Private Ayes A tale of four cities
Since the mid-1980s, state and local governments have been working to provide better services in often faltering economies. But opposition to raising taxes to pay for local services, coupled with eroding tax bases, has made that difficult.
In answer, a number of local governments have embraced the notion of privatizing, mainly in the form of contracting out or introducing competition and the profit motive in order to contain and even lower the burdens of taxation. Current experiences with privatization illustrate both its potential savings and problems.
The private market produces most of the goods and services that consumers purchase. The market normally works well for private goods and requires no public intervention to change the products or consumption patterns. A company that can produce cars or bread more efficiently will gain sales and profits.
The market rewards firms that minimize costs or introduce new products or innovations in production.
Forms of Privatization
Privatization in the 1990s has involved contracting out of government services and the sale or divestment of government assets. Hiring a firm to manage the billing for a government water utility or contracting with a company for trash removal services are examples. The government usually allows the firm to choose how it will satisfy the contract.
For example, a contract may specify trash removal services for the area residents a certain number of times per week. The firm is normally allowed to choose the methods it will use to perform the requirements of the contract, the trash trucks used and the number of workers on each trash truck. The profit motive will encourage the firm to produce the services efficiently at the least cost, a motive absent in government provision of services.
Alternatively, a government may grant a franchise to a firm to remove trash in a certain area and allow that firm to charge residents governmentally determined prices for the service.
But this form of privatization is much less common than simple contracting out.
The question, then, is: What are the characteristics of the service that allow for it to be contracted out? In short, the work and the targeted population can be specified precisely, and the resulting performance can be monitored and measured.
Sale of assets achieves privatization by removing the government from the service and allowing competition to enforce efficiency. Sale of governmental hospitals is an example.
The trend has been to rely increasingly upon privatization to introduce efficiency into government goods and services. In its “Tenth Annual Report on Privatization,” the Reason Foundation noted that between 1987 and 1995, the percentage of local governments contracting out certain services grew substantially. In 1987, slightly more than 50 percent of the 120 local governments in 34 states surveyed by the Mercer Group contracted out their janitorial services. In 1995, that percentage had increased to 70. Contracting out jail food, a service infrequently privatized, increased in the same period from about 8 percent to about 17 percent. In fact, contracting out had increased in all of the 18 services studied during that time.
The privatization trend is also apparent from the highly publicized efforts of cities like Indianapolis, Phoenix, Philadelphia and New York. Indianapolis, under Mayor Stephen Goldsmith, privatized most of its services between 1991 and 1994.
In 1994 alone, Philadelphia, under Mayor Ed Rendell, opened up 11 services to competition, including park maintenance and the operation of parking garages. In 1995, New York City, under Mayor Rudolph Giuliani, subjected 40 municipal services to competition.
Their results have provided a boost to the privatization movement. Giuliani, for instance, has predicted that competition created by privatization will lower costs and provide better services for New Yorkers.
Rendell noted, “Ironically, privatization is the most effective way we know to restore productivity and the taxpayers’ faith in government.”
And Goldsmith stated that “… the moral of the story is that competition can create quality and better government, and even the residual government institutions are better off after competition.”
The New York City Case
New York has privatized or subjected to competition a wide variety of services. But when it proposed contracting out a portion of its street sign maintenance and installation, the prospect of loss of work to private contractors prompted negotiation between the city administration and the department of transportation workers involved in maintenance and installation of street signs.
In 1995, the city workers agreed to increase their productivity by 50 percent, installing and repairing 54,000 signs compared to 35,000 previous year — this with no increase in the number of employees. Expected annual savings: $1 million.
New York also has contracted out services like maintenance in some parts of the city. For example, in 1994, a private contractor was awarded a contract to clean and repair 47 small parks, playgrounds and medians. In Spring 1995, a private contractor began repairing roads in Queens.
New York’s efforts in school maintenance illustrate the contracting process. It requested competitive bids in 1995 for combined custodial, maintenance and repair services for 52 public school buildings.
The New York Times had noted that “the system of repairing schools has long been inadequate.” Introducing competition into the custodial work, repair and maintenance of school facilities will almost certainty reduce the overall costs of providing the service. By packaging the schools into clusters of six to 12, the city is attempting to help contractors realize whatever economies of scale exist.
The clusters further prevent a monopoly by a single contractor, although given the relative ease of entry into school custodial and maintenance services, that possibility is probably remote.
Nevertheless, the threat of a monopoly forces the city to exercise great care in designing its contracting process.
