write an assignment and a discussion
Chapter 10
Public Entrepreneurs and Privatization
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Public entrepreneurism (municipal capitalism): where the public sector takes either a strong partner or even a leading partner role
We will look at:
State and national examples of an entrepreneurial strategy
Local examples
Positive: San Diego’s Ballpark, Victoria Gardens (text), Hospitality Lane (not detailed)
Mixed success: San Bernardino 66ers Stadium
Failure: initial redevelopment of Carousel Mall (2004-2007)
Entrepreneurial strategy
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Adoption of policies that focus on developing high-growth new firm and technologies
Not a case-by-case strategy (rather it is policy driven)
A “demand-side” approach
Typical tools:
business and innovation assistance centers,
technology and business parks,
venture financing companies,
one-stop business information centers,
micro-enterprise programs,
technology transfer programs,
workforce development programs,
export promotion programs, etc.
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Entrepreneurial strategies
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State of Nevada: Gambling – no state tax
States of Delaware: ease of incorporation
Nevada, South Dakota, and Wyoming – no corporate tax
Countries of Malta, Cuba, Brazil – generic pharmaceuticals
CORPORATE CENTERS
Hong Kong: International Financial & Trade Center
Dubai: world business hub (innovative real estate projects, hotels, and sports events)
Cayman Islands: International Financial Center
Bahamas: tourism, a growing foreign corporate center
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State and national examples:
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When governmental development activities move from managerialism to entrepreneurialism.
Actively partnering with the private sector in launching “homegrown” economic development projects (e.g., public private partnerships)
Frequently being a leading player during the economic development process
Focusing on return-on-investment
Willing to adopt higher levels of risk than in the past
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“Municipal Capitalism”
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sports facilities
convention centers
aquariums
festival marketplaces
specialty museums
Opportunities for spillover effects & positive externalities
Potential problems
substitution effects
leakages in the economy
flagship projects are often extremely expensive and “oversold”
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A frequently used tool in entrepreneurial strategies: Flagship or landmark projects (special activity generators)
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When conversion of unimproved areas and simple land intensification is planned, it is usually called economic development.
When the area being developed is blighted, however, it is generally called redevelopment.
Normally property that is already of high value is re-purposed without government assistance, and so is not normally considered economic development per se. However, occasionally “good” neighborhoods will be aided by government in upgrading to very good neighborhoods in a process known as gentrification. This is particularly common in historic areas.
Economic development, redevelopment, and gentrification
Unsafe or unhealthy buildings, e.g., possess serious building code violations, faulty or inadequate utilities, etc.
Factors that prevent or substantially hinder the economically viable use of buildings or lots, e.g., lack of parking, inadequate size, etc.
Adjacent or nearby uses that are incompatible and prevent economic use.
Subdivided lots of irregular form or shape, or inadequate size.
Land that is in multiple ownership (Beatty et al., 1994, pp. 29-30).
Physical Blight Defined
Source: http://www.answers.com/topic/urban-blight-jpg
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Depreciated or stagnant property values.
Abnormally high business vacancies, abnormally low lease rates, high turnover rates, abandoned building, or vacant lots.
Lack of necessary commercial facilities, including grocery stores, drugstores or banks.
Residential overcrowding, an excess of bars, liquor stores, or other businesses that cater exclusively to adults, that could lead to problems of public safety and welfare.
A high crime rate (Beatty et al., 1994, p. 30).
Economic Blight Defined
Source: http://www.redevelopment.com/norby/ch07.htm
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Needed new ballpark for Padres
“Burned” before by Chargers
also needed redevelopment in the area (southern part of Gaslamp District and to the west and south of it)
a variety of players interested:
CCDC
City of San Diego
Port Authority
Padres
Private sector (thru JMI realty)
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The Case of San Diego
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Competition for new ball parks was intense in the 1990s
Bad deal with Chargers 1995: 60m deal that went to 78. City ended up being responsible to buy unsold tickets--which came to be very expensive; led to public outrage
Area south of downtown not assisted by other redevelopment efforts--it was the area’s turn
CCDC: Centre City Development Corporation (city’s quasi-public downtown redevelopment arm) TIF
Port Authority [government corporation] owned the Convention Center; Controls land
Padres: National League,
Ballpark
Public: SD $225, CCDC $51, Port $21
Private $115 (largely out of future ballpark related revenues--naming rights, concessions, parking, luxury suites)
Ancillary development: (hotels, offices, retail, etc.)
