A discussion hw 300-350words

10 Public Entrepreneurs and Privatization

Case Scenario: Good Buddy E-Solutions doing business with government 283

Introduction 284

Entrepreneurial Strategy 285

Public Entrepreneurs 288

Privatization and Deregulation 294

Political Ideology and Economic Development Strategies 305

Analytical Case: Corrections Corporation of America 306

Practical Skill: Doing business with government 308

Summary and Conclusion 310

CHAPTER CONTENTS

CASE 10 SCENARIO

Good Buddy E-Solutions doing business with government

Tyler and Zoey have been good friends ever since their college days at Somewhere State several years ago. Tyler majored in computer engineering and Zoey, as we learned, graduated with a degree in entrepreneurial management. After graduation, Zoey started Happy Paws Pet Store in the City of Somewhere, and Tyler found work with a large IT company in the same industrial park where he had his part-time job, at Acme Bottling Company, where Zach’s father was the CEO.

Soon after Happy Paws opened, Zoey expressed an interest in expanding to online sales for her pet shop. Her boyfriend Zach was developing a line of organic pet products, Acme Bottling Company was already lined up to do the packaging, and Zach and Zoey wanted to test market the products soon, and perhaps even allow people to start pre-ordering. Tyler set up a webpage and Zoey and Tyler ironed out the kinks. Having gone through the whole process of dealing with government rules and regulations, Zoey was rather adept at weaving her way through any red tape

they encountered. She was even able to give Tyler’s father a few pointers when Trujillo Landscaping ran into a problem with government.

That sparked an idea. Along the way, Zoey and Tyler decided to join forces and start another potential money-making business—Good Buddy E-Solutions—to provide e-commerce solutions for businesses. They were able to get Good Buddy up and running rather quickly since there was no brick and mortar involved. In the beginning, it was pretty quiet, but things changed dramatically when Good Buddy successfully won a contract from and developed the e-commerce platform for a leading e-commerce company. Because of that success, and great reviews, Good Buddy has been steadily growing and has gained a regional reputation for e-commerce website services. Tyler has taken over most of the day-to-day running of Good Buddy E-Solutions while Zoey runs Happy Paws and Zach develops his product line. But they are always looking for new business opportunities.

Last week, a friend of Zach’s who works for the city government told them that the city was planning to outsource their e-government website and has published an RFP (request for proposals). Despite the numerous website service companies that may submit a bid for the contract, Zach’s friend said that the City of Somewhere was impressed with Good Buddy and they had a decent chance. The city prefers to use local vendors whenever it can. Though Good Buddy has never dealt with government clients before, Tyler and Zoey were excited and confident about the opportunity, which may open the door for another market. Good Buddy has won a number of business contracts, but they know that contracting with government may be different from contracting with a private company, as government procurement is often regulated closely to prevent fraud, waste, corruption, and favoritism. Both Zoey and Tyler feel it is critical to understand the rules and processes of government contracting. They decide to attend a few seminars and do some research before they attend the contract bid meeting where they and other potential applicants can ask detailed questions prior to formal submission.

Introduction

Both business and government have a shared interest in economic development, in

which they interact frequently, while each pursues their different goals. Governments

often frame long-term strategy, which is a collection of actions and activities that

help them to achieve their goals. In the previous chapter we introduced location-

based industrial recruitment, which involves subsidizing existing firms in order to

induce them to relocate or prevent them from relocating, as popular government

economic development strategies. Unfortunately, such strategies often lead to a huge

waste of resources as jurisdictions race to the bottom to claim credit for subsidizing

high-profile firms. A growing number of governments instead have become

“entrepreneurial”—in other words, they adopt policies that promise to increase

public revenue and focus on nurturing new firms, high technologies, growing

industrial sectors, and other high-growth businesses. Some governments are even

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more innovative in embracing characteristics previously restricted to the private sector, and in partnering with business for economic development. In addition, many policy-makers, especially free-market economists, believe that the less government involvement there is in the business realm, the more it will lead to a raised level of competitiveness, and therefore higher productivity and more overall economic growth. Under such an ideology, privatization, especially deregulation, has been pursued as a way to induce economic development. Privatization goes beyond de - regulation; in reality, other forms of privatization, though not necessarily targeting economic development directly, create opportunities for firms to conduct business with government.

Entrepreneurial Strategy

Entrepreneurial strategy refers to a collection of government economic development policies that focus on developing high-growth new firms and technologies. The emergence of this alternative to economic development can be traced back to the 1980s. Under the pressure of increased international competition, as well as federal stimulation of policy innovation at the state level, many states experimented with a wide range of programs such as support for research and development (R & D), technology transfer, workforce development, venture capital investment, and loan programs, among others. The trend was captured in Peter Eisinger’s 1988 book The Rise of the Entrepreneurial State. Different from chasing firms outside the state, as is the emphasis of traditional locational strategy, these entrepreneurial programs aimed at enabling the integral growth of existing businesses already within the jurisdiction as well as nurturing new ones.

Unlike case-by-case industrial recruitment strategies, entrepreneurial strategies are generally policy driven. That is, government promotional programs are offered to all firms alike. States have historically been innovative at adopting policies to encourage the growth of business. For example, the state of Nevada legalized “wide-open”gambling in 1931. Under this liberalized regime, commercial gaming grew gradually. In the 1940s and 1950s, with the success of the Las Vegas Strip, the modern American gaming industry cluster emerged in the state. As of 2010, gamb ling revenue constituted 39 percent of the state revenue. Because of this gambling revenue stream, Nevada does not levy a state income tax. Another example is the state of Delaware, which is famous for its friendly corporate and tax laws. Businesses from New York, New Jersey, and elsewhere are attracted to Dela ware for purposes such as incorporation as they seek all legal means to reduce their tax bills. Nearly half of all public corporations in the United States are incorporated in Delaware; the state is often referred to as the State of Incorporation.

There are many other examples of states using special tax policies to lure businesses and commercial activities, such as no state corporate income tax in Nevada, South Dakota, and Wyoming; no state individual income tax in Alaska, Florida, Nevada, Texas, and Washington; and no sales tax in Alaska (may have city level sales tax only), Delaware, Montana, New Hampshire, and Oregon. For international examples, see Exhibit 10.1.

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EXHIBIT 10.1

International examples of entrepreneurial strategies

Entrepreneurial strategy has been practiced worldwide. Here we offer a few examples:

Malta’s Pharmaceutical Sector

Malta is a small island country in the Mediterranean, famous for its pharma - ceutical industry. Pharmaceutical firms in Malta enjoy several advantages from various entrepreneurial policies offered by the country. Maltese companies are subject to 35 percent income tax on their chargeable income, but their shareholders are entitled to a refund of all or part of the tax paid upon receipt of a dividend, especially for trading income. It is critical for generic pharma - ceutical manufacturers that Malta’s legal framework provides effective patent protection and incorporates all obligations from international treaties. The protection of Maltese industrial property rights is not limited to the Maltese territorial boundaries, but also extends to other signatory countries of the international Patent Cooperation Treaty (PCT) and the European Patent Con - vention. Malta offers various investment allowances, research and develop- ment incentives, and investment assistance, and most importantly, a supply of university-educated chemistry graduates and a highly trained workforce experienced in using the sophisticated and high-precision machinery of pharmaceutical companies.

