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Privatization News Roundup, Nov. 5, 2009

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 05 Nov 2009 16:45:00 EST

Some privatization news highlights from the last two weeks that haven't been covered elsewhere on the blog:

FEDERAL

"VA will turn to a contractor to reduce backlog of GI educational benefits," NextGov.com
"Senators express concern about administration's contracting guidance," Government Executive
"OMB's new procurement guidance inadequate, lawmakers say," Federal Times
"OMB pushes more fixed-price contracts," Federal Times

STATE & LOCAL:

"Panel offers cost cuts," The Advocate
"Public vs. private: Should NC give up booze control?," WRAL.com
"State-run setup's benefit doubted," The Patriot-News
"FSSA chief outlines plan to create 'hybrid' welfare system," The Herald-Times
"Plan to privatize prison deserves consideration," Denver Post
"Missouri Department of Corrections calls prison population boom no problem," Columbia Missourian
"Privatization fears persist for public Macclenny hospital," Florida Times-Union
"Eliminate, privatize some state services," Sioux City Journal
"Walker makes direct budget pitch," Milwaukee Journal Sentinel
"Novato Sanitary referendum gets green light," Contra Costa Times
"Brown County to look at privatizing planning," Green Bay Press Gazette
"Somerville Mayor Curtatone reconvenes Financial Advisory Committee," Somerville Journal
"Cape May County Youth Shelter employees, parents oppose privatization plan," Press of Atlantic City
"Central Dauphin moving forward with bus outsourcing plan," The Patriot-News
"Staffing drives airport's quest to privatize," Daily Inter Lake

INTERNATIONAL:

"Brazil In Talks On Rio's Galeao Airport Concession," Wall Street Journal
"State mulls disposals, partnerships to release value from property portfolio (South Africa)," Creamer Media's Engineering News
"KDB takes one step closer to privatization," Korea Herald
"KDB plans for mergers ahead of privatization," JoongAng Daily
"Poland's privatization plan shall help to close budget gap," Poland.com
"Czech Airlines Privatization Off For Now," Aviation Week
"Serbia to Privatize a Number of State Enterprises in 2010," PropertyXpress.com
"Syria launches its first electricity privatization tender," Daily Star
"AZN 75 million invested in Azerbaijani privatized enterprises for Jan-Sept," Azerbaijan Business Center
"MP offers to start using private prisons in Kyrgyzstan," 24 Press Club

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

California to Send 2,300 More Inmates to Out-of-State Private Prisons

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 03 Nov 2009 12:43:00 EST

Per Southern California Public Radio, California has amended its contract with private prison provider CCA to increase the total number of contracted out-of-state prison beds by an additional 2,300 as part of the state's strategy to get a grip on its prison capacity crisis:

Back in 2006, Governor Schwarzenegger declared a state emergency in California's prisons due to overcrowded conditions he said threatened inmates and prison guards. That proclamation authorized the Department of Corrections and Rehabilitation to temporarily transfer 7,900 inmates out of state over the last 3 years.

The departments' Gordon Hinkle says the transfers enabled California to get rid of thousands of makeshift cells erected in prison day rooms and gymnasiums. "One of the things we've been trying to do in California is to shut down any of the 'bad beds' or dorm-type living situations which creates a higher security risk not only for the inmates but for also for the correctional officers that are working to supervise them."

Under an amended contract with the Corrections Corporation of America, one of the largest private prison operators in the country, California will be able to transfer an additional 2,300 high-security inmates to the company's facilities in Arizona, Mississippi, and Oklahoma. The transfers are expected to begin early next year.

The inmates are likely to be housed at CCA's North Fork Correctional Center in Oklahoma and its Red Rock Correctional Center in Arizona. This is now the fourth time that the contract has been amended since originally signed in 2006, representing a ten-fold increase in three years (from 1,000 in 2006 to 10,468 under the latest amendment).

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Corrections Privatization Research and Commentary

More Bad News for Pennsylvania Turnpike Commission, Part 2

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 29 Oct 2009 13:31:00 EDT

Following up on my post yesterday, the "he said-she said" discussion is over. Remember that yesterday, Pennsylvania Turnpike Commission representatives—including executive director Joseph Brimmeier—issued strong statements denying that the FBI had visited their offices and seized computer equipment and records. Here's what Brimmeier said yesterday afternoon (emphasis mine):

Turnpike CEO Joe Brimmeier today told the Pittsburgh Post-Gazette that "It never happened. The FBI did not visit any turnpike offices or confiscate any equipment belonging to the turnpike. (Toll Roads News) has a long history of sloppy or inaccurate reporting that reflects their efforts to malign the Pennsylvania Turnpike and its over 2,200 employees. Today they crossed the line between sloppy and reckless. The posting is false."

Just a few hours later though, the PTC changed their tune significantly. Per John Micek at The Morning Call:

In a brief telephone interview, [Turnpike] commission spokesman Bill Capone told us that the FBI is, indeed, investigating goings-on at the Valley Forge interchange. But that's because the Commission voluntarily called in the Feds after its own Office of Inspector General determined that the matter was too big for them to tackle on their own.

"These irregularities were to us first, and we, the Pennsylvania Turnpike Commission, contacted the FBI and asked them to get involved in it," Capone said this evening."

Capone said the Turnpike's OIG was put onto the matter after the agency "got a tip that something was going on with the Valley Forge widening project."

From a basic PR standpoint, wouldn't that have been a better statement to release right off the bat? Instead PTC played the deny-then-confirm game, which tends to make people question the details of the confirmation. When the director says, "The FBI did not visit any turnpike offices..." and then a few hours later the spokesman says that indeed the FBI did visit (for whatever reason), it starts to smell even fishier. With a flip-flop like that, how much faith is one supposed to have about the veracity of any statements that follow? Even if this all turns out to be all smoke and no fire, the sheer hubris of the PTC is stunning. I'd say they owe Peter Samuel an apology for trying to throw him completely under the bus, but I wouldn't hold my breath waiting. On a related note, Brad Bumsted at the Pittsburgh Tribune-Review confirms today that rumors of a state grand jury investigation of the PTC (for corruption, patronage, shady contracting, etc.; fairly stock stuff for the PTC) are indeed true:

A statewide grand jury based in Pittsburgh is investigating patronage and contracts at the Pennsylvania Turnpike Commission.

The involvement of Attorney General Tom Corbett's office surfaced Wednesday after reports that the FBI has been investigating matters at the agency. [...]

"It's an investigation we launched internally ourselves," [PTC spokesman Bill] Capone said. "It's an ongoing investigation."

Asked about the statewide grand jury investigation by Corbett, Capone said: "I have heard that unofficially. Officially, I have not been made aware of it."

Officials say the state investigation is looking at alleged "pay-to-play" contracts involving campaign contributions given by contractors or solicited from them.

I know that the scandalous aspects of this will be the primary media focus, but to me the larger issue at play is that the entire future of Pennsylvania's transportation system is now effectively in the hands of the PTC, thanks to the ill-conceived Act 44 a few years ago. This means Pennsylvanians are forced to trust that the corrupt PTC will act in citizens' best interests. Good luck on that. As I said yesterday, the $12.8 billion privatization offer last year would have taken the candy away from the bad guys, but state legislators had their blinders on. In retrospect, given today's markets that would have likely been the smartest move they could have made. I'd bet that some wish they could have a mulligan on that now.

Anti-Privatization Pacheco Law Continues to Hamstring Massachusetts Budget

adam.summers@reason.org (Adam Summers) — Wed, 28 Oct 2009 23:35:00 EDT

My colleague, Len Gilroy, did an excellent post the other day on efforts to repeal or amend the anti-privatization Pacheco Law in Massachusetts. Reason has been critical of the Pacheco Law for many years. Back in 2002, Reason VP for Research Adrian Moore, former Reasoner Geoffrey Segal, and I wrote a white paper for the Pioneer Institute for Public Policy Research on privatization and the effects of the Pacheco Law in Massachusetts. Here is an excerpt from that paper:

When faced with insufficient revenues, state governments typically have four options: increase taxes, scale back expenditures, spend down reserves, or seek ways to provide services more efficiently through contracting with private providers. Massachusetts, however, has only the first three options available; it is the only state in the nation that has virtually outlawed the privatization of public services.

The Pacheco Law was enacted by the Massachusetts legislature in 1993. The law, now M.G.L. ch. 7 sections 52-55, set up a series of tests that a state agency must pass before it can award a contract to a private company to perform services that had been previously performed by state employees. The law presents both statutory and political roadblocks to efficient government operations. Its provisions essentially slam the door on many opportunities that have been shown to improve services and save money in other places, as the law disregards all potential benefits other than lower costs.

Reducing costs is only one of many reasons agencies in other states choose to contract with private service providers. Well-designed contracts allow agencies to improve quality, accommodate peak demand, speed project delivery and meet deadlines, gain access to expertise, improve efficiency, spur innovation, and manage risk more effectively.

