Tag Archives: contracting out

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.

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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.

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Privatization, Truth-Telling and Easy Answers

As I previously noted, I’ve been bemused by the level of interest in prison privatization displayed by my students this semester. The subject of contracting out in general, however, is a staple of my Law and Policy course.

Use of the term “privatization” is a misnomer; the impression is that a service or task is no longer being provided by government. That is rarely if ever the case, at least in the U.S. The term typically refers to a decision by a government agency to contract with a nongovernmental business or organization to provide a government benefit. Government continues to use tax dollars to pay for that service or benefit, and remains responsible for its proper delivery.

Sometimes, contracting out makes a lot of sense. Sometimes it doesn’t. So our class discussions are not “should we or shouldn’t we;” instead, we consider when and how. 

Unfortunately, in far too many venues, what should be a thoughtful consideration of relevant factors has become yet another ideological litmus test, with predictable consequences. An example:

When he was governor of Florida, Jeb Bush privatized veterans’ health benefits. It didn’t go well. As CNN reported

Bush’s experience outsourcing veterans’ nursing homes in Florida was a case study in privatization’s pitfalls. By the time it was over, Florida officials determined the state could provide higher-quality care at a better price for taxpayers.

Despite what should have been a sobering experience (click through for the details), Bush’s campaign continues to insist on the virtues of privatization, and claim it is “the remedy” for the problems experienced by the Veterans Administration.

I’ve picked on Bush, but there are hundreds of other examples, because we voters reward politicians who have bumper-sticker remedies for what ails us–politicians selling simple answers to complicated problems. (Are teenagers dropping out or getting pregnant? Put prayer back in schools! Is the economy underperforming? Cut taxes!) (Actually, “cut taxes” seems to be the one-size-fits-all solution for far too many politicians. Measles epidemic? Potholes? Crime wave? Whatever the problem, the reflexive answer is “Cut taxes!”)

The problem is, simple answers sell. We voters are far too ready to buy snake-oil, and far too reluctant to accept the reality that sometimes–not always, but often–the real answers begin with a recognition that “it’s complicated” and “it depends.”

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A Little-Noted Lesson from the Fiscal Cliff

Apparently, the country will be taking a leap off the so-called fiscal cliff, since–despite a flurry of last-minute activity and a vote by the Senate–midnight came and went without passing anything. (And even the Senate’s measure didn’t remotely resemble a “grand bargain.”)

For most of us, the tax consequences are likely to be short-term. Incredibly, a significant number of Representatives refused to vote in 2012 to terminate the Bush tax cuts for rich folks, but are perfectly willing to come back early in 2013 after the cuts have expired and vote to reinstate them just for the non-rich. Why is that, you might reasonably ask, when the result will be exactly the same? Because they can then tell their constituents they never voted for a tax increase. They evidently think the American public is really, really stupid–and we elected them, so maybe they’re right.

Then there’s the issue of spending cuts. If a larger deal cannot be negotiated, and the dreaded “sequester” goes into effect, we’re told that government spending will be sharply reduced. And that’s true–as far as it goes. But the nasty little secret is that government is no longer a word that describes…government. As in public sector employees and elected and appointed officials. After decades of privatization and contracting out, government is all of us and everywhere–defense contractors, civil engineers, social service agencies and other for-profits and nonprofits that depend upon government contracts to survive. The last analysis I saw–and it is now several years old–counted some eighteen million people working full-time at ostensibly private and nonprofit sector jobs that were wholly supported by our tax dollars.

Retrenchment in those government contracts–required by the sequester–will affect more than just those 18+ million people who are employed in what we might call the “quasi-government” sector. When the defense contractor loses his biggest customer, his suppliers lose theirs, and so on down the line. The economic contraction would be rapid and severe.

I say it “would be” because I believe that the reality of that outcome will quickly become apparent even to the less-than-brilliant policymakers in Congress. (Their constituents can be counted on to point it out, if they somehow don’t get it.) Call me Pollyanna, but I think we’ll see some sort of acceptable-but-not-ideal agreement early in January.

Even if we evade economic disaster via fiscal cliff-diving, however, it may be worth pondering the largely unrecognized extent to which the private and nonprofit sectors are now part and parcel of that “bloated and wasteful” government we routinely excoriate, and the extent to which demands for cuts in “government spending” threaten to reduce our own incomes. That’s certainly not an argument for unrestrained spending; it is, however, an argument for recognizing economic reality and the extent to which “privatization”–which has increased, rather than reduced, the size of government–has made necessary spending cuts infinitely more difficult.

Happy New Year.

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What Drives Me Crazy

A couple of days ago, I got my ever-thinner print version of Newsweek, and began leafing through it. I came to an article by one Niall Ferguson (“Niall Ferguson Solves the Debt Crisis”) I don’t know who Ferguson is, although I’ve seen his name here and there, but obviously, if he has a solution to the “debt crisis,” (the precise nature of which was conveniently undefined), I wanted to know what it was.

And what was it? Privatization, which–he blandly assured readers–“has been a huge success nearly everywhere it’s been tried.”

When I came to that sentence, my husband called from another room to ask me why I was making that strange noise.

Let me explain why Mr. Ferguson’s article made my head explode. I have spent a reasonable percent of my time in academia studying privatization, and have written a number of (peer reviewed) articles on the subject, and it is clear that Ferguson is, shall we say, confused. The first clue is his reference to Margaret Thatcher’s successes. I agree that much of Thatcher’s privatization effort was successful and sound, but what Thatcher called privatization was very different from what Americans mean when we use the term. Thatcher sold off assets (steel mills, for example) that most economists would agree should never have been owned by government in the first place. And she sold them, to private owners who were left to own and operate them, pay taxes on any profits, and go under if they failed. These assets were no longer on the British government’s balance sheets, for good or ill.

This is significantly different from the situation in the United States, for two reasons. First of all, we were never socialized to the extent that England and many European countries were, so our governmental units–with very few exceptions–do not own property that is extraneous to the mission of government. We don’t have publicly owned steel mills or coal mines or other assets more appropriate to private ownership to sell off. Ferguson cites Mitch Daniels’ “lease” of Indiana’s public highways with approval; I think many of us would argue that public roads are hardly in the same category as steel mills.

That allusion to Indiana’s Toll Road brings us to the second difference between British and American practices: what we call privatization in the U.S. isn’t really privatization. We use the term to mean “contracting out.” If we have potholes to fill (and right now, boy do we!) we ask private asphalt companies to bid on filling them–we don’t expect government to manufacture its own asphalt and use its own employees to do the job–but we don’t expect government to sell the streets and allow the market to determine which ones get paved, either.

I didn’t intend to turn this post into an academic lecture/rant, but I get so tired of pompous pundits who don’t bother to do any homework, who don’t bother to define their terms, blandly prescribing simple fixes for complicated issues they clearly do not understand.  If Ferguson is advocating that we sell off government assets, he needs to distinguish such outright sales from the “leases” and “contracts” that Americans are familiar with, and he needs to identify the assets that he believes should be privately rather than publicly owned. (I’d be quite willing to sell off sports stadiums, but I’d fight a proposed sale of libraries.) If we ever have that discussion, I think it is highly unlikely that we’d find enough stuff to sell to retire the national debt.

And just for Mr. Ferguson’s information, privatization (defined as contracting out) has not been a “success nearly everywhere.” I’d be happy to supply him with citations to multiple studies demonstrating quite the contrary–but somehow I doubt he’d be interested.

Who said “It ain’t what you don’t know that hurts you, it’s what you know that just ain’t so”?

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