Bahamas’ Offshore Banking

In order to lessen the economy’s dependence on tourism, the Bahamas government has followed a policy of diversification since the 1970s. The country focused on developing itself into an offshore banking center. Com - panies enjoy a variety of financial and legal advantages offered by the Bahamian government, such as low taxation, enhanced privacy, easy access to deposits, and protection against local political or financial instabilities. Policy incentives include freedom from taxation, democratic stability and investment incentives, preferential trade incentives, and an infrastructure that encourages, supports, and rewards international investment. Once a haven for pirates, drug dealers, and smugglers, the islands of the Bahamas are now not only a retreat of fine white sand and subtle coral-colored beaches, but also host to world-famous financial institutions. Financial services constitute the second-most important sector of the Bahamian economy. However, since December 2000, when the government enacted new regulations on the financial sector, many international businesses have left the Bahamas.

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Dubai’s Innovative Real Estate Development

Dubai City is the capital of Dubai, one of the seven emirates that constitute the United Arab Emirates (UAE) in the eastern Arabian Peninsula. To lessen its dependence on the oil industry, the emirate has adopted Western-style entrepreneurial business policies, which have diversified its economy, with the main revenues coming from tourism, aviation, real estate, and financial services. Dubai City is famous for its innovative large construction projects, such as skyscrapers and high-rise buildings, in particular the Burj Dubai (“Dubai Tower”), currently the tallest freestanding structure on earth. In addition, Dubai is home to other ambitious development projects including manmade islands, luxury hotels, and some of the largest shopping malls in the world. Dubai government’s emphasis on real estate development resulted in the property boom of 2004–2006, which made Dubai one of the fastest-growing cities in the world. However, during the financial crisis of 2007–2010, many construction and real estate projects were suspended or abandoned. The crisis also caused property prices to fall considerably throughout the United Arab Emirates.

Burj Khalifa Tower, Dubai. Source: Wikimedia Commons.

The more recent development of entrepreneurial strategy focuses on improving the capacity of local firms, enhancing growth-producing economic sectors, and developing “homegrown” projects (Eisinger 1988). Many states have utilized a variety of tools to achieve these purposes. In addition to the more traditional tools such as planning and development controls, financial support, economic and enter - prise zones, and public infrastructure improvements, states are also experi ment ing with new tools such as business and innovation assistance centers, tech nology and business parks, venture financing companies, one-stop business information centers, micro-enterprise programs, technology transfer programs, workforce development programs, export promotion programs, and so on (Leicht and Jenkins 1994).

Unlike industrial recruitment strategy, which emphasizes reducing production factor costs, entrepreneurial strategy uses a “demand-side” approach, in which government takes an external market demand to spur new enterprise, production, and projects to meet that demand (Eisinger 1988). Government assumes the central role in launching new firms, creating new technology and products, developing new markets, and fostering the various growing economic sectors. For example, stemming from the concern that the economy was too dependent on the gambling industry, the state of Nevada established the Industrial Development Revenue Bond program in 1981 to diversify the economy through attracting new business to the state. The program also won wide support from the existing business community.

Public Entrepreneurs

Another facet of entrepreneurial strategy captures the recent trend of government actively partnering with the private sector in launching “homegrown” economic development projects. Over the past three decades, many governments have experimented with more and more innovative policies and practices, and some now even embrace a number of characteristics indicative of the private sector in pursuing economic development. Typifying this entrepreneurial approach, government now regularly undertakes high-risk projects and utilizes innovative financing mechanisms such as speculative revenue bonds, tax increment financing, and public–private partnerships.

This trend is apparent in some American cities under the influence of global - ization (Clarke and Gaile 1992; Hall and Hubbard 1998). These entrepreneurial cities differentiate themselves from other municipalities by pursuing innovative strategies to maintain or enhance their economic competitiveness in the global economy (Jessop and Sum 2000). They use specific, identifiable, and purposeful strategies to promote economic development and adopt a new discourse centered on innova- tion to establish an entrepreneurial business climate (Clarke and Gaile 1998). Specifically, they use market criteria rather than political criteria for public funds allocation. They may also involve themselves in complex financial arrangements via public–private partnerships. Some of them even take the role of an active capitalist, fully engaging in market activities with the expressed intent of seeking a return on investment (ROI) (Chapin 2002).

One of the hallmarks of these public entrepreneurs is the development of highly visible and expensive flagship projects, which are expected to be special activity

288 Business–Government Relations in Economic Development

generators. Such flagship projects include large sports facilities, convention centers,

aquariums, shopping malls, and specialty museums. It is expected that such projects

will have positive spillover effects to the local economy. Spillover effect refers to

the externalities of economic activity or processes that affect those who are not

directly involved. For example, the economic benefit of a large sports stadium is

not only limited to within the facility itself, but also may extend to nearby

restaurants, hotels, and retail stores.

This trend is apparent in redevelopment, especially in attacking the problems of

urban decay or blight. See Exhibit 10.3 for an expanded definition of redevelop-

ment and blight. For example, Chapin (2002) describes the City of San Diego: In

pursuing its downtown redevelopment goals, San Diego partnered with private-

sector entities in constructing the city’s landmark BallPark District (see Exhibit

10.3), which contains not only the Padres Ballpark, but also a pedestrian-oriented,

urban neigh borhood that includes a mix of retail, office, restaurant, hotel, and resi -

dential properties. Multiple players of both sectors entered into agreement, where

each party financed and contributed to the overall project. Like their private-sector

counterpart, the public-sector entity aggressively sought for a return on its invest -

ment in the form of a redeveloped city area, including new hotels, office buildings,

retail space, and revenues generated by taxes on the new development and guests

at the new hotels.

Despite the advantages offered by public entrepreneurship, such municipal

capitalism also raises some concerns. First of all, the basic public–private partnership

in economic development blurs the lines between public and private. Further, a

partnership such as this does not come into being easily. For example, Peters (1998)

opines that a relationship qualifies as a PPP only if:

1. It involves at least two actors, one of which is a public entity

2. Each of the participating actors can bargain for themselves

3. The relationship is long-term and enduring

4. Each party contributes either material or symbolic goods to the relationship,

and

5. All participating actors share the responsibility for the outcome.

The partnership does not always bring together the best of both the public and private

sectors and often leads to confusion regarding the roles of the actors. Despite the

common goal of project success, public and private actors have significantly

different objectives. There is an inherent conflict between the public sector’s need

for greater social good and the private sector’s demand for profit (Ni 2012).

