated by PPPs
action across state and local government and concessions over the past year, APR
that includes a state privatization roundup features an article by Deloitte Research’s
and budget outlook, an article on new public sector global director William Eggers
accounting rules covering government responding to the most commonly-voiced
liabilities, and the latest on Mayor Richard concerns, objections, and misperceptions
Daley’s extensive privatization efforts in about PPPs.
Two issues that have attracted a great to us. Please feel free to contact us with
deal of attention in policy circles this past questions, suggestions, or for more
year are examined in APR’s “Emerging information. For more privatization news,
Issues” section. First, we review federal check out Privatization Watch (www.
and state efforts to make government more reason.org/pw.shtml), now in its 31st
transparent by allowing taxpayers access year of publication. For the most up-to-
to spending information, typically through date information on the rapidly changing
“Google government” Web databases. privatization world, please visit Reason’s
Second, we provide a roundup of several Privatization Center (www.reason.org/
states’ proposals to privatize their lottery privatization/) and our weblog, Out of
systems. Control (www.reason.org/outofcontrol/).
APR’s “Education” section includes Leonard C. Gilroy, Editor
comprehensive updates on school choice
and child welfare privatization, as well as
two articles on the promise of the weighted-
student-funding program for improving
low-performing school districts and giving
parents more choice.
APR 2007 also dives in to the ever-
changing world of telecommunications
policy, with updates on video franchise
reform, network neutrality, and the
municipal provision of broadband services.
This update includes an assessment of the
rocky start for Provo, Utah’s municipal
broadband system, as well as a summary of
Reason’s 2006 study, A Dynamic Perspective
on Government Broadband, authored by the
Mercatus Center’s Jerry Ellig.
With private property rights remaining
a hot topic in state legislatures and at the
ballot box two years after the Supreme
Court’s controversial Kelo vs. New London
decision, this APR highlights the latest state
action on eminent domain reform. We also
feature an analysis of Arizona’s Proposition
207, a comprehensive package of property
rights protections approved by Arizona
voters last November that’s designed to
protect property owners from both eminent
domain abuse and regulatory takings via
land use regulation.
Your comments on the Annual
Privatization Report 2007 are important
Annual Privatization Report
Federal Update......................................................................................................... 1
A. Update on the Program Assessment Rating Tool (PART): PART Nears Full Cycle
Assessing All Federal Programs............................................................................... 1
B. Program Performance Evaluation Continues......................................................... 7
C. Federal Competitive Sourcing Slows, But Continues to Demonstrate Results..........8
Local and State Update........................................................................................... 10

A. Local Privatization Update................................................................................. 10
B. State Privatization Update................................................................................ 12
C. State Budget Outlook.........................................................................................17
D. State and Local Tax Burdens Hit 25-Year High..................................................... 19
E. New Accounting Rule Shines Light on Government Liabilities.............................. 20
Surface Transportation...........................................................................................22
A. Building Roads to Reduce Traffic Congestion in America’s Cities:
How Much and at What Cost?................................................................................ 22
B. Long-Term Toll Road Concessions: An Overview.................................................. 25
C. Privatization of Existing Toll Roads..................................................................... 29
D. New PPP Toll Roads & Toll Lanes.........................................................................31
E. International Toll Road Developments................................................................ 35
F. Answers to the Most Common Objections to PPPs............................................... 39
Air Transportation...................................................................................................44
A. Global Airport Privatization............................................................................... 44
B. U.S. Airport Privatization................................................................................... 46
C. U.S. Airport Security......................................................................................... 48
D. Global Air Traffic Control................................................................................... 49
E. U.S. Air Traffic Control........................................................................................51
Education and Child Welfare................................................................................... 55

A. School Choice Update....................................................................................... 55
B. No Choices Left Behind: Restructuring California’s Lowest-Performing Schools.... 62
C. Experimenting With School Choice: A Tale of Two California Districts................... 63
D. Child Welfare Privatization Update.................................................................... 66
E. The Case for Privatizing University Housing........................................................ 72
Emerging Issues..................................................................................................... 75
A. State Lottery Privatization................................................................................. 75
B. Government Transparency................................................................................. 77
Water & Wastewater............................................................................................... 81

A. Public Works Financing Issues 11th Annual Water Privatization Report................. 81
B. U.S. House of Representatives Passes Water Funds............................................ 81
C. World Bank: New Generation of Privatization?.................................................... 82
Telecommunications...............................................................................................84
A. States Push for Video Franchise Reform............................................................. 84
B. Push for Network Neutrality Regulation Loses Momentum ................................. 87
C. Problems Emerging with Municipal WiFi.............................................................88
D. Lessons Learned from Provo’s Municipal Broadband.......................................... 89
E. A Dynamic Perspective on Government Broadband............................................. 92
Land Use and Property Rights.................................................................................95

A. Eminent Domain Reform Update........................................................................ 95
B. Measure 37 Rewrite Sent to Voters....................................................................102
C. Arizona’s Proposition 207: The New Standard for Regulatory Takings Reform......104
D. Sustainable Development in Urban Planning: The Case for a Market-Based
Approach........................................................................................................... 108
Public Health and Safety........................................................................................110

A. Corrections Update.......................................................................................... 110
B. Journal Releases 200-City EMS Survey.............................................................. 112
Federal Update
Contents
A. Update on the Program Assessment Rating Tool (PART): PART Nears Full Cycle Assessing All
Federal Programs
B. Program Performance Evaluation Continues
C. Federal Competitive Sourcing Slows, But Continues to Demonstrate Results
A. Update on the Program the congressional decision-making process.

Assessment Rating Tool (PART): Among other statutory obligations, GPRA
PART Nears Full Cycle Assessing All requires federal agencies to publish strategic
Federal Programs and annual plans describing specific
program activities with the intention of
By Patrick R. Mullen, Ph.D. establishing a more tangible link between
performance information for these programs
Under the President’s Management and agency budget requests.
Agenda for performance and budget
integration, the Office of Management
and Budget (OMB) designed the Program 1. How Does the PART Process Work?
Assessment Rating Tool (PART) to The Bush administration has taken
breathe new life into performance-based several steps to strengthen the performance-
budgeting as envisioned by the Government resource linkages for which GPRA laid
Performance and Results Act (GPRA). the groundwork. Central to the budget
Federal interest in performance information and performance integration initiative,
and its relationship to budgeting practices OMB developed the PART as a means to
has existed to varying degrees for over strengthen the process for assessing the
50 years. This interest resulted in the effectiveness of programs by making that
passage of the Government Performance process more robust, transparent, and
and Results Act (GPRA) and related systematic. PART is a series of diagnostic
management reforms of the 1990s. GPRA questions designed to provide a consistent
mandates that federal agencies develop approach to rating federal programs.
performance information describing the Drawing on available performance and
relative effectiveness and efficiency of evaluation information, the PART questions
federal programs as a means of improving
Reason Foundation • www.reason.org

rate the strengths and weaknesses of a single weighted numerical rating could
federal programs with a particular focus on suggest false precision, or draw attention
individual program results. The PART asks, away from the very areas most in need
for example, whether a program’s long-term of improvement, numerical scores are
goals are specific, ambitious and focused combined and translated into qualitative
on outcomes, and whether annual goals ranges.” The qualitative ratings and point
demonstrate progress toward achieving ranges of the weighted summary ratings are:
long-term goals. Effective (85-100), Moderately Effective
PART is designed to be evidence-based, (70-84), Adequate (50-69), and Ineffective
drawing on a wide array of information, (0-49).
including authorizing legislation, GPRA Since the fiscal year 2004-budget
strategic plans, annual performance plans cycle, which began with preparation
and reports, and reviewing financial of the 2004 budget request in calendar
statements, inspectors general reports, and year 2002, OMB has applied PART to
independent program evaluations. The 977 programs (about 96 percent of the
reviews of individual programs are done on federal budget) and given each program
a collaborative basis by the OMB budget one of the four overall ratings discussed
examiner responsible for the program’s above. A fifth category of “Results Not
budget presentation in the president’s budget Demonstrated” was given—independent
documents and the program, planning and of a program’s numerical score—if OMB
budget offices in the respective departments decided that a program’s performance
and agencies. OMB makes the final PART information, performance measures, or
determinations but the departments can both were insufficient or inadequate. As
appeal OMB’s decisions for a better score program and budget officers learn how to
for each section where they can demonstrate satisfy PART requirements, they are able
improvement. The program office can also to convince OMB budget examiners that
provide more information the next year there is enough performance information
to show progress; this is known as “re- to make a definite determination of where a
PARTing.” PART questions are divided into program falls within the four performance
four sections. Each section is given a specific categories. During calendar year 2006,
weight in determining the final numerical the Administration assessed all remaining
rating for a program. Table 1 shows an executive branch programs, with limited
overview of the four PART sections and the exceptions, and reported the results with
weights OMB has assigned. the release of the fiscal year 2008 budget
The answers to the questions in each of request. Table 2 shows the distribution of
the four sections discussed in Table 1 result ratings from calendar years 2002 through
in a numerical score for each section ranging 2006 (fiscal years 2004-2008) budget
from 0 to 100. These scores are then requests.
weighted to give a summary score, again For each program assessment, PART
ranging from 0 to 100, for the program. summary worksheets were published in a
In the budget documents explaining PART separate volume starting with the president’s
scoring, OMB states “Because reporting fiscal year 2004 budget request. For the

Table 1: Overview of Sections of PART Questions

Section Description Selected Questions
(Weight)
1. Program To assess whether • Is the program purpose clear?
Purpose and • The purpose is • Does the program address a specific and existing problem,
Design clear, and interest or need?
(20 %) • The program design
makes sense. • Is the program designed so it is not redundant or duplicative of
any other federal, state, local or private effort?
• Is the program design effectively targeted, so that resources
will reach intended beneficiaries and/or otherwise address the
program’s purpose directly?
2. Strategic To assess whether • Does the program have a limited number of specific long-term
Planning the agency sets valid performance measures that focus on outcomes and meaningfully
(10 %) programmatic reflect the program purpose?
• Annual goals, and • Do all partners (grantees, sub-grantees, contractors, cost-
• Long-term goals. sharing partners, government partners) commit to and work
toward annual and/or long-term goals?
• Are independent evaluations of sufficient scope and quality
conducted on a regular basis or as needed to support program
improvements and evaluate effectiveness and relevance to the
problem, interest, or need?
3. Program To rate agency • Does the agency regularly collect timely and credible
Management management of the performance information, including information from key
(20%) program, including program partners, and use it to manage the program and improve
• Financial oversight, performance?
and • Are federal managers and program partners (including grantees,
• Program sub-grantees, contractors, cost-sharing partners, government
improvement efforts. partners) held accountable for cost, schedule and performance
results?
• Does the program use strong financial management practices?
4. Program To rate program • Has the program demonstrated adequate progress in achieving
Results and performance on goals its long-term performance goal(s)?
Accountability reviewed in • Does the program (including program partners) achieve its
(50%) • The strategic annual performance goals?
planning section, and
• Through other • Does the program demonstrate improved efficiencies or cost
evaluations. effectiveness in achieving program goals each year?
• Do independent evaluations of sufficient scope and quality
indicate that the program is effective and achieving results?
Source: Analysis of the Budget of the United States Government, Fiscal Year 2004, Performance and Management Assessments (Washington, D.C.:
February 2003) and the PART Excel spreadsheet questions.

Table 2: PART Program Ratings by Year Completed, 2002-2006

Ratings 2002 2003 2004 2005 2006
(FY 2004) (FY 2005) (FY 2006) (FY 2007) (FY 2008)
Effective 6% 11% 15% 15% 17%
Moderately Effective 24% 26% 26% 29% 30%
Adequate 15% 20% 26% 28% 28%
Ineffective 5% 5% 4% 4% 3%
Results Not Demonstrated 50% 38% 29% 24% 22%
Total Programs 234 407 607 793 977
Source: Office of Management and Budget, Budget of the United States Government, Fiscal Year 2008, Analytical Perspectives, p. 15.
fiscal year 2005 and 2006 budget requests, 2. Observations About the Impact of PART
similar information was provided on the Reviews
OMB Web site and in an accompanying PART is credited for helping to structure
CD-ROM. The detailed, supporting OMB’s use of performance information for
worksheets for each program were posted its internal program and budget analysis,
on OMB’s Web site. For programs assessed making the use of this information more
and published with the budget request for transparent, and stimulating agency
the first time, all summary sheets display interest in budget and performance
the program’s goals and measures, budget integration. OMB and agency staff said
information, significant findings and this helped OMB staff with varying levels
recommendations (also known as follow- of experience focus on similar issues. One
up program actions). Beginning with the of PART’s major impacts is its ability to
FY 2006 budget request, summary sheets highlight OMB’s recommended changes in
for programs that have been reassessed or program management and design. Much
originally published with the fiscal year of PART’s value lies in the related program
2004 or 2005 budget requests include recommendations, but realizing these
information on when the program was benefits requires sustained attention to
last assessed and the status of the follow- implementation and oversight to determine
up actions. Status ranges from “no action if desired results are achieved.
taken” to “action taken but not completed” There are inherent challenges in
to “completed.” For fiscal years 2007 and assigning a single rating to programs having
2008 reporting of PART results, OMB’s multiple purposes and goals. OMB devoted
PART recommendations are generally aimed considerable effort to promoting consistent
at improving program design, management, ratings, but challenges remain in addressing
funding, and/or assessment. They can inconsistencies among OMB staff, such as
be general or very specific. Examples of interpreting PART guidance and defining
recommendations for each of the four acceptable measures. Limited credible
categories are shown in Table 3. evidence on results also constrained OMB’s
ability to rate program effectiveness, as

Table 3: Examples of PART Recommendations for Categories of Program Management

Category Example of Recommendations
Program “Reduce unnecessary subsidies to lenders and other program participants.”
Design “The 2006 Budget proposes to restructure the grant allocation process, providing
the Secretary with greater discretion to award funds based on risks, threats, and
vulnerabilities.”
Program “Continue to improve the contractor evaluation processes and weapon program
Management performance metrics to focus on schedules and performance against baselines to
increase performance and cost-effectiveness.”
“Increase the number of accounts supporting this program to quicken the transfer of
funds with contractors and increase management flexibility to address changing security
conditions and mission priorities. This will significantly improve the obligation and
costing process of funds.”
Funding “Maintaining funding at the 2005 enacted level until the agency can show how it will use
additional funds to improve performance.”
“Directly related to the PART findings, the Budget includes $37 million, a $3 million
decrease.”
Program “Develop a means of regularly performing independent evaluations to examine program
Assessment effectiveness.”
“Developed baselines for its proposed long-term measures. Without baselines for the
measures, it was impossible to verify the performance of the program.”
Source: OMB PART assessments.
evidenced by the 50 percent of programs crosscutting comparisons. OMB is now

rated “results not demonstrated” in the using PART to a greater extent to evaluate
fiscal year 2004 budget documents. PART similar programs together to facilitate trade-
is not yet well integrated with GPRA, which offs or make relative comparisons.
is the current statutory framework for PART clearly must serve the president’s
strategic planning and reporting. By using interests. However, the many actors whose
the PART process to review and sometimes input is critical to decisions will not likely
replace GPRA, goals and measures, OMB is use performance information unless they
substituting its judgment for a wide range feel it is credible and reflects a consensus on
of stakeholder interests. The PART-GPRA goals. It is important for OMB to initiate
tension is further highlighted by challenges timely discussions with Congress concerning
in defining a unit of analysis useful for both the focus of PART assessments and to clarify
program-level budget analysis and agency the results and limitations of PART and the
planning purposes. Although PART can underlying performance information. A
stimulate discussion on program-specific more systematic congressional approach to
measurement issues, it cannot substitute providing its perspective on performance
for GPRA’s focus on thematic goals issues and goals could facilitate OMB’s
and department- and government-wide understanding of congressional priorities

and thus increase PART’s usefulness in OMB discussed its planned next steps to
budget deliberations. improve the effectiveness of the president’s
The PART process has aided OMB’s budget and performance integration
oversight of agencies, focused agencies’ initiative:
efforts to improve program management, 1. Ensure plans are aggressive and result in
and created or enhanced an evaluation improved performance through rigorous
culture within agencies. Although the PART follow-up on recommendations from
has enhanced the focus on performance, the the PART to accelerate improvements
PART remains a labor-intensive process at in the performance of federal programs.
OMB and agencies. However, most PART This will ensure that the hard work
recommendations are focused on improving done through the PART produces
outcome measures and data collection, and performance and management
are not designed to result in observable improvements through tracking and
short-term performance improvements. reporting mechanisms established by
Since these necessary first steps on the path OMB.
to long-term program improvement do
not usually lead to improved short-term 2. Expand cross-cutting analyses by using
results, there is limited evidence to date of the PART to facilitate cross-cutting
the PART’s influence on outcome-based analysis where there is a higher return
program results. Moreover, as of February than approaching programs individually.
2007—the date of the most recent available The goal of these efforts is to increase
OMB data—the majority of follow-up efficiency and save dollars by building
program recommendations have not yet on the success of previous cross-cutting
been fully implemented. By design OMB analyses. OMB states that congressional
has not prioritized them within or among guidance will be a factor in choosing
agencies. Because OMB has chosen to topics for the next group of cross-cutting
assess nearly all federal programs, OMB and analyses.
agency resources are diffused across multiple 3. Maximize www.ExpectMore.gov impact
areas instead of concentrated on those areas by holding the federal government
of highest priority both within agencies and accountable to the public for its
across the federal government. This strategy performance. OMB states that this
is likely to lengthen the time it will take “web-based tool provides candid
to observe measurable change compared information on how programs are
with a more strategic approach. OMB has performing and what they are doing to
used the PART as a framework for several improve.”
crosscutting reviews, but these have not
always included all relevant tools, such as 3. Conclusions
tax expenditures, that contribute to related OMB is to be commended for
goals. Greater focus on electing related developing the PART to bring a renewed
programs and activities for concurrent focus on individual program-level
review will improve their usefulness. management and performance. PART
In the fiscal year 2008 budget request, has had several successes, including

helping structure and discipline OMB’s B. Program Performance Evaluation

use of performance information over a Continues
broad range of programs, questions, and
evidence. PART has also made OMB’s This past year brought about another
use of performance information more round of performance reviews as the
transparent in terms of public reporting of administration implemented its Program
judgments and sources, including explicit Assessment Rating Tool (PART). Every
recommendations to change management budget submitted by this administration
practices and program design in response to has used this tool to rate programs and use
PART findings. This has, in turn, stimulated the ratings to determine budget priorities.
agencies’ interest in performance and budget Many failing or ineffective programs have
integration and in improving evidence been outlined for elimination or reduction
regarding demonstrating program results. in previous budgets, however, Congress
Nevertheless, several challenges have also has yet to use the rating or the outcomes in
been evident during five years of PART determining funding. In the FY2008 budget,
implementation, such as the consistent 91 programs will be terminated for a savings
application of general principles to diverse of $5 billion and 50 programs have seen
cases, which requires interpretation and major reductions providing $7 billion in
judgment. Another challenge is for agencies, savings, for a total of $12 billion in savings.
OMB, and Congress to define agreed-upon In the fifth year of reviewing government
program outcomes and reduce complexity programs via PART, the Office of
to a consensus bottom-line rating. This Management and Budget has now assessed
challenge is exacerbated by the difficulty of about 96 percent (977 programs) of all
obtaining credible information on program federal programs. The following chart
effectiveness, which is compounded by outlines the breakdown of PART results:
limited agency evaluation capacity. If these
challenges can be successfully overcome— Table 4: Distribution of Program Ratings,
which will be an incredibly difficult task to FY2008
say the least—OMB will have gone a long Number of Programs Assessed 977
way, through its development of PART, in
Effective 17%
providing performance-based information
Moderately Effective 30%
on individual programs to the full range of
Adequate 28%
actors who implement budget, policy, and
management decisions. Ineffective 3%
Results Not Demonstrated 22%
Patrick R. Mullen, Ph.D. is an assistant pro-

The success of federal programs has
fessor of public administration and policy,
been growing according to PART’s standards
with a joint appointment with the Institute for
showcasing that now 75 percent of them
State Leadership and Policy, at the University
are operating “effectively.” PART’s primary
of Illinois at Springfield.
role is to ensure that these programs do

what Congress mandated them to while reiterated that getting rid of the provisions
being managed effectively, thus providing that limit best value contracts “would allow
value for the taxpayers. The programs in taxpayers to get the best results possible
the bottom 25 percent are now candidates from competitive sourcing.”
for termination or reduction in funding to In May, OMB reported to Congress
bring about reform. Those that are rated on the results of competitions in 2006.
as ineffective “are not using tax dollars The federal government completed 183
effectively” and 22 percent cannot show competitions, comprised of 6,678 full-time
any impact or results for their efforts or equivalent employees representing about
spending because “they have not been able 1.7 percent of the federal workforce. While
to develop acceptable performance goals a wide range of activities were studied,
or collect data to determine whether it is information technology, maintenance and
performing.” property management were among the most
Increasingly, Congress has paid more studied areas.
attention to these ratings as reflected in Federal employees won 87 percent of
the number of programs terminated. For the competitions, generating savings of $1.3
example, in FY2005 only seven of the 65 billion over the next five to ten years. Each
proposed reductions occurred; this year position studied saved of $34,500, or 36
91 were terminated. Additionally, OMB percent gross savings.
launched www.expectmore.gov to shed Since 2003, 12 percent of the federal
more transparency on PART. On this workforce has faced a competition, winning
Web site, citizens are able to view which 83 percent of them and generating savings
programs have been evaluated and their of $6.9 billion. Taxpayers get $31 for every
ratings are searchable by keyword, topic or dollar invested in competition, for a total
agency. of $226 million invested in competitive
sourcing. Furthermore, average net savings
are 28 percent per position studied.
C. Federal Competitive Sourcing
Slows, But Continues to Demonstrate
Results
The FY2008 budget illustrated a

continued implementation, although slow,
of public-private competition for federal
jobs. In the section devoted to federal
management, officials revealed that since
the Office and Management and Budget’s
(OMB) Circular A-76 overhaul in 2003
they have seen, “process reengineering,
workforce realignments, better leveraging of
technology and operational consolidations.”
Furthermore, the budget’s text also

Table 5: Competitive Sourcing FY2006 Results

FY2006 Total
Completed Competitions
Number of PMA agencies completing competitions 20
Number of competitions completed 183
Number of FTEs completed 6,678
Total estimated net savings $1.3 billion*
Estimated annualized savings $220 million
Competitions where federal agency selected to perform work (as a percentage of total 87%
FTEs completed)**
Announced Competitions
Number of competitions announced 86
Number of FTEs announced 9,691
* Figure rounded to nearest $100 million.
** Calculated by FTEs competed.
Table 6: Cumulative Results (2003-2006)

Four-Year Total*
FTE competed 46,825
Number of competitions conducted 1,243
FTE competed under standard competitions 36,696**
Incremental cost $230 million
Estimated net savings $6.9 billion
Estimated annualized savings $1.1 billion
* Dollar savings figures are rounded to nearest $100 million.
** Standard competitions require head-to-head competition between the public and private sectors and the development of an MEO staffing plan
by the federal incumbent provider.
Table 7: Four Year Averages

Four-Year Average
FTE competed 38
Number of competitions conducted 78%*
FTE competed under standard competitions $5,000**
Incremental cost $25,000
Estimated net savings 83%
* Standard competitions require head-to-head competition between the public and private sectors and the development of an MEO staffing plan by
the federal incumbent provider.
** Incremental cost figures are rounded to nearest thousand.

Local and State Update

Contents
A. Local Privatization Update
B. State Privatization Update
C. State Budget Outlook
D. State and Local Tax Burdens Hit 25-Year High
E. New Accounting Rule Shines Light on Government Liabilities
A. Local Privatization Update infrastructure, valued at $65 million for an

initial rebuild and more than $550 million
1. Chicago Remains a Privatization Leader over the term of the lease.
Chicago’s lease of its Skyway for $1.83 The city dedicated $278 million of the
billion in 2005 is widely known. What may proceeds to debt retirement. $122 million
not be well known is that Chicago, under will be used for city park improvements
Mayor Richard Daley’s leadership for the with another $120 million invested into the
past 18 years, has privatized more than two Chicago Park District “Reserve” account,
dozen other functions or assets—and there’s generating annual income of $5 million.
more to come. Another $35 million is dedicated for the
The city recently leased four adjacent rebuilding of the Daley Bi-Centennial Plaza.
underground parking garages located Daley is also considering a lease of Midway
downtown. The 9,178 spaces made airport, several recycling centers and city-
Chicago’s system the largest in the United owned marinas.
States. Daley and his team realized that In the same vein, between 1995 and
parking garage operation were not a core 2005 the city of Chicago successfully
function of government. Having already privatized 27 other government functions.
entered into contractual agreements on Because of these efforts, taxpayers have
other city lots, leasing these lots was a saved hundreds of millions of dollars. In
natural extension of the success of the additional to the capital outlay costs needed
Skyway deal. Morgan Stanley was awarded to equip the city to perform many of these
a 99-year lease over 12 other bidders with functions, it would cost taxpayers nearly
a bid price of $563 million. Additionally, $45 million annually to bring all of the
Morgan Stanley agreed to rebuild garage functions listed in this report back in-
10 Reason Foundation • www.reason.org

house today. The city estimates that it has however, is the form of operational
achieved cumulative savings of $175 million government. Originally created with
in that period. just four government employees, the city
Furthermore, the city reports achieving decided to contract out all other non-
an additional $7.9 million in annual savings public, safety-related functions. The city
from seven privatizations that occurred maintains ownership of assets and ultimate
before 1995, resulting in a total savings of budget control by setting priorities and
$102 million. service levels. Meanwhile the contractor is
responsible for staffing and all operations
2. San Diego Passes Managed Competition
and services.
Initiative
Sandy Springs recently successfully rolled
New Mayor Jerry Sanders was swept out its own police and fire departments,
into office after budgeting scandals left as the Georgia state constitution requires
the city in dire straits. Competition was that public safety services are provided
a centerpiece of his campaign, however, by government. Counting police and fire
upon entering office he learned that the City employees, the city of 87,000 has only 196
Charter limited the city’s ability to subject total employees. Nearby Roswell, a city of
services to competition and contract them 85,000 has more than 1,400. Furthermore,
out. Functions that were provided by public Sandy Springs’ budget is $37 million less,
employees were exempted from competition and by most accounts provides a higher level
even if contracting out could demonstrate of service.
savings, improved services, or greater Sandy Springs only spends $803 per
efficiencies. resident and has only 22 employees for
A change to the City Charter was needed every 10,000 residents. It had no tax or
to enable managed competition. Proposition fee increases in 2007. Couple that against
C emerged and citizens were asked: Atlanta. While a much larger city with
Shall the Charter be amended to perhaps more diverse challenges, the order
allow the City to contract services of magnitude is still significant. Atlanta
traditionally performed by City civil spends more than $2,000 per resident and
service employees if determined to be has 183 public employees for every 10,000
more economical and efficient while residents. Additionally, Atlanta’s General
maintaining the quality of services Fund budget is expected to increase by 40
and protecting the public interest? percent this year. Mayor Shirley Franklin
With more than 60 percent of the suggested she’d find the money by looking
vote Proposition C passed. The Sanders in “other people’s pockets”—code for tax or
administration is now developing its fee increases.
competitive sourcing plans. Following in the footsteps of Sandy
3. Sandy Springs One Year Later; Others Fol- Springs, two new cities—Johns Creek and
low in its Footsteps Milton—were formed on December 1, 2006.
Both employ similar operating models, with
The city of Sandy Springs became
five and three public employees respectively.
Georgia’s first new city on December 1,
Both cities have chosen the same contract
2005. What makes Sandy Springs unique,
Reason Foundation • www.reason.org 11

operator as Sandy Springs. In doing so, the The California Supreme Court
cities are finding additional efficiencies. unanimously affirmed a ruling by the
Two other communities—South Fulton First District Court of Appeals that the
and Chattahoochee Hill Country—will vote state Department of Transportation could
in June on whether or not to incorporate. indeed contract out architectural and
Both would likely follow similar operational engineering services. Voters in 2000 passed
models. Furthermore, the communities Proposition 35 explicitly authorizing the
of Peachtree Corner and Dunwoody have state to do so. However, the Professional
legislation pending in the Georgia General Engineers in California Government, the
Assembly. union representing state employees, sued to
By some accounts there are upwards prevent the state from outsourcing work.
of a dozen upstart communities planned in Writing for the court, Justice Carlos R.
the metro Atlanta area. Additionally, many Moreno said that there is “a clear intent
of the new privately run cities have called by the electorate to supersede prior law,
for the creation of a new county, Milton, under which the ability of state agencies
which had merged with Fulton County to contract with private entities for
in 1931. Given the operational model of architectural and engineering services was
several of the cities that would make up limited.” Governor Arnold Schwarzenegger
Milton County, its conceivable that a similar called the court’s decision “a great victory
operational model will be implemented. for commuters and taxpayers.”
In Colorado, SB 251 would eliminate
the requirement that the Regional
B. State Privatization Update Transportation District (RTD) contract
Alabama’s legislature is attempting to out at least 50 percent of its bus service,
authorize the Director of the Department including special services for the disabled.
of Transportation to enter into agreements Furthermore, it would cap privatization of
related to the privatization of roads built bus service at 58 percent.
in the future. The bill, HB121 is still in The bill is promoted by the transit
committee and pending action. workers union and calls for RTD to
Privatization in Arizona took a step maintain employment numbers high enough
forward when Governor Janet Napolitano so that RTD can “step in when private
approved the privatization of public rest contractors fail.” In order to broaden
areas, assuming approval from the Federal support, the union agreed to an amendment
Highway Administration. that would not allow privatization
In Arkansas, public-private partnerships percentages to become an issue in labor
(PPPs) met a mixed bag. Legislation was negotiations.
passed to strike the opportunity to use PPPs RTD officials noted that if they were
in the state’s Information Office as well as in forced to bring contracted services in, their
the school districts or public charter schools. budget would need to increase by $35
However, the legislature passed Act 389 million a year. Currently RTD pays about
allowing regional mobility authorities to use $63 an hour for privatized bus service and
public-private partnerships. $91 an hour for in-house delivery.