The Pacheco Law essentially prohibits Massachusetts agencies from contracting out to improve service quality, increase the number of people served, or reduce an existing backlog. A proposal to contract out cleaning and maintenance of bus shelters—which would have brought several million dollars annually to the state from new advertising revenues—was rejected because the contractor did not specifically calculate the difference in cleaning costs.

When a Massachusetts agency entertains bids for the right to deliver a service, public employees have the opportunity to submit bids to keep the work in-house. The Pacheco Law gives state workers significant advantages.

The cost and quality of service offered by private contractors must be compared not to existing cost and quality but to the hypothetical situation of public employees working in the most cost-effective manner and providing the highest quality possible. At no time are state employees held to these standards. If public employees win the contract, they are not held any concessions made as part of the bid.
The contractor must add lost tax revenues to the cost of the bid if any work is to be performed outside Massachusetts. No such adjustment is made to the public sector bid for the loss of tax revenues that would be realized if the work were to be performed by a private business subject to state taxes.
Private bids must also include estimated costs of monitoring contractor performance, while no such monitoring takes place in the public sector. The likely benefits of monitoring are not considered.

Even if a private contract scales these hurdles, the State Auditor may reject any proposal he deems not to be “in the public interest,” without providing a definition or reason. The rulings are final and may not be appealed.

Prior to the passage of the Pacheco Law, the Weld administration issued 36 privatization contracts, saving taxpayers an estimated $273 million. The procedure Massachusetts agencies must follow under the Pacheco Law is so onerous that only eight proposals have been submitted to the Auditor since its adoption in 1993. Only six were approved.

Over the last decade, federal, state, and local government agencies nationwide have contracted with private vendors to provide services from data processing to prison operations to adoption. According to the Government Contracting Institute, the value of federal, state, and local government contracts to private firms is up 65 percent since 1996 and exceeded $400 billion in 2001. Massachusetts law should not continue to prohibit agencies from taking advantage of this tool for reducing the cost and increasing the quality of state services.

Ideally, the Pacheco Law should be repealed. Short of repeal, it should be amended such that privatization can become a useful policy tool for legislators and agency managers.

Sadly, the Pacheco Law remains on the books seven years later. The silver lining of the state's current fiscal straits is that at least now there seems to be some momentum to weaken or eliminate the law and use the efficiency of the private sector to help balance the budget while providing high-quality services.

Other Resources:

» Pioneer Institute for Public Policy Research White Paper: Competition & Government Services: Can Massachusetts Still Afford the Pacheco Law?

» Reason Foundation's Annual Privatization Report 2009 (See page 19 for discussion of the Pacheco Law)

» Reason Foundation's Privatization Research and Commentary

More Bad News for Pennsylvania Turnpike Commission

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 28 Oct 2009 15:52:00 EDT

Corruption at the Pennsylvania Turnpike Commission is a well-known and unfortunate reality, and the scandals continue to mount. Already this year we've seen the conviction of former State Senator Vincent Fumo (the Turnpike's leading legislative patron during his tenure in office) and Ruth Arnao (wife of fired PTC chair Mitchell Rubin) on a combined 182 counts in a federal corruption case. Gov. Ed Rendell subsequently canned Rubin, who is now the target of a federal corruption investigation. Last week former PTC staffer Michael Palermo pleaded guilty to receiving $290,000 in state funds through bogus work contracts arranged with Fumo. And this summer a state grand jury began to investigate corruption at the Turnpike. As if that all wasn't bad enough, Peter Samuel at TollRoadsNews.com reports today in two separate posts (here and here) that the FBI showed up unannounced at the PTC offices last week, confiscating hard drives and documents as part of a criminal investigation:

A number of Pennsylvania Turnpike officers have lost computer hard drives to the Federal Bureau of Investigation. Last Thursday morning Oct 22, FBI officers showed up unexpectedly at the Turnpike offices in Harrisburg and apparently presented their authority (subpoena) to impound, examine and confiscate equipment and records as part of a criminal investigation. The agents returned and spent most of Friday at the Turnpike also. Nothing has been announced by either the FBI or the Turnpike.

Hypothetically speaking, if Abertis' $12.8 billion bid for a Turnpike lease was still on the table today, would the PTC still have the political clout to convince a majority of legislators to reject it? Rather than put the PTC out of business through a Turnpike lease (as I've argued should have been done), somehow a majority of legislators convinced themselves that a better option was to expand the PTC's power and role in state transportation funding. Smart move, eh?

For all state senators and reps who stood in the way of the lease I have one simple question—how's that decision working out for you?

For the USDOT folks currently evaluating the PTC's proposal to toll I-80—a critical lynchpin of the deal enshrining PTC's continued transportation monopoly, which was already rejected twice before by the Bush-era USDOT—I'd simply ask, can you ignore this? The Obama administration could certainly end up with no small degree of egg on its face if one agency (USDOT) were to approve the PTC's I-80 tolling plan while another agency (FBI) was investigating the PTC for corruption.

UPDATE: In fairness, PTC executive director Joseph Brimmeier is denying that an FBI raid ever occurred. Peter Samuel responded with a source on the record claiming that it did indeed occur:

Bob Dietz, 55 of Lancaster PA, construction supervisor for a Turnpike widening project near Valley Forge says we can quote him as saying the FBI were at the Turnpike's head offices in Harrisburg Thursday afternoon and that they went away with computers and other materials.

Dietz says he has been providing the FBI with details of corruption in connection with a $170m six lane widening in the Valley Forge area. The job was originally bid at $90m, Dietz says. (We're checking this out - editor)

So it's "he said-she said" at this point. More to come as this story develops.

UPDATE 2: Nathan Benfield at the Commonwealth Foundation offers a similar take (with a dose of sarcasm) here:

But hey, it's not your father's Turnpike Commission (despite the number of patronage hires). Rampant corruption is no reason not to give the Turnpike Commission greater authority and control over I-80.

UPDATE 3: In my original post, I mistakenly wrote that Mitchell Rubin was "up on federal corruption charges," when in fact he is currently the target of a federal corruption investigation. I corrected this in the text above. My apologies for this error on my part, and many thanks to the reader who pointed it out.

Time to Repeal Massachusetts' Pacheco Law

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 27 Oct 2009 12:56:00 EDT

Massachusetts State Senate Minority Leader Richard Tisei and State Rep. Jeffery Perry write in separate op-eds (in The Boston Globe and the Cape Cod Times, respectively) that the state's ongoing fiscal crisis demands real government reform, and they suggest that the state could save over $1 billion through a series of reforms that include repealing the state's anti-privatization Pacheco Law. As Perry writes:

Since this anti-privatization measure was approved during the Weld administration, the state has lost out on the opportunity to save hundreds of millions of dollars through the outsourcing of certain government programs and services. The law has effectively stifled state privatization efforts by keeping most work in-house, even when a private company could potentially deliver the same services more efficiently and at a lesser cost.

As I wrote in Reason Foundation's Annual Privatization Report 2009, the 2009 legislative session in Massachusetts saw increased interest in tweaking the Pacheco Law:

The state's "Pacheco Law"—a 1993 procurement statute that many observers say has created numerous procedural obstacles to the privatization of state services—came under scrutiny in May 2009 amid legislative negotiations over the state's FY 2010 budget, which will require closing a $1.5 billion deficit.

By an 11-28 vote, the Senate rejected a budget amendment that would have repealed the law. Amendment opponents argued that the strict law serves an important oversight function and that its repeal would threaten state jobs. Supporters countered with several arguments in favor of repeal:

•Repealing the law would help the state do more with less through privatization, potentially saving hundreds of millions of dollars that could support vital programs.

•The privatization of state services has effectively stopped as a result of the highly restrictive provisions of the law.

•One provision of the law requires state agencies to compare the cost of using private contractors to a hypothetical cost if state employees were to optimize the efficiency of current service delivery, ignoring the true costs of current service delivery.

•The state auditor already has the authority to unilaterally reject contracts he deems "not in the public interest."

But the Senate did approve, 24-15, a separate budget amendment that would exempt all contracts under $2 million in value from the provisions of the Pacheco Law, which currently applies to contracts over $200,000. According to amendment supporters, raising the cap would facilitate more privatization and help the state save millions of dollars.

Let's be honest about it—this law should have never existed in the first place and represents a cynical political attempt to appease public employee unions by stacking the deck against privatization from the get-go. At a time of record deficits, policymakers should be focused on removing unnecessary and counterproductive laws and rules that stand in the way of streamlining government. Ironically, with the law in place, the public employee unions that fought to pass and subsequently protect this law actually made their jobs a little less safe, which is precisely the opposite of what they intended. After all, if you're not outsourcing very many services (driving up costs) and government gets as bloated as it is in Massachusetts, then when it comes time to close a multi-billion budget deficit, by definition the public employees will automatically bear the brunt of the cuts.