The Indy Experience
Indianapolis spent $30 million on solid waste collection in 1993, and the price was rising year by year. Federal environmental mandates were expected to add millions to the cost by the year 2000, causing $4 to $6 a month increases in consumer solid waste fees.
When the city’s contract with its four private haulers was up for renewal, it reduced its number of waste collection districts from 25 to 11, one of which would be under the control of the Department of Public Works. This would ensure that the city would retain the capacity to handle trash in an emergency.
The bidding process was designed so that no more that three districts could be won by any one private hauler.
The city’s trash workers realized that they had to work seven hours a day instead of the four they had been used to in order to compete with the private haulers. They found that the previous practice of sending an entire crew to the landfill to unload a trash truck was inefficient. So they arranged for an empty truck to meet them at the location where their truck would normally be full. The full truck would then be driven to the landfill by the driver of the empty truck.
Competition also led to greater employee involvement in decision-making and more successful efforts to improve staff productivity. In addition, some middle-level managers were eliminated to reduce the overhead burden.
The public works department won its maximum allotment of three divisions and increased its market share of the trash-hauling business in Indianapolis from 40 to 52 percent. Between 1993 and 1994, when competition began, the per-household cost of trash collection fell from $85 to $68, and public employee productivity grew substantially. The number of employees on public works trash collection crews also declined from 27 in 1993 to 17 in 1994, while productivity increased from 1992 to 1994 by 78 percent. Worker absenteeism and compensation claims also decreased, as did complaints.
Moreover, city workers were so productive that they achieved $2.1 million more in additional savings than they anticipated, allowing for a $1,750 bonus payment per employee in early 1995. Now, the public works department is predicting a total savings of $13.1 million by 1998.
But garbage wasn’t the only area in which Indianapolis saved money. The city’s official government records, more than a decade old, are preserved on microfilm, and the in-house microfilm division employed outdated technology, provided a low level of customer service and had a three-year backlog. Things were so bad that the Indiana Supreme Court would not certify the city’s copies for admissibility in legal proceedings. The microfilm operation had 22 employees and an annual budget of $674,000 for production and librarian services.
Now, a private contractor handles the service, providing improved microfilm images and using its own equipment and personnel. It also provides librarians and personnel to city archives.
Privatization has saved the city $240,000 a year, with a four-year savings of $1.5 million. Furthermore, in its first year of private operation, the private firm’s copies earned the Indiana Supreme Court certification for admissibility. Finally, the backlog had been eliminated, and previously unindexed microfilm materials have been categorized and are now retrievable by computer.
Indianapolis also privatized messenger services and now saves more than $15,000 per year with better service. The shifting to a contract supplier also added the equivalent of 17.6 officer-hours-a-day in police services that had been spent delivering interoffice mail and packages.
The Philadelphia Story
Between 1992 and January 1997, Philadelphia privatized or subjected to competition 46 activities, most of which have involved contracting out. Total savings have been estimated at $42.7 million per year.
One of its biggest success stories involves the water department’s Biosolids Recycling Center (BRC), an operation comprised of a centralized biosolids de-watering station and a 72-acre composting plant. The facility, one of the largest of its kind in the country, services three wastewater treatment plants serving 2.3 million people.
Before 1993, relations were strained between BRC management and unionized personnel. But in 1993, the water department considered privatization of the BRC, which promised savings of 10 percent to 30 percent.
A new management team began to work with the union, which was given one year to improve productivity. Streamlined work rules were developed, and some services like long-distance sludge hauling were outsourced. The city also bought more efficient equipment.
Through re-employment and attrition, the number of employees dropped from 212 in fiscal 1993 to 127 in fiscal 1997 without layoffs. The budget, too, has declined, from $30.6 million in fiscal 1993 to $15.3 million in fiscal 1997.
The better-processed biosolids also have a lower water content — and therefore weight — and thus cost less to transport to a landfill.
The BRC received a first-place award from EPA for its efficiencies and from the Delaware Valley Total Quality Consortium for its excellence in business and industry.
Obviously, warehouse services do not have to be provided in-house. They should only be internally provided if the city operation is more efficient than using outside suppliers. In the case of Philadelphia, the contract to supply office products directly to city departments was won by New Jersey Office Supplies.
The firm began service in April 1993 and was obligated to provide supplies to the individual city departments within 48 hours of their requests. Non-office supply sellers to the city are required as part of their contracts to supply services directly to the individual departments, obviating the need for a city warehouse, which was phased out in June 1993. A new contract, won by Corporate Express with a July 1, 1995 effective date, has led to annual savings of $1,152,853.
