No level playing field
Much has been written lately about “managed competition” in the area of municipal water or wastewater privatization. The issue has raised passions to the point that a reasonable discussion is often impossible.
Managed competition is simply a matter of having the existing municipal work force submit a proposal and compete with private firms. Some argue that the public sector has functioned in a non-competitive environment, and it should therefore be allowed to put its best foot forward in a competitive environment with the private sector. Others argue that it has been putting its best foot forward year in and year out with its annual budget and past record of performance.
At first glance, there is absolutely nothing wrong with putting the public sector in a competitive environment with the private sector. Private firms, in particular, believe in competition as the best way to achieve operational efficiencies and cost savings.
The reason they can offer municipalities cost savings and guaranteed performance is because they have learned to be competitive and efficient. Firms that do not learn this are soon forced from the field.
But managed competition is not always open — and not always fair. It may be appropriate in some circumstances; ill-advised in others. Private operation and management of municipal services is a rapidly growing industry, increasing at a rate of about 20 percent a year. Privatization offers a number of benefits that have been well-documented and publicized — cost savings and guaranteed performance, including compliance, chief among them.
Still, privatization is not for everyone. If your current system works well, your facilities run smoothly, labor relations are excellent and your operations are efficient, why change?
But if equipment is constantly failing, you are more often than not out of compliance, the community is complaining about plant odor, your drinking water has color and taste problems, your user rates are high, costs are rising yearly and taxpayers are rebelling, something obviously must change. Some problems may be institutional, among them lack of creativity, a reluctance to change, a monopolistic mindset, lack of incentives, the burden of bureaucracy, limited access to expertise and technology and lack of training.
The question to be asked, then, is: What is the likelihood that the existing local public entity can be energized and changed?
We are a country that roots for the underdog, the hometown team — that believes in second chances. So, why not give the existing work force a second chance? Given some of the difficulties involved in making managed competition truly fair and productive, however, it might be better to offer that opportunity before opening up the process to private firms. The private sector is not afraid of competition, but a level playing field on which to compete and the ability to create a truly equal basis of comparison is virtually impossible to create. Some areas of concern include:
Conflict of interest: How can the same people who are involved in preparing the procurement document and evaluating proposals submit a proposal? Even if an outside third party were brought in to take care of the mechanics of the process, it would be difficult to manage and ensure impartiality. This must be recognized by the public sector and addressed upfront in a frank manner.
Public sector cost proposal: Are all the public sector's costs included? Is overhead fully allocated and included? Are all costs (direct, indirect and third-party) included or are costs being reallocated elsewhere? Are costs included at sufficient levels, and are they commensurate with levels routinely budgeted by the private sector for areas like training and maintenance?
Qualifications: Most privatization procurements find qualifications and experience an extremely important selection criterion. Even if the existing work force had not performed inadequately in the past, how can it compete with firms that operate facilities throughout the country and possess a network of national experts and resources?
Accountability: Will the existing work force be subject to termination for failure to perform? If it cannot perform for the contracted price, where does the shortfall come from? Workers' paychecks? Taxpayers' wallets?
In the memorandum that serves as the official agreement between a city and the public wastewater facility work force that recently won a managed competition, the second sentence states:
“It is expressly understood that this Memorandum is not legally binding upon the city, nor upon any officer or employee of the city … Nevertheless, it is the intent of the council to commit the city, and of the employees to commit themselves, to the performance of the terms of this memorandum notwithstanding the absence of legally enforceable terms.”
Because responsibility is less clearly defined under public sector operations and there are no stipulations for penalties for non-performance, accountability can become diffused and incentives to perform weak.
If the requirements for the private sector include a performance bond and corporate guarantee, how can the public sector offer similar forms of security to assure an equal basis of comparison?
Risk: The public proposal places 100 percent of the risk at the public sector's doorstep. With a public-private partnership, much of the risk is allocated to the private sector.
(The actual percentage of allocated risk will vary from partnership to partnership.) As all risks have an economic consequence, the risk allocated to the private sector should be valued and that value added to the public's proposed cost.
Contract enforcement: The contractual relationship between the municipality and its work force may be problematic. How can a municipality enter into an enforceable contract with itself? How can the public work force guarantee its own performance?
The only legal relationships between the government and its employees are the traditional employer-employee relationship and a union contract. MOUs, statements of intent or agreements in principle may look good on the surface, but ultimately, the taxpayers will foot the bills for broken promises.
Labor problems: There is a chance that the existing work force will end up working for a firm with which it competed. More often than not, managed competition sets up an “us versus them; win at all costs” environment that can lead to bitterness, frustration and undue anxiety.
We prize sportsmanship in our society, but when one is involved in a do-or-die struggle, it is almost impossible to lose gracefully.
Consequently, the best approach is to pursue privatization by considering only qualified private sector firms, while taking great care to protect the rights and interests of the existing work force.
If local decision-makers consider what is best overall — for the municipality, ratepayers and the existing work force — they may find that this is the most rational course of action.
Doug Herbst is manager of corporate development, Professional Services Group, Houston.