”’Originally published in Washington Policy Center’s Policy Brief”’

In 2002 the Washington state legislature passed the Personnel System Reform Act which, among other things, allows state agencies to competitively contract for services historically provided by state employees. The competitive contracting provision of the Act, which takes effect in July 2005, offers new flexibility to state managers facing tight budgets and an intense focus on maintaining service levels while reducing overall cost. In many other states, competitive contracting is used to boost the quality of services, while ensuring the best cost for taxpayers.

In Washington, highway maintenance is one area of government historically recommended for competitive contracting. An independent audit commissioned by the legislature in 1998 found that competitive contracting for highway maintenance could save state taxpayers up to $250 million, without reducing the high level of service expected by state motorists.

The findings of the legislature’s audit reflect the generally positive experiences of other states. Highway maintenance contracting is used by many states to increase flexibility, ensure high quality and reduce cost for vital highway infrastructure. These positive results are distorted by a recent Washington State Department of Transportation (WSDOT) analysis of highway maintenance contracting. Competitive contracting is a vital component of a modern and efficient state government. For that reason Washington Policy Center and Reason Foundation have combined to provide a critical review of the WSDOT research.

The following study provides a brief but informative response to WSDOT’s review of highway maintenance contracting out, which is titled, “Synopsis of WSDOT’s Review of Highway Maintenance ‘Outsourcing’ Experience.” The report has been submitted to the national Transportation Research Board for review in early 2004. In many circumstances the WSDOT report provides inadequate, misinformed or simply distorted explanations of the vast positive experience of other states with competitive contracting for highway maintenance.

To illustrate these misconceptions, we asked officials in other states and private sector executives with intimate knowledge of their state’s competitive contracting programs to review the WSDOT report. The results provide a revealing and often contradictory view of the generally negative analysis of competitive contracting provided in the WSDOT paper. This response will provide a more accurate reflection of the impressive operational efficiencies and quality improvements that competitive contracting has brought to other states.

”The Semantics of Competition”

Throughout its paper WSDOT uses multiple words and phrases to describe competitive contracting. In its analysis the terms outsourcing, contracting out and privatization are used interchangeably to describe the same basic process. While the first two are fairly similar in practice, privatization is an entirely different policy and one that rarely, if ever, truly happens in the United States.

The difference is subtle but important. To be fair, privatization in its modern usage has come to embrace a wide range of practices. However, the term “privatization” often carries a negative connotation. Thus it is important to note that states are not “privatizing” per se, that is, they are not selling the roads. A more appropriate term is “contracting out” (or “outsourcing”). This more accurately describes the process by which government competitively contracts with a private organization or public employee group to provide a service or part of a service through a management contract. Public employee groups often submit bids for, and win, competitive contracts.

”The Role of Politics in Public Policy”

In its analysis WSDOT implies that politics should not be part of the decision to introduce competition to government service. In reality, politics is part of any policy decision, because ultimately representatives elected by the people are responsible for setting policy. Additionally, politics is evident throughout the WSDOT analysis. For example, several states examined in the analysis either have their success dismissed because of political motivations, or political opposition is characterized as an indication that the programs are unsuccessful. In one example, the Abstract of the WSDOT analysis states, “Florida is poised to expand highway maintenance outsourcing programs as part of a government wide privatization commitment.”

Later the Abstract states, “Massachusetts did not expand a much-criticized pilot program.” This characterization is both factually inaccurate and fails to consider the political nature of the anti-privatization forces that tried to block the Massachusetts program. As a result of the success of the program, Massachusetts expanded highway maintenance contracting statewide through a managed competition platform. With this new program state employees not only bid on, but won several contracts, effectively reducing cost and increasing service levels for state taxpayers and drivers. If any one factor can be blamed for the slowdown in competitive contracting in Massachusetts it is the highly restrictive outsourcing law recently passed by the state legislature. The new law hampers the ability of agency managers to expand successful outsourcing programs.

”Characterization of the Oklahoma Pilot Program”

In the Abstract WSDOT states, “Oklahoma cancelled their pilot program.” This is simply wrong. Both sides sued for breach of contract, the case is in litigation, and it is very difficult to determine who is at fault. Careful analysis shows that this particular circumstance is more a function of a poorly written contract than anything else. Later in the paper WSDOT correctly states that a well-written performance-based contract with strong reporting and monitoring provisions is essential for a successful outsourcing program. Without these important elements, even the most well-intentioned contract can run into unforeseen problems. In Oklahoma, many key contract components were lacking, leading to the eventual failure of the competitive highway maintenance program.

”Cost Savings from Highway Maintenance Contracts in Massachusetts”

WSDOT contends Massachusetts’ experience with competitive contracting has been mixed, if not largely negative. Both the Kennedy School of Government at Harvard University and the Coopers & Lybrand accounting firm conducted independent analyses of the Massachusetts highway maintenance contracting program. Both reviews concluded that the savings generated through competition were likely greater than 21 percent. The reports also found that highways were better maintained and received a higher level of service than before.

