Gov. Mitch Daniels - Reforming Government Through Competition

Annual Privatization Report 2006

In a moment of apparent epiphany, Mario Cuomo is recorded as having said "It is not government's obligation to provide services, but to see they're provided." However sensible and straightforward this notion seems, it remains heresy in much of American public administration. The Indiana state government our crew inherited a year ago was still doggedly cooking its own food, cleaning its own buildings, and running its own power plants. Six departmental print shops sat side by side a few blocks from the nearest Kinko's; the state owned one motor vehicle for every three employees. Predictably, dysfunction and inefficiency were rampant.

More than ineptitude was at work; shrewd politics was a central factor. On arrival, we found dozens of state employees spending 100% of their time on public employee union business, zero for the taxpayer. By gubernatorial executive order, 25,000 state employees were paying compulsory union dues of almost 2% of their pay, money faithfully recycled into political campaigns of the staunch union allies running state government.

The orthodoxy of Big Government was so rigid that it produced some true absurdities. Having built a $135 million prison, our bankrupt state government found it could not afford to open the facility at the state's cost of nearly $60/inmate/day. Rather than accept private service provision within our state, Indiana left its white elephant vacant and shipped hundreds of prisoners to a private prison in Kentucky. When our administration took the obvious step of inviting private management to run our paid-for prison, our state reaped multiple pluses: we "brought our boys home" and began using the empty facility; 300 Hoosiers were hired to replace the Kentuckians guarding our offenders; and the taxpayers saved $2 million per year.

The case for judicious private contracting rests, of course, not just on superior efficiency but also on grounds of sound philosophy: anything that strengthens the private sector vs. the state is protective of personal freedom. And in an economically struggling state like ours, channeling more public dollars to private businesses can make a modest contribution to a stronger economy. We couple our privatization initiatives, and all government procurement, with strong and unapologetic preferences for Indiana firms.

But basically our choices are driven by the duty of stewardship. We approach each activity with the question, "Assuming this service is proper for government at all, what is the best way to deliver it?" Personally, I never use the word "privatization", because it connotes an orthodoxy of its own, a preconception that things should be done privately as a matter of doctrine, not practicality.

Applying these approaches first at the federal level, as Director of OMB, and now as governor, I've labeled our policy "Competitive Sourcing," to indicate that it is the cost-reducing, service-enhancing power of competition that we seek to capture for government's customer, the taxpayer. Wherever possible, we encourage and assist incumbent public employees to submit their own bids, and I confess to a special gratification when any such bid is the winner.

Shortly after taking office, our new Corrections Commissioner asked me "Did you know we're cooking our own food in 26 separate kitchens, and we're paying $1.41 a meal to feed the offenders?" "No," I answered, "is that a lot?" "It only cost us 95 cents where I worked last" he said, so I authorized an immediate competition.

A well-established food service company won most of the business, at a cost of 98 cents per meal (nutritional quality and consistency improved, by the way, by the terms of the contract). But, in one delightful outcome, the employees of one facility trimmed middle management, reorganized their processes, and won the right to continue while cutting a minimum of 30% from the previous costs. At this writing, they are doing even better than that, and seem sure to qualify for substantial bonus checks at the end of the fiscal year.

We have applied the "Yellow Pages" test (if you can find a service there, maybe government should not try to do it itself) to a host of activities, ranging from janitorial service (annual savings = $500,000) to debt collection of delinquent taxes (achieving a return of 16:1). Next, we hope to contract for the more accurate adjudication of entitlement claims—Medicaid, food stamps, welfare, and so forth—to improve on a system where error rates average 25%, and administrative costs are exorbitant while deserving citizens are left stranded in long waiting lists.

Again and again these reforms demonstrate that people specializing in delivering a given product or service, and spurred to constant improvement by competition and the profit motive, can achieve their goal better than the bestintentioned administrators of the best organized government bureaucracies.

