Friday, May 25, 2012

Public Funds for Private Firms: Obama’s Record

The Washington Post has a great opinion piece about the problem with federal tax money going to private businesses: Forget Bain — Obama’s public-equity record is the real scandal - The Washington Post.  Excellent editorial, very worthwhile.

My point here is not to attack Obama overall - this is not a partisan website - but rather to address this species of privatization and intermingling of government with firms in the market.  For those who consider themselves capitalists or believers in free markets, it's good to remember that Adam Smith originally wrote The Wealth of Nations partly to attack the system of state-endorsed monopolies and government-supported private businesses of his day.  The current practice of channeling millions of dollars from the public coffers to private firms runs contrary to the original intent of free-market capitalism.  Here are some excerpts from the Post editorial:
Since taking office, Obama has invested billions of taxpayer dollars in private businesses, including as part of his stimulus spending bill. Many of those investments have turned out to be unmitigated disasters — leaving in their wake bankruptcies, layoffs, criminal investigations and taxpayers on the hook for billions. 
And he concludes:

Now the man who made Solyndra a household name says Mitt Romney’s record at Bain Capital “is what this campaign is going to be about.” Good luck with that, Mr. President. If Obama wants to attack Romney’s alleged private equity failures as chief executive of Bain, he’d better be ready to defend his own massive public equity failures as chief executive of the United States.

He then offers several examples.  Raser Technologies received a $33 million federal grant, but is now in bankruptcy, has a handful of employees, and owed over a million in back taxes.  ECOtality received $126.2 million in taxpayer money and recently announced that it will not be profitable anytime in the foreseeable future, and they're under investigation for insider trading.  Nevada Geothermal Power (NGP) received a $98.5 million taxpayer loan guarantee but is no longer expected to be able to stay in business. First Solar got more than $3 billion in loan guarantees from two states (CA and AZ) and recently announced $402 million in losses.   And it goes on.  

As I have said before, government subsidies for businesses distort markets, reduce efficiency, foster monopolies, and undermine competition.  These government programs lead to a vicious cycle of dependence (they need repeated infusions of capital and subsidies to stay afloat); there is little incentive to innovate, take risks, or work hard when the money was not earned, but bestowed by politicians.  

And it's not just that the recipients waste or lose the money: infusing one firm in the marketplace with millions or billions in cash or loan guarantees ultimately puts the other firms in that arena at a disadvantage, so they are not as profitable, they're less attractive to investors or talented employees, and so on - in other words, the subsidies for one firm generate below-market returns and results for the other firms that are legitimately competing in the marketplace.  Obama's subsidies can also cause specialized inflation, affected the prices or costs associated with the suppliers or distributors of the firms that receive millions in free money.

 - Dru Stevenson

Wednesday, May 23, 2012

Arizona Privatized Agency Subsidizes Private Corporations with Tax Dollars

New from the website In the Public Interest: Arizona’s Corporate-Run Agency Gives Taxpayer Subsidies to Other Corporations but Little Information to the Public. Arizona replaced its Department of Commerce last year with a public-private partnership called the Arizona Commerce Authority (ACA). The ACA's board includes mostly private businessmen, not government employees. Its funding comes partly from taxpayer dollars, and partly from private donations given by local corporations.  Here's an excerpt:
But this isn't just any agency. Its task is to try boosting the state economy by handing out taxpayer-financed subsidies to individual companies of its choosing. A new report by Arizona Public Interest Research Group Education Fund tallies up over $41 million in subsidies so far dispensed by 13 subsidy programs at the ACA. The annual amount could reach over $150 million next year, plus other publicly-financed loans and technical assistance. Arizona residents foot the bill for these goodies through their taxes and through cutbacks to other programs. Arizona's subsidy programs have multiplied in recent years despite serious budget shortfalls. Two years ago, lawmakers were so desperate that they sold off legislative and administrative buildings for short-term cash and rented them back...
....According to Arizona PIRG's report, only two of the 13 incentive programs even track how many jobs or other benefits they generate -- and none disclose that information publicly. For all its business-savvy rhetoric, the ACA can't demonstrate performance if it doesn't track results. Only one program publicly discloses what companies promise to deliver for their subsidies. Worse still, only 4 of the 13 programs even disclose which companies received subsidies or how much. And when companies that receive subsidies fail to deliver on promised economic development benefits, the ACA can reclaim taxpayer subsidies for only one program, and there is no way for the public to see if this ever happens.  

The article expresses concern mostly over the potential here for graft (or at least conflicts of interest) and the diversion of public funds from other state programs.  These are valid concerns, but are likely to resonate as basically political/partisan complaints - i.e., "Hey, public funding is flowing to those special interests over there (corporate, conservative), instead of my favorite special interest groups (the poor, minorities, unions, schools, etc)."  I understand that liberals take it as a tenet of faith or a universal truth that public funding should go toward helping the unfortunate rather than profitable businesses.  But conservatives will answer that the businesses do a better job of improving the local economic climate by creating jobs and spending money on local suppliers and distributors.  And never shall the two hear each other.

