PUBLIC SERVICES IN PRIVATE HANDS

PRIVATIZATION. The term calls to mind the transfer of state-owned smokestack industries to private hands in former communist lands. But it is just as applicable in the proudly capitalist United States.

Here, privatization rarely takes the form of outright sales of publicly owned assets to private buyers - though in some areas, like waste-water treatment plants, that may be about to change.

New Hampshire-based Wheelabrator EOS, for example, is poised to buy the waste-water treatment plant owned by the Miami Conservancy District near Franklin, Ohio. All that's needed is final approval by the Environmental Protection Agency, and that's expected soon. This will be the first such purchase in the US since a brief burst of them in the mid-1980s, and it could stimulate others. Many companies, including large European-owned private water utilities, are watching.

Most privatization in this country, however, takes the form of contracting out to private firms - both profitmaking and nonprofit - a raft of services once monopolized by government. This practice has been spreading for nearly two decades. The International City/County Management Association, in its 1994 Municipal Year Book, reports that every service provided by local governments - from arts programs to waste collection to day care - is being contracted out by a city or town somewhere in the US, with cost-cutting the primary motive.

In some cities, traditional public-works departments take part in the bidding for municipal projects. Steve Fantauzzo, head of the Indianapolis branch of the American Federation of State, County, and Municipal Employees (AFSCME), says that his local has won 75 percent to 80 percent of all the contracts offered by city government. Mr. Fantauzzo prefers to view this activity not as ``privatization,'' but as a way of instilling competition and upgrading city services.

But public employees generally - sensing a surge of privatization led by cities like Indianapolis and Phoenix - are preparing for a fight to keep work that was once theirs alone. Private Firms Move Into Domain of Government

One battleground is education. The country's two teachers' unions - the National Education Association (NEA) and American Federation of Teachers (AFT) - vigorously oppose any step toward private management of the public schools. The AFT has termed ``crazy'' any school district that would do business with Education Alternatives Inc. (EAI), a Minneapolis-based firm that already runs nine public schools in Baltimore and one in Miami. The union disparages the company's record in Baltimore, while other observers point out that it's too early to judge, since EAI has been on the job there only two years.

Nonetheless, Hartford, Conn., is preparing to sign a contract with EAI to manage all its public schools. That will be a privatization landmark.

The move toward contracting out and private management has been less controversial in other arenas. Care for the mentally retarded or mentally ill used to be provided primarily at large state institutions. But since the late 1960s, states have turned more and more to private, nonprofit agencies to provide care, rehabilitation, and training.

Some of these nonprofits, like the Vinfen Corporation in Cambridge, Mass., have grown into large businesses that have to balance state funding and regulation with their commitment to remain community-oriented and flexible.

A quick survey of the US privatization scene might begin with waste-water treatment - the epitome of a big, public-works project long thought to fit naturally in the domain of government.

For sale: waste-water plant

As you walk through the fortress-like concrete compound that houses the Lynn, Mass., waste-water treatment plant, the order and cleanliness of the place strikes you. Even the odors are minimal.

This is a municipally owned operation, but it has been managed for the last seven years by Wheelabrator EOS, Inc., a company that specializes in clean-water technologies. It is a good example of the contracting-out facet of privatization.

Plant manager Jim Taylor explains each step of the process that turns 26 million gallons of turgid ``influent'' streaming in daily from four communities into relatively pure water. This facility, with aeration reactors where bacteria feed on organic matter and other state-of-the-art features, is on the leading edge of waste-water technology.

It is not, however, on the leading edge of privatization. For that, one has to look 750 miles to the west, to Franklin, Ohio. Wheelabrator is in the final processes of signing a contract to not only operate, but own the waste-water treatment plant serving that midsized city and two neighboring towns. The plant's price: $6.8 million.

The incentive for the company in this deal - and, it hopes, future ones - is to secure its place in a business that, like any utility, promises a regular flow of income. Wheelabrator is quite willing to take on the risks - such as environmental emergencies, meeting permit conditions, and the threat of fines - that now rest on the municipalities, says John Dowd, vice president of the company's Clean Water Systems division.

