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chapter CHAPTER 2 PRIVATIZATION, COMPETITION, AND PARTNERSHIP If you have only a hammer, all problems look like nails. - Law of the Hammer Although this book is about the privatization of child support enforcement,
it does not advocate privatization-the use of private resources to perform
government functions-as the only solution to the challenges faced by Title
IV-D agencies. Privatization is but one of many tools available to elected
officials and public managers. In selecting this or any other tool, they
should be mindful of the Law of the Hammer. Privatization is the right tool
for addressing some problems, but used indiscriminately it can destroy more
than it fixes. This chapter defines the term "privatization" more fully and
provides some perspective on this approach so the reader can see where it
fits in the armamentarium of public management. It also introduces the concept
of "competitive government," which is the idea that when public
services are put out to bid private companies need not be the only ones
bidding. Finally, it addresses the issue of "public-private partnership"
and suggests some rules for creating strong partnerships between the Title
IV-D agency and its private contractors. The classic definition of privatization is "the assumption by the
private sector of a function or service formerly provided by government"
(Ingoldsby, 1995). This definition needs to be expanded, however, to account
for the type of "creeping privatization" that occurs when public
administrators find themselves managing contracts for services their agencies
never used to provide. Genetic screening serves as an example. When this
technology became available and child support agencies were required to
use it in establishing paternities, they did not rush out to build their
own genetic testing labs. They instead turned to private sector laboratories
that were already performing this type of work for hospitals and other clients.
Today, states routinely devote a portion of their Title IV-D budgets to
contracts for this service. The term privatization, therefore, must also
include the assumption by the private sector of functions or services that
government has never before performed, but for which it is newly responsible. Contracting Out Is the Most
Feasible Privatization Option for Child Support Enforcement Privatization includes a wide range of activities. William Eggers of
the Reason Foundation (1993a) lists ten different types of privatization,
which are shown in Exhibit 2-1. Examining Eggers' list of privatization
options reveals that most are not available to state and local governments
seeking to privatize child support enforcement services. States are required
by federal law to have a state plan for child support that provides for
the establishment of a single and separate organization within the state
to administer the plan. Thus, load shedding-getting out of the child support
business altogether-is not an option. State and local officials are still
responsible for the provision of child support services in a privatized
system, even if government does not actually deliver the services. The proper conditions also do not exist for using strategies such as
asset sales, subsidies, infrastructure development, and deregulation. Self-help
is not an option because of the scope and complexity of child support services.
Volunteers are used already to supplement public employees on some tasks
such as file maintenance; however, a child support system could not rely
exclusively on volunteers. Vouchers might be considered as a means for obtaining
legal representation for low-income families seeking support from non-custodial
parents, but vouchers would not be an appropriate means for providing other
services such as parent location, collections, and disbursement of payments.
These are the types of services that lend themselves to contracting out
because private agencies already exist that perform similar services for
other clients. In summary, the primary privatization option available to state and local child support officials is contracting out services to private firms. The guide concentrates on this aspect of privatization. TEN TYPES OF PRIVATIZATION 1. Contracting. Government contracts with a private organization, for-profit or nonprofit, to provide a service or part of a service. 2. Franchise. A private firm is given the exclusive right to provide a service within a certain geographical area. This is contracting with a twist. For example, governments often give franchises to cable television companies and bus companies, or to fast food chains to operate restaurants on turnpikes. 3. Vouchers. Government pays for the service; however, individuals are given redeemable certificates to purchase the service on the open market. The certificates, or vouchers, subsidize the consumer of the service, but services are provided by the private sector. Food stamps, housing vouchers, and vouchers for child day care are some examples of widely used voucher programs. Voucher programs put the "power of the purse" in the hands of consumers, allowing them to decide who will get their business. 4. Subsidy. The producer of a service is subsidized by the government contributing financially or in-kind to a private organization to reduce the costs to consumers. Hospitals, medical schools, and developers of low-income housing are subsidized because they produce goods and services considered beneficial to the public interest. 5. Service or "Load" Shedding. Government stops providing the service, relinquishing any responsibility for its provision, and lets the private sector assume the function. 6. Asset Sale or Lease. Government sells or leases assets such as airports, gas utilities, or real estate to private firms, thus turning physical capital into financial capital. 7. Volunteers. Volunteers provide all or part of a government service. 8. Self-help. Community groups and neighborhood organizations take over a service or government asset such as a local park or community pool. The new providers of the service also directly benefit from the service. 9. Infrastructure Development. The private sector builds, finances, and operates public infrastructure such as roads and airports, recovering costs through user charges. 10. Deregulation. Government regulations are eliminated from a government monopolized service to allow private providers to compete. Deregulation of express mail statutes governing the Postal Service, for example, allowed Federal Express, United Parcel Service, and their competitors to begin delivering packages overnight.