I have additional concerns beyond those mentioned in the article.  Even from a conservative, free-market perspective, government subsidies for businesses distort markets, foster monopolies, undermine competition, and reduce efficiency.  The same complaints that business advocates make about the welfare system apply to government programs to help businesses - the vicious cycle of dependence, the lack of incentive to work hard or face difficult choices, the inevitable favoritism (some businesses get taxpayer subsidies, others miss out, and those that do have an unfair advantage over competitors who might otherwise win in a free marketplace).  It has a chilling effect on market-driven innovation, improvements in efficiency, or "creative destruction." The subsidies can cause inflation as the local market prices correct for the infusion of unearned money. The inherent risks in entrepreneurship get externalized onto taxpayers rather than internalized by those who hope to reap the profits if they get lucky.  The conflict-of-interest problem is not just that the businessmen will engage in whitewashed embezzlement, diverting funds to their own businesses or friend's businesses (or to their suppliers, in hopes of getting discounted inputs).

The problem is also that other firms - firms that might be more efficient, providing better goods and services at lower cost - face higher entry barriers when the existing holders of market share are bolstered by government handouts.  In other words, I see little difference in the morality of handouts for poor individuals/families and handouts for businesses.  There is a spiritual virtue in helping the poor, of course, but also a virtue in helping those who are hard-working and who have made sacrifices to become successful.  The problem for me is the unintended consequences of government subsidies for entities that are supposed to compete and succeed in a free market.

-Dru Stevenson

Monday, May 21, 2012

Sheriff: Gang started prison riot in Mississippi

Link to article private prison article: http://www.google.com/hostednews/ap/article/ALeqM5gLtS8NpiL2ojMXn5iDhg7A8WiCig?docId=32105b2b4b1a406b804ca63e6c35cd54

“Privatizing” Space - Taxpayers Still Pays the Bills

For those interested in the growing privatization of space travel, this new article from City Watch provides an interesting perspective: “Privatizing” Space: Companies Shoot for the Stars, but Uncle Sam Still Pays the Bills

Saturday, May 19, 2012

Interesting TSA Graphic

TSA Waste
Created by: OnlineCriminalJusticeDegree.com

Thanks to Tony Chin

Charter School Lobby Group Quits ALEC Two Days After Being Identified By Republic Report


Now, my purpose in linking to this is not to attack ALEC.  I actually find ALEC interesting from the standpoint of legal theory - they are one of several entities, some political activists and some academics, that draft and publish model legislation that legislatures can adopt in whole or in part.  One of my current research/writing projects is about the proliferation of legislation in the twentieth century, and one contributing factor was the emergence of entities like the American Law Institute (which gave us the Model Penal Code, Restatements, and various Uniform Acts).  I don't think this is necessarily a bad thing, even when conservative groups like ALEC do this; liberal activist groups can do the same thing.  I think that these model legislation documents over time will help legislation get vetted more rigorously by the public before legislatures adopt it.  It will be fascinating to see if public commentary about such model legislation - like newpaper editorials or law review articles scrutinizing ALEC proposals - will eventually make it into the canon of "legislative history" that courts consider in determining a statute's meaning.

Nor do I disagree with everything ALEC advocates - on some issues, I actually like their proposals. But not on privatization.  On this issue, I think they push government outsourcing as a panacea for cost-cutting, and I am skeptical about whether the savings actually occur after the states hire all the contractors to do governmental tasks. 

-Dru Stevenson

Friday, May 18, 2012

Privatizing Parking Meters (NYC and Elsewhere)

The WSJ reports here that NYC is considering a plan to privatize its parking meters.  The Gothamist has a nice post here about it with handy links to stories about Chicago's nightmare experience with doing the same thing recently.  I posted previously about Sacramento's plan to privatize parking here.

I see this as a bit different that hiring private companies to perform inherently governmental tasks, like running prisons, fighting on the battlefield (mercenaries, which today we euphemistically call "military contractors"), or administering welfare programs for the poor - which I generally oppose, for reasons explained repeatedly in my other posts.  Parking meters are more analogous to a physical asset that the government can lease out to others for a term of years, like unused lands or buildings.  I don't see anything wrong with the government leasing or selling its unused real estate to private parties, and to some extent parking meters are just that.  

But they're not quite just that.  They involve the imposition of fines for violations of government regulations (parking rules and rates).  In many states, unpaid parking fines can mutate into a criminal matter that can even result in jail time.  This is the problem - will the private entity have the right to set parking rates?  Many will complain about that if the rates escalate, but my concern is whether the criminal justice system will intervene when people do not pay the astronomical fines.  To return to the state-owned real property analogy, suppose McDonald's leases a parcel of real estate from the city (they apparently have leased some square footage from my local Wal-Mart).  If someone trespasses on the property or parks their car so as to block the drive-through lane, it would merely be a civil matter of towing the car, suing the wrongdoer, etc. - no different than if McDonald's owned that parcel.  It's very different to entangle their business interests with something that can involve criminal penalties.  There's more below the line...

