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John M. Zervos

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Detroit in Transition: The Restructuring of Governance Through Privatization and Corporatization

Posted: 02/21/2012 4:58 pm

The national media has been closely watching the social and economic trajectory of Detroit and other urban cities in Michigan. Many efforts to recreate and transform these post-industrial cities have been well documented. Less publicized, however, is a transformation that is occurring throughout the state -- the restructuring of governance through privatization and corporatization.

On March 23, 16 experts from around the country will convene at Wayne State University Law School to discuss how Detroit and other cities in Michigan are experiencing a transformation in the way civic structures operate and allocate resources.

So what are privatization and corporatization? Academics have spent careers analyzing these concepts. But at the most basic level, privatization is the process by which management of a publicly owned resource is outsourced or a publicly owned entity is sold to a private entity. Corporatization is a paralleled concept -- an approach to resource allocation, whether public or private, characterized by increasingly centralized and hierarchical decision-making.

Cash-strapped cities seek structural change. Transformation in governance structure can be traced across various sectors of Michigan cities. Advocates of corporatized and privatized models see previous models as failed structures and change as the only viable option for system sustainability. However, critics warn that while profit-driven governance structures may shore-up short-term finances, it does so by replacing the social mission of traditional models of governance and shifts accountability from residents to investors.

Detroit is at the center of this change, and other parts of the country should take note. Asking the right questions is the first step. Is Detroit in need of corporate restructuring under an emergency manager? Would The Detroit Water and Sewage Department be more efficient under a privatized system? Will the acquisition by a for-profit corporation save the once nonprofit Detroit Medical Center? If transformation is taking place, if existing models of governance in local government, public works and health care are transforming into newer models through complex processes of corporatization and privatization it appears critical that the behavior and objectives of varying governance types be analyzed.

The Corporatization of Local Government

Public Act Four, "The Emergency Manager Law," has earned widespread attention on both local and national levels. Scholars, pundits, politicians and community groups have been watching as Michigan cities transform under new management. Local cities have an important function in developing and maintaining mechanisms for allocating resources to its residents. Emergency managers may intervene in faltering cities and possess unilateral tools for immediate change, including increased powers and specific training in corporate efficiency and privatization.

These issues are at the core of economically struggling Michigan cities. The traditional model of governance functions by allocating resources through city-managed departments with an emphasis on community input. The traditional model is concerned primarily with its social mission -- to provide adequate quality and a voice to citizens. However, city deficits alarm some who call for a complete overhall in the way resources are allocated within cities. Proponents of change see efficiency and competition as the strongest arguments supporting outsourcing management or selling assets, and propose that corporatization through privatization of resource allocation can shore-up the finances of ailing cities. This new system of governance under an emergency manager is marked by centralization of authority through executive dominance and hierarchical decision-making.

Privatization of Water and Health Care

Cities that are severely struggling economically are met with the probability of being restructured under the corporate-emergency manager model. Financially insolvent city-departments and large nonprofits are offered a similarly related transformation -- privatization.

The Detroit Water and Sewage Department serves millions of people in Southeast Michigan. The City of Detroit owns the system and decision-making is brokered through a partnership between the City of Detroit and the Detroit Department of Water and Sewage. There has been federal oversight of the system since 1977. On November 4, 2011, Federal Judge Sean Cox granted broader power to the director of the Department, including the ability to sell publicly owned assets and privatize services. These actions have led many to believe that further regional control and, ultimately, a fully privatized model of system governance, are inevitable. But change has consequence. The behavior and objectives of water allocation under government control/ownership and under a for-profit private entity must be compared. Through such comparison, issues such as quality and financial solvency under varying governance types can better be explored.

A similar story unfolds for health care in the City of Detroit. On November 13, 2010, Michigan Attorney General, Michael Cox announced approval for sale of the nonprofit Detroit Medical Center to the for-profit Vanguard Health Systems. The DMC management approved the sale as a necessary transition from the former cash-strapped, non-profit model of health care governance to a more sustainable model. However, critics of the conversion warned that the non-profit system was essential in its social commitment to the indigent, that alternative avenues of credit could be obtained, and that sustainability of for-profit models is not guaranteed.

Is the nonprofit system of health care worth saving? Examining the fundamental questions concerning the nature and characteristics of nonprofit and for-profit governance systems is the place to start. Support for nonprofits is largely based on the theory that behavior is derived from the social mission of the nonprofit -- that nonprofits are uniquely structured to care for the under-served. As Detroit shifts toward more private health care, with nonprofits and for-profits competing within the same market, the underserved may suffer the most. However, an alternative theory diminishes differences in service between the systems of ownership and in fact for-profit models remedy the failures of the nonprofit system, focusing on efficiency and development of services.

The Symposium

The March 23 symposium at Wayne Law will provide a unique forum to develop this dialogue. The symposium is free and open to the public and participation will be highly encouraged. For more information please visit this website.