Friday, June 14, 2013

Privatization Coming to Detroit

Detroit’s long slide into the financial abyss has been a function of local government trying to paper over serious financial problems, and refusing to implement solutions that make financial and operational sense. The economic factors that created some of the problems were not the fault of local officials, but the failure to realistically deal with those issues certainly can be fairly laid at their feet. The fiscal disaster has brought Detroit an Emergency Manager who supplants local authority, and is now working to deal with the crushing debt facing the City. The new E.M. is convening labor, bondholders, and other stakeholders to talk about solutions that could help the City to avoid a Chapter 9 bankruptcy, but will require substantial sacrifice for labor, and “haircuts” for bondholders. In the interim the Emergency Manager has begun to assert operational control over City functions. One of his first orders of business? Privatizing trash collection.

The Detroit Free Press is reporting that E.M. Orr has begun conversations with national trash haulers to replace City workers with a private vendor. Reports indicate that such a move could save 30% on the $50 million that the City is currently spending. The push-back from municipal unions has already begun, with union representatives disparaging the effort, and denying that there will be cost savings.

Richard Mack, a lawyer for city unions who has helped battle previous privatization efforts, said outsourcing could end up costing the city more in the long run.

“Study after study shows privatization costs the government more,” Mack said. “When the private bids come in, they will be lower. But once the city gets rid of all of its trucks and equipment, the change orders come in, and the city can’t do anything about it. You have nothing to negotiate with, and then you’re at the mercy of contractors who’ll bleed you dry.”

I understand that Mr. Mack is doing his job, but in this case his representation does not ring true. A good contract does not allow for “change orders” in curbside pickup or tipping fees. As I looked at the story, and the back and forth on privatizing city services, I thought it might be a good time to re-visit the Stephen Lisauskas paper “A Practitioner’s Guide to Outsourcing”, done for the Pioneer Institute back in 2012. Lisauskas wrote what I consider to be an outstanding paper which looked at outsourcing, dealing with the positives as well as the negatives of the practice. As you look at the potential for savings in Detroit and why a private company could not just raise prices once they got a trash removal contract the Lisauskas paper has a sentence that is instructive.

Outsourcing often involves market competition for services. This provides public sector agencies the opportunity to access more modern, flexible approaches to providing a service than may not have evolved through internal service provision.

Private competition is fierce in trash removal, and vendors can and do change frequently in municipalities. That is the way you prevent monopoly type pricing. So what are the benefits of outsourcing?

Outsourcing allows managers to focus on measuring and managing outcomes rather than on dealing with significant input issues. These input issues are typically complicated and time consuming given the many laws, regulations,collective bargaining provisions and financial challenges under which municipalities operate.
As a result, a focus on outcomes – and the public reporting and discussion of these outcomes– is often underemphasized or absent when municipalities provide services using internal resources. Outsourcing improves the likelihood
that municipalities can focus on what truly matters to many recipients of public services – are school children being fed appropriately, is trash being removed, are schools clean and safe – rather than focusing their time and effort on planning for and managing the inputs used in service provision.

But Lisauskas also deals with the problems that could arise from outsourcing the “wrong” services.

While outsourcing has a number of potential benefits, there are also potential challenges to using this service delivery method. Outsourcing is not appropriate for every service. Services that are difficult to define and whose outcomes are difficult to quantify are generally difficult to outsource. Seeking private competition for these services could potentially be unproductive or result in higher costs if the work is not properly defined or if outcomes are improperly measured.

The key to a successful “outsourcing” project? It is all in the planning, and the ultimate work product is what is asked for in the procurement document. If it is well drafted and tightly constructed, dealing with all foreseeable contingencies, the procurement document will allow for a successful effort. A sloppily drawn procurement that does not address known industry issues, or does so in an imprecise way, can lead to disaster.

A well drafted procurement document and contract is critical to a successful outsourcing. This concentrates risk in discrete events that could be handled in error and, with multiyear contracts, could disadvantage a municipality for some time to come.

The paper talked about some of the services that might more easily lend themselves to successful outsourcing. Let us circle right back to Detroit, and the potential for saving money through trash removal outsourcing.

Services tend to be candidates for outsourcing when they can be easily defined and when performance is easily measured and quantified. This dynamic can be observed when one considers the relative ease of defining and measuring solid waste removal services – routes can be defined, tonnage measured and poor performance (that is, missed
pickups) are easily observed and remediated.

I tend to agree with Lisauskas, and also with the Emergency Manager in Detroit. That is why, in Massachusetts municipalities have largely outsourced trash collection on the curb. Outsourcing curbside collection, as well as tipping fees, will likely save that 30% (or more) talked about in Detroit. Want to gain some valuable insights on outsourcing beyond curbside trash collection? Take a look at the Lisauskas paper, which I have linked to here. Stay tuned for more on Detroit in the weeks to come.

    Thursday, June 13, 2013

    Manzi in the Morning- Ron Marsan Interview

    Methuen East District Councilor Ron Marsan came on the Manzi in the Morning program to talk about re-election, and about some of the important issues facing Methuen. My thanks to Councilor Marsan for taking the time to come on the program.

