Tag Archives: contracting out

Reich’s Rules

What American politicians call privatization has been a focus of much my academic work.(If you go to the “Academic papers” section of this blog and search for privatization, you’ll find a lot of entries.)

I phrase it as “what American politicians call privatization” because–as Morton Marcus pointed out to me years ago– genuine privatization is what Margaret Thatcher did in England. She sold off government-owned assets like railroads and steel mills to the private sector, after which they were private. They paid taxes, and either prospered or failed, but government no longer had much to do with them.

What Americans call “privatization” is very different. The accurate term is “contracting out” –and it refers to the decision by government agencies to provide government services through for-profit or non-profit surrogates. That process should not be confused with procurement–no one expects city hall to manufacture its own computers or the myriad other items it requires in order to function. (Admittedly, the line can get blurry: contracting with a private paving company to fill potholes, for example. But few privatization critics are troubled by those long-standing practices.)

It is important to recognize that when a government agency contracts with a surrogate to provide services that the agency is legally required to provide, government remains legally responsible for the proper delivery of those services.

Robert Reich recently enumerated five rules that should govern these decisions. His rules are very similar to those on my class lecture on the subject.  It should be obvious, for example, that government shouldn’t contract out when keeping a service in-house will be more efficient and cost-effective.

Other rules are less obvious, but no less important.

  • Don’t privatize when the purpose of the service is to bring us together – reinforcing our communities, helping us connect with one another across class and race, linking up Americans who’d otherwise be isolated or marginalized.

 This is why we have a public postal service that serves everyone, even small rural communities where for-profit private carriers often won’t go. This is why we value public education and need to be very careful that charter schools and other forms of so-called school choice don’t end up dividing our children and our communities rather than pulling them together.

  • Don’t privatize when the people who are supposed to get the service have no power to complain when services are poor.

 This is why for-profit prison corporations have proven again and again to violate the constitutional rights of prisoners, and why for-profit detention centers for refugee children at the border pose such grave risks.

  • Don’t privatize when those who are getting the service have no way to know they’re receiving poor quality.

 The marketers of for-profit colleges, for example, have every incentive to exploit young people and their parents because the value of the degrees they’re offering can’t easily be known. Which is why non-profit colleges and universities have proven far more trustworthy.

  • Don’t privatize where for-profit corporations face insufficient competition to keep prices under control.

 Giant for-profit defense contractors with power over how contracts are awarded generate notorious cost overruns because they’re accountable mainly to their shareholders, not to the public.

Perhaps the most troubling contracting practices involve the military; contract soldiers are uncomfortably similar to mercenaries, and the growing use of private companies in America’s  various wars and military actions generates a number of very thorny issues, a topic I’ve explored elsewhere.

One of America’s many overdue conversations should address what services we expect  our various levels of government to provide and the nature and extent of the evidence needed to support a decision to outsource service delivery.

 

 

 

Up In The Air…

Every once in a while, the Indianapolis Star actually carries something we can consider news. (Not often: as I skimmed the paper the other day looking for actual information about the city, municipal and/or state government, area schools, or other coverage that could be classified as news, I came across several sports stories and an article–I kid you not–about a local family being reunited with their lost cat….)

One recent article that was newsworthy raised questions about privatization and a living wage.

The article began by profiling one of the baristas who works at the Indianapolis airport, noting that like most of the airport’s workers, she makes 10.50 an hour, and has to work two jobs in order to make ends meet.

In August, the City-County Council passed a proposal that sets a $13 “living wage” for city and county staff members. There are 365 workers earning $9.13 to $12.98 per hour who work for the city and county that will be eligible for pay increases.

But not everyone who works for the City will see a raise.

Reed, and nearly 100 cashiers, coffee baristas, janitors and service workers at the airport, argue that the city’s recent move to increase municipal workers’ minimum wage to $13 an hour should apply to them, too.

However, because the Indianapolis International Airport — ranked the top airport in the country five-straight years — has outsourced its labor to private companies through public-private partnerships, airport workers will not see those wage increases.

The article noted that airport privatization began with former Republican Indianapolis Mayor Stephen Goldsmith in 1995.  Ours was the country’s first full outsourcing of an airport. Goldsmith declined to comment on the Star’s report, but was quoted on the subject from a previous article:

 “I wanted to market-test whether a private company that specializes in airport management, with access to worldwide technology and best practices, could produce more customer satisfaction, better airline relationships and more net revenue while holding down increases in passenger enplanement costs,” Goldsmith told Governing Magazine in April.

