State Ends Contract with ABC Paving Company

In 1994 the state of Michigan contracted with a private business to provide maintenance for 121 lane miles of I-496 and U.S. 27 near Lansing. ABC Paving Company of Trenton, Mich. won the bid and has maintained the stretch of road outlined in its contract with the state until recently. The state considered this an experiment or pilot program for road privatization.

The first contract was worth $2 million and allowed for an extension of one year, which the state picked up. In 1997 the state re-bid the contract, choosing ABC Paving Company a second time. This time the contract was for $3.2 million and 43 months with no renewal. This contract has ended and the state decided against re-bidding the contract.

The first contract was let amid substantial political opposition. Unfortunately, there was no clear performance benchmarking done before signing the contract with ABC so it was nearly impossible to measure how well (or poorly) ABC was doing. Benchmarking establishes a performance measure by which future work can be measured. Unfortunately the state never calculated what it cost government to do the same work it was asking ABC to perform. (See MPR `98-02 for more information.)

The state Senate Fiscal Agency attempted such a measurement in January, 1998 and concluded that the work of ABC was not cost effective. It also found that Michigan Department of Transportation work was expensive, too, particularly when compared to county road agencies.

According to the report, ABC's costs were about $15,000 per "E-mile." An "equivalent" E-mile is a standard road measuring unit that is based on the total distance of all lane miles. Costs per E-mile for roads maintained by the county and by MDOT in the same district were about $7,000 and $8,800, respectively. This was not a surprise to some analysts, as a Detroit News editorial noted, simply because ABC did not enjoy the same economies of scale over the 20 miles for which it was responsible than the state and counties benefited from in over thousands of miles of road in other areas.

State officials have now performed a cursory review of the second contract and found that, even in competition with county road commissions, which had better economies of scale, ABC finished "in the middle of the pack" in terms of costs.

Regardless, the state has let the ABC contract expire due in large part to the fact that it will be doing major construction on I-496 (part of ABC's maintenance responsibility) and will not require maintenance services for some time and because MDOT believed that the experiment had run its course.

The Michigan Department of Transportation's experiment with road privatization was not a full-blown success. Neither, however, was it a failure. The state should conduct another experiment, but this time ensure that it is easier to measure the success or failure of the public and private enterprises involved.

Michael LaFaive is managing editor of Michigan Privatization Report.