A reasonable alternative

Managed competition is a hot topic these days, and many private firms are quick to advise decision-makers in city governments to beware. Why? Because the results of managed competition can go against the flow of what private companies want everyone to assume, which is that private operation of many public services is the obvious answer to what ails America’s cities.

Today’s municipal governments face difficult issues — eroding tax bases, aging facilities and demands to provide more for less. It is no wonder, then, that public officials are eager to explore alternative delivery systems for the services they currently provide. Managed competition is one of those alternatives.

In its purest sense, managed competition is a process whereby the bidders for a service bid to one set of rules on a level playing field. All bidders have access to the same information and are bound to comply with equal contract terms. As it applies to municipal services, such as water and wastewater treatment, it includes the right of public employees to bid against private competition. To achieve this, the public bidding entity must be restructured within the governmental unit to exist as a separate, yet connected, entity, whereby it can function independently yet be able to “buy” services provided in other areas within the government structure.

The parallel exists in many private firms, where a business unit or division has a charter that allows it to generate profits by providing its particular service, while being supported by the parent entity and allocated costs for corporate services in legal, accounting, human resources, research and development, advertising, public relations and management areas.

If the division or unit is large enough, it may mirror some or all of the corporate functions, but then those costs are also allocated as overhead to be spread across various projects under contract by the division.

Private firms, however, have been cautioning municipal decision-makers that a managed competition that includes the public entity in the bid process is not really comparing apples to apples, and that the idea is not as great as its press would suggest. Private firms live and die by their ability to compete for and win profitable contracts; consequently, when a new market — water and wastewater privatization, for instance — becomes available, that opportunity demands a tremendous amount of attention.

Private firms have several advantages, including laws designed to make privatization easier, conferences targeting decision-makers, sales pitches in every mayor’s office and media accounts of successful ventures.

Why, then, are they worried about a public entity’s ability to bid for the service in question?

Private firms are engaged in an attempt to convince this potential market that managed competition is a flawed process. Below are some private firm claims and the arguments against them:

Qualifications: The public work force is not qualified to do its current job, and if it was evaluated fairly in an objective process, it would not be permitted to make a proposal.

That’s a pretty hard knock on a lot of well-run public water and wastewater utilities across the country. There is certainly room to improve, but that is also true of the private sector, where there are well-run companies and better-run companies. In the case of water and wastewater utilities, the public entity has been providing the service for as long as 80 years. The record of performance may certainly be improved and optimized, but that is the entire point of managed competition. If it is assumed that the public entity will not be allowed to restructure to take advantage of the best practices of the public and private sectors, then it is an easy target.

If public sector workers are permitted to remove the shackles of past practice and use the best techniques the private and public sectors have to offer, they should at least be permitted the opportunity the opportunity to bid for their jobs.

Accountability: Private firms question how a public work force can be held accountable to decision-makers, noting that its proposal is simply a piece of paper describing what it thinks it can do.

But a public entity provides a service under a Memorandum of Understanding, which, granted, is not the same thing as a contract. However, it is the next best vehicle for establishing the principles and foundations found in a binding contract while establishing an arms’ length relationship. The terms, conditions, performance requirements and obligations of the parties are the same as those that would apply to the private bidder. And failure to perform results in termination of the MOU.

Guarantees: Private firms argue that the ultimate guarantor of a public entity’s proposal is the full faith and credit of the city and its ratepayers. This is absolutely true. But it is not the entire risk equation. Any contract or MOU would define clearly the performance requirements of the system and any other related criteria. Under a contract with a private firm, determining whether a guarantee has been met leads to an examination of the conditions or range of conditions specified in the contract for normal operations. Anything outside this range — as well as costs associated with expansion, changes in regulations and maintenance expenses not directly spelled out — is the responsibility of the city. Private firms will accept risk only for what they can control.

In a managed competition, the same terms should appear in the MOU so as not to penalize the public bidding entity by forcing it to take on more risk than its private competition. The city is no worse off, given that it will take on all uncontrollable risks in either scenario.

The essence of the guarantee boils down to guarantees under “normal” operation. In a public bidding entity’s proposal, the city is the ultimate guarantor. If that entity is the successful bidder, then the city can evaluate taking the incremental risk of guaranteeing “normal” operations versus paying more for a private firm to guarantee “normal” operations. In either case, the city remains responsible for the larger risks of changing regulations and expansion requirements.

Contract risk and enforcement: Private firms raise the issue of the meaningfulness of enforcing contract terms found in private contracts, including default, termination and guarantees, against the public entity.

The private contract or MOU will have equivalent terms regarding these aspects. The city will have the lion’s share of the risk in either case, because the private firms will not subject themselves to more than a “deductible” amount of risk. If the public entity is the lowest bidder, the city can evaluate whether to pay more to get some degree of risk-sharing or save the real dollars and assume the amount of risk a private firm is willing to offer. But valuing risk assumptions is a tricky proposition at best, because contracts are always subject to interpretation.

Labor problems: The private sector is concerned that, if a managed competition takes place and the public entity bidding loses, public employees would be bitter. Thus the transition to a private operation would be difficult.

The practical situation is that employees will understand that their jobs are at risk very early in the process, and that their past performance, along with their skills and experience, will be put to the test. If they fail, the notion of survival will override the emotion of defeat. The bottom line is that no one enjoys losing a job.

A job is still gone whether it is lost because of a lost competition or because there was no opportunity to compete. The answers to the privatization question are, consequently, not so simple. Does privatization of public services make sense? Absolutely. Should it be used in all cases? Absolutely not. There are varying degrees of the scope of privatization services, and public decision-makers need to balance the merits of all alternatives and be wary of those who seek to limit their options.

Frank Gill is national program manager for municipal advocacy, HDR Engineering, Omaha, Neb.