The state paid DPCS of Livonia $500,000 to terminate its campground reservations contract.
Problems will arise as government privatizes a growing number of services to improve
quality and reduce costs. This is especially true in areas where government hopes to
retain both discretionary decision making powers and ultimate control while contracting
out functions once performed by public sector employees.
Contracting out by government to private companies carries the same risks and
benefits that private businesses assume when subcontracting to outside firms.
Contracting out by government to private companies carries the same risks and benefits
that private businesses assume when subcontracting to outside firms. For example, a
private company might contract with a janitorial service because it believes the service
can clean at less cost and higher quality than the companys in-house janitors. The
company in essence transfers to the janitorial service payroll costs including wages,
Social Security, unemployment insurance, Medicaid, and benefits. If the janitorial service
fails to properly clean the building or if the company fails to pay the negotiated price,
the contract may be breached and become a matter of litigation.
When government contracts out, it carries some special risks not encountered by private
businesses. Public sector employees often lack the expertise and training required to
effectively contract out for services. When contracts are not awarded through competitive
bidding and followed through with proper monitoring, they can become fertile ground for
political kickbacks and cronyism. If union or other artificially high wage rates are
mandated, or other nonessential requirements are added to favor certain groups, the
bidding process will be frustrated. Little may be gained by trading public sector
employees for state-favored private sector employees. But special bidding and contract
extension requirements are often in everyones best interest because they can assure
that acceptable quality is not sacrificed for the cheapest bid. There must be a neutral,
nonpartisan means of determining valid contract requirements.
Contracting with private firms is not an immediate cure-all for government
inefficiency. Private firms often do not have access to accurate information upon which to
base a bid. Since public sector services are usually free of the discipline of
competition, government is seldom forced to determine its true costs of providing a
service. It may not be able to provide bidders complete information about how it provides
the service or how much it costs.
Government must ensure accountability and reliability when it contracts out for
services, but contracts should be flexible to allow all parties to work together and make
appropriate decisions that benefit government, the contractor, and citizens.
The state of Michigan recently learned a $500,000 lesson in contracting out services
when the state privatized its campground reservation system. Many are calling the soured
deal between DPCS International of Livonia and the state of Michigan a textbook example of
why privatization does not work.
Critics are right to point out certain red flags involved in awarding this contract.
Some of them go too far by insisting that the contract is evidence that privatization
itself does not work. Instead, the DPCS debacle underscores the need for designing an
effective bidding and monitoring system to minimize problems in state competitive
DPCS was awarded a contract with the state travel bureau in 1993 to provide a toll-free
tourism telephone service and fulfill requests for travel brochures. The travel bureau
reportedly gave high marks to DPCS. When the Department of Natural Resources and
Department of Management and Budget sought to contract out the states campground
reservation system, DPCS was awarded the work by an extension of the travel bureau
After many callers complained that they could not get through to the reservation
system, officials began to rethink the contract with DPCS. When the state threatened to
pull the plug on the contract, DPCS responded by submitting a bill to the state for over
$1 million. Although the state refused to pay that amount, the matter was settled for
Critics claim that the contract extension was awarded to DPCS because its CEO, Wilhelm
Kast, has close ties to the Engler Administration and is a heavy GOP contributor. Rep.
Karen Willard (Algonac) said that the deal was based on favoritism and called for a full
investigation of DPCSs contracts with the state. State officials responded by noting
that the contract was bid competitively and DPCS was the winner. However, state officials
say that DPCS then failed to perform well in its role as reservation system manager.
Kast countered by claiming that the DNR insisted that DPCS use specific software
provided by Info 2000 Corp., which proved to be faulty. Kast also stated that his
political ties to the governor had nothing to do with the contract award and that DPCS
lost money trying to implement the reservation system.
Rep. Deborah Cherry (Burton) has suggested that privatization should not occur unless
it saves taxpayers significant funds and provides equal or better services. Rep. Cherry
pointed to the DPCS contract as a primary example of the "adverse effects of
privatization," and stated that "state employees were doing a better job than a
Flawed attempts to privatize government services will only inflame such
antiprivatization rhetoric and sabotage attempts to provide exactly what Rep. Cherry
demandssignificant taxpayer savings with equal or better services.
A chief advantage of the competitive marketplace is choice. If an organization fails to
perform its tasks, one may freely look elsewhere and establish beneficial relationships
with different organizations. The Department of Management and Budget has exercised this
flexibility by requiring greater accountability from Info 2000 and by contracting with
Consolidated Market Response for campground reservations.