Privatization: Washington braces for push to sell off US assets

Stuart Butler, a slim bespectacled man with a clipped British accent, leans back in his chair and smiles ever so faintly. ``Gramm-Rudman was the turning point,'' he says. Now that congressmen are seeing the tight ceilings they're working with, ``privatization has become very interesting to them.''

Dr. Butler, director of policy research at the conservative Heritage Foundation, is spearheading a drive to shrink government down to a few core activities. He and other staunch free-marketers have had the President's right ear for years, as was reflected in the White House budget this year.

But now, with the Gramm-Rudman-Hollings budget-balancing law breathing down their necks, lawmakers may begin to listen.

There are stirrings in that direction in a recent bill to sell off government loans, for example. There aren't many tangible victories for the privatizers yet. But, most agree, the momentum is in their direction. What privatization means

A close look shows privatization to be a complex idea indeed, a legislative stone soup that includes not just cost cutting but legal and ideological questions about the role of government.

To some, it means contracting out services traditionally done by the government and letting the marketplace bid down the bill the government has to pay.

The city of Scottsdale, Ariz., for example, saves $2 million a year by contracting out firefighting services. Few people object to saving money, of course. But many public-service issues, like policing powers or prison management, are not so cut and dried.

To others, privatization means selling federal assets like the government's oil fields, Dulles Airport, and student loans. This brand of privatization is controversial but runs into trouble mainly for political reasons.

Senators from the Northeast, for example, delay the selling of Conrail, and those in the Northwest balk at selling the Bonneville Dam and power authority, which includes the Grand Coulee Dam and 21 others.

In a broader sense, privatization means deregulation. The President's 1987 budget, which has been rejected by the full House and by the Senate Budget Committee, has a number of suggestions in this direction. For one, it proposes abolishing the Interstate Commerce Commission (ICC), which regulates surface transportation, and transferring some of its functions to the Department of Transportation.

Last September, Attorney General Edwin Meese III questioned whether the Federal Trade Commission -- and, by extension, other independent agencies like the Securities and Exchange Commission and the National Labor Relations Board -- actually are allowed regulatory powers under the Constitution.

Other moves that may be down the pike include taking away the US Postal Service's monopoly on delivering letters, and eventually replacing social security with private pension plans. Getting the ball rolling

The push for privatization, especially at the federal level, came with the Reagan administration.

During the 1981-82 recession, says Alice Grindstaff, spokeswoman for the American Federation of State, County, and Municipal Employees, ``private companies saw [government contracts] as a way to make up the money they were losing in the private sector.'' Add to that ``the Reagan philosophy that anything the public sector can do the private sector can do better,'' she says, and privatization was on its way.

``I really don't think you can say it has anything to do with Ronald Reagan, other than this coincided with pressures on state and local governments because of reductions in federal support,'' says Dr. Butler at the Heritage Foundation.

He argues that privatization is a ``pragmatic response'' to deficits and recession, and that both here and in Europe ``it tracks much better with the financial problems of the government than it does with any ideological revolution.''

Contracting out services is far more widespread on the state and local level than at the federal level and has been going on for well over a decade. In part that's because, until recently, the federal budget has been expanding while state and local budgets have been squeezed.

Also, 41 percent of all work that could be done by outside contractors for the federal government is done in-house, mainly for national security reasons.

At the local level, private companies do everything from policing and firefighting to managing hospitals and providing legal services for the poor.

In a recent study, the conservative National Center for Policy Analysis found that about 35 percent of local governments now contract out for residential garbage collection (44 percent for commercial collection); 42 percent hire private firms to operate and maintain their bus systems; and 80 percent contract out vehicle towing and storage.

Advocates say that companies, motivated by profit, have greater incentive to lower their costs than government employees, whose budgets are set and who gain little by being more efficient.

While dollar figures are hard to find, studies suggest that savings are considerable. One study commissioned by the Department of Housing and Urban Development found that when municipalities contracted out janitorial services they saved 73 percent. They saved 42 percent on refuse collection.

A study by the Institute of Transportation Studies at University of California, Irvine, found that cities saved 25 to 50 percent by privatization measures involving mass transit.

Dr. Butler claims that merely letting companies compete with government employees for a contract lowers the cost of the service. That's true even for federal agencies, he says, which are newer to the contracting game.

