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Myth #1: Privatization saves money.
The Truth: Privatization often raises costs for the public and governments.
Proponents of privatization promise to fix budget woes by saving the
government money. But numerous examples in a variety of sectors show
that projected savings don't always materialize. Cost overruns
combined with hidden and indirect costs, such as contract monitoring and
administration, can make privatization more expensive than in-house
services for governments. In fact, the Government Finance Officers
Association estimates that hidden and indirect costs can add up to 25%
to the contract price.
[i]
The Government Accountability Office has found that methods by which
agencies and privatization consultants conduct projections and report
contract costs can make cost savings appear greater than they actually
are.
[ii]
According to a 2007 survey by the International City/County Management
Association, 52% of governments that brought services back in-house
reported that the primary reason was insufficient cost savings.
[iii]
- An audit report from the Wisconsin Legislative Audit Bureau
revealed that the state's department of transportation wasted more
than $1 million by outsourcing almost half its engineering work to
private contractors over the past five years. The audit found that
about 60% of these outsourced jobs could have been done at a lower
cost by state workers, which would have saved the state $1.2
million.[iv]
- In February 2009, Chicago and Chicago Parking Meters LLC signed
a 75-year concession agreement for the operation of Chicago's
36,000 parking meters. Along with many problems related to
malfunctioning meters, rates have significantly increased,
causing many residents to think twice before parking in the city.
Many stores and merchants in the area complain that the rates
have decreased business. In some parts of the city, rates
increased in the first months to 28 quarters ($7) for 2 hours of parking
time. The parking charges also have been extended to 7 days
a week and for more hours during the day.[v]
Myth #2: Private companies do a better job than the public sector.
The Truth: Many examples show declines in service quality under private contractors.
Faith in the private sector to outperform government agencies is
deeply ingrained in the American psyche. However, the facts disproving
that belief are steadily mounting. In many cases, private contractors
have failed to deliver, leaving communities without vital services and
assets. Private companies naturally seek to maximize profits, which
can incentivize cutting corners to reduce costs. This can greatly
impair service quality and maintenance of vital assets. The most
popular reason for in-sourcing, according to the International
City/County Management Association survey mentioned above, was a decline
in service quality. Over 60% of governments that brought functions
back in-house reported this as their primary motivation.
[vi]
- In 2009, Indiana cancelled its $1.34 billion contract with IBM
to provide public benefit eligibility services. For two years,
vulnerable families failed to receive benefits for which they
qualified, including food stamps, health coverage, and cash
assistance, due to the company's poor provision of these services.
The privatized system led to high error rates and poor
timeliness, among many other problems.[vii]
- In 2010, Gary, Indiana cancelled its 10 year contract with
United Water. In May 2008, a state inspection found that the
district, under United Water's management, had violated discharge
limits 84 times between 2005 to 2007; had at least 25 pieces of
broken equipment; filed inadequate monitoring reports; and failed
to meet mandated deadlines.[viii]
By cancelling the contract and bringing water service back in-house,
the city expects costs to decrease from $16 million to $8 million a
year.
Myth #3: Privatization allows governmental entities to better anticipate and control budgetary costs.
The Truth: Cost estimates are extremely unreliable and privatization can cause result in unforeseen budgetary consequences.
Some believe that privatization allows for more precise budgeting,
since the inflow or outflow of money appears fixed once a contract with a
private entity is signed. But hidden costs and cost overruns can
significantly distort these figures, market circumstances can reverse
the estimates, and ripple effects of privatization can increase
unexpected areas of governmental budgets.
Governments cannot anticipate the cost of privatization failures,
from the overtime expenses of sending city work crews to correct sloppy
work by private road maintenance companies to the massive ordeal of
rebuilding entire outsourced departments when a contractor's costs,
delays or service breakdowns become unsustainable.
- In 2009, the Pew Center on the States analyzed Pennsylvania's
failed attempt to sell the Pennsylvania Turnpike. The Governor
predicted that the lease income would generate about $1 billion a
year for the state's transportation budget. But this rosy
figure assumed a 12% annual return on the state's investment. According
to the Pew report, with the stock market decline the previous
year, the state would have actually lost money on its investment.[ix]
- Sometimes perceived cost savings in one area can increase the
cost in another area of the budget. According to the Economic Policy
Institute, in 2006, nearly 20% of all federal contract workers
earned less than the federal poverty level of $9.91 an hour, while
40% earned less than a living wage. Many of these workers do
not receive employer-sponsored health benefits[x].
