Decisions on whether or not to privatize municipal services require thoughtful
consideration of some 'Guiding Principles'
(from Maine Townsman, January 1995)
By Jo Josephson, Staff Writer
To privatize or not to privatize services? That is the question these days for a number of municipalities, large and small. Can one reduce costs and improve services by turning over the operation of a service currently delivered by government to the private sector?
It's not a new question. But in today's tight budgetary times it appears with increasing frequency. It's a good question to ask, but not an easy one to answer. It's not necessarily a panacea for what ails. It could bring more headaches than you could ever imagine. Just ask the folks who have tried.
There are all those hidden costs to consider. More than likely you will not be able to save on them. There is the quality of service to consider, a quality that could be lost through the private sector's cost cutting measures.
There is the issue of control. How do you exert control over those who are delivering the service for you? And last but not least there are the human costs to consider. What do you do with the public employees who were providing the service for you?
This article is about the City of Bangor and the guidelines it developed to help it answer the question: To privatize or not to privatize? It is also about how the city applied those guidelines to privatizing its residential solid waste collection.
It's not that Bangor didn't have experience in privatizing its services at the time it decided to establish a six-member privatization committee in mid-1993.
It was because it had enough experience with privatization to know it needed to establish guidelines before it went any further. And it did want to go further. But not before it laid down some guidelines.
In recent times it had turned over the control of its parking lots, airplane repair, school crossing guards, and harness racing to the private sector, to name some of its major forays into the private sector. But it had also backed off from privatizing other city services, including the operation of its nursing care facility and its motor pool.
"There were different reasons for going or not going ahead" (with the privatization of a particular service), Bangor City Manager Edward Barrett told the TOWNSMAN. The guidelines would provide a structured approach.
Membership on the committee included individuals who were knowledgeable regarding business management, accounting, private sector financing. It also included a representative of the city council; the city manager and finance director were ex-officio members. The committee was aided by Mark Ryckman, an intern from the University of Maine's Department of Public Administration.
It should be noted that the committee was to establish privatization guidelines; it was also to make a preliminary assessment of additional services that could be privatized using those guidelines.
A discussion of those principles follows:
Guiding Principle: Savings
Privatization should only be pursued when there is sound reason to believe that there will be actual cost savings.
Cost: actual, full, true, direct and indirect. What it really takes to deliver the service. Not just the salaries of the people who deliver the service. But the salaries of those administering the service; the salaries of those repairing the service's equipment; the salaries of those who prepare the payroll, etc. They must all be taken into account when calculating cost.
But you don't stop there. You then look at the costs you will actually be able to save. And that is where it gets difficult, warns Barrett.
"What do you do with the fact you can only save one-third of a mechanic by privatizing the pick-up of your residential garbage? Do you get rid of a full-time mechanic and hire a part-time mechanic, knowing it will not only be difficult to recruit the type of experienced mechanic but that it will be difficult to retain them?
When it comes to cost, when it comes to comparing apples to apples, the question should not be how much does it cost to provide the service, but rather, what costs can actually be avoided or saved, says Barrett. While privatizing may reduce the workload in certain departments, it won't necessarily reduce the workforce.
So when you compare the bid price, be sure you compare it with your avoidable costs. You may be surprised.
"Normally you find when you compare the full cost associated with a service, it will be cheaper with the private sector," says Barrett, "because it is often difficult to translate much of the so-called marginal or hidden costs into actual budget reductions."
While there is no rule of thumb establishing how much savings is enough to warrant privatization, it should be noted that in a national survey conducted in 1987 by the International City Management Association (ICMA),40 percent of the governments that contracted out services for the purpose of saving money re-ported saving at least 20 percent, and 10 percent saved 40 percent or more.
It should also be noted that 59 percent of those responding to the ICMA survey indicated that their lack of interest in pursuing privatization was because they believed there was no apparent cost saving or other benefits.
