Privatization

How Trump's Trillion-Dollar Infrastructure Plan Could Succeed

Former Indianapolis Mayor Stephen Goldsmith on the privatization revolution.

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"We're at a really interesting moment where public-private partnerships could blossom in a pretty dramatic way," says Stephen Goldsmith, former mayor of Indianapolis and professor at Harvard's Kennedy School of Government. "If we have technologies that are highly refined…we can anticipate a problem and fix it before it occurs."

Goldsmith, author of 2014's The Responsive City: Engaging Communities Through Data-Smart Governance, was the recipient of the Reason Foundation's 2017 Savas Award for promoting public-private partnerships. (The nonprofit Reason Foundation is also the publisher of Reason.com.) As mayor of Indianapolis from 1992 to 1999, Goldsmith trimmed $100 million from the city budget mainly by requiring departments of the municipal government to compete with private companies.

"The ideas…frankly, were from Reason," states Goldsmith. "[Director of Transportation Policy] Bob Poole spent I don't know how many lunches in Indianapolis when I was running for mayor and after I got elected kind of going through A to Z on how to privatize."

Goldsmith states that one impediment keeping struggling cities from embracing public-private partnerships is a basic understanding of the goal. "[It] isn't to monetize assets," explains Goldsmith. "The goal is efficiency."

At the national level, Goldsmith says public-private partnerships could be key to making President Donald Trump's one trillion dollar infrastructure investment program successful.

"Regardless of how much money it is that Washington ends up [spending]… it can't be done effectively without public-private partnerships," Goldsmith states. "Both for purposes of paying back the money and for purposes of maintaining the asset."

Edited by Alexis Garcia. Hosted by Nick Gillespie. Camera by Jim Epstein and Kevin Alexander.

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**This is a rush transcript—check all quotes against the audio for accuracy.**

Stephen Goldsmith: Regardless of how much money it is that Washington ends up doing.

Donald Trump: We're gonna start spending on infrastructure big.

Stephen Goldsmith: It can't be done effectively without public/private partnerships.

Nick Gillespie: Hi. I'm Nick Gillespie with Reason. Today we are talking with Stephen Goldsmith, the former mayor of Indianapolis, who has won the newest Reason's Savas Award for pushing public-private partnerships. Mayor Goldsmith, thanks for talking to us.

Stephen Goldsmith: Sure.

Nick Gillespie: You were mayor of Indianapolis from 1992 to 2000, Special Advisor to George W. Bush, Deputy Mayor of New York, and you're now a professor of government at Harvard's Kennedy School, and most recently the author of The Responsive City, which came out in 2014, and we'll talk about that in a second. At your time in Indianapolis you save taxpayers about $400 million by privatizing. What was the impetus for that? Where did the ideas come from?

Stephen Goldsmith: Right. Right. Well, I think we can answer that in two different ways. First, I became mayor. We had a structural deficit in the budget, and we had a Chamber of Commerce report saying we need a billion dollars in infrastructure and our property taxes were higher than our suburbs, but you can't raise taxes. It's not good for the economy. We need to rebuild the infrastructure. So what do you do? Well, you become as efficient as you can. The goal, then, was to reduce the operating costs of government and transfer that into an investment in the infrastructure in the future for the city. So those were the conditions. The ideas about how to get there, frankly, were from Reason. Bob Poole spent I don't how many lunches in Indianapolis when I was running for mayor and after I got elected kind of going through A to Z and how to privatize.

Nick Gillespie: You didn't just go through A to Z, you went through the phone book with A to Z, right? What was the rubric that you used to see whether or not the government should be the sole provider of a good or a service?

Stephen Goldsmith: Right. Thanks. The goal was not to privatize. The goal was to be as efficient and effective as possible. Sometimes that meant you continue to do things the way you have always done, not very often but sometimes. Other times it meant you have privatized the asset. Other times it means you set up managed competitions so labor would have to bid on continue to do the work they've done and become more productive. I've generally found that if, very sophisticated test. Open up the phone book in the Yellow Pages. If there are three or more other businesses in the same area in your city, you're probably not the most efficient provider of those services, and we bid out or did manage competition over 80 times.

Nick Gillespie: Many cities today in America obviously are facing structural deficits. Are they following the path that you blaze in Indianapolis? And if not, what's the biggest problem? Is it not knowing how to do that? Or is it political interest getting in the way?

Stephen Goldsmith: I think the basic problem is an understanding of the goal, right? The goal isn't to monetize assets, so you bring all of the revenues forward like parking meters and then spend it on operating. The goal is efficiency, right? So how do you operate something more efficiently? Is there anybody in the world anybody in the world better than you are in your city at operating streetlights or parking or golf courses or water or wastewater or airports? Then you take the savings and invest that in the future of the city. So I think the thing that's holding people back is that they're thinking about as, "Do we want to privatize or do we want to sell the family jewels?" As contrasted to what is the role of government in terms of managing that asset.

Nick Gillespie: What was a specific asset or thing that Indianapolis was doing, and how did you shift it into a more efficient mode?

Stephen Goldsmith: Right. So we did about 80 of these either managed competition or privatization. We did the first large wastewater privatization in the country. Today there are tens of billions of dollars of mandates against local authorities for water and wastewater EPA appliance and alike. So the city needs to clean its water, right? There are environmental responsibilities. Indianapolis at the time according to Ernst & Young was one of the most efficiently run wastewater treatment plants in the country, and yet then we went ahead and asked for anybody in the world to give us a bit about how to manage our plant. It turns out that the winning bidder had more PhD's than we had employees, right? There was no way that we were as effective as they were. There's no way we had the best technology and no way we had the best management. So essentially, then, they managed the plants for about 25 to 30% less per year, which produced a savings that we could then use for debt or efficiency purposes for some other reason that invested in the infrastructure of the city.