If passed, Connecticut’s Clean authorizing state and county departments

Contracting Standards Act would establish and agencies to provide government services
a State Contracting Board and require through contracts with private entities. In
that appointed members not only have addition, HB1824, currently in committee,
knowledge of privatization, but that they would authorize purchasing agencies to
are also part of the selection process. establish public-private partnerships for the
Related bills are currently in committee. construction of state facilities.
Another piece of legislation that would Efforts in Illinois would allow
transition all services currently provided by public-private partnerships to be used in
the Department of Mental Retardation into transportation and agriculture. S1333
private, non-profit providers is currently would create PPPs with the Passenger
being heard in committee. Service Rail Act and S378 would create the
Privatization efforts continue in Florida, Transportation Act. The Transportation
most notably with the Florida Government Act would authorize the Department of
Accountability Act, which allows state Transportation and the Illinois State Toll
agencies to privatize or outsource in order to Highway Authority to enter into public-
reduce cost or improve services to citizens. private agreements for the development,
The Lake Okeechobee Watershed Protection operation, and financing of transportation
Act was passed encouraging and supporting facilities.
the development of public-private After two years of study Indiana signed
partnerships for water storage to further a contract with an IBM-led consortium to
restore water quality on Lake Okeechobee. reform and modernize the state’s welfare
Two additional efforts were tabled in system. The 10-year $1.16 billion contract
Florida. The first would have created the anticipates saving a half billion dollars over
Tampa Bay Area Regional Transportation the next 10 years on administration. Savings
Authority and encouraged the option of will increase as fraud and errors are brought
PPPs in regional multimodal transportation down, and could balloon savings to north of
improvements. The second called for an a billion dollars.
evaluation of all major privatization efforts Before modernization, the application
in the last five years and a comparison on process in Indiana was very paper-intensive.
cost to see if money really was saved as Bankers’ boxes full of files and paper
related to state information technology. literally crowded each of the state’s 107
There are some efforts to privatize county offices. Each benefit program had
underway in Georgia. HB461 calls for the its own records and requirements, creating
privatization of the state’s mental health large case files and an extremely laborious
centers and HB291 would allow the Georgia process.
Arts Alliance to employ PPPs to support the Client interaction only took place in
arts. This bill was brought forth because face-to-face meetings and often required
of the successful PPPs that the Georgia multiple trips. Upon entry into the system
Research Alliance has gained in higher clients were assigned a caseworker, and
education. regardless of availability, that’s the only
Hawaii repealed the sunset of the law person they could interact with. It didn’t

help that the caseworker was the only one legislative authority in Indiana face a
who knew where a client’s file was. difficult uphill battle for the time being.
Under the new operations, a premium In fact, a proposal to allow the private
will be placed on client services. By moving development of two new toll facilities was
into an electronic-based system, new scrapped after achieving Senate approval.
internet and phone services will become The House, now under Democratic
available. For the first time in Indiana, leadership, didn’t give the bill a hearing,
clients will be able to access caseworkers effectively killing it. Furthermore, it
24 hours a day, 7 days a week. Governor wouldn’t entertain a hearing privatizing the
Daniels said “no longer will they have to lottery. House Speaker Pat Bauer considers
contact the system only at places and times privatization a non-partisan issue, i.e., it’s
convenient to the bureaucracy, then wait a the “politics of greed…and you can be a
month or longer for an answer or decision.” Democrat and do that, too.”
The new system will also improve There were several legislative efforts
Indiana’s high error and fraud rate. In to thwart privatization efforts by creating
addition, Indiana has the worst welfare- more bureaucracy in Indiana. H1062
to-work record in the country. Currently would have created a Privatization Review
errors cost Indiana taxpayers $100 million a Committee that would review plans and
year, not counting fraud. Simply eliminating make recommendations to the governor.
that is a major benefit. However, providing Furthermore the bill would ensure that
a path to self-sufficiency is perhaps even no contracts were signed that would
more valuable. extend into the administration of the
The IBM-led team will be responsible for next governor. H1313 would establish a
adding new ways for clients to interact with general accountability office to review all
benefits administrators and caseworkers. privatization contracts entered into after
Additionally it will be responsible for data December 2004.
collection and electronic storage. Perhaps Maryland legislators are calling for
one of the most important aspects will the Maryland Transportation Authority
be the development of new technological to implement PPPs with HB662, which
improvements around the state’s current is in committee. However, they were able
core computer system. to pass legislation requiring that notice
IBM offered employment to all and information be given to the General
existing state employees too. And not Assembly and the Department of Legislative
just employment, but better pay, benefits, Services before issuing a public notice of
pensions and career prospects than the state procurement for PPPs. Additional efforts to
plan. Furthermore, employees will be able allow private companies to administer the
to spend more time helping people and not programs of the Maryland Small Business
just pushing paper. The modernization will Development Financing Authority and Child
be phased in over several stages, as the next Placement Services were withdrawn.
stage cannot begin until the previous stage is In efforts similar to Indiana’s legislation,
completely and successfully transitioned. Minnesota is calling for a required state
Privatization efforts that require employee cost comparison before entering

into any transportation privatization viable option.

contracts, a 10 percent savings requirement Although New Jersey has not passed
and an annual report. S1278 addresses any legislation, multiple bills are currently
competitive sourcing and acquisition. in committee. All bills were introduced last
Bills in both chambers call for pay session, and none of them is friendly toward
equity compliance meaning that “a state privatization. Companion bills require that
agency may not accept a bid or proposal “no decision regarding the privatization of
for a contract in excess of $500,000 any service provided by the State should be
from a business with more than 40 full- made without a careful evaluation of the
time employees in the state unless the long term impact of the privatization on
Commissioner of Employee Relations has the State, its citizens and its employees.”
approved the business’ plan to establish The bill basically requires a report detailing
equitable compensation relationships for all aspects of the privatization and the
its employees and has issued the business anticipated net reduction of in-house costs
a certificate of compliance.” Legislation to be posted publicly and reviewed by the
remains in committee. State Auditor before any outside bids can
Missouri’s Public Service Accountability be solicited. A2168 would require the State
Act, if it passes, would require most public Auditor to review potential Department
bodies to conduct a cost benefit analysis of of Corrections Privatization contracts
any privatization program. In Montana, in a similar manner. Then S1557 would
a joint bill called for a privatization study require state agencies to submit notices of
for state agencies, however, it did not gain request for proposals and other documents
support. pertinent to privatization contracts to the
Nevada legislators made a broad-based state employees who may have in fact lost
attempt to privatize government services, their job to privatization. Another attempt
although some of these efforts fell flat to de-privatize the Motor Vehicle Inspection
because they did not take action before Program when the vendor contract
a legislative deadline. Those efforts were concludes was made with S1556.
privatization of motor vehicle registration, Additionally, Governor Jon Corzine
privatization of the regulation of foster care, partnered with UBS Investment Bank to
and the privatization of ombudsmen used conduct an evaluation of state assets,
for dispute resolution in common-interest identifying which were most appropriate for
communities. There is still legislation privatization and the potential value. The
pending in committee: the privatization review looked at assets owned by the state
of early intervention service providers for and its independent authorities. All assets
infants and toddlers, the privatization of were considered, including but not limited
jails, and the privatization of public works to toll roads, transit facilities, rights-of-way,
as they relate to management and inspection buildings, air rights, naming rights, airports,
of construction projects. Perhaps most bridges, water facilities, ports, parks, lottery
notably, AB74 would encourage all agencies and the student loan portfolio.
that receive money from the State General New Jersey currently has the third
Fund to look at privatization of services as a highest level of debt per capita in the nation,

as well as the highest level of property taxes. A1647 would provide for awarding of
The state carries at least $29.7 billion in public works contracts as well as creation of
debt with payments eating 8 percent of state a Privatization Advisory Board. Companion
spending. This also does not account for bills A5644 and S153 also call for the
unfunded pension liabilities. Given this, creation of a Privatization Advisory Board
the state is looking to generate new value to but add statutory requirements for the
have a significant reduction in existing debt, awarding of public works contracts by the
allow new capital investment, and deliver Triborough Bridge and Tunnel Authority
new efficiencies and quality to existing as well as the Metropolitan Transportation
services. Authority and its subsidiaries.
Tier 1 assets have a sound commercial While A5851 aims to promote fairness
viability and a meaningful value to the in competitive bidding by providing for
state. These assets are early candidates for enforcement of prevailing wage provisions
privatization: applicable to public work construction
• Atlantic City Expressway projects, companion bills would similarly
• Development rights at New Jersey enforce competitive bidding. Additional
Transit stations legislation aims to enact the Public Private
Partnership Disclosure Act requiring state
• Garden State Parkway
agencies entering into PPPs to promulgate
• New Jersey Lottery rules and regulations regarding review and
• New Jersey Turnpike disclosure relating to such relationships
UBS also identified several Tier 2 assets. as well as public notice and a report to
Essentially, these are assets that would likely the legislature. Similarly, A1021 calls on
be successful, but there just isn’t enough all public authorities owning, leasing, and
information at this time. controlling critical infrastructure to study
• Atlantic City International Airport the potential consequences of privatization
before engaging in it.
• Fiber Optic Network
Ohio State Treasurer Richard Cordray
• High Occupancy Toll lanes proposed creating a central inventory of
• Naming Rights state properties with a goal of weeding out
• Newly-Tolled Facilities unused or under-utilized land. An initial
review of just 20 counties representing 36
• PNC Bank Arts Center
percent of Ohio’s population found 7,364
Of the assets, the Lottery and Atlantic state-owned properties—nearly 6 percent
City Expressway scored the highest in of those properties remain unimproved
terms of viability. Closely behind those or unused. Those 446 properties appear
two were the NJ Turnpike, Garden State to be suitable for divestiture and private
Parkway, HOT Lanes, newly tolled facilities, development.
development rights at train stations, naming Cordray wants government to reduce the
rights and the PNC Bank Arts Center. amount of vacant land it owns and restore
New York’s current situation is not that those properties to the tax rolls. Indeed,
different from its neighbors in New Jersey: Cordray suggested that the state should
all legislation is pending in committee.

“feel an obligation to ensure that state- survey of state fiscal officers. Of the
owned properties are being utilized to their 48 states (Texas and Arkansas did not
maximum potential.” participate) in NCSL’s State Budget Update,
The proposal includes a “defining November 2006, 23 reported their overall
principle” for the state’s property policy: revenue collection was above the original
If the State owns land that forecast. Additionally, 22 states reported
is non-productive, and if there is their collections on target. Only three states,
no immediate plan to make that Maryland, Michigan, and Tennessee, took in
property productive, then the private less revenue than was forecasted.
sector and community groups When looking at specific taxes,
should be given the opportunity corporate and personal income tax
to propose one or more plans to collections were either at or above
improve and utilize that property, forecasted levels in most states. However,
and the presumption should favor 14 states reported sales tax collections below
any such proposal that results in projections—at this time last year, only
the disposition or use of the land to seven states reported underperforming sales
create value, jobs, tax revenue, and tax collections.
community improvement. For the first time since 2002, the number
Utah made an attempt to privatize its of states reporting an “optimistic” outlook
correctional facilities but the bill failed. went down from 26 to 16. In addition,
And Vermont’s HB272, which would the number of states that are “concerned”
completely prohibit the outsourcing of tripled from the 2002 survey to six.
any state services, is awaiting a vote in Officials in the remaining states expect their
committee. Virginia passed legislation revenues to be “stable,” leaving no state
calling for periodic analysis of outsourcing’s with a “pessimistic” outlook for the future.
feasibility. In addition, any program or States with deficits also decreased in
activity with privatization potential must the latest report. However, some 14 states
now undergo a cost/benefit analysis. The continue to face a deficit. Historically, this
Secretary of Finance must independently number is down by five from last year and
certify the results of the comparison of the 9 less from 2005. The two most common
private and public operations and devise, in programs over budget were Medicaid and
consultation with the Secretary of Finance, corrections.
evaluation criteria to be used in conducting The survey also asked officials to
performance reviews of any program or identify the budget priorities for the coming
activity that is subject to a privatization legislative session. Twenty-nine states
recommendation. identified education as the top priority.
Medicaid and health care came in second
with officials from 23 states calling it a top
C. State Budget Outlook priority. In this area officials specifically
The 2007 Fiscal Year looks to be a good noted debate about funding the uninsured
one for most state budgets, according to the and expanding coverage for all citizens. In
National Conference of State Legislatures addition, corrections, transportation and

Table 8: Notable Tax Changes

Type State Action Result
Sales New Jersey 1% increase; widening of base $1.25 billion and $300.6 million respectively
Income Ohio 4.2% decrease Part of 21% reduction over 5 years
Corporate Pennsylvania Continued phaseout of capital Decrease of $198.2 million
Income stock and franchise
Cigarette Texas $0.41 per pack increase Increase of $431.7 million
Gas New York Cap Decrease of $109 million
Table 9: Tax and Fee Changes in the States

Tax Number of States Action
Sales 15 Decrease
Personal Income 18 Decrease
Corporate Income 17 Decrease
Cigarette, Tobacco and Alcohol 4 Increase
Gas 5 Changes resulted in a decrease
public employee retirement will be high on pressure will remain in Medicaid programs
the agenda in a number of states. while looming issues such as pensions and
FY 2008 revenue growth is forecasted infrastructure will begin to take center
between 0.5 percent (New York) to 6.5 stage, an almost exact forecast as the NCSL
percent (Georgia) growth—while the report.
average growth was pegged at 3.6 percent. Spending in FY 2006 grew at a
Less than half the states provided forecasts staggering rate—8.7 percent, significantly
for FY 2009, however, the forecast is much higher than the 29-year average of 6.4
more upbeat with the range between 2.5 percent. The survey noted this growth was
percent (Maine) and 7.3 percent (Nevada), largely due to states spending in programs
with an average of 4.7 percent. that received cuts in recent years. In
The results of the NCSL survey addition, growth of budget reserves counts
largely mirror the results of the National as spending and contributed to this growth
Association of State Budget Officers/ rate as many states dedicated new revenues
National Governors Association Fiscal into reserves.
Survey of the States. The NASBO/NGA FY 2007 spending is forecasted to be
survey only covers general fund spending closer to the average and achieve a growth
but found state fiscal conditions had rate of 7 percent. Pressure will continue
improved in 2006 with only two states from mandatory programs, especially
forced to make mid-year budget cuts. Medicaid.
The survey anticipates more modest The survey also reported that states
growth in 2007, however, forecasted strong enacted a net tax and fee decrease of $2.1
expenditure demand from programs that billion in FY 2007. While 15 states enacted
may have been cut in the past. Further, net increases, twenty-four had net decreases.

Personal income taxes saw the largest to the surge.

decrease, $2.32 billion, while sales taxes Vermont, Maine and New York had
increased $622.4 million. the highest state-local tax burdens, whereas
Unlike the NCSL report, the NASBO Tennessee, New Hampshire and Alaska
survey reported that 46 states’ revenues had the three lowest. Alaska is helped with
exceeded expectations, while the other four large oil reserves that residents occasionally
were on target. In fact, revenues were 5.9 receive royalties from.
percent higher than originally estimated,
1. How Do Americans Think About Taxes?
with corporate income taxes coming in
almost 21 percent above forecasts. This It’s no surprise that a majority of
represents a dramatic swing from FY 2002 Americans say the federal income taxes
when forty-two states reported collecting they pay are “too high.” Some of the key
less revenue than budgeted. findings:
• Only 10 percent of Americans say
they’re willing to pay higher taxes to
D. State and Local Tax Burdens Hit help eliminate the federal budget deficit.
25-Year High • 66 percent of Americans favor a
According to a new study by the Tax complete elimination of the federal death
Foundation, state and local taxes will tax.
consume a record-setting 11 percent of the
• 48 percent would support giving up
nation’s income in 2007. Tax burdens have
some federal deductions for an across-
not dipped below 10 percent since 1986 and
the-board cut in tax rates.
2007 marks the first time they’ve risen above
However, some of the findings from the
10.9 percent.
third annual survey of taxpayer attitudes
Tax collections have been boosted
by the Tax Foundation may be surprising.
as personal and corporate incomes have
For example, respondents were asked
risen for almost four consecutive years.
the maximum level of income someone
Additionally low unemployment has added

Figure 1: State-Local Tax Burden and Ranks (Calendar Year 2007)
Source: Tax Foundation
should be taxed—including federal, state, E. New Accounting Rule Shines Light

and local taxes. The result was an average on Government Liabilities
(14.7 percent) that is less than half that of
An accounting rule set in 2004 by
the actual average taxpayer burden (32.7
the Governmental Accounting Standards
percent). Additionally, the income group
Board (GASB) goes into effect this year.
that most favored lower tax rates is those
The rule, GASB 45, effects state and
with modest incomes, while those in the
local governments and how they account
highest income brackets favored the highest
for employee benefits. Before GASB 45
tax rates. Education level also factored
governments used cash accounting to
into what people’s attitudes about tax
account only for that year’s expense. Now,
rates should be. The lower the education
governments will have to shift to accrual
level, the lower the tax rate. Conversely,
accounting and to account for long-term
as education level increased, so did the
promises as incurred costs or liabilities.
opinions about what tax rates should be.
A Credit Suisse report issued in
The federal death tax was deemed the
March 2007 estimates that state and local
most “unfair,” followed by gas and income
governments have amassed more than $1.5
taxes. Locally, gas taxes were considered
trillion in unfunded pension and employee
the most unfair, followed by property and
benefit liabilities. Almost $1 trillion of
motor vehicle taxes
that is held at the local level. To put that

Figure 2: Do You Consider the Amount of Federal Income Tax You Have to Pay
as Too High, Too Low, or About Right?
Source: Tax Foundation
into perspective the entire municipal bond in a recent budget address New Jersey
market was $2.4 trillion at the end of 2006. Governor Jon Corzine said “the constant
Furthermore, the companies in the S&P 500 focus on short-term priorities without
“only” had an unfunded liability of $326 consideration of long-term costs has led to
billion. financing decisions that hang over the state
Only three states—Mississippi, today, tomorrow, and far into the future.”
Nebraska, and Wisconsin—have no GASB 45 is a very rude awaking for many in
unfunded pension liabilities. California, government and taxpayers alike. Given this
New Jersey and New York likely face reality many governments are left with few
liabilities of $70, $60, and $54 billion options:
respectively. At the local level, Jacksonville, • Shift to defined contribution plans
Indianapolis and San Jose have the three (although promises made will still have
lowest liabilities among U.S. major cities. to be funded, but the bleeding can be
Detroit, San Francisco and Philadelphia stopped);
are at the other end of the spectrum. New • Cut benefits;
York City faces a deficit of $50 billion if you
• Raise taxes;
account for all public employees, including
teachers. • Cut services; or,
When this picture is painted, government • Privatize
balance sheets look a lot darker. In fact,

Surface Transportation
Contents
A. Building Roads to Reduce Traffic Congestion in America’s Cities: How Much and at What Cost?
B. Long-Term Toll Road Concessions: An Overview
C. Privatization of Existing Toll Roads
D. New PPP Toll Roads & Toll Lanes
E. International Toll Road Developments
F. Answers to the Most Common Objections to PPPs
A. Building Roads to Reduce Traffic how much additional capacity will be

Congestion in America’s Cities: How needed to relieve severe congestion. These
Much and at What Cost? findings are then extended to all 403
urbanized areas. The report then estimates
By David T. Hartgen, Ph.D., P.E. and M. the cost of providing that additional
Gregory Fields capacity.
These costs include construction in each
Reason Foundation’s August 2006 state, major bridge widenings, adjustments
study, Building Roads to Reduce Traffic for induced travel, and requirements for
Congestion in America’s Cities: How Much some elevated or tunnel sections. Detailed
and at What Cost? (available at www. results are provided for each city and state.
reason.org/ps346/index.shtml), quantifies The study also provides a simplified state-
the magnitude of traffic congestion and the level assessment for rural areas and for
cost of its removal through the provision of moderate urban congestion.
additional capacity. The study defines and The study finds that severe traffic
quantifies severe congestion, in which peak- congestion is pervasive in large regions and
hour traffic volumes exceed road capacity, is worsening throughout the United States.
and estimates future congestion if trends In the future even small, urbanized areas
continue. are likely to experience congestion common
With the help of 32 participating in mid-sized areas today. The cause of this
urbanized areas, the study uses sophisticated increase is not wastefulness but increasing
traffic modeling techniques to determine

Figure 3: An Overview of the Congestion Problem
Figure 4: Urban Areas in the United States Requiring

Congestion Relief with Costs to Relieve Congestion

Table 10: Cities with 2030 Travel Time Delays Worse Than Today’s Los Angeles
City Population in 2030 (000s) Congestion Index in 2030
Los Angeles-Long Beach 15,652 1.94
Chicago 9,522 1.88
Washington 5,973 1.87
San Francisco-Oakland 4,968 1.86
Atlanta 5,009 1.85
Miami 7,551 1.84
Denver-Aurora 3,210 1.80
Seattle-Tacoma, WA 3,963 1.79
Las Vegas 1,029 1.79
Minneapolis-St. Paul 3,370 1.76
Baltimore 2,437 1.75
Portland 2,513 1.75
population and preferences for private budgets. The benefits of an investment in

mobility, combined with limited additions additional capacity would be substantial.
to road capacity. Nationwide, the number In addition to reduced travel time, other
of lane-miles of severely congested roads is benefits include smoother traffic flow,
expected to increase from about 39,500 in reduced accidents, improved air quality
2003 to 59,700 in 2030. To relieve severe through lower emissions, lower fuel use
congestion by providing additional capacity, and operating costs, more reliable travel,
an additional 104,000 lane-miles of capacity lower logistical costs for manufacturing and
(about 6.2 percent of current lane-miles) delivery, more choices of jobs for workers
will be needed, costing about $533 billion and businesses and wider choices for
over 25 years, in 2005 dollars. The amount consumers.
needed—about $21 billion per year—is David T. Hartgen, Ph.D., P.E. is a professor of
about 10-15 percent of the federal highway transportation studies at the University of
program over 25 years, about 28 percent North Carolina at Charlotte. M. Gregory Fields
of the cost of present urban transportation is a graduate student at the University of
plans, and about 39 cents per day per North Carolina at Charlotte pursuing masters
commuter trip. However, the travel time degrees in Geography (Transportation), Earth
savings are estimated at about 7.7 billion Sciences (Environmental Monitoring) and
hours annually, so the cost per hour of Sociology. The above article is a summary of
delay saved is about $2.76. If moderate Reason’s August 2006 study, Building Roads
congestion and rural congestion are also to to Reduce Traffic Congestion in America’s
be addressed, an additional $304 billion will Cities: How Much and at What Cost? The full
be needed. study, detailed appendices, interactive maps,
The study also finds that congestion and overviews of state-by-state congestion
relief through provision of additional data and road capacity needs are available at
capacity is quite feasible, given current www.reason.org/ps346/index.shtml.

B. Long-Term Toll Road Concessions: For mega-projects, in particular, shifting

An Overview those risks from taxpayers to investors
can be a major benefit of the long-term
1. Introduction & Overview concession approach.
From the perspective of U.S. The other major benefit of long-term
transportation history, 2006 will be toll concessions is the mobilization of large
noted as the year in which long-term toll new sums to be invested in much-needed
highway concessions emerged as a major highway improvements. There are other
new alternative. The lease of the Indiana forms of “innovative finance,” including
Toll Road for $3.86 billion in June 2006 issuing bonds backed by future fuel-tax
garnered much of the attention, but the revenues. But while such mechanisms shift
longer-term story is the potential for the timing of funds to permit some projects
using the concession mechanism to meet to be built sooner, they do not add to the
a significant share of the need for new total amount of highway investment. Only
highway capacity, both on urban freeways the introduction of tolls adds new capital
and on long-distance Interstates. That’s investment, making possible large-scale new
why a growing number of states are either projects.
enacting first-time public-private partnership The Federal Highway Administration’s
(PPP) legislation or amending existing 2006 report on highway conditions and
laws to ensure that they are conducive to performance, released early in 2007, finds
concession-type PPP agreements. that capital investment by all levels of
The basic concession model works as government averaged $70 billion in the most
follows. For a given large-scale roadway recent year for which data were available
project, the state selects a winning bidder (2004). To maintain pavement conditions
that will design, finance, build, operate, and current congestion levels (i.e., prevent
and maintain the project over a sufficiently things getting even worse) would require an
long term to have a reasonable likelihood of additional $9 billion per year. To improve
achieving a competitive (double-digit) return conditions, including actually reducing
on its investment. The state’s commitment, congestion below today’s levels by removing
by signing a legally binding long-term bottlenecks and otherwise adding capacity,
concession agreement, provides the means would require a total annual investment
by which the company can raise the needed of $132 billion, i.e., $61 billion per year
funds to build the project (assuming the more than current levels. (This calculation
underlying economics are sound). Typically, was based on doing all proposed highway
such deals transfer at least three risks from projects whose benefits exceed their costs.)
the state to the private partner: There are several other national
investment needs studies, by groups like
• The risk of construction cost over-runs;
the American Association of State Highway
• The risk of delays in project completion; & Transportation Officials and the U.S.
Chamber of Commerce. While their
• The risk of inadequate traffic and
numbers differ, all agree that the United
revenue.
States faces a major shortfall in highway

capital investment over the next several add infrastructure as a new asset class for
decades, with serious consequences for both its $230 billion fund. Russell Read, chief
goods movement and personal mobility. investment officer, has mentioned toll roads
This is the context in which the introduction as one type of infrastructure that might
of the long-term toll concession model to the qualify for CalPERS support.
United States must be assessed.
Table 11: New Equity Funds for [U.S.]
2. Capital Markets and Companies
Infrastructure, 2006
Fortunately, the global capital markets Fund Size ($billions)
have now “discovered” the United States. Goldman Sachs $6-7
As The Economist (Jan. 20, 2007) noted Citigroup and Blackstone $5
recently, “America is catching up with a Macquarie European Investment Fund II $4-5
trend that was pioneered elsewhere—in this DRIVE (Transurban) $2.8
case as far away as Australia. Infrastructure Macquarie Infrastructure Partners $2-3
has become the most fashionable of asset CSFB/GE Capital $1-2
classes, as governments desperate for cash AECOM $1-2

Morgan Stanley $1-2
link up with pension funds desperate to
Carlyle Group $1-2
diversify out of shares and bonds.” The
Reef $1-2
article cited the estimate of Michael Wilkins
Babcock & Brown $1-2
of Standard & Poor’s that $100-150
Fondo Italiano (F2i) $1.5
billion was raised in 2006, worldwide, for
BNP Paribas $1-2
infrastructure investment. HSBC $1
Table 10 lists new equity funds for Bahrain $1
infrastructure created during the past year. Total potential size: $29-37
As can be seen, major U.S. investment
Source: Macquarie Research, Feb. 2007, as reported in Public
banks and private equity companies have Works Financing.
entered the field, alongside European and
Australian capital. The total of these new At this point in time, the investor-owned
funds is estimated to be $29–37 billion. This toll roads industry in the United States is
is equity investment. Assuming that a toll still predominantly made up of overseas
road concession project is funded 30 percent companies. That’s because no such industry
by equity and 70 percent by debt, the total emerged in 20th-century America, as toll
investment these funds could generate would roads were developed and operated almost
be in the $100-125 billion range. exclusively by government toll authorities
In Australia, Canada, and Europe, at the state or local level. Adding to the
both public-sector and private-sector preference for state dominance of this field
pension funds now invest in infrastructure, was the availability of tax-exempt toll
including toll roads. Innovation Briefs revenue bonds, available only to government
reported in March that U.S. pension funds entities. Long-term toll concessions today
are seriously considering entering this are offering serious competition to the
field. The huge CalPERS (California Public state-only model, thanks in part to greater
Employees’ Retirement System) intends to willingness and ability of the private firms

Table 12: Major Global Toll Road Players

Company Market Capitalization* Miles of Toll Road**
Abertis $10.4 billion 915
ACS $ 7.7 billion See note***
Autostrade $10.4 billion 2,080
BRISA $ 4.0 billion 610
CINTRA $ 2.0 billion 1,000
Cofiroute $ 1.5 billion 577
Macquarie $ 5.5 billion 930
SyV $ 4.3 billion 1,609
*Market capitalization is for the most recent available year and is for the whole company. In some cases, toll road activity is a
small part of the total while in others it is the major or total business activity. Euros are converted to U.S. dollars at $1.30 = E1,
and Australian dollars at A$ = $0.80.
**Many private toll roads have multiple owners. The list presented here is the miles of toll road in which the company reports
some share of ownership; hence, there is some degree of double-counting.
***ACS does not break out mileage numbers, but reports that it has “more than 50 toll concessions.”
to take on traffic and revenue risk (given 3. Controversy Over Concessions

sufficiently long terms) plus the new Both the leasing of existing toll roads
availability of tax-exempt private activity and the use of concessions for new tolled
bonds (PABs) for public-private toll roads highway capacity have provoked opposition.
under the federal SAFETEA-LU legislation. Although the long-term lease of the Chicago
Table 11 lists the major global toll road Skyway sailed through the Chicago City
companies as of 2006. This table is drawn Council with little opposition, the legislation
from a 2005 Reason Foundation policy to approve the lease of the Indiana Toll
study which includes brief profiles of each Road passed on a close vote; some even
of the companies (see reason.org/ps334. attributed the subsequent defeat of several
pdf). Since this table was created, the two Republican legislators in November 2006 to
largest companies, Abertis and Autostrade, their votes in favor of the deal. And in early
have proposed to merge. Although the 2007, controversy over the specifics of toll
merger was initially turned down by Italian road concessions for new projects in Texas
authorities, the European Commission culminated in the passage of a bill to impose
overturned that decision, and in early 2007 a two-year moratorium on such projects
the companies were still considering it. (though most toll concession projects
Separately, Spain’s ACS in March 2007 already in the pipeline were exempted from
announced plans to acquire a controlling the bill’s provisions).
stake in Germany’s Hochtief AG and its Several of the concerns raised by critics
U.S. construction arm Turner Corp. That apply to both existing and new projects.
would further a trend in which global They include:
toll-concession companies are partnering
• Foreign companies;
with U.S. firms—e.g. Fluor/Transurban,
• The long length of the concessions;
Cintra/Zachry, and Kiewit/Macquarie. The
emergence of a purely U.S. toll concession • Adequacy of caps on annual toll rate
company seems only a matter of time. increases;

• Details of provisions limiting the extent deals are just too long. But the European
of state competition, via new “free” terms cited are for basic, rural, inter-city
roads. toll roads built in the 1960s, ‘70s, and ‘80s.
Discussions of these and other issues More complex, costly, and riskier European
will be found in two sets of Frequently toll projects involve longer terms (e.g., 70
Asked Questions published in early 2007 years for the A86 West tunnel near Paris
by Reason Foundation (available at reason. and 78 years for the Millau Viaduct, the
org/pb58_building_new_roads.pdf and world’s highest toll bridge). Under U.S.
reason.org/pb60_leasing_state_toll_roads. tax law, road and bridge assets of existing
pdf). In this space, we can provide only toll projects may only receive depreciation
brief summary arguments on these write-offs if the concession term is greater
points. They are also addressed in Robert than the useful life of the asset. That was a
Poole’s testimony before the U.S. House key factor in the long terms of the Chicago
Subcommittee on Highways & Transit, Skyway and Indiana Toll Road. (Companies
Feb. 13, 2007 (available at reason.org/ were willing to bid more for a concession
commentaries/poole_20070213.shtml). agreement that permitted depreciation write-
Foreign Ownership: CNN’s Lou Dobbs offs.) For new toll facilities, depreciation
and various elected officials have decried write-offs are available in any case; hence,
“the sale of tax-funded roadways to foreign Texas has not had trouble getting serious
companies.” This is doubly misleading, bids to develop billion-dollar-scale new toll
since no actual or proposed concession deal road projects despite a legal limit of 50 years
involves the sale; all—whether for existing for concession length.
or new toll roads—involve long-term leases. Cap on Toll Increases: Rep. Peter
Second, none of the roadways involved DeFazio (D, OR), chairing his Feb 13, 2007
was built with tax money; these are toll hearing on long-term concessions, repeatedly
roads, financed based on toll revenues. As asserted that the cap on annual toll rate
for the foreign-ness of the companies, as increases in recent agreements was “a floor,
noted previously, the only companies with not a ceiling.” By that he meant that a toll
competence and a track record of long-term road company would always select the index
development, operation, and management (GDP per capita) that permitted the largest
of toll roads are from Europe and Australia, annual increase, and would raise tolls to
where such industries have been encouraged that level without fail. But this completely
by government policy. Joint ventures are ignores what economists call “elasticity
already emerging between U.S. and foreign of demand”: you cannot charge whatever
companies, and (assuming politicians don’t you want, because customers have options
stifle this emerging U.S. market), we are and will balk at paying rates they consider
likely to see purely U.S. toll road companies more than the value they get from using the
emerge over the next five to 10 years. toll road. That’s why prospective toll road
Long Concession Length: Critics point developers (public or private) pay upwards
to Europe as having concession lengths of of a million dollars for investment-grade
30 years and suggest that 50 or 75-year traffic and revenue studies—to determine
terms in some recent and proposed U.S. what toll rate in each future year would

maximize revenue. (Hint: it’s never the developed country has since privatized those
highest rate one could imagine.) To be sure, utilities, learning from the U.S. model. But
states could adopt lower annual caps (such even before doing that, those countries had
as the CPI), and many deals would still get developed the concession model for investor-
done. But either the up-front payment or the owned roadway utilities, mobilizing billions
future revenue-sharing with the state would in private capital to develop high-quality toll
be lower, as a consequence. These are policy motorway systems, both urban and intercity.
choices that can be made in any concession Transportation officials and
agreement. policymakers are beginning to learn from
Competition Provisions: Whether their counterparts overseas, adapting
public-sector or private-sector, toll roads the equity-based, long-term concession
are vulnerable to unexpected competition model to U.S. highway needs. The global
from large amounts of new “free” roadway capital markets have come to view the
capacity. Banks and bond-buyers historically U.S. highway market as an untapped
have asked for limits on such competition, business opportunity, just as consensus was
and generally state DOTs have cooperated, developing that we have a major shortfall
agreeing to certain, limited restrictions of highway investment. The sections that
which get incorporated into bond covenants. follow detail recent developments in long-
With concession projects, such limitations term concessions and toll road PPPs, both
become part of the concession agreement. domestic and abroad.
These days, it is rare for such provisions
to ban parallel free roadways. Generally,
the agreements only define certain types of C. Privatization of Existing Toll Roads
competing roads as subject to compensation,
1. Leases Accomplished or Rejected
if they can be shown to have diverted traffic
from the toll road and thereby reduced its As of the end of 2006, three existing toll
revenues. Excluded from such provisions roads had been leased to the private sector
are all roads that are part of current long- under long-term concession agreements.
range transportation plans and all roads The Chicago Skyway deal closed in January
more than X miles on either side of the 2005, and the Indiana Toll Road deal closed
toll road. As with toll rate caps, the details in June 2006, shortly after Gov. Mitch
of such provisions are negotiable, though Daniels signed the enabling legislation. And
provisions offering very little protection may that same month, Transurban closed a deal
reduce either the up-front payment or future for a 99-year lease with the Virginia DOT
revenue sharing. to rescue the ailing Pocahontas Parkway,
one of two new toll roads developed under a
4. Conclusion kind of non-profit public-private partnership
In the 20th century, America showed during the 1990s. The Parkway, located
the world that investor-owned electric, gas, in Virginia, had attracted only about 60
and telecommunications utilities worked percent of the projected traffic and revenue
better than the state-owned utilities in during its early years, and was at serious
carrying out these functions. Nearly every risk of defaulting on its toll revenue bonds.