Instead of fighting privatization, it might be more sensible to public employees to just embrace competition, as the costs savings generated by privatization will work to reduce the pressure on the state budget over time, which would be a win-win for both the public employees and contractor community.

» Reason Foundation's Privatization Research and Commentary

Oklahoma Corrections Report Ignores Costs to Make Public Prisons Look Cheaper

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 26 Oct 2009 13:31:00 EDT

Following up on my post last week, here are two more reasons to question the Oklahoma Department of Corrections' new report suggesting lower per diem costs in public prison beds relative to private prisons.

First, I just received a copy of the so-called "report" (a three-pager with few details, pretty underwhelming) and it appears that my original suspicion was correct—ODOC is selectively leaving significant costs out of their analysis. And they admit it on the very first page of their report! They start by explaining their new "revised" per-diem calculation, which reveals these major red flags:

"[T]his model does not consider indirect or adminstrative funding in the facility operating cost calculation."
"Similar arguments can be made for indirect costs."
"The revised model no longer reflects costs paid by other agencies..."

Translation—running prisons actually costs more than what's in the ODOC budget alone, so it relies on overhead, administrative and other funds from elsewhere in the state budget. The ODOC claims that they are "revising" their per-diem calculations for the purpose of making their numbers more comparable to how a private prison would calculate per-diem rates, when in fact government works very, very differently with costs smeared across various budgets and agencies.

Here's the kicker—ODOC justifies its revised methodology on trying to get more accurate comparisons in a situation where "each private facility is given a budget and expected to operate within that budget with no 'outside' operating monies." Then ODOC goes on to create a methodology where it removes all of the "outside" operating monies from its own side of the ledger! That's a 180 degree bait-and-switch.

Policymakers should not be fooled. If this isn't a blatant attempt to game the numbers to make ODOC look unrealistically competitive, I don't know what is. The ODOC made this very obvious by including in their new report what the per-diems would have been under their old methodology, and the private sector had lower per-diem rates than public prisons for both minimum and maximum security facilities. Tweak the methodology a little bit, ignore some costs, and viola...under the new methodology the ODOC magically becomes "cheaper." Hmmmm. Classic government obfuscation.

Second, the state's Legislative Service Bureau issued a lengthy, detailed performance audit of the ODOC in late 2007 that clearly found lower costs in private prisons (full report here):

Private prison beds currently cost the state $47.14 per bed per day, a rate significantly below the $51.94 cost of the most directly comparable state-run medium-security institutions (Exhibit 1-6).

The relative cost efficiency of the private prisons appears attributable to the fact that DOC institutions tend to be antiquated, poorly designed facilities that require higher staffing levels to compensate for severe security deficiencies inherent in their physical plant. The private prisons, by contrast, are relatively new institutions designed to facilitate the efficient use of staff resources and to enhance security.

To conduct a fair comparison of the state’s cost for private prisons versus state-operated facilities, we compared the expected cost of private operation of the new maximum-security facilities at Davis to the estimated amount DOC would spend to operate comparable facilities. Our analysis shows a per diem cost of $62.34 for private operation of the facility ($58 contract rate + $4.34 in associated indirect costs) versus a $65.36 per diem for government operation, a difference of 4.8 percent.

Private operation, then, appears cheaper for the state up to a contract rate of $61.03 per bed. Above that price, department management is the cheaper option.

Cost however, is only one of the many factors that require evaluation in a thorough assessment of privatization. The ability of the private sector to develop and open new facilities quickly is a critical advantage. On the other hand, relying upon private correctional capacity involves an element of risk, as demonstrated by DOC’s recent loss of critical bedspace due to Cornell's termination of its contract with the state. Even so, our report recommends improved systems for contract control and management, and an approach to procurement that emphasizes competition and diversification, to address this concern.

At a minimum, state policymakers should be seriously scrutinizing ODOC's new numbers, given that they're reportedly being used to justify why the private prisons should be asked to bear the brunt of a 5 percent budget cuts, while sparing state-run facilities the same. When a change in methodology produces a flip-flop in outcome, it deserves to be taken with a grain of salt until further vetted.

It seems pretty clear to me that the ODOC has decided that the old methodology wasn't working out in their favor, so viola...they just changed the methodology and problem solved. Yet another micro-example of a long-standing phenomenon: when the rules of the game aren't working for the public sector, the public sector tends to just change them.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Some Perspective on Virginia's IT Contract Controversy

leonard.gilroy@reason.org (Leonard Gilroy) — Sun, 25 Oct 2009 17:19:00 EDT

In a recent column I argued that the political controversy over Virginia's IT modernization contract with Northrup Grumman should not distract policymakers from the correct course forward—identifying the implementation challenges and working with the contractor to correct them and right the ship. Fairfax City Councilman Daniel Drummond (and former Northrup Grumman consultant) reaches a similar conclusion in this Richmond Times-Dispatch op-ed today that offers some important perspective on the project that shouldn't get lost amid the current kerfuffle:

To fix the problems, though, we need to understand why we are here in the first place. This deal wasn't about technology alone. In addition to fixing the state's ancient and vulnerable IT systems, it was about job creation, economic development, and introducing a new way of governing through a public-private partnership.

When then-Gov. Mark Warner announced the awarding of the 10-year, $2 billion contract in November 2005, state agency IT departments were already being put under one roof known as VITA. The next step of this transformation was to find a private partner to modernize the state's woefully inadequate computer systems. Highlights of the inept system included state employees using 12 separate e-mail services, some agencies using Windows Office 97, and millions of dollars' worth of illegal copies of software floating around.

The modernization concept (and how to pay for it) was this: Turn IT into a service similar to a utility, not much unlike the telephone or electricity. So instead of individual agencies buying their own computers and software, they instead would now buy "seats" that in turn got them not only the latest equipment, but also enhanced security and technical know-how.

In finding a partner, the state was looking for the company to make a significant investment in Virginia by building two new data centers (including VITA's new headquarters) in addition to paying for all of the computers, wires, software, and widgets needed to revitalize the state's IT infrastructure.

The General Assembly also insisted that the contract be equal to the same amount the state would have been paying for its IT services -- not a dime more. To make this happen while also satisfying the need to make a profit, Northrop Grumman would take the financial risk, but it would be allowed to leverage the state's IT network and sell services to local governments, higher education institutions, and the private sector.

The true genius of this was to find a partner that could help expand economic opportunity throughout the state. In other words, this wasn't just a contract -- it was a job creator. Not just the 400 Northrop Grumman jobs the company expects to ultimately create, but the ancillary employment and economic development opportunities that would result.

It worked: In Lebanon, for instance, CGI built its facility next to Northrop Grumman's IT facility, creating an additional 600 jobs in the rural part of the state. That's 1,000 new jobs in Russell County directly attributable to this project. The state also got the added benefit of having 600 VITA employees become Northrop Grumman employees, thus coming off the state's pension and health insurance plans and eventually saving taxpayers millions of dollars.

Clearly, there are difficulties facing this marriage. This deal has not lived up to expectations and both sides are to blame. But with a $400 million break-up fee hanging over its head, the commonwealth can't afford to walk away. Nor can Northrop Grumman, as its reputation and prestige are on the line.

With the upcoming legislative session certain to bring proposals to reform the contract and VITA itself, it's time to take a step back and see what's worked and what hasn't. And those working to salvage this deal need to remember that this partnership isn't about them. Rather, it's about the people who now have jobs in Russell County, the chance to save taxpayers money, and creating a partnership that will be a model for other states to follow while moving Virginia forward.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Privatization News Roundup, Oct. 23, 2009

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 23 Oct 2009 15:16:00 EDT

Some privatization news highlights from the last week that haven't been covered elsewhere on the blog:

FEDERAL

"GAO: Army shouldn't privatize West Point jobs," The Associated Press
"Panel Recommends Privatization of Fannie Mae And Freddie Mac," Talk Radio News Service
"Justice kicks off planning phase of $1.5B contract," Washington Technology

STATE & LOCAL:

"Puerto Rico to Use Private-Partnership Proceeds to Repay Bonds," Bloomberg
"Arresting Developments," Barron's
"Miami Tunnel Reaches Closure," The Bond Buyer
"Despite speed bumps, Port of Miami tunnels continued attracting lender interest," Miami Today
"Lawmakers eye using budget as a tool against Northrop Grumman in IT deal," Richmond Times Dispatch
"Montana Airport to Privatize Security Screening," Security Management
"Airport to privatize security," Daily Inter Lake
"Colorado prison cuts possible elsewhere," Denver Post
"Fire department should keep going to medical emergencies, committee says," Record-Searchlight
"Village gets bid by company to construct sewer system," The Reporter

INTERNATIONAL:

"Scottish Think-tank Propose PFI Replacement," PPPFocus.com
"Private firms model for projects," BBC News
"UK's Royal Mint Workers Protest Against Privatization Plans," Bloomberg
"Japan Post Goes in New Direction," Wall Street Journal
"Makeover of postal privatization," The Japan Times
"France: Voters Reject Postal Privatization," Toward Freedom blog
"Russia may privatize certain state corporations - Medvedev," RIA Novosti
"Poland Banks on Privatizations to Plug Budget," BusinessWeek
"Zambia Shortlists Eight In Privatization Of Zamtel," Wall Street Journal
"Public-private partnerships contribute to country's development," AngolaPress
"Zimbabwe: Privatization Opens Massive Infrastructure Opportunities," AllAfrica.com
"Government announces new wave of privatization," Daily Georgian Times
"More private finance initiatives to reduce budget deficit," Malaysia Star
"6 power plants to be privatized next year," Manila Bulletin

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Policy Stinker of the Day: Arizona Mulls Hiking Vehicle Fees to Fund State Parks

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 23 Oct 2009 13:28:00 EDT

As an Arizona taxpayer, an outdoor recreationist, and transportation wonk, I'm frankly offended by the latest bad idea to craftily pick our pockets in the midst of the state's cascading budget deficits:

State parks officials are turning to the idea of introducing a car-registration surcharge to save the financially crippled parks system from deterioration or even possible shutdown.

The plan, which could face significant opposition in the Legislature, would add $10 to $15 to the cost of registering a non-commercial vehicle in Arizona. In return, Arizona motorists - who likely would be allowed to opt out of the surcharge - could enter any state park without paying admission. The proposal is modeled after programs in Montana and Washington, and backers say it would generate $32 million a year.

"Instead of paying an entry fee of $6 or $10, or buying an annual pass that costs up to $200, every citizen of Arizona with a license for a non-commercial vehicle could enter state parks for $10 to $15 a year," said Bill Scalzo, a member of a task force on state parks appointed by Gov. Jan Brewer. "That is the greatest deal I've ever seen for state parks." [...]

Already, officials have closed three parks and reduced hours at 17 others. Administrators also laid off 40 percent of the parks staff, which oversees 27 parks with 2.5 million annual visitors. "We're moving toward the total collapse of the parks system," said Bill Meek, head of the Arizona State Parks Foundation, a non-profit advocacy organization.

Some lawmakers say they would consider supporting a registration surcharge, so long as motorists could opt out. "I think that would be an excellent way to go," said Rep. Nancy Young Wright, D-Tucson, whose district is home to Catalina State Park. "We need to protect opportunities to connect with nature."

From where I stand in Arizona, over 75% of the state is owned by the federal, state or local government and held in the public trust. Are we really lacking opportunities to "connect with nature?" I do a ton of hiking, biking and camping myself, and you could live here a lifetime and still not explore all of the current public land in the state. Lack of access to nature is really not much of an issue in Arizona.

House Appropriations Chair John Kavanagh nailed it:

[Kavanagh] said requiring motorists to opt out would result in too many people inadvertently donating funds because they had not read the fine print.

"It might generate great revenue, but it's not ethical," said Kavanagh, R-Fountain Hills. "Nice try, but come back with something with a little less scam in it."

Indeed this idea is a scam, and it's terrible public policy.

What's the nexus between vehicle registration and state parks? Right, there isn't one. If policymakers intend to spend the political capital to hike vehicle registration fees, you'd think they'd do so for the purpose of addressing the state's transportation funding crisis, not the state's park funding crisis. Arizona is facing over $100 billion in unfunded transportation infrastructure needs over the next several decades, one primary factor driving the passage of a law to facilitate private sector investment in state transportation earlier this year. With a transportation funding gap that dwarfs the state parks gap, can policymakers really mingle parks and vehicle registration fees with a straight face? (For the record, I don't think vehicle registration fees should be raised for either purpose; mine is more a comment on the "ready-fire-aim," tone-deaf nature of the proposal.)

This is nothing more than a sneaky tax, a way to smear costs across park users and non-users alike. Rep. Kavanagh's right. Many people will just sign the paperwork, write their registration check and never know that they could have opted out of the parks tax. And our state legislature has shown a propensity for fund sweeps and other gimmicks to close the state's ever-mounting budget deficits. So what's most likely to happen is that the new funds get swept out of parks and used somewhere else to close the deficit.

Meanwhile, you've just incentivized more people to use the state parks at the same time that you've left those parks in an operating deficit and are unable to maintain them. So you don't solve the parks deficit at all, and in fact, you accelerate the parks' decline.

Both the transportation and parks long-term funding crises share a similar root—weak user fee structures, bad price signals, and too much socialization and subsidy. As my colleague Adam Summers recently commented on California's state park funding crisis:

User fees provide a fairer funding source since they ensure that those who actually use government services are primarily responsible for paying for those services, reducing tax dollars and giving people more choices.

User fees also offer practical benefits such as increased park management flexibility—allowing park managers to adjust to economic conditions or changes in park visitors' recreational preferences—and greater financial accountability. States such as Vermont, New Hampshire and Texas have realized significant park services cost savings through user fees.

Opening up park management and maintenance services to a competitive bidding process, and turning these operations over to private-sector or non-profit groups, could further reduce costs and help to make the parks self-sufficient while addressing maintenance backlogs.

Read the whole thing for more on why user fees and competition should be the focus of parks funding discussions, not a hidden money grab under the guise of a "voluntary" tax. It seems a lot less voluntary when the tax is already on your bill when you get it and you bear the burden of having to remove it.

For an in-depth exploration, see Adam's 2005 study on improving services and accountability in the National Park System through user fees, as well as this 2003 Reason Foundation testimony before the U.S. Senate Energy and Natural Resources Committee on competitive sourcing in parks.

If this silly idea somehow moves forward, then count me in as an opt-out. And I'll continue to pay their underpriced park entry fees, knowing that I'd actually be very willing to pay twice that if it was a true user fee and was relied upon to turn that park into a self-sustaining operation.

UDPATE: Washington State recently adopted this policy, and Jason Mercier at the Washington Policy Center offered a similar critique on their blog yesterday. Reading his piece, it's now become very clear that Arizona proponents are trying to justify their idea at least partially on the basis of another state that has had exactly one month of a track record.

If Washington State jumps off a bridge, should Arizona follow too?

UPDATE 2: Thanks to Tom Jenney at Americans for Prosperity Arizona for the link. Tom's post further explores the idea of private concessions at state parks (an idea also discussed in California recently) and is well worth a read. If concessionaires can operate the lodges, restaurants, stores, tours and activities in the crown jewels of the national parks—Yellowstone, Death Valley, Grand Canyon, Bryce Canyon, Zion, Crater Lake, Petrified Forest and Rocky Mountain, to name a few—then why can't Arizona look to innovative public-private partnerships for its state parks? After all, if it's good enough for the Grand Canyon...

Unfortunately, as Tom notes, privatization and public-private partnerships were not even considered by the university consultants. Yet another instance of taxation as first resort.

Noteworthy PPPs in 2009

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 22 Oct 2009 16:16:00 EDT

A reporter recently asked me about noteworthy public-private partnership (PPP) infrastructure projects that have advanced in 2009. Since this is a question that there's probably a lot of interest in, I thought I'd share my response. There are certainly several to choose from across a variety of sectors (water, prisons, courthouses, etc.), but I focused my response on transportation since there are a few noteworthy megaprojects that really jump out (and should be emulated by cash-strapped states and cities):

I-635 managed lanes project (Metroplex area, Texas): This blockbuster, $4 billion, 52 year concession project will deliver a technically complex mix of new "free" (untolled) lanes and managed express toll lanes. The state is contributing $445 million in public funds, while the concessionaire will bring the remainder of the financing to the table. The project reached commercial close earlier this year, and financial close is anticipated before summer 2010. Interestingly, the Dallas Police & Fire Pension System is on the investor team, making them the first public pension fund to be direct equity investors in toll road projects in the U.S.

North Tarrant Express (Metroplex area, Texas): This $2 billion, 52-year concession project, also in the Metroplex area, involves a combination of dynamically priced managed lanes & untolled lanes. The state is contributing $570 million in public funds; the concessionaire will bring the remainder of the financing. Interestingly, the Dallas Police & Fire Pension System is one of the investors, making them the first pension fund to be direct equity investors in toll road projects in the U.S. The project reached commercial close earlier this year, and financial close is anticipated by early 2010. Like the I-635 managed lanes project, the Dallas Police & Fire Pension System is one of the equity investors.