Nick Gillespie: Were there any big mistakes that you made where either the privatization or failing to do that just blew up in your face?

Stephen Goldsmith: Right. If you continue to do a mediocre service and don't change the status quo, you generally don't get criticized. If you try to change the status quo, let's say it's like and you go like this, but you wanted to go like this, it's often viewed as a failure. Still better than it was before, but not as good. So one of the most important lessons we learned was benchmark everything before you begin. Benchmark it in terms of quality and benchmark it in terms of cost. So occasionally we slipped up on that. The other issue, which I don't think is a mistake, but we did make mistakes, a mistake in terms of we shouldn't have done it is, what are the service level requirements after you privatize the asset?

What do you want the experience to be for passengers in the airport? What do you want the quality of the water to be? How high to do you want the grass to be after you privatize the mowing of the medians? So get the service levels right, get the benchmarks right, have the numbers right, and then you can do it correctly, and you occasionally got those wrong.

Nick Gillespie: Let's talk about the next frontiers in public-private partnerships … I mean, actually it's more making government more efficient. How does The Responsive City, your 2014 book, deal with that? Or what is that about?

Stephen Goldsmith: I think we're at a really interesting moment where public-private partnerships could blossom in a pretty dramatic way. If we have technologies that are highly refined. Let's say, go back to water and wastewater, so we put sensors in pipes. We know where the leaks are. We know where the pressure. We know when the water hydrant is gonna be low. We can anticipate a problem and fix it before it occurs. We have a sensor on a bridge that says, "This bridge is vibrating too much in Minneapolis, but it's gonna fall down if you don't come fix it, right?" A streetlight that says, "I'm about to burn out. Come fix me before I burn out, right? So the public/private partnerships and what we talk about in Responsive City is how to use data, how to use data analytics, how to use sensors in order to anticipate problems and solve them before they become serious?

Nick Gillespie: What are the chief impediments to pushing forward on using big data, on using … On pushing this forward? Where's the resistance?

Stephen Goldsmith: The impediments generally are perceived to be, "Is this hostile to labor?" And our experience was, it wasn't hostile to labor at all. In fact, our labor, as it became more productive, earned more money. What we said is we don't need as many managers and we need more technology. So as we look at the uses of technology, we're having a pretty high attrition and retirement rate in the public service, right? Because of the age of the average public employee. So you don't have to lay off anyone. What we're basically saying to the employees is, "As a result of partnering with a private sector, as a result of getting more technology, as a result of using predictive analytics and sensors, we can make your work more effective, therefore you win and the taxpayer wins.

Nick Gillespie: As workers, in the public sector like the private sector generally as they become more productive, which technology help with, they'll be paid more.

Stephen Goldsmith: None of that 400 million dollars we saved was from reducing the wages of employees, employees attritted, they retired, they may have decided they didn't want to work as hard as the private sector made them work, the managers thinned out, but what happened is they became so much more productive that they could win and the taxpayers could win. And data and technology and mobile devices and the like let you do that today in ways that we hadn't even dreamed of.

Nick Gillespie: Looking at a national level, Donald Trump has talked about a trillion dollar infrastructure investment program. Not clear what the details are or anything. Is that the type of thing that should be done exclusive through public-private partnerships?

Stephen Goldsmith: Right. So if you look at public-private partnerships and you think about this trillion dollars and everyone's a little confused about what the trillion dollars is, but somebody's gotta pay back that money, right? The problem with infrastructure is not that you can't borrow the money. There's plenty of people willing to loan you the money, but a mayor or a governor has to pay the money back. So if we thought about public-private partnerships the following things happen. A, there is money locked in those assets like water or wastewater or airports that could be taken out of operations more effectively and used for that service they'll like. Two, if you do public-private partnerships you build faster and less expensively and with more value engineering. And three, you have lifecycle costing.

So regardless of how much money it is that Washington ends up doing, and I don't know how much that will be, it can't be done effectively without public-private partnerships, both for purposes of paying back the money and for purposes of maintaining the asset.

Nick Gillespie: And kind of getting the money in the first place, right? I mean, you can always borrow, but if there are firms that are willing to build roads or expand road capacity or take over water treatment, they're putting in a lot of the money, right?

Stephen Goldsmith: Well, yeah. Firms are willing to put money into equity. They want to partially own these assets. The same firms are saying, "Look, I'll maintain that asset for 20 years so you don't have to worry about me building it in an inferior way so that the cost of maintenance is transferred to the public sector. And also in terms of water and wastewater, airport privatization and the like, we see great new revenue sources that can be produced to help pay back those funds.

Nick Gillespie: Is that one of the biggest lifts, though? I mean, it seems to me it's kind of like this shift from free TV to cable TV. It's hard to do and now nobody would ever go back to free TV. Is there a turn there that we have to make that's gonna be hard to do?

Stephen Goldsmith: Well, it'll be hard to do because there's a lot of support in the status quo, right? If anybody had any idea how inefficiently the public sector does capital assets, and I don't mean corruptly, I just mean efficiently. So you have a long procurement to hire somebody to design it and long procurement to hire somebody to build it, then somebody has to maintain it, probably the government, right? There are handoffs at each of those areas. And so all of those handoffs, all of that inefficiency can become more efficient. A public-private partnership says, "Here's the scope of what we want", the mayor says, "You tell me how you're gonna build it, how you're gonna maintain it, how you're gonna finance it. I'll decide whether the service levels are right, that fairs are right, the fees or the tolls, and the service is right."

Nick Gillespie: Well, we'll leave it there. Thanks so much for talking with us. Mayor Stephen Goldsmith, the recipient of the 2017 Reason Foundation's Savas Award.

Stephen Goldsmith: Thank you very much.