Under the deal, Transurban will defease the Metro heavy-rail system from the Virginia
existing bonds, refinancing the Parkway. It suburbs to the airport.
will also build a planned extension to the Macquarie made an informal proposal
Richmond airport, which will likely increase to the San Joaquin Hills Transportation
traffic and revenue. Although there was Corridor Agency in Orange County,
no up-front payment (given the parlous California in 2005, but the offer failed to
state of the Parkway’s finances), if the road generate enough political support to go
does well enough over the long term, the forward. That toll road (the San Joaquin
concession deal provides for revenue sharing Hills Toll Road, SR 73) is also at some risk
with VDOT. of default, though its traffic is in the 80
Several other ailing start-up toll roads percent range of its projections.
would be logical candidates for such Another rejection was in Houston.
rescues. Another nonprofit PPP toll road is The Harris County Commission in early
the Southern Connector in Greenville, SC. 2006 commissioned three outside studies
Like the Pocahontas Parkway, its traffic on possible changes to the Harris County
and revenue are far below projections, but Toll Road Authority’s system (consisting
thus far no offers from the private sector of the Hardy, Sam Houston, and Westpark
have materialized (or if they have, they have toll roads). The J.P. Morgan team studied
not been disclosed). Yet another ailing toll a possible sale of the system, estimating
road is the Northwest Parkway, opened in that the county might net as much as $20
2003 as the northwestern portion of greater billion by doing so. The Goldman Sachs
Denver’s beltway (of which the E-470 toll team analyzed a long-term lease, finding
road forms the eastern half). In this case, the that this could yield between $7.5 billion
toll agency that was created to do the toll and $13 billion, depending on the length of
road has gone out to bid for a concession- the term. And the Citigroup team studied
based rescue. In April 2007, the Northwest ways of leveraging the system’s revenues,
Parkway Public Highway Authority selected while keeping it in county control. The
from among 11 bidders the proposal commissioners liked the third option, voting
of Brisa/CCR to negotiate a long-term unanimously in June 2006 to reject lease or
concession agreement. sale. No written explanation was provided
In three other cases thus far, proposed as to the basis for the decision.
leases of existing toll roads have been
2. Leases Under Consideration
rejected. Virginia had received five proposals
to lease its Dulles Toll Road in October As of this writing, in spring 2007, the
2005, in amounts ranging up to $5.7 billion. most likely major toll road lease candidate
But the new administration that took is the Pennsylvania Turnpike. This proposal,
office in early 2006 decided to reject them, subject to enactment of the necessary
opting instead to have the Metropolitan legislation, has the strong support of Gov.
Washington Airports Authority (which Ed Rendell and of some leaders of both
operates Dulles Airport) take over the toll parties in the state legislature. It also faces
road and use a planned increase in toll opposition, not only from those opposed to
revenues to help finance an extension of the tolling and to foreign companies but also

from the Pennsylvania Turnpike Authority. billion if tolls were adjusted annually for
In response to criticisms of other actual and inflation. Other lease assumptions produced
proposed leases, Gov. Rendell has crafted proceeds as high as $17-24 billion for a
a proposal that would (1) limit the term of 75-year lease. Schoenberg, who chairs the
the lease to 30 years, and (2) dedicate 100 Senate Appropriations Committee and a
percent of the proceeds to transportation, by revenue-forecasting commission, proposes
creating a permanent fund whose earnings that all proceeds be used for transportation
would be used for both highway and transit investment and to bail out the state’s under-
projects statewide. As of this writing, the funded public employee pension system. As
proposal was favored by voters, 49 to 41 of this writing, the idea is on hold, with the
percent, in a Quinnipiac University poll. governor focused on leasing the state lottery.
The Turnpike Authority has attacked New Jersey’s Gov. Jon Corzine has
the governor’s plan, contending that it could cautiously proposed leasing a number of
raise just as much money as the proposed state-owned assets, primarily to reduce the
lease would raise. But a close look at the state’s severe debt problems. A report by
Turnpike’s plan reveals that it would raise UBS Investment Bank identified a number of
a large fraction of its total by (somehow) possible lease candidates, including the New
putting tolls on the parallel I-80, a low- Jersey Turnpike Authority and its individual
probability outcome. It has also not made toll roads. Enabling legislation was
a credible case for how it would prevent introduced by an ally of the governor, but
future governors or legislatures from legislative hearings exposed a considerable
preventing the regular toll increases its amount of bipartisan opposition, and few
own plan calls for (which would be legally other supporters.
permitted for the life of a private concession, As of early 2007, Delaware DOT was
if that alternative is voted in). And it ignores looking into the possibility of leasing its toll
one of the issues that has helped lead to roads, I-95 and Del. 1. The state has a $2.7
majority voter support for the lease: endemic billion shortfall in its transportation budget
corruption at the Turnpike Authority, as over the next six years; by some estimates,
attested to in numerous media accounts leasing the toll roads could generate $4
and by the governor himself, at the White billion. Delaware already has PPP legislation
House Surface Transportation Legislative on its books, under which a lease could be
Leadership Summit, Feb. 9, 2007. offered.
Leasing of existing toll roads or systems
is also on the agenda in Illinois and New
Jersey. In the former, the impetus has come D. New PPP Toll Roads & Toll Lanes
from the legislature, where Sen. Jeffrey
1. PPP Enabling Legislation
Schoenberg has publicized the idea of leasing
the Illinois Tollway system. At his urging, According to a report in the March 2007
the legislature commissioned a study of the issue of Public Works Financing, measures
idea by Credit Suisse. That report, submitted are pending in nine states to permit toll road
in August 2006, estimated that leasing the PPP agreements, generally including long-
system for 75 years could yield $5.8 to $8.4 term concessions. Two other pending laws—

New Jersey and Pennsylvania—have been the Senate could pick up the bill again next
discussed above, and are focused primarily January.
or exclusively on the lease of existing toll Indiana: Gov. Mitch Daniels in late
roads. March 2007 withdrew his proposal for
The new measures are broader, and two new PPP highways, one a beltway
focus mostly or entirely on using toll PPP around Indianapolis and the other a joint
arrangements to develop new roadways and project with Illinois. In both cases, strong
bridges. opposition arose from landowners, which
Arizona: Competing bills on PPPs were would likely have been the case regardless
in the Senate rules committee as of March of whether the roads were proposed as toll
2007, making passage unlikely this year. roads or not.
Bills authorizing HOT lanes and PPPs did Mississippi: The legislature in March
pass the Senate Transportation Committee 2007 passed a new PPP enabling act, which
in February. will make that state the 22nd with such a
California: Since the pilot program law on its books. It permits the government
law enacted in 2006 has been judged or private contractors to design, finance,
unworkable by the private sector, the build, and operate new toll roads and
governor’s office has drafted a revised bridges. Free alternative routes must be
version that deletes the objectionable available, and the tolls must be removed
provisions (the legislative veto of negotiated after the construction debt has been paid
agreements and the limitation of tolling off.
to commercial vehicles). The bill has been Nevada: As of this writing, bills were
introduced by Sen. George Runner, and pending in both houses to allow both state
informational hearings have been held thus and local governments to build and operate
far in early 2007. toll roads, including via private concessions.
Florida: A bill revising the state’s current Tennessee: In February 2007,
PPP law to permit the lease of existing toll both the Democratic chair of the
roads (except the Florida Turnpike) passed House transportation committee and
the House in March 2007. It would also add the Republican chair of the Senate
some concession-related provisions to the transportation committee introduced PPP
existing PPP law, for example to limit terms enabling legislation. Separate bills are also in
to 50 years unless the state DOT shows that motion permitting toll roads in the state.
a longer term (up to 75 years) is needed. It Virginia: The legislature passed a
would also permit mixed (public/private) measure to amend the state’s existing PPP
funding for projects that are part of the state law to permit a local agency, the Northern
highway system. Virginia Transportation Authority, to levy
Hawaii: A bill permitting PPPs passed tolls and pursue toll concessions. Previously,
the House, but was killed by the chairman only Virginia DOT had such authority.
of the Senate transportation committee, PPP legislation is also under discussion
who failed to hold a hearing by the required in Kentucky, Michigan, Oklahoma, and
March 23, 2007 deadline. But apparently Puerto Rico, as of spring 2007.

2. New PPP Toll Roads metro area. But most current PPP interest
Most states with existing or pending centers on a proposed $575 million toll road
PPP legislation have one or more projects around the east side of Colorado Springs.
in the works, generally new toll roads. The The 33-mile project’s initial feasibility study
following section offers a brief recap. found it to be financeable solely with toll
Arizona: A new $900 million toll revenues.
road in Pinal County, in the fast-growing Florida: With its well-established public
southeastern suburbs of Phoenix, seems toll authorities at the state and metro-area
to be the focal point of attention as the levels, Florida might seem to have little
legislature debates a PPP toll roads bill. Also need of PPP toll roads. But what appears
on the agenda, via separate legislation, is the to be emerging is the use of concessions for
proposed conversion of HOV lanes on I-17 riskier projects that don’t fit the conservative
to HOT lanes. funding criteria used by the toll agencies.
California: The Golden State first The Tampa Hillsborough Expressway
authorized concession toll pilot projects Authority, for example, has gone out to
with legislation in 1989, and the second of bid for its new East-West Road, a short but
two such projects under that (since-repealed) costly connector between fast-growing New
law is due to open in the second half of Tampa and I-275. Though only 3.1 miles
2007: the South Bay Expressway (SR 125 long, the project is expected to cost $150
South) running north-south through the million because much of it must bridge
eastern suburbs of San Diego. The main the Cypress Creek swamp. Elsewhere,
potential concession projects, thus far, are concession projects are being considered
all in the greater Los Angeles area. The most for a new 46-mile Outer Beltway around
ambitious is a toll truckway system, built Jacksonville and for proposed elevated
along I-710 and SR 60 to get short-haul express toll lanes on I-95 in Miami and I-
drayage trucks from the Ports of Long Beach 595 in Ft. Lauderdale. Florida is also using
and Los Angeles to the distribution centers a concession for the $1.2 billion Miami
located in Riverside County. Three other Port Tunnel, though in this case the revenue
proposed projects are long-distance, deep- stream will be availability payments from
bored tunnels: one beneath South Pasadena state and local agencies rather than tolls.
to complete a missing link on I-710, Georgia: Although the state has received
another between Glendale and Palmdale and is moving forward with PPP proposals
to significantly shorten driving distance for three toll lanes projects (Georgia 400,
and time between those two cities, and the I-75 North, and I-285 West), none of these
Riverside/Orange County tunnel providing involves concessions. But in February 2007
a new east-west link between the inland Georgia DOT announced a major new 10-
bedroom communities and coastal Orange year proposal for statewide transportation
County. improvements. Included would be four
Colorado: The Colorado DOT’s mega-projects in the Atlanta area: a network
Colorado Tolling Enterprise has done a of express toll lanes, a tunnel beneath
large-scale feasibility study of possible toll downtown (to relieve congestion on the
roads and toll lanes, mostly in the Denver I-75/85 Downtown Connector), a new east-

west toll road in the northern suburbs, and of three possible toll projects in the Portland
a separate truck tollway system. All four area. In January 2007, MIG announced that
are potential candidates for long-term toll two of the three are potentially feasible. The
concessions. two are the widening of South I-205 and a
Hawaii: The principal focus of proposed proposed Newberg-Dundee bypass toll road.
PPP legislation is the development of Texas: Texas DOT negotiated its first
reversible elevated express toll lanes to two long-term concession deals (called
provide a bus and motorist congestion-relief Comprehensive Development Agreements
alternative to the congested H-1 freeway. under Texas law). Cintra/Zachry will
Indiana: Gov. Mitch Daniels proposed develop segments 5 and 6 of SH 130, the
two major toll concession projects. The new toll road between Austin and San
Indiana Commerce Connector was a 75-mile Antonio. TxDOT’s internal toll feasibility
outer beltway around most of Indianapolis, study found that conventional toll financing
to relieve congestion on the region’s could cover less than half the project’s
numerous Interstates. The other was called estimated $1.3 billion cost, but Cintra/
the Illiana Expressway, a truck-oriented Zachry will do the entire project at no
connector between northwestern Indiana taxpayer cost under a 50-year concession.
and northeastern Illinois. In both cases, For SH 121 in the Dallas suburbs, the
vocal local opposition from property owners fundamentals were so strong that Cintra
proved to be sufficiently powerful to cause agreed to build the $560 million toll road
Daniels to withdraw the proposals in early but also to provide an up-front concession
2007. fee of $2.1 billion. However, that project
Kentucky: A massive $3.9 billion Ohio has been entangled in controversies over
River bridges project is the impetus behind whether CDAs, as currently defined,
consideration of a PPP toll roads law for actually serve the public interest, and also
this state. The cost of the two bridges plus complicated by a late proposal submission
interchanges has ballooned from $2.5 from the North Texas Tollway Authority,
billion, and the longer the delay in going operator of several existing Dallas-area toll
forward, the higher inflation is expected to roads. Despite the passage of Senate Bill
boost the cost. 792 in June 2007—which places a two-
New York: Although former Gov. year moratorium on CDAs, gives local
George Pataki twice tried and failed to get toll authorities the first option on new toll
PPP enabling legislation enacted, there are projects, and creates a new market valuation
indications that new Gov. Eliot Spitzer is process for new projects—approximately
receptive to the idea of a PPP concession a dozen other CDA projects under
approach to fund the replacement of the development statewide were explicitly
obsolete Tappan Zee Bridge across the exempted from the moratorium and will still
Hudson River, north of the New York City proceed forward.
metro area. Utah: Although Utah’s legislature
Oregon: Under a unique contractual enacted a comprehensive PPP toll roads act
approach, Macquarie Infrastructure Group in 2006, no actual toll road projects have
is doing feasibility studies for Oregon DOT emerged yet. The most likely project is a 35-

mile Mountain View toll road, estimated to toll-financed and usually done as long-term
cost $2.5 billion. Running generally north- concession projects. In many such cases, a
south, it would relieve congestion on surface key enabling technology is the tunnel boring
streets in the western Salt Lake City suburbs machine—a giant, self-contained structure
and provide an alternative route to the Salt with a rotating drill head up to 50 feet in
Lake City airport. Utah’s first toll project diameter—and machinery to erect the tunnel
of any kind is the new HOT lanes on I-15, walls as the drill moves forward to bore the
opened in 2006 by converting former HOV tunnel.
lanes. Sydney, Australia is a prime example of
Virginia: Final approvals are near for a major city that has made use of tunnels
the Fluor/Transurban concession to add as a critical element in developing a region-
two HOT lanes in each direction to the wide toll motorway system. Tunnels
southwest quadrant of the Beltway (I-495) made feasible key links in the M1 Eastern
in northern Virginia. The same team has also Distributor (downtown to the airport)
been selected to convert the existing HOV and the M2, M4, and M5 toll motorways,
lanes on I-95/I-395 into HOT lanes. Virginia as well as providing new tunnel capacity
DOT has also received three proposals parallel to the landmark harbor bridge.
in response to its RFP to add 55 miles to The only Sydney tunnel that has not been a
US460. The project would be funded partly financial success is the Cross City Tunnel, a
by tolls and partly by state funds. 1.3 mile route that permits downtown traffic
Washington: The state released a major to bypass many signalized intersections.
tolling study, building on the state DOT’s Over-optimistic traffic projections misled
frequently expressed view that current investors, and the tunnel company filed for
funding sources, despite a recent gas tax bankruptcy at the end of 2006. However,
increase, will permit very little increase in taxpayers are not at risk, and the receiver
highway capacity. Legislators enacted a PPP is keeping the tunnel in operation. Sydney’s
law in 2005, but thus far no specific projects success has led concession companies to
have emerged. Gov. Christine Gregoire has incorporate large tunnels in Melbourne’s
suggested new toll bridges, such as on I-90 first two tolled motorways, and now
in Snoqualmie Pass and on I-5 at the Oregon Brisbane is doing likewise, with its first two
line. Others have suggested tolls and PPPs to projects being the A$2 billion North-South
replace the Alaskan Way Viaduct and the SR Bypass Tunnel and the A$1.2 billion Airport
520 Bridge. Link tunnel.
Other notable urban tunnel projects are
as follows:
E. International Toll Road Paris’s A86 West. French toll road
Developments company Cofiroute is nearing completion of
the first of two large tunnels (34-foot inside
1. Large Urban Tunnels diameter) that will fill in a long-missing-
One of the most notable global trends link on the A86 ring road around Paris.
in recent years is the development of large Local opposition had held up the planned
new urban roadway tunnels, generally surface route for decades, since it would

have bisected historic Versailles. Cofiroute Under normal conditions, the lowest level
made an unsolicited proposal to the French will be empty of water and traffic will flow
government to finance, build, and operate on the two vehicle decks. Under certain
the project as tunnels created via tunnel conditions of heavy rainfall, water will
boring machines. The first $2 billion tunnel be diverted into the tunnel’s lowest level,
is nearing completion; at 6.3 miles long, with traffic continuing to flow on both
it will provide for two decks, each able vehicle decks. Only under full stormwater
to accommodate three lanes of auto-size operations—expected to be once or twice
vehicles (no trucks). A parallel tube, to a year—will the tunnel be closed to traffic
be built subsequently, will have a single so that its full capacity can be devoted
deck and one lane each way for truck-size to flood control. As of this writing, basic
vehicles. The project cost is being financed construction had been completed. The
based on projected toll revenues, without tunnel opened in May 2007.
government guarantees. The concession Yangtze River Tunnels. Under
term is 70 years. construction currently in Shanghai are twin
Madrid’s M-30 tunnels. Madrid’s inner 50’ 6” roadway tunnels, being excavated by
ring road, the M-30, is heavily congested the world’s largest tunnel boring machines.
and in need of additional capacity. Due to The tunnels will be 5.6 miles long when
land-use constraints and costs, a tunnel completed; they are key components of the
solution was judged to be the best approach. Shanghai Yangtze River Tunnel & Bridge
The most spectacular portion of the overall Highway, whose total cost is $1.6 billion,
M-30 expansion is the South By-Pass. Twin including both the tunnels and two major
tunnels of 49-foot diameter have been bridges. The overall highway is nearly 16
constructed via tunnel boring machines, miles long. This is but one of dozens of
creating a bypass route that is almost a mile large tunnel projects currently under way
shorter than the existing M-30 route. The in China. Another crossing of the Yangtze
tunnels average 2.2 miles in length, and are River is taking place at Nanjing, using a
connected every 650 feet by cross-passages. 49-foot diameter tunnel boring machine.
Each tunnel provides a single main deck A third tunnel crossing is at Wuhan, using
with three full-size lanes accommodating a 37-foot diameter tunnel boring machine.
all types of vehicles, plus a lower deck The German firm Herrenknecht, the world’s
for emergency vehicles (including full-size leading tunnel boring machine producer,
fire/rescue trucks). The M-30 tunnels were told Engineering News-Record in March
scheduled to open in spring 2007. 2007 that it had supplied nearly 40 tunnel
Kuala Lumpur’s SMART Tunnel. This boring machines for projects in China,
large project (about $650 million), in the and estimates that another 10 from other
capital city of Malaysia, is the world’s first manufacturers are also at work in China.
combined stormwater and roadway tunnel. City Ring Brussels Tunnel. This
It combines a 6-mile stormwater tunnel with proposed tunnel would be 6.2 miles in
a 1.9-mile double-deck roadway (two lanes length, with three lanes on each of two
each deck), all within a 37-foot diameter decks, within a 45-foot diameter. Its
tunnel created via tunnel boring machines. dimensions would permit buses as well as

cars, but not heavy trucks. state, Queensland, has now embarked on
Buenos Aires Tunnel. This proposed a major roadway expansion effort: the
tunnel would run 150 feet below the surface South East Queensland Infrastructure
of 9 de Julio Avenue in the center of the Plan & Programme (SEQIPP). It envisages
Argentine capital. Twin double-deck tubes spending A$66 billion over the next two
are proposed, each with four lanes. This decades, nearly half of it on transportation
project, along with a planned riverside infrastructure. Besides the Brisbane toll
highway, is intended to relieve congestion on tunnel projects mentioned previously, others
the city’s streets. include a twin span for Brisbane’s Gateway
Bridge, a A$2 billion Northern Busway,
2. Other PPP Toll Roads
and the A$543 million Tugun Bypass.
As noted in previous editions of this Queensland is following the trail blazed by
report, the use of long-term concessions has New South Wales (Sydney) and Victoria
become standard practice for large-scale (Melbourne) in making use of long-term toll
highway, bridge, and tunnel projects in most concessions.
of Europe, the urban areas of Australia, and Brazil: South America’s largest country
parts of South America. Generally speaking, is also its leading practitioner of toll
in Europe and Australia, most such projects concession projects, with over 5,500 miles
use toll finance, with concession terms of of highway operating under 36 federal
from 30 to 75 years. Several European concession agreements. In early 2006, the
countries have used “shadow tolling” for government announced an expansion of
some of their roadway projects, notably the program; however, it got entangled in
Spain, Portugal, and the United Kingdom. politics and was put on hold for most of
In politically stable countries with the rule the year. In January 2007, however, new
of law, investors are willing to finance such rules were issued to get the program moving
projects based on the government’s pledge forward again. The projected seven new
to make annual payments over the life of concessions would cover up to 1600 miles
the concession term, based either on traffic of additional highway, involving up to
counts or some other formula. In developing $9 billion in investment. Two other firsts
countries, little use has been made of for Brazil: the first state-authorized toll
shadow tolling thus far. Instead, where new concession (a $300 million upgrade of an
roads (or major upgrading of existing roads) existing highway in Minas Gerais) and the
are needed, but toll revenues are insufficient country’s first express toll lanes (on a 7.5
to cover the capital and operating costs, the mile highway in Sao Paulo), to be done as a
typical model is one of mixed funding. The $564 million concession.
government (perhaps aided by development Britain: With only one real toll road
banks) puts up a portion of the capital costs; concession project (the successful M6Toll),
then the balance is raised via toll financing. Britain in 2006 continued to pursue its
Below are some highlights of notable own form of shadow tolling—design,
developments during 2006 and early 2007 build, finance, operate (DBFO) concessions
in selected countries. in which the government commits to
Australia: The country’s fastest-growing “availability payments” over the life of the

concession. The largest of these will soon concession agreement. The $1.6 billion
request proposals from five short-listed project includes 235 miles of toll road, on
teams for the $8.9 billion project to widen two separate north-south routes along the
and operate London’s M25 ring road, under country’s east and west coasts. It is one of
a 30-year concession. The award is expected seven major toll concessions comprising a
in 2008 with construction beginning major upgrade of the country’s highway
in 2009. Meanwhile, debate continues system. Two additional concession contracts
over government proposals to institute were signed in January 2007 and the winner
nationwide road pricing. of another announced in February. The
Canada: Our neighbor country has latter is a 228-mile, $3.5 billion project that
only one significant toll road, the privatized includes a 10.5-mile bored tunnel.
(via 99-year concession) Highway 407 in India: This fast-growing country
Toronto. Most of the concession activity continues to move forward on its $13 billion
these days is along British DBFO lines. That National Highways Development Project,
is true of recently awarded concessions for much of which is being carried out via
the Sea-to-Sky Highway and Golden Ears toll concessions. Following completion of
Bridge projects in British Columbia (though the first phase—the Golden Quadrilateral,
the latter will charge real tolls, to be paid linking Delhi, Kolkata, Chennai, and
to the government, which in turn will pay Mumbai—the second phase is moving
the concessionaire). It’s also true of several forward smartly with new concession
roadway projects in Alberta. However, two projects being awarded in most parts of the
notable exceptions are now under way. In country.
Quebec, the 26-mile A30 project will be a Indonesia: As part of a series of good-
toll road concession, for which three teams government reforms, Indonesia has joined
have been short-listed and invited to submit the move to privatize existing toll roads.
proposals. At the federal level, the transport The government’s toll road agency, PT Jasa
minister has proposed a toll concession for Marga, announced in March 2007 that it
a new crossing of the Detroit River, linking would lease all 16 of its existing toll roads
Detroit and Windsor. to concession companies, so as to raise cash
Chile: This country continues to have to develop new projects. Jasa Marga is the
one of the most advanced toll concession largest toll road operator in Indonesia; the
systems in the world. In 2006 the four country’s other toll roads were developed
concession companies that have developed and are operated by concessionaires.
a fully interoperable system of toll roads Mexico: This country is widely known
in Santiago received legal permission to for failed private toll road projects in the
institute peak/off-peak tolling differentials, 1980s and 1990s, in which bids were won
to enable them to better manage traffic by the company that offered the shortest
flow so as to minimize congestion. The concession period and subsequently
system includes nearly 100 miles of new toll attempted to charge unrealistically high
motorway. tolls. Those projects were nearly all taken
Greece: In December 2006 the Greek over by the government after failing
government signed its then-largest toll financially. But having learned from its

mistakes, the country’s Secretaria de Works Financing in March 2007 reported

Transportes y Communicaciones (SCT) that four international teams have been
is trying again. In 2006 it began offering qualified to bid for the first such project, the
new toll road concession projects, on more west section of a new St. Petersburg beltway.
realistic terms. And in 2007 it is beginning Studies are under way on the second
to “re-privatize” some of the toll roads project, the M10 between Moscow and St.
it nationalized previously. An initial four, Petersburg.
totaling 346 miles, will be offered via two
concessions this year, under standard 30-
year toll concessions. SCT is also offering F. Answers to the Most Common
several hybrid projects, combining tolled Objections to PPPs
and shadow-tolled stretches, on 20-year By William D. Eggers
concessions.
Panama: Thirteen years ago the Objections to public-private partnerships
government awarded a concession to a (PPPs) tend to be markedly similar across
Mexican firm to develop a 36-mile toll countries. For the most part, the main
road parallel to the Panama Canal. That objections simply reflect a sincere desire
firm failed after completing only one-fourth to protect the public purpose and get the
of the project. Now Brazilian developer most value for taxpayers. Nevertheless,
Odebrecht has bought out the concession some of the concerns are driven by a
and will complete the project, investing misunderstanding of PPPs, while others
$215 million. are based on outdated or incomplete
Peru: A $1.3 billion InterOcean information. Following are answers to the
Highway project is under way to link most common concerns.
Brazil with Peru. The Brazilian portion
is already completed, but the Peruvian 1. Higher Cost of Capital
portion, crossing the Andes, has proved Objection: Government-issued debt is
more difficult. It has been divided into five cheaper than the private sector’s, making
sections, each one awarded as a 25-year private financing and development a bad
toll concession. As of January 2007, three deal for taxpayers.
of the five were under construction. The This is perhaps the major objection to
other two, which involve upgrading existing PPPs. This line of argument contains some
paved roads leading to coastal cities, are to truth, but it also overlooks several important
be awarded in the first half of 2007. When points.
completed, the highway will permit ocean- Difference between cost of capital and
to-ocean trips in four days. cost of debt. First, the argument assumes
Russia: The government is supporting that the cost of capital and the cost of
a bill in the State Duma to provide a legal debt are one and the same. However, a
framework for toll road concessions, with government’s risk-adjusted average cost
the aim of upgrading Russia’s dilapidated of capital typically exceeds its cost of debt
highways. The bill includes a requirement because the public sector takes on project-
that there be parallel free routes. Public specific risks such as cost overruns and

delays that need to be factored into the cost to finance PFI (Private Finance Initiative)
of capital for each project it undertakes. schemes. Under the credit guarantee
Moreover, even though the private sector program, the government provides funds
takes on some of the risks of construction, to the PFI project through cash advances
time overruns, and project performance, it governed under the terms of a loan
can better control its capital costs by making agreement. The private firm repays these
efficient use of resources. The comparison loans to the government after completing
should therefore be between the public the project. Also the government receives an
sector’s cost of capital (to which a risk unconditional repayment guarantee from
premium must be added) and the private the private financier for providing this loan
sector’s cost of capital (which amounts to facility in return for a fee.
the weighted average of its cost of debt In the United States, the Department
and equity), not between the two sectors’ of Transportation has allocated $15 billion
different costs of borrowing. Moreover, the in tax-exempt private activity bonds for
benefits achieved in terms of superior service qualifying PPP highway and intermodal
delivery alone are often worth the extra freight facilities. This approach lowers the
costs to the government. private sector’s cost of capital significantly,
Gap Narrowing. Second, as the private enhancing the investment prospects.
infrastructure market has grown and
2. Failure to Realize Value for Money
financing mechanisms have become more
sophisticated, the gap between the public Objection: When you combine the
and the private sector’s cost of debt has higher borrowing costs of private financing
narrowed. For example, with the maturing with the often higher transaction costs—and
of the private finance market in the United subsequent monitoring costs—of engaging
Kingdom, the financing costs difference in these kinds of deals, the taxpayers end up
between the private cost of capital and paying far more than they would have under
public borrowing is now in the range more traditional public financing.
of only 1-3 percentage points. As Allen The issue of value for money should
Grahame notes, the additional cost to the be an important feature of any public
public sector should not be significant infrastructure project, though it gets more
enough to risk losing the value for money emphasis with PPPs. Value for money
of the project, provided the private sector is based on the theory that the private
can deliver savings in other aspects of the sector brings in benefits and efficiencies
project. that outweigh its higher borrowing costs.
Creative Financing Models. Last, a In analyzing value for money, it must
variety of financing approaches enables be recognized that lowest price does not
governments to combine their ability to always mean best value. Value for money
obtain lower interest rates with the benefits is a function of, among other things, price,
of private financing and development. In the quality, and the degree of risk transfer. UK
United Kingdom, the Treasury launched a government officials consistently rate PPPs
program called Credit Guarantee Finance as a good value for money. In a survey of 98
(CGF) to reduce the costs of borrowing projects by the UK National Audit Office

Table 13
Category Financing Type Characteristics
User fees, Tolls Tolls (or similar user charges for use of a facility) are considered a
revenue revenue source for a project, thereby providing a stream of payments
sources that the bidders can use to determine their return on investment and
to obtain financing.
Shadow tolls Shadow tolls are typically a means by which the government sponsor
can make payment, based on usage of the facility, to the private sector
operator.
Availability Availability payments are financial payments from the government
to the private partner stipulated in a transaction to make up the
difference between the government-imposed user fee (if any) and
the cost of usage of the delivered service. Such payments can be in
the form of tranches or in one lump sum (such as at the successful
completion of the facility or for the agreed-upon maintenance
requirements of the facility).
in 2001, for example, 81 percent of the “bundling” helps to spread procurement

public authorities said they were achieving costs across several discrete projects.
satisfactory or better value for money from
3. Windfall Profits to the Private Sector
their PFI contracts, while only 4 percent
described value for money as “poor.” Last, Objection: The private sector sees the
conventional procurement has resulted in opportunity to make windfall profits from
very poor value for money, thanks to cost infrastructure investments—particularly
overruns, delays, and so on. investment banks and financiers who often
Several factors contribute to value for receive big upfront fees from refinancing the
money, but primary among them is efficient debt.
risk allocation. Risk allocation is based on Indeed, concession holders will likely
the premise that risk should be transferred seek to refinance their project debt on more
to the party that is best suited to manage it. favorable terms with a greater amount of
Optimal risk allocation leads to reduced cost leverage. However, this need not necessarily
associated with risk, which in turn leads to prove a particular problem for governments.
better value for money. For one thing, some of the biggest
Evidence supports the view that PPPs refinancing gains from PPP transactions
transfer construction and maintenance came in the early stages of PPP development
risk to the private sector more effectively when the market was less mature and
than traditional methods and are likely to interest rates dropped worldwide to
deliver value for money where competition historically low levels. With market
is strong and the projects are large. A review maturity, the likelihood of the private sector
of eight Partnerships Victoria projects found making huge gains from refinancing falls.
a weighted average savings of 9 percent Second, where it makes sense,
against the risk-adjusted Public Sector governments have the option to negotiate
Comparator. In the case of smaller projects, with their private partners to share

in refinancing gains. Gain clauses can This is a complicated issue because

be included in contracts, where the historically political considerations have
government’s share can be either taken as a often meant that increases in user fees did
cash lump-sum at the time of the refinancing not keep pace with the rate of inflation for
or in the form of reduced service charges. toll roads and other public infrastructure
It is important to recognize, however, that and their associated operational and
such “clawback” mechanisms, while they maintenance costs. This gap contributes to
may make the profits more politically funding shortfalls and deferred maintenance.
acceptable, may also result in more One goal for many governments in using
expensive contracts upfront. PPPs—whether explicit or implicit—has
Third, explicit sharing mechanisms don’t been to move the issue of fee increases away
necessarily have to be built into the contract from the political realm so that market,
for the public sector to share in the gains. rather than political, considerations can
General approval rights over changes in guide fee increases.
contracts or financing arrangements, such as That said, governments have several
termination liabilities, should put the public options to limit excessive fee increases and
sector in a strong negotiating position. In protect consumers of the infrastructure.
numerous cases, government agencies have First, fee increases can be limited by contract
capped the rate of return of the provider and to the rate of inflation or some other
negotiated revenue sharing arrangements. predetermined rate, a common practice
Both can help in certain cases to enhance for toll road projects, or the government
the long term political viability of the can retain the power to set rates based on
partnership. objective criteria.
When refinancing gains are not shared, Second, private investment presupposes
such benefits should reflect reward for a revenue stream from which the private
effectively managing risk and costs rather investor can earn a return. The revenue
than a pure windfall gain. The key thing stream, however, does not have to consist
is to seek an equitable outcome that solely of an interest in tolls or other fees
protects the interests of the taxpayer and is imposed directly on users of the project.
defensible publicly. In cases where governments want a toll
lower than what is needed to service/repay
Governments have several options to project debt, they can pay an “availability
limit excessive fee increases and protect fee” to the private sector to make up for
consumers of the infrastructure. the difference. Great Britain likewise has
used “shadow tolling” to support its PFI
program.
4. Customers of the Service Will End Up on
Governments can also link the payment
the Short End of the Stick
for the use of the infrastructure to the user’s
Objection: Since the infrastructure ability to pay. To offset the hardship that
facilities often are monopolies, the particular groups might experience from
private sector can raise charges as much toll charges, for example, public officials
as they wish on consumers who end up can consider transportation vouchers or
disadvantaged by PPPs.

other mechanisms, like subsidies, to ease the Melbourne’s EastLink project transfers 100
financial burden, understanding that this percent of the project risk to the private
will bring in less revenue. sector. To be sure, when the private provider
For sectors where future needs are less faces problems with demand and is unable
certain, like water and waste, the public to continue the contract, it may terminate
sector can enter into an arrangement where the partnership, but it cannot take the
it buys back the facility from the private facility with it. In most cases, the facility
partner immediately after it is completed. reverts to the public sector.
The public sector can then enter into a A variation on the conventional DBFO/
long-term leasing agreement with the M is the DB/FO/M model, a two-stage
private sector to operate the facility and sell model used in the Highway 407 project
water to customers at a fixed price. Both in Canada, which has been successful in
the public and the private sector gain from bringing projects with uncertain revenue
this arrangement and the customer is not streams to the market. The model is
adversely affected. The public sector gains usually employed in situations when there
ownership of the facility without having is uncertainty about the future needs.
to make upfront capital investments; the Initially the public sector finances a design
private sector gains more certainty about its build project undertaken by the private
future revenue. partner and later sells the completed facility
to a private consortium responsible for
5. The Government Is Forced to Bail Out PPP
its operations. This model is dependent,
Projects When Demand Fails to Meet Projec-
tions however, on the availability of public funds.
Objection: Underestimating future

demand jeopardizes project returns and the William D. Eggers is the global director for
fiscal solvency of the project itself. Deloitte Research—Public Sector. He is the
As explained earlier, shifting risk to the author of Governing by Network: The New
private sector is a major part of the rationale Shape of the Public Sector (Brookings, 2004)
for PPPs. In the United States, most road and Government 2.0: Using Technology to
PPPs transfer all or most of the demand Improve Education, Cut Red Tape, Reduce
risk to the private sector. Down under, Gridlock, and Enhance Democracy (Rowman
and Littlefield, 2005).