Additionally, because of the success of the pilot program competitive contracting was expanded to the entire eastern part of the state in 1993. Seven contracts were put out for bid; private firms winning four and public employees three. The contracts saved the state $7.5 million the first year and delivered an additional $10 million worth in services.

Despite WSDOT’s claim, the Massachusetts program was eventually expanded statewide in 1996. Overall, 14 contracts were offered for bidding — with half of contract awards going to private firms and half to public employees. In 1998, the contracts were re-bid, and five additional contracts were reviewed in the last year without any controversy or negative media attention. Because of the program’s success, competitive contracting has become a way of doing business. As a result, the maintenance budget for the Massachusetts Department of Transportation fell from $40 million in 1991 to $25 million in 1999 (in real dollars), with the same amount of work being performed at a higher level of performance.

”Maintenance Contracts for Massachusetts Route 3”

Continuing with its analysis of the Massachusetts experience, WSDOT implies that the contractor hired to design, build and operate a new section of Route 3 acted inappropriately by accepting a contract extension that was not put out for bid. Not competitively bidding the operating and maintenance contract is a failure of the contracting agency, not the contractor. Additionally, this example does not fit in the context of the larger paper, and even this case does not condemn outsourcing as such. Rather, it provides a valuable lesson: Contracting out is only as successful and productive as the binding agreement that governs the relationship between the government and the contractor. All performance standards and potential areas of conflict should be clearly established in writing before the work begins.

”The Virginia Experience”

WSDOT’s review of the Virginia experience with competitive contracting for highway maintenance distorts the true results of the program. Shirley Ybarra, former Virginia Secretary of Transportation, was asked to review the WSDOT report on highway maintenance outsourcing. She said this about the report’s characterization of Virginia’s experience: “I have read this entire report and am very concerned. All of the facts are just not accurate!”

Further review shows that many of WSDOT’s findings do not properly illustrate Virginia’s experience with contracting for road maintenance. The first bid in 1996 was indeed unsolicited, however, after the initial bid was received additional bids were sought and an extensive round of negotiations was completed. WSDOT also points to the uncompetitive extension of the contract as a sign of poor contract performance. A provision was placed in the original contract that allowed the contract to be automatically extended if the Virginia Department of Transportation was satisfied with the level of service and the price. This is a common practice in all contracting.

Additionally, it should be noted that in 1995 the Virginia legislature passed the Public and Private Transportation Act (PPTA) mandating that the state Department of Transportation evaluate alternate proposals to maintain and rebuild roads. The Act also authorizes the department to evaluate both solicited and unsolicited bids. The Legislature’s goals were simple: to improve efficiency and save valuable tax dollars. Proposals are compared against the Department’s traditional work methods.

A number of cost savings estimates have been produced which illustrate the benefits of competitive contracting to Virginia taxpayers. WSDOT quickly dismisses each of them with little objective consideration of their validity. Original savings estimates by the Virginia Department of Transportation were based on comparing the usual cost of maintenance work in the contracted area and against the costs proposed in the contract. Savings from competitive contracting were identified as $23 million over five years using standard methodology and actual cost data. A second analysis performed by Virginia Tech found savings from contracting out of between $16 and $23 million, or 12 percent. Finally, the contractor completed an analysis showing contracting out saved Virginia taxpayers nearly $8,000 per lane mile of maintenance.

WSDOT’s claim that allowing private competition did not save as much as originally planned does not take into consideration changing contract conditions that made the original estimates inaccurate. The claim also fails to recognize the real savings that, while not identical to what was originally predicted, still represent a valuable savings to Virginia taxpayers and motorists.

WSDOT does note that the Virginia Assembly and its research wing have requested additional and better data, but to date that data does not exist. Thus, it seems unfair to criticize the contracting process. Shirley Ybarra adds, “This is not all about savings, it is also about getting ‘more bang’ for the bucks and having [a] guaranteed price.” Ms. Ybarra’s statement helps explain that competitive contracting is about more than money. Competitive contracting is also about improving the culture of state agencies, so they provide better quality service to state taxpayers and improve the stability of the transportation budgeting process.

Furthermore, WSDOT fails to even acknowledge the quality or performance-based portion of Virginia’s experience. Elsewhere in the Virginia report that WSDOT cites, we learn the contractor met or exceeded performance targets for nearly 90 percent of the items evaluated.

”Texas: A Model of Continuous Improvement”

In its report, WSDOT cites newspaper articles about poor contractor response to icy road conditions in a Texas contract for highway maintenance. The particular articles WSDOT selected failed to note these were the worst ice storms the region had seen in years, that the contractor had responded and in many cases road-clearing equipment was stuck in traffic and was unable to reach the affected areas. Road-clearing crews manned by public employees would have faced the same severe conditions. The performance problems, while certainly something that needs to be addressed with the contractor, do not provide objective evidence that competitive contracting itself is less effective and more costly than a government monopoly.

Even considering the problems mentioned by WSDOT, Texas Transportation Director Kris Heckmann said that district managers, “would be willing to try more private maintenance if the project was written differently

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