I-595 Express Lanes project (Fort Lauderdale area, Florida): This $1.6 billion project to add express toll lanes to I-595 reached both commercial and financial close in 2009. This is an example of an "availability payment" concession in which the the concessionaire will finance, design, build, operate and maintain the lanes and will be repaid over 35 years through "availability payments" (or payments from the state based on delivering the lanes and keeping them "available" for users). In contrast to the Texas projects, in the I-595 case the state—not the concessionaire—will actually collect the tolls in this project, which effectively means that the state takes on the revenue risk of the project. Counterbalancing that is that these types of arrangements require less upfront equity invested, so they may be easier to finance in today's market, relative to full concessions.

Also of note, the two Dallas-area projects will ultimately total about $6 billion in infrastructure investment to eliminate some of the most congested bottlenecks in the region (and state), and the state will only be contributing roughly $1 billion of that. So the state essentially pays for a can and gets a six-pack. Adding in the state's other toll concession—State Highway 130 segments 5 & 6, where the private sector is delivering all of the financing for the $1.3 billion project—the state is paying about $1 billion to get over $7 billion in investment. By contrast, Texas received less than half of that (about $2.5 billion) for highway improvements from the so-called "stimulus."

Along similar lines to something I've written before, if you really want to see a stimulus, unleash the billions in private capital sitting out there looking for projects like these to invest in.

» Reason Foundation's Transportation Research and Commentary

Privatization and State Laboratories of Democracy

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 21 Oct 2009 16:46:00 EDT

Following up on my post last week on the cancellation of Indiana's welfare modernization contract with IBM, there have been a mixed bag of opinions floating around in the state newspapers, some of which unfortunately paint the situation as a "failure of privatization," (which I argued earlier was a false interpretation). However, I found this sensible editorial in The News-Sentinel (Fort Wayne) to be spot on:

The failure of the plan should not be taken as proof that the effort never should have been tried in the first place. If we still believe in our republic's promise that states will be laboratories of democracy, we must accept experimentation. And some experiments fail.

The point is to learn from the failures. It could be argued that Indiana could have learned better from Texas, where a similar effort to privatize welfare failed spectacularly. And it should be argued that Texas and Indiana together provide a cautionary tale for other states planning such efforts.

But the focus should be on improving privatization efforts rather than eliminating them. Government can and must both serve its constituents and become more efficient.

Oklahoma Corrections Study Merits Scrutiny

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 21 Oct 2009 03:02:00 EDT

Barbara Hoberock at the Tulsa World reports today that the Oklahoma Department of Corrections has done an internal study which they claim shows that the state has similar or lower costs per prison bed than private prisons. Unfortunately, having scanned the ODOC's website, they haven't made a copy of the report available so that we can review their methodology, so at this point I think it's best to take the study with a grain of salt, because the reported findings raise more questions than answers. First, some context from Hoberock's article:

The findings were released to the state Board of Corrections last week. [Department of Corrections Director Justin] Jones said the department is required to report rates to the board each year. "We are either less than the private per diems or extremely competitive," he said.

The cost to house an inmate in a public, medium-security bed is $44.35 a day, compared with $49 for a bed in a Corrections Corporation of America lockup and $44.83 for a bed in a GEO prison, Corrections Department figures show.

Jones said the public rates were calculated before the agency's most recent budget cuts, so they do not include recent cuts in contracts with private prisons.

The daily cost to house an inmate in a maximum-security state prison is $63.70, compared with $64.50 in a CCA prison, the department says.

Some red flags here:

These numbers don't jive with the ODOC's own data reported in its March 2009 Facts and Figures publication. There it clearly shows a medium security per-diem rate of $56.10, and a maximum security per-diem rate of $70.04. Both are clearly higher than either the public or private per-diems cited in the article. It may be that these are old figures, it may be that they're an average of all facilities (public & private), or it may be that the ODOC's new report ignores important costs—it's hard to tell without more information. Regardless, the discrepancies warrant further review of the new study's methodology.

It may even be that budget cuts and other system changes have actually reduced medium-security per diems by 20 percent in 6 months (from $56 to $44). I seriously doubt it, but for the sake of argument let's say it's accurate. In that case, I'd say that the outcome would then validate the findings of the Vanderbilt University study discussed in Reason Foundation's Annual Privatization Report 2009, which found that states can better keep their corrections budgets in check by partnering with the private sector to deliver correctional and detention services. In essence, the study demonstrated that the injection of competition with private prisons worked to drive cost efficiency in the public prisons. But again, this interpretation is dependent upon the idea that the state managed to bring costs down by 20 percent this year, which just doesn't happen very often in government.
Does the new study factor in the capital costs of the prisons (several hundred million for roughly 5,000 new beds) the state would need to build to house the thousands of inmates currently incarcerated in private prisons? A true apples-to-apples cost comparison would need to factor that in. It's easy to make the public sector look very cost competitive when you start ignoring significant costs like these. Throw in tens of millions in annual debt service for a public bond issue to build new prisons, and the public sector per-diem rates will starts to look a lot different. If the goal is to compare the value for money for public prisons vs. private—which should be the underlying question, right?—then you can't just wish away major costs, nor the societal trade-offs for pursuing public debt for prisons, as opposed to funding other priorities (or just not adding to the debt burden in the first place).
Similarly, did the ODOC factor in those costs borne by the state outside of the corrections budget? What about legal expenses? How about risk management and insurance coverage (states are usually self-insured for these sorts of things, which is probably not in the corrections budget? What about facility maintenance, HVAC systems and the like—are those costs captured in the corrections budget or handled by another agency? What about overhead and utility costs? The list goes on, which is why (a) it's tricky to do good public-private cost comparisons (especially when they're done by the contracting agency itself, who may have an incentive to game the numbers out of self-preservation), and (b) the reported findings of the ODOC report should be taken with a major grain of salt. As they stand today, the numbers are not transparent.

In fact, this is what makes this statement so ironic:

However, Jones said the evaluation is deceiving because the state system also supports an agricultural operation and has different inmate health care costs than private prisons do. The public system does not transfer inmates with severe health problems to the private prisons, he said. "We still have costs they don't have," he said.

And the private prisons have costs the state doesn't have, like taxes for one. Again, a key reason why a true value for money analysis would look at all of these factors, shared costs and unique costs alike, to try to get to an accurate public-private cost comparison.

I'm not the only one who's skeptical at this point:

Sen. Anthony Sykes, R-Moore, the chairman of the Senate Appropriations Subcommittee on Public Safety and Judiciary, said the analysis was based on assumptions and did not appear to take into account factors that cannot be ignored. He said the state has a long history of maintaining a balance between public and private prisons.

"It appears that DOC has used this analysis to justify having private prisons and halfway houses bear the entirety of the 5 percent cut ordered by the Office of State Finance and that no cuts are being imposed on public facilities," Sykes said. "At the very least, this action by DOC places the state in potential breach of contract."

I don't want to speculate on motivation, but knowing that the study is being released at the same time as the state is requiring the private prisons to bear the entire burden of agency budget cuts demands serious scrutiny of the ODOC analysis. The implication is that Oklahoma has achieved something no other state (or nation) has—maximum efficiency in their public prisons, to the point that they should be spared any cuts at the same time that many other state services are.

Let's get real—most states are in a fiscal crisis. No one should be off limits when it comes time to spread the cuts around state government. Whenever some agency claims that it should be given special treatment, it should generally be interpreted as a self-interested attempt to protect its budget. Ask most state agencies and they'll tell you they too have one thing or another that deserves protection from spending cuts. If policymakers listened to all of them, significant spending reductions in state government would be few and far between.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Budget Woes Prompt Colorado State University to Consider Partial Privatization

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 20 Oct 2009 13:47:00 EDT

The Denver Post reports today that officials at the Colorado State University system are considering partial privatization as one potential response to significant budget cuts to higher education in the wake of the state's fiscal crisis and the expiration of federal stimulus dollars in 2011:

As state funding cuts loom in 2011, leaders of the Colorado State University system have started considering an option unheard of in all but a handful of states: converting to a part-public, part-private structure in which students pay more for costlier degrees.

If implemented, the change could mean CSU's $4,800 annual in-state tuition jumps to about $13,500 for liberal-arts programs and as much as $20,000 for engineering degrees at the Fort Collins campus. [...]

CSU executives earlier this month raised partial privatization as a possible answer to the state's defunding or severely reducing its support for higher-education institutions. Also under CSU's consideration are plans to cap the number of Coloradans who can receive reduced, in-state tuition rates.

CSU chief financial officer Rich Schweigert cautioned that the suggestions are the start of a last-resort contingency plan, and their implementation depends on how the state handles higher-education funding. All of the suggestions would require legislative approval. [...]

Colorado institutions are scrambling to cut costs and find new revenue ahead of a funding crunch that will leave them a collective $230 million-plus short in 2011, when federal stimulus money runs dry.

That shortfall represents more than a third of the state's support for colleges and universities, and the shortfall is only expected to worsen with the state's budget crisis. [...]