Air Transportation
Contents
A. Global Airport Privatization
B. U.S. Airport Privatization
C. U.S. Airport Security
D. Global Air Traffic Control
E. U.S. Air Traffic Control
A. Global Airport Privatization Authority via an initial public offering.

That sale of 100 percent of BAA netted the
Although airport privatization is scarcely government $2.3 billion. Since then, BAA
on the radar screen in the United States, it acquired partial ownership stakes in the
was a banner year for such privatization overseas airports of Budapest and Sydney,
around the world. According to the Centre but its principal assets remained the three
for Asia Pacific Aviation, there were 15 major London airports. When it was bought
major airports or airport groups privatized by Spain’s Ferrovial in 2006, BAA’s market
in 2006, the second-highest ever; 1998 was value was $18 billion.
the highest on record, with 21 such deals. Table 14 summarizes a number of
David Bentley, author of the Centre’s Global airport privatization transactions from
Airport Privatization report, cited two key 2001 to 2005, with the value of the airport
factors in the growth of this market. given in local currency. To provide some
In developed countries, privatization indication of how to value airports that
helps avoid additional debt on government might be considered for future privatization,
balance sheets, transfers risks to the private the last column divides the sale price by a
sector, and introduces efficiencies in airport financial measure called EBITDA (earnings
operations that may be difficult to achieve before interest, taxation, depreciation, and
in the public sector. In developing countries, amortization). As can be seen, depending on
privatization can tap global (as well as a number of specifics that are unique to each
domestic) capital markets to fund large-scale airport, investors paid anywhere from 7.5 to
projects, reducing the financing requirements 31.9 times EBITDA for airports in this time
on national governments. period, with the average being around 15.
Airport privatization began in 1987 There has been considerable change
when the U.K. government of Margaret since 2000 in the composition of the global
Thatcher privatized the British Airports airports industry. A number of privatized

Table 14: Market Value of Recently Privatized Airports

Airport Company Acquirer Year Stake Purchased Currency Value (M) Value/EBITDA
Budapest BAA 2005 75.0% Euro 1,957.0 31.9
Copenhagen Macquarie 2005 37.7% DKK 15,075.0 10.2
Airport Co. of S. Africa Public Investment Corp. 2005 20.0% Rand 8,607.8 7.5
Hochtief European airports Hochtief Airport Capital 2005 100.0% Euro 432.3 9.7
TBI ACDL (Abertis/ AENA 2004 100.0% GBP 685.0 14.8
Brussels Macquarie 2004 70% Euro 1,635.0 12.3
London Luton TBI 2004 28.6% GBP 351.3 15.9
Firenze Acquisizione Prima 2003 29.0% Euro 99.3 14.3
Belfast City Airport Ferrovial 2003 100.0% GBP 35.0 14.5
Hainan Mellan Copenhagen Airports 2002 20% HK$ 1,907.2 11.3
Aeroporti di Roma Macquarie 2002 44.7% Euro 2,680.8 14.3
Sydney So. Cross (Macquarie) 2002 100.0% A$ 5,588.0 17.7
Auckland Institutionals 2001 7.1% NZ$ 1,828.3 13.1
Birmingham Macquarie 2001 24.1% GBP 417.5 10.1
Newcastle Copenhagen Airports 2001 49.0% GBP 293.8 17.5
London Luton TBI 2001 46.4% GBP 195.0 26.8
East Midlands Manchester Airport 2001 100.0% GBP 241.0 13.8
Bournemouth & Glasgow Infratil 2001 100% GBP 40.4 28.4
Bristol Macquarie 2000 100.0% GBP 234.0 16.4
Hamburg Hochtief & Air Rianta 2000 36.0% Euro 804.5 8.6
Aeroporti di Roma Leonardo 2000 51.2% Euro 2,591.6 17.4
Centro Norte (Mexico) ADP consortium 2000 15.0% US$ 606.7 11.2
Beijing Capital ADP Management 2000 10.0% HK$ 12,688.0 17.4
High 31.9
Low 7.5
Average 15.6
Median 14.5
Source: Macquarie
airports have even become acquirers of Bristol, Glasgow, Belfast City). Since
stakes in airports being privatized, only to being acquired by Ferrovial, BAA has
be acquired themselves by other firms (e.g., been selling off its non-UK airports (e.g.,
BAA, Copenhagen). As of 2007, there are Budapest).
six major global airport firms with annual • AENA ($2.9 billion in 2005): Although
revenues in excess of $1 billion, plus a still government-owned, AENA operates
number of smaller players. The six majors commercially. It owns 47 airports in
are as follows: Spain and has ownership stakes and/or
• Ferrovial/BAA ($4.04 billion BAA management contracts for 29 others in
+ $0.9 billion Ferrovial revenues in seven countries including several major
2005): This combined company owns airports in Colombia and a stake in
Heathrow, Gatwick, and Stansted plus one of four regional Mexican airport
a number of smaller U.K. airports (e.g.,

groups, GAP. In a joint venture with B. U.S. Airport Privatization

Abertis, it bought U.K. airport company
TBI in 2004, thereby acquiring airport After languishing for a number of years,
management contracts in the United airport privatization was put back on the
States and Bolivia, as well as the U.K. U.S. policy agenda in 2006 by Chicago
• Fraport ($2.65 billion in 2005): The Mayor Richard Daley. After successfully
parent company of Germany’s Frankfurt raising several billion dollars via the long-
Airport, Fraport was privatized in 2001 term leasing of the Chicago Skyway and
though state and municipal governments the city’s parking garages, Daley proposed
still hold stakes. Fraport owns major to lease Midway, filing an application
portions of Hahn and Hanover airports with the Federal Aviation Administration
in Germany, Lima airport in Peru, New under the terms of the 1996 federal Airport
Delhi airport in India, and one of the Privatization Pilot Program.
Mexican regional airport groups. The pending lease hit some bumps in the
road early in 2007. Crain’s Chicago Business
• Aeroports de Paris ($1.44 billion): The
reported that Southwest Airlines, which has
French government sold a minority stake
the lion’s share of service at the airport, is
in ADP in June 2006. The company
thus far not persuaded that the deal would
owns the two major Paris Airports (De
give it any significant benefits. After the
Gaulle and Orly) and a part interest in
city shared with the airlines an outline of
Liege airport in Belgium; it is selling
the financial details of a possible lease—
its 33 percent stake in Beijing Capitol
basically offering operating cost savings
Airport. ADP also has management
and controls on rate increases—Southwest
contracts and joint venture interests in
hired Citibank to analyze the plan. After
other airport services.
this review, the airline sent a letter to the
• Schiphol Group ($1.17 billion): The city in February 2007 stating that “While
previous Dutch government had new information could change our minds,
planned to privatize Schiphol, but presently we believe that privatization is
did not complete this action prior to threatening to the interests of [Midway] and
losing power in 2006. Schiphol is fully the airlines and passengers who rely upon
commercialized, owning the airports in it.”
Amsterdam, Rotterdam and Lelystad, This matters, because under the terms
plus important stakes in Kennedy of the federal Airport Privatization Pilot
Airport’s Terminal 4 and Brisbane Program, in order for the city to make
Airport in Australia. use of lease revenues from such a deal for
• Macquarie Airports ($1.1 billion): general city purposes, the lease must receive
Macquarie owns the large majority of the approval of both 65 percent of the
Sydney Airport, and major stakes in airlines operating at Midway and airlines
Copenhagen and Rome, plus a number representing 65 percent of the annual landed
of other U.K. and continental airports. weight. That gives all Midway carriers,
and especially Southwest, considerable

bargaining power. The potential attraction other state-owned airports. Chicago just
of such a lease is reduced operating costs happens to own a second airport, O’Hare.
and more predictable rates and charges And O’Hare just happens to have a $15
for using the airport. Under the current billion expansion under way, not all of it
arrangements at Midway, those rates depend funded. That should give Mayor Daley an
on each year’s airport operating results, and excellent fallback position in negotiating
can differ considerably from year to year. with Southwest (which has no presence at
If the Midway privatization succeeds, O’Hare).
it is likely to stimulate interest in doing Ironically, Stewart (thus far the only
likewise in other cities. Officials in airport to be privatized under the Pilot
Milwaukee and Austin have raised the issue Program) was “de-privatized” in 2006, not
in their communities, as has a candidate for by design but due to circumstances. The
mayor in Philadelphia. Just as Mayor Daley company that won the bidding in 2000 was
set off an earthquake in the toll road field National Express, a diversified U.K.-based
by leasing the Chicago Skyway for $1.86 transportation company. Within a few years
billion, so would a win-win lease deal for of acquiring the 99-year lease of Stewart (its
Midway Airport. first airport acquisition), National Express
Yet the current Airport Privatization made a corporate decision to refocus the
Pilot Program would restrict other cities’ business on its bus and rail operations—
options. There are only five “slots” in the thereby making Stewart an orphan business.
program, and only one can be a large hub, By the start of 2006, it has decided to sell
as defined by the FAA. Since Midway meets its leasehold. Although other firms were
this definition, none of the other 29 large interested, the winning bid was submitted by
hubs would be eligible (though both Austin the Port Authority of New York and New
and Milwaukee, as medium hubs, would Jersey. PANYNJ seeks to develop Stewart,
be). The FAA’s reauthorization proposal, over the longer term, into the fourth major
introduced in February 2007, would remove airport for the greater New York City
that restriction, while expanding the number region. It is also able to cross-subsidize
of slots to 15. It would also remove the 65 Stewart’s development from its overall
percent airline approval requirement, which revenues, in particular improving its ground
some have dubbed the airlines’ poison pill. access to the New York metro area.
There is also a chance Midway will be In the United States, there are still plenty
leased without the airlines’ OK. That would of skeptics who argue that since this country
not be as good a precedent (unless Congress has tax-exempt revenue bonds and business-
removes the poison pill), but what some like airport authorities, privatization doesn’t
people forget is that the 65 percent approval have much to offer, apart from possible one-
is only needed for the city to use the lease time financial windfalls to hard-pressed local
proceeds for general-fund purposes. When governments. But there are still important
New York State leased Stewart Airport in differences between a business that is
2000, it did not win airline approval. So it accountable to shareholders and a not-for-
was required to use all the lease proceeds profit government entity that is not. One
for airport-related purposes—at Stewart and way in which this difference may show up is

in willingness to think outside the box to get TSA certification to go nationwide. So it

things done. scrambled to get operations up and running
These days, one of the hardest things by the first of the year at the airports it had
to do is to expand an urban airport. In already signed up: Cincinnati, Indianapolis,
Germany, Frankfurt has been struggling for San Jose, and Terminal 7 at Kennedy. It took
years with this problem, needing to acquire until March 2007 for Unisys’s competing
land for a fourth runway to keep pace with RT operation, RT Go, to get certified. Two
projected growth. Late in 2006 it announced other providers were still working on getting
a breakthrough deal. Fraport will spend $898 certified as of April 2007.
million to move a chemical plant owned by During the roll-out, Verified introduced
Celanese, to clear the way for the new runway. its GE-developed shoe scanner at Atlanta.
Celanese had been prepared to engage in The original idea of Registered Traveler was
costly litigation to prevent the runway from that TSA’s background check would pre-
being built, arguing that the plant would be so clear RT members, so they would not have
close to the runway as to pose an unacceptable to go through all the rigamarole that regular
safety risk. Under the agreement, Celanese passengers must endure at the checkpoints—
will end production at the plant in June remove shoes, remove sweaters and jackets,
2011, and the whole area now occupied by take out laptop, etc. But no, TSA apparently
the plant will be turned over to Fraport by doesn’t trust its own background check (even
2015. Fraport hopes to have the runway built to the point of insisting that RT members
and in operation by 2011, and will use the present their easily counterfeited driver’s
acquired land for purposes compatible with license in addition to their biometrically
the runway’s presence. coded RT membership card!) So the only
way RT members can be exempted from any
of the checkpoint requirements is if the RT
C. U.S. Airport Security provider employs technology that does the
job instead. Hence, Verified’s shoe scanner,
In 2006, the Transportation Security
on which the member stands while having
Administration finally allowed the private
his iris scanned and compared with what’s on
sector to begin rolling out Registered Traveler
the membership card. If the scanner detects
programs—which allow travelers who have
no metal or explosive particles, the member
paid for prescreening background checks to
need not remove his shoes. (Verified is still
bypass onerous airport security lines—though
hoping to develop additional tools to obviate
everything seemed to take a long longer than
jacket removal; no word yet from TSA about
expected. TSA’s announced June target date
laptops.)
for national roll-out came and went, with
By April a number of other airports
TSA later announcing it would only approve
were holding competitions to select their RT
a dozen or so airports at first. More than 20
provider.
had applied to be in the program by July,
The other area of security privatization
yet still the TSA-approved pilot program
is the ability of airports to opt-out of TSA-
at Orlando was the only one in operation.
provided passenger and baggage screening.
It was not until November that Orlando’s
Due to TSA, rather than airport, control
company, Verified Identity Pass, finally won

of all the key decisions about selecting D. Global Air Traffic Control
and managing a private security firm, and
such rigid controls as to make cost savings The move toward transforming
difficult, very few airports have chosen to government air traffic control departments
exercise this option. The five original pilot into financially self-supporting ATC
program airports (San Francisco, Kansas corporations continued during the past
City, Rochester, Jackson Hole, and Tupelo) year. The number of full members of the
have continued with the companies they got Civil Air Navigation Services Organization
used to during the pilot phase. But only one (CANSO) reached 45 by year-end, with the
new airport signed up in 2005, Sioux Falls, addition during 2006 of France, Iceland,
and just two more in 2006. Both of those and Tunisia, among others. Most of these
(Marathon, Florida and New York’s 34th are government corporations, analogous to
Street Heliport) were airports not previously the U.S. Postal Service and the Tennessee
having scheduled passenger service, so by Valley Authority. Like those familiar entities,
going with private contractors, they eased the air navigation service providers (ANSPs)
TSA’s burden of trying to add new airports do not receive their funds out of the national
within their fixed number (43,000, as government’s budget; instead, they are paid
capped by Congress) of airport screeners. directly by their customers, and can go to
Sonoma County, California was set to do the bond market to raise funds for large-
likewise in spring 2007. scale modernization projects.
In one other area private security firms Two of these ANSPs won awards from
have emerged: airport worker screening. the International Air Transport Association
Attention was focused on Orlando Airport for outstanding service to their member
early in 2007 after airport workers sneaked airlines. Sweden’s commercialized LFV
through an unguarded entrance into a secure won IATA’s 2006 Eagle Award, and the
area after hours as part of smuggling guns runner-up was Denmark’s NAVIAIR. At
to Puerto Rico on a next day’s flight. The year-end, IATA singled out Airservices
airport’s board voted in March to physically Australia, Austrocontrol, Nav Canada,
screen 100 percent of workers with access and ROMATSA (Romania) for excellent
to secure areas, whether employed by the cooperation with airlines on issues such as
airport, airlines, tenants, or vendors. Since charging and modernization. Nav Canada,
TSA has no screeners to spare (and did not which celebrated its 10th anniversary in
mandate worker screening), the airport 2006, is a previous winner of the Eagle
allocated $5 million to hire Covenant Award.
Aviation Security (a TSA-approved screening Germany’s commercialized ANSP, DFS,
company) to do the worker screening. had been slated for privatization in 2006,
Orlando was not the first. Since 1998, with the government planning to sell 75
Miami International has been screening 100 percent to investors. But late in the year the
percent of airport workers with access to German president vetoed the sale (which
secure areas, as part of combating a serious had been approved by the parliament earlier
drug-smuggling problem. It, too, uses private in the year), contending that the legislation
security firms to carry out this screening. was counter to constitutional provisions

requiring ATC to be carried out by a state positive.

organization. The government is expected to “The major finding is that
try to amend that provision. commercialization models that provide the
Two new studies of the performance right balance of incentives have resulted
of this new generation of self-supporting in significant cost reductions, dramatic
ANSPs were published in 2006. One was improvements in modernization, and major
conducted by a Canadian consulting firm improvements in service quality, while
in conjunction with three universities. The improving safety.”
other was sponsored and published by the One of the most interesting findings
IBM Center on the Business of Government. is that “Providing more autonomy for the
ANSP has tended to cause a reorientation
1. The MBS Ottawa Study
from treating government as the primary
MBS Ottawa, in conjunction with client to responding to the needs of the
George Mason University, Syracuse aviation community. There is no longer
University, and McGill University, any doubt as to who the customer is.
published its study, Air Traffic Control Commercial ANSPs have demonstrated
Commercialization Policy: Has It Been enhanced ability to respond quickly
Effective? (available at mbsottowa.com), to customer needs.” Along with this,
in January 2006. The project was overseen “there has been a . . . clarification of the
by a 15-member international advisory government’s role. Governments have
committee. The project team made site visits ensured the public interest through effective
to, and collected detailed quantitative data safety and economic oversight, financial
from, the 10 commercialized ANSPs listed regulations, environmental laws, protection
in Table 14. In addition to documenting of consumer rights, and recourse through
the performance of the ANSPs since they the legal system.”
were commercialized, the study (and its In summing up the findings, the report
appendix) provides considerable detail on notes the following:
the governance structure and institutional Commercialized ANSPs exhibit
framework of each. three main strengths—sensitivity to
Overall, the study judged ATC customer needs, agility in reaching
commercialization to be a success. Trend a decision, and ability to carry it
analysis found the following with respect through. These characteristics have
to commercialization’s impact on key led to continuous improvements in
performance measures: efficiency, business discipline that
• Safety: neutral or enhanced; delivers projects on schedule and
• Modernization: greatly improved; on budget, and rapid deployment
• Service quality: improved; of modern technology to enhance
service quality.
• Costs: generally reduced, significantly in
some cases; 2. The IBM Study
• Financial stability: maintained; The most recent study, Reforming the
• Public interest: most areas neutral or Federal Aviation Administration: Lessons

from Canada and the United Kingdom, on that transition, the authors conclude:
was published in mid-2006 by the IBM “The adoption of a user charge system in
Center for the Business of Government. principle increased the desire for users to
Researched and written by Clinton Oster play a role in governance. The not-for-
and John Strong, its focus is on applying profit structure with board representation
lessons learned from the commercialization by stakeholders creates good incentives for
of ATC in Canada and the UK to reform of cost control and improved capital program
the U.S. system. Thus, the report provides management, and reduces the need for
three parallel studies of ATC reform: the economic regulation.” Also, “The customer
long history of efforts to reform the FAA, orientation appears to extend to a capital
plus case studies of the commercialization of program and planning approach that has
Nav Canada and NATS. Since FAA reform been much better at both modernization and
will be discussed in the next section, we will the development of new technology, with
focus here on the lessons the authors draw respect to cost, delay, and performance.”
from the Canadian and UK reforms of air Turning to the need for Nav Canada to
traffic control provision. cope with the economic downturn following
This report provides considerably more 9/11, the authors conclude that “Nav
detail on how both Nav Canada and NATS Canada’s organization structure turned
came into being, in an effort to solve long- out to be an asset . . . . The stakeholder
standing problems in the provision of ATC model in effect required all parties to
services. Although the organization models make contributions and sacrifices. The
are quite different, and both had to cope nonprofit status established a clear financial
with the serious downturn in North Atlantic objective during the period, while the rate
airline traffic in the several years following stabilization fund allowed the company to
the 9/11 attack, the authors conclude manage the consequences of the downturn
that both ANSPs “have emerged from over a longer period.”
the 2001-2004 period as financially solid
organizations that are both well positioned
not only to modernize to meet the growing E. U.S. Air Traffic Control
needs of their own airspace, but also to
extend their provision of various air traffic The Federal Aviation Administration
management services to other parts of the in February 2007 released its long-awaited
world.” proposal to revamp the way its activities
Several other lessons specific to Nav are funded. As expected, it would shift
Canada are worth highlighting. Unlike most from taxes on airline tickets to user fees for
European and Asia-Pacific countries, where air traffic control services. It would permit
ATC user charges have been in effect since FAA to issue revenue bonds to fund some
at least the end of World War II, Canada of the large capital expenditures needed to
was one of the few remaining countries that implement the proposed Next Generation
funded ATC by means of a tax on airline ATC system. And it would attempt to give a
tickets (like the United States still does), stronger voice to its aviation customers via a
prior to ATC commercialization. Reflecting new advisory board.
The proposal represents the culmination

Table 15: Characteristics of Major Commercialized Air Navigation Service Providers

Country Date Established Name Ownership Economic Regulation Safety Regulation
Australia 1995 Airservices Australia Government corporation Commission oversight Separate agency
Canada 1996 Nav Canada Not-for-profit corporation Self-regulating per statutory Separate agency
charging principles
France 2005 DSNA Government department Approval by Minister Internal but separate
Germany 1993 DFS Government corporation Approval by Minister Internal but being
separated
Ireland 1993 IAA Government corporation Regulatory commission Internal but separate
Netherlands 1993 LVNL Government agency Approval by Minister Separate agency
New Zealand 1987 Airways Corp. of NZ Government corporation Self-regulating, per charging Separate agency
principles
South Africa 1993 ATNS Public company Ministry of Transport Separate agency
Switzerland 2001 Skyguide Not-for-profit company Approval by Minister Separate agency
United Kingdom 2001 NATS Public-private partnership Commission oversight (price- Separate agency
cap regulation)
Source: Table 4.1 in Air Traffic Control Commercialization Policy: Has It Been Effective? MBS Ottawa, January 2006 (www.mbsottawa.com)
of several years of analysis and rethinking 67 percent of the FAA’s budget is accounted
at the agency, led by Administrator Marion for by the ATO, but if you subtract out
Blakey and Air Traffic Organization (ATO) the safety-related Flight Service Station
chief Russ Chew. They have learned a lot program, the ATO budget that should be
by studying ATC reform in the rest of the recovered from users is 61 percent. The
Western world, where virtually all other FAA’s traditional safety regulatory functions
countries have converted their government account for 7 percent, but adding in FSS
ATC departments into self-supporting air boosts that to 13 percent. Nearly all the
navigation service providers (ANSPs) that rest—25 percent—is the airport grants
can operate on a commercial basis, regulated program.
(at arm’s length) for safety and subject to
some form of external control over their The FAA proposal argues that the
rates and charges. government’s general fund should be
The FAA’s proposal rests on an paying only for those functions that are
impressive piece of work: the “FY2005 Cost clearly public interest issues.
Allocation Report,” January 2007, available
at www.faa.gov. The methodology was Refreshingly, the FAA proposal argues
developed by PriceWaterhouseCoopers, and that the government’s general fund should
it was applied by GRA, Inc. to the agency’s be paying only for those functions that
FY2004 and 2005 costs. Everyone involved are clearly public interest issues: the safety
in debating the user fee issue should read functions (13 percent) and the use of the
this report; it’s the best and fairest FAA system by government users (military and
cost-allocation study to date—and the first civilian) that Congress has always exempted
one based on data from the FAA’s new cost from paying, another 2.8 percent of the FAA
accounting system. total. So in round numbers, that’s 16 percent
Thanks to this study, we now know that of the total that should come from general

taxpayers. (The actual legislative proposal

ends up at 19 percent). Airport grants (AIP)
should be paid for by some kind of tax on
all airport users, and ATC should be paid
for by ATC users, in proportion to their use.
The ATC cost allocation study parses the
data, based on three underlying principles:
• Different air traffic services have
different costs;
• Different types of aircraft affect
ATC costs differently (with the
main difference being between high-
performance/turbine planes and piston/
helicopter planes);
• ATC costs vary according to activity
volume, with miles flown in the system
used to measure en-route activity and
the number of operations (landings &
takeoffs) used for terminal-area activity.
These principles are applied all over
the world by ANSPs, and are reflected in
the charging principles promulgated by the and exempt) for each flight regime: oceanic,
International Civil Aviation Organization. en-route, and three types of terminal areas
(large hubs, middle terminal, and low-
If this proposal were enacted into law, it activity tower). The resulting tables and pie
would represent a far bigger reform than charts show how much cost each of these is
the creation of the ATO three years ago. responsible for.
The legislative proposal would authorize
The underlying principles for allocating the FAA to charge ATC fees to commercial
costs take seriously the point made by users only: passenger and cargo airlines
general aviation groups that some major plus fractional jet operators and air taxi/
elements of the system (fixed costs) are there charter operators. It also takes seriously the
primarily to serve high-performance users, repeated plea from the National Business
so those fixed costs are allocated entirely to Aviation Association that its mostly turbine
the principal users, with only the variable users should continue to pay for their share
costs allocated among all users, based of costs via a fuel tax, rather than direct
on percentage use. There are many more fees for service. So, in accordance with the
details, but the end result is to break down cost allocation study, the fuel tax for all GA
cost responsibility among high-performance (piston and turbine) would be more than
users (commercial, General Aviation, and tripled to 70 cents/gallon to recover their
exempt) and piston users (commercial, GA, share. A portion of that—13.6 cents/gal.—

would be the new AIP tax, which would also turbine GA paying fuel taxes for ATC,
be paid by airlines. the proposal further muddies the waters,
Overall, this is a solid proposal. It since user fees paid to the Treasury could
clarifies who should be paying for what— eventually be converted to user fees paid to
general taxpayers, high-performance users, a revamped ATO—but a fuel tax is a tax,
and low-end (in terms of demands on the and by definition must be appropriated by
system) users. It provides clear funding Congress before it can be spent, creating
sources for each major FAA activity. And it a stronger barrier to subsequent financial
authorizes a modest amount of borrowing independence. Third, the modest bond
authority to help pay for the major funding would allow ATO to access only
upcoming capital investments needed to Treasury borrowing, and only for five
implement the Next Generation system. years, unlike the access to the private
What’s not to like? Compared with the capital markets afforded self-supporting
financially autonomous ANSPs that are the government corporations like the Tennessee
inspiration for these changes, the proposal Valley Authority and the U.S. Postal Service,
falls short in several ways. First, the fees let alone virtually every air-carrier airport in
would still be paid to the Treasury, and have the land.
to be appropriated each year by Congress. Still, if this proposal were enacted into
That’s a long way from financial autonomy, law, it would represent a far bigger reform
as is now common in Europe’s, Canada’s, than the creation of the ATO three years
and Australia’s ANSPs. Second, by keeping ago.