Second, there is the concern that if the public sector selects projects primarily

based on profitability, then other worthy, yet unprofitable, projects may not be

funded. Many public redevelopment projects, such as affordable housing, com -

munity centers, and public parks, are all socially beneficial and desirable projects,

but fail as revenue generators. If a city has to choose between a public library and

a potentially profitable aquarium, capitalistic public entrepreneurs may pursue

the latter.

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EXHIBIT 10.3

Redevelopment and blight

Redevelopment tends to refer to economic development for blighted areas, but occasionally also includes upscale redevelopment as well.

Blight is a two-faceted concept. Physical blight describes the deteriorated condition of housing, businesses, and industrial sites that have worsened over time due to human neglect and disinvestment. Physically blighted areas contain vacant or boarded-up buildings, weedy sidewalks, broken windows, and irreg - ular or inadequate lots. Physical blight negatively impacts the visual aesthetics of the urban environment and creates safety concerns. Neighbor hoods exposed to blight are at an increased risk of various health, economic, and social problems. Historically, blighted neighborhoods also have higher rates of crime and illicit drug activity.

Failure to address physically blighted neighborhoods can lead to economic blight, when businesses leave an area of town, taking jobs and property tax dollars with them. The residents of those areas are more likely to be unemployed as a result. Economic blighted areas are characterized by decreased property values, discouraged business development, and high crime rates. Decreased property values mean less tax revenue to support issues relating to health care,

A blight area. Source: Wikimedia Commons.

Public Entrepreneurs and Privatization 291

public safety, and other public services. A compounding effect arises because people prefer to build new properties rather than reinvesting and rehabilitating existing properties whenever blight is present.

Federal and state redevelopment statutes give cities and counties the authority to establish redevelopment agencies (RDAs) and give the agencies the authority to attack problems of blight. The fundamental tools used for redevelopment by government include the authority to acquire real property, the power of eminent domain and land assembly, and the authority and obligation to relocate persons who reside in the property acquired by the RDA. The financial tools used for such operations include borrowing from federal or state governments, selling public bonds, and Tax Increment Financing (see Chapter 8).

San Diego Ballpark Village

EXHIBIT 10.3

Source: http://www.welcometosandiego.com/wp-content/uploads/2009/11/east-village- condos.jpg.

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Thirdly, entrepreneurial economic development projects often entail high risks; a project failure would lead to huge public loss. Just as any private-sector innovation, public-sector entrepreneurial projects face no less a rate of failure. Using the sports facility as an example, empirical studies found that such entrepreneurial projects often fail to produce the anticipated economic impacts, delivering very little in economic returns to a city (Baade 1996; Coates and Humphreys 1999; Hudson 1999; Noll and Zimbalist 1997). Sports facilities have failed as economic growth engines largely due to substitution effects. For instance, consumers who choose to spend money at the stadium may cut their spending in movie theaters, resulting in little increase in commercial activity. A second reason is leakage in the economy: Sport team owners and players may take away the lion’s share of the money earned at the stadium, but spend little of it in the local economy. In addition, since public-sector entrepreneurs are often less experienced in taking on risky projects and have less leverage in negotiations with the private sector when compared to their private-sector counterparts (e.g., major league sports are cartels), the failure rate is even higher.

In another example, in chasing sports teams, the City of San Bernardino, California, joined with the private sector via a baseball team and a real estate development firm in constructing a sport stadium with the hope of it becoming an activity generating center for the city. The project was funded by tax allocation bonds at a significantly higher than expected cost as projected private financial support fell short. Despite the attendance at the ball park being relatively promising, the city was charged with high management costs by the team management, leaving

EXHIBIT 10.4

Victoria Gardens in Rancho Cucamonga

The Rancho Cucamonga Redevelopment Agency (RCRA) administers a variety of economic development, redevelopment, and housing-related programs that support businesses and residents in the City of Rancho Cucamonga. Estab - lished in 1981, the Agency has assisted in the elimination of blighted condi- tions, resulting in the development of new public facilities and affordable housing projects, improved infrastructure, and the creation of a strong local economy through business attraction/retention, workforce development, and tourism efforts. An entrepreneurial project, Victoria Gardens was developed by the RCRA through partnership with Forest City Development California, Inc., and the Lewis Investment Company of Upland, California.

Forest City and Lewis had exclusively negotiated with the RCRA since November 4, 1999. Working closely with the city, they conducted market studies and an economic feasibility analysis and prepared alternative site plans and physical design concepts for the proposed project. On July 19, 2000, the City of Rancho Cucamonga granted conceptual approval of the proposed preliminary project design. The approval by the City of Rancho Cucamonga of

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a Memorandum of Understanding (MOU) with Forest City symbolized a major milestone for the developers of the proposed project and allowed them to move forward with the development process. The plan underwent several refine - ments, as finally reflected in its current design. The project officially broke ground on September 16, 2003 and opened on October 28, 2004. The project encompasses a land area of 147 acres and an investment of $200 million.

Located in the northwest quadrant of US Interstate Highway 15 and Foothill Boulevard/Route 66, in Rancho Cucamonga, California, the Victoria Gardens project includes approximately 1.3 million square feet of retail and office space, 14 acres of peripheral (out-lot) retail area, and 20 acres of multi-family housing. The venue includes over 150 retailers carrying fashions, shoes, and accessories for men, women, and children, in addition to restaurant choices and entertain - ment venues such as the Victoria Gardens Cultural Center, which features the Lewis Family Playhouse, Library, and Celebration Hall.

The project has been considered Rancho Cucamonga’s new downtown. It represents the ideal setting for innovative retail shopping, working, and living opportunities combined with civic, cultural, and other amenities that comple - ment the traditional family lifestyle. The blending of neighborhoods, commercial, civic, and cultural uses within the Victoria Gardens project promises to make it the center of activity for the Rancho Cucamonga com munity. In addition,

Source: Wikimedia Commons.

little “net profit” for the city. In addition, none of the originally projected economic spillover effects has materialized. The stadium stands alone, surrounded by empty lots, costing a large amount of money to simply maintain the facility. The stadium was eventually handed over by the city to a credit union.

Yet when these public–private partnerships work, they are the envy of their region and the pride of local citizens, as Exhibit 10.4 illustrates.

Privatization and Deregulation

In addition to various entrepreneurial strategies, deregulation has been pursued by many governments for economic development purposes. Deregulation, the policy and practice of government reducing or removing regulations, is a special form of privatization. An introduction to privatization will help better explain the rationale behind deregulation.

