Monday, January 30, 2012

Privatization Trap - Stuck with Outsourcing in Nebraska?

Articles here and here describe the alarming situation with privatized foster case services in Nebraska.  Despite an uproar over horrible service provided by the private contractors, the director of the state's child welfare services says that the state agency is now dependent on the private firms and is unable to to bring the work in-house to deal with the problems.  This is one of the worst features of privatization - pushed as a panacea for budget woes, government agencies rush into the arrangements, and then cannot switch providers or end the arrangements if the contractor fails to do the work properly.  Privatization advocates complain that government workers are unmotivated - but how motivated are the employees at the firm with the government contract, knowing that the agency cannot feasibly end the contract?

Here are some other gems from the articles that are sadly typical of privatization fiascoes.  First, state legislators now admit that the state rushed into privatization hastily, in response to pressure (lobbying) from the firms who wanted the contracts.  Second, three of the five firms hired have folded (dropped out), leaving undone the work they contracted to do - and the state cannot find replacement contractors.  The two remaining firms have had high turnover in employees, resulting in a significant decline in the quality of service - case managers do not know the names or addresses of the children they are supposed to be monitoring.  Advocates complain that the job security afforded state employees makes them inefficient, but they ignore the hidden costs of high turnover rates, especially in providing certain social services.  The privatizing firms assure us that they can fire unproductive employees and can pay the productive ones less than the state does - both of which present problems with turnover rates.  Third, the remaining to contractors, recognizing the desperate situation of the agency, are threatening to pull out if they do not get their contracts renewed with favorable terms.  Fourth, as often happens, the projected savings were simply a hoax:

"A report by the Legislature's Performance Audit Committee last year found that the reform effort lacked specific goals, had no clear timetable and failed to consider the true cost of a reform that is now $30 million more expensive than original projections."

Sunday, January 29, 2012

Privatization in the Courts - Recent Cases

Here are some recent (Dec-Jan) cases involving privatization of government services:

Mathis v. GEO Group, Inc., Slip Copy, No. 2:08–CT–21–D, 2012 WL 43586 (E.D.N.C., Jan 9, 2012)(latest round in a case by inmate in private prison alleging inadequate medical attention - court granted some parties' motions and denied others, ordered Bureau of Prisons to submit a reply brief arguing against class certification)

Pontiac School Dist. v. Pontiac Educ. Ass'n, --- N.W.2d ----, 2012 WL 28653 (Mich.App., Jan 5, 2012)(unfair labor complaint growing out of privatization of certain public school functions and the resultant layoffs of occupational and physical therapists)

Friday, January 27, 2012

New Study Documents Hidden Costs to Privatization

This article reports on a  recent presentation by Jack Norman of the Institute For Wisconsin's Future - documenting hidden costs involved with privatization of state services.  The purported cost savings are questionable, the author of the study concludes.  Here is a quote:

"The gains touted don’t always materialize and might do more harm than good for local communities, said Jack Norman, director of policy research and development for the Institute for Wisconsin’s Future . . . The promised savings might be offset by a reduced level of service, he said, or a loss of income in the community as government workers are replaced by lower-paid employees who spend less locally — or live elsewhere. . . Private entities also are not bound by open records requirements to disclose budgets, salaries or results of outside oversight, such as quality testing or financial audits, he warned."

Thursday, January 26, 2012

Privatizing Student Transportation in MN INCREASES Costs

New on SSRN: The Estimated Cost Impact of Privatizing Student Transportation in Minnesota School Districts, by Owen Thompson (UMASS Amherst - Department of Economics)

Student transportation makes up a substantial portion of a typical school district’s operating budget, and sub-contracting bus service to private firms has been advanced by some as a way to reduce transportation costs. Previous studies have found conflicting evidence regarding the cost impact of privatization. This paper seeks to improve on previous studies by estimating cost equations using data that spans six school-years. The primary result is that privatization acts to substantially increase transportation costs. Estimates using a pooled cross section predicted that going from fully outsourced to fully in house reduced costs by approximately 15.8%.

Wednesday, January 25, 2012

Florida Prison Privatization Moves Forward

Florida's push to privatize its prisons moved forward on Tuesday (Jan 24) as the proposal cleared a House committee in the state legislature.  Miami Herald coverage is here.  The votes have split along party lines, with Republicans on the relevant legislative committees insisting privatization will save taxpayer money, and Democrats opposing it.  