Schweigert said the CSU programs most ripe for privatization are those that cost the most to provide, such as veterinary medicine.

At the same time, CSU could limit the number of students admitted at lower, in-state rates to the amount that state funding will pay for. Both scenarios would mean tuition hikes for many students.

And both will be met with resistance from the legislature in 2010, when lawmakers expect CSU and other colleges to start pushing backup plans such as these.

And the political honesty award of the week goes to Colorado State Representative Jack Pommer:

[Pommer], incoming chair of the budgeting committee, said higher education's funding crisis has been a long time in the making as lawmakers for years have shied away from politically inexpedient proposals to allow tuition increases and other fixes.

"I'm very glad CSU is looking at these options. They really don't have a choice," said Pommer, D-Boulder. "If we're not going to plan ahead, at least the schools are."

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Privatization News Roundup, 10/16/2009

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 16 Oct 2009 16:00:00 EDT

Some privatization news highlights from the last week that haven't been covered elsewhere on the blog:

FEDERAL

"Administration wants tighter reins on contractor fees," Washington Technology
"Report says government should focus on quality of contracting competition," Government Executive
"North Georgia gets new immigration detention site," Chattanooga Times Free Press

STATE & LOCAL:

"US Airport Executives Eye Privatization Amid Traffic Slump," The Wall Street Journal
"Virginia audit blasts Northrop Grumman IT contract," The Virginian-Pilot
"Oklahoma DOC to cut some private prison contracts ," The Oklahoman
"Prison system to shop for new medical provider," The News Journal (Delaware)
"Proposal to privatize snow removal plowed under," Chicago Sun-Times
"Okaloosa schools' privatized health service a success, parents still concerned," Northwest Florida Daily News
"Cape May County looks to privatize youth shelter," Philadelphia Inquirer
"Fight at city hall after re-vote privatizes Baywalk sidewalk," The Daily Loaf (blog)
"Petition Backs Private Bid for Animal Shelter," Sag Harbor Express
"Grass cutting bids now being accepted by city," The Natchez Democrat

INTERNATIONAL:

"UK Considers Privatizations to Cut Its Debt," Wall Street Journal
"Firms eyes stake in Mombasa port," Business Daily Africa
"French companies eager to join public-private partnerships in concession of water and sewerage companies," Focus News Agency
"French Companies Interested in Privatization of Sofia Heating Utility," Sofia News Agency
"Yuschenko instructs cabinet to consider privatization of small hydro power plants," Interfax.com
"NAREDCO presents models for Public Private Partnership in housing," Webnewswire.com
"Govt roping in private players to construct old-age homes," Indopia
"Saudi Arabia committed to privatization," Middle East North Africa Financial Network
"Privatization of The Bahamas Telecommunications Company Enters Due Diligence Phase," Reuters

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Indiana Cancels IBM Welfare Modernization Contract

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 16 Oct 2009 13:52:00 EDT

Yesterday, Indiana Governor Mitch Daniels announced the cancellation of the state's large welfare modernization contract with IBM after deciding that not enough progress had been made on a corrective action plan to resolve ongoing implementation issues. As Mary Beth Schneider and Bill Ruthhart at the Indianapolis Star report today:

Calling it an endeavor that "just did not work," Gov. Mitch Daniels on Thursday canceled Indiana's 10-year, $1.34 billion contract with IBM to deliver welfare services. In its place, Indiana will develop a hybrid structure that keeps some elements of the modernized welfare system, Daniels said, while restoring the best of the past system: personal contact. [...]

He said taxpayers still will save money under the hybrid system, though less than hoped for under the IBM contract.

Under the hybrid system, instead of being pushed to apply for help through impersonal call centers or computers, clients once again will meet face-to-face with a worker in a county office. State-employed caseworkers will be assigned to assist applicants.

Privately employed workers remain, along with a paperless computerized system for tracking cases. But subcontractors who had been managed by IBM, including those employed by Dallas-based Affiliated Computer Services who take the initial applications, now will be managed by the state.

Even as he yanked its contract, Daniels thanked IBM, which had added employees and more technology this summer in an effort to salvage the contract. "They did try hard," he said. "It wasn't resources. It wasn't effort. It was a flawed concept that simply did not work out in practice."

A separate AP story adds:

Daniels has said repeatedly that he inherited one of the nation’s worst welfare systems, which was troubled by fraud, high error rates, long customer wait times and slow progress in moving people from welfare to work.

He said Thursday some reforms have worked.

"The fraud appears to have stopped, and we're still on track to save taxpayers hundreds of millions of dollars, but the intended service improvements have not been delivered and that’s not acceptable," Daniels said.

IBM officials countered that the state's claims are "unjustified" and that the company was indeed making progress. They cited the external pressures of a national recession that drove Indiana's welfare rolls up 33 percent since the modernization contract began three years ago. It's unclear whether IBM plans to pursue legal action.

This massive privatization effort has certainly been the source of much controversy in Indiana in recent years, and there will no doubt be critics that claim, as Indiana House Speaker B. Patrick Bauer already did, that the contract cancellation represents "a blow to privatization." I suppose that depends on your perspective. I see it differently, for three reasons.

First, it must not be too much of a blow to privatization, since the state plans to work with IBM's current subcontractors to build the hybrid system.

Second, while no one will argue the contract worked out as originally intended, Daniels was quick to acknowledge that some of the reforms worked, most notably addressing the high levels of fraud that helped prompt the state to persue reform in the first place. And on a deeper level, a major thrust of the original initiative was transitioning from a Cold War-era, paper-based welfare benefits system to a paperless, electronic system commensurate with what citizens should expect in e-government. That system, and the contractors who built it, will remain moving forward.

Last, the Indy Star article notes Gov. Daniels response to the question:

Daniels, though, rejected that his decision says anything about the merits of privatization.

"It has nothing to do with private or public. It had to do with a concept," he said. "If you would use the same concept IBM brought, and every worker was a state worker, you would have had the same results, or worse."

I said something similar in my latest column a few days ago on the inherent "trickiness" of major IT transformations, public or private:

With any large-scale privatization initiative, especially those involving complex system overhauls like an IT modernization, you have to expect upfront that there will be obstacles. This would also be the case if government was doing the exact same work in-house—large-scale projects are inherently tricky. It's all about how you deal with the inevitable challenges.

When all is said and done, this privatization initiative wasn't cancelled—it morphed midstream. That happens sometimes on large-scale projects for which there's no proven template. Gov. Daniels and his administration deserve tremendous credit for (a) embracing a bold reform solution (political risks and all), (b) defending it against political attacks after the early setbacks, (c) requiring a corrective action plan and giving the contractor a window of time to implement it, and (d) not being afraid to course-correct and acknowledge shortcomings, while at the same time not abandoning the things that have actually worked in the reform.

So let's be clear—it would be a huge mistake for media and other observers to surmise that Indiana dealt a "blow to privatization" this week. Instead, they're entering "welfare modernization version 2.0." Indiana couldn't have made the improvements its made in the welfare system to this point without privatization (don't forget the horribly broken system the state started with, the "public option" they were desperately trying to dismantle). The state won't be moving forward without privatization either.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Puerto Rico's New Infrastructure Public-Private Partnership Law

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 15 Oct 2009 18:49:00 EDT

The law firm Allen & Overy offers a useful summary of Puerto Rico's new public-private partnership (PPP) law here, and it's well worth a read. Some of the quick highlights:

The enabling legislation, SB 469, centralized PPP procurement and implementation authority in the new Public-Private Partnership Authority, a public corporation and affiliate of Puerto Rico's Government Development Bank.
It facilitates a broad range of PPPs—really, any contract that separates or combines project design, building, financing, operation or maintenance in some form or fashion.
Most state PPP enabling legislation covers only transportation facilities (Virginia being a notable exception). Puerto Rico's legislation goes much further, authorizing PPP procurements in ten classes of infrastructure, including energy, transportation, telecom, IT and water. Policymakers also have discretion to expand the menu to include any other priority projects. Hence, it's broad-ranging.
The legislation exempts PPPs from property taxes and caps the income tax rate on corporate income derived from PPP projects at 10 percent (not for alien and non-resident individuals or corporations, though).
The legislation does not require legislative approval of contracts and caps contract terms to no more than 50 years.

To see how Puerto Rico's new PPP law compare with those adopted this year in Arizona and Massachusetts, see here.

» Reason Foundation's Transportation Research and Commentary

Complimenting Chicago's Parking Meters

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 15 Oct 2009 16:38:00 EDT

Columnist Mary Schmidt at the Chicago Tribune offers a contrarian—and in my view, sensible—take on Chicago's parking meter lease:

[I]'m sorry, I like the new parking boxes. [...]

It's easier to find a spot to park. It's easier to pay.