Privatization

Privatization refers to both the policies and practices of delegating public duties to the private sector, either to a business that operates for a profit or to a non-profit entity. The history of privatization dates from the founding era of the nation, when the newly established federal government contracted out a variety of public goods and services to the private sector (see Chapter 2). Privatization gained a new worldwide momentum in the 1970s and 1980s under the leaderships of Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States. This renewed interest in privatization was driven by the so-called New Public Manage - ment (NPM) movement, which aimed to modernize and render more effi cient the public sector. The central tenet underpinning NPM holds that government should be run like business, and that the market-oriented management of the public sector will lead to greater cost-efficiency and resolve many contem porary social problems.

Driven by NPM under Thatcher, the UK privatized a large number of state-owned enterprises, such as British Airways, British Petroleum, British Aerospace, British Steel, British Telecom, and so on. In the US, privatization took a different track. Despite the lack of a Thatcher-like privatization agenda, the Reagan Administration

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because of its excellent location and accessibility from major freeways within San Bernardino County, it is also a destination location for over 3.6 million potential shoppers and families throughout the Inland Empire region.

Since being built, the project has generated significant economic, and other, benefits for the city. These include a combined total of over $5 million per year in new retail sales, property, and business license taxes. The project also has generated approximately 3,000 new permanent and part-time jobs. In addition, it has acted as a catalyst for additional economic development of a mixture of uses on surrounding land in the area.

created an interagency Privatization Working Group, which supported a whole series of federal privatization studies targeting candidates such as the Air Traffic Control System, Amtrak, Conrail (a freight railroad), etc. Reagan’s privatization studies paved the way for subsequent real privatization during the Clinton Administration. Under Clinton, the federal government sold off the Elk Hills Naval Petroleum Reserves, the US Enrichment Corporation, many parts of the electromagnetic spectrum (selling the rights to transmit signals over specific bands of the spectrum to industry), as well as contracted out over 100 airport control towers and numerous military base functions (Poole 2004). More significantly, this trend has been extended to state and local governments—a multitude of government services such as utility, waste collection, human services, and prison and corrections which were traditionally kept in-house have been increasingly contracted out to the private sector.

Deregulation

Whereas privatization delegates public duties to the private sector, deregulation also delegates regulation of the private sector to itself, mainly through the invisible hand of the market. The underpinning rationale of deregulation is based on free-market economics, which in general says that government intervention in economic affairs is undesirable; and that fewer and simpler regulations would lead to a raised level of competitiveness, subsequent higher productivity and efficiency, and eventual economic growth.

Deregulation is similar to industrial recruitment in that both focus on reducing production factor costs. Instead of government investing through capital and tax subsidies, deregulation reduces governmental regulation of private economic activity. Proponents of deregulation generally view government forces as negative and feel they should be limited in order to maintain a legal and social environment for businesses to maximize shareholder profits.

Since the late nineteeth and early twentieth century, many industries in the United States have been regulated by the federal government (see Chapters 1 and 2). One problem caused by regulation was that these industries often swayed the government regulatory agencies by lobbying through the legislative process, exploiting them to serve the industries’ special interests; regulation by government sometimes became weak and ineffective, with the government hardly holding them responsible. Industries also thought they could be more profitable with less government intervention. In addition, many free market economists believed that excessive regulations contributed to the economic stagnation of the 1960s and 1970s in the US.

As a special form of privatization, deregulation also gained much momentum in the 1970s, influenced by the theories of Friedrich Hayek, Milton Friedman, and other liberal economists, as well as research at the University of Chicago. Many economists, such as Alfred Kahn, played critical roles in participating in subse- quent deregulation efforts by government. From the 1970s to the 1990s, the federal government significantly deregulated the industries of transportation, energy, communications, and finance. See Exhibit 10.5 for a list of the federal legislation deregulating various industries and Exhibit 10.6 for a successful example.

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Federal deregulation Acts from the 1970s to 1990s

Industries Deregulation Acts

Transportation The Railroad Revitalization and Regulatory Reform Act of 1976

The Airline Deregulation Act of 1978

The Staggers Rail Act of 1980

The Motor Carrier Act of 1980

The Bus Regulatory Reform Act of 1982

The Surface Freight Forwarder Deregulation Act of 1986

The Ocean Shipping Act of 1984 and 1988

The Federal Aviation Administration Authorization Act of 1994

Energy The Energy Policy Act of 1992

Communication The Telecommunications Act of 1996

Finance The Depository Institutions Deregulation and Monetary Control Act of 1980

EXHIBIT 10.5

EXHIBIT 10.6

The US airline industry: A positive deregulation example

In the early 1970s, the US economy experienced the worst downturn since the Great Depression, with stagnant economic growth, rising unemployment, and inflation. Economists from the University of Chicago attributed the inflation and rising fuel prices to rigid government regulations.

In the airline industry, the federal Civil Aeronautics Board (CAB) had regulated all domestic interstate air transport routes since 1938, leaving intrastate routes under the regulation of each state government. CAB’s regulation covered almost every important area of airline operation including setting fares, routes, and schedules. Most of the major airlines, such as Pan Am, favored the rigid system because their profits were virtually guaranteed and they never had to compete with newcomers; but passengers who were forced to pay escalating fares disliked the system. In addition, the CAB was so notorious for its bureaucratic inefficiency that airlines were subject to lengthy delays when applying for new routes, fares, or schedule changes, which were not often approved.

In 1977, President Jimmy Carter appointed Alfred E. Kahn, a professor of economics at Cornell University, to be the chairperson for CAB. Under Kahn’s leadership, a concerted push for deregulation developed and swiftly gained legislative results in 1978—the deregulation bill was passed and signed by

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Carter on October 24, 1978. The Act intended to remove various restrictions on airline operations over several years in the hope that competition would produce growth in the industry. The impact of deregulation was generally positive. A 1996 Government Accountability Office (GAO) study found that between 1979 and 1988, the average fare per passenger mile, adjusted for inflation, declined by 9 percent at small airports, 10 percent at medium-sized airports, and 5 percent at large airports (GAO 1996). Over the next 20 years, the airline industry employed twice as many people to fly almost three times as many passengers.

Jimmy Carter signs the Airline Deregulation Act of 1978. Source: Wikimedia Commons.

Many state governments have also pursued deregulation for economic develop -

ment. State deregulation policies mainly focus on reducing governmental regulation

of employer/employee relations as well as relaxing environmental and other

regulations that directly affect the production process. Early deregulation measures

adopted by state governments were right-to-work laws that limited collective

bargaining (see Chapter 4) during the 1940s, mainly in southern states. A right-to-

work law does not aim to provide a general guarantee of employment to people

seeking work, but rather is a government regulation that prohibits an established

union requiring employees’ membership, or payment of union dues or fees as a

condition of employment, either before or after hiring.

In later decades, these laws have spread across central and western states, weakening unions and holding down labor costs. Several states also refused to adopt minimum wage laws and fair employment codes, strengthening the hand of employers in labor relations. Lower labor compensation costs led to favorable business climates. In the 1980s, states regained interest in deregulating these areas; policy advances included state right-to-work laws to hinder unionization, the absence of a state minimum wage law, and the absence of state fair employment legislation. As of 2015, 25 states, mostly in the south and west, have adopted right-to-work laws (either by law or constitutional provision). Five states (Alabama, Louisiana, Mississippi, Tennessee, and South Carolina) have no minimum wage law, and thus business must only respond to federal minimums.