Goldsmith was a major proponent of what is incorrectly called privatization (real privatization occurs when government simply “sells off” a function to the private sector a la Margaret Thatcher in England, and is thereafter not involved). What we call privatization is really contracting out. Government is still responsible for supplying the service, but rather than employing people directly, it hires companies or organizations whose employees provide it on government’s behalf.

One of the arguments for these arrangements–sometimes called “third-party government”–has been that private companies could do the work more cheaply. More recent research suggests the savings are largely illusory when the costs of negotiating and monitoring the contracts are factored in. (Unlike government, private companies bidding on government contracts also have to pay taxes, which adds to their costs.)

To the extent savings are realized, it’s usually because the private sector employees are paid less than their government counterparts.

The public administration literature suggests that actual experience with contracting has diminished its attractiveness to government agencies. Management problems, loss of institutional competence and other unanticipated consequences have taken the bloom off that particular rose, and many services that were enthusiastically outsourced by proponents like Goldsmith are being brought back “in house.”

That national reevaluation isn’t likely to be much comfort to the underpaid airport workers who are doing public jobs that benefit their communities but not making the same wage that they would make if they were on government’s direct, rather than indirect, payroll.

Connecting the Dots–Inequality Edition

I am one of those tiresome academics who has repeatedly criticized the so-called privatization of government functions.

I say “so-called” because what Americans call privatization is no such thing. Actual privatization would require government to sell off or otherwise abandon a particular activity, and let the private sector handle it. (Much like Margaret Thatcher selling England’s steel mills to private-sector interests.)

What Americans call privatization is more accurately described as contracting out; government retains responsibility for a service and the obligation to fund it, but delivers the service through a third-party surrogate, either for-profit or not-for-profit.

There are certainly instances where choosing such a surrogate makes sense; unfortunately, we Americans tend to embrace fads in government as elsewhere. So rather than engaging in analyses of risk and reward for each proposal to contract, too many public entities have accepted the argument that nongovernmental actors will do a better job, or be less expensive, no matter what is to be outsourced.

Research results strongly suggest otherwise. Sometimes, contracting is appropriate; often it is not.

With the publication of a new in-depth report, In the Public Interest has illustrated the often pernicious effects contracting can have on equality. The report centers on five ways in which contracting out exacerbates inequality:

User-funded contracting. Public budgets have tightened all across the country, largely due to the American public’s unwillingness to pay taxes to support services we continue to demand. As a result, some jurisdictions are allowing contractors to charge fees to end-users to subsidize or completely fund an outsourced service.

This is increasingly happening in areas where citizens have little to no political voice. In private probation, for example, offenders are expected to pay for everything from their own drug testing to the costs of ankle-bracelets, despite the fact that as a group they lack the resources to do so.

Rising rates. Residents of places that have privatized critical public services such as water or transit have experienced steep increases in their rates. Some of these increases can be attributed to the profit motive, but in other jurisdictions—like my own—the increases mask desperate, clandestine efforts to shift the costs of public infrastructure from taxpayers to ratepayers. (In Indianapolis, the city sold the water company, which—thanks to deferred maintenance needs—had a negative value of several billion dollars. As part of the deal, the purchasing entity, a nonprofit, “adjusted” its payments in lieu of taxes (PILOT) obligation, upward. That allowed the city to float bonds, repayable from the artificially increased PILOT, and use the proceeds to pave deteriorated streets. The result was to shift the costs of infrastructure repair from general tax revenues to utility ratepayers. It would be hard to think of a more regressive strategy.)

Cutting the social safety net. Programs like Medicaid and food assistance are often subjects to privatization experiments, and the report notes that the impact can be
tragic. Contractors have increasingly taken over critical social services like child foster care services, welfare, the distribution of food assistance, Medicaid, and child support services. But as the report details, the complex social problems faced by families and children who utilize these services are difficult to address using a privatization model, and many social services contracts have financial incentives that inadvertently perpetuate cycles of poverty and divert money from critical programs to corporate profits.

Indiana, again, provides an example. Then-Governor Mitch Daniels attempted to outsource welfare intake; as a result, many recipients were denied benefits to which they were clearly entitled, and others endured long waits and confusing, burdensome processes. The results were so negative that the effort was discontinued, but the ensuing lawsuits cost the state millions of dollars that might otherwise have provided needed services.

A race to the bottom for workers. One of the recurring criticisms of privatization has been that, when private companies take control of a public service, they often slash wages and benefits to cut costs, replacing stable, middle class jobs with poverty-level jobs. The report confirms the criticism.

Similarly, the report underlines increasing recognition that privatizing schools, especially, increases socioeconomic and racial segregation. As the text notes, introducing private interests into things like schools and public parks can—and often does–radically impact access for certain groups.