Education and Child Welfare

Contents
A. School Choice Update
B. No Choices Left Behind: Restructuring California’s Lowest-Performing Schools
C. Experimenting With School Choice: A Tale of Two California Districts
D. Child Welfare Privatization Update
E. The Case for Privatizing University Housing
A. School Choice Update the next five years, with a maximum of 400
students each. Principals and teachers at
1. School Empowerment Surges Ahead in those schools would work under a separate
2007 contract that would free them to determine
In his 2007 State of the City Address, school calendars, curricula, budgets and
New York City Mayor Michael Bloomberg administrative structures.
called for school empowerment through By decentralizing school dollars and
the “weighted-student formula,” a growing allowing school funding to move with the
trend in which public funding moves child, principals have greater control of their
with the child, for all of New York City’s resources and can give innovative teachers
1,467 schools. One week later, Nevada more flexibility. In cities like Oakland,
Gov. Jim Gibbons echoed Bloomberg’s Houston, Santa Monica, and Edmonton,
proposal with his own weighted-student Alberta (where the first weighted-student
formula plan, which would affect more formula program was implemented),
than 100 schools and empower families schools are offering improved curricula and
with greater educational choice. Finally, better instruction. Public schools compete
the Los Angeles Unified School District for students by improving the quality of
and union officials have agreed in concept teaching and diversifying their curricula, so
to develop a group of independent small that students who are proficient in math can
schools in the Pico-Union area, allowing find a school where calculus is offered, or
students to choose a campus that best fits students looking for a language immersion
their interests. The Belmont Pilot Schools experience can attend a school where they
Network would consist of five to ten fully can have classes in Spanish or Tagalog.
autonomous high schools launched over Similarly, Nevada Governor Jim

Making Schools Work
In a March 11, 2007 New York Times commentary, William Ouchi, a professor of manage-
ment at the University of California, Los Angeles, and the author of Making Schools Work,
explains how school empowerment has worked in New York City:
In New York City, Schools Chancellor Joel Klein and Mayor Michael Bloomberg have
proposed school empowerment changes that would radically alter financing formulas
for the city school system and revolutionize its existing bureaucratic management
structure. City lawmakers and the State Board of Regents are nervous, but they
shouldn’t be.
Despite what the critics say, the changes will work. Over the last five years, my
team has visited 66 New York City public schools and 42 of the city’s more than 300
empowerment schools. At the empowerment schools, where principals on average
control 81 percent of the money spent in their schools, we found fewer administrators,
more teachers and an array of unique instructional innovations.
At the regular schools, we found that the average teacher was responsible for 121
students. At empowerment schools, however, the average teacher had 86 students. As
a result, the teachers at the empowerment schools were spending more time working
directly with their students either in small groups or one on one.
New Yorkers should not underestimate the magnitude of the innovations that the
mayor and the chancellor have put forward. The extension of autonomy to all of the
city’s 1,467 schools is a natural step and one that will almost surely benefit all students.
And allowing the money to follow students will remedy inequities of long standing and
strengthen the autonomy of each school. Moreover, continuing to give parents a choice
in where they send their children creates a powerful incentive for schools to perform
and address specific needs.
Gibbons has introduced legislation to 100 schools. In addition to Nevada and

decentralize much of the authority that New York City, statewide adoption of
currently rests with districts down to the school empowerment plans is now under
school level, and give school principals consideration in Ohio, South Carolina,
control over nearly a school’s entire budget. Delaware, and Florida, though at early
Empowerment schools also would have stages.
authority over hiring and firing staff, and Decentralized districts demonstrate that
be able to implement pay incentives. They it is possible to allow parents to choose any
also allow all children zoned for other school in a district and that the resulting
district schools the opportunity to apply competition and need to attract parents can
to an empowerment school. Additionally, help improve even the lowest-performing
Gibbon’s program provides funding for schools and encourage them to adopt

best practices and unique programs that way it receives revenue from the state:
will benefit the children in their schools. unrestricted Average Daily Attendance
Weighted-student formula programs have (ADA) funding is allocated to the
resulted in positive outcomes in terms of schools based on their current year
choice and student achievement for students enrollment. According to Education
in several districts: Week, Oakland is the only district in
• In 2004 the Oakland Unified School the nation that gives principals direct
District transformed its budgeting control of their ADA funding. The
formula from a centralized process to bottom line for Oakland is that in three
“results-based budgeting.” As reported years, Oakland went from failure to
in a new Education Trust West report, having the highest academic gain among
“California’s Hidden Teacher Spending California’s 33 largest unified districts,
Gap,” the Oakland District allocates urban or otherwise.
funding to its schools based on the • In Boston, pilot schools opened in 1995
number and type of students at each as a result of a unique partnership
school. Oakland gives each school among the Boston mayor, school
administrator the flexibility to allocate committee, superintendent and teachers
this funding in whatever way fits the union. Pilot schools are part of the
school’s instructional needs. Oakland Boston Public School system (BPS),
allocates funds to the school in the same but have autonomy over five key areas:
Table 16: API Gain in California

Large CA District (20,000 or more students tested) Number Tested 2006 API 2005 API 2006 Growth 2005 to 2006
Oakland Unified 28,689 634 653 19
Rialto Unified 21,890 646 664 18
Fresno Unified 49,687 644 661 17
Montebello Unified 25,467 641 658 17
Pomona Unified 24,313 666 682 16
Garden Grove Unified 36,554 740 756 16
San Jose Unified 22,098 737 752 15
Long Beach Unified 55,984 713 727 14
Compton Unified 21,378 592 605 13
Orange Unified 21,324 765 778 13
Clovis Unified 26,856 806 816 10
Glendale Unified 21,426 794 804 10
Capistrano Unified 38,219 813 823 10
Moreno Valley Unified 25,540 652 662 10
San Francisco Unified 39,547 745 755 10
Fremond Unified 23,786 833 842 9
Los Angeles Unified 502,491 649 658 9

budget, staffing, governance, schedule reduced the number of failing schools

and curriculum, and assessment. under No Child Left Behind from 20 to
Attendance at pilot schools averaged 18, even as the state raised the bar for
95 percent, compared to 89 percent at proficiency.
other schools. The average number of
students for high school teachers in the 2. Charter School Enrollment Soars
pilot schools is 66 compared to 81 in the Charter schools continue to be the
traditionally managed schools. Scores on largest example of school privatization with
state tests at these pilot schools are 30 more than 4,000 schools holding contracts
percent to 50 percent higher than they with government agencies in the 2006-2007
are at regular public schools with similar school year, serving more than one million
student bodies. children.
• In 2005 Cincinnati Public Schools, According to a September 2006 study
where 70 percent of students are on charter school market share from
African-American, improved from the National Alliance for Public Charter
“Academic Watch” to “Continuous Schools, in some communities large numbers
Improvement,” and test scores were up of students enroll in charter schools:
for most students in most grade levels. While charter schools enroll
a modest percentage of students
• Seattle continues to see increases in
nationwide, some communities far
student achievement and in 2005
exceed national and state averages
Table 17: Charter School Market Share

Community Charter Market Charter Non-Charter All
Share
1. New Orleans, LA 69% 7,815 3,578 11,393
2. Dayton, OH 28% 6,374 16,365 22,739
3. Washington, DC 25% 18,000 54,000 72,000
4. Pontiac, MI 20% 2,563 10,385 12,948
Kansas City, MO 20% 6,457 25,766 32,223
Youngstown, OH 20% 2,326 9,248 11,574
5. Chula Vista, CA 18% 4,640 21,832 26,472
Detroit, MI*** 18% 28,047 131,643 159,690
Southfield, MI 18% 2,233 9,907 12,140
Toledo, OH 18% 6,561 30,200 36,761
6. Cincinnati, OH 17% 7,029 35,479 42,508
7. Brighton, CO 16% 1,632 8,818 10,450
Cleveland, OH 16% 10,858 59,035 69,893
Milwaukee, WI 16% 15,059 81,275 96,334
8. Buffalo, NY 15% 6,332 37,000 43,332
Mohave County, AZ 15% 4,315 23,593 27,908
9. Dearborn, MI 14% 3,016 18,094 21,110
Oakland, CA 14% 6,668 41,467 48,135
10. Minneapolis, MN 13% 5,558 38,532 44,090

to enroll high percentages of charter or 25.3 percent of the 167,490 city students
school students. In fact, 19 different enrolled in district schools. A teachers’
communities educate over 13 percent strike last fall delayed the start of classes in
of their public school students in the Detroit school district, and enrollment
charter schools. fell 9.6 percent, according to the Michigan
New Orleans leads the pack with 69 Department of Education. The district is
percent market share, due primarily to the considering a proposal to close 52 schools
post-Katrina reconstitution of the schools. by next summer in response to declining
Ohio alone has five different communities enrollment.
in the top ten, with Dayton leading the pack New York: In March 2007, New York
at the #2 spot on our countdown with 28 legislators passed an estimated $120.9
percent. Our nation’s capital, Washington billion budget, doubling the maximum
D.C., comes in at #3 with 25 percent. And number of public charter schools to
the largest community on the list is Detroit, 200, including up to 50 new schools in
with 18 percent of its nearly 160,000 New York City. A year-long freeze on
students in public charters. As of 2007, approvals, however, means the next wave
Detroit has a 25 percent market share. of new charter schools may not open
Several states and individual until September 2008. The new legislation
communities are demonstrating the impact requires the Education Department to hold
of charter schools at scale. Let’s examine hearings before placing a charter within an
some brief profiles in market share: existing public school. The bill also bows
Michigan: Enrollment in Michigan to union demands by requiring a provision
charter schools has reached nearly 100,000. that automatically unionizes the employees
The 2006 Michigan Educational Assessment of any charter school serving more than
Program (MEAP) tests show that elementary 250 students in its first two years. In 2005,
charter school students are matching or charters in New York outperformed non-
outpacing their district counterparts in charters in surrounding schools districts
English and math testing. More importantly, in 4th and 8th grade reading and math. In
Michigan’s charter public schools exceed the Buffalo, New York 15 public charter schools
average scores of their host districts on 23 serve more than 5,500 students in the city,
of 27 MEAP tests this year. Canton Charter catering to about 13 percent of public school
Academy boasts a waiting list of nearly enrollment. Data gathered by the Buffalo
1,000 children. The 58 charter schools run News reveals the city’s charter schools
by Central Michigan University have waiting achieve better results than traditional public
lists of more than 10,000. Charter school schools despite having a higher proportion
success has spread throughout Michigan of students living in poverty.
and parents are clamoring for a lift of the Washington D.C.: Charter school
charter school cap. Perhaps most telling is enrollment in the District of Columbia
their success in urban areas. Detroit is the has increased by 2,260 over the past year.
leader in market share in Michigan. The Charter schools now serve 19,733 students,
number of children from Detroit enrolled in 26 percent of the city’s children. At the same
public charter schools last fall was 42,378, time, enrollment in the D.C. public school

Table 18: Charter School Enrollment and Closures by State

State Total Schools Operating Enrollment Average Enrollment Closures 1992
Alaska 24 4,814 201 5
Arizona 462 105,422 228 83
Arkansas 15 3,998 267 4
Calfornia 637 219,460 345 83
Colorado 132 47,443 359 6
Connecticut 19 3,577 188 4
Delaware 19 7,826 412 2
Washington, D.C. 68 19,143 282 13
Florida 347 96,007 277 53
Georgia 59 25,882 439 4
Hawaii 27 5,538 205 0
Idaho 28 9,384 335 1
Illinois 55 21,343 388 8
Indiana 38 8,274 218 2
Iowa 8 1,249 156 0
Kansas 26 2,588 100 8
Louisiana 6 17,315 376 8
Maryland 23 4,870 342 0
Massachusetts 60 21,987 366 6
Michigan 241 96,200 399 22
Minnesota 137 23,455 171 24
Mississippi 1 367 367 0
Missouri 27 11,134 412 4
Nevada 22 5,979 271 5
New Hampshire 8 388 49 1
New Jersey 53 15,381 290 17
New Mexico 62 10,034 162 2
New York 95 23,972 252 7
North Carolina 99 29,070 294 27
Ohio 301 87,288 289 20
Oklahoma 15 4,606 307 1
Oregon 71 10,105 142 8
Pennsylvania 120 55,760 465 9
Rhode Island 11 2,723 248 0
South Carolina 31 5,844 189 8
Tennessee 12 1,891 158 0
Texas 283 94,429 334 27
Utah 54 18,985 352 1
Virginia 3 241 80 3
Wisconsin 198 32,667 165 18
Wyoming 3 235 78 0
Total 3,940 1,156,874 267 494
Source: The Center for Education Reform, April 2007

system has declined by 2,670 students from 3. Competition Key for Future of New Orleans
the previous school year. Total public school Schools
enrollment remained relatively steady, with One unexpected by-product of
75,088 students in 2006-07, compared with Hurricane Katrina: New Orleans is now
75,498 the year before. Charters outperform the only city in America offering unfettered
non-charter schools in reading and math on public school choice.
the most recent national assessments. Schools fought to attract customers
Milwaukee: Not only is Milwaukee with radio and TV advertising, enrollment
home to one of the nation’s largest publicly fairs, visits to local churches and community
funded voucher programs with almost groups, and roadside signs pitching the
15,000 students in the program in 2005-06, benefits of their programs. The New
it also boasts a robust charter school sector Orleans Times-Picayune told parents,
with over 15,000 students in 2005-06. “Think of yourselves as consumers in a
The types of charters in Milwaukee range brand new marketplace.”
from district-sponsored charters largely Critics predicted chaos all summer. In
independent of the district, to district- August 2006, The New York Times ran
sponsored charters that are still part of a negative piece headlined “Rough Start
the district, to charters authorized by non- for State’s Efforts to Remake Faltering
district entities (the city or a local university) Schools in New Orleans.” Tulane University
that are completely independent of the education professor Lance Hill told the
district. Times, “We’ve created the most balkanized
school system in North America. The
The New Orleans Times-Picayune told average parent is mystified.”
parents, “Think of yourselves as consumers But as the Times-Picayune reported in
in a brand new marketplace.” fall 2006, 53 schools with 34,000 students
have opened with relative calm and few
New Orleans: Although enrollments snafus. Parents somehow managed to
change daily, enrollment in charters by navigate their choices without mass chaos,
the fall of 2006 was 69 percent. Schools and now one of America’s pre-eminent cities
have dropped residency requirements, is getting a dose of educational liberty.
so any student living anywhere in the All of the schools have a fresh start
city can register at any school on a first- and a level playing field in terms of
come, first-served basis. In 2007 students accountability and performance outcomes.
can choose from 31 charter schools, 20 The schools will have two years of fresh test
state-run schools, and five schools run by score data and graduation and attendance
the local district. Twenty-five different rates to establish baseline data for school
organizations, from nonprofits to national performance. Schools starting anew this
charter chains, are running schools, and the year will not receive their first post-storm
options run from comprehensive curricula performance scores until the fall of 2008.
to niche schools featuring early college, An inspiring story from the Times-
French immersion, Montessori, the arts, and Picayune from March 2007 describes
architectural design. a compelling example of the new

opportunities open to all students in New to sort out. However, this new choice-based
Orleans: system offers students a fresh start and new
In the city’s bold new landscape opportunities for high-quality education.
of charter schools, Science and Math,
well-respected before Katrina for
producing strong performance from B. No Choices Left Behind:
students of a wide range of ability, Restructuring California’s Lowest-
has expanded to become its own, Performing Schools
full-day charter school in Uptown.
The school works on a theory that The federal No Child Left Behind Act
an open-access school—with no (NCLB) requires states to show that students
admissions standards—can do just in every subgroup, including minorities,
as well, if not better, than one with low-income, and special education students
admissions standards—if it commits are proficient in reading and math. In
to focus solely on academics and 2005, each subgroup in elementary and
jettisons the all-too-common stand- middle school had to have at least 24.4
and-deliver lecture method. Instead, percent of students proficient in reading
the school strives for daily lessons and 26.5 percent proficient in math. In high
that engage students with concepts school each subgroup needs 22.3 percent
and require them to wrestle with of students proficient in reading and 20.9
problems. percent of students proficient in math.
Science and Math is, in A total of 2,215 California schools are
essence, a thinly veiled challenge listed as “needs improvement” under NCLB
to the very existence of the city’s and have entered program improvement
selective admissions schools, who status. Of these, 355 have been chronically
by their nature teach fewer low- low-performing for more than five years.
performing students, and in the case Process improvements such as class-size
of some, such as the exclusive Ben reductions, bigger budgets, or threatened
Franklin High, no low-performing sanctions have failed to address the problem.
students[...] California needs school improvement
At the start of this school year, legislation requiring schools with five or
just 14 percent of its freshman class more years of failure to choose a competitive
could read at grade level—some model that offers students meaningful
scored as low as second- and third- alternatives to the current low-performing
grade levels. Now, after making use public school including:
of phonics lessons, 43 percent of 1. offering opportunity scholarships to
freshman read at grade level. students in failing schools;
New Orleans schools still have an uphill 2. competitively bidding out low-
battle. Implementation issues from teacher performing schools to outside operators;
shortages to decisions about where to 3. restructuring the district to a weighted-
develop new school capacity will be difficult student formula system where a student

could choose any school in the district, or approaches to fixing their schools. And
4. converting the low-performing school to so far, Oakland’s policy of giving parents
a charter school. more choice is showing far more success
Students need the right of exit from than Compton’s strategy of micromanaging
these low-performing schools. School classrooms.
funding needs to be put into the backpacks Oakland and Compton are not identical,
of children and follow them into the school of course. Compton, located in the outskirts
of their choice. Offering parents and of Los Angeles, does not have the gorgeous
students “buying power” will help inspire San Francisco Bay scenery of Oakland. It
excellence in low-performing schools if they has a quarter of Oakland’s population and
have to compete for students in order to no wealthy neighbors. But they are both
receive funding. high-crime inner cities. Both have a large
The weighted-student formula is a Hispanic and black population, and a small
simple and equitable per-pupil funding Asian and white population. Average family
system that allows money to follow each incomes are comparable—about $40,000
child. This reform wins out over other for Oakland and $33,000 for Compton.
competitive reforms because it allows They both became targets of a state
California to develop a stable school takeover and a large financial bailout in
funding stream and would put every the last decade. And the federal No Child
school provider—whether public, charter, Left Behind Act for two years in a row has
or private—on a level playing field in ranked them both among California’s 162
California. districts “in need of improvement.”
In short, the two districts have similar
This piece was adapted from the Reason
student bodies, similar challenges, and—
study, No Choices Left Behind: Competitive
until now—a similar history of failure. But
Models to Restructure California’s Low-
Oakland is beginning to break away from
est-Performing Schools, which is available
this history, and the reason is the weighted-
online: reason.org/ps354.pdf.
student-formula program it embraced some
years ago and fully implemented last year.
Under this program, kids are not
C. Experimenting With School required to attend their neighborhood
Choice: A Tale of Two California school, especially if it is failing. Rather,
Districts they can pick any regular public or
charter school in their district and take
Policymakers, unlike scientists, don’t
their education dollars with them; more
have the luxury of conducting controlled
students therefore means more revenues
experiments to test competing solutions
for schools. Furthermore, as the name
to social problems. But when it comes to
suggests, the revenues are “weighted” based
reforming failing public schools, something
on the difficulty of educating each student,
close to that is occurring in two California
with low-income and special-needs kids
school districts: Oakland and Compton.
commanding more money than smart,
The districts, comparable in many
well-to-do ones. Schools have to compete
respects, are opting for completely different

for funding, but the upside is that they have and 60 percent passed math, a 6-point jump
total control over it. from the year before. By contrast, Compton
Compton has stuck to a completely showed no gains in English—staying stuck
different approach that does not involve at 58 percent—and posted a 2-percentage-
empowering parents—or decentralizing point drop in math, from 50 percent to 48
control to schools. Instead, it has tried to fix percent.
its failing schools by mandating “classroom Similarly, Oakland’s score on the state’s
inputs.” To this end, all Compton schools Academic Performance Index—a numeric
over the last few years have been ordered grade that California assigns to its schools
to reduce class size by 12 percent, improve based on the performance of their students
teachers’ credentials, adopt a tougher on standardized tests—went up by 19
curriculum, and even clean up bathrooms. points. Compton, in contrast, gained only
What are the results so far? Oakland 13 points.
schools have shown a remarkable flexibility Yet even this overstates Compton’s
in responding to student needs, while performance, because almost all of its gains
Compton has stagnated. In 2003-04, for came at the elementary level, where students
instance, Oakland’s high schools offered are not so intractable. Compton’s middle
17 Advanced Placement classes. Last year, schools lost an average of 6 points, while
they increased this total to 91, or about Oakland’s gained an average of 16 points.
one AP class for every 143 students. By Meanwhile, half of Compton’s high schools
contrast, Compton’s AP offerings went up lost points on the API score—including
by two that year, to one class for every 218 Compton High, where now fewer than 6
students. Oakland students also are taking percent of males are proficient in reading,
high-level math and science courses more and fewer than 1 percent in algebra.
frequently. About 800 high school students Conversely, Oakland high schools gained,
studied first-year physics last year—nearly on average, 30 points. Even Oakland’s
triple the number taking the course in the economically disadvantaged and limited-
2004 school year. English students have shown major
improvements. In 2006, its economically
Oakland kids have shown major disadvantaged students gained 60 percent
improvement on the California High School more on the performance index than
Exit Examination. Compton’s, and its English-language
learners gained 120 percent more.
More to the point, of course, are student Nor is Oakland’s progress in any
performance measures. Oakland kids have way anomalous. Oakland borrowed
shown major improvement on the California the weighted-student program from San
High School Exit Examination, which all Francisco, where the approach has already
students must pass in English and math had six years of success. San Francisco
before graduating from high school. Sixty- kids in every grade level in every subject
two percent of high school students passed have consistently performed above the
the English-language-arts portion, compared state average. Since 2001, its low-income
with 57 percent in 2005—a 5-point gain— students have posted gains of 83 points,

16 percent more than Los Angeles’s and 25 community and the school board. The state-
percent more than Compton’s. Last year appointed administrator for the Oakland
alone, San Francisco students overall earned schools was forced to hire a bodyguard
the highest API test scores of any urban because of threats to his life at community
district in California—97 points higher than meetings. But because the weighted-student
Los Angeles and 150 points higher than formula decentralized control to individual
Compton. Even San Francisco’s minority, schools and effectively put parents in charge
poor, and special education students have of enforcing accountability, principals were
shown major improvements. English- insulated from this ugly infighting, allowing
language learners, a challenging group, them to focus on what matters: students.
gained 12 points in 2006, compared with In essence, this mechanism proved stronger
zero points for Los Angeles’s. Similarly, San than district politics.
Francisco’s special education students gained The success of the weighted-student
19 points that year, whereas Los Angeles’s formula program has not gone unnoticed.
gained only 1 point. The Washington-based Thomas B. Fordham
What’s more, a wide array of schools Foundation last year touted the approach as
have cropped up in the city, catering to an important tool for school reform. Former
practically every student need and interest U.S. Secretary of Education Rod Paige has
by offering dual-language programs, praised it in The New York Times. Although
college-preparatory classes, performing-arts most teachers’ unions resist handing
electives, and advanced math and science control of school funds to principals, out
courses. In fact, every public school in San of fear that this might dilute their ability to
Francisco is fast developing its own unique enforce such union work rules as seniority-
blend of size, pedagogic style, and course based promotions, some unions have given
offerings. cautious approval to the concept.
Meanwhile, Oakland hosted a day-long Nationwide, close to 10,000 schools
fair last month at which the district’s 120- are considered to be failing under the No
plus schools could vie with each other to Child Left Behind Act, hundreds for more
entice parents, handing out information than five years. Yet less than 1 percent of
about course offerings, highlighting students in these schools manage to transfer
accomplishments, and answering questions. to a higher-performing school, even though
In short, schools are being forced to sell they have that right under the federal law.
themselves to each and every parent. Political leaders can change this by building
Compton and the majority of low- on Oakland and San Francisco’s modest
performing schools nationwide that can experiment in school choice. No student
count on a captive audience have no such deserves anything less.
plans. A version of this article by Reason’s Lisa
What’s more remarkable is that Snell and Shikha Dalmia appeared in Educa-
Oakland’s turnaround happened at a time tion Week.
when the state had initiated a hostile school
takeover, triggering protests from the

D. Child Welfare Privatization Update performance of the 22 community-based

care lead agencies and found mixed results
In 2007, the privatization of child for the state’s child welfare system since
welfare services received mixed reviews in fiscal year 1998-99, the year before the state
Florida and Texas and became the subject began the transition to outsourcing these
of a national study on the effectiveness of services.
performance-based contracting for child Most significantly, the OPPAGA report
welfare services. revealed an increase in the percentage of
children who experienced re-abuse over the
1. Mixed Reviews on Florida’s Child Welfare past six years. It found that 11 percent of
Privatization children were victims of re-abuse in 2004-
In 2005 Florida became the first state 05, compared with 8 percent in 1998-99.
to complete the transfer of all foster care, Some of the increase in the re-abuse
adoption, and child welfare licensing rate can be attributed to a more aggressive
operations across the state to private focus on child-abuse investigation. In 1999,
agencies, making Florida the first state in legislation was passed that broadened the
the nation to fully privatize its child welfare definition of abuse, increased the number
programs. The state Department of Children of people and agencies responsible for
and Families (DCF) has 22 contracts—some mandatory reporting of child abuse, and
representing single counties, and others increased the penalties for caseworkers
multi-county areas—with a “lead agency” who left children in dangerous situations.
that is responsible for the social work that All of these factors have contributed to an
was once handled by DCF. increase in child-abuse reports overall, re-
Lead agencies, having taken over abuse reports, and an increase in the number
responsibilities from DCF over the last four of children removed from their homes.
years, are responsible for all social services Therefore, it is somewhat inappropriate to
in their area. They typically contract with compare current re-abuse rates with pre-
community providers for most of those 1999 rates, which were reported under a
services, including substance abuse, case completely different legal framework for
management and foster care. child abuse and investigations.
The 22 community-based care agencies Despite the reported increase in re-abuse
that manage state child welfare services have rates, the OPPAGA report did reveal several
annual contracts that require them to meet other positive trends that should contribute
targets for eight performance measures. to the future safety of Florida’s children:
As of May 2007, none of the lead agencies • The number of children who exit foster
that manage abused and neglected children care within 12 months increased by 24
in Florida’s 22 areas is meeting all eight percent.
benchmarks. • The number of children reunified
A 2006 study (www.oppaga.state.fl.us/ with their families within 12 months
reports/pdf/0650rpt.pdf) by Florida’s Office increased by 20 percent.
of Program Policy Analysis and Government
• The number of children in licensed foster
Accountability (OPPAGA) analyzed the
care decreased by 15 percent.

• Case loads for case managers and case foster care. To measure the effectiveness of
manager vacancy rates both decreased the waiver, an independent evaluator will
by one-third. conduct an assessment of the results. Florida
• The number of adoptions finalized will receive federal funding during the
by community-based care agencies course of a five-year period based on what
(CBCs) has more than doubled. Florida the state would have received under IV-E
has repeatedly been recognized as a rules. This amount increases by 3 percent
national leader in this effort. In 2006, per year over federal foster care funding in
Florida received the highest adoption the federal fiscal year that ended September
incentive bonus in the nation from the 30, 2005. The program puts funding
U.S. Department of Health and Human incentives in line with the program goals
Services. of maintaining the safety and well-being
One achievement not mentioned in the of children and enhancing permanency by
report is that Florida ranks second in the providing services that help families remain
nation in the visitation of children in foster intact whenever possible.
care, as reported by the U.S. Department The bottom line for Florida is that
of Health and Human Services inspector hundreds of millions of dollars that formerly
general. In May, for example, more than 97 could be used only to warehouse children
percent of these children were seen by case in foster care now will be available to fund
managers. better alternatives. It also means DCF gets
Two other developments in Florida the money as a flat grant—no automatic
should lead to even more positive outcomes increases for taking away ever more
for children. First, Florida is the first children.
state to accept a waiver from the federal The second positive development in
government that reduces some restrictions Florida is a huge improvement in real-
on how federal child welfare dollars are time data collection. A data “DashBoard”
spent. The U.S. Department of Health provides real-time information about all
and Human Services’ Administration for performance-based expectations for child-
Children and Families (ACF) authorized welfare. Department of Children and
the five-year waiver under Title IV-E of the Families (DCF) Secretary Lucy D. Hadi
Social Security Act, allowing Florida to today unveiled a new way for Floridians
demonstrate that flexibility in funding will to see a DCF “report card” that can be
result in improved services for families. accessed through a Web-based performance
The waiver allows federal foster care Dashboard at: dcfdashboard.dcf.state.fl.us/
funds to be used for any child welfare The Dashboard displays over 200
purpose rather than being restricted to performance measures, so the public
out-of-home care as generally required can view the most recent and accurate
under federal law. It also enables funds to data compiled about adoptions, missing
be used for a wide variety of child welfare children, abuse investigations, and substance
services including prevention, intensive abuse treatment outcomes among others.
in-home services to prevent placement of Concerned citizens can now monitor how
children outside the home, reunification and well DCF is meeting federal and state

legislative mandated standards for all its to see trends as they occur and to address
programs including substance abuse, mental concerns before they become problems.
health, adult services, child welfare, refugee DCF managers and providers are held
services, homelessness, domestic violence, accountable for corrective action if
child care regulation and economic self- performance expectations are not met.
sufficiency.
2. Child Welfare Privatization Slows in Texas
Most reports found on the Dashboard
are updated daily, weekly or monthly. The In 2007 Texas has slowed its efforts to
information is displayed by geographic completely privatize child welfare services in
regions and by contracted providers with the state. The House and the Senate passed
statewide totals. Definitions of performance legislation that would roll back almost
measures and descriptions of data sources all of the privatization of foster care case
are also available on the Web site. management that lawmakers ordered in the
Monitoring this significant data previous legislative session. News reports
enables DCF and its contracted providers about the beating deaths of three foster

children in North Texas since August 2005 that should have been prevented by the
have revealed spotty state oversight of foster state child welfare agency. At the same time
care contractors and state officials’ lack of states privatize child welfare, they also often
information about Texas’s nearly 10,000 increase efforts in child-abuse investigation.
foster homes. In Florida and Texas privatization
Senate Bill 758 appropriates $100 resulted in an unexpected and large increase
million to the Department of Children and in children entering foster care. This also
Families to increase child protective service happened when Kansas implemented
workers and to outsource a maximum of its statewide child welfare privatization
10 percent of the 30,000 children under program in 1996. In each case, privatization
the Texas foster care system. This bill freed state social workers from managing
eliminates the Independent Administrator foster-care placement and allowed them
role for contractors and will require that to focus on investigating child-abuse
organizations compete for the Outsourcing cases. This results in many more children
Pilot as direct service providers working being removed from their homes, which
under the supervision on the State. The overwhelms the capacity of the private
legislation must still be signed by the foster care system.
governor. For example, according to a May 8,
The 2007 legislation eliminates a 2005 2007 article in the Dallas Morning News,
law’s call for private contractors to manage improvements to child-abuse investigations
each region’s supply of foster homes and ordered by the Texas legislature in 2005
mandate that all CPS “case management” have increased the number of children
duties be outsourced by 2011. The new removed from their birth families, which
legislation also calls for annual inspections has increased caseloads for state-employed
of all foster homes; currently, about one- caseworkers who are currently responsible
third are inspected each year. The measure for permanency placements for foster
also would require a database be kept on children.
foster parents who have been dismissed This has led to two stresses on private
by private child-placing agencies. Some foster care agencies. First, there are more
lawmakers fear that a small number of children in the system because of increased
foster parents are evading detection by child-abuse investigation and there are
jumping from agency to agency. fewer children leaving the system to find
permanent placements through adoption or
3. Reducing the Foster Care Population: the
family reunification because of the increased
Illinois Model
caseloads of state social workers. In Texas,
The experience in Texas with more privatization is blamed for a system change
abuse in foster care and the problems in that has very little to do with privatization
Florida with the large foster care population and more to do with large increases in the
reflect a familiar pattern when child welfare foster care population.
services are initially privatized. Child Similarly in Florida, tougher child-
welfare privatization is often called for after abuse investigation requirements have
horrific examples of child abuse or deaths led to a huge expansion of the foster care

population. It doesn’t have to be this way. of focusing the work on maintaining kids
Performance-based contracting with the in care rather than aggressively pursuing
correct incentives can reduce the foster care permanency.
population and bring safe and permanent In Illinois the state realigned contracts
living arrangements for children in state with financial incentives to secure
care. Both Florida and Texas could learn a accountability and reinforce the importance
lesson from Illinois. of achieving outcomes over maintaining
Illinois tried a different approach children in care. Agencies were allowed to
when it privatized its child welfare system. use superior performance in moving children
The Illinois Department of Children and to permanency as a way of lowering their
Families took steps to reduce the number of caseloads, maintaining their contract level
children who require foster care. Through and financially enhancing their program.
new early intervention services, called Front This shift was accomplished through
End Redesign, contractors have financial redesigning how agencies receive new
incentives to give families help immediately cases for placement services. Upon the
after their needs become apparent, even implementation of performance contracting,
before a child-abuse or neglect investigation all agencies were required to accept 24
is completed. These services may help percent of their caseload in new referrals.
prevent the need for a child to be placed Added to this was the expectation that all
into foster care. In accordance with state agencies would move 24 percent of their
and federal laws, an increased emphasis caseload to permanency—an outcome
has been placed on early permanency that expectation reflecting a nearly three-fold
includes a child’s return home, adoption, or improvement over the then system-wide
guardianship. average of 8 percent in 1998.
Illinois changed its financial incentives The benefits and potential consequences
to reward contractors for permanency. With were immediately apparent to contracted
so much of Illinois’s child welfare system agencies. By exceeding the 24 percent
privatized, the renewed focus on securing benchmark in permanency expectations,
permanency for children posed unique an agency could secure caseload reductions
challenges. Longitudinal data collected by without a loss in revenue. Falling short of
the Department showed that the rate of the benchmark meant serving more children
children exiting the system fell below the without a change in the contract level.
rate of new cases coming in system-wide. Since the implementation of performance
A significant part of the problem was contracting, the dramatic increase of
inherent in Illinois’s basic contracting children moving to permanency has been
structure. Contracts based upon a fee-for- nothing less than stunning. At its height in
child payment can undermine permanency, fiscal year 1997, 51,331 Illinois children
as once the child welfare issues have been were living in foster care. Because of an
resolved and the child is discharged, an increased emphasis on early intervention and
agency faces losing revenue unless the permanency services such as adoption, that
child is replaced with a new referral. This number has declined to 16,157 children in
dynamic leads to the predictable practice April 2007—a 67 percent decline compared

to June 1998. Through a competitive application

As notable as these gains are, the process, the QIC PCW and the Children’s
single most important accomplishment of Bureau selected three performance-based
performance contracting is the reinvestment contracting projects for funding for January
made possible through consistent gains in 1, 2007 through September 30, 2010.
permanency. These reinvestments support These projects will be testing models of
better service delivery for children and performance-based contracting and quality
families in Illinois’s child welfare system. assurance systems.
Florida and Texas both have an Florida’s Department of Children
opportunity to learn from Illinois. The and Families (DCF) District 13 will be
federal waiver in Florida would make it implementing the Performance Based
easier to implement an Illinois model of Contracting and Quality Assurance
performance-based contracting. If Texas Systems Demonstration Project which is
moves at a slower pace in case management a partnership between DCF / District 13
privatization, it should make performance- and Kids Central, Inc. The state intends to
based contracting a crucial component of demonstrate that a comprehensive planning
future pilot projects and new legislation. process leading to the development of
performance-based contracts and inclusion
4. Projects Underway to Assess Effectiveness
of performance measures in the quality
of Performance-Based Contracting
assurance process leads to improved
At the national level, an effort is outcomes for children in out-of-home care.
underway to extend the lessons learned The local site evaluation will be conducted
about the effectiveness of performance-based by Jean K. Elder & Associates.
contracting in child-welfare privatization. The Illinois Department of Children
The Children’s Bureau in the federal and Family Services will be partnering
Department of Health and Human Services with the Child Care Association of Illinois
has designed a five-year project to study to implement the Striving for Excellence:
the effectiveness of performance-based Extending Performance Based Contracting
contracting in the privatization of child to Residential and Independent Living
welfare services. The Quality Improvement Programs project. Its partnership will design,
Center on the Privatization of Child Welfare implement and evaluate the extension of
Services (QIC PCW) at the University the state’s existing performance-based
of Kentucky will study evidence of the contracting and quality assurance system
outcomes of performance-based contracting to residential, independent living and
in the provision of child welfare services. transitional living programs in order to
The QIC PCW will serve as a resource for improve outcomes for this population of
information on child welfare privatization out-of-home care youth. The state agency
efforts and provide lessons learned from will examine outcomes that are appropriate
these efforts. The center will test innovative to the early adult child welfare population
strategies for implementing performance- such as increased rates of educational and
based contracting and quality improvement vocational goal attainment, improved
systems in the private sector. employment experience and stability, and

improved independent living skills. The local a national performance-based contracting

site evaluation will be conducted by the symposium and in journals such as Research
Child Welfare Institute. on Social Work Practice.
Missouri’s Children’s Division is
partnering with seven consortiums to
implement the Maintenance Needs in E. The Case for Privatizing University
Performance-Based Contracting Success: Housing
The Missouri Project on Privatization
of Out-of-Home Care for Children. College students who expect more from
This project will examine the long-term their living spaces are forcing universities
maintenance supports and quality assurance to come up with creative approaches to
processes needed to successfully implement resolving housing shortages, renovating
a performance-based contracting system dilapidated dorms, and providing appealing
for case management services for out-of on-campus options to compete with off-
home care and adoption. An independent campus alternatives. Some universities
evaluation will be conducted by the have called upon the expertise of private
University of Missouri-Columbia School of housing providers to develop comprehensive
Social Work. solutions to these problems. In return, they
The three projects will measure child have reaped the rewards of lower cost,
well-being outcomes such as the rate of higher-quality student housing.
abuse while in state care, decreased time Despite these success stories,
until permanent living arrangements, privatization of student housing remains
increased rates of family re-unification, underutilized. A 2005 survey of 73 public
and reduced rates of re-entry into the child universities revealed that less than 14
welfare system. These types of outcomes percent of new residence halls were to be
will be measured in an experimental funded with private developer dollars. Only
design where some cases are assigned 16.6 percent of new residence halls will be
to a treatment with performance-based owned by private developers or foundations,
incentives and disincentives and some cases and 15.3 percent will be privately managed.
are handled based on a traditional child
welfare contract without performance The private sector has shown that it can
incentives. Each experiment will measure build, renovate, operate, and maintain
the effect of performance incentives and higher-quality housing communities at less
disincentives on very specific outcomes for cost than traditional military construction
children. methods.
After the individual experiments are
completed, the QIC PCW will also complete Just as apartment-style living spaces
a cross-site evaluation to report on shared and updated buildings are replacing some
themes and lessons learned across the three of the 11 by 14 foot dorm rooms and
child welfare privatization experiments. 1960s residence halls, it is time to replace
The findings from the three studies and the old notions of government-subsidized
cross-site evaluation will be presented at construction and management of university