Another area of state deregulation focus is environmental regulation, which has stirred much political controversy. The paradox of environmental laws is that overly strong regulations can lead to industrial flight, whereas lax regulations are feared to turn the country into a “pollution haven.” The underlying rationale for deregulation here is that environmental regulations have a strong effect on industrial locations and that differential regulations between states will, at a minimum, induce specialization and perhaps significant capital movement to states with weaker regulations. In the US, environmental regulations vary from state to state. Although national environmental policies have certainly raised the minimum level of environ - mental standards, important differences in state environmental policies remain. Federal laws notwithstanding, regulations governing hazardous waste disposal, wetlands filling, air and water pollution, and wildlife protection vary considerably among different states.

Although the goal of deregulation is to encourage economic growth by greater reliance on market forces, not all deregulation policies have produced the desired outcome. Previous studies found that transportation deregulation generally led to increased competition, communication choices, and the creation of new firms and jobs. Similar to the airline industry’s deregulation, trucking deregulation also pro - duced a boost to US industries in shipping, merchandising, and inventories (Moore 1988). However, deregulation in the financial sector led to very poor results and the sector was re-regulated (as discussed in Chapter 3). There are also mixed findings about the economic impact of environmental regulation, as lax environment laws have not necessarily always led to economic growth (Meyer 1995).

Perhaps the most controversial deregulation has been in the energy industry, such as practiced in California. In 1996, California began to modify controls on its energy market and took measures ostensibly to increase competition. The policy largely contributed to the California electricity crisis of 2000 and 2001, in which the state suffered from multiple large-scale blackouts, illegal shutdowns of pipelines by Texas energy consortium Enron, and capped retail electricity prices. Yet as Cali - fornia significantly limited retail electric competition for most customers because of its poor implementation, other states across the country more successfully pursued deregulation for electricity, including Illinois, Maryland, Ohio, Pennsyl vania, and Texas. Increased competition in these states has produced cost savings and inno - vative products and services, such as clean energy supplies and programs that give customers the flexibility to manage their energy use according to market prices.

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EXHIBIT 10.7

The California electricity crisis: A negative example of deregulation

Deregulation of the electricity sector in the US began in 1992. The Energy Policy Act of 1992 eliminated obstacles for wholesale electricity competition, but the policy has not been adopted by all states. California passed the Electric Utility Industry Restructuring Act (Assembly Bill 1890) in 1996, allowing wholesale electric competition to begin in March, 1998. Following the transition period, the three large investor-owned utilities, namely Pacific Gas and Electric (PG&E), Southern California Edison (SCE), and San Diego Gas and Electric (SDG&E), could purchase electricity from any independent trader or exchange.

The reform was a partial deregulation, where wholesale prices were de - regulated, and retail prices were regulated for the incumbent utilities, based on the expectation that “frozen” retail rates would remain higher than wholesale prices. This expectation sounded reasonable, as in the 1990s the generating capacity in the western states usually exceeded the demand for electricity. But after the summer of 2000, the scenario changed—demand for electricity started to outpace the generating capacity, because of economic growth, weather patterns, some loss of hydropower capacity, and other conditions. Conse - quently, the deregulated wholesale market pushed electricity prices to unantici - pated levels.

Because the state government had a cap on retail electricity charges, as rising wholesale prices for electricity consistently exceeded frozen retail prices, PG&E and SCE were forced to sell purchased power at a loss. Customers of SDG&E, by contrast, paid the market price, which was three times higher than it was the previous summer. On June 14, 2000, PG&E interrupted service for the first time in its history, affecting 100,000 customers in San Francisco. On December 7, 2000, suffering from low supply and idle power plants, the California Independent System Operator (Cal-ISO), which manages the California power grid, declared the first statewide Stage 3 power alert, meaning power reserves were below 3 percent.

Some speculative energy traders such as Enron also contributed to the crisis. As a leading player in the West Coast energy market, and supplying electricity for more than 2.6 million homes in the state, Enron was in a unique position both to control the power supply and lead the way in price gouging and market manipulation. For example, Enron discovered it could flood the state’s trans - mission lines with more electricity than they could handle in order to collect “congestion payments.” It could also shut down grids to create artificial short - ages and charge higher prices, as Cal-ISO would pay traders a premium for providing more power than was required when energy supplies were tight. Enron’s “gaming” actions assaulted the state’s power supply for years and were largely concentrated at the height of the California energy crisis.

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Contracting Out

Contracting out refers to the hiring of private-sector firms or non-profit organizations to render goods or services for the government. In this method, the government agency retains ownership and overall control but employs the private vendor to actually provide the service. Contracting out has been traditionally practiced by government, especially in military and defense contracting. Government contracts have played a critical role and have largely encouraged the growth of the arms industry in the United States. Today, government purchases from defense contractors cover a multitude of goods, including military aircraft, ships, vehicles, weaponry, and electronic systems, as well as services such as logistics, technical support, training, and security. Military contracts have made the nation by far the largest arms manufacturer and exporter.

Contracting out has gained popularity during the recent rising tide of privatization. As the dominant form of privatization in the United States, contracting out encompasses a wide range of services, including administrative and general services in education, health, social services, and transportation. There is extensive use of contract workers in waste collection, street repair, street cleaning, building main - tenance, and data processing.

The preference of contracting out reflects both practical and political con - siderations. Practically, contracting out allows government officials to retain substantial control over service production and delivery while seeking the cost- efficiency and improved quality promised by the private sector. Under contracts, government officials are largely involved in the design and oversight of production. In the case of poor performance by the private service provider, governments can either terminate the contract or shift to another vendor, or revert the service back to in-house provision, if the agency retains the equipment and expertise to do so. Politically, service features may be designed to give substantial benefits to select

This crisis eventually led to the bankruptcy of PG&E and near bankruptcy for SCE in early 2001. On January 17, 2001, Governor Gray Davis had to declare a state of emergency and was forced to step in to buy power at highly unfavorable terms on the open market. The subsequent massive long-term debt obligations contributed enormously to the state budget crisis and resulted in widespread grumbling about Davis’s administration.

Meanwhile, the City of Los Angeles was unaffected by the crisis because local public utilities in California, including the Los Angeles Department of Water and Power, were exempt from the deregulation legislation. The city sold its excess power to private utilities in the state, mostly to SCE, which prevented much of the greater Los Angeles area from suffering the long-term blackouts experienced in other parts of the state during the crisis.