Remember back in ye olde parking days -- just a few months ago -- when you reached your destination only to discover in a panic that you had no quarters? I once found myself kneeling on the greasy pavement, groping under the car for the precious coin that got away.

Remember circling block after block looking for an empty spot? Remember all the broken meters? Remember the parade of eyesores?

It's true -- this is a common complaint -- that now you have to walk up the block to get to the box and then walk back.

Fellow citizens, please. Chicago prides itself on being tough. We can't handle a 10-second walk?

It's also true that parking costs more now. That hurts. But cheap parking isn't all good. It encourages people to drive and so discourages them from taking public transportation.

And now, if you pay by credit card, you can track your parking expenses on your monthly statement. Nothing like coming face to face with that number to get you on the bus or "L" or on your bike.

Around town, a few old parking meters still stand, wearing little notices: "Meter Remains as a Courtesy to Cyclists." They're the new hitching posts, and already they look like the strange artifacts of a parking era to which it's time to say good riddance.

For more on Chicago parking meters, see my recent article here.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

State Tax Receipts Tumble

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 15 Oct 2009 15:41:00 EDT

Michael Cooper at The New York Times reports on a new study from SUNY's Rockefeller Institute finding that state tax collections have declined at a greater rate than any period over the last several decades. Cooper writes:

Total state tax collections from April through June dropped by a record 16.6 percent compared with the same period a year earlier, according to a report released today by the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York. The report found that total state tax collections were down by $63 billion for the year ended in June, which is roughly twice the amount of money that the states had received in fiscal relief through the stimulus program up to that point.

The stark numbers in the report tell the story of the recession. People were out of work or earning less, and income tax collections were down 27.5 percent in the quarter. They spent less, and sales tax collections were off by 9.5 percent.

The dismal data highlighted a hard truth: there can be a long delay between the time the economy begins to improve, as some economists believe is happening now, and the time that the change is reflected in state finances. [...]

Some state officials fear that by the time tax collections rebound, the stimulus money will have run out, continuing a cycle of budget gaps that will have to be filled with cuts or tax increases or expensive borrowing.

...or how about streamlining government? Louisiana's extensive government streamlining efforts are driving some fundamental rethinking in service delivery and just earned the state a credit rating upgrade. Other states should give it a try before resorting to pouring more money into the same government bureaucracy, expecting different results. It's time to do more with less, not the other way around.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

New at Reason: IT Controversy Shouldn't Spoil Public-Private Partnerships in Virginia

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 14 Oct 2009 15:18:00 EDT

In my latest column, I write that the controversy over the Virginia Information Technology Authority's handling of its ten year, $2.3 billion IT contract with Northrup Grumman should not curb Virginia's desire to engage in public-private partnerships (PPPs). Commonwealth policymakers should recognize that challenges occur and focus on fixing problems, not politicizing them. Here's an excerpt:

...Virginia's had a long history with successful PPPs and is widely recognized as a state leader. State officials recognize by now that PPPs come in all shapes and sizes. An IT modernization project is a lot different than a toll road partnership, which is in turn a lot different from a partnership to modernize a state psychiatric hospital. Virginia's undertaken these and many other types of PPPs over the last two decades.

Commonwealth policymakers should have a sophisticated enough understanding by now of the nuances and varieties of PPPs, recognizing that there is no cookie-cutter template. Each PPP is a unique vehicle structured to achieve a set of specific goals, and each type of contract has to be carefully constructed and monitored to ensure that both the state and their private sector partners deliver on their commitments. And if you run into a situation where one party or the other fails to deliver, then you remember that it's a partnership, where the parties work to resolve implementation issues.

Read on for a look at how other states have handled similar controversies. The key for policymakers is to tune out the politics and stay focused on understanding and resolving the implementation challenges.

For more on Virginia's IT contract, see here and here.

IT Controversy Shouldn't Spoil Public-Private Partnerships in Virginia

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 14 Oct 2009 03:14:00 EDT

Bacon's Rebellion

Could the high-profile kerfuffle over the state's contract to consolidate and manage the state's information technology (IT) infrastructure diminish the state's appetite for outsourcing and public-private partnerships (PPPs)?

That's a question suggested in a recent Richmond Times-Dispatch article on the simmering controversy over the Virginia Information Technology Authority (VITA)'s handling of its ten year, $2.3 billion IT contract with Northrup Grumman.

The answer is, it shouldn't. Virginia's had a long history with successful PPPs and is widely recognized as a state leader. State officials recognize by now that PPPs come in all shapes and sizes. An IT modernization project is a lot different than a toll road partnership, which is in turn a lot different from a partnership to modernize a state psychiatric hospital. Virginia's undertaken these and many other types of PPPs over the last two decades.

Commonwealth policymakers should have a sophisticated enough understanding by now of the nuances and varieties of PPPs, recognizing that there is no cookie-cutter template. Each PPP is a unique vehicle structured to achieve a set of specific goals, and each type of contract has to be carefully constructed and monitored to ensure that both the state and their private sector partners deliver on their commitments. And if you run into a situation where one party or the other fails to deliver, then you remember that it's a partnership, where the parties work to resolve implementation issues.

Resolving challenges can take a variety of forms. It may necessitate, as in the case of Indiana's troubled welfare eligibility modernization project, requiring the contractor to implement a corrective action plan and allowing sufficient time to evaluate the results before considering a cancellation of the contract.

Similarly, when Florida ran into similar challenges with three major IT outsourcing initiatives a few years ago, they had to adjust contracts and project timelines when the projects bogged down in implementation. One of the main reasons was that end users-primarily state agencies-weren't ready to ditch the antiquated systems they had gotten accustomed to and inundated the contractors with hundreds of customization requests, which complicated the implementation significantly. However, as Florida's Council on Efficient Government detailed in an excellent post-implementation review of these projects, the state and its private partners ultimately were able to navigate the challenges and deliver on the projects.

With any large-scale privatization initiative, especially those involving complex system overhauls like an IT modernization, you have to expect upfront that there will be obstacles. This would also be the case if government was doing the exact same work in-house-large-scale projects are inherently tricky. It's all about how you deal with the inevitable challenges.

Unfortunately, as we're seeing in Virginia, some policymakers and officials have a tendency to turn expected implementation challenges into political footballs. It was no different in Indiana and Florida, but administration officials wisely tuned out the politics and focused on keeping their PPP projects moving forward.

We haven't seen that in Virginia with the IT initiative. Instead we've seen state officials fired, fingers pointed and a general lack of focus on getting the project back on track, as Reason Foundation colleague Steven Titch details here.

If there are legitimate implementation issues that have arisen thus far, the proper response for the state would be to sit down with its private partner, understand the challenges, and develop a plan to address them. The contractor doesn't want to lose the contract and the state doesn't want to stop a major overhaul midstream, so the incentives are aligned to work things out. And the state needs to perform the due diligence of closely monitoring the contractor's performance every step of the way-holding their feet to the fire with penalties if appropriate-while also ensuring that agency staff aren't presenting internal obstacles to successful implementation.

Virginia knows how to do PPPs well. The problem is that officials are simply not living up to their own standards in their handling of the IT contract and should quickly adjust course. And allowing what are likely resolvable outsourcing challenges to become heavily politicized unnecessarily exacerbates the situation.

Despite Virginia's reputation in the PPP industry as a state with broad-ranging experience, political flare-ups like the one we're seeing today can begin to change that perception. If contractors believe that their projects might be thrown to the political wolves, they may think twice about bidding on contracts in Virginia. Or at the very least they may factor political risk into their pricing, driving up costs.

Policymakers should see the forest through the trees and remember that PPPs have had a long and successful track record in Virginia and are a proven tool for doing more with less in state government.

With revenue shortfalls continuing to drive state fiscal woes for the next several years, Virginia officials will need to do more PPPs, not less. It's time for officials to turn down the politics and focus squarely on righting the IT project. In the long-run, fixing it will be much more productive than politicizing it.