Benefits of Military Housing Privatization

By examining the nature of the benefits that have accrued to military housing as a result
of privatization, it is possible to understand how similar partnerships would alleviate most
universities’ housing woes.
• Cost Savings: Private project development is significantly cheaper than government
housing construction and management. According to the DoD, it would have cost $16
billion to make necessary housing improvements based on the traditional military
construction (MILCON) program. Privatization is expected to cost only $14 billion, which
represents a savings of $2 billion. DoD concluded in 2004 that private development is
much cheaper:
Life cycle analyses have shown privatization to be less costly than military
construction for all projects so far. Our most recent data reflects for the 20 projects
we’ve analyzed thus far, a life cycle advantage for privatization of about 10-15 percent.
Under the Military Housing Privatization Initiative (MHPI), the private developer pays the
vast majority of the development costs. DoD policy requires that a privatized housing
project must generate at least $3 of housing development for every $1 appropriated by
Congress to support the project, or a “leverage ratio” of 3 to 1. For the 43 projects awarded
as of February 2005, government construction costs totaled $767 million for developments
that would have cost $11 billion under the traditional MILCON approach. This represents a
leverage ratio of over 14 to 1, far exceeding program guidelines and expectations.
• Speed in Addressing the Housing Shortage: Not only are private-sector housing developers
cheaper than government developers, they are also much faster. Using MILCON, DoD
estimates it would have taken another 20 years to fix all of the military’s substandard
housing. Assuming DoD’s budget requests are fulfilled, the Department anticipates
eliminating all inadequate military housing units in the United States by the end of FY
2007—and all inadequate units overseas by the end of FY 2009—by allowing the private
sector to manage the process.
• Better Housing Quality: According to DoD, in January 2001 approximately 180,000 of
the Department’s 300,000 family housing units worldwide were deemed “inadequate,”
requiring significant renovation or repair. In 2005, on-base housing had an average age
of 33 years, and 25 percent of it was over 40 years old. Primarily because of the military
housing privatization program, DoD expects to eliminate all inadequate units by the end of
FY 2007. This represents a dramatic improvement from the 60 percent inadequacy rate of
just a few years ago.
• Better Property Management: Privatized military housing offers better property
management and maintenance. For example, private management companies reportedly
fix maintenance problems much more quickly. Chris Crennan, Vice-President of Lincoln
Military Housing, Mid-Atlantic Region, proudly reported his company’s maintenance track
record at NAS Patuxent River housing privatization project: It addresses 97 percent of
reported problems within 24 hours and meets emergency needs within 30 minutes. At Fort
Meade, the base handed over a maintenance backlog of 4,000 repairs to the new private
management company, which fixed all problems within eight months.

housing. The innovation

and efficiency inspired
by privatization benefits
students, universities,
and the states
themselves.
Those who
doubt the promise of
privatized university
housing can look to the
U.S. military housing
model for reassurance.
The Military Housing
Privatization Initiative
(MHPI) has proven to
be a remarkable success
since its creation in
1996. In less than a
decade, the military
services have made
impressive strides in
utilizing private housing
developers to replace
inadequate on-base
housing. The private
sector has shown that
it can build, renovate,
operate, and maintain
higher-quality housing
communities at less they can use MHPI as a model for
cost than traditional military construction harnessing private sector efficiency and
methods. Privatization has resulted in innovation to offer students higher-quality
greater efficiency for the services and housing more quickly and at lower cost. By
greater quality of life and morale for service taking advantage of private sector expertise
members and their families. in delivering housing services, universities
Universities that face the challenge of will be free to focus more of their attention
providing new or modernized housing, on their primary mission of providing high-
especially those historically dependent quality education to their students.
on state appropriations for construction
This piece was adapted from the Reason
and renovation, can learn a great deal
study, Privatizing University Housing, which
from the success of the Military Housing
is available online: reason.org/ps356.pdf.
Privatization Initiative (MHPI). Specifically,

Emerging Issues
Contents
A. State Lottery Privatization
B. Government Transparency
A. State Lottery Privatization may, for the first time, truly operate as a
Several states including Illinois, Indiana for-profit business function with the goal of
and Texas floated plans to privatize their generating more sales.
state lotteries in 2006-07. The plans are Several states including California,
fairly similar to toll road concessions: a New York, and Florida have contracted out
long-term concession would be signed aspects of their lottery operations; however,
establishing the guidelines and expectations this form of lottery privatization is new to
of both parties, as well as what the state’s the United States. However, it is not new
regulatory role will become. to the world. Leading up to the Athens
Since no deal has formally been Olympic Games in 2004, Greece sold off a 5
completed it is not totally clear what a percent stake in the nations’ lottery. Italy’s
final deal would look like. However, the lottery is run under a concession that lasts
concessionaire will likely pay an upfront fee until 2012. The concessionaire operates
(possibly in the billions of dollars) for the 22,000 lottery machines in retail outlets—
right to operate the lottery on behalf of the the machines are also used to pay car taxes,
state. In addition, some states asked for an traffic fines, and television license fees. The
annual royalty and/or revenue sharing plan United Kingdom’s lottery also currently
on top of the upfront fee. operates under a seven-year concession.
Like toll roads, there is little doubt that In Indiana, 10 companies expressed
lotteries are valuable assets. They have a interest in leasing the Hoosier Lottery.
fairly stable revenue stream and one that Governor Mitch Daniels said that at least
certainly can be maximized under private half of those are “north of a billion and a
management. Private operators will likely half,” with two offers of at least $2 billion.
introduce new, more popular games. The state was also requiring concessionaires
Marketing will also be professionalized to commit to an annual $200 million a year
using the latest technology to target games in royalty payments.
to markets. Under this arrangement, lotteries Funds would be directed to creation of
an ambitious Hoosier Hope Scholarships

program to high school students attending years, slightly more than what they received
Indiana colleges and universities and then last year in lottery income.
remaining in the state to work at least Colorado was the only state to put
three years; to bring top researchers and forward a proposal generated by the
professors to Indiana, and to keep top legislative branch. Senator Josh Penry, R-
students in the state; the idea of directing Grand Junction, and Senator Chris Romer,
proceeds to pay down public employee D-Denver, teamed up to offer legislation to
retirement fund obligations, reduce the allow the Colorado lottery to be privatized.
excise tax on automobiles and fund capital The legislation would have required an up-
building projects front payment of at least $2.2 billion. Of
The enabling legislation, SB 577, passed the proceeds, $1.5 billion would be invested
the Senate 27-20. However, the bill did not in a trust fund while the remaining $700
get a hearing in the House. Daniels said million would be used for veterans’ health
he is putting off the plans to privatize this care, open space acquisition, and college
year—but that it would be back on the table scholarships. The bill was scuttled because
next year. One issue facing the governor is of an adverse opinion from the state’s
what to do with proceeds nearly twice the Attorney General.
anticipated levels. However, a volunteer lobbyist has
In Texas, Governor Rick Perry given second life to the concept. Marvin
suggested using the proceeds from a lottery Meyers, legislative chairman of the United
privatization to develop a host of new Veterans Committee of Colorado, has filed
government programs in his State of the the paperwork to pursue a citizen-sponsored
State speech. With expectations of $14 initiative that would put lottery privatization
billion the governor wanted to use $2.7 on the November ballot. Similar to the
billion for health insurance plans and $3 Penry-Romer bill, Meyers anticipates that
billion for cancer research. The balance the state would receive between $2.2 and
would be left, earning interest for public $2.6 billion upfront. Those funds would
schools. However, the enabling legislation also go to veterans’ services, buy open space,
(HB 3973) was not moved out of committee create a college scholarship fund and fund
during the 2007 legislative session. other projects. The initiative still needs legal
Illinois went the furthest with its effort approvals, draft ballot language and more
in 2007. Hoping to attract as much as than 76,000 signatures.
$10 billion from investors the state issued Governors in Michigan and New Jersey
a request for qualifications in January. have also initiated discussions about lottery
Under the plan the state would receive a privatization. Lawmakers in Maryland and
multibillion-dollar one-time payment, and the District of Columbia also mulled the
the lottery’s new operators would receive all idea over without offering concrete plans.
revenue and profit for 75 years. There are serious policy considerations
During his reelection, Governor Rod about the use of proceeds from lottery
Blagojevich called for privatizing the lottery. privatization. Again, while similar to
Under his plan he would provide the schools road and highway concessions, there are
with $650 million a year for the next 18 significant differences when it comes to

the allocation of proceeds. Many have federal legislation. It has been designed
expressed concerns about proceeds being in a user-friendly manner and allows for
used to create new programs or fund access to regular e-mail alerts, information
ongoing operating expenses. on how the bills if passed into law would
affect taxpayers, and a catalog organized by
topic. Although it was just launched by the
B. Government Transparency Sunlight Foundation it is quickly becoming
a great tool for activists, lobbyists and the
While transparency has always been public policy community.
coveted, new efforts at both the federal Over the past few years, there have
and state level hold promise to add more been many efforts at the state level calling
sunshine on how government operates. In for similar efforts, commonly known as
September 2006, President Bush signed “Google government”-type databases. These
the Federal Funding Accountability and Web sites would make state government
Transparency Act (S. 2590) into law. This more transparent by allowing taxpayers
bipartisan legislation was co-sponsored access to spending information and clarity
by Senator Tom Coburn (R-OK) and on where their tax dollars are being spent.
Senator Barack Obama (D-IL) and The governors of Indiana, Florida, and
requires that a free, searchable database Texas have led the most successful efforts on
be created to include all federal grant this issue.
and contract funding information on In 2005, Indiana Governor Mitch
payments over $25,000 (with exceptions Daniels (R) signed Executive Order 05-07
on classified information and individuals’ directing the Department of Administration
federal assistance). This Web site, www. to post written state contracts on this Web
federalspending.gov, will formally be site: www.in.gov/gov/media/eo/EO_05-07_
launched in 2008. Log_Contracts_On_Internet.pdf.
On Tax Day, April 17, 2007, Senator In January of 2007, Florida Governor
Robert Byrd (D-WV), Chairman of the Charlie Crist issued Executive Order
Senate Appropriations Committee, called 07-01 which created the Office of Open
for implementation of disclosure on Government, whose sole purpose is to
earmarks, since the larger ethics bill, HB provide “the Office of the Governor and
1136, does not look likely to pass. Also
known as the Ethics Reform Act of 2007,
if passed it would abolish the Committee
on Standards of Official Conduct in the
House of Representatives and establish an
Independent Ethics Commission to perform
the same duties.
As transparency and accountability
efforts sweep the nation, a new Web site was
launched in April; www.washingtonwatch.
com, is a Web site designed to get citizens
the opportunity to post and track pending

each of the executive agencies under his Finally, HB 2560, sponsored by Rep.
purview with the guidance and tools to serve Bill Zedler (R), went a step in a different
Florida with integrity and transparency.” SB direction calling for school districts to post
2516 was also introduced by Sen. Rhonda their check registers online; it passed out
Storms (R) calling for the Department of of the House but was left on the Senate
State to create a “Google government” calendar.
Web site which is now in the Economic Furthermore, Texas House Joint
Development Appropriations Committee. Resolution 19 was unanimously passed
At the end of January, 2007, Texas in both chambers giving voters the option
Governor Rick Perry (R) called for of adopting a constitutional amendment
government transparency as one component requiring a roll-call vote on the final passage
of his “Five Point Budget Reform Plan” of all substantive bills passed through
calling for all state agencies to publish the legislature. If approved by voters on
expenditures online in a clear and consistent November 6th, no measure could be passed
format. Believing on leading by example, through via an anonymous voice vote.
the governor has already made all of the Missouri Governor Matt Blunt’s office
governor’s office expenditures available is currently building a “transparency
online: www.governor.state.tx.us/divisions/ website” that it plans to launch in June.
press/files/2007Q1_expenditure.pdf In Georgia, SB 300 sponsored by Sens.
State Comptroller Susan Combs Chip Rogers (R) and Chip Pearson would
followed suit, posting not only her office’s require the Department of Audits and
expenditures, but also those of eight other Accounts to create a searchable Web site on
agencies (available at www.cpa.state.tx.us). the expenditure of state funds; it has been
The Texas State Legislature unanimously referred to the House.
passed HB 3430, mandating the creation of Arizona has created an online database
an easy to search, free database listing state (www.spirit.az.gov) that provides a
expenditures, including grants and contracts. searchable database of statewide contracts
This will allow Texans to literally open up for its agencies and over 400 colleges and
the state’s checkbook and see for themselves universities, counties, cities, school districts,
where taxpayer dollars are being spent. and qualified non-profits.
Additional bills were introduced in Hawaii’s Rep. Marcus Oshiro’s (D)
the Texas legislature. Rep. Ken Paxton (R) HB 122 passed, requiring the creation of a
sponsored HB 42 which would create a searchable Web site. Senate versions, SB 157
database of all state contracts; this bill was and SB 1689 would have imposed a $25,000
given a public hearing but died at the end threshold.
of the session. Rep. Bryan Hughes’ (R) HB Illinois Rep. John Fritchey (D)
640 would have required online posting of introduced HB 473, the Funding
expenditures by state agencies, and Rep. Accountability and Transparency Act,
Corbin van Arsdale’s (R) HB 1007 would requiring full disclosure of entities and
have required the online disclosure of state organizations that receive funds from the
grant information in a searchable format; state. In addition, the Governor’s Office of
both bills were left pending in committee. Management and Budget would have to

commodities. Additionally, Kansas

considered HB 2207, which would have
created a comprehensive searchable Web
site for the state’s expenditures, including
grants, contracts, subcontracts, tax refunds,
rebates and credits, payments made under
the Kansas Investments in Major Projects
and Comprehensive Training Act, as well
as expenditures pursuant to any compact
between the governor and any federally
recognized Indian tribe or nation in Kansas;
this bill was left pending in committee.
Del. Warren Miller (R) sponsored
HB 1252 in Maryland which would
have required the Department of Budget
and Management to disclose pertinent
information regarding state grants and
contracts by the start of 2008; it died in
committee.
Minnesota’s HF 376 and SF 416
were placed in the State Government
Omnibus bill, signed into law by Governor
establish a searchable Web site; there is a
Pawlenty on May 25, 2007. Although,
$25,000 threshold for disclosure. HB 473
grants and contracts to local government
passed the House and has been referred to
units won’t be included, the database will
the Senate Rules Committee.
allow Minnesotans to search for detailed
Kansas was the first state in 2007
information on state grants and contracts
to sign comprehensive government
which are valued over $25,000 starting in
transparency legislation into law. HB 2457,
2008. This information will be stored online
also known as the Taxpayer Transparency
for 10 years.
Act, sponsored by Rep. Kasha Kelley (R)
Although no legislation has been
in February of 2007, was signed by the
proposed yet, New Hampshire Gov. John
governor and became law in April. The
Lynch has made his monthly spending
Taxpayer Transparency Act requires the
reports publicly available. Officials expect to
Secretary of Administration to develop
make the spending side of the state’s budget
and maintain an easily searchable Web
available soon; citizens can already track
site containing: certain state and local
what goes into the budget.
revenue and expenditures including annual
In New Mexico, both Rep. Kathy
expenditures such as disbursements by state
McCoy (R) and Rep. Larry Larranaga
agencies from funds in the state treasury,
(R) introduced similar bills calling for the
salaries and wages including compensation
Department of Finance and Administration
paid to individual state employees,
to create a transparency Web site
contractual services, capital outlay and

information pertaining to supplies and

services contracts via a variety of search
criteria at www.procure.ohio.gov/proc/
index.asp.
Following a large turnover in the
General Assembly, Pennsylvania has
launched www.passopenrecords.org to
bring sunshine on the state’s expense
account records. Currently, the state asks
for a burden of proof from a citizen to
open a record. This blog points out that the
records should be presumed open and that
a particular office or agency should have to
prove otherwise.
In February of 2007, Tennessee Rep.
Matthew Hill (R) introduced HB 943, the
Transparency in Government Act, which
would require the state and its agencies to
create a searchable Web site and post the
lost revenue report from the previous fiscal
year. This bill is still pending in committee.
Although they never moved out of
committee, Kentucky’s HB 159 called
for creation of a Web site providing
access to most state expenditures, and
Washington’s HB 2342, would make state
showcasing info on state revenues and budget information available to the public
expenditures. North Dakota’s SB 2093 (although Washington’s Department of
passed the Senate unanimously and recently General Administration currently provides
passed the House; in addition to the information on state-awarded contracts on
creation of a Web site, this bill also calls for www.ga.wa.gov). And in Connecticut, HB
transparency of government purchase cards. 6809 would have required the Department
Oklahoma state senators modeled of Information Technology to create one of
legislation after the federal bill and called these “Google” Web sites with information
for creation of a Web site showing all state on state grants, contracts, projects, and
spending. This bill—unanimously passed loans. Colorado also suffered a loss when
in late May and signed into law by the HB 1164 was killed in committee; the
Governor in early June—is known as The Transparency Act would have created a
Taxpayer Transparency Act. This new “Google government” Web site requiring
“Google government” Web site is scheduled postings within five days of the treasurer
to be launched by January 1, 2008. receiving the information.
In Ohio, citizens are able to look-up .

Water & Wastewater

Contents
A. Public Works Financing Issues 11th Annual Water Privatization Report
B. U.S. House of Representatives Passes Water Funds
C. World Bank: New Generation of Privatization?
A. Public Works Financing Issues 11th B. U.S. House of Representatives

Annual Water Privatization Report Passes Water Funds
Water and wastewater services continued The U.S. House of Representatives

on their path of expansion, although at a passed HR 720, the Water Quality Financing
slower rate than in recent years, reports the Act of 2007 by a margin of 303-108. The
11th annual water report from Public Works bill dedicates $14 billion over the next four
Financing. The survey is based on a review years for the Clean Water State Revolving
of the eight largest water utility operators. Loan Fund.
The market has grown steadily by Another $1.7 billion in grants over five
5 to 12 percent a year since 2000 (total years was authorized in HR 569, the Water
dollar value)—with 2006 reporting as Quality Investment Act of 2007. Both bills
one of the slowest yearly gains in recent await action in the Senate.
years. There are 1,038 wastewater and While these bills may be a step in the
746 water facilities under private operation right direction, they fall short of what the
in the United States. In 2006, a total of U.S. Environmental Protection Agency
1,463 municipal, state, or federal clients says is needed. Some $350 billion or
outsourced their water or wastewater an additional $22 billion each year in
operations to the private sector; representing new investment is needed in our water
a 4.3 percent increase over 2005. infrastructure. One tool that would be
The industry’s contract renewal rate helpful is not included in the either of these
remained high, averaging 95 percent over bills. Last heard in the previous Congress,
the last four years. lifting the cap on Private Activity Bonds
(PABs) would offer private service providers
access to low-interest loans. HR 1708 (in

the 109th Congress) would have enabled 2005 investment totals amounted to $1.5
public-private partnerships to flourish billion—comparable to investment levels
for water and wastewater systems, likely over the last five years (with the exception of
resulting in more progress toward closing a single $2.5 billion concession in Malaysia
the investment gap. PABs would make in 2004). Private investment was prominent
public-private partnerships more attractive in China and Algeria.
because the private sector could offer lower Forty-one projects were finished in
prices because of new access to cheap capital 2005—the most since 1990. So even
and debt. though total investment, in dollar value,
has declined, the private sector remains very
active and engaged. There was a shift in the
C. World Bank: New Generation of type of investment though—sewer treatment
Privatization? plants saw investment increase significantly,
raising their share of investment from 9 to
A recently published report from the 35 percent.
World Bank, Private Participation in Water: There were 36 concessions between
Toward a New Generation of Projects?, 2002 and 2005, with most of them granted
examined the role of the private sector in in Chile, China, Columbia, and Malaysia.
international water and sewer investment Management and lease contracts have
and development. been gaining ground—now consisting of a
While private participation has slowed, quarter of all private activity.
it has become more concentrated. In

Figure 5: Investment Commitments Slowing,

Number of Projects Increasing in Recent Years
(Private Participation in Water Projects in Developing Countries, 1995-2005)
Source: World Bank and PPIAF, PPI Project Database.
Figure 6: A Changing Allocation of Private Activity

(Investment in Water Projects with Private Participation in Developing Countries by Segment, 1995-2005
(US$ billions))
Source: World Bank and PPIAF, PPI Project Database.

Telecommunications
Contents
A. States Push for Video Franchise Reform
B. Push for Network Neutrality Regulation Loses Momentum
C. Problems Emerging with Municipal WiFi
D. Lessons Learned from Provo’s Municipal Broadband
E. A Dynamic Perspective on Government Broadband
A. States Push for Video Franchise franchising authority—there are 700 of

Reform them in Missouri alone, according to the
American Legislative Exchange Council
As the consumer benefits become clear, (ALEC). Franchise reform also lowers the
more state legislatures are expected to adopt legal burdens traditionally imposed by local
franchise reform measures over the course of franchise agencies—burdens that have made
2007 and 2008 that permit new entrants to it costly, time-consuming and difficult for
apply directly to the state to offer cable TV competitors to enter. In addition, statewide
and cable-like video service. franchise reforms restrict or eliminate the
Video franchises are the revenue-sharing sometimes arbitrary concessions imposed by
agreements that cable TV companies sign local franchise agencies.
with local governments for the right to offer
1. Statehouse Groundswell
video services to customers. In return for
a portion of the gross video revenues the States are increasingly embracing video
company pays to the municipality, cable TV franchise reform as a way of accelerating
companies get use of the city’s right of way competition for cable TV services. As of
and a right to sell cable service in the area. mid-May, at least 12 states had introduced
Statewide franchising eliminates legislation to allow new entrants to apply
the need for applicants to go from directly to the state for franchising authority,
municipality to municipality to negotiate bypassing the need to engage in often costly
individual agreements, a process that can and time-consuming negotiations with local
take 24 months or longer. Under current towns and municipalities.
franchising rules, new entrants must Of these, the Missouri General Assembly
negotiate individually with each local was the first to pass franchise reform in 2007.
The Missouri House of Representatives voted

March 14 143-4 in favor of the measure, by passing statewide franchising bills

known as the 2007 Video Services Providers by wider and wider bipartisan margins.
Act (SB 284), following a 32-2 vote in favor Studies in 2006 by Reason Foundation,
of the bill in the Senate. Gov. Matt Blunt the Mercatus Center at George Mason
signed the bill March 22. The law will take University, and the George Mason University
affect August 28. School of Law, among others, looked at the
Lawmakers in Georgia followed in way the local franchising process inhibited
April, approving statewide franchising by competitive entry, and the results that
margins of 166-2 and 52-2, respectively, in occurred in Texas and Indiana, which in
the state House and Senate. As few weeks 2005 and early 2006 became the first two
later, the Florida legislature passed statewide states to create statewide schemes.
franchising, and Gov. Charlie Crist signed After Texas created statewide video
the bill May 21st. In both states the act franchising in August 2005, Verizon began
became effective July 1. extending its new FiOS fiber-to-the-home
Elsewhere, Nevada Gov. Jim. Gibbons network in Keller, Texas, which had until
signed AB 526 on June 4, creating a that point been operating as a pilot project,
statewide franchising process in the Silver into surrounding communities in north
State. Compared to similar legislation in Texas. By the end of that year, Charter
other states, where reform has taken a year Communications, the incumbent cable
or two to happen, Nevada moved rapidly. company in Keller, had cut some cable rates
The bill was introduced on March 23. by 27.5 percent.
The Illinois House of Representatives As AT&T ramped up its 2006 U-Verse
passed a franchise reform bill June 1 by a launch in San Antonio, Time Warner Cable
unanimous 113-0 margin. At presstime, the boosted the speed of its Road Runner
bill was awaiting vote in the Senate, where Internet service. Once AT&T went on-line,
it was expected to pass. Once it clears the Time Warner began discounting TV and
upper chamber, Gov. Rod Blagojovich is phone plans, throwing in premium movie
expected to sign the bill. channels and faster Internet connections.
The only setbacks thus far have in In October, Time Warner introduced an
Tennessee and Colorado, where bills have innovative new service feature called “Start
stalled in committee and are unlikely to Over” that allows viewers tuning in late to
come up for vote. watch their shows from the beginning.
Other states that have introduced After statewide video franchising took
statewide video franchising this year are effect this past summer in Indiana, Verizon
Iowa, Massachusetts, New York, Utah, stepped up FiOS deployment. Comcast
Washington and Wisconsin. responded by increasing the speed of
Opposition to legislation tends to come broadband service in Verizon territories such
from municipalities, which fear both loss as Howard County to keep up.
of franchise revenues and that new entrants In Ft. Wayne, Indiana, Verizon began
will not serve all parts of the community. deployment of FiOS service in the low-
But the case for competition is proving more income Hanna-Creighton neighborhood.
compelling, and legislators are responding AT&T has rolled out U-Verse service across

all parts of San Antonio, not just the tony bills currently under consideration vary in
neighborhoods. the deadlines they impose on new entrants
Where enacted thus far, franchise regarding coverage of the entire area.
reform’s benefits have been undeniable. The Tennessee bill imposes no build-
Consumers have enjoyed greater choice out requirement, allowing new entrants
and a range of new services, including to deploy service in response to market
on-demand video and “a la carte” content conditions and economies of scale. Illinois
selection, at lower cost. Incumbent and Missouri require that within five years
cable providers have responded to new at least 30 percent of households where
competition by lowering costs and service is available must qualify as low-
improving service. income.
Some bills, including those in Colorado
2. Bills Differ in Details
and Illinois, require the incumbent cable
Although all the bills introduced so far company to remain bound by its existing
create statewide video franchising authority, local franchise agreement until it expires.
there are some differences. Others, such as in Florida, Missouri, and
Most states cap the franchise fees Tennessee, permit incumbents to apply for
percentage formula at 5 percent of gross a statewide franchise upon the entry of a
video revenues, although some bills, competitor. The Wisconsin bill would permit
including the one in Illinois, designate an incumbent to apply for a statewide
an additional 1 percent to fund public, franchise with or without competition.
educational, and government (PEG) All legislation calls for statewide
channels. franchisees to provide PEG channels, usually
The definition of gross video revenues a minimum of three, often more based
can also differ. All bills consider income on population. Franchisees must provide
from service provision—billings for set- a means of connection from PEG studio
top box rental, monthly service, premium facilities to the head-end.
channels and pay-per-view—as video All the pending legislation prohibits
revenue. More controversial has been cities from discriminating against some
the inclusion of cable-related income service providers by denying access to rights
that does not come from consumers, of way or charging higher prices for access
including revenues from local advertising, than to other providers.
commissions paid by programmers such
as the Home Shopping Network and QVC 3. FCC Action
on sales of merchandise to franchisee As state action proceeded, the FCC
customers, and promotional fees paid issued a new set of rules and guidelines
to franchisees by cable programmers for for local franchise authorities that regulate
including their channels on the system. cable operations within their specified
Bills in Colorado and Tennessee use the jurisdictions. The rules became effective
broader definition, while the Illinois’ bill, for March 5th, the date the FCC released the
example, does not. order.
Regarding build-out of new services, the The FCC rules, contained in the March