Thursday, May 17, 2012

Book Discussion: Laura Dickinson’s “Outsourcing War and Peace”

The blog Opinio Juris is doing an online symposium this week on Laura Dickinson's new book about private military contractors and other related subjects: Book Discussion: Laura Dickinson’s “Outsourcing War and Peace”

Highly recommended!

Monday, May 14, 2012

Slate: America's Helium Privatization Fiasco

America's Helium Privatization Fiasco explains the helium shortage that has resulted from the government selling off its stockpiles of helium gas at below-market rates over the last 14 years.

Advertising on Public Lands

I couldn't decide if this was exactly relevant here, but the proposal in Florida to allow private advertising in state parks and public lands caught my eye (via Huffington Post).

I am not anti-advertising per se, and I suppose if this was the be-all end-all approach to keeping parks open, I could get comfortable with it.  But as I discussed here last week, the main purpose of state parks agencies is to maintain the character of, and public access to, unique lands.  Allowing advertising seems to be taking a significant risk with this mission.

For a private company, one of the biggest outsourcing mistakes it can make is to outsource the activities that are core to its success and competitive advantage.  Advertising in public parks seems to be a mistake of this sort.  Parks refuse to consider alternatives to performing non-core activities cheaper (ie by continuing to use high-cost civil service employees to mow grass and clean bathrooms) but threaten the basic character of the park, the protection of which is the heart and soul of their mission, for trivial revenue gains.

One problem I have found is that public agencies like to shift attention to new revenue opportunities and away from expense reduction, even if the revenue opportunities are relatively small.  In so doing they often lose sight of what is core and non-core to their mission.

In most cases, the revenue improvement initiatives are an order of magnitude smaller than potential expense reductions. 
Let's take one state that will remain nameless.  It rejected out of hand private concession proposals to operate whole parks and said it would focus on private concession proposals to increase revenues by paying concession fees, in this case seeking a private company to rent bicycles in the park.  So let's look at the park: 
Park gate fees:  $500,000
Park expenses  (probably missing some stuff):  $800,000
Situation:  The park requires at least $300,000 a year of general tax funds to stay open.  These are going away, so this gap must be closed or the park will close. 
Proposal #1:  Revenue Enhancement.  A private company will be enticed to open an equipment rental (bicycles, etc.) in the park (there is already a store).  In the best case, this might net $100,000 a year in revenue for the private company which would pay the state 10% or $10,000 in annual concession fees.  The state's $300,000 loss is reduced to $290,000 
Proposal #2:  Expense Reduction.  A private company proposes to take over all expenses of the park in exchange for keeping the park gate fees, paying the state a 10% concession fee.  This is entirely possible in this example, as private concessionaires often have 50% or more cost reductions for the same or better service levels in operating parks  (remember, most of park operations is cleaning bathrooms and mowing the lawn).  In this example, the park's $300,000 loss is reduced to zero, and in fact the state now receives $50,000 in concession fees from the park which can cover supervision of the concessionaire and perhaps some improvements to the park. 
Hopefully, this helps explain my issue.  Focus on revenue enhancement, and taking risks with the character of the park through things like advertising, have almost trivial impact on park financial sustainability when compared to addressing the expense side of the equation.
Here is the best analogy I can think of for this -- A state parks agency cleaning the bathrooms itself but allowing private companies to post ads in the park is as if Apple outsourced iPhone design to the lowest bidder in China and then assembled the phones itself in Cupertino.

Lawmakers Want to Privatize Workers' Comp System

Illinois lawmakers are considering a privatization scheme for their state's troubled workers compensation system - news report here and pending legislation here.

Meanwhile, Politico has a quote in this story alleging that the Republican candidate for Washington Governor similarly plans to privatize workers' comp in that state if elected; this followed the "I'm not Scott Walker" line that made a splash in the press.

Note that last March, Denver news outlets reported here and here about Colorado's state-chartered workers' comp program, Pinnacol Insurance, spending millions in a failed attempt to privatize itself. (!)  More recently (May 4), an editorial appeared in the Denver Business Journal decrying (in detail) the pending privatization efforts.  The law firm Kaplan Morrell has a nice discussion of the issue on their firm's blog as well.

Ohio is also in the process of reforming its workers' comp programs, but is not considering privatization, according to this report.

- Dru Stevenson

Saturday, May 12, 2012

Privatization and Drones


Attorney Keric D. Clanahan has a new article on SSRN connecting government contracting/privatization to another hot topic: military drones.  The article is Drone-Sourcing? United States Air Force Unmanned Aircraft Systems, Inherently Governmental Functions, and the Role of Contractors, published in the Federal Circuit Bar Journal, Vol. 22 (2012). Here is the abstract:      
In the last ten years of war, unmanned aircraft systems (UAS), often called “drones,” have played a major role in the disruption of Al Qaeda, Taliban, and other insurgent enemy forces. Due to the lethality of these weapon systems, many critics have challenged the legality and morality of drone strikes. However, little scholarship has focused on the human capital requirements of the UAS mission, namely the personnel performing logistics and maintenance, video and imagery analysis, vehicle and sensor operation, and kinetic force delivery. This paper investigates the numerous roles necessary to sustain and perform the Air Force UAS mission, and attempts to identify which roles are being performed by military, federal civilian, and/or civilian contractor personnel. Based on the nature of certain roles, this paper argues that Government personnel should perform certain activities because they are inherently governmental functions, or for other policy reasons, and provides recommendations to ensure that the military does not outsource certain UAS roles to a contractor workforce.