He cites a 1984 study by the Office of Management and Budget, which found that since 1979 the federal government reaped an average 20 percent savings when a particular activity was open to competitive bidding. That translates, he says, into savings of $6 billion a year -- perhaps $15 billion when white-collar services are thrown in.

However, that study also notes that the Defense Department contracts out more work -- 27 percent -- than any other federal agency. If what the Defense Department paid for hammers and toilet seats is any measure, critics say, the savings may be exaggerated. The cost of cutting costs

``There can be, in terms of out-of-pocket expenses in the near term, a slight cost'' when the government awards contracts to private firms, says Mark Musell, an analyst at the Congressional Budget Office.

``When an activity stays in-house, [government employees'] retirement costs are deferred . . . and if contracting out results in layoffs, it would also have a cost that wouldn't have been otherwise incurred.''

The government may be able to recoup that cost in the long run, he says, but right now, contracting out could worsen the Gramm-Rudman squeeze.

Mr. Musell also says that, as far as he knows, ``no one has ever gone back to assess how close the actual cost was to the [contractor's] bid'' -- a point that government employees are quick to note.

Government employees say private companies cut corners to get higher profit margins. ``Their cost comparisons are based on two different levels of service,'' says Ms. Grindstaff at the government employees union.

``When refuse collection was done in-house, it was backyard pickup three days a week, and they'd take everything. Now it's curbside pickup, it's once a week, and they won't take shrubs.''

Others point out that the arithmetic of the marketplace doesn't always serve the public. If a private company is running the city's bus routes, for example, it could try to serve only the most traveled and profitable routes, leaving some riders out in the cold.

Another example was the privately run Humana Hospital in Louisville, Ky., which attempted to close down its adult burn unit because it was unprofitable. After angry protests from the city's firemen, the hospital reversed itself. Legal and ethical dilemmas

There are legal questions, too, and these are only now being thrashed out in the courts. One of the most thorny revolves around accountability.

John Burkoff, a law professor at the University of Pittsburgh, uses this example: Say a private guard is hired by the state to police an area. He stops you, searches your belongings, and fails to tell you your rights.

``Can I use all of the Bill of Rights against him? Because if I can't use it, then all the state has to do is come in with these private police and they can do whatever they want.''

The law, he says, ``is all over the place,'' as courts hand out conflicting rulings.

Perhaps the most controversial issue is prisons. At this point, only halfway houses and juvenile institutions are run privately, and the cost savings have been big and widespread, according to one correctional counselor who surveyed correctional institutions.

But there is an ethical dilemma here. People running an institution hold some sway over when an inmate is released or allowed on parole.

``How do you delegate that decision to a private provider whose profitability rests on keeping people in?'' asks Michael Keating, a lawyer who has studied private prisons.

Selling off assets has its attractions as the federal government pares down for during its first (4.3 percent) round of Gramm-Rudman cuts. The government owns trillions of dollars worth of assets in land, outstanding loans, oil reserves, dams, satellites, and so on. If the government sold off even some of these assets, says Dr. Butler, ``we could save staggering amounts . . . trillions of dollars.''

But even the least controversial moves, such as selling the governments loans to the private sector, seem headed for trouble.

Sen. Daniel Moynihan (D) of New York has been backing a bill to sell off $3 billion worth of loans to the private sector. That's a fraction of the government's $257 billion portfolio -- larger than Citicorp and BankAmerica combined. But the bill's outlook isn't good, says a congressional aide. ``People are more willing to tax than to sell these loans.''

The chances are even slimmer for things like forest land or oil reserves -- what one analyst calls ``saving money by mirrors,'' that is, selling off assets that could bring in money in the future just to get cash now.

Why sell the Naval Petroleum Reserves when oil is trading at the lowest price in a decade?

One reason, advocates say, is to get some time to play with until the US can shrink the federal bureaucracy, restructure the economy, and make it run more efficiently.

For now, at least, those wanting to sell off assets and take the more controversial step of shutting down independent agencies may be whistling in the wind. But the battle lines are drawn.

And as the squeeze gets tighter, legislators wanting to save a dollar may be willing to talk with a President eager to leave his mark on the structure of the American economy.

And privatizers across the country are smiling ever so faintly.