Edison Should Get to Run Schools Its Way

Keys to success in Philly privatization

A recent column in the Philadelphia Inquirer illustrates the cultural clash between the Philadelphia public schools and Edison schools and why it is crucial to get the contract right in the upcoming Philadelphia school privatization. The Inquirer columnist asked, "How realistic can Edison's advice be when a top executive is clueless about something as uncomplicated as the cost of painting a school?" The column then goes on to ridicule Edison's executive vice president, Eugene Wade, because Wade was "incredulous" at the Philadelphia school district's claim that painting all schools in the district would cost nearly triple the $51 million the governor has proposed to spend over three years. Wade argued that it should not cost more than $500,000 to paint each school. The columnist pointed out that in Philadelphia the high-school painting contracts are always awarded to the lowest bidder but, "it costs almost $1,000 over the course of two days to pay one union painter." The columnist then argues that it "raises the obvious question: what other facts are missing from Edison's plan to fix the public schools?" The implicit assumption in this exchange is that it will cost Edison the same amount to paint the schools in Philadelphia as it will cost the district.

While it is unclear what role Edison will ultimately play in Philadelphia's schools, the plan, as it stands, calls for 60 schools to be managed by private companies in partnership with local community groups. Edison is seeking to be the "lead provider" which, under the plan, would give them 45 schools. And in a news conference just before Thanksgiving, both Governor Schweiker and Mayor Street said that Edison would have a significant role in central office operations as a consultant and systems provider.

Whatever the outcome, the road to increased student achievement for Philadelphia children will be difficult for both Edison and the Philadelphia public-school system.

The unions and district officials argue that Edison has greatly overstated the money that can be saved on school maintenance and elsewhere. Edison has estimated that the school district could save between $650 million and $700 million over five years. The school district estimated it could save only $276 million in that same period. The discrepancy between the Edison and district figures represents more of a conflict of visions on how cost savings will be achieved than an actual difference in the potential cost savings. The Inquirer columnist and school district officials assume that Edison will face the same constraints and costs as the district. They miss the point of privatization. One benefit of privatization should be that Edison would not have to pay a $1000 for two days of painting. Why hire Edison if you aren't going to let them use their own business model?

"In a successful privatization, the government agency spells out the desired outcomes for the contractor, such as raising student achievement, sets penalties for failure and rewards for success, and then gets out of the way.

Because of the potential for serious and ongoing conflicts of vision between Edison and the Philadelphia public-school establishment, the key to a successful privatization in Philadelphia is to follow research-based best practices for privatization. These include open and competitive bidding, contractor flexibility over inputs, open and full disclosure by the contractor, and a well-designed contract monitoring system.

This policy update examines some of the principles that should guide the contract process in the Philadelphia school reform effort.

Encourage Competition

Edison is not the only private education provider hoping to play a role in running Philadelphia's schools under a state takeover. Eight other private management companies want to do business in the district as well.

To ensure that the most qualified companies are involved in the reform efforts, the bidding process must be fair.

Bidding for services should be open and competitive whenever possible and bid awards should be widely publicized. Furthermore, if the bid is to be negotiated, a formal explanation of why the agency's interests are best served by the manner proposed should be prepared. Most criticisms of privatization revolve around fair-competition issues.

The state of Philadelphia should have opened up the original school competition to other firms. For example, the largest private school provider, Nobel Learning Communities (with headquarters in Philadelphia), which operates 173 schools (a firm which already turns a profit, unlike most in the industry), would have liked to serve as a consultant in the privatization project. Nobel's chairman and chief executive officer, A. Jack Clegg, notes that his company is interested in running five to 10 schools in the city. Clegg told The Inquirer that his firm also might have liked a shot at serving as a consultant to the Philadelphia district's central office, a role that Gov. Schweiker carved out for Edison.

"We have never even been asked if we would like to be part of the group to oversee it," Clegg said. In this context it is unclear whether Edison or Nobel Learning or both have the best advantage to advise the school district. Without a competitive-bidding process the strengths and weaknesses of each company's proposal will not be weighed in a systematic way. While choosing a contractor by some method other than the competitive process does not necessarily mean that the privatization will fail, it opens the privatization process up to criticism.

Contract Flexibility

Edison executives need to reacquaint themselves with the cardinal rule of privatization: In a successful privatization, the government agency spells out the desired outcomes for the contractor, such as raising student achievement, sets penalties for failure and rewards for success, and then gets out of the way. The contractor controls how the work is to be performed. The direction things are moving, it appears that this tenant is about to be shattered.

Rigid rules that strictly define day-to-day operational requirements prevent private competitors from proposing cost-saving innovations or thinking "outside the box". Most successful contracting processes specify performance standards-frequency of service, allowable customer complaint levels, and so on-rather than input standards.

...thirty years of research demonstrates a very low rate of success in privatization efforts where contractors are unable to make decisions about their employees.

