Thursday, January 31, 2013

Does Government Outsourcing Impede Job Growth?

Robert Strenge reports at thee Washington State University News Center that new research indicates privatization of prisons yields disappointing results for the states' labor market, especially in rural areas.  The article is Researchers Find Prison Privatization Can Impede Job Growth.  Here is a quote:
Proponents of privatization anticipate positive economic outcomes - lower costs to taxpayers, similar or improved service delivery and improved salary and working conditions. But Hooks and fellow researchers Clayton Mosher, WSU associate professor of sociology, and Shaun Genter, a WSU alumnus teaching sociology at Tacoma Community College, found many of the jobs promised by private prisons simply never materialized. . . The researchers also determined that private prisons are less likely to contribute to employment stability than publicly run prisons because of their comparatively high turnover rate, which the researchers believe is the result of the relatively low wages paid by private prison operators.
  - Dru Stevenson

Tuesday, January 29, 2013

Russian Governor's Office Searched in Alleged Privatization Fraud

Russian Governor, Nikita Belykh's office was searched recently in connection with suspected embezzlement of a local distillery that was privatized in 2010. The distillery in question, Urzhum Distillery Company, was reportedly sold for 98 million roubles (less than 3.3 million dollars in U.S. currency) while the stock's market price was valued at over 197 million roubles (over 6.5 million dollars in U.S. currency).

The primary suspect in the case is the former Head of the State Property Department of the Regional Administration, Konstantin Arzamastsev. He is currently in hiding, and his whereabouts are unknown by the local authorities. Others suspected of taking part in the fraud, including a securities appraiser and the director of the company that bought the stock, are already in custody. As more facts continue to come to light in the investigation, more will be known about the alleged frauds committed. For more information on the investigation, click here.

Volokh on Privatization and Antitrust

Another interesting new publication by Alexander Volokh is his post Privatization and Antitrust over on the Volokh Conspiracy blog.  He summarizes his forthcoming book chapter on the subject - we look forward to reading it in print!  Very insightful.

 - Dru Stevenson

Sasha Volokh on Privatization and the Employee-Contractor Distinction

Alexander Volokh has a new article in the UCLA Law Review entitled Privatization and the Elusive
Employee-Contractor Distinction.  In it, he tackles an important - and hitherto neglected - aspect of government outsourcing, namely, the blurry line between contractors and employees that plagues employment law in general.  This is an important contribution to the literature and highly recommended.  Here is the abstract:
Does it matter whether prisons are managed publicly or privately — that is, whether prisoners are kept by state employees or by private contractors?

Yes, for all sorts of empirical reasons. Chiefly, we reasonably expect and observe and public and private providers will act differently and otherwise affect the real world.

But is there any inherent, normatively relevant difference between employee- and contractor-managed prisons, independent of such data-driven concerns? No.

The state is an abstract set of relationships; therefore, to act, the state must use agents of some sorts. Both employees and private contractors are private individuals; both do things forthe state in exchange for money; both have private purposes, as well as the discretion to follow those purposes sometimes, even contrary to the desires of the state. Private contractors can be unaccountable, but so can public employees; private contractors can lack legitimacy in the eyes of the public; but so can public employees.

The extent to which the public and private sector differ is an empirical, contingent question. It makes sense to favor or oppose privatization, and to treat the public and private sectors differently in the law, but the reasons for doing so must be based not on any inherent difference between sectors but rather on the empirical — and hotly contested — difference in howthe two sectors will act in the real world.

Sunday, January 27, 2013

Analyzing Public vs. Private Sector Objectives

Eduaro Porter, of the New York Times, published an interesting article analyzing how organizations, whether they be public or private, can most effectively meet their business goals. The article focuses on British Petroleum (BP), a company that has been in both the public and private sector, as an intriguing case study. Below is an excerpt from the article, discussing the trade-offs BP faced in managing its business goals in both the public and private sector.
While in government hands, British Petroleum paid too little attention to profitability, constrained by its need to please elected officials who often cared more about keeping energy cheap and employment high. But in private hands, it may have cared about profits far too much, at the expense of other objectives. “BP veered from being a company that made sure nothing blew up to one focusing on cost-cutting at all costs,” Professor Fisman said.
The author argues that the private sector works best when objectives are clearly defined, and goals are tied to profit. However, where objectives are harder to define and more complex, making it more difficult to match profits with objectives, the public sector may be the best solution to achieve business objectives. I highly recommend reading the entire article, which can be found here.


