The pros and cons of long-term privatization
Cranston, R.I., was in a pickle. Old facilities and new air and water quality mandates were forcing the city to look at improving its 20-year-old wastewater treatment facility. Trouble was, the necessary improvements came with a price tag somewhere in the neighborhood of $30 million.
That neighborhood was a little too pricey for Cranston’s residents, whose sewer rates likely would have doubled. Meanwhile, the city’s Sewer Enterprise Fund, which had been borrowing money from the general fund to finance piecemeal plant improvements, owed the general fund $8.6 million.
In the past, Cranston would have looked to the state and federal governments for financing help. State and federal water and wastewater grant subsidies, however, had dried up just as water and air quality standards were tightening.
A few years before things got that serious, Cranston Mayor Michael Traficante, out of curiosity, wandered into a session on privatization at the U.S. Conference of Mayors annual meeting. His interest piqued, Traficante began studying the issue on the assumption that, sooner or later, Cranston was going to have to make some major decisions.
In 1989, the city tested the privatization waters with a five-year operations and maintenance contract on its wastewater treatment plant. The plant’s performance improved markedly, but necessary capital expenditures forced Cranston to keep tapping into its general fund.
That short-term contract ended in 1994, and Traficante once again began researching options. He spent a year negotiating with the Narraganset Bay Commission, a regional operator of wastewater facilities, figuring that regionalization would provide the economies of scale that could help Cranston improve its plant performance and lower its rates.
The commission, however, was understandably reluctant to be saddled with the $8.6 million debt owed the city’s general fund, and it had no plans to help out with the $26 million sewer fund debt. Consequently, the city discarded that option.
Over the next year, two major occurrences gave Traficante his answer. First, Presidential Order 12803 opened the door to long-term privatization by setting out conditions for grant repayments should ownership of facilities be transferred to private parties. Then in January 1997, IRS regulations changed to allow “safe harbor management contracts” of up to 20 years (the previous limit was five years).
Shortly thereafter, Cranston signed a long-term contract, technically a lease and service agreement, with Triton Ocean State, basically turning over its entire wastewater system to a private entity. (Triton is a subsidiary of Poseiden Resources Group of Stamford, Conn., which will finance and manage the agreement. Its team includes Houston-based Professional Services Group (PSG), which will operate, maintain and repair the facilities; and Wakefield, Mass.-based Metcalf & Eddy, which is responsible for capital improvements.) Under the contract, Triton provided the city with an upfront payment of $48 million and agreed to secure an additional $30 million in private financing to fund mandated capital improvements.
Cranston’s historic agreement was followed in short order by contracts between private providers and a number of other cities. By most accounts, local government water and wastewater officials see similar contracts mushrooming over the next few years. Not surprisingly, the companies that provide those services agree.
The Players Contracts for operations, maintenance and management (OM&M) — or some combination of the three — have been around for decades, at least in the United States. Their roots, however, go back to mid-nineteenth century France.
In 1853, Compagnie Generale des Eaux (CGE) was chartered by a nephew of Napoleon Bonaparte to provide water to Paris. Another company, Lyonnaise des Eaux, followed close on its heels. The two companies did a modest business handling the country’s water and wastewater needs.
Then came the two world wars. After World War II, France began rebuilding its devastated infrastructure. The country was concerned primarily with its hospitals and schools; CGE and Lyonnaise, on the other hand, saw rebuilding the water and wastewater infrastructure as a once-in-a-lifetime opportunity. Today, 70 percent of France’s water and wastewater functions is controlled by the two companies.
Meanwhile, in the United States, the 1970s brought about a building boom in water and wastewater facilities. Flush with federal and state grants, communities across the country began building state-of-the-art plants that they did not have the expertise to operate, manage or maintain. American engineering firms saw the same opportunity that CGE and Lyonnaise observed in France after World War II.
The industry has evolved into one of the most competitive — and incestuous — in the country today. Companies rise and fall, and buy, sell and absorb each other, while their employees move easily between them. The business reads like an eye chart : PSG, OMI, AWT, CGE, EOS, EMC, CH2M. (Lyonnaise and CGE own parts of some companies, and the British are beginning to make their presence felt with companies like American Anglian.)
Changing the rules A January 1997 change in IRS regulations regarding private activity bonds had a profound effect on the entire industry. “Prior to that, the basic rule was that, if a public jurisdiction had tax-exempt debt outstanding, it couldn’t enter into a service contractual arrangement with private parties for more than five years without losing that tax-exempt status,” says Roger Feldman, chairman of the Project Finance and Privatization Group with the Washington, D.C., law firm Bingham Dana. “The concern was that private parties would use those contracts as a back door to get to public benefits. It was a big-picture way of looking at things.”
“It used to be that the IRS thought if you are making it too easy for the private guys to make money off it, it begins to smell like a private business,” says David Seador, a privatization consultant with New York-based Price Waterhouse and president-elect of the National Council on Privatization. “The IRS had developed case after case describing what is a legitimate operations contract and what isn’t. To have that kind of thing dependent on an IRS understanding of how to operate a water system is a bit ridiculous.”
The new rules create “safe harbors” that permit private operation or ownership of a facility while maintaining the tax-exempt status of the bonds used to finance that facility. For “public utility property,” contracts may now extend to 20 years (or 80 percent of the useful life of the facility) as long as at least 80 percent of the compensation under the contract consists of a periodic fixed fee.
Why do it? According to their proponents, long-term contracts offer numerous advantages over short-term deals. “Cities are able to say, ‘We want a concession fee for the honor of serving us,'” says Feldman, who also chairs the National Council on Public/Private Partnerships. “If the company is able to keep rates at the same level, it can achieve significant savings. It can borrow upfront against those savings and make a payment to the municipality. That’s what happened in Cranston. The city could never do that itself.”
Before it signed its 20-year agreement with Palm Desert, Calif.-based U.S. Filter, Danbury, Conn., figured out its projected savings over the course of the contract. Then, says Danbury Finance Director Dominic Setaro, the city took a percentage of those savings upfront, in the form of a $10 million payment.
Beyond that, however, Feldman says that long-term agreements, by their very nature, are cost-effective. “In the modern age,” he says, “you can control costs better if you’re doing it on a long-term basis.”
“Cities are doing this because it allows them to enlist private sector efficiency, tools and techniques,” Seador says. “That almost always means money saved.”
Sometimes that can be big money. In North Brunswick, N.J., studies by Ernst & Young, the city’s financial advisor, indicated that North Brunswick would save about $46 million over 20 years because of its operations and maintenance contract with Chicago-based U.S. Water.
“We knew our rates were going to rise,” says North Brunswick Mayor Paul Matacera. “We just wanted to make it as painless as possible. It turns out that, this way, they increase a lot less than they would have.”
In fact, Matacera says, the city studied its past rate hikes and found that the increases over the next 20 years would be milder than those of the last 20. (North Brunswick maintains ownership of its facilities and the ability to set rates.)
“A private company can do what I call ‘financial engineering,'” says George Raftelis of Charlotte, N.C.-based Raftelis Environmental Consulting Group. “It can structure an agreement in such a way that, over the long term, the impact on the community is more even, more gentle.”
Raftelis, whose company works with local governments to determine the best OM&M alternatives for them, also urges cities and counties to consider Design/Build/Operate (D/B/O) arrangements. “D/B/O contracts allow you to tap public capital and the economies of the private sector,” he says. “They allow you to fix the responsibility with the entity that does the job, so if something goes wrong, you don’t have three or four different consultants, designers and engineers pointing fingers at each other.”
Of all the advantages to long-term contracts, though, peace of mind is the one local government officials cite most frequently. “If a company has a 20-year lease, it can do the necessary improvements without always having to go after RFPs,” says Chester, N.J., Mayor Hugh Newman. Chester has just such an agreement with Long Beach, Calif.-based Earth Tech. “It’s a hell of a lot easier for a company with a 20-year contract to plan,” Newman says. “We take the position of ‘They’re the experts; they’re responsible.'”
Chester’s system was failing miserably, and the state environmental agency was breathing down its neck, when the borough first considered privatization after failing to find a purchaser for the system. Its original contract operator, New Jersey-based Applied Wastewater Technologies (AWT), came in, Newman says, looked at the mess and said, “You’ll never hear from the state again.”
“And,” Newman adds, “they were right. They said, ‘Here’s what’s wrong, and here’s what has to be done.’ They corrected all the deficiencies in the plant. They dragged us out of the fire.” (Earth Tech, which was awarded the Chester contract after bidding $2 million less than AWT over the length of the contract, also draws high praise.) Chester now is in the process of extending its service, and its sewer rates have stabilized.
To Cranston Public Works Director Peter Alviti, the ability to transfer risk is the main reason for his peace of mind. “The company has complete control over how the facility is operated, maintained and repaired,” Alviti says. “So it makes sense that most of the risk rests with the company. Plus, over the period of time covered by the contract, a number of conflicts could have arisen. Having the contract eliminates finger-pointing. All the city has to worry about are circumstances that are uncontrollable, like acts of God.”
Contract specificity Awarding a long-term contract is merely the final step in a long, involved process. Hiring qualified consultants and experts should be among the first steps a local government takes, Alviti says.
“You can be sure that the private companies you’re negotiating with have experts on their side of the table,” Alviti says. He credits Cranston’s team of New York law firm Hawkins Delafield and Wood; White Plains, N.Y.-based HDR Engineering and New York-based financial advisors Bear Stearns with the smoothness of the city’s privatization process.
Every long-term contract will have some similarities and some variations. Specificity, the experts say, is the key to making the agreements successful.
Most importantly, Alviti says, every effort should be made to incorporate public concerns about rates and environmental issues. “The public has to be included from day one,” Alviti says. “The general public, particularly that 20 percent that is against everything, can have trouble grasping the savings if it’s not explained carefully.”
The general public, though, is only one hurdle. When Donald Walker ran for mayor of Warner Robins, Ga., municipal employees convinced him that privatization of the city’s wastewater treatment facilities was a seriously bad idea. Consequently, opposition to the contract between Denver-based OMI and the city became one of Walker’s election issues.
Walker now blames that opposition on a lack of knowledge. “The previous mayor had never discussed the issue with anyone — not the employees, not the public,” he says. “Once I began looking into it, I discovered that there was no way we could do as good a job as the company that was running it.”
The mayor now considers himself a cheerleader for the concept of long-term privatization. “If someone has a question or complaint,” he says, “I can go right to one person and discuss it, and that one person has the ability to take care of whatever it is. I think most of the employees realize that.”
Still, dealing with employees who are frightened about potential job loss is not always that easy. Consequently, most companies do their utmost to safeguard those jobs. In most cases, that is easy to accomplish. The vast majority of short-term contracts (and all long-term contracts signed thus far) provide for workforce reduction by attrition, as opposed to firing.
Despite those protections, however, privatization still is a dirty word as far as many unions are concerned. In California, Professional Engineers in California Government (PECG) is taking its case against privatization to the voters.
A June 2 ballot measure called the PECG initiative, or Proposition 224, seriously threatens the state’s ability to contract work out to private firms.
The amendment, which is being closely watched by government unions in other states, would apply to any local, state, federal or private sector project that involves a state agency. It also would apply to any state program or project that would be funded, administered, constructed or owned by the state or involve state responsibility or liability. Opponents, led by the Consulting Engineers and Land Surveyors of California, are calling the measure the “Competition Killer Initiative.”
Whatever happens in California, most of those who have been involved in privatization efforts say it is critical that unions be involved from the beginning. In fact, after initial wariness, unions have ended up supporting most OM&M providers.
In Indianapolis, for instance, unions initially fought the city’s long-term contract with Harrington Park, N.J.-based United Water, despite assurances that no jobs would be lost. In fact, only 196 of the city’s 322 sewer workers ultimately were hired by the contractor. The rest, however, benefited from company-funded placement services, and all eventually were hired in comparable or better positions. Now, Indianapolis is considered a template for relations between labor unions and contractors.
“Long-term contracts allow for an even more reasonable approach to labor than do short-term deals,” says United Water’s John Joyner, who worked with Indianapolis on employee relations issues during contract talks. “They allow for more natural attrition. With a five-year deal, there’s much more pressure on the private company to reduce labor costs early.”
While keeping their jobs is of utmost importance, employees also are looking for salaries and benefits that are consistent with those the city offers. In Milwaukee, United Water is awaiting an IRS private letter ruling that will allow the employees of the now-privatized Milwaukee Metropolitan Sewer District to remain in the city’s pension plan. Joyner is optimistic that the letter will be favorable.
(According to Bethesda, Md.-based Infrastructure Management Group, which served as Milwaukee’s competition advisor, the Milwaukee RFP insisted on an employee-friendly contractor. In fact, the city’s RFP pointed out, “The district has a long history of being a good employer, providing family-supporting jobs, benefits and career opportunities for its employees. The successful respondent is expected to continue this record.”)
Ironically, in Atlanta, the city’s recently published RFP (for what will be the largest long-term water contract signed to date) drew criticism for a provision protecting city employees. A local watchdog group claims the provision limits the potential for cost savings.
What can go wrong? Ultimately, the residents will determine whether a long-term contract is successful. That means that, as much as possible, the city should avoid surprising its citizens.
North Brunswick Mayor Matacera urges cities to look closely at their billing procedures to make sure their customers are getting accurate accounts of their water use. “We found a portion of the population that we were not billing as accurately as we should have been,” he says. “Those people had a false sense of security. When the bills started getting more accurate, they can be a lot larger. Immediately, they will say, ‘You sold this thing, and now these people are gouging us.'”
As Matacera points out, what happens before the contract is signed is important, but the contract itself is absolutely critical. Long-term contracts are such new animals that their care and feeding still is open to debate. One thing, though, is clear: If it is not spelled out, it probably will not happen. In cases in which privatization has failed, a lack of specificity in the contract was nearly always at fault.
Bremerton, Wash., for instance, is in the middle of a protracted court fight with the operator of its wastewater treatment plant. The city is asking $14 million, $7 million of which is to reimburse its general fund for a payment to local residents who complained about the plant’s odors. (The rest is for equipment the city claims the plant did not need.)
Witnesses on both sides have pointed fingers, and articles in the Bremerton Sun make it clear that blame can be spread. To save money, the city failed to approve a number of remedial measures that could have made a difference, and it failed to provide a clear oversight mechanism in the original contract.
Other witnesses pointed out that the contractor was responsible for the presence of a 30-foot “rag ball” (a clump of diapers and cloth material tangled on a drain or pipe) that the city claimed affected the plant’s operation. (Testimony on the rag ball — “I couldn’t believe what I was seeing,” said one witness — apparently broke up the courtroom.)
The fact is, if it’s not in the contract, it’s not part of the deal. “The vendor is obligated to meet the performance standards of the contract but is not obliged to go beyond, and the city should not expect it,” asserts “Thinking Through The Privatization Option,” a local officials’ guide published by the National League of Cities (see the accompanying sidebar). “The city, therefore, has to be very definite about specifying what it requires from the operator.”
It is important to have measurable goals, NLC says. “As a general rule, people pay attention to whatever is counted,” the guide notes. “By specifying what will be counted (time to answer citizen inquiries, number of documents scanned per hour, time necessary to plow the streets), the contract also serves as a device for signaling the city’s wishes to the vendor. If the vendor’s speed is measured, but accuracy of performance is not, it should be no surprise when the vendor sacrifices accuracy to improve speed. A poorly drafted contract can send the wrong signals.”
The organization also urges local governments to check out any relevant local legislation. In New York and New Jersey, for instance, enabling legislation allowing for long-term contracts had to be passed before local governments could proceed with any negotiations. Additionally, NLC says, consequences of non-compliance with the contract and liquidated damages should be spelled out, and the city must be prepared to monitor and measure performance and act to enforce the contract.
The procedures for terminating the contract must be understood by all parties. Some cities, like North Brunswick, have termination language that is predicated on a sophisticated set of indices. Others, like Danbury, have “convenience termination” clauses that basically allow them to back out of the contract at any time for any reason (with repayment, of course, of the company’s $10 million upfront payment).
Danbury Finance Director Setaro calls that termination clause “the biggest advantage we received because it eliminates uncertainty.
“Twenty-year contracts are a new concept,” he says. “These are new waters. If something doesn’t go right — and I certainly don’t expect that to happen –we can always go back to the way we were with very little hassle.”
Finally, the Association of Municipal Sewer Agencies (AMSA), which represents the operators of publicly owned treatment works, urges caution in proceeding with long-term privatization contracts. Often, AMSA maintains, internal re-engineering can solve many of the problems that prompt local governments to turn to contract operations.
AMSA has published a series of guides — “Thinking, Getting, Staying Competitive,” “Evaluating Privatization,” and “Managed Competition: Developing and Responding to RFQs and RFPs” — to assist local governments in making that call. (For information, contact AMSA at (202) 833-AMSA.)
A wide array of forms of operation and ownership of water and wastewater facilities falls under the headings “privatization,” “public/private partnerships” and “the traditional approach.” Traditional municipal operation and facilities ownership is at one end of the spectrum; full, private investor-owned and -operated facilities are at the other. The design/build/operate (DBO) approach is in the middle.
The traditional architectural and engineering sequential approach starts when a political entity decides that an asset is needed and commits funds. A project management group, such as the municipal engineering staff, solicits a contract with an architectural or engineering (A/E) design firm to undertake the design. The A/E firm prepares bid documents in concert with the municipality and the municipal legal council, and the city awards a contract to the construction company that submits the lowest bid.
Often, the city retains a construction manager to see that the construction company fulfills its contract. Upon completion of construction, the asset is turned over to the municipal operating agency. From design to completion, the entire project typically involves at least seven principal parties and three discrete contracts.
The municipality retains virtually all project risks, and the process is neither interactive nor integrated. Relationships are based primarily on the delivery of a product, as opposed to performance, and the interests of several of the parties can be inherently disparate. Still, that process has delivered some of the greatest public infrastructure in the world.
The D/B/O approach is a relatively new form of public/private partnership in the market. It has stirred interest because of the potential for saving 15 to 25 percent of construction costs and 20 to 40 percent of operating costs. Additionally, it shifts commercial and performance risks from the municipality onto the private sector.
The D/B/O procurement process challenges the traditional approach, beginning with a municipality’s solicitation to contract with a unified design, construction and operations team. Although the traditional number of parties is involved on behalf of the municipality, only one entity is contractually responsible for the project.
Typically, a sharing of overall risks is part of the contract negotiations. Commercial and performance risks tend to shift to the private sector with future capital risk, while the risks for future regulatory revision and uncontrollable circumstances remain with the municipality. Further, D/B/O teams can be required to guarantee certain aspects of the cost and project performance because they are in control of virtually all aspects of the project.
For example, Seattle Public Utilities (SPU) was looking to develop a new, greenfield 120-mgd, filtration/ozonation water treatment plant to treat surface water on the Tolt River. SPU staff initially benchmarked the cost of the project using a traditional or conventional approach.
The utility then went through an extensive D/B/O procurement process, in which private contractors bid for the design and construction of the facility, as well as for a 25-year operations contract. Under the D/B/O contract, SPU would retain ownership and liability for future capital improvements.
The city of Seattle provided project financing, and SPU negotiated a contract with a consortium led by locally based CDM-Phillips. The city estimates that it will save 40 percent ($70 million) using the D/B/O method rather than the traditional approach. Additionally, SPU will benefit from risk mitigation, rate stabilization and guarantees concerning regulatory compliance.
This article was written by Joe Dysard and Neil Callahan, consultants with R.W. Beck’s Orlando and Boston offices, respectively.
Vast changes are sweeping the U.S. drinking water and wastewater industry, and the attitudes of utility leaders are changing right along with the business. That fact was demonstrated clearly in a survey sponsored by White Plains, N.Y.-based environmental consultants Malcolm Pirnie. Respondents revealed that industry perspectives are substantially different from those expressed in 1996.
The survey, which dealt mainly with the consultant-contractor relationship in privatization initiatives, indicated that 71 percent of respondents see the potential for conflict-of-interest problems when consulting engineering firms and privatization contractors develop cozy relationships. That, respondents believe, could affect the consultant’s ability to remain objective. The figure is up from the 61 percent who reported the same concerns in the 1996 survey.
More seriously, two-thirds (65 percent) of survey respondents indicated that the potential for conflicts of interest would affect their decision about whether to select a particular consultant. In 1996, just 26 percent of respondents said that independence was an important selection criterion. “There is a trust issue with the owner and consultant,” one respondent wrote. “If consultants are providing more than one service, their decisions may be biased.”
Other survey answers indicated that more than 90 percent of utility decision-makers believe they are providing services efficiently and effectively. Further, they believe their customers would agree with that assessment. Many respondents, however, were able to name several areas, including customer service, plant operations and distribution or collection systems, in which improvement was needed. Most reported that such improvement programs are under way and say they have long-term strategic plans for future improvements.
About 75 percent reported that their agencies use a combination of staff and outside contract services to provide those improvements. Nevertheless, only about 25 percent believe that privatization is appropriate for their agencies, a number similar to 1996 findings.
The survey was conducted in February 1998 by Washington, D.C.-based Westat, using telephone interviews with 175 municipal utility decision-makers.
For the next several months, there is no hotter spot in the country than Atlanta, at least as far as the nation’s private water industry is concerned. Atlanta, which recently put out an RFP for operation, maintenance and management of its water system, is expected to select a contractor in August. “It is the biggest thing going right now,” says one industry professional whose company is bidding for the project.
For years, Atlanta’s water system — and its wastewater system, for that matter — has suffered from inattention. “The system’s management was not terribly efficiency-conscious,” says Price Waterhouse consultant David Seador, whose company, along with locally based Brown & Caldwell wrote the city’s RFP. “It’s very political here, but that’s true in most big cities.”
Privatization of the city’s water and sewer systems became a campaign issue in the city’s mayoral race between incumbent and eventual winner Bill Campbell and challenger Marvin Arrington. (Arrington claimed in debates that the city’s drinking water was unsafe, a charge denied by virtually everyone familiar with the subject.)
After Campbell’s re-election, privatization of the water system became his fast-track issue — so fast-track, as it turned out, that a stunnedcity council put on the brakes. Councilmember Clair Muller, a proponent of the idea of privatization, complained that the mayor was moving too fast and balked at the idea of a 20-year contract.
“The city of Atlanta does not have a stellar record of management, and to be looking at a 15- to 20-year contract doesn’t strike me as a good idea,” Muller said in an Atlanta Constitution interview. “When you look at a 15- to 20-year contract, you’re creating another monopoly.”
Muller also argued that the city had not studied all its options. “We … have been told that the only options are privatization or raising rates,” she told the newspaper. Campbell, however, maintained that privatization would save the city $30 million a year, money that would be applied toward the debt on bonds floated to finance sewer system improvements.
Ultimately, the city council voted 14 to 1 for the concept of a long-term contract that would include operation, management and maintenance of the city’s two main water treatment plants; operation of the water distribution system, laboratories and engineering services; customer service, billing, personnel and other support services. The RFP was issued in March; proposals are due in July; and the contractor will be selected in August.
The RFP has drawn criticism from several corners for a lack of specificity about the monitoring of the contract and the financing of certain capital improvements. “[It] leaves the door wide open for cronyism, excessive costs to the city and the distinct possibility of little or no improvement in city operations,” reads a statement put out by the Metro Group, a group of civic and business leaders watching the process.
The RFP employs an unusual point system for evaluating bidders, with cost-effectiveness deemed most important (30 points). The quality of both the technical approach and the management team rates 20 points; equal business opportunity plans are worth 15; and employee relations and transition plans are good for 10. Performance capabilities, (e.g., the bidder’s experience in the arena) is worth a mere five points, a fact that has rankled some observers.
OMI, United Water Resources, Compagnie Generale des Eaux/Air & Water Technologies and U.S. Filter are expected to bid on the contract.
Last year, it became apparent to Seminole County, Fla., officials that their computer-related services were falling short of their needs. To compensate, various operating departments began developing their own information services (IS) operations. Attempts to fix the problem only added to it, causing more separation and inconsistency.
“We got to point where it was overwhelming in terms of what needed to be accomplished and where we were,” says County Manager Gary Keiser. “There was no way we could do what we needed to do within an acceptable timeframe or for an acceptable amount of money.”
Additionally, the county’s equipment and software were outdated, there was a two-year backlog of requests for application modifications, and the county’s 21-employee IS staff did not have the resources to respond to the burgeoning demand.
“Our entire operation — staffing, programming — everything we had was failing,” Kaiser says. “For years, the county had not allocated sufficient resources to keep pace with technology. The users were frustrated, and we were, by most conservative estimates, two-and-a-half years behind schedule.”
“The bottom line is we weren’t living up to the expectations of our internal customers, meaning the county employees, so they couldn’t live up to the expectations of the citizens,” says Seminole County IS Manager Chris Grasso. “It doesn’t get any more bottom line than that.”
Finally, after evaluating their options, Kaiser and county staff recommended outsourcing the IS operation. They argued that privatizing the operation would provide far greater technological capabilities than the county itself had, as well as new application software, help desk services, training, PC support and ongoing equipment and software updates for the same amount the county was already spending.
In September,1997, county officials agreed to a five-year, $8 million outsourcing services agreement with HTE, Lake Mary, Fla. Under the agreement, the county turned over management of its entire computer-related operation (including staff and all software and hardware) in exchange for a monthly fee.
Within three months, the county’s network and support services stabilized, and its user base increased. Its wide area network expanded from 150 workstations to about 600, and 17 servers were added. The network allowed e-mail and Internet capabilities to be distributed among employees, enhancing communication and coordination. The county also has developed its web site and begun replacing software applications.
Finally, despite the fact that saving money was not Seminole County’s intent in privatizing its IS operation, the county has saved an estimated $200,000.
Additionally, the county just signed a deal to lease all its Compaq PCs. “We found that our problem was not purchasing PCs as much as it was getting rid of them,” Kaiser says. “The technology is exploding, and there’s no sign that that will slow down. Machines become overwhelmed, but when we try to justify budgeting replacements for computers that may be three or four years old, we have a problem.
“The technology that will be available to us will take us out from behind the technology curve and put us on the leading edge at a cost that is less than we would have had to spend ourselves,” Kaiser says. Furthermore, since the company handles the IS operations for six of the county’s seven municipalities, “the future networking potential is exciting,” he says.
In 1996, when the state of California slashed Riverside County’s library budget by a third, the county immediately began looking for ways to deal with the dramatically reduced funds. The county’s library system had been managed by the City of Riverside Library Board of Trustees since its 1911 chartering, but the cuts meant the board could no longer maintain a level of service that was acceptable to the county.
“The cutbacks left the library system in a shambles,” says Tom DeSantis, deputy county executive officer. “We had branches closed more days a week than open, plus there were other branches that literally could not open their doors if a volunteer called in sick. The book budget dropped to below $30,000 for serving approximately one million patrons.”
Outsourcing operation of the 25-branch system was the county’s solution. The county issued an RFP that spelled out the level of services that had been delivered on a branch-by-branch basis. Respondents had to provide a detailed description of how they would match and, ideally, improve upon those services, based on a budget of $5.3 million — $1.2 million less than the existing budget. (The county was setting aside the difference to pay library building mortgages or leases, maintenance and the salary of a county librarian, a newly created position.)
Turning over the management and staffing of a public library to a private company was historic, not only in Riverside, but across the United States. The county’s contract with Library Systems & Services, Germantown, Md., marked the first time it had been done. Consequently, the contract received a tremendous amount of attention within the public library community.
To allay fears of a private takeover of public assets, three Library Zone Advisory Boards were set up to provide local control and local return to source funding. Made up of elected city officials and county supervisors, each zone board provides policy recommendations directly to the full Board of Supervisors. Additionally, the county has retained ownership of all of the library buildings and possessions, including its collection of books.
County Librarian Gary Christmas has oversight responsibility for all library policy. Christmas serves as a liaison between the county, its 15 different city “customers,” 25 different library volunteer groupsand the company. He also works closely with the California State Library and other library cooperative organizations.
Christmas coordinates library policy and procedures, handles building maintenance issues, ensures contract adherence and participates in and approves the system’s collection development strategy. All broad-scale book acquisitions go out to bid to at least four venders, with Christmas giving final approval.
Importantly, the collection acquisition budget for 1997-98 was increased to $180,000, up from less than $30,000 in 1996-97. The county plans to increase the amount even more this year through public/private partnerships.
All of that means happier patrons. Additionally, Christmas says, the library staff ishappier. “The fear of layoffs every year was a very real issue,” he says. “Since 1993, we have cut 100 staff members. Avoiding more layoffs was specifically something that the Board of Supervisors wanted to do.”
To that end, the contract guaranteed that existing library staff would remain on the job with no loss of pay and essentially the same benefits. (The retirement package now consists of a 401K plan and Social Security, instead of participation in the state employee retirement program.) Employees who were old enough to qualify for state retirement benefits but young enough to keep working for the new management team made out particularly well, according to Christmas.
“A little over a year ago, many of our libraries were barely open and were minimally staffed,” DeSantis says. “[Now], we are able to be open more hours, and we can add staff. The result has been a win-win situation for everyone involved.”
This article was written by Rob Seitz, a freelance writer and a trustee of the New Rochelle Public Library in New York.
The National League of Cities has published a new guide to help local elected officials evaluate the options, procedures and issues commonly associated with outsourcing municipal services. “Municipal Service Delivery: Thinking Through the Privatization Option” offers a concise, step-by-step approach to identifying potential areas for privatization of public service delivery. The 60-page guide also outlines alternatives to privatization, including redesign and use of nonprofit groups, that cities can adopt to improve overall practices.
The guide uses a flow chart to identify various checkpoints in the decision process. In progressing through the chart, the authors explain the potential long-term and short-term consequences of each decision. Goal specification, scope definition, analysis of current processes and the need to be explicit about problems are emphasized.
Two of the main problems cities cite when attempting to privatize services — the effect on city employees and ensuring adequate service delivery — are covered in detail. The guide includes examples of cities that have successfully contracted out certain services and suggests procurement strategies and contract practices that can help cities avoid common pitfalls.
The book suggests that cities complete a comprehensive side-by-side comparison of all alternatives, ensuring that both direct and indirect costs are considered. Reviewing the potential number of service providers to ensure competitive bidding and avoiding the appearance of impropriety when selecting a contractor also are vital elements that should be considered.
The book is part of NLC’s “Local Officials Guide” series and was researched and written for the NLC and the Illinois Institute of Technology. Copies may be ordered from the NLC Publications Center, P.O. Box 491, Annapolis Junction MD 20701; telephone (888) 571-2939 or (301) 725-4299. The prices is $15 for NLC members or $20 for non-members, plus $4 for shipping and handling.