Detroit: Donald Cohen Warns of Privatization, Calls for Bailout

As Detroit officials discuss a “fire sale” of public assets and services to private interests in the wake of the city’s $18 billion Chapter 9 bankruptcy last Thursday, some conservative politicians and business leaders may realize their dreams of “running government more like a business” after all.

Detroit became the largest metropolis to file for Chapter 9 bankruptcy in U.S. history, and the city’s troubles have been largely framed in the mainstream media in terms of high tax rates and pension shortfalls.

The city lost much of its manufacturing in an era of massive off shoring and suffered greatly from trade policies like the North American Free Trade Agreement and corporate welfare policies in the form of subsidies and tax loopholes for corporations. Yet it is municipal retirees, with an average $19,000-a-year pension benefit, who find themselves shouldering a disproportionate amount of the blame.

Now the city stands to lose not just its manufacturing base to outsourcing, but much of its public infrastructure too, as officials grapple with ways to infuse Detroit’s budget with much-needed revenue. But as many hail privatization of the public’s assets as the best way for the city to get out of debt, the costs of selling the city’s quality of life to for-profit corporations could prove to be more than just a cautionary tale of the loss of democratic control, according to Donald Cohen.

Cohen is the founder and executive director of In the Public Interest, a national resource center on privatization and responsible contracting. Cohen helped found the Partnership for Working Families, a network of urban research centers. He is also on the board of Green For All, the Ballot Initiatives Strategy Center and the Center for Effective Government. Truthout spoke with Cohen about the inherent dangers of privatizing city services and infrastructure.

Candice Bernd: What might the future of Detroit look like under privatization?

Donald Cohen: That’s a good question. You’ll have a city with enormous corporate and private control over some pretty fundamental things, pretty fundamental public goods and services. They could sell anything, from water and libraries and parks, and well, I don’t know what they’re going to do just yet, but conservative voices are calling to get rid of it all.

So the first thing is private control, and that will have a huge impact. When private interests control the public good, they often get decision-making powers about public direction, about public policy. So if the city votes that, say, private interests control the water system, those interests would have a lot to say about what sorts of things we’d want to do with our water system — to use recycled water, or to clean up water, or to do things that are good for the environment and drinking water — they might have a lot to say because those public decisions that get made could affect their bottom line.

When we sell something off like that, we become contractually obligated to meet private companies’ needs. So that may be a little abstract, but that’s what happens when you sell off this stuff — they get to decide. Take libraries, they may say, “Well we have to charge people to enter the library,” and they may get to control of something that is basically part of our education policy — whether we have good, publicly acceptable libraries. Private interests get to decide whether someone gets charged. They get to decide what books are purchased.

So in all of these public services and infrastructure, there are tons of decisions about how we want to run the city, and private companies will get to have a say. The other thing is that if private corporations think they can make money by operating what is a public service, then why can’t we? Some of that money is going to leave the city and become a return on investments; it’s going to be a profit.

If that’s the case, then we should take what would be those profits and put them right back into the city to rebuild neighborhoods and provide public services. Private corporations are going to take some of those funds and send them away from Detroit, where they are needed the most. Those are the big picture answers since we don’t yet know what the city is going to do.

How does this decision-making power granted to private interests under the subcontracting of public infrastructure and services limit the scope of the public’s democratic decision-making power over those services?

It’s case by case. It’s all in the details of the contract. The first thing that gets taken away is transparency. You don’t have the right to know.

If something is public, you have the right to know how many workers there are, what they’re paid, access to every public meeting or hearing. You have a right to know everything about that public service and how it’s delivered as well as the finances. When you privatize it, you no longer have the right to know some pretty basic stuff.

They would never tell you how much the CEO made, or how much the workers made, or how many workers are on the job — which translates to whether or not the job is getting done. That’s the first thing you lose.