Source: Congressional Budget Office (2001). Causes and Lessons from the California Electricity Crisis. September. URL: http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/ 30xx/doc3062/californiaenergy.pdf.

constituents in order to gain concessions from certain voters. Moreover, contractors are willing to influence decision-makers, such as elected officials, via campaign contributions or other political favoritism by sharing some of their contract benefits (Seidenstat 1999).

Other Forms of Privatization

Privatization can take many other forms, all aiming to shift functions and responsibilities, in whole or in part, from the government to the private sector.

Asset Sale

Asset sale refers to the transfer of ownership of government assets, commercial- type enterprises, or functions to the private sector. After the asset is sold, government will have no role in its financial support, management, or oversight. Asset sales have been practiced as a major form of privatization by many countries around the world, including in both the Western democracies such as the United Kingdom, New Zealand, and Australia, and transitional economies such as Russia, China, and many eastern European countries. In the latter countries, asset sales mainly involve the selling of state-owned enterprises. In the United States, although the large-scale sale of state-owned enterprises is less common (because there was relatively little to sell off compared to more socialized countries), governments routinely auction off a variety of government-seized surplus and tax-foreclosed property and assets including land, houses, jewelry, cars, trucks, tools, computers, and so on.

Franchise

Franchise is a concession or privilege government grants to a firm to conduct business in a particular market or geographical area. For example, a city can grant a cable franchise to a private firm to operate cable television network in its jurisdiction. In facing increased financial challenges, many governments have extended franchise agreements into more traditionally monopolized government services. For example, in 1989, the State of California started to allow the private sector to enter into franchise agreements with the Department of Transportation for the development of new roads. Private firms, through franchise agreements, are enabled to finance, construct, and operate state highways with a concession of collecting tolls for a certain period of time.

Government Corporation

Government corporations are legal entities that are created by a government, generally with the intent of conducting revenue-producing commercial-type activities on behalf of a government. They are normally free from certain govern - ment restrictions related to personnel and procurement. They include government- sponsored enterprises, a group of financial service corporations created by Congress and privately owned by stockholders. Fannie Mae and Freddie Mac, for instance,

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used to be government-sponsored enterprises but were nationalized during the 2008–2009 economic crisis and became government-owned corporations (see Chapter 3). Government-owned or chartered corporations provide public services, but unlike government agencies, they have a separate legal personality from the government and maintain a high level of political independence. Some of them may receive government budgetary appropriations, but some also have independent revenue sources. This type of government corporation includes the Overseas Private Investment Corporation (OPIC), the Export–Import Bank of the United States, the Federal Deposit Insurance Corporation (FDIC), and Amtrak.

Grant

A grant (or subsidy) is a sum of money (or a privilege or rights) government gives to private companies to encourage their involvement in accomplishing public purposes. Grants and subsidies are commonly used to encourage economic development purposes, such as funding low-income housing and research and development (see Chapter 8).

Lease

Lease refers to the arrangement of government granting the temporary possession or use of government-owned properties and facilities to private organizations, usually for compensation at a fixed rate and with service and profit restrictions. For example, private airlines often sign an airport concession lease with government agencies and airport authorities for using terminal facilities. Although all commercial airports in the United States are publicly owned, the private sector plays a significant role in their financing and operations. Airport rents and airport concession fees constitute the majority of airport revenue.

Public–Private Partnership

Public–private partnership (PPP or P3) is a contractual arrangement formed between public- and private-sector partners that can include a variety of activities involving the private sector in the development, financing, ownership, and operation of a public facility or service. Under widespread fiscal stress, this approach has been increasingly explored by all levels of government to introduce private investment into public infrastructure and services. For example, about half of the states around the country have enacted laws to allow private-sector entry into the development of transportation infrastructure via PPPs with government transportation agencies. The PPP has also become an important means of local economic development, especially for flagship projects as described earlier in this chapter.

Voluntarism

Voluntarism refers to any public services conducted through either a formal agency volunteer program or a private non-profit service organization. A service can be

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organized and funded by a government agency that enlists volunteers to provide all or part of the services offered. Such service may be directly supervised by the agency. For example, the National Park Service recruits many youth, families, groups, and individual volunteers to help care for the national parks. A service can also be offered through a non-profit service group. For example, the delivery of meals to homeless people is often funded by government assistance programs, but offered by non-profit organizations such as the Salvation Army.

Voucher

Vouchers are government financial subsidies given to individuals for the purchase of specific goods or services from the private or public sector. Common examples include housing, school, and food vouchers. A school voucher, or an education voucher, can be used to fully or partially pay for the tuition at school, either public or private, that parents choose for their child. The voucher program enables parents the flexibility and control of selecting the preferred school for their child. In some states or local areas, the voucher can be used to cover or reimburse home-schooling expenses, while in other jurisdictions, vouchers only pay for tuition at private schools. Food stamps are another type of voucher provided to lower-income or poverty-stricken individuals by the federal Supplemental Nutrition Assistance Program. A housing voucher, also known as the Section 8 program, is a premium issued by the federal government to low-income tenants to pay for, usually part of, their rents to private landlords.

Limitations of Privatization

As governments at all levels face the challenges of growing public-service demands and stagnant fiscal capabilities, various forms of privatization have been increasingly explored, not only as a strategy to encourage economic development, but also as a viable way to cut costs and to introduce private-sector resources in providing public services. The scope and scale of public services and responsibilities have been continuously expanding into areas that were traditionally untouched by the private sector. For example, though national combat troops have never been privatized, the logistical services supporting military maneuvers are contracted out. In addition, whereas city, county, and state police forces are still kept in-house, jail, detention, and correction services are now provided by the private sector. These practices naturally raise some fundamental questions, including: What are the limits of privatization, can or should business undertake all public functions and services, and what are the implications of privatization?

The underlying assumption of privatization is that public and private sectors are alike and many government functions can be performed more efficiently and economically by the private sector. However, as introduced in Chapter 1, the political, historical, and cultural settings of the United States have given rise to fundamentally different and characteristically distinct public and private sectors. Ultimately, the single most important characteristic—sovereignty—distinguishes the public sector from the private, especially at the federal level (Moe 1987). Sovereign

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power, which is only possessed by government, encompasses several attributes (Moe 1987), such as:

• Coercive power: The sovereign legitimately possesses the power to enforce its will, such as tax citizens and impose penalties on those who refuse to pay

• Power to go to war: A sovereign can legitimately declare war against another • Immunity from suit: Except by their permission, a sovereign is not subject to

legal constraints • Indivisibility: A sovereign is indivisible and cannot share its power with another

entity claiming sovereignty • Power to disavow debts: A sovereign reserves the right to reject debts; the

declaration of bankruptcy is not inhering to the sovereign • Eminent domain: A sovereign reserves the right to establish the rules for

protection and transference of public and private property.