Private: $450
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San Diego Case: Original deal (millions)
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Actual ballpark:
Proposed Actual
SD: 206 225
CCDC: 76.4 51 (City Center Development Corp)
Port: 21 21
Private: 146 total: 294
Petco Park
Blurring the line between public and private
Public sector responsible for building a sports facility that will profit a private entity (the Padres) almost exclusively
Private sector (JMI Realty) responsible for ancillary development that will generate revenues to public sector (the city and CCDC)
Each party working on behalf of the other with explicit contract listing the terms, dates, and form of the projects
Project also requires occasional privatization of public space to generate revenue for private section … i.e. Padres will privatize the “Park at the Park” on event days and sell concessions and apparel in this space
San Diego Case: Implications
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Baseball Stadium
Background
The need of a new stadium
Fierce competition among jurisdictions for sports team
Previous loss of a team to a new stadium in Rancho Cucamonga
Chamber of Commerce aggressively promoting a new stadium
The project:
$18m funded by tax allocation bonds
Lease agreement: profit to team owner and expense to public
None of the original predicted spillover materialized
High maintenance cost
Epilogue: ultimately signed over to private sector owners at a large loss; today, moderately successful as an island of activity
Critique of Economic Development Implementation: Mixed success
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--We will use SB for our examples: tough row to hoe because it has not had natural dynamics leading to redevelopment (as we saw in coastal cities)
stadium: poor deal but at least functioning, discuss how much spillover there has been (little); originally expenses were manipulated so that there was little profit to share; renegotiated in 2002 with the renaming but still financially weak:
--Chamber member: expectation: annual attendance of over 200,000; spillover effect (restaurant, downtown)
--$18m funded by tax allocation bonds (1996), higher than projection $13m
Lease agreement: profit to team owner and expense to public, Initial 10 year lease gave team owners parking fees, 2/3 of net profits from all concessions including non-sporting events, City received certain percentage of net profits from ticket sales, stadium cost controlled by team owners who charge very high adm. Cost. Little net profitEDA
--None of the original predicted economic impacts materialized
Surrounded by Vacant lots
High maintenance cost: simply maintaining the facility costs the EDA $30,000 per year until turned over private sector owners
--Turned over to Arrowhead (Arrowhead Credit Union Park); turned over to San Manuel Tribe and renamed San Manuel Stadium in 2012
Spillover effects?
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Multiplex theater (CineStar) in San Bernardino in 2004-2005 to 2007
$8.3m by EDA with $7m secured by CDBG
$3.6m by developer’s finance company
Superficial and disjointed “market analysis”
Attendance
Technology issues
Foreclosed in 2007
Buying back by RDA in just two years at 1.4 million dollar loss—a market failure and financial loss
Epilogue: Eventually sold to Regal Cinemas who made it a self-contained financial success; currently unable to provide spillover
Critique of Economic Development Implementation: redevelopment failure
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Regal 14 today
Privatization
Definition: “the practice of delegating public duties to private organizations”
Public duties can include:
Government functions
Government services
Government facilities
Economic Development Strategies
Privatization refers to the practice that government delegates public duties to private sector organizations. Such public duties may include:
government functions, such as prisons, HR, accounting, planning,
government services, such as waste collection, cable services, social services
and government owned facilities, including airport, train station, stadiums, highways, and so on.
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The process by which governments remove, reduce, or simplify restrictions on business and individuals in order to (in theory) encourage the efficient operation of markets.
Positive example
Deregulation of the airline industry in the 1970s
Negative example
Forms of Privatization: Deregulation
One form of privatization is deregulation, which refers to the process by which governments remove, reduce, or simplify restrictions on business and individuals in order to (in theory) encourage the efficient operation of markets. Deregulation has been often pursued by government as an economic development strategy. The impact of deregulation is often mixed. There are positive examples, such as the deregulation of the airline industry in the 1970s. However there are also negative examples, such as the California energy crisis in the 1990s. Detailed descriptions of the examples can be found in your assigned reading for this class.
Privatization goes beyond economic development purpose. There are many forms of privatization not aiming at economic development, but they provide opportunities for firms to do business with government.
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The hiring of private-sector firms or nonprofit organizations to provide goods or services for the government.
e.g., Defense contracts
Contracting out is the predominant form of privatization in the US.
Forms of Privatization: Contracting out
The most popular form of privatization in the United States is contracting out, the hiring of private-sector firms or nonprofit organizations to provide goods or services for the government. For example, defense contracts from government have largely encouraged the development of the arms industry in the nation. In addition to military products and service, government also contracts out many services, such as waste collection, human service, social services, and so on.
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Example of contracting out: the City of Riverside
Forms of Privatization (GAO 1997)
Asset Sale: the transfer of ownership of government assets, commercial-type enterprises, or functions to the private sector.
Franchises: a concession or privilege government grants to a private organization to conduct business in a particular market or geographical area
e.g., Highway 91 Express Lanes; Cable franchise
Example of the franchise fees collected by a small city
Asset sale is the transfer of ownership of government assets, commercial-type enterprises, or functions to the private sector. Asset sale was very important as a tool of privatization in many countries in the past, such as the UK, Russia, and China, but in the US, it is much less important as the US does not have a lot of state-own enterprises like those countries.
Franchise is a concession or privilege government grants to a private organization to conduct business in a particular market or geographical area. For example, your city may grant franchise the cable service to one firm, making it the privileged provider of such service in the jurisdiction.
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Government Corporations: separate legal entities that are created by Congress, generally with the intent of conducting revenue-producing commercial-type activities, and that are generally free from certain government restrictions related to personnel and procurement.
e.g., Community Development Financial Institutions Fund; Overseas Private Investment Corporation (OPIC); Federal Deposit Insurance Corporation (FDIC); Amtrak
Grants (or subsidies): a sum of money (or a privilege or rights) government gives to private organizations to encourage their involvement in accomplishing public purposes
e.g., the funding of low-income housing, or tax subsidies, R&D grants or tax credits.
Forms of Privatization (GAO 1997)
There are also government corporations, which are often created by Congress to conduct commercial activities. For example, the Community Development Financial Institutions Fund, a wholly owned government corporation within the U.S. Department of the Treasury, promotes economic revitalization and development in distressed urban and rural communities throughout the United States. The overseas private investment corporation helps US firms invest in less developed countries and areas. The Federal Deposit Insurance Corporation was created to maintain the stability of and public confidence in the nation's financial system. All these organizations operate like a business but serve a government function.
Grants (or subsidies) are a sum of money government gives to private organizations to encourage their involvement in accomplishing public purposes, such as funding for low-income housing, tax subsidies, R&D grants, and so on.
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Lease: the arrangement of government granting the temporary possession or use of (lands, facilities, etc.) to private organizations, usually for compensation at a fixed rate and with service and profit restrictions.
e.g., Los Angeles World Airports (LAWA) is the City of Los Angeles department that owns and operates a system of three airports: Los Angeles International (LAX), LA/Ontario International (ONT) and Van Nuys (VNY). It rents space to the various airlines.
Forms of Privatization (GAO 1997)
Lease is the arrangement of government granting the temporary possession or use of (lands, facilities, etc.) to private organizations, usually for compensation at a fixed rate and with service and profit restrictions. For example, airport is often owned by government, but is leased to airlines.
Public-Private Partnerships or PPP, which was introduced previously is also a form of privatization that often involve the private sector in the development, financing, ownership, and operation of a public facility or service.
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Public-Private Partnerships: (sometimes referred to as a joint venture) a contractual arrangement formed between public- and private-sector partners that can include a variety of activities that involve the private sector in the development, financing, ownership, and operation of a public facility or service.
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Voluntarism: activities conducted through either a formal agency volunteer program or a private nonprofit service organization.
Vouchers: government financial subsidies given to individuals for the purchase of specific goods or services from the private or public sector.
e.g., Food stamps, housing vouchers
Forms of Privatization (GAO 1997)
Approximately 2 M Section 8 vouchers.
Voluntarism refers to the activities conducted through either a formal agency volunteer program or a private nonprofit service organization. Some of you might have volunteered in some public services, such as national park service, library service, community service, and so on.
Vouchers are government financial subsidies given to individuals for the purchase of specific goods or services from the private or public sector. Food stamps, housing vouchers, school vouchers are the common examples.
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The single most important characteristic that separates the public and private sectors —
SOVEREIGNTY:
Coercive power
Power to go to war
Immunity from suit except by their permission
Power to disavow debts
Right to establish the rules for protection and transference of property (eminent domain)
Indivisibility
The Limits of Privatization
Government privatizes a variety of public duties, however could all government duties be delegated to private companies? Definitely not. Some scholars point out that privatization cannot go beyond any duties related to sovereignty, which is the single most important characteristic that separates the public and private sectors. As a sovereign state, government is subject to no other authority. It posses coercive power, the power to go to war, the immunity from suit except by their permission, power to disavow debts, and the right to establish the rules for protection and transference of property (such as the eminent domain). A sovereignty is also indivisibility.
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Additional factors to consider
National security (e.g., CIA, embassies)
Public safety
Accountability issues
Management capacity
Possibility of corruption
The Limits of Privatization
The public sector must be careful, however!
In addition, privatization may also raise many undesirable issues, such as threats to national security or public safety, accountability issues, management issues, as well as the opportunity for corruption.
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Purpose.
This circular establishes federal policy for the competition of commercial activities.
Policy.
The longstanding policy of the federal government has been to rely on the private sector for needed commercial services.
To ensure that the American people receive maximum value for their tax dollars, commercial activities should be subject to the forces of competition.
Office of Management & Budget (OMB) Circular A-76
The Office of Management & Budget, which oversees the operation of the executive branch, promulgated the Circular A-76 to establish guidelines for privatization, especially contracting out. The policy emphasizes federal government’s reliance on the private sector for needed commercial services and encourages government agencies considering contracting out commercial activities.
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Commercial Activities
A commercial activity is a recurring service that could be performed by the private sector and is resourced, performed, and controlled by the agency through performance by government personnel, a contract, or a fee-for-service agreement.
OMB Circular A-76
The commercial activities are recurring services that could be performed by the private sector and are resourced, performed, and controlled by the agency through performance by government personnel, a contract, or a fee-for-service agreement.
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An inherently governmental activity:
is an activity that is so intimately related to the public interest as to mandate performance by government personnel.
Inherently governmental activities:
require the exercise of substantial discretion in applying government authority and/or in making decisions for the government
normally fall into two categories:
The exercise of sovereign government authority or the establishment of procedures
The processes related to the oversight of monetary transactions or entitlements.
OMB Circular A-76
However, the Circular also specifies that there are inherently government activities should not be privatized. Those Inherently Governmental activities require the exercise of substantial discretion in applying government authority and/or in making decisions for the government. They normally fall into two categories:
The exercise of sovereign government authority or the establishment of procedures and
The processes related to the oversight of monetary transactions or entitlements.
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Discussion questions:
What are the potential advantages and disadvantages of privatizing correction services?
If you are a manager in the CCA, what are the major concerns for your company?
If you are a public manager in a correction agency which has contracted with CCA, what are your major concerns with this relationship?
What are the social implications of privatizing correction services?
Discussion: Privatization of Prisons
Stop the video at 11:07
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Economic development has grown as the role of government has grown.
Different approaches may be suitable for different situations: industrial recruitment, entrepreneurial strategies, and privatization strategies. These strategies are affected by ideology and implementation.
Reasonable people can disagree about the ideal mix of strategies because of their beliefs.
Additionally, the success of any approach (or mix of approaches) is highly dependent on the quality of implementation of the partners involved. The quality of the conceptualization of economic development, its practicality, the long-term leadership, the balance of managerial competence among the partners, and even luck are key factors that influence the ultimate success of initiatives.
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Summary Comments
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