Phoenix Leads
Phoenix has long been among the leaders in privatization, having contracted out its solid waste collection in the early 1980s.
The city helps the process along by making extensive analyses of costs for particular city or county services. The determination of actual costs allows private firms to decide if they can provide the service more efficiently.
Phoenix is divided into five solid waste districts. In the Southwest District, the city’s public works department was the low bidder. An auditor’s report concluded that for fiscal year 1993-1994, actual savings were $157,689, and for fiscal year ’94-’95, savings amounted to $404,533. For the period from January 1989 through June 1995, savings in the Southwest District were $2,831,371. The auditors also concluded that service levels were being maintained.
Commentators have noted that, without the interest in performance, many of the improvements in efficiency would not have occurred. For example, Phoenix purchased a state-of-the-art collection vehicle when its public works department won the Southwest District contract.
Additionally, competition in refuse collection over the entire 13-year period has led to substantial savings.
The Savings
In each of these cities, the savings achieved through privatization and competition are substantial. For example, Philadelphia’s privatization of its BRC resulted in savings of about 50 percent, and the microfilm contract in Indianapolis yielded savings of about 61 percent.
Further, quality is usually also improved.
The Obstacles
Still, labor opposition is often a problem in creating effective privatization and competition programs. Government, on occasion, has redundant employees, partly because concern for efficiency is not pronounced. Not surprisingly, labor organizations oppose policies like privatization that threaten their membership.
Opponents also argue that privatization adversely affects minority workers, since governments often hire minorities in larger proportions than other employers. Thus, if government size is reduced, relatively more minority workers are likely to lose their jobs.
Interestingly, cities like Philadelphia have obtained substantial efficiencies and yet retained most workers by absorbing them into other positions. One 1989 study of privatization for 34 privatized city and county services around the United States found that of the 2,313 government workers affected by privatization over a five-year period, only 7 percent were laid off, 58 percent went to work for the private contractor, 24 percent were absorbed in other governmental positions, and 7 percent retired.
In the long run, excessive costs for services require increases in taxes. Poor local services and higher taxes prompt businesses and relatively affluent residents to move to the suburbs, creating a significant decline in the tax base. That, in turn, yields reduced quality of service, higher taxes and additional losses in the tax base.
Mayors of large cities like New York, Philadelphia, Chicago, Phoenix, San Francisco and Indianapolis have recognized the problem and initiated bold moves, both contracting out services and selling assets and businesses that do not require government involvement.
And the phenomenon does not seem to be party-specific, since the ’90s privatization trend includes mayors of both major political parties.
Privatizing requires that the goods or services be specified in such a way as to encourage efficiency. For example, it is desirable to specify trash collection as the number of collections per time period and allow the contractor to determine the most efficient means of fulfilling the contract.
Sufficient competition must also exist so that a public monopoly is not replaced by a private monopoly. But for most privatized goods and services, adequate competition does exist.
The contract must also be long enough to allow the contractor to recover any required investment. Finally, the contract must be monitored to ensure compliance.
Government exists to provide services that produce benefits to constituents that cannot be provided by private markets. The three criteria that require government intervention are pure public goods (items like national defense, clean air, snow removal), externalities (like factory pollution that threatens nearby residents) and economies of scale.
However, even if one of these criteria is present, government involvement should be kept to the minimum necessary.
Services like oeprating golf courses or tennis courts, hospitals and television stations are provided privately, suggesting that local governments that still offer them could sell them to private operators. On the flip side, governments exist to protect those members of society who do not possess sufficient resources to protect themselves, so care must be taken to ensure that those members do not suffer.
Other services, like law enforcement, should remain under the auspices of government; however, they may not require government supply. For example, crime labs, criminal investigation and even patrol can be contracted out to private operators. This is not a new theory; even during the American Revolution, private spies and detection services were successfully provided to George Washington by a private firm.
In New York, Indianapolis, Phil-adelphia and Phoenix, privatization appeared to at least maintain the level of service at lower costs to the public sector. Furthermore, evidence shows that public agencies should be allowed to bid on contracts along with private operators, since this exposure to competition has led many public agencies to improve their service delivery and significantly reduce costs.
The authors are professors of economics at Temple University, Philadelphia, associated with the university’s Privatization Research Center. They can be reached by telephone at (215) 204-5037 or e-mail at [email protected].