The paper opens with a nice introduction about the special legal problems/issues with military contractors, and how the use of contractor soldiers has mushroomed in recent years.  As far as I know, this is the first article addressing the unique issues presented when private parties are maintaining or operating the drones at the behest of the federal government - a very important contribution to the literature on military privatization.  Highly recommended.

 - Dru Stevenson

Wednesday, May 9, 2012

A Large Barrier to Achieving Privatization Savings

Last week Dru Stevenson linked a study which concluded Arizona pays more for private prisons than it would cost the state if it built and ran the prisons themselves.  In a similar vein, John Stossel and John Pistole of the TSA have been going back and forth over public vs. private screening costs:
TSA administrator John Pistole wrote a letter to the Wall Street Journal claiming there were "inaccuracies" in my recent reporting on the TSA.
Pistole claims that private screening at San Francisco International Airport is no better than TSA and comes "at a higher cost than federal screening."
As I note in today's WSJ, the opposite is true. A Congressional Transportation Committee Report (2011) found that if Los Angeles International Airport switched to private screeners similar to those at San Francisco, screening costs would fall by 42%....
Pistole was likely referring to an internal TSA study. In 2007, the TSA determined that private screeners were 17% more expensive.
But the GAO looked into that study and found 10 different problems with it, noting that the TSA had simply ignored many costs, including "workers' compensation, general liability insurance, certain retirement costs..."
After the GAO report, the TSA came out with a revised study last year that found that private screeners were 3% more expensive.
The GAO says that the TSA's revised study is better, but that it still fails to address four concerns. "TSA needs to take additional actions... to address the remaining four limitations," the GAO said, noting that the TSA makes assumptions about some costs in their study that they were unable to justify.
Despite Stossel's later implication, I don't think the TSA is being disingenuous here.  The heart of the problem is that public accounting systems are simply not set up to do this kind of analysis, and the public officials who use them simply don't have the relevant experience to even spot these limitations.

Back when I was in the corporate world, "Make-Buy" decisions -- decisions as to whether the company should do some task itself or outsource it to companies with particular expertise or low costs in that area -- were quite routine.  Even in the corporate world, though, where accounting systems are built to produce product line profitability statements and to do activity-based costing, this kind of analysis is easy to get wrong (in particular, practitioners frequently confuse average versus marginal costs).

But if these analyses are tricky in the private world, they are almost impossible to do well in the public sphere.  Grady Gammage, a senior and highly respected research fellow at Arizona State University's Morrison Institute, has as much experience with public policy analysis as anyone in the state.  Several years ago, he spent months digging into the financial numbers of Arizona State Parks, with the full cooperation of that agency.  A critical question of the study was how much it actually cost to operate a park, vs. do all the other resource and grant management tasks the agency is asked to perform.  Despite a lot of effort by Gammage and his staff, he told me once that the best he could do was make an educated guess --plus or minus several million dollars -- as to how much of the Agency's budget is spent actually operating parks vs. performing other tasks.

The reasons that this is so hard is that the parks agency's budgeting process was not set up to determine true net operating gains and losses at parks.  It was set up, like most public accounting systems, to enforce accountability to different pools of money that have been allocated by the legislature for certain tasks.  This tends to lead to three classes of problems that cause public make-buy decisions, as well as ex post facto third-party analyses, so difficult.  Since I am most familiar with the parks world, I will discuss these three issues in the context of parks:

  1.  Costs are spread among multiple funds.  A parks agency typically has numerous sources of funds -- gate fees, donations, general revenue funds, capital funds, special grants, heritage funds, lottery funds, etc.  The budgeting process is set up to make sure money from, say, a special heritage fund is tracked, is being spent within its legislated limits, and that its money is used only for allowable purposes for this particular fund.  But this means that to find all the costs associated with a particular park, one must look across numerous budgets.  The local operating budget will have some of the costs, but it will almost never include the cost of equipment and capital assets, which tend to be in an entirely different account; often short term park maintenance is in a different budget item from long-term capital maintenance; and certain activities like local educational programs may be charged to specific grants.
  2. Many costs are not allocated to the field at all, but show up only in headquarters budgets.  For example, Arizona State Parks charges park employee wages to the individual park budgets, but the health insurance contributions and pension contributions or park employees are charged to headquarters.  In addition, costs for numerous headquarters services from HR to IT are not allocated to the parks.  To make analysis even harder, some of these headquarters costs would go away if the park operations were privatized (e.g. lease on a T1 line or maintenance of the park-specific web site) while some costs would not be reduced at all (e.g. cost of maintaining an IT help desk).
  3. A number of large operating costs don't show up anywhere in public accounts.  The best examples of these are liability and workers compensation costs.  Most public agencies are self-insured, so they appear to have no liability insurance costs.  But in reality this self-insurance has real costs (private park operators pay about 6% of revenues for liability insurance), but since states generally pay out liability claims by special legislative acts, these costs never hit park budgets.  In states with pay-as-you-go retirement benefits systems, the cost of future retirement liabilities don't show up on budgets either.
For those who are not ideologues, one way or another, about privatization, the whole point is to save taxpayer money.  But how do we know privatization of an activity is saving money if the government does not know how much money is being spent on the activity?  It's a tremendous problem, and one which leads, inevitably, to a lot of disputes over privatization results, not to mention a serious lack of accountability.