To date, the most noteworthy of Indiana's new initiatives involved our approach to transportation infrastructure. In a problem almost universal among the states, we faced a shortfall of some $3 billion, equal to ten years of new road construction at the current level, between road-building needs and projected revenues.

Meanwhile, a 40-year-old Indiana Toll Road across the northern part of our state continued losing money and deferring maintenance and expansion, while charging the lowest tolls of any comparable highway. Tolls had not been raised in twenty years; at some booths the charge was 15 cents. (As the new governor, I innocently inquired what it cost us to collect each toll. This being government, no one knew, but after a few days of study the answer came back: "34 cents. We think." I replied, only half in jest, that we'd be better off going to the honor system.) With politicians in charge, neither sensible pricing nor businesslike operational practices were likely, ever.

As a faithful Reason subscriber, I was well aware of the growing role around the world of private capital in financing public infrastructure. Without knowing what level of interest to expect, we offered to lease our toll road long-term to any interested operator willing to pay for the privilege.

Independent estimates of the road's net present value in state hands ranged from $1.1 billion to $1.6 billion, the latter figure aggressively presuming that all future politicians, unlike all their predecessors, would raise tolls at least in line with inflation. I had resolved that only a bid far in excess of that range would be worth advocating to my fellow citizens.

In the event, we received a best bid of $3.8 billion. Upon closing, we will cash a check in this amount and commence the largest building program in our state's history, while transferring the burden and the risk of running the toll road to the private firm. At one stroke our seemingly insurmountable transportation gap will be closed. Needed projects that have sat around in blueprint stage for years will now become reality. The jobs generated by the construction alone will be measured in the tens of thousands, and the permanent payoff in incremental economic activity should far exceed that.

Any businessperson will recognize our decision here as the freeing of trapped value from an underperforming asset, to be redeployed into a better use with higher returns. We viewed it as critical that the dollars liberated from one capital asset must all be reinvested into long-term capital uses, and not dribbled away on any short-term operating purpose.

However obvious from a business and economic standpoint, this proposal touched off enormous controversy and opposition when proposed in the political realm. Many citizens, with a sincere sense of responsibility, misperceived that value was simply being pulled forward from future years. Many have not yet understood that the state is being paid more than $2 billion more than the road conceivably would have been worth in public hands. Far from "stealing from our children," we have acted to leave our children billions in new public assets—roads, bridges, airports—that they would otherwise not have enjoyed. Turning down this deal would have been the real theft from the future.

But we almost did turn it down. The fact that the winning bidder was an Australian-Spanish joint venture struck many of my fellow citizens negatively, and this reaction emboldened a partisan opposition that united to almost defeat the necessary enabling legislation. The irony of this "antiforeigner" argument in an export-dependent state that is home to hundreds of foreign owned firms was lost on many Hoosiers. Over time, one hopes that a modernized, more customer-friendly toll road, coupled with the highly tangible benefits to our state as the proceeds are reinvested, will overcome misplaced patriotism.

I often advocate policies of competitive sourcing as "antitrust for government," appealing to Americans' natural suspicion of bigness, whether in business, labor, or government. But the very best arguments are usually pragmatic: which approach will get the food cooked, the offices cleaned, or the roads built in the most effective way, at the least cost to taxpayers?

More than a decade has passed since a president who had just attempted the biggest expansion of American government ever proclaimed "The era of Big Government is over." However strong the philosophical case for freedom and a limited state, it is the relentless march of the evidence, through statism's many spectacular failures, that has discredited Big Government in the minds of our ever-practical fellow Americans, and that furnishes the template for progressive proposals of better ways forward against our common challenges.

The Honorable Mitchell E. Daniels is the governor of Indiana. He previously served as the director of the federal Office of Management and Budget from 2001 to 2003. This article is an excerpt from Reason Foundation's Annual Privatization Report 2006, available online at www.reason.org/apr2006.




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