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.

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