5th Report and Order and Further Notice Industry concerns about the effect the
of Proposed Rulemaking, are designed to exploding amount of video traffic will have
strengthen the existing provisions of Section on Internet transmission in general have
621(a)(1) of the Communications Act of tempered the urge to ban tiered pricing
1934, as updated over the years, which structures that would allow major content
prohibits franchising authorities from and applications providers such as Google,
unreasonably refusing to award competitive Yahoo, Sony and Disney to upgrade the
franchises for the provision of cable services. speed and quality of their commercial
The new rules require local authorities services as they cross the Internet.
to decide on a franchise application within By way of measurement, the monthly
90 days or the license will be deemed volume of Internet traffic grew by 35 percent
granted. In addition, local authorities can between December 2005 and December
no longer make extraordinary requests from 2006. The Internet in December 2006
applicants for the deployment of hardware handled about 700 million gigabytes (1
or for requests unrelated to the provision of billion bytes), compared to 450 million
video service. in December 2005 and 300 million
The FCC also listed several other in December 2004. This snowballing
practices as an “unreasonable refusal to growth has technologists coining the term
award a competitive franchise,” including: “exaflood.” The word derives from exabyte,
• requiring an applicant to agree to which equals 1 quintillion bytes (1 followed
unreasonable build-out requirements, by 18 zeros). In terms of equivalency, 700
• demanding additional fees and million gigabytes equals 0.7 exabytes.
compensation that are not counted In and of itself, the exaflood does not
toward the statutory 5 percent cap on necessarily pose a crisis. Right now the
franchise fees, and global Internet has the capacity to handle
the traffic. The question is, when the amount
• demanding unreasonable obligations
of Internet data truly begins to reach the
relating to PEG channel and institutional
capacity of the network, as it inevitably will,
networks.
how will the industry be able to respond?
Free market proponents argue that deep-
pocketed companies will likely be willing
B. Push for Network Neutrality
to pay for quality guarantees. At the same
Regulation Loses Momentum
time, their high-bandwidth applications will
be partitioned away from the conventional
Both Congress and the states are moving
“best effort” Internet that supports the
slowly on network neutrality, which would
great majority of Web-based content and
regulate, and perhaps prohibit, the use of
applications, allowing these to perform
network-based techniques to improve the
free of the congestion the few big players
performance of time and error-sensitive
would otherwise generate. In fact, many
Web-based applications, such as two-way
of these companies already rely on Web
voice, video and interactive games.
caching, compression and other server-based
The push for regulation has lost some
techniques that enhance the way their Web
momentum from the last half of 2006.

sites work and mitigate congestion at the neutrality provisions to the upcoming
same time. It is not as if today all Web sites spectrum auction of frequencies in the 700
operate on neutral footing. MHz band. The FCC opened the band with
As of mid-May, there had been no an eye toward creating more channels for
movement on a congressional network wireless data services. The move is part of
neutrality bill introduced by Sens. Olympia a broader effort to push for caveats and
Snowe (R, Maine) and Byron Dorgan (D, restrictions that would bar some groups of
N.D.). Efforts in Maryland and Michigan companies from participating in the auction.
to enact network neutrality rules at the state At presstime, it was unclear how these
level were voted down. efforts would play out.
Some early industry proponents of
network neutrality, including Microsoft,
have backed off. In addition to service C. Problems Emerging with Municipal
providers such as AT&T, Verizon and WiFi
Comcast, most U.S. telecom manufacturers
have urged lawmakers and regulators to As more cities launch municipal wireless
deal with any market abuses should they systems, many of the predicted problems are
occur, and not pre-empt the market with a emerging, ranging from higher costs to low
new law that addresses no current problem. usage to poor coverage.
Even Google, which until now has been The problems are not limited to purely
among the most vocal corporate backers of city-owned and operated systems. Recent
neutrality regulation, has started sending news indicates that companies participating
mixed messages. Although a spokesman in public-private partnerships are revisiting
reassured net neutrality supporters at their business models and hedging on their
SavetheInternet.com that Google remains promises.
committed to the cause, a number of key For example, MetroFi, one of the
Google executives have been hedging on leading wireless network companies in the
their support for government intrusion in municipal space, has told cities it will not
the market for network and applications offer a tier of free services unless the city
management. agrees to become an anchor tenant on the
Alan Davidson, Washington policy network. The company said that while a free,
counsel for Google, said at a Federal Trade advertising-supported tier of wireless access is
Commission workshop in February that not viable, it cannot by itself support a city-wide
all network management is anti-competitive. network infrastructure. Adrian van Haaftan,
Two weeks later, Andrew McLaughlin, MetroFi’s vice president of marketing, told
Google’s head of global public policy, told a Wireless Week, an industry trade publication,
Silicon Valley audience that he believed market that revenues from municipalities must be
mechanisms will ultimately solve Internet part of the sales “equation.”
congestion problems. “None of us want any Both private companies and
kind of heavy-handed regulation,” he said. municipalities are also learning that
As of early June, proponents were infrastructure costs are higher than thought.
pushing the FCC to attached network Early studies estimated that a “mesh” of

25 WiFi antennas per square mile would be access to the city system were required to
adequate to assure wide area, in-building purchase $100 signal extenders.
coverage. Many cities based their spending
plans on these estimates. As WiFi systems
build out, engineers are discovering that it D. Lessons Learned from Provo’s Mu-
takes up to 50 mesh antennas per square nicipal Broadband
mile to assure adequate coverage.
Meanwhile, many municipal wireless After only two years, the municipal
systems that were once highly touted are broadband system in Provo, Utah has begun
limping along. Lompoc, California, which to show the pattern seen in other cities
spent $3 million on a citywide municipal that have mounted expensive fiber optic
wireless network reported in April that networking projects. With less than half the
had signed up a only 281 customers, subscribers expected by this date, iProvo, the
representing an investment of $10,676 $39.5 million system launched in July 2004,
for every customer. The town’s original has had to request $1 million in additional
feasibility study said the system would need funds from the Provo’s electric utility to
3,000 subscribers to break even. meet its costs.
The wireless system in Foster City, The request for additional funding
Calif., covered only 60 percent of the town comes after a troubled first 18 months of
as of early April. The private contractor, operation marked by slow growth and a
MetroFi, had promised residents 95 percent rocky relationship with a retail partner
coverage by then. It blames the coverage that came to an abrupt end during a heated
problems on the layout of homes in Foster mayoral campaign. The sole bright spot
City and the geography of the city itself. is that iProvo construction has stayed on
Meanwhile an independent evaluation schedule. The iProvo Web site reports that
of the municipal wireless system in Portland, all eight construction phases were completed
Ore., another MetroFi project, found just 50 by the initial July 2006 deadline.
percent coverage. The evaluation was done iProvo is set up as a city-owned fiber
by a Portland user group unaffiliated with optic network that wholesales capacity
the city. About two weeks afterward, the city to retail service providers. The unit
refuted the user group with its own study that operates under the administration of the
it commissioned and funded, which found Telecommunications Division of Provo
that 99 percent of the municipal system’s hot City’s Energy Department. Construction
spots were functioning as specified. on the iProvo network began in July
And the latest news from St. Cloud, 2004. As of December 1, 2005, fiber optic
Fla., reports that the town had to replace connections were available to more than half
every antenna on its network due to water of Provo’s approximately 27,000 residences
damage. The change-out did not cost the and 4,100 small businesses, making it
city any money directly, but it did require the largest municipal broadband system
considerable time from city employees. Last in the United States to date, according to
year, the town fell short of its promised Broadband Business Forecast, an industry
in-home coverage. Residents who wanted newsletter. Local newspaper reports place

the subscriber total at 7,700 as of October HomeNet and iProvo started with, as few as
2006. iProvo also owns and operates a cable 1,600 were left by the time HomeNet closed
television distribution facility. up shop. This occurred as Mayor Billings
iProvo began with high hopes. But was in the middle of a heated re-election
for all the optimism that the city had campaign in which iProvo performance was
found a better formula in wholesaling, the an issue. This put pressure on Billings to find
experience remains a warning to other cities replacements for HomeNet quickly, giving
that municipalities, even when they take a more leverage to would-be partners to
wholesale role, cannot compete with the extract favorable concessions from the city.
private market. Despite the advantages it
had at the outset, just two years into the For a project that began as an example of
project, iProvo is dealing with the same innovative urban planning and pro-active
struggles other municipalities have had in technology policy, iProvo has had an
the past. inauspicious 18 months.
iProvo is behind on its business plan and
is being forced to borrow more money. In Cable and Internet prices charged by
February 2006, Mayor Billings and iProvo iProvo partners are not significantly lower
officials asked the Provo City Council than pricing from Comcast or Qwest. An
to approve a transfer of $1 million from original goal of iProvo had been to offer
Provo’s electric utility reserve to cover fiscal broadband services at “affordable” rates,
2006 costs. In June, iProvo requested and implying the rates charged by private service
received a line of credit for an additional providers are too high. Yet, when compared
$2 million to cover costs in fiscal 2007 and with similar service packages from the
2008. iProvo officials also said in October incumbent cable and telephone companies,
that the operation will need 12,000 to iProvo’s two current retail partners (Veracity
15,000 customers to break even, an increase Communications and MStar Metro) do not
the original break-even target of 10,000 offer sizable discounts.
customers. The original plan had anticipated There is little evidence to suggest iProvo
iProvo achieving 10,000 customers by has generated any significant growth in
December 2005. With revenues and broadband usage or penetration in Provo.
customer uptake short of goals, there is All reports suggest that the great majority
mounting pressure on asset value and cash of iProvo’s 5,000 customers had broadband
flow. iProvo’s “burn rate” (the rate at which service prior to iProvo, either as customers
expenditures exceed income) in fiscal year of bankrupt Provo Cable or as customers of
2005 was $325,000 a week. Veracity and MStar.
iProvo’s wholesale plan attracted iProvo’s current retail partners, Veracity
only one retail partner, HomeNet and MStar, are two local Internet service
Communications, in its first year of providers (ISPs). They replaced HomeNet in
operation. That relationship proved a August 2005. While the city of Provo funds
disaster that ended with HomeNet pulling construction and maintenance of the fiber
out of the market in July 2005 and declaring optic backbone and cable head-ends, fiber-
bankruptcy. Of the some 2,400 customers to-the-premises (FTTP) connections to each

home and business are the responsibility Set up under a wholesale model, iProvo
of Veracity and MStar, which are principal also was touted to be immune from the
points of contact for consumers. The problems municipalities have had with retail
two iProvo retailers compete with other FTTP systems. That has turned out to be a
broadband and cable TV providers, false hope. Indeed, while financial reports
including Qwest Communications looked good in the first year of operation,
International and Comcast Corp., as well as much of iProvo’s revenues were generated
direct broadcast satellite (DBS) companies from interest accruing on bond funding that
and other ISPs. Large users, such as Brigham had been banked. Although the warning
Young University, do business directly with signs were there, namely in the form of poor
iProvo. The city of Provo is also a customer customer growth, iProvo officials chose to
of iProvo. play them down. It was only in its second
Yet just two years into operation, year, when cash from the bond issue began
iProvo has had to call on the city’s power to deplete, that iProvo’s revenue shortfalls
of the purse. In the free market, failing and cash flow problems came into high
companies close shop, and that is the relief.
end of the financial loss. In requesting an For a project that began as an example
allocation from the city’s electricity reserve, of innovative urban planning and pro-
iProvo can do what no private company active technology policy, iProvo has had
can: cross-subsidize broadband operations an inauspicious 18 months. In its first
from other utility funds. The electricity year, certain aspects of its balance sheet
reserve fund was created as a hedge against and revenues appeared sound, but they
price increases in the cost of electricity, a do not stand up on closer examination.
volatile market as it is. Provo’s electricity Because it calls for a smaller investment, the
customers, not its broadband users, pay into wholesale model appears more attractive.
it. Although iProvo seeks only $980,000 of The wholesale model is getting more
the $17 million in the reserve, it establishes a consideration as more cities contemplate
precedent and leaves the electric utility, and municipal wireless networks. Yet the
its customers, that much more vulnerable. cautionary tale of Provo is that operating
In addition to engaging in overt cross- as a wholesaler is not enough of a hedge
subsidization, iProvo demonstrates more against the financial and logistical problems
subtle problems municipal broadband that occur when a city seeks to compete
systems create for taxpayers and the local with commercial service providers in a
economy when they attempt to compete competitive business sector.
with the private sector. For example, The above is the executive summary from
when the city of Provo sold Provo Cable’s Reason’s study, Spinning its Wheels: An
customers to HomeNet at 40 percent of Analysis of Lessons Learned from iProvo’s
true market price, it indirectly subsidized First 18 Months of Municipal Broadband,
HomeNet’s market entry. In selling a key available online at www.reason.org/ps353.
asset for less than what it was worth, Provo pdf.
cheated both local commercial service
providers and Provo taxpayers.

E. A Dynamic Perspective on Govern- year, or 20-50 percent in subsequent years,

ment Broadband appears highly unrealistic in most cases. A
wireless system might expect to serve about
By Jerry Ellig 25 percent of the residential market and
10-20 percent of the business market. The
Debate over government provision
only exceptions might be small communities
of broadband has generated many of the
serviced only by expensive alternatives, or
usual arguments over the pros and cons
municipalities willing to commit to very
of government service provision. On the
large subsidies for their broadband systems.
one hand, such initiatives might make
2) Performance Competition:
broadband more affordable and hasten its
Competitive businesses seek to continually
adoption. On the other hand, they could
improve performance—or even develop
also generate significant costs for taxpayers
new aspects of performance that were not
and stunt incentives for cost containment.
previously thought capable of improvement.
Such arguments commonly occur when
Speed is perhaps the most measurable aspect
governments consider direct provision of
of performance. Comparing prices and
electricity, gas, water, roads, and many
services offered by government-sponsored
other services that tend to be provided by
Internet provision to those in the private
monopolies that invest in long-lived assets.
sector, the prices and performance of
Less extensively discussed, however,
existing government systems are inferior
are some unique challenges that arise
to those of existing private systems. An
because broadband is a new, fast-changing
effective government-owned competitor
technology available from competing
must be prepared to offer a price/
suppliers. Policymakers need to consider
performance combination that a significant
some unique problems when a government
number of consumers will prefer to those
enterprise enters a dynamic market such as
offered by competitors. If government
the provision of Internet services.
ignores performance competition, it could
Scholarship on dynamic competition
end up offering a fairly plain service
suggests seven new issues that are likely
appealing only to customers who want
to be significant in municipal provision of
relatively slow broadband speeds, and may
Internet service:
not be willing to pay much for it. While
1) Competition: Unlike a monopolist,
such an approach might be attractive as
an enterprise that faces competition cannot
social policy, it is unlikely to pay for itself
count on a captive market. In many cases,
over the long term and would likely require
government-sponsored broadband will
ongoing subsidies.
have to compete with incumbent firms,
3) Continuous Improvement: One
such as cable, telephone, and wireless
indicator of the extent of change is the
companies that already have a substantial
pace at which prices of goods and services
head start. After reviewing many cities’
fall as technology improves, costs fall, or
actual experience with cable and broadband
competition intensifies. This has occurred
enterprises, research concludes that an
frequently in the market for Internet service,
assumed penetration rate for a municipal
as well as in related or analogous markets
system of more than 10 percent in the first

such as wireless communications, telephone plus interest, but also recover the initial
equipment, and telecommunications capital outlay in three to five years.
services. Real consumer price indices for 6) Risk: Financially, investment in a
wireless, telephone equipment, and long- dynamic field such as Internet provision is
distance service have fallen even faster—by less of a “sure thing” than a conventional
45-65 percent. If recent experience is a government monopoly. That means the
guide, government broadband operations cost of capital should carry a higher
will need to be prepared to continually risk premium than normally considered
improve in the future if they want to keep appropriate for government enterprises. But
pace with private sector competitors. just how risky is it? Comparing risk levels
4) Technological Change and Lock-In: shows clearly that investments in electric,
“Lock-in” occurs when an initial decision gas, and water utilities have involved much
gives one technology a slight edge, then less risk than investments in firms that
sets in motion a process which leads that sell broadband or wireless data services.
technology to dominate the market. If Electricity, gas, and water are precisely the
the technology that gets locked in is truly types of static, monopolized industries where
the superior technology, then there’s no governments have traditionally invested.
harm done. But if an inferior technology In terms of risk, broadband is a whole new
gains a temporary edge in market share, ballgame. Investing in broadband is much
some scholars argue that it might remain riskier than investing in the overall stock
dominant even though it is inferior. The market. Nevertheless, some governments
market gets locked in to the inferior have financed broadband initiatives as if
technology due to the decisions of the early they were traditional, low-risk investments
adopters, and often has to rely on subsidies in infrastructure that provides necessities.
to stay afloat when better technology is A government enterprise that faces an
available elsewhere. Government broadband artificially low cost of capital is more likely
plans should squarely address the potential to waste the public’s money by “investing”
for lock-in and explicitly evaluate whether in capabilities that produce little value for
subsidies would give an inferior technology customers, or do so only after an excessively
an artificial boost. long time.
5) Obsolescence: In a dynamically 7) Uncertainty: A private business
competitive market, networks become firm’s shareholders bear uncertainty as
obsolete faster. Technology improves more well as risk. The prospect of additional,
rapidly, and as a result capital investment higher returns entices them to bear that
becomes obsolete more quickly. Business uncertainty. The fact that uncertainty affects
plans for government broadband enterprises shareholders’ financial fortunes gives them
need to assume faster depreciation rates, strong incentives to seek out management
and concomitantly higher prices, than have that will exercise sound judgment. The
traditionally been used for government most likely method would be to organize
utilities. For example, a workable plan the enterprise as a for-profit company,
for municipal Wi-Fi needs to assume that with explicit expectations from the owner
revenues will not just cover operating costs (the government) that it be successful. The

Figure 7: Utility Risk Levels (Beta Coefficients, Where Stock Market = 1)
2.5
1.5
0.5
0
Electic Utility Gas Water Utility Cable TV Telecom Wireless
Distribution Services Networking
Source: Aswath Damodaran, http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html
most credible way governments make these The factors outlined above need not
types of commitments is by enacting a imply that government-provided broadband
plan to privatize the enterprise. But in this is a bad idea. However, no plan for
context, a privatization plan would beg the government-sponsored broadband should
question of why the government is getting be considered complete or responsible unless
into the broadband business to begin with! it addresses many factors. Government
For government broadband enterprises, faces the daunting challenge of entering a
taxpayers bear the uncertainty in their role market where technological change is swift,
as the ultimate owners. At a minimum, the future is uncertain, and competitors’
therefore, effective accountability requires actions are unpredictable—a playing field
that government broadband initiatives fundamentally different from the stable,
should have accountability and transparency predictable utility markets that have
for taxpayers at least as good as that which traditionally attracted public investment.
publicly held companies must have for their Jerry Ellig is a senior research fellow at the
shareholders. These transparency measures Mercatus Center at George Mason University.
may not be sufficient to make government The above article is a summary of Reason’s
managers as accountable to uncertainty- December 2006 study, A Dynamic Perspec-
bearing taxpayers as corporate managers tive on Government Broadband Initiatives,
are to uncertainty-bearing owners. But it is available online at www.reason.org/ps349.
difficult to see how accountability is possible pdf
without them.

Land Use and Property Rights

Contents
A. Eminent Domain Reform Update
B. Measure 37 Rewrite Sent to Oregon Voters
C. Arizona’s Proposition 207: the New Standard for Regulatory Takings Reform
D. Sustainable Development in Urban Planning: The Case for a Market-Based Approach
A. Eminent Domain Reform Update land for clearly defined public uses—such as
roads, parks, and public buildings—but Kelo
1. Property Rights Win Big in November 2006 opened the door for government to condemn
Election property for almost anything that it could
Besides Democrats, the big mid-term argue had a public “benefit.”
election winners in November 2006 were The backlash was immediate. Since
homeowners in the nine states that passed the Kelo ruling over two dozen states have
initiatives protecting property rights and passed legislation to curb eminent domain
reining in government’s power to take abuse, and in the November 2006 election,
homes and businesses. These initiatives voters passed a variety of measures intended
were sparked by the Supreme Court’s to do the same thing.
controversial ruling in the 2005 Kelo vs.
New London decision, which gave the Kelo opened the door for government to
government a green light to use eminent condemn property for almost anything that
domain to take private property and it could argue had a public “benefit.”
turn it over to developers for “economic
development” purposes. An overwhelming majority of voters
Many Americans were incensed at the in Florida, Georgia, Louisiana, Michigan,
notion that government could arbitrarily New Hampshire, and South Carolina
evict people from their homes, businesses, approved constitutional amendments that
and churches simply because it could forbid the use of eminent domain to transfer
generate more local tax revenue if these land from one private party to another for
properties were redeveloped as condos, economic development purposes. Similar
offices, and hotels. Traditionally, eminent voter-initiated constitutional amendments
domain was only used to acquire private passed in both North Dakota and Nevada,

though Nevadans will need to pass the same the two biggest threats to property rights in
amendment in 2008 for it to take effect. one fell swoop.
Of all states, voters in Oregon have However, two similar “Kelo-Plus”
taken one of the strongest stands in recent measures failed to pass. California’s
years to protect their property rights. Proposition 90 was defeated by a 52 to 48
Measure 39, a statutory initiative that margin. Idaho’s Proposition 2 also failed
reins in eminent domain abuse, passed to pass. Opponents of these measures—
in November by more than a two-thirds including environmental groups, municipal
margin. Moreover, Measure 39 followed associations, and urban planners—mounted
on the heels of voters’ passage of Measure a vigorous campaign to defeat them,
37 in 2004, which was designed to protect outspending measure proponents by a wide
Oregonians from “regulatory takings,” a far margin. Voters in Washington State also
more pervasive threat to private property defeated Initiative 933—a regulatory takings
rights than eminent domain abuse. measure modeled after Oregon’s Measure
37—by a 56-44 percent margin.
Local governments routinely pass Despite the success in Arizona and
restrictions the owner’s property—without Oregon, the defeat of the California, Idaho,
compensating owners. and Washington measures indicates that
regulatory takings reform faces higher
Local governments routinely pass hurdles to voter appeal than pure eminent
restrictions on the ability of property owners domain measures. Not only do they generate
to use their land in ways that were legal more opposition from a variety of special
at the time they bought their property— interests that benefit from government’s
resulting in enormous losses to private unfettered ability to regulate, but the issue is
property values—without compensating inherently complex and largely unfamiliar to
owners. After several decades of enduring voters.
egregious regulatory abuse, Oregonians And given that regulatory takings
passed Measure 37 to require government to frequently occur in conjunction with zoning
either pay landowners for these “regulatory regulations preventing development on
takings,” or waive the regulations. agricultural land or open space, the issue
Voters in Arizona followed Oregon’s resonates more with rural voters than city
lead and passed Proposition 207—the dwellers, as the geographic breakdown of
Private Property Rights Protection Act—by voting for California’s Prop 90 suggests.
a 65-35 margin, breaking new ground in Support for Prop 90 was strongest in the
the process. Proposition 207 was designed Central Valley, the Northeast, and Southern
to address both eminent domain abuse and California, while opposition centered in
regulatory takings in one comprehensive the Bay Area and Los Angeles County. The
set of property rights protections in what key for future campaigns will be to craft a
has come to be known as a “Kelo-Plus” message that more effectively connects with
initiative. Untested prior to this election, urban voters.
the passage of Proposition 207 establishes However, viewed in total, the election
“Kelo-Plus” as a feasible strategy to target results indicate that the property rights

Table 19: 2006 Election Summary: Property Rights Ballot Measures

State Ballot Measure Status Scope %For %Against
Arizona Proposition 207 Passed Eminent Domain/ 65% 35%
Regulatory Takings
Florida Amendment 8 Passed Eminent Domain 69% 31%
Georgia Amendment 1 Passed Eminent Domain 83% 17%
Louisiana Ballot Measure 5 Passed Eminent Domain 55% 45%
Michigan Proposal 06-4 Passed Eminent Domain 80% 20%
Nevada Question 2 Passed Eminent Domain 63% 37%
New Hampshire Question 1 Passed Eminent Domain 86% 14%
North Dakota Initiated Constitutional Passed Eminent Domain 67% 33%
Amendment 2
Oregon Measure 39 Passed Eminent Domain 67% 33%
South Carolina Amendment 5 Passed Eminent Domain 86% 14%
California Proposition 90 Defeated Eminent Domain/ 48% 52%
Regulatory Takings
Idaho Proposition 2 Defeated Eminent Domain/ 24% 76%

Regulatory Takings
Washington Initiative 933 Defeated Regulatory Takings 41% 59%
movement is alive and well. Millions of states, the ban in S.B. 167 does not extend
citizens nationwide sent a clear message to to cover the use of eminent domain for
elected officials: they care very deeply about economic development purposes. S.B. 167
property ownership, and they understand makes several other changes to state eminent
that the government is there to protect their domain law:
right to that property, not to take it away. • Requiring a public hearing before a
property may be taken and requiring
2. 2007 Eminent Domain Reform Legislation
local officials to approve proposed
Continuing the trend seen in 2005 and takings by a two-thirds vote;
2006, 11 state legislatures (as of press time)
• Imposing a ten-year deadline for
modified their eminent domain laws during
completing a taking;
the 2007 legislative session. These states
include: • Requiring that property owners are to
Connecticut: After two years at the be compensated at 125 percent of the
center of the national eminent domain average of two independent property
backlash in the wake of the U.S. Supreme appraisals;
Court’s Kelo vs. New London, eminent • Giving the former owner of condemned
domain reform finally came to Connecticut property the right of first refusal to
in June 2007 when Gov. Jodi Rell signed buy it back if it is not used for a public
Senate Bill 167 into law. The bill, passed purpose; and
overwhelmingly in both houses, prevents • Allowing homeowners to appeal a
the use of eminent domain for the primary taking in state court.
purpose of increasing local tax revenues. Some lawmakers and property rights
However, in contrast to reforms in other advocates complained that S.B. 167

represents weak reform that would not have future citizen initiatives like the invalidated
prevented the taking of homes in the Fort Initiative 154 from 2006—a “Kelo-Plus”
Trumbull neighborhood of New London, measure that would have addressed both
the actions which gave rise to the Kelo case. eminent domain and regulatory takings
According to Michael Cristofaro, whose reform—which some feared would
home was among those condemned in New negatively impact local land use planning
London, “[t]here’s nothing in [S.B. 167]. No and zoning.
one’s rights are saved yet.” Nevada: The Nevada Assembly passed
Maryland: After more than 40 eminent two eminent domain bills in 2007 that could
domain bills died in the 2006 legislative supersede a ballot measure—the People’s
session, the 2007 session brought modest Initiative to Stop the Taking of Our Land
eminent domain reform to Maryland. (PISTOL)—passed by Nevada voters in
Gov. Martin O’Malley signed Senate Bill November 2006.
3 on May 8th, increasing the caps on the Assembly Joint Resolution 3, a proposed
amount paid to homeowners, tenants, and constitutional amendment restricting the
small business and farm owners who are use of eminent domain, won final legislative
displaced as a result of a condemnation approval in May. Under Nevada law,
action. S.B. 3 also requires governments A.J.R. 3 must pass the legislature again in
to file condemnation action within four 2009 before facing voter approval in 2010.
years after the date of the administrative Assembly Bill 102, signed into law by Gov.
or legislative authorization to acquire the Jim Gibbons, is a statutory companion
property; governments exceeding the four- measure to A.J.R. 3 that takes effect
year window period would need to obtain immediately. A.B. 102 was a compromise
a new authorization to proceed with a bill negotiated between PISTOL proponents
condemnation action. and opponents concerned that PISTOL
Montana: In May 2007 Governor Brian would negatively impact government’s
Schweitzer signed Senate Bill 363, sponsored ability to complete necessary public works
by Sen. Christine Kaufmann (D-Helena), projects.
modifying state code to prevent private PISTOL will remain on the 2008 ballot,
property condemned for urban renewal and if passed by voters, it would supersede
projects to be transferred to another private the provisions of A.B. 102. If A.J.R. 3
party for economic development and tax were to then pass in 2010, it would in
revenue generation purposes. According turn supersede the provisions of PISTOL.
to one of the bill’s supporters, Sen. Dave PISTOL would require higher compensation
Lewis (R-Helena), many legislators agreed payments than A.B. 102, and it would give
that the Montana Constitution and state government five years to complete projects
jurisprudence already prevented Kelo- on land taken through eminent domain, in
style takings, but that S.B. 363 makes it contrast to the 15 years allowed under A.B.
“absolutely clear” that eminent domain 102.
should only be used for traditional public New Mexico: Having been the nation’s
use projects. Some supporters felt the first governor to veto eminent domain
clarification was also necessary to prevent reform legislation in 2006, New Mexico

Gov. Bill Richardson signed House Bill demanded by the owner, shall be determined
393 and Senate Bill 401 in March 2007, by a jury.”
repealing statutes allowing governmental Utah: In March 2007, Utah Gov. Jon
entities to redevelop blighted areas and Huntsman signed House Bill 365, making
encourage economic development through Utah the first state in the nation since
the use of the power of eminent domain. the Kelo decision to roll back its eminent
These bills repeal the state’s Community domain protections. The legislature
Development Law, most of the Urban approved Senate Bill 184 in the 2005
Development Law, and provisions in session, preventing local governments from
the Metropolitan Redevelopment Code using eminent domain to acquire property
allowing to the use of eminent domain to in blighted areas. By contrast, House Bill
acquire property for economic development 365 expands eminent domain authority
purposes. This legislation was developed to by allowing redevelopment authorities
address the key recommendations offered to condemn property if they receive
by the eminent domain task force Governor approval (via petition) from 80 percent of
Richardson appointed after his veto of residential property owners or 75 percent
House Bill 746 in early 2006. of commercial owners in a project area.
North Carolina: Building on statutory Redevelopment condemnations could also
eminent domain reforms passed in 2006, the proceed with approvals from the equivalent
North Carolina House of Representatives of 70 percent of residential property value or
overwhelmingly passed House Bill 878 60 percent of commercial value.
in May 2007, which would place a Virginia: In April 2007, the Virginia
constitutional amendment on the next General Assembly approved Gov. Tim
statewide ballot to restrict government’s Kaine’s amendments to House Bill 2954,
ability to use its power of eminent domain. which limits government’s use of eminent
If passed by the Senate, H.B. 878 domain to traditional public uses (such as
would ask voters whether the following roads, schools and public buildings), tightens
language should be inserted into Section the state’s previously broad definition of
19 of Article I of the North Carolina “blight,” and prevents the seizure of non-
Constitution: “Private property shall not blighted properties in “blighted” areas. The
be taken except for a public use, including bill also provides that a property owner
preservation for that use. Public use does may challenge that a taking is a pretext
not include the taking of property for the for an unauthorized use. H.B. 2954 passed
purpose of thereafter conveying an interest overwhelmingly in both chambers, and Gov.
in the property to a third party for economic Kaine offered mostly minor amendments.
development. This paragraph does not However, one amendment exempts the
apply to the taking of blighted properties as Norfolk Redevelopment and Housing
defined by general law, nor to takings for Authority from the provisions of H.B. 2954
access by the owner to property. As used until July 2010 while that city builds a new
in this paragraph, blight includes only the recreational facility.
physical condition of the property taken. Washington: On April 17th, Washington
Just compensation shall be paid and, if Gov. Christine Gregoire signed Substitute

House Bill 1458 into law, requiring introduced in the 2007 legislative session
governments to provide better notification but failed to pass. Another eminent domain
to citizens whose property is condemned reform bill passed overwhelmingly in
through eminent domain. Condemning the Texas legislature but was vetoed by
authorities will now be required to send Gov. Rick Perry after a late amendment
notices to property owners by certified raised objections from state and local
mail in advance of the public meeting in transportation agencies; these agencies
which they will issue a final decision on asserted that the amendment would
a condemnation action. The bill was a expand landowners’ ability to demand
response to a Washington Supreme Court compensation for diminished access to
ruling that found that governments could private property during road projects,
satisfy the state’s notice requirement by increasing the potential for litigation and
merely posting notices of condemnation bringing billions in new costs. Finally,
hearings on government Web sites. In eminent domain bills were still pending
addition to certified mailings to property in Massachusetts, New Jersey, New York,
owners, SHB 1458 requires condemning Ohio, and Rhode Island as of press time.
authorities to publish advance notices of
3. California Likely to Face Competing Emi-
public meetings in major area newspapers.
nent Domain Measures
SHB 1458 was unanimously passed by both
houses of the Washington legislature. Despite the narrow defeat of Proposition
Further eminent domain reform may be 90—the property rights measure on the
on the legislature’s 2008 agenda. In January November 2006 ballot—the push for
2007, Attorney General Rob McKenna substantive eminent domain reform remains
announced the creation of a task force to very much alive in California. In fact,
review state eminent domain statutes and California voters will likely decide the fate
recommend changes to the 2008 legislature. of at least two competing ballot measures on
Wyoming: In March 2007, Gov. Dave eminent domain in 2008.
Freudenthal signed House Bill 124, the Assemblyman Hector De La Torre
legislature’s response to complaints that introduced a package of eminent domain
Wyoming’s current eminent domain law legislation in May 2007 entitled The
leaves landowners at a disadvantage in Eminent Domain Reform Act (EDRA)
negotiations with industry and utilities of 2007/2008 that figures to be the main
seeking their land. H.B. 124 requires vehicle for eminent domain reform this
private companies to provide better notice legislative session. The package includes
to landowners, engage in good faith both statutory changes and a ballot initiative
negotiations, and pay fair market value that, according to proponents, would amend
for private land taken by eminent domain the state constitution to prohibit state and
for pipelines, utilities and other public use local governments from taking homes or
projects. small businesses for private developers
In other legislative news, eminent through eminent domain. Some of the most
domain bills in four states—Arkansas, notable supporters of De La Torre’s measure
Hawaii, Oklahoma, and Mississippi—were are groups that were strongly opposed to

