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9 Urb. St. & Loc. L. Newsl. 1 (1985-1986)

handle is hein.journals/stlolane24 and id is 1 raw text is: URBAN, STATE and LOCAL LAW NEWSLETTER An Introduction to Privatization By Sarah E. M. Solmssen * Privatization has attracted much attention in re- cent years as local government units, responding to federal budget cutbacks and initiatives from the private sector, have begun to explore more eco- nomical-perhaps even profitable-means of provid- ing public services. What is privatization? The term cannot be found in a dictionary. One large accounting firm even tried, but failed, to trademark the word. To municipal lawyers and financial advisors, privati- zation means a method of financing and managing traditionally public works whereby private companies design, finance, construct, own and operate these facilities under service contracts with municipal or state governments. Examples of traditional govern- mental services that have been contracted out suc- cessfully to private firms include ambulance services, solid waste disposal facilities (also known as resource recovery facilities), wastewater treatment and drink- ing water facilities, prisons, hospitals and transport facilities. In its simplest form, a municipality contracts with a private corporation which provides the neces- sary capital, builds a facility and operates it at a pre- determined quality standard. The municipal partner purchases the services provided by the facility on be- half of the local community. The municipal partner also collects charges from the community users and pays them to the private partner. Privatization is an at- tempt to prove that public services can be provided lends the proceeds to a pilvate party -who constructs and owns the facility. In turn, the private owner is prin- cipally obligated to py back the governmental entity which, in turn, pays debt service on the bonds. This financing structure is typically evidenced by a long- term service contract between the public unit (service recipient) and private party (service provider), ex- tending over a period of time sufficient for the private party to pay off its obligation. The economics of the structure are quite attractive to private investors. To use solid waste recovery facilities as an example, the private owner may operate the facility, in which case the governmental unit agrees to supply solid waste in exchange for treatment services provided by the owner/operator. Steam and electricity are produced as by-products or end-prod- ucts of many solid waste technologies. The operator's service fees are paid from tipping fees, which are usually set at a prescribed rate per ton. Local utilities are required by federal law to purchase the electric power produced from cogenerating recovery facilities at a price based on what it would cost to generate the electricity themselves. Alternatively, the owner may lease the facility to a third party operator, in which case the government unit still contracts with the owner to supply, but in addition contracts with the third party for treatment services in exchange for service pay- ments based on tipping fees. more cheaply and effec- tively by private competi- tion than by government monopoly. Structure Many privatization proj- ects are based on some form of tax-exempt con- duit financing in which a governmental entity issues tax-exempt industrial de- velopment bonds and In this issue Scholar's Column ................. 2 A Good Year ..................... 3 Public Purpose Bonds .............. 5 Estoppel Against the Government ..... 9 News from the Communications D irector ...................... 11 Section and Council Meeting Report ... 13 Publications Scan ................. 15 The service agreement is central to any successful solid waste project. By careful structuring, a muni- cipality can delegate vir- tually all responsibility for trash collection and dis- posal, yet retain control over service quality and cost. The private operator, on the other hand, gets a long-term, fixed-price con- (continued on page 17) Section of Urban, State and Local Government Law Vol. 9, No. 1, Fall 1985

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