``We're in the business of long-term contracts. It's the very bedrock of our business,'' Mr. Dowd says, and nothing is longer-term than ownership. Dowd and his colleagues also point out that the deal is good for the cities and towns involved. ``If assets can be transferred to a private company, the cash from those purchases can go into community hands'' and pay for needed infrastructure improvements, says Al Scaramelli, a Wheelabrator vice president for business development.

The key to the deal with Wheelabrator, says Samuel Coxson, Franklin's city manager, is the service agreement, which specifies the rates to be charged homeowners and businesses. That agreement is the outcome of months of bargaining between Wheelabrator, the towns, and the privatization consultant hired by Franklin and adjoining communities.

``We've locked in a rate that adjusts only to the CPI [the Consumer Price Index, which measures inflation] for the next 20 years,'' Mr. Coxson says. ``We couldn't have gotten that in any other way.''

The Franklin city manager says he thinks his area is pioneering what could become ``the primary way of meeting waste-water needs.'' Things have ``lined up,'' in his view: a 1992 executive order by President Bush that encouraged infrastructure privatization, the commitment by the Environmental Protection Agency to sponsor privatization pilot projects (Franklin's sale to Wheelabrator is one of them), and the willingness of both companies and municipalities to give it a try.

Robert Poole, president of the Reason Foundation, a Los Angeles-based research organization that champions privatization, says other corporations, including some European multinationals, are on the same ``acquisition trail'' as Wheelabrator.

But it's a trail with noteworthy bumps, such as union resistance. ``We certainly think that it's important that public services, like waste-water treatment, should be left in the public's hands,'' says Don Wasserman, director of collective bargaining for the American Federation of State, County, and Municipal Employees. He warns against getting ``back to the situation of 100 years ago when much of this stuff was done privately.'' That, he says, could lead to a lack of accountability and uneven service.

Another bump could be the absence of the tax breaks - investment tax credits, accelerated depreciation, and access to tax-free financing - that spurred a quick burst of such sales in the mid-'80s. Doug Watson is city manager of Auburn, Ala., and watches the trends in privatization of infrastructure. ``The tax law of 1986 took most of the incentives out,'' Mr. Watson says. If Wheelabrator's move in Ohio spawns similar deals in the absence of incentives, he adds, ``I'd really be surprised.''

Others see an almost irreversible momentum building. Mr. Poole notes that New York City is preparing to sell off some of its waste-water treatment facilities (for as much as $750 million). The Milwaukee area is in the midst of a ``bidding war'' over the sale of a county-owned electric power plant. Indianapolis is considering putting its airport on the block.

While the purchase of such public assets has been going on in Europe for quite a while, only now is it beginning to seem ``less outlandish'' in the US, Poole says. ``Real money is on the table.''

Battle over public schools

But buying ``things'' is quite different from buying into the public-school system. The basic hurdle to privatization in this realm is summed up by Judy Behnke, director of the National Educational Association's Center for the Preservation of Public Education: ``We are opposed to for-profit companies coming in and running public schools with for-profit motives.''

The company that Ms. Behnke and other critics of school privatization have most in mind is EAI. The firm is striving to expand its foothold in public education beyond nine schools in Baltimore and one in Miami. The focus of its efforts is Hartford, Conn.

Connecticut's capital city has hit fiscal straits, and its schools have had drooping test scores and rising drop-out rates. ``I felt we needed far-reaching, you might even call them drastic, changes,'' says Thelma Dickerson, a member of Hartford's school board who favors bringing EAI aboard.

In late July, she was part of a board majority that voted to seek a contract with the Minneapolis-based firm to begin supervision of the city's schools this fall.

The company has already been given a go-ahead to start to assess the condition of Hartford's school buildings. In Baltimore, one of EAI's undisputed successes has been the tidying up of school facilities. Ms. Dickerson, a former teacher, and other board members traveled to that city to view the company's operation. The cleanliness of the buildings left a strong impression, as did the computers that EAI installs in each school and the morale of the teachers.

Still, ``we're going to be quite different from Baltimore,'' Dickerson says. Among other things, she says, Hartford will require a different formula for determining how the company is to be paid than the per-pupil ratio used there, which has sparked some criticism that EAI is getting paid too much.

Elizabeth Brad Noel, another school-board member, has a different perspective. She was not that impressed by what the company had accomplished in Baltimore and voted against seeking a contract. Changes were already under way and should have been allowed to develop through normal structures, she says. The city had adopted a strategic plan for its schools, 300 teachers had taken an early-retirement plan, and a new superintendent was in place.

