VITA project raises doubts on privatization

SPECIAL REPORT: http://www2.timesdispatch.com/rtd/news/vita/>VITA

Fallout from a controversial shift to a privately run computer network has some Virginia leaders rethinking their affinity for outsourcing.

But the state, if only for financial reasons, shows no sign of retreating from what some call "government by contract."

"This privatizing has got to stop," said Senate Majority Leader Richard L. Saslaw of Fairfax County, a business-friendly Democrat. "That's become an excuse for not paying for services. . . . What are you going to do for your next act -- sell the Capitol?"

For more than 20 years, starting with a toll road linking Washington Dulles International Airport with western Loudoun County, the state has turned to the private sector to operate -- for the profit of owners and investors -- programs run by government.

The move has been hastened by partisan shifts at the statehouse and a continuing squeeze for cash, despite a $1.4 billion tax increase five years ago. Privatization deals can include up-front cash payments to the state, partly replenishing a treasury drained by other services and recession.

"To be sure, privatization cannot solve all of Virginia's budget problems, but it can play a vital role in expanding economic-development opportunities and improving the fiscal outlook for state and local governments," Leonard C. Gilroy of the Thomas Jefferson Institute for Public Policy said in an August paper urging Virginia to accelerate outsourcing efforts.

Privatization, a concept backed by both candidates for governor, is at the heart of Republican Bob McDonnell's highway-financing plan. He wants to sell the state's 75-year-old chain of liquor stores, saying it could generate $500 million. Democrat R. Creigh Deeds counters that the idea has been junked repeatedly -- by Democrats and Republicans.

Michael Likosky of New York University, an expert on privatization who has studied it across the country and overseas, believes taxpayers and policymakers are becoming wary of outsourcing. He said they generally consider privatization -- Likosky calls it "government by contract" -- effective in managing public assets, such as harbors and highways, but are leery of its usefulness in supplying services.

That apparently is grounded in widely reported delays, disruptions and disappointments in privatized services, such as Virginia's troubled experience with a Northrop Grumman-run information-technology network under a 10-year, $2.3 billion contract.

Even Virginia supporters of outsourcing say the continuing turmoil over the Northrop Grumman venture, the state's richest-ever privatization contract, has them thinking anew, if only to insist on greater public control and more accountability by business.

"We have to tread on this very easily," said Del. Harry R. "Bob" Purkey, R-Virginia Beach, head of a legislative panel investigating possible private operation of the state-owned Port of Hampton Roads -- a proposal about which he has grave doubts.

States on the vanguard of privatization are pulling back.

Indiana led the way in highway privatization with the 75-year lease of its toll road in 2006 that raised $3.8 billion for transportation. But the state is considering taking back control of its welfare-management system from IBM and Affiliated Computer Services because of gaps in service.

The credit crunch also is slowing outsourcing, killing takeovers of Chicago's Midway Airport and the Pennsylvania Turnpike. But while Wall Street and many banks are reluctant to lend, the strongest investment firms are pressing ahead. Goldman Sachs and the Carlyle Group are underwriting two of the three bids to run the Port of Hampton Roads.

Likosky, Purkey and others warn of risks, particularly on the front end of privatization proposals. Government, potentially blinded by the promise of a cash windfall, may find itself outmaneuvered by private interests with access to top-flight lawyers, financiers and lobbyists.

"The main concern is that the tail wags the dog in this area," Likosky said.

That worry is strengthening the reluctance of Hampton Roads officials to sanction surrender of the port, one of their region's defining features, to private interests. The port deal easily could dwarf the Northrop Grumman hire, carrying a price tag of $3.8 billion or more.

"We've seen too many problems with other contracts," said Purkey, referring to Northrop Grumman's hiring in 2005 by the Virginia Information Technologies Agency.

Further, some fear that port privatization is bad business -- for local government. Mayor Paul D. Fraim of Norfolk has said port localities, already concerned they're not getting enough in state aid as a substitute for taxes they can't slap on government-owned property, could get the short shrift from private operators.

Since 1995, when Virginia put in place a legal framework for privately initiated transportation projects, there have been $9 billion in improvements. They include two in the Richmond area: the Pocahontas Parkway, a financially ailing toll road largely in Henrico County, and state Route 288, linking Goochland and Chesterfield counties.

In 2002, the state adopted a law opening to private interests other swatches of the bureaucracy, such as its information-technology system. It was under this statute that Northrop Grumman won the deal to provide more than 80 agencies -- large and small -- with computers, software, servers and networks.

Despite the furor over delays, poor service and incomplete billing by Northrop Grumman, the contract is defended, even by critics such as Del. Samuel A. Nixon Jr., R-Chesterfield, as a leap forward -- one in which the cash-strapped state is the beneficiary of a big private investment.

"To me, that was one of the advantages of this approach," said Nixon, an IT expert and head of the House Republican Caucus, referring to the $270 million Northrop Grumman has spent on new operations centers in Chesterfield and Russell counties and equipment upgrades.

Contact Jeff E. Schapiro at (804) 649-6814 or .