Making Privatization Work

Privatization Manual
To order this or other privatization manuals, call the Mackinac Center for Public Policy at (989) 631-0900.

Editor’s Note: The following is excerpted from Designing an Effective Bidding and Monitoring System to Minimize Problems in Competitive Contracting, a manual by John Rehfuss published jointly by the Mackinac Center for Public Policy and the Reason Foundation. The full, 12-page document is available for $10.00 postpaid from the Mackinac Center, P. O. Box 568, Midland, Michigan 48640.

The most common arguments against privatization are that it can lead to instances of collusion, corruption, and waste of taxpayer money. This may include unresponsiveness of contractors to constituents, incomplete work as specified in contract, poor service quality, kickbacks to public officials, fraud in substituting cheaper materials, and illegal agreements to obtain contracts. Specific examples include

  • cutting corners or reducing service levels by such means as skipping required maintenance on trucks; missing required rug shampoos; and applying one coat of paint instead of two and sharing the savings between the contractor and the inspector;

  • contracts for ill-defined consulting and personal services given to a preferred consultant in return for campaign contributions;

  • contractors winning bids by using illegally underpaid employees, and the profits shared with agency officials who look the other way; and

  • contractors bribing inspectors not to check on them.

This list can be extended forever. However, it has to be put into perspective. The occurrences of severe problems in the contracting out process represent only a small fraction of the total instances of contracting out. Furthermore, corruption in contracting is certainly no worse than in other city programs such as building inspection and zoning.

The occurrences of severe problems in the contracting out process represent only a small fraction of the total instances of contracting out.

Nevertheless, contracting problems, particularly inferior service quality, corruption, and collusion are management and political problems. The major public employee union, The American Federation of State, County and Municipal Employees (AFSCME), has targeted these practices as their major argument against contracting. AFSCME typically cites a few isolated examples as proof that these are inherent in the contracting out process. Two typical AFSCME examples:

Example #1:
In 1981, the consulting firm of Daniel, Mann, Johnson and Mendenhall (DMJM) pled guilty to fraud in Massachusetts. The firm had used political campaign contributions to obtain a $2 million design contract. A special Massachusetts investigative committee reported that "corruption was a way of life," with "political skill, not professional skill" the primary criterion for state and county decisions.

Example #2:
During the 1980 mayoral Democratic primary in Chicago, Jane Byrne, the successful candidate, campaigned partly against the incumbent’s "sweetheart deals" (city contracts for campaign contributions) with an architectural firm, C. F. Murphy. Byrne later received a $30,000 contribution from Murphy in the general election. After the election, she awarded $150,000 worth of sole source contracts (no bidding) to the same firm.

In addition to showing the need for greater government oversight, these examples also demonstrate that public employees are often also to blame for collusion and corruption in contracting. In order for a bribe or payoff to occur, a government official or politician who is in a position to affect the awarding or management of the contract must be willing to accept the money. Such criminal activity usually cannot occur unless government agencies and/or politicians are involved. Government officials are also sometimes to blame for poor service quality due to a lack of proper oversight of the contractor.

Another form of public corruption of the contracting out process is the cynical use of contracting to disguise an intended reduction in service. Lack of monitoring then allows the contractor to quietly reduce the service. Contracting has also been used by public officials as a political club in partisan political fights rather than as a management device.

Figure 1
Keys to Successful Contracting
  • Open Bidding Process.

  • Appropriately Detailed Specifications.

  • Frequent Competitive Rebidding.

Figure 2
The Ten Principles of Successful Contracting

1. Encourage competition.

2. Prohibit employees from having any financial or other interest in the contract.

3. Prohibit ex-employees from representing others, such as a contractor, before the agency. A two-year prohibition after leaving the agency may be an appropriate period.

4. Allow bid openings and awards only in an open, public meeting.

5. If a bid is awarded on any basis other than the lowest competitive written proposal, publicize the rationale for the decision. Any formal bid analysis should be made public.

6. In setting standards, do not use the specification of anyone bidding for the contract.

7. If the bid is to be negotiated or based on a "request for proposal," or RFP, basis, prepare a formal explanation of why the agency’s interests are best served by the manner proposed.

8. Rely on legal counsel throughout the bidding process.

9. Once the bidding process begins, limit contacts with contractors to the negotiation period.

10. Publicize bid awards widely and vigorously and keep a record of the search for contractors and the bid award.