Postscript:  These accounting issues also lead to at least two typical games played by private companies and public agencies:
  • Private companies will often claim savings of allocated costs that may not actually go away if the services are privatized.  Public agency employees tend to have little experience with marginal analysis and zero-based budgeting, and struggle to counter these arguments.
  • Public agencies frequently play a hide-the-pea game to avoid privatization.  Here in Phoenix, we have a rule that if private contractors are allowed to bid on providing a service to the city, the city's departments may bid as well.  These departments have gotten good at cost-shifting to budgets outside of their area of control to submit unrealistically low bids.


New Article: Link between Demographic Representation and Federal Contracting Decisions

Recently (May 6), a fascinating new privatization article appeared on SSRN - The Link between Demographic Representation and Federal Contracting Decisions, by Professors Deanna Malatesta (Purdue University Indianapolis), Sergio Fernandez (Indiana University Bloomington), and Craig Smith (University of Arizona).  This important article is forthcoming in the Public Administration Review.

Here is the abstract:     
Relying on the traditional claims associated with the theory of representative bureaucracy, this study examines whether the racial and gender characteristics of contracting officers and other public agency personnel affect decisions to award contracts to members of socially and economically disadvantaged groups. The expectation under the theory is that decision makers are inclined to provide substantive benefits to the groups to which they belong. Our seemingly related regression (SUR) models provide evidence that is consistent with the theory for racial minorities but not for women. In fact, more women in agency senior positions are associated with fewer contract dollars awarded to women-owned small businesses. This finding offers preliminary evidence that implicit biases against women may be more intractable than biases against racial minorities. Results of our analyses have important implications for the effectiveness of the Small Disadvantaged Business (SDB) program and the Women-Owned Small Business (WOSB) program, both of which are intended to address the significant historical underrepresentation of racial minorities and women in government procurement. We believe a main contribution of the research stems from the introduction of plausible explanations for our findings from social psychology that should be useful for future research on representative bureaucracy.

This is an important side of government outsourcing and privatization - at least on the federal level (and I think in many states), privatization and contracting out involves not only cost-saving conserations, but other policy objectives as well - like providing a boost to minority-owned or women-owned businesses (the latter contributes to the commonplace anecdotes about entrepreneurs listing their marginally-involved wives as the "owner"on the business in order to be eligible for lucrative government contracts.  Before turning to the findings in this new article, I must point out a more preliminary observation: the federal government has long recognized that government contracts are a significant boost to the private firms that obtain them, helping them expand operations, cultivate credit, and capture greater market share.  This recognition is the entire basis for the federal laws requiring that firms owned by womena and minorities get favorable treatment in the selection process.  Yet the same recogniztion disappears when politicians are talking about privatization and outsourcing in general - then, suddenly it's all about what the firms can do for the taxpayers, supposedly saving boatloads of money for the public fisc.  They omit how beneficial the contracts are for the firms that obtain them, how such contracts can distort the market and provide ancillary (and unfair) advantages for the firms that get the contracts. The fact that favoring minorities and women in government contracts helps these groups implies that government contracts in general provide intangible (and sometimes quite tangible) subsidies for the private firms - which brings into question whether the taxpayers are really getting the best deal they could.  My point is that outsourcing is not all about saving money for the taxpayers - it's also about the benefits to the contractors.  But they don't discount their rates to the taxpayer to offset this benefit.  If they were required to do this (that is, required to give the taxpayer the best possible deal, which is what the private sector would demand), then most would no longer be interested in the government contract.

Now, about the findings here: very signficant contribution to the literature.  Their first observation - that the government officials tend to favor contractors from the same ethnic group - is, in my view, the more significant.  The conclusion that bias against women is super-strong - based on the fact that  even female officials fail to favor women-owned businesses - is, well, one of many conclusions that one could draw from that fact.  The evidence that government outsourcing and privatization - which is becoming ubiquitous - involves a measurable amount of favoritism and self-interest by the officials selecting contracts - that's rather alarming.  And undermines the idea that taxpayer savings really control these decisions.

 - Dru Stevenson

Tuesday, May 8, 2012

Paper: Tenure for Individual Government Contractors?

Theodore T. Richard, of the United States Air Force, has published an article about the federal government hiring individual contractors (as opposed to firms, which is the traditional rule): Government Personal Services Contracting and Antidiscrimination Laws: Tenure for Contractors?

