Privatization in Michigan Works--When We Let It

Contracting out government services to private sector providers--the most prominent form of "privatization"--is on a roll in Michigan.

At the local level, services from street repair to tree trimming to snow removal are being transferred from public sector bureaucracies to for-profit, cost-conscious private firms. More than three-quarters of Michigan municipalities have privatized garbage collection, for instance. Wastewater treatment is going private too, a good example of which comes from the city of Alpena, which has saved as much as $250,000 each year since contracting its wastewater treatment to a Grand Rapids firm in 1988.

A recent Mackinac Center study of Ecorse, Michigan--a community of 12,100 south of Detroit--documented that the 1988 privatization of the entire Department of Public Works is saving that city nearly half a million dollars every year.

At the state level, the Engler administration is moving to privatize portions of the health care delivery system within the Department of Corrections. The Director of the Department of Transportation, Pat Nowak, is overseeing an aggressive strategy of contracting out road and rest stop maintenance. The Governor also has made it plain he wants state government to shed its liquor distribution system and its workers' compensation insurer, the Accident Fund.

Contracting out has become more than just a trend; with years of experience from all over the country, it has quickly become something of a science. A vast literature has emerged which is teaching government officials and private contractors how to do it right and avoid the pitfalls. These are some of the essentials: open, competitive bidding that precludes cozy closed-door deals with politically-favored firms; carefully-written contracts that come up for periodic re-bidding, thereby maximizing a contractor's incentive to keep his standards high; and watchful monitors within government who make sure a job is done according to specifications.

When contracting out is done properly, it harnesses the powerful market forces of competition and accountability. It means that government officials don't have to be hemmed in by an indifferent bureaucracy; instead, they can "shop around," as other consumers do, for the best available buys. Cost savings of 20 to 40 percent are routinely the result, and are often accompanied by improvements in service quality.

Unfortunately, a number of artificial barriers are stunting the potential of privatization in Michigan. Without these barriers, state and local taxpayers would surely benefit from substantial savings.

For instance, an obscure 1937 law known as the State Printing Act effectively requires that any state agency which contracts out a printing job must engage a union shop. While most state printing is done by private firms, more undoubtedly could be done--and done at less expense--if the process was broadened to include all competent firms.

Civil Service Commission rules mandate that before any agency of state government can contract with the private sector, savings of at least 10 percent must be assured (why would it be a good idea to reject a 9 percent savings?) Contracting out many child and family services by the Department of Social Services must meet an even more stringent 20 percent savings test. Fortunately, DSS contracts out millions of dollars of these services to an array of private agencies because savings have been proven to be 25 percent and higher.

The potential for savings in corrections privatization is enormous, especially at the county jail level. More than a dozen states have successfully contracted out the design, construction, operation, and management of county jails and even state prisons (including a few medium and maximum security facilities) to private firms. Outdated regulations supported by many in the corrections bureaucracy have blocked this promising option for Michigan again and again.

A House Republican Task Force on Privatization in State Government, chaired by Rep. Keith Muxlow of Brown City, identified other barriers within the state's Department of Education, in a report issued in mid-June.

The Department administers the surplus food subsidy program for the United States Department of Agriculture (USDA). While local school districts in other states are contracting out this program to private food service companies to save money, the Michigan Department of Education's excessive regulations have virtually blocked such initiatives here, according to the GOP Task Force.

Also, the Department's rules will not allow for the reimbursement of school districts which have contracted out transportation services. So, while 35 percent of public school pupils nationally are bussed by private firms (and nearly 100 percent in states like Massachusetts), almost every Michigan school does it the most expensive way--without the benefit of involving competitive, private firms.

Privatization ought to be a bipartisan, good government issue. Saving money while delivering quality services is simply the kind of responsible stewardship of the public purse that taxpayers have a right to expect. Public policy makers at every level of government in Michigan should be eager to both learn from the privatization experience and to remove those obstacles that are limiting its potential.