Privatization: Analyzing the Process of Privatization in Theory and Practice

Cases of Privatization: A Comparative Analysis

Together, sections two and three provide a broad, generalized overview of privatization both in practice and in principle. Section two outlines the many forms of privatization available to the public administrator and introduces major problems that often effect privatization efforts, while section three builds on this information by highlighting expert theories on the merits of privatization, how and why it can succeed or fail, and why governments and individuals turn to or reject privatization in meeting their goals, however different those goals may be.

This section will call upon and apply the information and theories of the previous sections to examine privatization programs in Massachusetts and Virginia. Each case presents a unique approach to the privatization process, how and why it came about, strategies used to implement and level of success. Particular attention will be paid to the types of privatization used, the way major problems were or were not addressed, the motivations behind the decisions to privatize and, of course, examine and critique the results of each.

Massachusetts: A Legislative Approach to Regulation

Privatization in the Commonwealth of Massachusetts is largely controlled by a series of laws passed by the state legislature in 1993, in response to an aggressive privatization campaign by the administration under then governor, William Weld.

Weld was the first Republican elected governor of Massachusetts in over fifteen years. A self-described “supply-sider” and opponent of big government, who faced strong Democratic majorities in both houses of the legislature, privatization provided Weld an opportunity to promote his ideological convictions about the appropriate size of government and strengthen his position as the chief executive by controlling more of the bureaucracy.48

Weld began a privatization initiative within months of taking office. Supported by members of his cabinet, Weld instituted a decentralized privatization initiative, calling on agency directors and cabinet members to identify programs they wished to privatize. The guidelines for identifying appropriate programs to privatize only need to meet three, extremely vague, criteria. They were required to be able to be defined in a request for privatization (RFP), have measureable performance standards, and have more than one vendor able to perform the service.49 Weld’s guidelines were criticized for being recklessly, if not intentionally vague. According to one scholar, “the lack of specificity and the desire to minimize the fear of initially tying privatization to service cuts suggested politics was more important than policy.”50

Within two years, Weld’s administration had contracted-out over 35 public services in areas that included health and human services, public safety, transportation, construction and environmental affairs.51 Weld propertied that these efforts had saved the Commonwealth nearly $300 million (about 2% of its budget), however his claims were challenged by critics who argue that a large portion of that figure is potential, indirect or even estimated.52 Weld’s newly privatized programs would go on to experience a myriad of fates.

Among the notable privatizations that Weld carried out between 1990 and 1993, was the decision to close ten state hospitals and mental health facilities. This forced mental health patients to seek treatment at general hospitals, where their treatment would be reimbursable by federal Medicare subsidies. This move was met with great resistance from patients and their families, however it was carried out within months. According to Weld, closing the facilities saved the Commonwealth $143 million dollars, an amount almost equal to all other reported cost savings. Weld faced much criticism for claiming this move was such an astounding victory for privatization by critics who argued that closing the hospitals only shifted the state costs to other agencies and to the federal government.53 This argument suggests that real cost savings were, in fact, negligible or unknown.

The decision to close the mental health and social service facilities not only failed to adequately examine the true fiscal implications, but it made no attempt to examine the changes in service quality or the impact on its recipients. A study of the effects of this drastic restructuring of the Commonwealth’s social service and mental health programs identified “an accelerated cycle of shrink services that in turn produces an increased demand for the severely limited services” noting that homeless saw an increased population requiring mental health services due to “an unresponsive system that has become paralyzed”.54 Similar upheaval was evidenced when the Department of Social Services was sued over the negligence of a private service provider when a young girl was continuously abused while in the care of child protective services.55 All of these are prime examples of the risks of privatizing services without paying direct and careful attention to maintaining service quality.

Another Weld privatization program that ended in controversy was the decision to privatize state highway construction in Essex County. The administration let a contract to a private construction company for $3.7 million to build highways in the county. It soon came to light that the union representing the previous workers had submitted a bid to continue the work for only $2.9 million, but the administration had thrown out their bid due to a technicality. This led to a range of speculation that Weld’s vendor selection was driven by motives other than cost savings. This led to the further realization that the administration had then sold the equipment infrastructural assets the public workers had used, essentially making it impossible for the union to submit a bid in the future.56 In 1993, the State Audit Bureau issued a report on the highway privatization charged that there was no evidence to suggest that the level of services had been maintained or that the Weld administration’s cost savings figures were accurate. It also noted that the administration refused to provide them with any information on the service levels prior to the decision to privatize, suggesting that a true cost-benefit analysis had not been performed.57

In light of questionable results of Weld’s hasty and decentralized privatization program, the Massachusetts Legislature intervened. In November 1993, the Legislature passed a series of laws regulating the practice of contracting in the Commonwealth. The bill, which became colloquially known as the Pacheco Law, after its lead sponsor in the senate, Marc Pacheco, was promptly vetoed by Governor Weld. Following the veto, both the MA House and Senate voted to override Weld’s decision, a vote requiring 2/3 majority in each body. The Pacheco Law established a uniform process for evaluation and a set of benchmark criteria to which all bidders must conform. In order to even be considered, all privatization proposals must:

• ensure the quality of service be maintained,
• be free of conflicts of interest,
• maintain the level wages and benefits afforded to current workers, and
• be approved by a uniform oversight process performed by the State Auditor.58

The passage of the Pacheco Law, marked the end of Governor Weld’s radical privatization campaign. In the nearly twenty years since, the Pacheco Law has stood the test of time. Privatization in the form of contracting has continued to happen, albeit far less frequently, and to date only two proposals have ever been rejected by the State Auditor.59 Critics of the Pacheco Law remain, charging that the law prohibits privatization and prevents the Commonwealth from reaping needed budget reductions.60 However, there is no evidence to suggest that this is any more true now than it was when Weld made the same claims. Even Steve Poftak of the Pioneer Institute, a group leading the charge for repeal of the Pacheco Law, admits that cost savings projections are very difficult to accurately assess and that the primary arguments for repealing the law reflect fundamental ideological differences about the appropriate role of government.61

In all, Massachusetts privatization policies were born from contrasting ideologies. The decision to institute legislative restrictions on privatization is an unusual approach to addressing privatization, but one of practical necessity for the Commonwealth. While instance of contracting have declined since the Pacheco Law was enacted, services that have been privatized have been evaluated and considered in a uniform and thoughtful manner.