As a result, these workers must rely on public benefit programs,
such as Medicaid and the Earned Income Tax Credit (EITC) program to
make ends meet. Lower wages and benefits, while making contracts
appear cost-efficient, lead to increases in other parts of the
federal and state budgets.
Myth #4: Privatization allows governmental entities more administrative flexibility.
The Truth: Privatization requires substantial administrative resources for monitoring and oversight.
Substantial time and personnel are necessary to adequately monitor
contracts, especially those involving essential governmental functions.
If governments don't dedicate sufficient personnel and time to
monitoring contracts, they run a high risk of poor contractor
performance and wasting large amounts of money.
- In a Cincinnati Enquirer investigation, the newspaper
concluded that the State of Ohio and many local governments
engaged in "casually administered" contracts with "lax controls."
From 2000-2003, 116 state audits found that contactors misspent
$97.7 million tax dollars.[xi]
- Texas entered into a contract with Convergys to administer
human resources functions for the Health and Human Services
Commission. An audit in 2006 revealed numerous problems related
to contract oversight. As a result of the minimal oversight, the
state was unable to be fully involved in the development, testing, and
validation of contractor's system. The agency relied on the
contractor to both develop and perform the testing and then to
assess the system and report the results of those tests.[xii]
As a result, the agency did not have the working knowledge of the
system to hold the contractor accountable for technical
performance issues.
Myth #5: The public still maintains control over a privatized asset
or service and the government retains the ultimate ability to make
related public policy decisions.
The Truth: Privatization can bind the hands of policymakers for
years, allowing private companies significant control of a privatized
asset or service and the ability to dictate important policy decisions.
Non-compete and "make-whole" clauses are just a few of the ways that
private companies control privatized assets and dictate important public
policy decisions. Non-compete clauses forbid competition and prohibit
the government from making policy and planning decisions that may
affect the contractor's revenues. These contract terms have prevented
numerous cities and states from improving public transportation or
implementing other planning or environmental initiatives that may have
threatened contractor revenues. Asset privatization contracts also
frequently stipulate that the government must reimburse or "make whole"
the contractor if an event, such as a parade or sudden natural disaster,
occurs. Often the true ramifications of these types of provisions,
which help reduce risk and guarantee profits for contractors, come as a
surprise to policymakers.
- In September 2008, Indiana was required to reimburse the
private Indiana Toll Road operator $447,000 for tolls that were
waived for people being evacuated during a severe flood. This
requirement in the contract forced the state to pay money to a
private contractor in order to ensure the public's safety.[xiii]
- In 2008, the private contractors that operated the Northwest
Parkway in Denver, Colorado, objected to improvements on W. 160th
Avenue. The 99-year privatization contract allowed the private
company to prevent improvements on city-owned and maintained roads,
since the improvements "might hurt the parkway financially," by
providing an alternative route for travelers, thus potentially
reducing toll revenue.[xiv]
Myth #6: If anything goes wrong, the government can easily fire the contractor or adjust the contract.
The Truth: Reversing privatization involves huge costs and service interruptions.
When governments turn over core services to private contractors, it
can be very expensive and time-consuming to alter contract terms or
cancel a contract. Taxpayers can be stuck with legal expenses when
companies file lawsuits seeking greater payment. Additionally, contract
cancellation can lead to service interruptions or loss of access to
public assets during the transition period.
- Virginia sought to end its contract with Northrop Grumman for
statewide information technology services because of numerous
instances of missed deadlines, cost overruns, and technical
problems. The state's auditors calculated that cancelling the
contract during fiscal 2010 would cost Virginia $400 million, which
auditors said the state can't afford.[xv]
As of 2010, the state may be forced to remain in the contractual
relationship because it cannot afford the cancellation.