Thursday, January 24, 2013

Follow Up: Pennsylvania's Privatization of Lottery

On Thursday, January 17, I posted an article discussing Pennsylvania Governor Tom Corbett's plan to privatize his state's lottery system. The sole company seeking control of the lottery, Camelot Global Services, has recently received some scrutiny in the United Kingdom where it manages the National Lottery. Jan Murphy, of the Patriot News, has posted an update detailing some concerns over the prospective purchaser.  

It was recently revealed that Camelot set aside $8 million dollars as bonuses to compensate executives. The news of these excessive bonuses coinciding with the recent decision to double lottery ticket prices leads many customers to the conclusion that these two things are related. However, a company spokesman for Camelot refutes these allegations and claims that these recent developments are unrelated.  The spokesman further urged that the raising of lottery ticket prices in the United Kingdom will ultimately have no effect on ticket prices in Pennsylvania. 

There have been many concerns raised over privatizing the lottery in Pennsylvania such as the lack of transparency of the process to concerned citizens, the rapid rate of speed at which the deal is progressing, and whether or not Governor Corbett legally has the authority to continue without receiving legislative approval. Senate Democratic Leader, Jay Costa, specifically expressed some of these concerns: “We said all along that this governor is giving a foreign company the ability to take hard-earned wagered dollars in Pennsylvania and shipping them overseas for high-ranking Camelot employees. We think those dollars should be invested back into state programs for seniors.”

Privatization and National Parks

I was on Huffington Post Live the other day in a panel discussion on privatizing National Parks.  The link to the video and comments is here.

None of the panelists, including me, advocated for privatizing National Parks.  The whole point of public lands, as I have written on this site before, is to change the decision-making calculus around development of and access to these lands from net present value to broader access and more natural settings.  In other words, no one wants a McDonalds in front of Old Faithful.

What I did advocate for, as discussed starting around the 7 minute mark, is for privatization of certain operational tasks, from bathroom cleaning to maintenance to landscaping, in order to reduce costs.  Already, the high cost of using civil service employees to perform these tasks are crowding out things like maintenance and renovation.

On a related note, today in Phoenix I am participating in a series of meetings to see if Arizona can create a program where savings from privatized operations can be banked to help fund infrastructure renovations in the parks.

Sunday, January 20, 2013

Chicago Accepting Bids to Privatize Airport

Kathy Bergen, of the Chicago Tribune Review, has an interesting article outlining the current bidding process for companies seeking to gain control of Chicago's Midway Airport. Potential bidders are submitting their applications as we speak and must formally express their interest in the contract before February 22.

Companies planning to submit a bid for the contract will need to meet a variety of specific terms including a lease of less than forty years and revenue sharing with the city. Southwest Airlines, the airport's leading provider, is in favor of the move towards privatization. It will take some time to evaluate the bids, but Mayor Rahm Emanuel appears very interested in the idea of privatization and moving forward with the process.

Thursday, January 17, 2013

Pennsylvania Lottery Privatization Moves Forward

Pennsylvania is the only state in the nation that allots all revenue earned from the state lottery solely to programs for seniors. It appears Pennsylvania is set to become the third state in the nation, following Illinois and Indiana, to privatize its state lottery system. Romy Varghehse, reporting for Bloomberg, has an interesting piece detailing Pennsylvania's new lottery proposal.

Pennsylvania governor, Tom Corbett, recently granted Camelot Global Services a 20 year contract to run the state's lottery system. Camelot Global Services is a subsidiary of Camelot Group Plc. which runs Britain's national lottery. The contract has been sent over to the Attorney General's office for review before the deal can be finalized. Camelot was the sole bidder for control of the lottery back in November, and the company expects to earn 34 billion in profits for the state over the next 20 years. 

Pennsylvania's lottery earned $1.06 billion in total profits during the most recent fiscal year, a new record for the state. Many people question why the governor wants to change something that appears to be working and trending in the right direction. Representative Mike Sturla voices his concern over the proposed deal: “People have serious concerns regarding the transferring of a thriving state asset that generated millions of dollars for senior programs last year to a foreign private firm accountable only to profiteers with little oversight.” Regardless of the concerns raised, it appears that Pennsylvania is moving forward with lottery privatization and few hurdles remain to finalize the deal. 

