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From CQ Weekly, PETER HARKNESS Public Works, Private Hands A very long time ago, I spent the last year of my service in the Army Reserve in a mobile unit that was responsible for making dry ice, which supposedly would be needed to keep blood plasma cold during combat operations. It was a scene straight from “Catch-22,” since the Army never needed our truck or our ice-making skills. They got all the ice they needed in Vietnam from Coca-Cola. 
I’m assuming that that unit was disbanded long ago because, during the past few decades, much of our military infrastructure has been privatized. A recent Pentagon survey concluded that there are about 100,000 contractors in Iraq, a figure that is creeping up on the number of troops stationed in the country. And it’s 10 times the number of contractors used during the first Gulf War 15 years ago, when we had more than three times as many troops committed. What we’re seeing in the military has become pervasive throughout the federal government, which is one of the reasons the number of federal employees is about where it was when John F. Kennedy was president. (The other is that so much of the work administering federal programs has been passed on to state governments.)
Now, though, the privatization trend is moving down the political food chain to the states and localities. The trend follows two plot lines: First, a number of states and cities are privatizing all kinds of functions traditionally handled by public employees, with mixed results. Second, an increasing number of governments, looking for revenue in an anti-tax environment, are planning to sell off (or enter into very long-term leases for) key revenue-producing assets such as highways, parking garages and, in the latest wrinkle, their state lotteries. Gov. Mitch Daniels of Indiana, former director of the Office of Management and Budget, is taking advantage of both trends. He recently signed a contract with IBM and a consortium of subcontractors to privatize the back-shop operation of Indiana’s welfare system for a decade at a price of $1.16 billion. Daniels says that not only will the state save $500 million over the life of the contract but that recipients will be better served and the state should benefit from a lower error rate. Indiana has the benefit of learning from the mistakes another state has made in trying to achieve the same goal. Texas just backtracked drastically on an ambitious plan to hand over most of the responsibility for running social-services programs in the state after a consortium of contractors began making embarrassing mistakes like taking away subsidized health insurance from 27,000 children. Now the contract has been reduced by more than half and public employees are back making decisions about who qualifies for various programs from Medicaid to food stamps. TAKING THE RISKS Daniels has been hands-on in overseeing the privatization of his state’s welfare system, moving slowly to avoid Texas-style disasters. State employees will continue to determine eligibility, and all other public workers will be offered jobs with the IBM Group, as it is called. He is a politician willing to take risks. He started a trend last year in selling the 157-mile Indiana Toll Road to a Spanish-Australian consortium for $3.8 billion, money which will be used to make fast improvements to the state’s crumbling infrastructure. Although his popularity suffered in polls, Daniels is betting that all that maintenance work will turn voters around. It’s not just a red-state trend, either. In Pennsylvania, Gov. Edward G. Rendell, facing an enormous backlog of deferred maintenance, wants to take bids on the Pennsylvania Turnpike, one of the nation’s busiest. “There is only one option that is not on the table, and that is doing nothing,” Rendell said in announcing his intentions. Across the border in New Jersey, Gov. Jon Corzine, who headed the investment bank Goldman Sachs before running for the U.S. Senate, has hired the Swiss bank UBS to decide which assets to sell. The first targets are the Jersey Turnpike, the Garden State Parkway, the Atlantic City Expressway and the state lottery. Earlier this month, Texas Gov. Rick Perry announced plans to do the same — sell the state lottery to help cover the costs of providing health insurance for up to a half million low-income adults. In Virginia, the privatization trend is tilting more toward the partnership model, where the state is seeking the expertise and the financial resources of technology companies, in effect to serve as its partner rather than as just a contractor. If the company has a good plan and is willing to invest risk capital, it can take a share of revenue. The list of revenue-producing infrastructure going on the block is growing fast, as is the number of governments willing to have private companies assume management of basic operations. If you’re skeptical, take note of this: Last fall, it was revealed that New York City is considering hiring private organizations to take over the management of large parts of its school system. Such a move, according to The New York Times, “would further Chancellor Joel I. Klein’s earlier efforts to tear apart the traditional bureaucracy of the nation’s largest school system, giving principals greater autonomy and increasing the role of the private sector.” That seems to be the way it’s going. Peter Harkness is editor and publisher of Governing. Previous columns: Privatization with a Difference I enjoyed your article, “Public Works, Private Hands.” The move to privatize public services seems to be gathering a lot of steam in the direction of the big ticket items like toll roads and lotteries. Privatization with a Difference I’d like to offer a comment on the article where you noted Virginia’s move toward a partnership model, with the private partner investing capital and sharing in revenues. I can tell you that’s a good model because it’s something the Arizona Motor Vehicle Division has been doing for more than 10 years. Since the mid-’90s the MVD has partnered with private-sector enterprises—auto dealerships, car rental companies, auto auctions and such—to conduct vehicle title and registration transactions. It’s called the Third Party Program. These companies fund their own start-up and ongoing operating costs, undergo annual audits and have to meet accuracy and security standards set by MVD. In return, they can retain a portion of the transaction fees they collect. The program started with 12 companies in 1994. Right now, there are 80-private sector locations around the state that offer MVD services, and the division is in the process of adding more. MVD’s online service system, ServiceArizona, also has been operated by a third-party partner, IBM, since 1997. Creation of the Third Party Program was prompted by the ongoing population growth in the state, resulting in increasing workload and unacceptable waiting times in MVD offices. There are probably two differences in Arizona from the typical privatization plan. One is that MVD didn’t go away. The program was designed to supplement the MVD customer service facilities and provide an alternative to customers. The division still operates about 60 of its own offices. The other is that there’s not just one partner contracted to perform the public functions, as noted above. Many of these are locally owned small businesses. Others are large companies—Swift Transportation, Avis, Hertz, U-Haul—that run their third party operation from their in-state facilities. This partnership model has worked very well for Arizona and has made a significant contribution to the reduction of waiting times in MVD’s own customer service offices. It’s good to see that another state is considering the partnership model that Arizona pioneered more than a decade ago. Jim Cullison © 2007, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
THE STATES AND LOCALITIES