Guiding Principle: Efficiency
Privatization should be considered where the city's operations are clearly inefficient or ineffective with little chance of being dramatically improved.
Efficiency and technical expertise are two reasons that are often given by municipalities for switching to the private sector, especially when it comes to privatizing their wastewater treatment plants. Be it access to experts, buying in bulk, or keeping on top of technology and the regulations.
So it is not surprising to learn that in recent years Rockland, Lisbon, and Biddeford have privatized the operation of their sewage treatment plants, contracting with engineering firms to manage the operations of their plants. Engineering firms have the expertise that cities do not, the argument often goes. After all they designed the plants in the first place.
Biddeford turned to the private sector after its sewage treatment plant had been fined almost $100,000 by state and federal agencies for discharging contaminated water into the Saco River.
"That's what they do. We don't have that level of expertise and we can't afford to let things go along as they always have been," the city's environmental specialist was quoted in the Biddeford Journal Tribune at the time.
Lisbon turned to the private sector, not because of non-compliance, but to control costs, according to Town Manager Curtis Lunt. He reports that now that the plant is being efficiently run, the city is saving $100,000 a year or 20 percent of its former costs.
Rockland turned to the private sector when it embarked on a major upgrade of its 20 year-old plant. According to Rockland City Manager Cathy Sleeper, there was no problem in efficiency or compliance.
"Rather it made sense to have the engineering company that modernized the plant, operate it as they would be most familiar with its equipment," says Sleeper.
Guiding Principle: Competition
Privatization should be pursued when there exists a level of competition within the private sector which will ensure that the city does not be-come a captive market to a single provider.
"The most important issue is not 'public' vs. 'private', it " monopoly vs. competition," says David Osborne, the author of Reinventing Government.
As Osborne sees it, sometimes when governments contract with private companies they wind up with monopolies and their costs skyrocket.
"Private monopolies are just as inefficient as public monopolies," says Osborne. And while you may get a good deal at first, when it comes time to renew the contract, the costs may go up.
Guiding Principle: Values and Goals
The service or function in question can be privatized in such a way as to meet and support the appropriate non-efficiency based community goals and values provided by the service in question.
Another way of saying this is: "Look beyond costs. Look beyond efficiency." And ask yourself what community values or goals could be threatened if you privatized this service?
While it's a somewhat fuzzy area, this non-cost efficient area, it is an important one to take into account when pursuing privatization possibilities. There are some things that government does better than business. While business may be better at innovation and adapting to change, government is better at policy management, regulation, ensuring equity and preventing discrimination or exploitation, says Osborne.
Public safety be it police or fire protection is often cited as an example of a service so core to the mission of local government that no matter what the savings, it should not be privatized.
Guiding Principle: Public Employees
"The goal of privatization must be to work within the city's personnel system to ensure that existing employees remain employed or are offered new employment opportunities."
In other words, take care of your own. It is not surprising that the strongest objections to privatization are often voiced by public employee unions. According to the ICMA survey, 24 percent of those responding stated that the reason they did not pursue privatization was due to union or employee resistance.
There are a number of steps governments can take to limit clashes with labor. You can find other jobs in-house for your employees. Even though this will reduce your savings, it will go a long way towards keeping up the productivity and morale of the rest of your employees. Or, you can require that the private firm you are contracting with hire them.
When Lisbon privatized its wastewater treatment plant two years ago, it required the firm to retain the city's five employees for at least the first seven months of the contract, according to Lisbon Manager Curtis Lunt. Two of the five were eventually let go "in the name of efficiency".
When Rockland privatized its wastewater treatment plant two years ago, it required the contractors to retain the city's 10 employees for at least 15 months and to offer them a salary equal to or greater than what the city was paying them. The contractor agreed. Sleeper reports that only one left due to retirement and the rest not only earn comparable wages but benefit from "performance bonuses".
