Monday, April 23, 2012

Zaffirini v. United Water Services: Litigation Provides Glimpse Into the Black Box of Privatization

A new decision from a Texas appellate court provides a glimpse into the murky world of privatization decisions and how firms, in order to obtain lucrative contracts, convince the government entities to outsource essential services.  It also illustrates how easily such arrangements can collapse.  The case is Zaffirini v. United Water Services, LLC, 2012 WL 1364984 (Tex.App.-San Antonio April 18, 2012).  Here is the fact summary from the court:
In the year 2000, United learned that the City of Laredo (“City”) intended to privatize the operation of its water and wastewater facilities. In order to increase its chances of being awarded the contract, United retained Zaffirini as its attorney for an initial one-year term to assist in United's negotiations with the City. United and Zaffirini signed a Retainer Agreement on January 17, 2002. The essential terms of the Retainer Agreement provided that Zaffirini was to earn a one-time $50,000 payment upon execution of the Retainer Agreement and an additional $50,000 payment if and when United and the City entered into a contract. The Retainer Agreement further provided that if United was awarded the contract with the City, then Zaffirini would receive a contingency fee consisting of monthly payments of $3,000 for “the life” of the City contract.  The City subsequently awarded the contract to United . . . The initial contract term between United and the City was for five years. Pursuant to the agreement between United and Zaffirini, United paid Zaffirini the $50,000 payment when the Retainer Agreement was signed and another $50,000 at the time the Service Agreement was signed by the City. United also began paying the contingency fee of $3000 per month. However, a dispute between the City and United eventually caused the parties to agree to a mutual dissolution of the Service Agreement in 2005. As part of the dissolution, United paid the City $3 million dollars to obtain an early termination of the Service Agreement. A few months after the dissolution of the Service Agreement, United stopped paying Zaffirini the monthly payments. As a result, this fee dispute arose over whether Zaffirini was still due monthly fees under his Retainer Agreement with United.
In other words, United wants a lucrative government contract; it hires a lawyer as a "fixer" to get the contract, through what appears to be a no-bid, non-competitive process; and the fixer's service is valuable enough for the company to pay $100,000 plus another $180,000 in contingency fees over the next five years.  The lawyer's total price tag ($280k) for arranging the contract suggests something about the stakes involved and the incentives for the parties involved - the lawyer has excessively high incentives to persuade the government officials to give his client the contract; the price is worth it to the contractor because the ultimate contract promises to be incredibly profitable; and the officials making the outsourcing decision come under intense pressure from self-interested fixers and firms.  It's also interesting to note that the privatization relationship fell apart - given that United paid the city $3 million to get out of the contract early.  Privatization nightmares take two general forms: either the contractor end up being much more expensive than anticipated (e.g., doubling the price after the contract is locked in), leaving the government with a bad deal, or the contractor discovers that providing government services is really not very profitable - their costs exceed their projections, and they bag on the contract early.  Examples abound of both scenarios.  This case illustrates the second type.

But wait, there's more!  The lawyer, Carlos Zaffirini, has been at the center of privatization controversies before.  See this article about Zaffirini's representation of GEO, the nation's largest private prison operator, and the allegations of impropriety around State Sentaor Judith Zaffirini (Carlos' wife) helping get the lucrative contract pushed through for GEO - and her husband.  In other words, the "fixer" who gets hundreds of thousands for convincing government officials to give outsourcing contracts to his clients is married to an influential politician who could, in theory, help get things approved or can pressure lower-level officials into acquiescence.  The triangle of highly-paid fixer, soon-to-be-disappointed government official, and solicitous contractor is enough to create doubts about privatization as a sure-fire way to save taxpayers money.  Add to the mix an entrenched politician with a vested financial interest - married to the fixer - and the situation becomes rather alarming.

- Dru Stevenson

1 comment:

  1. Does your concern here really apply any more fully than it would any time the government enters into a contract to buy miscellaneous services or even goods? The government isn't going to grow its own beef, most likely, so it will "outsource" that function to ranchers. It's generally a matter of degree, and of a consideration whether the government can more efficiently do the work itself or pay others to do the work for it.