A model for municipal privatization

City and county administrators are constantly challenged to come up with innovative and creative ways of running local governments. Some have called on the private sector to assume responsibility for carrying out service delivery and/or resource management activities.

The question is: Have they done their homework?

There are three important considerations that should be explored prior to privatization: First, the cause of the problems that privatization is expected to solve must be identified; second, the scope of activities privatization will embrace should be determined; and finally, the measurements that will govern the privatization contract must be established. Privatization is often seen as an easy solution to dealing with particularly problematic aspects of administration. But often, municipalities will turn to privatization to solve an issue that may not have been examined in depth.

A city may, for example, discover that the costs of vehicle maintenance are increasing from year to year and look to privatization as a means of controlling these spiraling costs. It may not, however, address the factors that are contributing to the cost increases. Overtime compensation, for instance, could be a problem that also applies to other aspects of the government.

If the root cause of the problem is not examined thoroughly, privatization will only obscure the difficulties that are equally pervasive in other aspects of the administration. But, if a specific collective bargaining agreement is contributing to the cost increases, municipal administrators may conclude that the only way to curb those increases is to move the activity to the private sector.

Additionally, they must determine what other activities are also affected by the agreement.

Obviously, then, the activities originally causing the problem need to be considered within a larger business framework. It may be that a specific collective bargaining agreement affects not only vehicle maintenance, for instance, but also facility and infrastructure maintenance activities. Only when the scope of affected activities is defined and tested can a municipality be confident that privatization will effectively solve the problem.

The last consideration is aimed at ensuring that the municipality does not privatize a set of activities only to find that its private sector company is not measuring up to its expectations. Consequently, before privatization occurs, a local government must determine what measures need to be in place to ensure the best outcome. A city or county must understand three elements involved in setting performance metrics: What is the name of the metric? What is the formula for calculating the metric? and What are the values for the metric?

Before a local government can set performance standards for a private sector firm, it must establish what it is attempting to achieve and what expectations are reasonable in light of these goals. Additionally, it must define the specific information required from the contract operator to prove that contractual obligations are being met and that service delivery is being achieved efficiently, effectively and with the required level of quality.

Defined performance metrics and monitoring mechanisms can assure both the city or county and its private sector partner of a convergence of the mutually agreed-upon expectations. Obviously, privatization can be a viable solution to city and county problems. But when it fails, it may leave the local government more dissatisfied than it was in the beginning. Consequently, it is critical that all parties do their homework. Only then can all be fully satisfied with the privatization option.

Alan Mitchell is director of subscriber relations for the Municipal Reference Model Program, Toronto, Ontario.