``I'm not philosophically opposed to privatization,'' Ms. Noel says. ``We have a bus company running the transportation system now. But I don't feel we should be contracting out the entire system.''

Despite protests from teachers' unions and the doubts of public officials like Noel, privatization of public schools is growing, according to Janet Beals, a Reason Foundation researcher who specializes in education. It's especially prevalent in noninstructional areas. Thirty to 40 percent of school-bus service is privately provided, Ms. Beals says, and so is 10 percent to 20 percent of janitorial work.

But examples of privatized classrooms still are rare. EAI's Hartford project could be a milestone. The Minneapolis school board has hired a private consulting firm, Public Strategies Group, to manage its 77 schools and $250 million yearly budget. And the Edison Project is on the verge of setting up charter schools in Massachusetts and elsewhere. Some other private firms, such as Nashville-based Alternative Public Schools Inc., are also eyeing the field. In schools as with infrastructure, ``the whole thing is about competition, whether we allow it or not,'' Beals says.

The human services arena

Competition is much less a factor in the human-services realm, where private nonprofit organizations are the major players.

Good examples of privately operated, though state-funded, human services can be found on Harvard Street in Brookline, Mass., about 20 minutes by car from Boston's downtown. Gateway Crafts is filled with people involved in weaving, painting, writing, pottery making, and other pursuits. Most of the artists here are considered mentally retarded. In the past, many of them might have spent their lives in huge, state-run institutions. Instead, they're being given a chance to explore their creativity; many produce works of art that sell very well.

Around the corner from Gateway Crafts is Webster House, a day-time program for the mentally ill that functions much like a clubhouse, with the client-members making rules and deciding on educational and other programs. The people here, as at Gateway, often require attention from a highly trained staff. The goal at both places is the same: Building self-worth and independence.

The Brookline programs are among dozens of residences, schools, and training centers run by the Vinfen Corporation, the largest private, nonprofit provider of human services in Massachusetts. It has facilities at 115 sites in the state and serves over 5,000 ``consumers,'' as Vinfen calls the individuals it helps. The company's revenue last year was $33 million.

Sheldon Bycoff, Vinfen's president and cofounder, traces the develop of privately run human services to the 1963 federal Community Mental Health Centers Act. It took time for federal money to flow, Mr. Bycoff says, but by the mid-1970s ``privatization really begins,'' spurred on by a sympathetic state administration and by federal court decrees mandating an end to the ``warehousing'' of mentally ill and retarded persons.

A human-services ``cottage industry'' sprang up, Bycoff says. Vinfen was formed in 1977 to ``provide services through the funding mechanisms then being developed,'' he explains. ``We've had very remarkable growth, as the state has looked to us to provide services to very disabled people.''

An indicator of the firm's robustness was its success early this year in getting a favorable rating from Standard & Poor's Corporation and Moody's Investor Service, a first for a private human-services provider. That rating allowed Vinfen to raise $9.2 million through tax-exempt bonds.

The bond-rating people concluded that ``this business was here to stay,'' Bycoff says. Earlier efforts to get money through bank loans failed because bankers were leery of a firm dependent on the state's ebbing and flowing tax stream.

Some privatization analysts look askance at big, nonprofit human-services providers like Vinfen. They see monopolistic tendencies in an arena with one buyer, state government, and few sellers. Huge nonprofits tend to become ``wings of government,'' according to William Eggers, head of the Reason Foundation's Privatization Center. Only a small part of Vinfen's funding comes from nongovernment sources, like foundation grants or individual tuitions.

Bycoff is aware of the dangers of being tucked too closely into the fold of government. In his view, the advantages of a private provider, compared to a state agency, are greater management flexibility, freedom from the ``rigors of the state budgetary process,'' and ``programmatic responsiveness.''

Still, he admits, ``We're a very heavily regulated industry,'' with ``tremendous amounts of paperwork'' demanded by the state. He acknowledges government's responsibility to monitor how tax dollars are being spent, but adds, ``I'd like to see the state not focus so much on process issues as outcome issues.''

Even with the constraints imposed by government, Bycoff expects privatization of human services to continue its growth.

``I've spent 25 years at it, and on average it performs very well,'' he says.