Today, this press release from the Teamsters Union requests that the legislature conduct a thorough cost-benefit analysis of the privatization proposal before lurching forward.  The Teamsters represent the prison guards who stand to lose their jobs in the process.  Here is an informative quote:

The group says it estimates that the cost savings proponents say will occur will be greatly diminished when it factors in other costs such as the payout of vacation, sick leave and holiday to public employees who would be replaced in the privatization.  
“We simply do not have all the facts to know the total economic impact this could have,” said former state Sen. Ron Silver, who is representing the Teamsters. “It would be reckless to run into what would be the biggest prison privatization in the country’s history without a thorough, non-partisan analysis of the facts.”

Even if the state initially obtains some savings (Republicans estimate it at 7% ) in year one, there is no way to guarantee that the costs will not increase dramatically once the private firms have the contract locked in and the state no longer has the prison personnel to end the contract and take back the prison.  The state becomes dependent, a hostage to the contract.  There is nothing to keep the firms from low-balling to get the contract and then enjoying the prison budget increases as they roll in year after year. 

In addition, the state of Florida will have to spend more money elsewhere in the budget for contract management personnel - these are complex contracts that require experienced procurement managers, which offsets the proposed savings.  Moreover, the private firms running the prisons turn around and lobby for longer prison sentences for criminals and for more behavior to be illegal - more inmates serving longer sentences means more profit for the private contractor.  READ MORE....

Tuesday, January 24, 2012

Recent SSRN Article on Privatization & Accountability

Professor Laura Dickinson (George Washington University Law School) has posted a new article on SSRN, Privatization and Accountability, which is definitely worthwhile reading.  Here is the SSRN Abstract:

"Privatization has become a dominant feature of twenty-first century governance, creating concerns about diminished accountability and oversight. However, to properly evaluate such concerns or respond to them, we must distinguish between two different forms of accountability: accountability as after-the-fact redress and accountability as managerial oversight. Moreover, each of these forms of accountability may be pursued through a variety of mechanisms or processes, including not only criminal or civil lawsuits but also reform of the contracts that are the engine of privatization; increased public participation in the design, award, and monitoring of contracts; and changes to the organizational structure or institutional culture of contractor firms. Accordingly, this review lays out a taxonomy for analyzing privatization so that we can more comprehensively evaluate both the impact of privatization and the efficacy of possible responses. In addition, the review highlights recent privatization trends in the military and foreign aid arenas, the potential impact of such privatization on core values, and possible responses."

Sunday, January 22, 2012

Privatization in the new Food Safety Modernization Act

The latest issue of the Harvard Law Review has this "recent legislation" comment about the Food Safety Modernization Act of 2011.  Most of the Act's provisions are helpful updates to federal food safety laws (revising a regime we've had since the 1930's), and should indeed make food safety regulation more scientific, consistent, and efficient.  It also attempts to deal with the huge growth in international trade in foodstuffs.

Privatization also features prominently in the Act, and the HLR comment explains the issue very nicely.  The Act provides for the FDA to accredit third parties - private, for-profit companies - to inspect and approve food before it enters the market.  Given how  unfeasible it would be for the FDA to monitor these private inspectors, the Act authorizes another layer of privatization - private parties accrediting the inspectors instead of the FDA.  As the HLR comment explains, it is likely that courts will uphold this delegation, given the very loose standards we have for delegations of governmental authority to private parties.  Even so, the authors argue that courts should not be as deferential to these private parties as they would to the FDA itself.  The accreditation decisions are somewhat analogous to the decisions in Mead and Skidmore, and the principles of Skidmore would warrant against judicial deference to the private inspection firms.

I agree with this argument, but a logistical problem remains.  The scenario in which the question of judicial deference or scrutiny would arise is one where a food company that has failed its inspection is challenging the legitimacy of the inspector - situations where the food did not go to market.  It is hard to see how judicial scrutiny will help in the opposite scenario, where inspectors approved contaminated food (which they would probably have a financial incentive to do - presumably the food producer will be paying the inspectors, not the FDA).  There would be no challenge in these situations, and actual harm to consumers  (poisoning) could result.