Guiding Principle: Contractual Agreements
The ability of the city to develop adequate and comprehensive contractual agreements with measurable performance standards and the ability to monitor and administer these contracts must be taken into account.
Which means you don't go out to bid, rather, you send out a RFP (Request for Proposal). With an RFP you look at things other than money; low bid is not enough. 'You want to know if the potential contractor has the necessary financial, experiential and technical resources to do the job." says Barrett.
Rockland developed a standardized list of questions and asked the same ones of all the bidders' former or current clients. Sleeper says the exercise was invaluable.
While nine-tenth of your success is based on choosing the right bidder, the other tenth is in writing the service contract, says David Seader, author of Privatization and Amenca's Cities.
"The contract should always have clarity, clear performance standards, methods of measuring and judging performance, proper incentives for performance and clear penalties for non-performance and simple and straightforward dispute resolution procedures," says Seader.
"Setting out the details," is how Bangor's Barrett describes it. Upon this may hang the success or failure of your privatization experience: foresight and hard work, anticipating all the issues, understanding up front the responsibilities of both sides.
APPLYING THE GUIDELINES IN BANGOR
One of the areas the committee suggested the city look into privatizing was its residential garbage collection. The committee estimated that the city could realize $500,000 in savings by having the private sector collect garbage from the city's 6,500 residences. The committee suggested that should a private firm be hired, that any savings be used to transfer existing persons to other areas of the public works department which are currently heavily stressed.
Using the guidelines developed by the committee, the city manager weighed the prospect of privatizing the collection of its residential waste, using the aforementioned guidelines.
He found there was definitely competition out there. Four companies submitted bids. But the low bidder at approximately $1.2 million over five years was 20 percent below the next low bid, causing the city manager to wonder what would happen at the end of the five-year contract.
The issue of cost saving was also not clear. The city differed with the lowest bidder on their analysis of costs. As such, it turned to an outside auditor for a cost analysis, splitting the cost of the auditor with the low bidder.
As to be expected, the auditor noted that the cost savings depended on whether there was to be a reduction in public works staff and how the equipment costs were to be handled. Depending on how those issues were handled, actual savings ranged from $100,000 to $350,000 over the five years of the contract.
As concluded by the city manager, given the fact that it was the city's intention to retain personnel, the city would achieve savings of only $20,000 to $30,000 a year during the course of the five-year contract and that the savings were almost totally due to eliminating the need for replacement of the city's garbage trucks.
When it came to efficiency and effectiveness, the answer was clear: the current services were effective.
When it came to goals and values, there appeared to be no current problem. The manager noted, however, that the field of solid waste was a rapidly changing one and that some form of mandatory recycling might be required in the future and that this might prove difficult to implement in a flexible and responsive way.
When it came to the issue of employees, the manager noted that it was likely that most, if not all existing workers could be transferred to vacant positions in the public works department. In fact the two operator and four laborers were moved into other positions, with no loss in employment.
As Barrett saw it there were advantages and disadvantages to privatizing the service. The major advantage was the elimination of the need to purchase garbage trucks at $90,000 apiece. The major disadvantage was that the city would not be in direct control of the service and that at the end of five-year contract, then could be a significant increase in the cost of the contract, given the differences in the original bidding, forcing the city to take up the service once again.
Bangor went ahead with the switch late last year. It maintains control through its public works director and a 30-page contract that spells out everything in complete detail.
Among other things, there is a complete list of penalties ranging from $10 an occurrence every time the garbage cans and lids are not replaced properly to $100 for every time collectable solid waste is not collected by the contractor.
The contract even has a termination clause that enables it to terminate the contract for "convenience" upon giving the contractor 30 days notice. The city will not be required to document its reasons for terminating the contract but will be required to buy back its equipment and make some additional payments to the contractor.
As Barrett sees it "there is a tendency on the part of contractors to take the public sector for granted. We have less flexibility because of the bottom line. That's why we wanted the ability to get out of the contract."