Leonard Gilroy is Director of Government Reform at Reason Foundation and Senior Fellow for Government Reform at the Thomas Jefferson Institute for Public Policy. This column was originally published at Bacon's Rebellion

When It Rains, It Pours--Part 2

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 12 Oct 2009 21:12:00 EDT

Following up on this recent post, the news on the state budget front continues to look bleak. Here's a sampling of some recent news:

Pennsylvania: Well, it was only 101 days overdue, but Pennsylvania finally has a budget for the current fiscal year. However, the $27.8 billion budget passed by the Senate and signed by the Governor Friday night leaves our friends at the Commonwealth Foundation asking, "is this the budget we waited for?" The answer is no, and they find that the recently-passed budget "taxes too much, spends too much, and puts Pennsylvania on an unsustainable path to the future."
Washington State: Despite closing a roughly $4 billion budget deficit just a few months ago, the state's ongoing fiscal woes deepened last week when a court ruling on the state's business-occupations tax exemption helped drive the current year budget deficit to somewhere between $1-1.2 billion. And as Jason Mercier at the Washington Policy Center writes here, State Treasurer James McIntire is worried about the potential of a proposed spending limitation initiative to harm state's strong credit ratings. As Jason writes, ratings agencies are probably much less interested in proposed spending limitations and are far more concerned with state policymakers finding ways to restore structural integrity to the budget when the stimulus gravy trains runs out.
Maryland: Facing a $2 billion shortfall for fiscal year 2011, Governor Martin O'Malley wants to avoid tapping "rainy day" reserve funds to help close the shortfall, but some of his colleagues in the legislature are asking "if you never use it, why do you have it?" They must have forgotten that rainy days funds are in large part designed to mitigate risk, and if the legislature wants to burn those funds now, then they'll expose taxpayers to much higher risk down the road. And the rainy day fund is best thought of as for use on a rainy day to deal with above average (but not extreme) revenue fluctuations, not to deploy in the midst of a fiscal hurricane that is set to last for years.
Indiana: While the state has generally weathered the fiscal storm engulfing so many other jurisdictions—it passed a balanced two-year budget in June with $1 billion in surplus—Indiana is now seeing sharp declines in tax revenue collections that threaten to throw that budget significantly out of balance. According to the Indianapolis Star, Gov. Mitch Daniels issued a warning last week that the state has seen revenues from the last three months come in $254 million less than expected, increasing the likelihood of budget cuts in coming months.
Massachusetts: According to the Boston Globe, policymakers are bracing for new revenue estimates expected to show that the state is already up to $1 billion in deficit for the current fiscal year, only three months in. The article notes that, "[the] projected deficits in the $27 billion budget three months into the fiscal year follow hefty tax increases in the past two years, heavy use of reserve and federal funds, and a round of spending cuts that state leaders described as devastating to government services."
Florida: After having already hiked taxes and fees in Florida by the tune of $2.2 billion this past year, Florida policymakers heard the unwelcome news last week that the state budget is facing a $2.6 billion deficit for next year.

How Long to Solve Funding Crisis in Public Pension Systems? Try "Infinity."

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 12 Oct 2009 16:16:00 EDT

David Cho has an excellent article in the Washington Post today on the looming crisis in state and local public pension system funding that should be required reading for fiscal hawks. Reason Foundation warned about the gathering pension storm in a 2005 study before the latest recession decimated pension fund holdings and exacerbated the problem.

Cho's article is well worth a read for some insights into the tight corner policymakers have backed themselves into through decades of promising lavish, unsustainable benefits to public sector hirees that the system cannot possibly support. In effect, policymakers in a bygone era promised the moon to public employees, but left the gory details of how to deliver on those promises to future generations that are now stuck with a Ponzi-eqsue mess it cannot afford. Between then and now, policymakers along the way saw a situation ripe for the political picking and moved to increase retiree benefits, while simultaneously allowing governments to pay less in to the system every year. That's a recipe for insolvency if I've ever seen one.

Cho's article highlights many examples of hard-hit public pensions from across the country, but the last one caught my eye—it really says it all:

In Ohio, for instance, the teachers pension system reported that it would take 41 years for its investments to catch up with the costs of meeting its obligations to retirees. That was before the worst of the financial crisis.

During the last fiscal year, Ohio's fund lost 31 percent. Its most recent annual report detailed how long it would now take for its investments to put the fund back on track. Officials simply said: "Infinity."

The article suggests that public pensions face two bad choices: cutting retiree benefits (the political and legal challenges to which would be enormous) or take greater risks with current fund holdings (which already burned many funds in the most recent downturn). I'd suggest before even thinking through the underfunding issue, the first step must be to stop digging the hole any deeper by shifting to defined-contribution, 401-k style systems and away from the disastrous defined-benefit systems so ubiquitous today.

For more on the public pension crisis, see colleague Adam Summers' recent op-ed on public pension crises in California, a state that knows all too well the phenomenon of promising the moon without having the funding to sustain it long-term.

Amid Budget Woes, Governments Turn to Technology to Drive Streamlining

leonard.gilroy@reason.org (Leonard Gilroy) — Sun, 11 Oct 2009 15:29:00 EDT

Steve Lohr at The New York Times writes today that the pressure to solve state and local fiscal crises may be prompting a fresh look at how technology can drive government streamlining and performance:

Local governments, like many businesses, are struggling with a data glut. Agencies collect huge amounts of information about topics as diverse as building permits, potholes, Medicaid cases and foster-child placements. Technology, according to computer experts and government officials, can be a powerful tool to mine vast troves of government data for insights to streamline services and guide policy.

"The mistake people make is to think that collecting the data is the endgame," said Michael R. Bloomberg, the mayor of New York. The real payoff, he said, takes another step. "We actually use the data," he noted.

Indeed, New York has been a pioneer among cities in the use of computing firepower to sift through data to improve services. It began in the 1990s with the city's CompStat system for mapping, identifying and predicting crime. The system, combined with new policing practices, reduced crime rates in New York and was later adopted by Los Angeles, Philadelphia, Baltimore and other cities.

In 2002, the city began its "311" telephone number for answering questions about government services and to report problems down to missing manhole covers. The service receives 50,000 calls a day, and earlier this year began operating on the Web as well. Complaints, response times and resolved problems are tracked and measured to improve performance.

In 2006, the city began an online service, NYC Business Express, to make it easier and faster to start a business. The average time to obtain a building permit, for example, has been cut to 7 days from 40. Such seemingly mundane improvements can add up to big gains in the efficiency of government service systems, experts say, nurturing productivity and growth in local economies. The process, they say, is similar to "lean manufacturing," a system first mastered by Toyota in which step-by-step changes on the factory floor, made repeatedly, translate into major advances in quality and productivity.

Linking government databases can be crucial. The New York Fire Department, in partnership with I.B.M., is developing a system that combines information on building floor plans, inspections and code violations from city agencies and then uses software to analyze and make predictions. Firefighters will be able to call up building information on hand-held wireless computers on their way to a fire. The real-time system, scheduled to be deployed next year, should help guide firefighting tactics and help firefighters avoid some dangers.

Read on to learn more about efforts in Alameda County, California and Dubuque, Iowa to leverage technology to drive efficiency. And in case you missed it the first time around, be sure to re-read former NYC Mayor Rudy Giuliani's article in Reason Foundation's Innovators in Action 2007—"Management Requires Measurement: The Key to New York City’s Renaissance"—where he details NYC's CompStat and other city efficiency initiatives implemented during his tenure as mayor.

Privatization News Roundup, 10/11/2009

leonard.gilroy@reason.org (Leonard Gilroy) — Sun, 11 Oct 2009 13:07:00 EDT

Some privatization news highlights from the last week that haven't been covered elsewhere on the blog:

FEDERAL

"Feds ‘In-Sourcing’ Could Hurt N. Va. Economy," Burke Connection
"DHS announces immigration detention reforms," Government Executive
"Defense policy bill has major implications for contractors," Government Executive
Report: "Civilian Agencies' Development and Implementation of Insourcing Guidelines," GAO-10-58R, October 6, 2009, U.S. Government Accountability Office
Report: "Contract Management: Agencies Are Not Maximizing Opportunities for Competition or Savings under Blanket Purchase Agreements despite Significant Increase in Usage," GAO-09-792, U.S. Government Accountability Office

STATE & LOCAL:

"Private Capital Can Serve as Second Stimulus," EarthTimes.org
"New council exploring public-private alliance," NJBIZ
"Oklahoma urged to sell worker's comp agency," Forbes
"Activists Storm Leno's Office, Demand Schwarzenegger Veto Privatization Bill," Fog City Journal
"Supervisor questions savings from 'reverse privatization'," Fairfax County Times
"Protesters pan privatization plan," New Haven Register
"Bidwell Marina deal sealed Friday," Oroville Mercury-Register
"Future of BayWalk sidewalk up in the air again," Tampa Tribune
"Library faces privatization or drastic cuts, report says," The Union
"Piscataquis County decides against dispatch contract," Bangor Daily News
"Southampton Councilwoman mulls bids to privatize town animal shelter," 27east.com
"Newton firefighters seek chance to bring ambulance service in-house," Gatehouse News Service

INTERNATIONAL:

"Russia to go ahead with privatization in 2010 - deputy PM," RIA Novosti
"Brazil to privatize Rio airport to prepare for 2016 Olympics," RIA Novosti
"Private group seeks slice of $3b rail budget," Brisbane Times
"Turkey achieves privatization successes," Hurriyet Daily News
"Iran's Telecom Privatization May Prompt Reform," Forbes
"Iran to privatize its ports, management," Tehran Times
"Belarus plans to sell stake in Beltelecom by end-2009," ISI Emerging Markets
"Mumbai Port opens RFQs for privatization of 3 berths," SteelGuru

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary