Outsourcing State and Local Government Services is About Looting

by Yves Smith, Naked Capitalism

For decades, citizens have been sold on the mantra that the hungry private sector can do a better and cheaper job of providing services than “inefficient” government. Now it is true that there were some badly run government entities that have done better when privatized (the poster child is British Telecom). But particularly on the state and local level, where voters demand a high level of accountability, this premise was always dubious.

First, as we’ve discussed at some length, outsourcing in the private sector often fails to deliver on their promises. But those dead bodies are seldom discussed. The fleeced buyer has every reason to hide the botched initiative. And they are often prohibited from discussing them: corporate IT projects, for instance, have non-disclosure provisions. As a result, CIO Magazine used a series of failed state outsourcing deals as a forensic exercise relevant to private sector, arguing that the problems were broadly the same.

But a new report by In the Public Interest, Out of Control: The Coast-to-Coast Failures of Outsourcing Public Services to For-Profit Corporations, shows why voter should regard outsourcing proposals with considerable skepticism. Remember, a corporate outsourcer will have to preform the same tasks as a government body would, plus he expected to recoup his selling/contracting costs and earn a profit margin. As we’ve seen with mortgage servicers, and the Out of Control confirms, one of the approaches used by private companies to meet their profit targets is to cut corners on compliance with the rules and with service levels. And when outsourcing is motivated not by ideology or a belief that savings can be achieved, but by service problems, all too often there’s reason to suspect that the legislation that the supposedly under-performing bureau is executing is cumbersome or poorly thought out. In other words, the problem is being treated as one of government execution, when it’s actually one of bad drafting or overly complicated requirements that won’t go away by fobbing them off to a private company.

The report is targeted to a lay reader and I strongly recommend you read it in full. It categorizes the ways in which contractor behavior is deficient: transparency, accountability, shared prosperity, and competition. For instance, even though government contracts are almost without exception public, outsourcing companies are trying to extend the veil of secrecy, just as they have with private companies, to impede scrutiny and exposure of failure to live up to their agreements:

Corporations can – and do – circumvent open records requirements claiming that documents and records related to government functions are “proprietary information” exempt from disclosure. Even basic information about a government contract and the accompanying procurement process can be difficult to obtain. Corporations may not diligently collect data and information related to public programs and services, leaving the public record incomplete. As a result, the public loses access to information about our own government. The debate about the size of government at the state and local level becomes meaningless because no knows exactly how many people – including contractors – are on the government payroll. By skirting open records laws, private corporations essentially perform public functions behind a veil of secrecy that would not be tolerated by public agencies.

The key sections of one example:

Recently in South Carolina, the Jenkinsville Water Company failed to pay state employee payroll taxes, lost millions of gallons of water, and could not account for tens of thousands of dollars.4 Concerned about mismanagement of funds,residents and journalists submitted open records requests to the company seeking copies of financial records, including audited financial statements and budgets. The company refused to comply.

State Senator Creighton Coleman (D-Fairfield) sought an opinion from South Carolina Attorney General Alan Wilson to determine whether the company was bound by the state’s open records laws.5 The Attorney General’s office stated that the Jenkinsville Water Company had to disclose the records.6 But even after the opinion was issued, the company refused to hand over documents, leading to a lawsuit filed by The Independent Herald newspaper.7

Not paying payroll taxes is a real stunner. I don’t know about South Carolina state payroll taxes, but that sort of violation is one where the IRS treats the “responsible person” as personally liable and is not shy about filing criminal charges.

And here’s another doozy:

In 2011, Deborah Toomey, a concerned citizen of Truth or Consequences, New Mexico, asked her city government to review video recordings of city commission meetings. The city contracts with Sierra Community Council, Inc., a private company, to record the meetings and maintain the video recordings. The city refused to hand over the recordings, stating that the videos were not subject to open records laws because the city did not have these recordings in its possession.9 Even though the recordings were of public meetings of elected city officials and pertained to government business, taxpayers were denied access to them because they were considered the property of a private company.

The blandly titled “Accountability” section is more accurately titled “Companies take money and don’t deliver anything approaching the stipulated level of services.” The report also reveals that one of the ways these contractors meet their targets is by effectively fobbing costs back on the state, by paying working low wages that force them to rely on public services. in 2008, 80% of the employees working on Federal service contracts made less than a living wage; the level is likely to be similar for state and local contracts. And of course, this means that local governments, perversely, are sabotaging their economies by driving wages and hence demand and eventually their tax bases down.

The last section debunks the idea that these contracts can even be bid out well. Even when you put aside the not-inconsiderable problem of cronyism (of having requests for proposal tailored so allies of key local pols will win the bid), the report discusses how in many cases, the needs of the local entity are so specific that there aren’t enough candidates to provide for real competition. And as we’ve discussed repeatedly with privatization, the agreements often have provision that vitiate whatever competition might have existed at the outset, such as automatic renewals and pricing provisions that guarantee profits.