The report is a sobering reminder that there is a critical difference between procurement—government purchases of such things as street paving or computers—and contracting out delivery of core governmental responsibilities. It turns out that “Weakening democratic control over public goods and services increases economic, political, and racial inequality.”

 

 

The Light Begins to Dawn…

America has long had a “bandwagon” approach to policy; our penchant for simple solutions leads us into all manner of fads: the New Public Management, outsourcing and privatization, untested education “reforms,” and others.

For the past couple of decades, the answer to virtually every management challenge has been “privatization.” As I’ve indicated previously, there are times/situations where contracting out (which is what our version of “privatization” really is) makes sense, but thanks to our penchant for jumping on the bandwagon, government agencies have employed this method of delivering public services without the sort of rigorous analysis–or often any analysis–that should accompany decisions to turn tax supported programs over to private vendors.

Lately, however, citizens and public officials are beginning to recognize the downside of inappropriate contracting. A newspaper in North Carolina recently editorialized on the results of that state’s privatization of mental health services:

[A]ccess to services was confusing; services became unavailable to clients, and the number of people with mental illness who ended up in emergency rooms and jails significantly increased.

According to the Orange County Register, privatization’s consequences for Costa Mesa, California, were similar.

When the Costa Mesa City Council attempted to privatize large portions of municipal operations, it did so without conducting any analysis about whether its actions would save money – or whether it would cost more, which it did….

Southern California has provided fertile ground for other failed outsourcing initiatives. In the 1990s, Seal Beach thought it was on the cutting edge of local government privatization. The beach community managed to save about $30,000 in its first year of privatized jail services, and local officials were quick to pat themselves on the back for what they thought was really smart governing.

But what privatization delivered was two decades of lawsuits, two in-custody deaths, improper responses to medical emergencies, inadequately trained staff and a steady stream of violations uncovered by state regulators and health officials. Privatization of Seal Beach’s jail has resulted in so many serious problems that the city is now spending a reported $1.2 million just to start the process of bringing jail services back in-house.

The county of Orange’s most recent information-technology debacle provides yet another cautionary tale. After the county entered into a staggering $132 million contract with Xerox to upgrade phone and computer networks, performance by Xerox was so poor that the Board of Supervisors appears to be poised to sue over the broken promises and cost increases.

The article cites other examples, and notes that enthusiasm for contracting may finally be on the wane:

Across the country, governments of all sizes are rethinking the outsourcing of services as they discover its many unwelcome consequences, including lack of transparency, cost overruns, lack of competition for contracted services, and glaring weaknesses in accountability and oversight.

It’s hard to argue with her conclusion:

Services provided by public entities should be judged by what is best for the health, well-being, civil liberty and security of the public. Inserting a profit motive is an open invitation to graft and corruption and, more often than not, results in services that cost more and serve the public less.

We’ve noticed.

A Lesson From Canada

I frequently post about the problems with “contracting out” by units of government–a process often misnamed “privatization.” (Contracting has also been a focus of my academic research, and my scholarly articles addressing privatization are archived on this blog under “Academic Articles.”)

The bottom line is that sometimes contracting makes sense, and sometimes it doesn’t. But even in situations where contracting is appropriate, the practice raises significant management issues that deserve attention. The “how” is every bit as important as “whether” and “when.”

So I was interested to see that Canada’s Project on Government Oversight recently issued a National Action Plan for Contracting Reform–a proposal that sets out 8 steps intended to “improve government contractor transparency and promote responsible contracting.”

Those steps–which I wholeheartedly endorse–are:

• An improved Federal Awardee Performance and Integrity Information System (FAPIIS) database.
• Publicly Release Contracting Documents
• Post Contractor Past Performance Reviews on FAPIIS
• Publicly Release the DoD Revolving Door Database
• Publicly Disclose Contractor Political Spending
• Publish an Annual Report on Defense Contracting Fraud
• A requirement for the government to inform FOIA requesters that specific contractor information has been withheld or redacted
• Ending Dun & Bradstreet’s control over how the government uses DUNS data

All of these steps are warranted, but the disclosure of prior performance reviews may be the most important. Units of American government preparing to enter into contracts to deliver services through private providers need to take a page from our neighbor to the north, and require those bidding on government contracts to document their prior performance.

Performance information is especially important when the contracts involve children. In Florida, to its credit, Palm Beach County recently tightened its rules on charter schools by requiring charter school applicants “to disclose any prior history with failed schools and prove they offer innovative programs.”

The underlying premise of government contracting is that the private sector can perform a given service or function more efficiently at the same or lower cost than government. It seems only reasonable to require solid evidence that the contractor can actually do so.