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Attempted takeover 'all wet'
By:
Dan Ewing
As
cities across the nation face mounting deficits, farsighted government leaders
are increasingly seeking free market solutions in the delivery of public
services.
While policymakers possess the willingness to deliver public services, they lack
the incentive to innovate and reduce costs that are necessary for private firms
to survive. Why does the Lexington-Fayette Urban County Government (LFUCG)
insist it can operate differently? As if Fidel Castro were advising it, LFUCG is
attempting to steal the Kentucky-American Water Company from its rightful owners
and convert it into a government entity.
This blatantly socialistic scheme offers Fayette County’s taxpayers a lose-lose
proposition. Not only will they be stuck with a multi-million dollar legal bill
necessary to pull off this theft, but they also will be forced to pay increased
water rates to subsidize a bond issue needed to complete the transaction. How
can LFUCG deliver water at the same rate to its citizens if it substantially
increases its costs? Fidel would have a tough time explaining this mathematics
to third graders!
George Raftelis, LFUCG’s hired gunslinger, predicts this theft will cost
taxpayers $158 million. Raftelis also estimates that municipal bonds issued at
an interest rate of between 4.75 percent and 5.25 percent are necessary to
complete this Tony Soprano-like transaction. Given these parameters, the annual
principal and interest payments on this bond would approximate $10 million per
year. Is this a realistic estimate? Not if LFUCG pays the market price for these
assets.
Normal acquisitions of corporate assets generally are priced on a reasonable
valuation agreed to by a willing seller and an able buyer. Kentucky-American
Water Company believes its market value to be between $500 million and $750
million, and it has no interest in selling.
Given this huge difference in price estimates between this coercive buyer and
unwilling seller, only the legal system can ascertain what this plunder would
cost water customers. No one – not taxpayers, Raftelis or the government – knows
what this takeover would ultimately cost.
LFUCG claims the profits earned by Kentucky-American Water are “drained” from
the pocketbooks of Fayette county water customers, and should be retained for
their benefit. Is Castro advising on this set of economics, too?
The water company earned a profit of $5.3 million in 2002. Assuming it earned
that same profit during each of the next 30 years, LFUCG would still have to
find $4.7 million every year to make up the difference between the estimated $10
million bond payment and the expected annual profit. That gap is sure to be
filled by water customers forced to pay much higher rates to cover the
astronomical costs of condemnation. Then, who would be getting “drained”?
How does the Kentucky-American Water Company use the monies that remain after
paying employees’ salaries and its cost of operations? Profits finance future
improvements and extensions to the Fayette County water system. Without these
profits, how would LFUCG add new subscribers and replace worn-out water lines?
Obviously these government bureaucrats have never operated a successful business
on their own. Money still doesn’t grow on trees!
Taxpayers cannot rely on government to operate a service more profitably and
efficiently than the private sector. Businesses, by their very nature, exist to
find and satisfy customers and, as a result of increasing revenues and
decreasing costs, ultimately earn a profit. Companies that do not generate
profits ultimately fail.
Governments, on the other hand, treat taxpayers like ATM machines when their
ventures fail and have no incentive to keep costs down. So, when faced with
today’s budget deficits, forward-looking government leaders increasingly look to
the private sector for help in controlling costs and delivering essential public
services.
When services previously provided by government are outsourced, the results are
often astounding. LFUCG should be looking for ways to outsource more public
services – not seize privately run operations – if it wants to better serve its
constituents.
As Indianapolis’ mayor in the 1990s, Stephen Goldsmith introduced free-market
principles in the form of competition into more than 70 different areas of
government services. These savings enabled Indianapolis to hire new police
officers, cut taxes and invest in $800 million worth of roads, bridges and
sidewalks. Among the phenomenal results were $65 million in savings during the
first five years after Goldsmith accepted bids on the city’s wastewater
treatment plants.
Instead of invoking the failed economics of communists, why doesn’t LFUCG model
innovators like Goldsmith to help them solve their budget woes? Imagine the
savings that could accrue to Fayette County taxpayers if outsourcing and
privatizing were the attitude of its government leaders?
While there are countless examples of private firms successfully performing
public services, there are few, if any, instances of public takeovers of private
firms that have produced lower costs, better services or more satisfied
constituents.
Dan Ewing is an analyst for the Bluegrass Institute.
Categories: Economic Development;
Economics, Basic;
Law;
Privatization;
Property Rights
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