The second thing you can lose is, and this really depends on how the contract is done, so I’ll give you a couple of examples. Chicago sold their parking meters for 75 years in what was fundamentally a “fire sale.” They sold 36,000 parking meters — too cheaply it was determined afterwards — for $1 billion, so the finances were terrible.

Here’s another thing they gave away. If the city wants to hold a street fair, they have to pay the private provider of the parking meters, for every dime, for every dollar, for every minute that those closed meters would have been used. Think about it. You want to do a street fair, but it’s going to cost you a couple of extra million bucks to pay off the private company? You won’t even propose it.

If you also want to close off a street for traffic management, you’ve got to pay the private companies; you’ve got to buy the spots back basically. If the city wants to buy competing parking lots, let’s say in six years they want to build three competing parking lots in downtown Chicago to provide for more urban living, you can’t do that without paying the private provider and compensating them.

Those are decisions that you don’t get to make contractually and that you don’t get to make because they simply cost too much. It’s in your interest because you are contractually obligated to protect their profits.

What other kinds of loopholes might be included in these types of contracts? What kind of tax breaks do these private contractors stand to benefit from?

Well, when cities are desperate, they make really bad deals. If a city is going into negotiation with a private company over the sale of something, even if the city decided they wanted to sell it, if the private company knows that you can’t walk away from the table and that you’ve got to sell it, then the city will get taken. The city has to be willing to walk away from any negotiation, and they’ve got to be able to negotiate hard to get a good deal.

So the city is already at the mercy of the private markets’ say, what the investors say — their bottom line. They’ll say, “We can’t make money if we pay more than this,” or “It won’t work.” They already start the conversation at the bottom line, to gain as many goodies as they can figure out.

In terms of specific loopholes and taxes, I’m not as familiar with Detroit municipal governance, but they could give away tax increment financing; if they have a hotel tax, they could give that away. I assume they could give away a property tax abatement.

There’s two ways to help the private companies, which is to reduce their costs or reduce their taxes — that could be a utility tax or whatever kind of municipal taxes they depend on — or pay them more. I’m sure they’ll look at both of those ways.

What kind of oversight is there on these private contractors?

That’s the real Achilles’ heel of all of this. If you think about it, everybody contracts for something. I can contract to paint my house, for instance. So whether you do that, or whether you’re a government contracting for somebody, or a private company is subcontracting for something; it is a fact that if you don’t watch closely, things go wrong.

In the worst case, you get taken; in the lesser case, things just go wrong; people mess up. If you’re going to oversee contracts — either sales of assets that are public or public services contracts — you have to have the ability to do audits, both performance audits and financial audits. You need to be able to do announced inspections. You need to watch really closely.

I don’t know of any governments that add enough staffing, management and oversight staffing, to watch closely. Nobody does it because they know if they do that, they’ll get better service, but it will also cost them more. But if you don’t watch, then private companies are going to cut corners.

What other options does Detroit have besides turning to privatization?

I don’t have expertise here, but you need a fundamental restructuring of that city. If you look at the causes of this, it’s not public pensions. It’s a slow and steady exodus from the city, of residents, of businesses, of major employers.

They need an economic development strategy that really does rebuild the infrastructure, the social and physical infrastructure, so that it becomes good for the people who live there, and it becomes good for the economy. Those things are not contradictory.

If we’re willing to bailout the banks and we’re willing to bailout the auto companies — which I thought was a good thing to do, the auto companies — then we should bail out a city that needs to be restructured because the populations are smaller, and these huge American, iconic businesses have left. I think a federal bailout at this point is necessary.

Just like we did with the auto companies, we need to restructure the city in such a way that everyone benefits: People get jobs; people get better communities, build new businesses and we rebuild the public sector.

Anything you want to add?

I just want to raise another point that a city could also just sell something — it’s gone, it’s not part of the public. Convinced by the business community that it’s the right thing to do, a city could sell things that actually generate revenue.

Detroit is talking about selling their art work. Does that generate revenue for the city? You don’t sell things that are making you money.