Privatization cannot go beyond the powers reserved by sovereignty. In addition, public policy-makers also attempt to differentiate what are the inherently govern - ment functions that should not be privatized. For example, the White House’s Office of Management and Budget (OMB) Circular No. A-76 specifies that

An inherently governmental activity is an activity that is so intimately related to the public interest as to mandate performance by government personnel. These activities require the exercise of substantial discretion in applying government authority and/or in making decisions for the government. Inherently govern - mental activities normally fall into two categories: the exercise of sovereign government authority or the establishment of procedures and processes related to the oversight of monetary transactions or entitlements. An inherently govern - mental activity involves:

1. Binding the United States to take or not to take some action by contract, policy, regulation, authorization, order, or otherwise

2. Determining, protecting, and advancing economic, political, territorial, property, or other interests by military or diplomatic action, civil or criminal judicial proceedings, contract management, or otherwise

3. Significantly affecting the life, liberty, or property of private persons; or 4. Exerting ultimate control over the acquisition, use, or disposition of United

States property (real or personal, tangible or intangible), including estab - lishing policies or procedures for the collection, control, or disbursement of appropriated and other federal funds.

Whereas the inherently governmental functions shall not be privatized, OMB Circular No. A-76 also specifies that commercial activities, which are non-inherently governmental functions, can be contracted out to the private sector.

Although privatization provides practical solutions to many public-sector problems by introducing private-sector advantages such as financial resources, technical expertise, innovation, and quality goods and services, it also points to many political, economic, and management implications.

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First and foremost, privatization weakens political accountability. A critical social value of American democracy is that public officials should be held accountable for their actions to the public through their elected officials. Whereas a government agency is directly accountable to elected officials, a private company has only an indirect and weak relation with elected officials and can only be held accountable by the contract. The public does not have any control or oversight of a private-service contractor. In addition, there is considerable diversion between the two parties’ goals in service provision. While the private sector inevitably seeks profit, the public sector in general has much broader social objectives. For example, if a government-owned company providing an essential service is privatized, such as water supply to all citizens, its private owner could potentially abandon the social obligation to those who are less able to pay, or to regions where water service is unprofitable.

Secondly, privatization does not always lead to more efficiency or better service quality. Empirical studies have found mixed results concerning contracting out; private firms may not perform better than government in assuming public duties. As privatization involves significant administrative costs, including costs for facilitating the bidding process, selecting vendors, supervising contracts, and evaluating contractor performance, the efficiency gains of privatization may hardly justify the cost.

Thirdly, the privatizing process could lack transparency, allowing the contractor and public employees controlling the contract to gain personally. The high stakes involved with winning contracts from government often push contracting firms to the edge of the law. There are substantive instances of corruption throughout US administrative history involving contracts with private contractors to perform a public service. Recent contracting scandals such as Haliburton and Blackwater renewed the public concerns about its potential for mischief.

Lastly, the government may lose the capacity to perform or manage privatized duties. In the long run, government may lose its institutional memory for service provision, which will not only affect its ability to manage contracts, but also make it impossible to regain the capacity to perform those duties if necessary. In addition, as public employees may lose their jobs in the process, government is likely to encounter employee or union resistance.

Political Ideology and Economic Development Strategies

Three distinct strategies of economic development with their instances and implications are introduced. The industrial recruitment approach uses tax incentives, capital subsidies, land, public infrastructure improvements, and other public resources to lure external businesses and to retain and promote existing firms. The strategy, in which government indirectly, and even passively, contributes to econ - omic growth, aims at reducing private-sector production factor costs.

Similarly, the deregulation approach, which seeks to reduce government’s involvement (i.e., regulation) in economic affairs, also targets keeping production factor costs down by delegating private-sector autonomy in the market. These two approaches are in alignment with politically conservative ideology, which believes

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that the free market system, competitive capitalism, and private enterprise create the greatest opportunity and promote overall economic well-being.

In comparison, the entrepreneurial strategy takes on the idea that government is an active party in economic development. Public entrepreneurs seek to produce economic growth through establishing new firms, developing new technology and products, building new growth sectors, and launching growth-generating projects. This approach is in agreement with politically liberal ideology that emphasizes the need for government in economic affairs. Unlike the private sector, the government is motivated by public interest. Government’s involvement in economic affairs retains the economic benefits in the hands of the state for greater social value.

In addition to the three strategies of economic development, the policy and practice of privatization in its various forms are discussed. Privatization shares with deregulation strategy the idea of limited government, which is a central belief of political conservatives. They believe that large government presents a threat to individual freedom; whenever possible, the market provision of services is politically preferable over government’s direct involvement.

Although the analysis of political ideology in relation to different economic development strategies provides business students with additional insights about the rationale behind each strategy and may help them better interpret specific govern - ment economic development policies in their political environment, generalizations about the relationship can be imprudent, as exceptions are both common and import ant. In many instances, economic development strategies are driven by practical needs instead of political beliefs.

ANALYTICAL CASE: CORRECTIONS CORPORATION OF AMERICA

Established in 1983, Corrections Corporation of America (CCA) is a private enter- prise providing jail, detention, and correction services, which are traditionally government-administered services. In just over 20 years, the company has become the fifth largest corrections system in the US, with more than 16,000 employees, behind only the federal government and three states. Currently, CCA has approxi - mately 72,500 beds in 65 facilities, including 40 owned facilities under contract for management in 19 states and the District of Columbia. The company manages approximately 70,000 inmates at all security levels and does business with all three federal corrections agencies, almost half of all states, and more than a dozen local municipalities.

In the US, about two million individuals are incarcerated and the inmate popula- tion continues to rise 3–5 percent annually. More than 12 percent of all federally sentenced offenders and approximately 6 percent of state prisoners are currently managed by a privately operated corrections management company, and those figures are growing. States such as New Mexico, Colorado, Oklahoma, Tennessee, Alaska, Hawaii, Idaho, Montana, and Wisconsin house 20–50 percent of their inmates in private jails and prisons. Texas has the nation’s largest privatization program with more than 40 private jails and prisons capable of handling nearly 30,000 inmates.

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CCA claims that, with over 20 years’ experience and a 95 percent contract renewal rate, its corrections systems feature an outstanding performance record, flexible service strategies, improved quality and less cost to taxpayers. It claims that:

• Its security record is 0.43 escapes per 10,000 inmates, over ten times lower than state prison averages

• Following the American Correctional Association standards, more than 75 percent of CCA’s private jails and prisons are accredited, far surpassing the national average in publicly managed corrections systems. Adhering to more than 500 standards, its facilities annually receive 20 audits

• Accountable to government, CCA measures program effectiveness. CCA inmate students average three months’ gain in educational functioning for every month of enrollment. CCA’s diverse locations, 72,500 beds, and program variety enable clients to customize their services to meet unexpected needs

• CCA innovatively seeks new methods and technologies to reduce incarceration costs. CCA provides comparable or improved services, with operating costs averaging more than 20 percent lower than states in which it operates. CCA’s short construction times (12–24 months compared to government’s 36–40) and its efficient and technologically modern designs lower operational costs. In addition, CCA can build prisons, freeing agencies to fund other capital projects.