      Monday, June 10, 2013

      Manzi in the Morning- Daniel Grayton Interview

      First time candidate Daniel Grayton came on the Manzi in the Morning Radio program (every Wednesday on 980 WCAP from 10:00 AM TO 11:00 AM) last week to talk about his candidacy for Methuen City Council (At Large) and some of the important issues facing the City. His campaign website is www.graytonforcitycouncil.com My thanks to Daniel Grayton for taking the time to be on the show.

        Thursday, June 6, 2013

        Government as a Business- Schnurer Part Two

        Eric Schnurer has posted the second installment of his series on government, with a focus on governments “competing like business.” I talked about Schnurer’s first piece on this blog last week. Let us look at the new installment

        Schnurer starts by making clear that he does not believe that government can “be run like a business.” He points to some of the reasons for that.

        It’s pretty clear that governments do not actually operate like businesses for a vast number of reasons:

        The employees, for the most part, cannot be fired, and thus have little reason to hit performance metrics, let alone respond to the views of management.

        The politicians ostensibly overseeing all this are guided by a complex set of conflicting motives and incentives and have little reason to work together or move in the same direction. These managers and executives are in turn guided by the demands of shareholders, investors, and consumers who themselves have contradictory and often ill-defined expectations for the organization.

        Most of this results from the fact that governments aren’t guided by the same profit motive as private-sector businesses. That isn’t necessarily bad in itself — in fact, a lot of what we expect and want governments to do is precisely those activities that are not profitable (or, at least, where profit cannot easily be captured). But the lack of a single, clear metric makes managing government, and assessing how the whole enterprise is doing, a lot more difficult.

        The author is correct, in my view, when he says that government cannot be run like a business. His reasoning, outlined above, is pretty hard to refute. Maybe they are the three iron laws of government. I will get to the second point more specifically later, as it is the one that has to be the most infuriating, but maybe the one that is least subject to change. As I mentioned in the prior post the fact that government is not a business does not mean you cannot apply sound business principles to government, and that is where Eric Schnurer takes this post. He looks to get away from the idea that sound business principles might only reflect relentless cost cutting, and moves to the concept that there is some space for government to innovate, even when that innovation produces a “higher cost” product. Schnurer gives some real world examples in his post, including Delaware becoming a financial center, a business improvement district in Philadelphia, and the potential for peak hour tolling plans that may contribute to reduced road congestion.

        On the issue of the type of model for government that is preferable Schnurer makes the very valid comparison between the so called “cost cutting” model, which infers lower taxes and fewer services, to innovation models that manage to find new ways to create revenues, including some that have folks that live outside the entity paying some of the freight (Delaware tolling is a good example). He lays out what he sees as the problem:

        Competing on cost relies on commoditization, low investment, low democratization, highly concentrated gains, and highly externalized costs (such as labor or environmental exploitation). Third World countries and their governments will be those that, like their private-sector counterparts, continue to be resource-dependent commodity producers with low margins, producing better-than-subsistence benefit only for a few who live off the many, placing little value on innovation and ingenuity — and thus on people and their participation. The United States could (like, say, many firms in the apparel industry, or countries whose economies are based largely on resource extraction) choose that as a competitive strategy. But is that really the vision of the future we prefer?

        Schnurer, of course, is decrying that “race to the bottom.” I do agree that, as laid out here, Schnurer makes a strong argument. My own experience, in local government, shows me that the distinction is not always the black and white choices laid out by Mr. Schnurer. Efficiency, and reform, does not of course mean that government is necessarily racing to the bottom, but it does lead to the inevitable political conflict. A good example of this might be in the so called “shared services” model, which indeed does cuts costs, but in the cases where it is done properly will actually produce better services for citizens. In a prior post we looked at some of those potentials laid out in a study done by the Boston Federal Reserve. Governing Magazine, in a post on “shared services“, looks at some of the drawbacks and many of the positives.

        So it isn’t hard to understand why most of these jurisdiction-consolidation proposals languish on the vine of legislative consideration. Yet the potential for savings is so important that it should not be allowed to slip away. The alternative with real potential for achieving service efficiencies is no secret: inter-local agreements, purchasing pools, sharing of specialized personnel and equipment, and in some cases either multi-county special districts or state assumption of services.

        I realize that maybe I am now the one rolling off the rails by moving to something that probably is not even a source of disagreement, but I feel the point is an important one. As far as that second point made by Schnurer on the “conflicting motivations” of politicians referenced above it is undeniably correct, but from my perspective it is a real problem. Why? Despite my having run for political office it is hard not to be frustrated by decisions based on knowingly false assumptions and numbers in the attempt to achieve a political goal. Even in local government (or maybe especially in local government) reform based on “sound business practices” is met, in many cases, with tremendous push-back. Now I have totally derailed. I look forward to the next installment in the fine series in “The Atlantic” by Eric Schnurer, and hope to have him on my radio show in the very near future.