- In 2007, when Texas cancelled its contract with Accenture for
public benefits eligibility services, it took 20 months for both
parties to settle issues related to the contract cancellation. In
the meantime, many families continued to have problems accessing
food stamps, welfare, and health insurance because the state had
fired a large portion of its case workers at the beginning of the
privatization effort. Nearly three years later, Texas is still
struggling to rebuild its public workforce.[xvi]
Myth #7: Companies are chosen for privatization contracts on the merits, not based on political or financial connections.
The Truth: Government for profit opens doors to unscrupulous behavior by politicians and businesses.
As many examples illustrate, the companies that receive lucrative
contracts may not be the best company for the job, but instead may have
the most insider connections.
- Two judges in Pennsylvania received $2.6 million over seven
years from Pennsylvania Child Care LLC, a private company that
operated a juvenile detention center. The judges helped secure the
company a 20-year, $58 million contract with the county and
aggressively sentenced children for minor infractions to ensure
that the detention center remained at capacity. In early
2009, the two judges were charged with racketeering, extortion, bribery,
money laundering, and fraud, among other crimes.[xvii]
- In 2009, the former president of the Jefferson County, Alabama
county commission was convicted of taking bribes to steer government
business to J.P. Morgan. The county commissioners followed advice of a
J.P. Morgan consultant and set up an unorthodox financing scheme to
refinance the debt on its sewer system. The county paid $120 million in
fees -- six times the prevailing rate - to buy interest-rate swaps from
J.P. Morgan and several other financial institutions. Within five years,
the bad advice had increased the county's debt by $277 million.
Low-income residents bore the consequences as the county raised sewer
rates again and again to stave off bankruptcy.[xviii]
[i] AFSCME, "Government for Sate: An Examination of the Contracting Out of State and Local Government Services," Eighth edition.
[ii]
United States Government Accountability Office, "Department of Labor,
Better Cost Assessments and Departmentwide Performance Tracking Are
Needed to Effectively Manage Competitive Sourcing
Program." November 2008. GAO-09-14.
[iii]International City/County Management Association. See:
http://icma.org/en/results/surveying/survey_research/whats_new
[iv]
Wisconsin Legislative Audit Bureau, "Construction Engineering in State
Highway Projects." May 2009., See:
http://www.legis.state.wi.us/LAB/reports/09-dotconstructionengineering_ltr.pdf
[v] In The Public Interest, Chicago Parking Meters case. See:
http://inthepublicinterest.org/case/chicagos-parking-meters
[vi] International City/County Management Association. See:
http://icma.org/en/results/surveying/survey_research/whats_new
[vii] In The Public Interest, Indiana Public Benefits Eligibility System case. See
http://inthepublicinterest.org/case/indiana-public-benefits-eligibility-...
[viii] Food and Water Watch, "The High Cost of Privatizing Water and Wastewater Services." Summer 2010.
[ix] Marcia Carroll, "Privatization: Recent Development," March 2009.
[x]
Economic Policy Institute, "Outsourcing Poverty: Federal contracting
pushes down wages and benefits." EPI Issue Brief #250. February 11,
2009.
[xi] Cincinnati Enquirer, "Weak Contracts Waste Tax Money," May 19, 2003.
[xii]
Texas State Auditor's Office, "The Health and Human Services
Commission's Consolidation of Administrative Support Services." January
2006. SAO Report No. 06-018.
[xiii]
Ellen Dannin, "Infrastructure Privatization Contracts and Their Effect
on Governance." Pennsylvania Dickinson School of Law, Legal Studies
Research Paper No. 19-2009. 2009.
[xiv] Ibid.
[xv] Washington Technology. "Trio of big contracts have problems." October 29, 2009. See:
http://www.washingtontechnology.com/Articles/2009/11/02/Upfront-Contract...
[xvi] In the Public Interest, Texas Integrated Eligibility Redesign System Case. See:
http://inthepublicinterest.org/case/texas-integrated-eligibility-redesig...
[xvii] In the Public Interest, Pennsylvania Kids for Cash case. See:
http://inthepublicinterest.org/case/pennsylvania-kids-cash-conspiracy
[xviii] In The Public Interest, JP Morgan Investment Consulting Fraud case. See:
http://inthepublicinterest.org/case/jp-morgan-investment-consulting-fraud
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