How Does Park Privatization Work?

A concession contract should be thought of as a commercial lease.  The concessionaire will sign a contract allowing it to run the park for profit, and then pay the public entity a rent in the form of a percentage of fee revenues. With a few exceptions, the private company pays all the expenses associated with operating and maintaining the park and is allowed to keep the customer fees paid at the gate as revenue.

When a retailer leases a store space in a mall, it is not allowed to do anything it wants with the space.  The landlord will set strict guidelines, including the hours the store must be open, standards and approval processes for signage and store fixtures, limitations on merchandise (e.g. no adult books), etc.   A park concession agreement works in much the same way.  A typical operating agreement between a public entity and a concessionaire can run well over 100 pages of standards and guidelines, from fee collection and refund procedures to uniforms to customer service to bathroom cleaning frequency to operating hours.  Public authorities retain an immense amount of control over the appearance and service level at a privatized facility, and generally have procedures in place for terminating contracts where private companies under-perform the standards.

In crafting the lease agreement, one of the key issues that varies case by case is the division of labor for major capital maintenance.  In shorter term contracts, say 1-5 years, the public authority generally retains responsibility for major maintenance, as it is nearly impossible for a private entity to get a return from large capital expenditures in such a short period of time.  Longer terms of 10-30 years allow the private entity to take on more of the major maintenance and capital improvements (most ski areas are a good example).

The only responsibility private companies typically don’t take on is law enforcement.  Private operators will enforce rules and try to prevent unsafe or dangerous behaviors, but actual arrests and use of force require a call to law enforcement (no different than, say, at a hotel or restaurant).

Does the Private Company Take Ownership of the Park?

No.  The parks and all the facilities remain the property of the public entity.   The park operator merely signs an operating lease, with strict rules, wherein it operates the park, keeps the fees paid by the public, and pays the state a “rent” based on a percentage of the fee collections.  Even when private companies invest in facilities, like this store building and cabins, these facilities become the property of the public at the end of the contract.

How Does the Private Company Get Paid?

With a few exceptions, most recreation concessionaires are paid entirely by user fees, ie by the fees at the gate, for camping, and from certain retail sales within the park.  The concessionaire not paid by the government, and receives no subsidy.   In our company, 100% of the revenues we receive is from visitors, which means that if we don’t run a good operation that is attractive to visitors, we don’t make any money.

How Does Privatization Help Keep Parks Open?

Generally, private operators are more efficient than the government in the park operations.  In part, this is because these companies have focused their whole business model on park operations, so they have developed proven processes for park management.  In part, this is because a private work force tends to be less expensive and more flexible than civil servants.  Just as one would not hire a Fortune 500 CEO to do one’s web design, park employees with masters in environmental science are not ideal for manning gate houses and cleaning bathrooms.  Perhaps more importantly, civil servants typically are paid all year long, even when the park is not very busy or is closed.  In contrast, concessionaires have identified a large pool of workers who are flexible and actually are looking for seasonal work.

Using these efficiencies, private operators take on public parks that are typically losing money for the government (ie require a subsidy to operate from the general revenue fund) and convert them to a financial asset, generating cash for the government in the form of rent payments will still serving the public.  For example, our company proposed taking over six Arizona state parks that were losing over $700,000 a year.

Perhaps most important, privatizing parks takes them off the government budget, and makes them immune from being pawns in government budget battles.  Typically, threatened park closures are used as leverage by government officials to increase taxes in tough times, since the public nearly always reacts very negatively to such threats.  Under private management, the parks are no longer dependent on money from general revenues, and so no longer fall victim to such budget battles.  In the 1990′s, when a disagreement between President Clinton and the Republican Congress shut down the government, the only federal parks open were those operated by private concessionaires.

To learn more, see this article on a better model for making state parks financially sustainable.

Won’t Private Companies Just Let the Facilities Run Down to Make More Money?

This point was made a while back in opposition to a proposal for park privatization in Utah:

Mary Tullius, director of the Division of State Parks and Recreation, doesn’t think so.  She says the state prides itself on giving Utah families affordable destinations like state parks. And if those destinations were made private, the quality would suffer.

“History has told us that whenever you privatize something people are so focused on making money that they don’t pay attention to the infrastructure or to the maintenance of the facility. What happens after five years and they’ve run something and they haven’t taken care of it and they turn back to the state? And then the state has a much bigger problem,” she said.

The number one problem we have in taking over government parks is that they are usually terribly run down.  By the time the government is finally willing to turn to private companies for help (generally in the category of “last resort”) the government has typically been ignoring the capital maintenance needs of the parks for years.  Nowadays, as a condition of taking over the operation of public parks, our company is generally asked to make a large up-front contribution to tackling deferred maintenance in the park.  In fact, in our newest contract with the Tennessee Valley Authority, we actually have rebuilt the entire park and campground from the ground up.