This appeared in the Journal of Contract Management, Summer 2009, but was posted to SSRN only two weeks ago.  This makes a truly significant contribution to the literature in this field by addressing the distinction between individual contractors and corporate contractors, and the unique issues that can arise with the former.  Here is the SSRN Abstract:      
Civil service employees are thought to enjoy “tenure,” or job protection, which does not necessarily extend to personal services contract employees. Antidiscrimination laws, however, can be used to extend job protection to personal services contract employees. While contracting for personal services is generally prohibited, exceptions to the prohibition exist. As the federal government considers liberalizing the rules governing personal services contracts, policy makers must be aware of potential tangential effects, such as increased liability, that may nullify the benefits of these types of contracts. This paper discusses the prohibitions on personal services contracts and the applicability of antidiscrimination laws to the federal government when using personal services contract employees.
Hiring numerous individual contractors actually solves some of the chronic problems with government outsourcing or privatization - the lack of real competition between firms bidding for contracts (it is commonplace that there is a single bidder, or at most two or three), and the lack of available alternatives when the government wants to switch away from a contractor who is either deficient or has raised its prices.  Richard highlights some significant downsides to hiring individuals that government procurement officials might overlook.  Very worthwhile reading, likely to be controversial.

- Dru Stevenson

Sunday, May 6, 2012

AZ review shows private prisons cost more. So legislature ends the study.

From Daily Kos: AZ review shows private prisons cost more. So legislature ends the study. 


 Worth a read for those interested in the issue of privatized prisons.


 - Dru Stevenson

Erroneous $15 Million Bonus to Government Contractor Still Missing


Privatization advocates consistently promise that outsourcing government tasks will yield greater efficiency and cost savings for taxpayers.  The results do not always meet expectations - it turns out that the government can be even less efficient at contracting out its work than it is in doing the work itself.  The Federal Times recently reported a case in point: $15 million gone missing after it was erroneously paid to a contractor to clean up a plutonium production site in Washington state.  Here's the introductory material from the article:
Almost a decade after demanding that a contractor return a $15 million bonus, Energy Department officials still don't know if that money was ever recouped.  In an audit released this week, the department's inspector general said the contractor, Bechtel National Inc., never reimbursed a "performance fee" that DOE awarded it in 2003 and then later revoked.  The fee was for Bechtel's production of a processing vessel to be used at a radioactive waste treatment plant in the cleanup of Hanford Nuclear Reservation, a former plutonium production site in Washington state.  But Energy Department officials later concluded that the company had failed to meet contract requirements to fully check the vessel for faulty welds. In early 2004, they asked for the money back.  While Bechtel expressed interest in a "mutually acceptable resolution," according to the audit, neither the company nor the government could supply evidence that the money was ever returned.

- Dru Stevenson 

Friday, May 4, 2012

Jeroen Temperman - Human Rights, Public Participation, and Privatization


Dr. Jeroen Temperman has a new article on SSRN: Public Participation in Times of Privatization: A Human Rights Analysis, recently published in Erasmus L. Rev. vol. 4, Issue 2 (2011).  Here is the abstract:
Privatisation may not only affect the enjoyment of the right to public participation itself, but might also impact other substantive rights. This article charts some of the ramifications of privatisation in relation to individual human rights as enshrined in international human rights conventions, with a particular focus on the impact privatisation has on the right to public participation. The right to public participation can be seen as both an example of a fundamental right that may be affected by processes of privatisation and, at the same time, potentially being the key to remedying (part of) the adverse impact privatisation has on the enjoyment of other fundamental rights.
I enjoyed this article and thought that the human rights perspective makes it a valuable contribution to the field, although the European perspective on what constitutes a basic right will seem foreign or unusual to many American readers.  Temperman does not define privatization in the paper, and I assumed that he is using the term as most Europeans do - the selling off of government assets or the withdrawal of the government from some sector, leaving it to the market instead.  (In the United States, "privatization" more often refers to the government hiring a private contractor to perform some governmental functions - the government still ensures the task gets done and pays for it, but hires non-state actors to make the goods or provide the services).  Yet Temperman talks throughout the paper about "government services," as opposed to assets, and some of his examples - such as education - overlap with "privatization" efforts in the United States.

UPDATE: The entire Issue (4:2) of Erasmus Law Review is a special issue dedicated to the phenomenon of privatization analyzed from different (international) legal perspectives. Dr. Temperman took on some of the international human rights issues surrounding privatization, while other scholars discussed it from the perspective of environmental law or trade & development law.

- Dru Stevenson
News reports announce that KBR, controversial military contractor and former Halliburton subsidiary, is moving into privatizing of police forces in the UK.  Police there are planning a protest march, which presumably will be quite orderly, as far as protests go.  A KBR spokesman had a subtle, nuanced way of describing their approach:
"KBR is not involved in policing; instead, our objective in the privatization of the police force is to get more police doing actual police work while KBR brings operational efficiencies to the back office with the objective of achieving an overall lower cost of service while improving service levels," the spokesman said. 

I find myself wondering about the plural form "efficiencies."  My spellchecker does not think it is a real word.  I'm trying to decide.  How many types of "efficiency" are we talking about here?