Virginia: The Commission Model

In 1995, the Commonwealth of Virginia commissioned a permanent advisory group to “examine and promote methods of providing a portion or all of select government-provided or government produced programs and services through the private sector by a competitive contracting program”.62 Competition programs had recently received attention after being successful implemented in several large municipal governments including Cleveland, Indianapolis and Philadelphia.63 The VA Commonwealth Competition Council’s (CCC) membership is comprised of individuals including employees of the executive branch, the state legislature, the private sector and the VA Small Business Commission. The task of appointing members to the Council is divided among executive and legislative branch membership.64

The legislation creating the CCC also establishes its duties and obligations. Tasks with which the CCC is charged include:

• develop a framework for a state wide competition program among and between public and private sector entities,
• create a system encouraging the use of feasibility studies to determine where competition can be used to reduce costs without harming the public,
• monitor the quality of the services and products produced by state agencies,
• create approval, planning and reporting processes for the council to carry-out its tasks,
• devise criteria for conducting performance evaluation prior to privatization,
• identify practices that may constitute inappropriate competition with private enterprise, and
• report the Council’s findings to the Governor annually and as requested.65

The CCC is a high-profile, permanent support structure specifically designed to advise Virginia’s governor and administration, as to how and where competition and privatization should and should not be used. One expert describes the CCC as “perhaps the most fully elaborated managed competition system among states”.66 In practice, the Council has proven to be extremely powerful, considering it is an independent, bi-partisan entity with a membership that represents a broad range of interests. The council is particular unique in the fact that it is given the staff and ability to act as a resource to state workers on how to appropriately and effectively participate in the bidding process. It also has the power to wave procedures or regulations that it believes unduly inhibit state agencies from achieving competitive costs.67

In order to promote private sector participation and improve their ability to evaluate costs between the public and private sectors, the CCC introduced a costing methodology called COMPETE. This program is an online database of public agency and private business data, which is routinely updated by users in both sectors via the internet. Among the data collected by COMPETE is information on personnel, benefits, wages, supply costs, asset purchases, depreciation, overhead and production all in an attempt to establish the actually cost of performing services in each sector.68

Among the successful privatizations implemented since the creation of the CCC is the contracting-out for maintenance of the Commonwealth’s motor vehicle fleet, which consisted of about 6,000 vehicles.69 The first phase of this plan, initiated in the late 1990’s, addressed vehicle maintenance, short-term vehicle rentals and fuel management. By decentralizing vehicle maintenance locations for reduced transit time and entering into agreements with private rental car and fuel companies to purchase gasoline and rental service in bulk in exchange for discounted rates. The program lowered costs by approximately 25%.70 By 2005, the state was realizing $500,000 in annual saving from bulk fuel rates alone.71

Already considered a successful privatization effort, the service was re-contracted in 2005 to include the a program called the Vehicle Maintenance Control Center (VMCC) which used over 500 private business to create 24-hour on-call maintenance service throughout the state. Since then, the state has reduced the cost of preventative maintenance by over 15% and has seen reduced vehicle downtime.72 The program was so beneficial, that in 2007 the state began the second phase of the operation which sought to establish a private Office for Fleet Management Services to oversee the long-term purchase, use, maintenance and disposal of state vehicles, and to offer use of the VMCC to municipal governments.73

Just as in Massachusetts, then Virginia Governor George Allen chose a portion of state highways, about 250 miles worth- to contract out to private maintenance providers. Seeing cost savings as high at 20%, that initial contract has since been expanded to cover hundreds of additional miles.74 This dichotomy from the experiences of Governor Weld in Massachusetts are likely do to the clear, uniform and generally accepted privatization process established by the CCC.

In the sixteen years since the Commonwealth Competition Council was created, privatization programs have continued to be successfully implemented by Democrat and Republican governors alike. This is because the process established by the CCC requires careful study and justification before services can be privatized. Unlike Weld, the Virginia model received bipartisan acceptance because it works. It identifies areas where privatization could be beneficial to state services, not political ideology, and for that reason it will continue to see broad, bipartisan support. In fact, a recent push attempt to privatize the retail function of Virginia’s liquor stores failed when it became politicized as an ideological issue.

In 2006, the CCC’s annual report included a recommendation to privatize the retail operations of the Commonwealth’s Department of Alcoholic Beverage Control (ABC).75 In 2010 their annual report specifically highlighted as one of the few areas where the Council had recommended privatization and no program had been implemented.76 Earlier this year, incoming Republican Governor Bob McDonnell announced that finally privatizing the ABC, and realizing up to $500 million in projected cost savings, would be among his top priorities for 2011.77 At first, McDonnell encountered little opposition, but when a few legislators asked him to address concerns that private liquor stores could lead to more instance of drunk driving and increase consumption, McDonnell defended his plan by stating that he didn’t believe that selling alcohol was an appropriate function of government.

Within months, the Democrats in both house of the VA legislature had decided to oppose private liquor stores claiming that the potential to save $500 million was not enough to justify the social consequences if alcohol consumption increased.78 This example serves to highlight, just as in Massachusetts, the way in which the debate over privatization can become contentious and divisive when implemented for ideological reasons.Continued on Next Page »