I am sure there are some private operators who have let things run down, but in general this has occurred when the public authority has insisted on giving the operator a series of 1-year contracts rather than a real 10-20 year contract.  Who is going to replace the roof if the contract only lasts for another 6 months.  On the other hand, who is going to fail to keep things nice if he knows he is going to be there for another 15 years?  McDonald’s doesn’t make money by letting their restaurants run down or having dirty bathrooms, and neither do we.

Won’t Private Companies Just Build a McDonald’s in Front of Old Faithful?

This is one of my favorite questions, because it is absolutely predictable that it will get asked whenever I discuss park privatization with a group of government officials.  Typically I give 3 answers:

  1. It simply is not possible.  Under the terms of a typical operating contract, a concessionaire cannot change fees, facilities, operating hours, or even cut down a tree without written approval form the parks organization.
  2. It is generally not in the company’s best interest.  Generally, the parks we take over are popular for their natural or historical attractions.  Diluting these attractions in any way is just business suicide for operators.
  3. It doesn’t happen.  We operate over 100 parks in this manner across the country and you would not be able to tell the difference between the facilities we manage and any other public park.  You are encouraged to visit one of the sites we run.  Don’t warn us in advance, but if you contact us afterwards, we will reimburse your use fee.

We aren’t trying to take ownership of the land.  We aren’t trying to pave the wilderness.  We aren’t trying to build condos in front of Old Faithful.  We are in fact willing to accept whatever recreation mission or preservation mission the public owner of the park sets and manage the park to that mission. If the site is to remain primitive, we keep it primitive.  If the public agency wants new facilities, we help bring capital investment in new facilities (all approved in advance by the public agency).

Will Private Companies Jack up the Entrance Fees?

Generally not.  First, operators cannot raise fees without their government landlord’s approval.  Second, public recreation is generally attractive to visitors because it is low-cost and offers real value — raising prices and reducing value would only drive customers away.  2009 was a very big year for public recreation precisely because, in a recession, low-cost public recreation options gave many families on a budget a chance to have a quality recreation experience.  A couple of comparisons:

  • In California, the State Parks agency charges as much as $30 for a no-hookup camp site.  Our company charges no more than $20 for any comparable camp site we operate in the US Forest Service.
  • in Arizona in 2011, we dropped visitation fees at the day use parks we operate by a dollar a vehicle, to a maximum of $9.  In the same year, Arizona State Parks raised summer gate fees at several of the parks they operate from $10 to $20.

It is much easier to keep prices low when one’s cost position and financial situation are sound.

Does Privatization Just Cherry Pick the Best Parks, Leaving Agencies Worse Off

A researcher for ASU’s Morrison Institute wrote me, as part of an email exchange:

“There is a fear, which I share, that privatization will peel off those parks that are either profitable or close to profitable”

This is a criticism I hear quite a bit, though I am not sure from what experience this even originates.  Some concerns expressed to me have real origins – for example, there have been poor-quality concessionaires and there have been local politicians who gave developers sweetheart real estate deals on public parks land, against the interest of the general public.  But I am not sure I know of any cases where public procurement strategy has been so short-sighted that it made this kind of mistake.  My response:

  • We and other companies operate many whole “systems” in the US Forest Service, the largest public recreation agency in the world – a system being all the campgrounds and facilities in a geographic area.  In fact, this is really the only way the USFS offers parks nowadays in concession contracts, as regional mixes embodying all the parks under their umbrella, large and small.    In these contracts, money-losing small facilities are combined with larger facilities into a contract that can be economic while not leaving any parks stranded.  I operate campgrounds as small as 6 spaces, which clearly are not profitable on their own, but I do so as part of a larger contract.
  • While I have offered on some or all of 6 Arizona State Parks (ASP) parks, I did so to get ASP’s attention.  In addition to these 6, my offer very clearly states that I could likely run many of the smaller ones as well in a package with these 6 or 7, but that I needed a bit of help from ASP with some simple due diligence (e.g. electricity bills).  The only thing stopping me from offering on a large spread of both small and large parks is the absolute resistance of ASP to even talk to me.  There are some limitations to what I can offer totally blind, but these limitations have more to do with the lack of cooperation from ASP than any inherent limitation in our or a similar company’s ability to operate a broad mix of parks.
  • I am not sure why it is somehow gutting ASP to take money losing parks off their hands, even if they are close to breakeven.  First, they are still losing money.  Second, we are proposing to pay rent to the state — it would surprise me if a multi-year competitively bid contract for Alamo Lake or Lost Dutchman went for less than 10-12% rent.  This means converting a $10-$20 thousand dollar loss to a $30-$40 thousand gain for the state at each park.
  • Companies like mine don’t “peel off” parks.  How could we?  We bid on parks packages as offered by public agencies.  There is nothing stopping AZ State Parks from offering a package of parks with the mix they want, not what private companies might want. This is what other thoughtful public recreation agencies do.  Positing any other outcome is merely to assume ASP is not competent in their procurement strategy.