- Dru Stevenson

Thursday, May 3, 2012

The Mechanics of Government Make-Or-Buy Decisions: DoD Wants to Change FAR Laws

The Federal Times today reports that the Department of Defense is seeking a small but enormously significant change to the Federal Acquisition Regulation (FAR) - specifically, the "of a type" clause in the regs.  The article is DoD Seeks New Commercial Buying Rules.  

Here are the opening points (the rest is worth reading for those who want to understand how federal outsourcing and purchasing works):

U.S. Federal Acquisition Regulation (FAR) language that permits purchases to be considered commercial if they are "of a type" similar to items available for sale in the private sector may be facing its most serious challenge yet. The Defense Department has proposed striking the language from the FAR, the guiding document for all government acquisition, as part of a batch of legislative suggestions sent to Congress at the end of March. While the precise number of contracts considered commercial across the federal government under "of a type" classification is unknown, critics fear the proposal could have a chilling effect on the government's ability to access commercial technologies. The DoD says the change could help combat pricing issues in the agency for what are supposed to be non-DoD-specific items, issues that are facing greater scrutiny as the agency begins the process of making deep spending cuts.
The Project On Government Oversight (POGO) site has this extensive analysis of the proposed change - which they see as a good thing, something POGO has advocated for a long time.


Dru Stevenson

Government Contractors Tell Senators To Back Off


The Federal Times quasi-blog "FedLine" on May 1 had this post: PSC to Senators: Contractors Are Feeling the Pinch, Too.  The post describes current Senate inquiries into the alarming proportion of private mercenaries being used by the Defense Department instead of actual United States soldiers and civilian personnel, and the response from an association of government contractors saying that the Senators should back off.  Here are two illustrative sentences from the post:
A recent call made by 26 senators to keep the Defense Department’s contract spending in check has prompted the Professional Services Council trade association to ”correct the record.” 
 . . .  PSC refuted the senators’ claim that federal employees cost less — a point that has been studied by several groups but has not yet resulted in a clear answer. But Soloway agreed with the senators in their support for allowing agencies the flexibility to manage their personnel as strategically as possible.

It seems to me that "refuted" should read "disputed," if the answer is now unclear.  I'll go with the Senators on this question (whether federal employees cost less) rather than the contractors who have a direct financial interest in maintaining the contracts.  It is nice, however, to see other acknowledging that often government contractors actually cost more than government employees doing the same task.


- Dru Stevenson

Wednesday, May 2, 2012

More From Volokh: Do Faith-Based Prisons Work?

We've recently featured a couple of Alexander Volokh's new articles about prison privatization.  A third new one that deserve mention (he is amazingly prolific) is Do Faith-Based Prisons Work? in  63 Ala. L. Rev. 43 (2011) (SSRN has an earlier version here).  In this piece, Volokh cuts new ground, exploring an issue largely ignored by the academic literature up to now.  Here is the abstract: 
This Article examines everything we know about the effectiveness of
faith-based prisons, which is not very much. Most studies cannot be taken seriously because they are tainted by the “self-selection problem.” It is hard to determine the effect of faith-based prison programs because they are voluntary, and volunteers are more likely to be motivated to change and are therefore already less likely to commit infractions or be re-arrested. This problem is the same one that education researchers have struggled with in determining whether private schools are better than public schools. The only credible studies done so far compare participants with nonparticipants who volunteered for the program but were rejected. Some studies in this category find no effect, but some do find a modest effect. But even those that find an effect are subject to additional critiques: for instance, participants may have benefited from being exposed to treatment resources that non-participants were denied. Thus, based on current research, there is no strong reason to believe that faith-based prisons work. However, there is also no strong reason to believe that they do not work. I conclude with thoughts on how faith-based prison programs might be improved, and offer a strategy that would allow such experimentation to proceed consistent with the Constitution.
I''m somewhat sympathetic with my fellow evangelicals trying to put their faith into action and to have an impact on some of the most broken parts of our society; and I presume, in a mostly hopeful way, that the original motivation behind these prisons was a rehabilitative agenda, which overlaps somewhat with the concept of redemption in Christianity (many religious people would simply equate redemption and rehabilitation, but I attribute this to believers today being weak on theology; the two are distinct concepts).  That being said, I worry about the "message" (as well as the significance) of evangelicals incarcerating people, especially when taken together with this disturbing new essay from my hero William Stuntz about the historical correlation between evangelical political power and the size of the country's prison population. And personally, I cannot think of anything more likely to corrupt a religious movement or organization than soliciting and profiting from government contracts.  And then there's New Testament passages like 2 Timothy 2:4 (apparently warning Christians not to get entangled in worldly "civilian" affairs) and 3 John 1:7 (which seems to praise evangelical Christians who seek no financial support for their movement from those who are not part of their faith community). Even the messianic prophecies in the Old Testament (which evangelical Christians believe apply to their own mission today) speak of freeing prisoners from their dungeons, not keeping them there (see, e.g., Isaiah 42:7; Isaiah 51:14; Isaiah 61:1 (quoted in the Gospels); and Zechariah 9:11-12).  So when religious folks want to run penal institutions, I don't get it - speaking as a religious person.

Alexander Volokh is a professor at Emory Law School, and is emerging as a leading voice in the intellectual discussion of privatization.