Proposition 90 and who funded much of the enough to protect private property rights.
$14 million campaign against it, including According to an analysis of EDRA prepared
the League of California Cities, California by the Institute for Justice, the Act “will
State Association of Counties, labor unions, do little to prevent the actual taking of
homeowner, and environmental groups. property in California—and this flaw is
Among its provisions, EDRA would: fatal.” Assemblywoman and Proposition
• Prohibit the use of eminent domain to 90 proponent Mimi Walters agreed: “This
acquire owner-occupied homes and is just an attempt to placate the voters
transfer them to another private person. who were outraged by the Kelo decision.”
• Prohibit the condemnation of small Walters introduced a separate eminent
businesses of less than 25 employees domain proposal—Assembly Constitutional
and subsequent transfer to a private Amendment 2—in late 2006, though as of
person, unless the taking is part of a press time the bill had still not been heard in
“comprehensive program to eliminate committee.
blight.” An analysis prepared by Pacific Legal
Foundation attorney Tim Sandefur found
• Allow small business owners to avoid
that De La Torre’s legislation would offer
condemnation by agreeing to make
“virtually no protection for property
physical improvements as part of an
owners.” According to Sandefur’s analysis,
urban revitalization project.
deficiencies in the proposal include:
• Give small businesses opting not to • Limited scope: The Act protects only
participate in the revitalization plan “owner occupied residences,” not
the choice of either relocating or selling apartment buildings, rental homes,
their business. Businesses choosing to churches, farms, or investment property.
relocate would receive fair market value Further, the proposal prohibits the
for their properties, moving expenses taking of property for the benefit of
up to $50,000, and up to three years of “private persons” but then fails to define
compensation to adjust for higher rents “private person.”
or mortgage payments. The owners
• Weak small business protections: EDRA
of businesses choosing not to relocate
proponents claim that the Act protects
would receive fair market value for the
small businesses, but its protections
property, though they could be eligible
only extend to small businesses with less
to receive 125 percent of the value of
than 25 employees. Because California
their business if it could not be moved
law defines a small business as having
and still remain economically viable.
less than 100 employees, many small
• Allow small businesses and homeowners businesses in California would not be
the right to repurchase their properties protected.
if they were condemned for a public use
• Loopholes and vague legal definitions:
that was ultimately never built.
The Act’s protections would be
Property rights advocates contend
undermined by loopholes and weak
that the new measure would not go far
legal definitions. For instance, California

law defines “blight” so vaguely that party, or transferred to a public agency for
virtually any property can be declared the same use as that of the private owner.
blighted and taken through eminent Former owners of condemned property
domain proceedings. This is significant, would be offered an option to repurchase
as De La Torre’s proposal allows for their property at the price at which it
small businesses to still be taken as part was taken if the stated public use for the
of a “comprehensive plan to eliminate property fails to occur. Reaquired property
blight.” would be taxed at its pre-condemnation
• No attorney’s fees: The proposal does value.
not provide for attorney’s fees, so Further, property owners would be
many property owners could find it entitled to compensation for temporary
prohibitively expensive to defend their business losses, relocation expenses and
property against eminent domain abuse. reimbursement of reasonable attorney
If California lawmakers approve EDRA, fees under CPOFPA. It would also entitle
the constitutional amendment would be property owners to immediate possession of
placed on the ballot in 2008. If EDRA fails the compensation offered, while maintaining
to pass, then the California League of Cities the right to challenge the fair market value
has already submitted language to the state determination.
Attorney General for a very similar ballot CPOFPA would also phase out existing
initiative containing many of the same rent control restrictions on property owners
provisions as EDRA. Supporters would once current tenants vacate the property.
need to gather nearly 700,000 signatures to Finally, unlike Proposition 90, CPOFPA
qualify it to go to ballot in 2008. does not include any regulatory taking
Property rights advocates critical of provisions to compensate landowners
the De La Torre and League of California for the impacts of land use regulations
Cities measures are also planning to qualify that act to reduce the value of private
an eminent domain measure for the 2008 property. Hence, CPOFPA would not affect
ballot. communities’ ability to enact land-use
The Howard Jarvis Taxpayers restrictions and enforce zoning ordinances.
Association, California Farm Bureau
Federation and the California Alliance to
B. Measure 37 Rewrite Sent to
Protect Private Property Rights submitted
Oregon Voters
language to the Attorney General’s Office
in May 2007 for the California Property Since it was passed by 61 percent of
Owners and Farmland Protection Act state voters in 2004, Oregon’s Measure
(CPOFPA), a constitutional amendment 37—the landmark regulatory takings
ballot measure that could be slated for the measure granting landowners the right
June 2008 ballot. to seek compensation for (or exemptions
Under CPOFPA, private property could from) land use regulations that restrict
not be seized for economic development the uses of their property—has survived
purposes, transferred to another private numerous legal challenges (including a

2006 Oregon Supreme Court decision received to date, unless landowners with
upholding its constitutionality), as well as already-approved claims have vested
a sustained media attack from a variety of their development rights (through,
interest groups interested in thwarting its for example, substantial financial
implementation and dissuading other states investments in improvements) before
from adopting similar measures. However, December 2007.
bills passed during the 2007 legislative • Establish maximum caps on Measure
session make significant changes to Measure 37 claims of between 3 and 20 homes
37 and would send a series of additional (depending on the property location and
changes to voters via ballot measure. other factors), with a limit of 10 houses
After several failed attempts early in in any contiguous block.
the 2007 session to craft statutory changes
• Place a maximum cap of 20 homes
to Measure 37, the Oregon legislature
on successful Measure 37 claimants,
passed House Bill 3546B-Engrossed on a
regardless of how many properties a
party line vote in both houses, with Gov.
landowner owns or how many claims
Ted Kulongoski signing the bill in May
they have filed.
2007. HB 3546B extends the period for
governments to process Measure 37 claims • Expedite claims processing for Measure
submitted after November 1, 2006 from 37 claimants who want to build three or
180 days to 540 days, after which claimants fewer houses, without requiring them to
would be entitled to file civil lawsuits for prove losses in property values resulting
just compensation. Bill proponents argued from land-use regulations.
that the extension was necessary to give • Require existing claimants seeking to
governments enough time to process the build between four and 10 houses to
large number of claims (accounting for half demonstrate that the loss of property
of the nearly 7,000 claims to date) filed value due to land use regulations equals
immediately before the December 2006 or exceeds the value of the homes that
deadline for retroactive Measure 37 claims. would be built.
Measure 37 proponents counter that the • Prohibit home sites larger than two acres
extension represents a de facto moratorium on high-value farm and forest land and
on processing Measure 37 claims. HB areas with water shortages.
3546B also appropriated $100,000 from
• Allows outside parties to obtain a
the general fund to the state’s Department
judicial review of Measure 37 claims,
of Land Conservation and Development to
opening the door for lawsuits and
defray Measure 37 claim processing costs.
lengthy delays in claim resolution.
Next, in June 2007 the legislature passed
House Bill 3540C, referring a package of • Prohibit any Measure 37 claims made
substantial amendments to Measure 37 on property whose highest and best use
to voters in a special election to be held was non-residential (e.g., industrial or
in November 2007. Among its changes to commercial) at the time the challenged
Measure 37, HB 3540C would: land use regulation was passed.
• Invalidate all Measure 37 claims • Establish that Measure 37 waivers

are transferable to future property C. Arizona’s Proposition 207: the

owners; however, subsequent property New Standard for Regulatory Takings
owners are required to build the homes Reform
authorized by a waiver within 10 years
of the conveyance. On November 7th, over 950,000
The changes proposed in HB 3540C, Arizonans voted to adopt Proposition
if passed by voters, would effectively 207, one of the strongest sets of property
invalidate the roughly 3,600 existing rights protections in the nation. Dubbed
Measure 37 claims currently being processed the “Private Property Rights Protection
and would radically alter Measure 37’s Act,” Proposition 207 was designed to
provisions. According to State Senator counter the two biggest threats to private
Roger Beyer, “[o]f the over 1,000 words in property rights—eminent domain abuse and
Measure 37, almost 900 are gone…[y]ou regulatory takings—in one comprehensive
can change terms, deadlines and groups package. In total, 65 percent of Arizona
affected, but at the end of the day this is voters, and a majority in all 15 counties,
still a repeal of Measure 37.” Oregonians supported Proposition 207.
in Action (OIA) president and Measure 37
1. Provisions of Proposition 207
author David Hunnicutt vows to mount
a campaign to defeat the legislative ballot The eminent domain reform component
measure: “We are going to go forward, of Proposition 207 is a direct response to the
tell the public what it does and doesn’t do U.S. Supreme Court’s 2005 Kelo vs. New
and we are pretty sure the public will reject London decision and was drafted with input
it—again.” from the Institute for Justice, the public
The legislature also passed HB 2640 in interest law firm that defended Suzette Kelo
the closing days of the session approving a in that case. Changes to Arizona eminent
ballot title, vote explanation, and summary domain law include:
for the HB 3540C measure, portraying it • Prohibiting the use of eminent domain
as a way to protect private property rights for economic development purposes;
while limiting large developments and • Narrowly defining the term “public use”
protecting farmland, forests, and water to include only (1) use by the general
resources. This responsibility typically falls public or by public agencies; (2) uses
to the state Attorney General, but legislators involving the creation or functioning
opted to deviate from that process. State of utilities; (3) acquisition to eliminate
Republicans, who unanimously opposed direct threats to public health or safety;
HB 2640, complained that the wording was and (4) acquisition of abandoned
crafted to deceive voters into approving the property.
measure. According to Hunnicutt, measure
• Requiring determinations of “blight’ to
proponents have taken a page from OIA’s
occur on a parcel-specific (i.e., property-
playbook: “What they’ve realized is, voters
by-property) basis;
in this state care very strongly about their
right to own and use their property.” • Requiring that local governments
must offer to locate and purchase a

comparable home for landowners whose The November 2006 election

primary residences are taken through demonstrated that a retroactive measure can
eminent domain, though landowners be a tough political sell. Washington State’s
may instead choose to receive monetary Initiative 933 was designed to be retroactive
compensation. 10 years, opening the door to opponents’
The regulatory takings component claims that such a measure would undo
requires government to compensate 10 years of planning mandated under that
landowners when new land use state’s Growth Management Act.
regulations reduce the fair market value By contrast, a prospective-only measure
of their properties. Similar to Oregon’s has two key advantages:
landmark Measure 37, Proposition 207 • It would undermine opponents’ claims
gives governments an alternative to that the measure would generate a
compensation—a waiver that exempts fiscal impact—if governments do not
the landowner from the provisions of the impose any new regulations that infringe
regulation(s) in question. Proposition 207 on property owners’ rights, then the
exempts several categories of regulations measure will not impose direct costs to
from its provisions: (1) public health government.
and safety regulations; (2) regulations • The merits of a prospective-only measure
that address historically recognized are easier to convey to citizens; they can
public nuisances; (3) regulations to limit be assured that all of the laws currently
pornography, liquor sales, and other adult- on the books will stay on the books and
oriented businesses; (4) laws that establish that the regulatory takings provisions
locations for utility facilities; (5) regulations would only apply to future regulations.
adopted to fulfill a federal requirement; and The other key difference between
(6) all pre-Proposition 207 land use laws. Proposition 207 and Measure 37 is
2. Contrasting Proposition 207 with Oregon’s that Proposition 207 has an explicit
Measure 37 provision that any waiver issued in lieu
While the regulatory takings provisions of compensation is transferable to future
in Proposition 207 were modeled after property owners, as opposed to only
Oregon’s Measure 37, it differed in two applying to the current landowner. Measure
key ways. First, Measure 37 was designed 37 did not include such a provision, and
to be retroactive to the point at which an the issue is still under litigation in Oregon.
owner (or his family, if heirs) purchased Put simply, non-transferable waivers
his property, while Proposition 207 was would essentially be worthless, as very few
designed as a prospective-only measure. property owners would be in a position to
While retroactivity has a built-in appeal finance development projects themselves,
to property rights advocates interested in and lending institutions used to working
offering relief to property owners already with established developers would find
impacted by regulation, a prospective-only such independent ventures extremely risky.
measure may be a more politically pragmatic Waivers that run with the land provide the
approach in most contexts. mechanism by which landowners can ensure
that the resale value of their properties

captures the full range of development buildings and replace them with luxury
rights, including those previously “lost” to condos. In response to complaints from
regulation. some local NIMBY activists, the city
Proposition 207 is now best regarded bypassed its normal procedures for historic
as the state-of-the-art model for regulatory district designation (which would require
takings reform, superseding Measure 37. approval from two-thirds of affected
While the passage of Measure 37 stands property owners) and instead declared the
alongside the U.S. Supreme Court’s 2005 area historic in November 2006—over the
Kelo decision as the two most pivotal and objections of most affected landowners—to
galvanizing forces in the property rights prevent Haskins from demolishing the
movement in decades, Measure 37 was apartments for a year. After that, he would
designed to address a very specific context. have been subjected to a far more onerous
It represented the culmination of public plan review and design approval process.
discontent with three decades of the most Haskins responded by filing a $40
aggressive form of land use regulation in the million lawsuit, claiming that under
country—Oregon’s centralized, statewide Proposition 207, the city was lowering the
land use planning system. By contrast, value of his land. City officials were quick
Proposition 207 offers a reform model that to repeal the historic district designation
may be more appropriate and viable in to defuse the issue. According to Phoenix
states that have yet to experience the same Mayor Phil Gordon, “[the repeal of the
degree of regulatory excess as Oregon. historic district] was on the advice of
attorneys. I’ve got a fiduciary duty to the
3. Changing the Way Communities Approach
citizens not to risk $40 million.” Haskins’s
Land Use Regulation
response to the repeal was especially blunt:
In just the first seven months of “[the City] wanted to play Socialist Republic
implementation, there have already been of Phoenix and got their hands slapped,
several indications that Proposition 207 hard.”
is changing the way Arizona communities Even the Arizona State Senate has had
approach regulation and growth to factor Proposition 207 into its decision-
management issues. making. In the 2007 legislative session, Sen.
For example, in April 2007 the Phoenix Robert Blendu proposed an amendment
City Council voted to repeal a historic to House Bill 2102 which would forbid
designation it had placed on an area in counties from issuing building permits
central Phoenix after being threatened for houses, churches and schools near
with a Proposition 207 challenge from two auxiliary airfields of Luke Air Force
an aggrieved landowner. Scott Haskins Base for safety reasons. Other lawmakers
bought two blocks of World War II-era, countered that the denial of such building
run-down apartments along the north side permits could run afoul of Proposition
of McDowell Road in central Phoenix in 207 by potentially diminishing property
2006. Before paying $5.4 million for the values (even though Proposition 207
land, Haskins verified that the city’s rules contains an exemption for public health
would allow him to raze the apartment and safety regulations), and the amendment

subsequently failed. Many cities and counties have begun to

Some observers predict that the first adopt waiver requirements as a precondition
Proposition 207 lawsuit could arise from to rezoning and permit approval; however,
a current land use controversy in Tuscon. there is a significant degree of variation in
The Tuscon City Council is considering the both policy strategies and implementation
adoption of a neighborhood preservation among local governments.
overlay district designed to change the Some cities and counties, such as
zoning in a ring surrounding the University Tucson, Marana and Pima County, have
of Arizona to protect these areas from confined their approach to asking the
the construction of new mini-dorms. property owner to sign waivers stating they
The proposed overlay zone would place will not to sue the city for taking the specific
more stringent restrictions on building action requested. Other cities are requiring
heights, setbacks and lot sizes than those landowners to sign waivers before they
contained in current zoning. A group of will grant routine approvals for activities
property owners is opposing the creation that have little chance of reducing property
of the district on Proposition 207 grounds, values.
arguing that it would restrict the use of their Other cities, such as Apache Junction,
property and decreased its potential value. are going much further by asking for
In response to these potential legal property owners to indemnify the city
ramifications, the City Council voted in against future Proposition 207 claims
April to delay its decision on the overlay brought by others. In Scottsdale, one
district until August 2007. developer attempting to gain approval for
a new housing development complained
4. Cities Requesting Proposition 207 Waivers
that the city asked him to sign a waiver that
In early 2007, the League of Arizona would have required him to assume legal
Cities and Towns began encouraging its responsibility for defending the city against
member governments to require property Proposition 207 claims from future owners.
owners seeking a rezoning or conditional When the developer balked, the city agreed
use permit to sign waivers agreeing not to to change the language in the waiver. The
seek future Proposition 207 claims for the city of Scottsdale has not yet decided on a
action requested. This came in response formal policy of whether it will mandate
to complaints from local government that applicants sign its waiver before
representatives that Proposition 207 projects can be approved.
contained a loophole that would allow a In April 2007, Peoria became the first
property owner to request a rezoning and city in Arizona to mandate waivers as a
then subsequently file a Proposition 207 precondition for project approval when it
claim if the rezoning lowered his property adopted an ordinance clarifying Proposition
value. Proposition 207 contains a provision 207. The ordinance outlines the conditions
allowing agreements between cities and that constitute a legitimate claim, specifies
property owners to waive diminution who is eligible to make them, and prohibits
claims, forming the basis of the League’s the approval of projects in which applicants
recommendation for a waiver requirement. refuse to sign a Proposition 207 waiver.

D. Sustainable Development in Urban about urban development. Unfortunately,

Planning: The Case for a Market- these benefits are rarely recognized in urban
Based Approach planning or understood by professional
planners. Markets efficiently aggregate and
Sustainability has become part of the disperse information about resource scarcity
orthodoxy of contemporary professional across national and global economies
planning. Unfortunately, the concept itself through trade, often at lightning speeds.
lacks a clear definition or focus, creating Nowhere is this more evident than in the
opportunities for special interest groups technology sector of the economy. The rise
to carry out their own goals. In many U.S. and fall of global giants such as Motorola,
cities, “sustainable” development programs Microsoft and Apple Computer depend on
have become little more than thinly veiled their ability to remain nimble and on the
attempts to impose a radical environmental cutting edge of technological innovation
agenda that limits consumer choice and since product lifecycles may last less than a
market-based innovation. This doesn’t have year.
to be the case. This contrasts with the slow, deliberative
On the surface, sustainable development procedures that bog down public decision
seems to be a noble goal—ensure current making where bureaucracy reigns (by
resource use does not limit the ability of design, as a way to establish public
future generations to meet their needs. accountability) and petty local politics can
But what does this mean in practice? stop an innovative idea dead in its tracks for
Unfortunately, policymakers have months and years.
little concrete guidance for developing Indeed, the Achilles’ heel of sustainable
workable sustainable development policies, development planning may be its failure
particularly if they recognize the value to recognize the role markets and private
markets, entrepreneurship, and private initiative play in fostering innovation
initiative play in creating sustainable and ensuring new technologies spread to
economies and communities. the broadest population base possible.
In principle, sustainable development Innovation increases a society’s resiliency,
can be achieved through any number of flexibility and capacity for self-correction.
means; in practice, sustainable development Markets, not governments, were responsible
has substituted highly centralized and for economic shifts brought about by new
prescriptive planning for decentralized, technologies in the face of the rising scarcity
market decisionmaking. Urban planning of “critical” resources such as wood and
shifts decision-making about land use, urban whale oil, and virtually eliminated the
form, energy use, resource conservation environmental impact of horse-drawn
and environmental protection away from transportation in urban areas.
market-based institutions toward political In the United States, sustainable
ones. development planning is hampered
The market has advantages over further by a strong cultural emphasis
conventional urban planning as an favoring free markets and democratic rule,
institutional basis for making decisions directly challenging the more top-down,

centrally directed planning implicit in most 3. Recognize the institutional limits

sustainable development programs. Market- of implementing sustainable development
based sustainable development does not programs within a legislative decision-
require either consensus or majority rule in making framework. Sustainable development
order to progress. programs often attempt to take a
Local community leaders, policymakers comprehensive approach to managing land
and professional planners who want to development when in fact they have little
encourage sustainable development policies control over many factors that influence
consistent with property rights and markets urban development and growth. Professional
should consider the following approaches planners and local policymakers should
and strategies. adopt a more realistic and open-ended
1. Develop strong performance criteria approach to implementing sustainable
for sustainable development. As in previous development principles by resisting the
planning periods, planning activity, temptation to adopt specific technologies,
regardless of outcomes, has often been strategies or approaches to meeting goals,
considered evidence of its success. Cities such as mandating specific construction
experimenting with sustainable development techniques or land uses. Moreover, planners
programs, however, find achieving their and local public officials should be aware of
goals difficult. The city of Santa Monica— the trade-offs implicit in their policy making.
arguably the most aggressive U.S. city For example, encouraging public transit use
adopting a sustainability agenda—has failed will likely increase commute times and urban
to significantly reduce per capita water use, congestion, reducing the overall quality of life
energy use, solid waste and wastewater for many people within the community.
flows despite increases in recycling and 4. Embrace technological innovation as
transit use. By making performance criteria a key component for achieving sustainable
explicit, errors and problems with the development, recognizing that current
framework will be more transparent and technologies are likely to evolve or become
avenues for reform more evident. obsolete as resources become more or less
2. Adopt a realistic understanding of the scarce. Planners should avoid relying on
way economic markets work. Prices convey straight-line trends to justify changes in
important information about risk and public policy, particularly those changes
scarcity and are much more dynamic than such as sustainable development that
conventional planning recognizes. Planners attempt to fundamentally alter lifestyles and
cannot possibly assimilate the amount of habits. Technology fundamentally changes
information markets do on a consistent the choice set faced by different generations.
basis. The key is for planners to recognize Planners are limited, as are economists, in
and harness that information in order to predicting the future and anticipating the
ensure the effectiveness of public sector needs of future generations.
planning by complementing market shifts The above article is a summary of a forthcom-
based on changing prices and industrial ing Reason Foundation study, Sustainable
profitability. Planning has a poor record of Development in Urban Planning: The Case for
overcoming market trends. a Market-Based Approach.

Public Health and Safety

Contents
A. Corrections Update
B. Journal Releases 200-City EMS Survey
A. Corrections Update Representing a 13-percent jump would

raise the prison population to a total of
1. Private Prison Population Nears 100,000 more than 1.7 million people. The cost to
There are currently 264 private build and operate the needed capacity is
correctional facilities in 34 states housing significant and leaves a clear role for the
more than 97,000 inmates. While the bulk private prison industry to play.
of inmates in private facilities are considered
3. Israel’s First Private Prison to Open in
medium security, private prisons operate 2009
facilities at every security level.
The Israeli Prison Service has announced
Various federal agencies contract
that it expects the 800-bed public-private
for more than 30,000 private prison
correctional partnership to be ready to
beds. Immigration detention centers are
receive its first inmates in 2009. The facility
considered a strong growth opportunity
is being built by Emerald Correctional
for private facilities. More than 58,000
Management. According to the IPS, this
beds are contracted at the state level. The
privatization project will save Israel $83
remaining private beds are under county or
million per year for the 25-year period of
municipal contract.
the agreement. That amount is almost a
2. Prison Population to Continue to Grow quarter of the cost of operating an identical
A new report by the Pew Charitable Trusts facility by the state.
suggests that U.S. prison population will Israel will join the United Kingdom,
continue to grow. According to Public Safety, Australia, Canada (Province of Ontario),
Public Spending: Forecasting America’s Prison New Zealand, South Africa, Germany,
Population 2007-2011, state and federal France, Japan, Brazil, and the Netherlands
prisons will swell by more than 192,000 in having at least one private prison.
inmates over the next five years.

Table 20: Private Prison Capacity by Facility Type

Facility Type Male Female Either Total
Prison 69544 2762 1289 73595
Detention Center 4356 300 5126 9782
Com./Rel. Center 497 0 1671 2168
Jail 0 0 5765 5765
Treatment/Educ. 1434 521 1950 3905
Mental Health 157 17 652 826
Non-Residential 0 0 1825 1825
Total - All Types 75988 3600 18278 97866
Source: Association of Private Correctional & Treatment Organizations www.apcto.org
Table 21: Private Prison Capacity by Security Type

Security Type Male Female Either Total
Maximum 7782 1298 7994 17074
Medium 56973 1749 2877 61599
Minimum 9795 388 857 11040
Residential - Secure 1263 260 888 2411
Residential - Open 599 172 1454 2225
Non-Residential 50 39 3428 3517
Total - All Types 76462 3906 17498 97866
Source: Association of Private Correctional & Treatment Organizations www.apcto.org
4. Texas Public and Private Comparison Con- comparisons using a new methodology of
tinues comparing prototype facilities. While the
The Texas Legislative Budget Board savings were not as dramatic, they were still
(LBB) issued another two-year set of data significant at $2.67 per inmate, per day.
comparing public and private prisons in
5. Two New Studies on Contracting for Perfor-
Texas. This extends the best historical mance
and trend data of the costs between public
A January 2007 MTC Institute study,
and private facilities as well as the impact
Contracting for Success: Improving
private facilities and competition can have
Performance in Corrections, suggests that
on a prison system. The average daily cost
the debate surrounding prison privatization
of operation in a government-run facility
should not be about who is providing
was $40.05 and $42.54 in 2005 and 2006
correctional services, but how well the
respectively. Costs in private facilities
provider is performing. Noting a general
under contract in Texas were only $34.61
public frustration with growing correctional
and $35.23, representing savings of 13.5
costs, the paper argues that correctional
and 17.2 percent. Savings are even more
performance needs to be front and center.
dramatic when the operational costs of jails
That correctional performance needs to
are compared.
be measured by established standards to
The LBB completed a second set of
produce desired outcomes; perhaps the most

critical outcome is preparing inmates to overview of the factors that should be

rejoin society. weighed when a government is considering
Naturally the paper notes the value privatizing a prison. The study provides
of competition but focuses on how elected officials and public policy makers
accountability can be built into operations. with a planning document containing
For starters, the report argues that both detailed information about public
public and private facilities should be policy issues (e.g., constitutional, legal
bound by similar contracts or agreements. and financial), roadblocks, practitioner
It outlines the following tools to improve considerations, and operational information
performance: for entities considering contracted
#1 Tool – The Contract or Agreement correctional services.
Directs Performance The study is available at: www.
#2 Tool – Monitoring Provides Essential mtctrains.com/institute/publications/
Oversight Contracting_Prison_Operations.pdf
#3 Tool – Data Is Collected and Publicly

Available
B. Journal Releases 200-City EMS
#4 Tool – Performance-based Budgeting Survey
and Contracting
The Journal of Emergency Medical
#5 Tool – Staff Performance Evaluation Services released its 2006 Survey of the
Systems Create an Important Linkage 200 largest cities in the United States
The bottom line, according to the for emergency medical services (EMS)
report, is that it is essential that programs operations. It’s no surprise that there
and facilities be held accountable for the are three dominant forms of EMS service
results they produce. Further, it argues delivery: public fire-based, private, and
that simply spending money on education hospital-based service. Indeed, the public
or career and technical training does not versus private operational model is a relative
guarantee success—corrections departments 50/50 split and has become common for
need to focus on programs that work. The years. Because of this, JEMS suggests this
use of performance contracting elevates and presents an opportunity to stop arguing
focuses the discussion on who can perform, over which operational model is best, and
meet qualitative standards and outcomes, be rather focus on how to establish the best
accountable, and limit costs to the taxpayer. EMS delivery system. However, in making
The study is available at: www. this pronouncement JEMS ignores some key
mtctrains.com/institute/publications/ data points in its own report.
ContractingForSuccessReport.pdf First, JEMS examines the relative
A second MTC Institute study response time of different models. The
released at the same time, Contracting survey found that cities with public/private
Prison Operations: A Plan to Improve partnerships used patient-centered models,
Performance, serves as more of a “how- i.e., response time was measured from the
to guide” for elected officials considering instant the patient called for help. About
prison privatization. It provides an half of the pure private providers also used

this methodology, whereas the other half a third higher operating budget than private
used another methodology that begins once EMS services. Given that private EMS
the EMS unit has been dispatched. Hospital services are able to operate at acceptable
systems were more likely to include call performance levels on a third less budget is
processing in their measurement. Fire-based significant. This suggests that the debate
systems, by a margin of 2-to-1, ignored between which operational model is superior
dispatch time and only counted travel time is far from over.
in their calculation. Of the 100 largest U.S. cities only 33
Why does this matter? Call processing cities used private sector EMS, whereas
and dispatch can take upwards of two 58 of the next 100 largest cities do. Large
additional minutes. Therefore response cities generally have more powerful
times may seem comparable, even though public employee unions, thus preventing
they truly aren’t—or certainly are less contracting out from occurring.
accurate than the patient-centered model.
Given that more private and public-private Table 22: Ten Largest U.S. Cities with Private
partnership operators use this method EMS
suggests a higher level of accountability, Houston (partial)
transparency and performance in their San Diego
operations. Furthermore, under a San Jose
contractual arrangement governments set Indianapolis (partial)
performance standards—this could include Milwaukee (multiple operators)
patient-centered measurement. Las Vegas

Portland
Second, the annual operating budgets
Tucson (partial)
between the models point to another major
Albuquerque
difference. According to the JEMS survey,
Sacramento
governmental EMS services average almost

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commentary is available at www.reason.org/privatization
For the best bimonthly analysis of developments in outsourcing and

privatization, subscribe to Privatization Watch: www.reason.org/pw.shtml.
And for daily privatization commentary, please visit Reason’s weblog,

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R e a s o n F o u n d a t i o n

Annual Privatization Report

Edited by Leonard C. Gilroy

Reason Foundation’s nonpartisan public policy research promotes choice,

Copyright © 2007 Reason Foundation. All rights reserved.

• Amanda Kathryn Hydro • David T. Hartgen, Ph.D., P.E. is a

Letter from the Editor

W elcome to Reason Foundation’s

Annual Privatization Report

Local and State Update........................................................................................... 10

Education and Child Welfare................................................................................... 55

Water & Wastewater............................................................................................... 81

Land Use and Property Rights.................................................................................95

Public Health and Safety........................................................................................110

A. Update on the Program the congressional decision-making process.

Reason Foundation • www.reason.org 

 Reason Foundation • www.reason.org

Table 1: Overview of Sections of PART Questions

Reason Foundation • www.reason.org 

Table 2: PART Program Ratings by Year Completed, 2002-2006

 Reason Foundation • www.reason.org

Table 3: Examples of PART Recommendations for Categories of Program Management

evidenced by the 50 percent of programs crosscutting comparisons. OMB is now

Reason Foundation • www.reason.org 

 Reason Foundation • www.reason.org

helping structure and discipline OMB’s B. Program Performance Evaluation

Patrick R. Mullen, Ph.D. is an assistant pro-

Reason Foundation • www.reason.org 

The FY2008 budget illustrated a

 Reason Foundation • www.reason.org

Table 5: Competitive Sourcing FY2006 Results

Table 6: Cumulative Results (2003-2006)

Table 7: Four Year Averages

Reason Foundation • www.reason.org 

Local and State Update

A. Local Privatization Update infrastructure, valued at $65 million for an

10 Reason Foundation • www.reason.org

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12 Reason Foundation • www.reason.org

If passed, Connecticut’s Clean authorizing state and county departments

Reason Foundation • www.reason.org 13

14 Reason Foundation • www.reason.org

into any transportation privatization viable option.

Reason Foundation • www.reason.org 15

16 Reason Foundation • www.reason.org

Reason Foundation • www.reason.org 17

Table 8: Notable Tax Changes

Table 9: Tax and Fee Changes in the States

18 Reason Foundation • www.reason.org

Personal income taxes saw the largest to the surge.

Reason Foundation • www.reason.org 19

Figure 1: State-Local Tax Burden and Ranks (Calendar Year 2007)

Source: Tax Foundation

should be taxed—including federal, state, E. New Accounting Rule Shines Light

20 Reason Foundation • www.reason.org

Source: Tax Foundation

Reason Foundation • www.reason.org 21

A. Building Roads to Reduce Traffic how much additional capacity will be

22 Reason Foundation • www.reason.org

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Reason Foundation • www.reason.org

Reason Foundation • www.reason.org

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