Privatization and Cartels

For years I have written that the single most common failure mode of privatization is when it replaces a public agency monopoly with a private cartel.  Private actors are not inherently more efficient or innovative than public ones -- they often are, but that is because they have better incentives imposed on them from the marketplace and particularly from competition.  Replacing a public monopoly with a private one seldom achieves much benefit.

Megan McArdle and the New York Times have a fascinating account of the recent New York school bus strikes.  The whole situation is a complicated mess with multiple failure modes, so its hard to assign one element or another the proper ration of blame.   For example, the way New York handles its exploding population of special ed kids adds a lot of cost to their busing system.

But its pretty clear from the article that bus drivers unions and bus companies have created a cartel to enrich themselves, choke off competition, and raise costs to the city.  It appears that companies pay the unions above-market pay and benefits and guarantee them a closed shop in exchange for the unions creating massively disrupted strikes whenever the city tries to change the status quo.

Sometimes the smallest issues can cause big problems.  This is not discussed in the articles linked, but it appears that the union and cartel hold a lot of its power because the city chooses to renew contracts in January, during the school year.  All the historic efforts to bring in competition or rationalize routes has been in January.

But trying to do this during the school year, rather than in June, is insane.  It gives the companies and unions incredible power, because they can threaten that any change will lead to disruption.  Even switching providers for a single route suddenly becomes risky, because the new provider would have to seamlessly take over the service on the fly.  I operate public campgrounds on contracts awarded through a bidding process.  All the agencies expire contracts and do bidding in December and January when the parks are closed for the winter.  I can't even imagine an agency trying to make this switch in the busy summer.  I could easily see competitors who wanted to game the system scaring agencies into renewing their contracts no-bid in this situation under threats of disruption and chaos.

Thursday, January 10, 2013

Does Prison Privatization Lead To More Lobbying For Harsher Sentences?

This question is probably a long way from being fully understood.  It depresses me to see prison corporations lobbying for things like the war on drugs, but what we often forget is that such lobbying is not necessarily incremental, as it may just be replacing similar lobbying by public actors.  In fact, Sasha Volokh uses some economics frameworks to argue that in certain circumstances privatization may actually reduce such lobbying rather than increase it:
Private prison firms are often accused of lobbying for incarceration because, like a hotel, they have “a strong economic incentive to book every available room and encourage every guest to stay as long as possible” (Schlosser 1998; see also Dolovich 2005; Shichor 1995; Sarabi and Bender 2000). This accusation has little support, either theoretical or empirical. At worst, the political influence argument is backward: privatization will in fact decrease prison providers’ pro-incarceration influence. At best, the argument is dubious: its accuracy depends on facts that proponents of the argument haven’t developed.
First, self-interested pro-incarceration advocacy is already common in the public sector—chiefly from public-sector corrections officers’ unions. The most active corrections officers’ union, the California Correctional Peace Officers Association, has contributed massively in support of “tough on crime” positions on voter initiatives and has given money to crime victims’ groups, and similar unions in other states have endorsed candidates for their tough on crime positions. Private firms would thus enter a heavily populated field and partly displace some of the existing actors.
Second, there’s little reason to believe that increasing privatization would increase the amount of self-interested pro-incarceration advocacy. In fact, it’s even possible that increasing privatization would reduce such advocacy. The intuition for this perhaps surprising result comes from the economic theory of public goods and collective action.
The political benefits that flow from prison providers’ pro-incarceration advocacy are a “public good,” because any prison provider’s advocacy, to the extent that it’s effective, helps every other prison provider. When individual actors capture less of the benefit of their expenditures on a public good, they spend less on that good; and the “smaller” actors, who benefit less from the public good, free ride off the expenditures of the “largest” actor.
Today, the largest actor—the actor that profits the most from the system—tends to be the public-sector union, because the public sector provides the lion’s share of prison services, and public-sector corrections officers benefit from wages significantly higher than those of their private-sector counterparts. The smaller actor is the private prison industry, which not only has a smaller proportion of the industry but also doesn’t make particularly high profits.
By breaking up the government’s monopoly of prison provision and awarding part of the industry to private firms, therefore, privatization can reduce the industry’s advocacy by introducing a collective action problem. The public-sector unions will spend less because under privatization they experience less of the benefit of their advocacy, while the private firms will tend to free ride off the public sector’s advocacy. This collective action problem is fortunate for the critics of pro-incarceration advocacy—a happy, usually unintended side effect of privatization.