- Dru Stevenson

Warren Meyer on Park Privatization

Greetings!  Dru Stevenson has been kind enough to allow me to join the bloggers on this site.

Quick background:  I have a mechanical engineering degree from Princeton and an MBA from Harvard.  I have been blogging for nearly 8 years at Coyote Blog, and I write a column at Forbes.com.  Probably most relevant to this site, for the last decade I have run a company called Recreation Resource Management which privately operates public parks.

So I suppose you can say I have a horse in the privatization race, but while I am passionate about the potential, my experience has also helped me better understand many of the traps in this public-private partnership world.

In particular, you will find I frequently focus on incentives, both public and private.  For example, in the park world, I distrust both inspections and "public spirit" as mechanisms for ensuring quality operations.  The best contracts in our business are those where it is in a company's best (most profitable) interest to keep a park clean and well-maintained.  While this may seem like like a chimera to some, I would point out that McDonald's and Marriott keep their bathrooms tidy without any government inspections or contractual obligations to do so.  Why?

We will try to tackle some of these issues in later posts, but in this introduction I just wanted to take on an preliminary issue:  Why do we have public parks and recreation at all?

In my history of public discussions on private operation of public parks, it is no surprise that I run into a lot of skepticism about having any private role at all.  But I also run into the opposite -- folks who ask (or demand) that the government sell all the parks to private buyers.  So why shouldn't privatization of parks just consist of a massive land sale?

The answer has to do with profit potential.  Over time, if in private hands, a piece of land will naturally migrate towards the use which can generate the highest returns.  And often, for a unique piece of land, this most profitable use might not be a picnic area with a $6 entrance fee -- it might instead be something very exclusive which only a few can enjoy, like an expensive resort or a luxury home development (think: Aspen or Jackson Hole).  The public has asked its government to own certain unique lands in order to control their development and the public access to them.

Public ownership of unique lands, then, tends to have the goal of allowing access to and enjoyment of a particular piece of land for all of the public, not just a few.  Typically this entails a public agency owning the land and controlling the types of uses allowed on the land and the nature and style of facility development.  I call these state activities controlling the "character" of the land and its use.  (One could legitimately argue that private land trusts could fulfill the same role, and in fact I have personally been a supporter of and donor to private land trusts.  However, I am not an expert in this field and will leave this discussion to others).

Having established a role for the government in setting the character of the lands we call "parks," we can then legitimately ask, "does this goal require that government employees actually staff the parks and clean the bathrooms?"  I'll begin addressing that question in my next post.

On the Radio

The recording  is here from today's live radio interview about privatization of public education on Warren Olney's public radio program, "To the Point."

Tuesday, May 1, 2012

Paper: Outsourcing and Accreditation of Public Service - Providing Efficiency and Accountability


Claudio Travaglini (University of Bologna - Department of Management)  has a new article on SSRN entitled Towards a New Model of Control in Outsourcing and Accreditation of Public Service - Providing Efficiency and Accountability.  This is an important component of privatization, and this paper makes a nice contribution to the literature on this subject.  Here is the abstract:
Public accreditation certification of private institutions and differentiation of institutional forms of public bodies providing public services determines a convergence between public and private nonprofit providing of social, educational and health services in Italy. A new paradigm and the need for new tools of governance and regulation.  In Italy system of public welfare and provision of social, health and educational services has developed in the past fundamental as an expression of the central and local government, regulated, financed and managed by the public administration.  On the other side private, religious, nonprofit institutions providing same services that were not included in public system had maintained a wide autonomy in organizing services, but suffering for the absence of a strong financial support.  In recent years, we can see a gradual process of contracting out before, and then public-private partnership, and now of general accreditation and public financing of private institutions providing public services.  On the other side and in the same period the increasing strategic and financial autonomy of public institutions and their search of financial resources are leading public administrations to a different frame of reference and to the adoption to private (profit and nonprofit) models in managing public services by public bodies.  
So private bodies (profit entities, cooperatives and nonprofit) reduce their differentiation and autonomy to conform to accreditation organizational standards defined by public authorities to gain full public financing and to cover their costs with public tariffs under the 'accreditation' framework regulation.  By contrast, in the meanwhile, public bodies, in search of new opportunities and new funding, tend to adopt private law models (before as public private partnership or for profit company and now as nonprofit public benefit organization) to adopt models more efficient. So public and private bodies provide same services, to same people, with same public money, with very different governance and accountability regulations. This path suggest us to affirm a new concept of 'public service' objective and not subjective, and to identify unified forms of regulation and transparency for it. In particular to public services managed by private operators with public funding should be requested more transparency and a mandatory formalized social control, while to the public bodies should be requested a greater responsibility and economic competitiveness with private entities that have the same standard of service. Only in this way the accreditation could be a fruitful revolution in competition in providing public service.


Dru Stevenson


On the Air Tomorrow with Warren Olney...


Tomorrow, Wednesday May 2, I'll be on Warren Olney's public radio program, "To the Point," discussing education privatization and related issues with other panelists.  Hope you can tune in!


 - Dru Stevenson