Rules for use of private contractors need easing


Some people say the Tax Reform Act of 1986 dealt a knock out blow to extensive privatization of municipal environmental services. While the jury is still out on that, it's clear the landmark legislation did force both the private and the public sector to analyze the finances of public-private partnerships on their own merits.

While many projects went down for the count without the prospect of unlimited tax-exempt bond financing, some privatization proponents are rising from the canvas stronger in their resolve to fight on without the federal government in their corner.

The benefits of privatizing city services are well documented. The privatization of the Mount Vernon, Ill., waste-water treatment saved the city $3 million, took substantially less time than any public proposal and removed liability from the city.

Myrtle Beach, S.C., contracted with a company to design, construct and maintain an ozone water treatment plant on a turnkey basis, thus allowing the city to acquire a sophisticated technology without risking its own investment.

zTC Seattle contracted for curbside recycling to a private partner, avoiding upfront costs and saving $2 million in 10 years. Studies consistently indicate that private contractors are between two and three times more productive in residential trash collection. Examples abound of private waste-to-energy facilities curing the solid waste woes of municipalities.

Agreeing on upfront financing remains a major obstacle. With tax-exempt bonds severely limited and accelerated depreciation reduced drastically, both private parties and public entities find laying out the cash to be much harder to justify.

Past legislation "went overboard" in the words of Wallace Turbeville, vice president of investment banking firm Goldman Sachs & Co. of New York. "Bill authors have put privatization of public services on equal footing with other private enterprises. Congress doesn't see it as any different from financing a McDonald's," he says.

Turbeville says less restrictive financing rules are needed. Legislators don't realize that tax-exempt bonds and accelerated depreciation schedules truly benefit state and local governments seeking infrastructure financing more than they benefit the private sector itself.

Turbeville leaves no doubt that the first step in privatization has to be a public sector policy decision. The second step is to improve the economic climate for privatization.

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