Similarly, while politicians are often tempted to stick contractors with the same kinds of requirements they impose on their own departments, this is ill advised. These include "buy American" requirements, veteran and minority hiring preferences, and stipulations about the "appropriate" level of wages and fringe benefits the contractor can pay their employees. Contractors may even be required to retain all affected personnel in their existing positions, and at the same pay, for a certain length of time. If they are to achieve cost savings and productivity gains, private contractors must be given the freedom to operate outside this restrictive framework.

It doesn't appear Edison's deal with Philadelphia, if one is reached, will give them the flexibility that their strategy relies upon. In a rush to secure contracts, Edison is compromising its business model and setting itself up for failure. There is mounting evidence that when Edison agrees to contracts with significant operational restrictions translates into inferior performance outcomes for students.

One could find an analogous situation in an individual with a personal trainer but who refuses to do sit-ups, lift weights, run, walk, or diet. How can the contractor do their job with such restrictions?

While Edison should seek out a contract that gives them the most freedom to operate the schools as they see fit, public school authorities, the government, and the taxpayer deserve nothing les than open and full disclosure about how they spend public school dollars.

The Role of Interference in Failure

With each new school contract signed, it seems that Edison loses more autonomy. The company currently has a deal with the Chester Upland School District. But Education Association members there voted against an agreement that would have allowed more frequent teacher evaluations and extended the length of both school days and the school year. No, doubt these compromises impact the way future contracts are negotiated.

Unfortunately, thirty years of research demonstrates a very low rate of success in privatization efforts where contractors are unable to make decisions about their employees. A comprehensive World Bank study of 200 privatization contracts found that all but one of contracts overseeing an unsuccessful privatization effort included limitations on the contractor's freedom and authority over labor. In contrast, all of the successful contracts gave the contractor maximum autonomy over personnel decisions-including the ability to fire personnel and set wages.

Education privatization has its own failures exacerbated by government and union interference. The most notorious failures occurred when the Baltimore and Hartford school districts hired Education Alternatives Inc. (EAI) to fix their public schools in the early 1990s. From the beginning, EAI clashed with unions over rulings that the company could not layoff or fire any district employees. The conflict became more protracted as EAI fought with the school establishment about every decision they made.

While EAI certainly wasn't guilt free, there is no question that union and school board interference played a large role in the failure.

Ironically, these very cases are being used to rally opposition against privatization in Philadelphia-either to their absolute defeat or to the point where there contracts face the same strictures and becomes a self-fulfilling prophecy of failure.

Open and Full Disclosure

Contractual freedom isn't something that happens in a vacuum. While Edison should seek out a contract that gives them the most freedom to operate the schools as they see fit, public school authorities, the government, and the taxpayer deserve nothing les than open and full disclosure about how they spend public school dollars. Edison's track record on this in Philadelphia is sketchy.

A report in the Philadelphia Daily News illustrates just how important it for a company like Edison to fully disclose their expenditures. The report argues that it is difficult to hold a private company like Edison accountable even when it spends public money, arguing "a government agency has to keep records of expenditures and make them publicly available, but a private company doesn't—even if it's running public schools with public money."

The paper accused Edison of refusing to say how much it paid any of the subcontractors it used for its taxpayer-funded audit of city schools. Full disclosure by Edison would dramatically reduce public consternation about privatization.

Performance Incentives and Penalties

The most important key to successful privatization is an effective contract-monitoring system. The city and state should recognize that they are not getting out of the business of education—they are merely shifting their role from one of provider to one of contract monitor. Doing so means clearly defining the evaluation criteria upfront and sticking to those criteria. There should also be a clear enumeration of the desired objectives and a way to hold Edison and other providers contractually accountable for the achievement or failure of those outcomes. There should be financial penalties associated with repeated serious failure to meet objectives and financial incentives and rewards for continuing to meet and exceed objectives.

The city and state should recognize that they are not getting out of the business of education�they are merely shifting their role from one of provider to one of contract monitor.

Conclusion

Edison's decision to negotiate with unions may help them win more school contracts and become a profitable enterprise in the short run, but it doesn't necessarily help student achievement. That certainly spells trouble for them and the broader privatization movement in the long run.

The company has invested millions of dollars in research to discover what helps low-achieving children succeed. It would be a shame to throw away these lessons because of self-inflicted contract restrictions that constrain the company's ability to freely pursue higher student achievement.

Interestingly, Edison and the unions most certainly agree that education failure isn't a result of bad people running a good system. Instead it is the result of a bad system hindering the efforts of caring, dedicated, and utterly frustrated people. Simply putting Edison in these same constraints, and changing little else than the sign on the school office, will not overcome this fact.

...education failure isn't a result of bad people running a good system. Instead it is the result of a bad system hindering the efforts of caring, dedicated, and utterly frustrated people.

If the state selects Edison to run a district or several schools in Philadelphia, they should be given the opportunity to run them their way. That way if they succeed we'll know why. If they fail, they won't have any excuses.

Lisa Snell is director of education and child welfare at Reason Foundation. She formerly taught speech courses at California State University, Fullerton.

Lisa Snell is Director of Education





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