The good news is the public seems to be waking up to this scam. For instance, Pennsylvania’s governor had to abandon his plans to privatize the state lottery after multiple groups criticized the deal, which included guaranteed payments to the buyer even if revenues fell short of projections.

I hope you’ll circulate this report to friends and colleagues to educate them about how often outsourcing abuses take place and the sort of reforms that need to be put in place to make sure the contractors live up to their side of the deal.

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Out of Control

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3 replies on “Outsourcing State and Local Government Services is About Looting”

  1. Let’s turn the entire economy over to government. I think there are major questions as to which functions are best outsourced versus performed in house but in many cases the level of effort varies over time and a public entity that endeavored to perform that function would be overstaffed whereas private contractors are able to move their resources from client to client as the requirements of the clients vary.
    It is not clear to me that a private company’s profit for performing work for a governmental entity is any different than the return taxpayers desire on funding government. A private company has a capital structure of debt and equity. When work is contracted out, the private sector entity provides the debt and equity. If done internally the taxpayer has to provide the debt;. The private company will be less highly leveraged than the governmental entity. So the private sector profit is to some extent related to having more equity in the mix than a governmental entity.
    I am assuming that there is no significant DNA difference between those in the private sector and government. For the Federal Government average compensation exceeds that available in the private sector. The reverse is usually the case with State and Local government.
    I have learned that generalizations tend to always be wrong. When I looked at this for U.S. DOT I concluded that outsourcing was a good idea when there was market or technological risk and that insourcing worked better when you did not have one or both of those two factors which are difficult for government entities to handle. 
    So I would say that a more nuanced assessment is preferable to an ideological analysis.

  2. This is a good article, but it misses some core issues at the heart of the problem of public purchasing.
    For the past forty year local, state and federal government has grown at unprecedented rates.  This created a huge army of well-paid bureaucrats who did a poor job of providing public services and goods at reasonable prices.  It also created a huge liability to the taxpayers for the retirement benefits enjoyed by these bureaucrats.  In order to control these costs, well-meaning, but poorly skilled decision-makers, opted to create competition by introducing private sector “efficiency” into purchasing and management philosophies of government.
    The “Reinventing Government” philosophy was a wolf in sheeps clothing led by flim-flam artists like Al Gore.  Much as the Communist bureaucrats evolved a state-owned system into a private mafia, Gore pioneered the efforts by retiring bureaucrats to find the “revolving door” in reaping the rewards of purchasing systems they had created while on the taxpayer dole.  As government retirees, these former employees founded or became part of large corporations that took over the provision of goods and services that were so inefficiently provided when these same people worked for the government.
    Same work and same boneheads doing the work.  The only difference is that many are getting paid even larger salaries to manage flunkies doing the work as private contractors and sub-contractors.
    There are a lot of good ideas in the paper by inthepublicinterest.org attached to this article.  However, some of the standards seem to be the product of bureaucratic mindset.  Calling for increased transparency is a good thing, but setting a standard used by government agencies is a very low goal.  How many times have I seen a multi-million dollar bid for goods and services issued by government employees on Friday afternoon for submission on the following Monday morning.  Government transparency isn’t.
    The solution might be to have public employees bid on the same work  being bid (or often awarded on a non-bid basis) to private companies.  An even better idea would be to start shrinking the scope of what the government purchases.

  3. What complete and unadulterated nonsense! If the anecdotes were the rule rather than the exception, Macquarie would have been driven out of business by the voters in the 42+ countries they operate public infrastructure projects years ago. In fact, Sweden has been a very happy client of privately operated infrastructure since the 1990s. Of course none of this fits the agenda of the statists, especially American ones still clinging on to the FDR model of political economy where public sector unions substitute declining private sector ones. Public sector unions do plenty of looting of the taxpayers themselves. Albeit it is done with no media coverage and transparency because rarely do politicians not cave into demands by public sector workers. To see this all you have to do is look at Detroit, its bankruptcy, and 45 years of economic mismanagement. Voters’ faith in Western countries in their government institutions are at an all-time low and for very good reason, public graft and waste is at epidemic proportions.
    Then of course the author goes after outsourcing. If it did not work, I guess all of these Indian and Philippine based software firms, like Tata Consultancy, Cognizant, Infosys, and etc. would not have clients. But they do and their clients continue to contract with them.
    Let me tell you what doesn’t work in the New Asian Century: Westerners with a grandiose sense of entitlement accustomed to inflated wages by using political pull and connections of the political establishment of USD and Euro based countries to live better than those in developing nations with better skill sets.

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