However, a recent report by Grassroots Leadership, the Corporate Research Project of Good Jobs First, and Prison Privatization Report International found that, even by its own standards, CCA has not been a success. It still manages only about 3 percent of prison and jail beds in the US, and its global aspirations had to be abandoned. Only a few years ago, CCA was infamous for poor management practices at a number of its facilities that were associated with abuse, violence, and escapes. In 2000, the company had a major management shakeup accompanied by a $120 million settlement of lawsuits brought by angry shareholders. Though the new leadership has worked hard to persuade investors, governments, and the public that the company has fundamentally changed over the past several years, the research group found, through reviewing court records, government reports, and local new accounts, that CCA has been buffeted by numerous lawsuits and scandals involving allegations of:

• Failure to provide adequate medical care to prisoners • Failure to control violence in its prisons • Substandard conditions resulting in prisoner protests and uprisings • Criminal activity on part of CCA employees, including the sale of illegal drugs to

prisoners • Escapes.

In addition, the research group also identified several key areas in which CCA has left a dubious legacy:

• Financial instability—the company borrowed a huge sum to support speculative construction while facing weak demand for new private prisons at the state and local level

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• Self-defeating labor practices—in order to depress its labor costs, CCA has kept wages low and denied its employees traditional pension plans, resulting in understaffing and high rates of turnover at some of its facilities

• Attempts to influence public policy—CCA has cultivated close ties with public officials and legislators around the country through campaign contributions and involvement with organizations such as the American Legislative Exchange Council (ALEC)

• Use of questionable research—in order to give its business a veneer of academic respectability, CCA has subsidized a small body of research that purports to prove the superiority of private corrections over the public sector.

Questions for Discussion and Analysis

1. What are the potential advantages and disadvantages of privatizing correction services?

2. If you are the manager of CCA, what are the major concerns for your company? 3. If you are a public manager in a correction agency that has contracted with CCA,

what are your major concerns with this relationship? 4. What are the social implications of privatizing correction services?

Source: Adapted from the information on the CCA’s website, URL: http://www.correctionscorp.com/ and the Grassroots Leadership report: Corrections Corporation of America: A Critical Look at Its First Twenty Years. URL: http://www.goodjobsfirst.org/sites/default/files/docs/pdf/CCA%20Anniversary %20Report.pdf.

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PRACTICAL SKILL

Doing business with government

Before Good Buddy E-Solutions (in our opening scenario) can pursue government contracts, it is critical for them to realize that contracting with government can be an onerous process, even though government business opportunities are abundant and sometimes favorable to small business, as governments often set aside a certain portion of contracts for them. This skill exercise will focus on small business, although the lesson may be applicable to large business. The exercise will mainly discuss state and local government contracts. For federal government contract, a good resource will be the Small Business Agency website: http://www.sba.gov/category/ navigation-structure/contracting.

Register Your Business

To become a vendor for government, you are required to register with the procurement office. Some states offer an eProcurement database via their procurement agency’s website. You may also inquire at the procurement agency for information regarding registration.

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Qualify Your Business

To qualify as a government contractor, you need to be able to comply with government requirements. Each state or local government agency has specific requirements, ranging from a proven ability to complete a task, to tried-and-tested quality-control procedures. It is generally valuable if you could obtain small business certification, which will enhance your com - petitiveness. If your business is not qualified to hold a formal contract, you may team or sub-contract with another company to improve your chance of winning a contract.

Understand the Market

Just like entering a new market, you need to do research. In this case, governments become your market. It is important to figure out where the best opportunities are by investigating their financial status, contracting history, budgetary cycle, and procurement code. Much of this information is available on government websites. Marketing to the government can be challenging. It is critical to build a good relation with government agencies. You need to engage in networking activities, such as attending government professional conferences or joining governmental associations to meet agency decision-makers.

Find Opportunities

Government contracting opportunities are general provided by state or local government procurement offices. There are also many commercial companies that provide their own database of government contracts. For example, www.findrfp.com offers an online database of active US and Canada government contracts. Contracting opportunities are often posted as a Request for Proposal (RFP) or Request for Tender (RFT), which asks for an offer to be submitted in response to a request. If a competitive bid is involved, it is posted as an Invitation for Bid (IFB), which asks for a bid, and the lowest bid will win. A Request for Quotation (RFQ) is normally for small contracts, often less than $25,000, which is kept simple so that the contract can be awarded quickly.

Bid for Contracts

When an opportunity is right for you, you need to write a proposal (or bid) and follow the rules and regulations. Make sure that you respond to each requirement outlined in the RFP and fill out any required forms and submit your proposal as stated. Government officials may contact you for the proposal.

Skill Exercise: Pursuing a Government RFP Opportunity Target a state or local government entity and do a search for an RFP. Identify an RFP of your interest and specify what requirements are needed. Discuss your strategies to pursue the RFP.

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SUMMARY AND CONCLUSION

1. In addition to industrial recruitment, government also uses entrepreneurial strategy and deregulation for economic development.

2. As a general policy approach, entrepreneurial strategy focuses on developing high growth new firms and technologies. Recent developments in entrepreneurial strategy focus on improving the capacity of local firms, enhancing growth- producing economic sectors, and developing “homegrown” projects.

3. Another facet of entrepreneurial strategy refers to government actively partnering with the private sector to launch flagship projects, especially for redevelopment purposes. Some public entrepreneurs pursue municipal capitalism to partner with firms aggressively seeking return on investment. There are significant risks and implications involved with this approach.

4. Deregulation, a special form of privatization, is another economic strategy that focuses on reducing or removing regulations to enhance market competitiveness, productivity and efficiency, and eventually economic growth.

5. Privatization goes beyond deregulation. Various forms of privatization, namely contracting, asset sales, franchises, government corporations, leases, grants, public–private partnerships, voluntarisms, and vouchers all offer the private sector opportunities to conduct business with government.

6. The policy and practice of privatization has significant social, economic, and political implications.

7. Industrial recruitment and deregulation are in agreement with politically con - servative ideology, while entrepreneurial strategy is better in alignment with politically liberal ideals.

Asset sale Blight Contracting out Deregulation Franchise Government

corporation

Inherently governmental functions

Lease Municipal capitalism Privatization Redevelopment

Sovereign Voluntarismal Voucher

KEY TERMS

STUDY QUESTIONS

1. Describe and compare the three strategies of economic development.

2. Look at the local municipal level. Do you see evidence of the three economic development strategies in local cities or counties?

3. What is municipal capitalism? Discuss the social, economic, and political implications of municipal capitalism.

4. What is privatization? What are the limits and implications of privatization?

5. Discuss the different forms of privatization. Provide examples.

6. Investigate a local economic development case. Discuss the economic impacts of and government roles in the case.

7. How extensive a role do you think government should play in economic development?

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