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

handle is hein.journals/stlolane24 and id is 1 raw text is: 




      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
  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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