Tag Archives: privatization

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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Public Assets, Private Profits, Politics

And the beat goes on.

Over the past several years, Indiana government has entered into a variety of deals in which public assets have generated or guaranteed private profits. The toll road lease probably received the most attention. Daniels’ ill-fated privatization of the welfare application process–and the ensuing lawsuits– was high profile for a time, but his Administration’s thirty-year agreement with Leucadia National Corporation to purchase the output from its Rockport coal gasification plant (coincidentally managed by a long-time political ally) received significantly less coverage.

Locally, of course, we’ve seen a number of dubious transactions, notably the 50-year parking meter contract.

More recently, a politically-connected developer has been given long-term control of the Indiana Dunes. 

The parkland surrounding Indiana’s towering dunes was intended to keep industry away from a geological marvel molded over thousands of years at the southern tip of Lake Michigan.

Yet five years after a politically connected developer suggested officials should hire a company to rehabilitate a dilapidated beachfront pavilion at the popular tourist destination, a small construction project has ballooned into a decades-long privatization deal with the state. It includes two beachfront restaurants, a rooftop bar, a glass-walled banquet hall promising “the best view in Indiana” — and there is potential for more development to come.

What’s more, the company ultimately picked to do the job was co-founded by Chuck Williams, the developer who pitched the initial idea. Williams, a regional chairman of the state Republican Party, worked behind the scenes for over a year with the administrations of two GOP governors, shaping and expanding the plans.

There are times when so-called “public-private partnerships” make sense. There are times they don’t. The problem is, these deals increasingly occur without the public vetting required to make that determination.

In the case of the Indiana Dunes, critics characterize the deal as a “usurping” of public land in the name of private development, and charge that the state Department of Natural Resources did not hold public meetings or seek out more competitive bids. Worse still,

Preliminary figures submitted to the DNR by Williams suggest the project will yield a handsome profit. In its first year, the development is expected to turn a $141,000 profit — a figure projected to climb to nearly $500,000 in a decade.

In return, the DNR will get 2 percent of the company’s annual revenues and $18,000 a year in rent for property that state parks Director Dan Bortner describes as having a “million dollar smile.”

The merits or flaws of this particular contract aside, Hoosier citizens need to demand a halt to the steady sell-off of public goods at both the state and local level until a full public debate can be held to consider the rules–and the ethical guidelines– that should govern privatization agreements.

In far too many cases, the risks are socialized and profits privatized–with We the People guaranteeing the revenues of politically-connected cronies.

And we wonder why citizens are cynical….

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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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Infrastructure, Part Two

Yesterday, I shared Adam Gopnik’s “take” on Republican objections to infrastructure investments. But it turns out that he is not the only one considering the ideological roots of the Right’s disinclination to invest tax dollars in public goods like  roads, bridges, and railroads.

A lengthy post at Daily Kos ticked off some specifics.

Over and above the general animus toward government, manifested in a desire to “starve the beast,” the post pointed to the Right’s continuing romance with privatization.

More than anything else, this privatization fetish explains Republicans’ efforts to gut and discredit public infrastructure, and it runs the gamut from disastrous instances of privatizing parking meters to plans to privatize the federal highway system.

There has been a good deal written about these and other efforts to outsource what we used to consider public functions, but there has been much less information available about a financing mechanism that makes these privatization deals much more lucrative–private activity bonds.

As the New York Times recently explained,

These deals involve so-called “qualified private activity bonds,” which state and local governments issue on behalf of corporations. The bonds allow companies to borrow at low rates, while the bondholder doesn’t owe federal tax on interest. (If a corporation issued its own bond, it would pay a higher rate and the bondholder would owe tax on interest.) As an article in today’s Times explains, the justification for this sort of treatment is that a private project will fulfill a public need. In practice, it often looks like pork by another name, worth roughly $5 billion a year to corporations that could afford to invest without a subsidy, or to vanity projects — like a winery in North Carolina, a golf resort in Puerto Rico and a Corvette museum in Kentucky.

Meanwhile, across the board spending cuts threaten needless hardship and real suffering, and congressional Republicans won’t even talk about ending or trimming private-activity bond subsidies — or, for that matter, any individual or corporate tax breaks, which total $1.1 trillion annually. $1.1 trillion. That’s more than Medicare and Medicaid combined. It’s more than Social Security. It’s nearly two thirds more than the total cost of all non-defense discretionary spending, the category that includes infant formula for poor mothers and infants. Corporate welfare has never been so costly.

I have a friend who lobbies for socially-responsible organizations–environmental groups, human services nonprofits and the like. When I ask him why the legislature has done thus-and-so he just smiles and tells me to “follow the money.”

These days, greed–masquerading as “creative financing” or “economic development”– consistently trumps the common good.

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The Cost of Saving Money

Last year, In the Public Interest released a report that highlighted a harmful but frequently overlooked way in which our tax dollars are fueling income inequality.

Every time a city or state outsources a public service to a low-wage contractor, the community loses. Taxpayers have to make up the difference in the form of nutrition assistance, healthcare coverage, and other programs designed to help people working for minimum wage and living in poverty. The report included examples from across the country, including public servants in Costa Mesa and Fresno, CA, who either lost their jobs to – or were at risk of being replaced by – low-wage contractors.

There are a number of problems with government outsourcing–aka “privatization”–and a copious academic literature documenting those problems. When government provides services through surrogates–via third-party contracts–it needs different management skills (skills that are relatively rare in government agencies, meaning oversight is hit or miss). Mayors and governors often give in to the temptation to reward their cronies with lucrative contracts. (Indeed, privatization has become the current form of patronage). And the promised savings are rarely realized, even without accounting for the problem identified by the report.

There are certainly times when outsourcing makes sense, but far too often the decision has been made on the basis of a near-religious belief in the superior performance of the private sector. As this report suggests, those perceived “efficiencies” can end up costing us in less visible but no less expensive ways.

There really is no such thing as a free lunch.

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