The Legislative Research Division, a nonpartisan department of Michigan's state government tasked with researching various policy issues, has produced a report highlighting a few of the Great Lakes State's more notable attempts at privatization.
The report, entitled "Privatization in Michigan: An overview of State Efforts to Privatize Liquor Distribution and Warehousing, the Accident Fund, and the Biologic Products Division," is a balanced, historical review that should prove useful for the future of privatization in our state.
Published in October of 2001, the document lists arguments for and against privatization and sets the stage for more in-depth analyses by offering a sweeping account of Michigan's fiscal health from as far back as January 1983. One of the most salutary services of the study is to expose the negligence of the State of Michigan in failing to impose any uniform system of monitoring to determine whether its privatization attempts have been successful-or even whether they were implemented at all.
For example, the report details Gov. Engler's Privatize, Eliminate, Retain, or Modify (PERM) process, implemented in his first term, which used sound methodology for determining whether or not a state activity should be privatized. But because no benchmarks were set up for marking improvement in cost and performance for programs and services privatized, the analysis of whether PERM was a success can only be based upon erratic data resulting in wildly differing assessments. While a successful monitoring system should have been part of PERM from the start, the only evaluations available are from entities other than those that did the privatizing, namely, the Senate Fiscal Agency and the Council of State Governments, a nonpartisan association that shares information among state governments. From the Legislative Research Division report:
From January 1993 until its abolition as an independent unit in September 1997, the Privatization Department supervised the PERM process. Over this period, according to the Senate Fiscal Agency, 15 departments submitted 67 PERM reports and 51 percent (34) of said reports were submitted by three departments: Military and Veterans Affairs (14), Transportation (13), and the Department of Natural Resources (7). In addition, among the 67 PERM reports there were only 38 recommendations for privatization (57 percent), 3 for elimination, 19 for retention, and 7 for modification.
Due to the lack of systematic follow-up, the fiscal agency reported that it was very difficult to ascertain the number of recommended privatizations that were actually accomplished. Of the 38 activities recommended to be privatized, the departments identified only 24 activities that were actually privatized, or 63 percent of the activities recommended for privatization.
The Senate Fiscal Agency findings are very different from those compiled by The Council of State Governments (CSG). In 1997, CSG conducted a nationwide survey of state executive agencies to determine the number of programs and services that had been privatized during the past 5 years. Among the 11 Michigan executive agency respondents, CSG reported that 119 services had been privatized. This number is significantly higher than the 38 recommendations for privatization and the actual 24 activities that had been privatized as cited by the Senate Fiscal Agency.
Only those privatizations that were in some way controversial and therefore of interest to news media received a level of public attention such that their success or failure was sufficiently documented. Perhaps the most controversial of Gov. Engler's privatization initiatives, cited in Privatization in Michigan, was the state liquor and warehousing distribution system. After years of debate, legislative proposals and counterproposals, one lawsuit, and even a restraining order, the system was privatized in January 1997.
Despite general approval of the effort by merchants, MPR criticized the plan at the time for not going far enough. "The problem is that the LCC (Liquor Control Commission) did not leave the business of liquor distribution. Truly effective privatization would have meant commercialization-walking away from the business lock, stock, and (half) barrel." For more on this subject, see "Liquor Privatization: Pouring a 200-Proof Opportunity Down the Drain" in the spring, 1997 edition of Michigan Privatization Report.
Another prominent example detailed in Privatization in Michigan occurred in 1994 when Blue Cross/Blue Shield of Michigan (BCBSM) paid the state $255 million to acquire the Accident Fund of Michigan, assuming the liabilities of this state-owned workers' compensation insurer, in what was at the time the largest privatization of a public agency (state or local) in U.S. history. Upon taking office, the Engler administration almost immediately pushed for privatization of the Accident Fund, an idea that was first advanced in a study by the Mackinac Center for Public Policy (for more on BCBSM see the late winter edition of MPR 2001-01).
The most current section of Privatization in Michigan details the privatization of the Michigan Biologic Products Institute (MBPI), which was purchased by the Bioport Corporation. The reason: The September 11 terrorist attacks on America highlighted the need for Anthrax vaccines, of which Bioport is the only producer. The report brings to light facts that were not widely circulated. For instance, the state of Michigan was paid only $14.4 million for MBPI, "instead of the nearly $25 million that the [Engler] administration reported."
This highly readable report is the first to provide an overview of the history of privatizations carried out by the state of Michigan. It offers a degree of detail that will prove helpful not only to those looking for examples to follow in the future, but also to those trying to assess the many pitfalls that can stymie efforts to return public assets to the private sector. Unlike many reports, this one names names-and for that reason deserves a place on the bookshelves of Michigan lawmakers.
Michael LaFaive is senior managing editor of Michigan Privatization Report.