Public Officials Must Carefully Weigh the
Arguments For and Against Privatization Any debate on opening a public service to competition from the private sector produces its share of supporters and opponents. Proponents generally argue that injecting competition will improve efficiency and cost-effectiveness. Eggers (1993b) asserts that privatization, appropriately structured and sufficiently monitored, can produce the positive results described in Exhibit 2-2. Opponents argue that just the opposite will occur. Exhibit 2-3 lists arguments against privatization that are frequently raised by public employees and their unions (AFSCME, 1983; n.d.). ARGUMENTS FOR PRIVATIZATION Saves taxpayers' money. Over 100 studies have documented cost
savings averaging between 20 to 40 percent from contracting out services
to the private sector (Hilke, 1993). Privatization also creates new tax
revenues from private contractors who pay taxes and license fees, whereas
government units do not. Increases flexibility. Public officials have greater flexibility
to meet the public's needs. They can replace a firm that fails to meet contract
standards, cut back on services when demand declines, and add to service
during peak periods. Being able to shop around for the most efficient and
effective service providers allows public managers to use any available
option to meet an agency's objectives, including in-house (public) service
delivery. Improves service quality. Competition induces both public and
private service providers to deliver better service in order to keep customers
satisfied and retain contracts. Service quality is not assured, however,
unless contracts include performance standards that create incentives for
high-quality service. Increases efficiency and innovation. Private management can use
its more flexible personnel practices and job categories, streamlined operating
procedures, and simplified procurement processes to work more efficiently
and lower operating costs. To stay ahead of competitors and keep its contracts,
a private firm also must innovate constantly. Allows policymakers to steer, rather than row. Competition allows
government leaders to spend more time on policy decisions (steering) than
on overseeing service delivery (rowing). It effectively separates management
from operations and reduces the time that leaders spend micromanaging programs.
Increases accountability for quality performance. Contractors know they can be let go if quality sags; it is harder to hold civil servants directly accountable for performance (Osborne and Gaebler, 1992). ARGUMENTS AGAINST PRIVATIZATION Costs taxpayers more. When making cost comparisons, governments
often omit the costs for contract preparation, administration, service monitoring,
and renegotiation. Often the cost of using in-house facilities or equipment
is omitted as well. Also, the taxpayer must foot the bill for unemployment
payments made to laid-off government workers. When all these factors are
taken into account, contracting out may actually cost more than in-house
provision of services. Decreases flexibility. Public managers directing a public workforce
have a large degree of flexibility in responding to unforeseen circumstances;
on the other hand, the contractor has the right to refuse to do even the
smallest task that isn't in the contract. Decreases service quality. The profit motive provides incentives
to cut corners on service quality-to hire inexperienced, transient personnel
at low wages, skimp on contract requirements, or provide inadequate supervision.
Promotes corruption. Using contractors to perform public services
can produce widespread corruption including bribery, kickbacks, collusive
bidding, conflicts of interest, and charges for work never performed. Creates dependence on private sector providers. As more services
become privatized, the government loses the capacity (facilities, equipment,
skilled workers) to provide public services on its own. The public becomes
dependent on private providers for essential services. Monopolies and price
fixing among private providers can result in higher costs and reduced quality
of service. Reduces accountability of public officials to citizens. Public officials often use contracting to wash their hands of administrative hassles and to avoid responsibility and blame for service failures. As more public services are shifted to the public sector, we move from an open, accountable society to a closed, secretive society easily subject to manipulation. In general, arguments for and against privatization should be taken with
a grain of salt. Opponents use the most egregious examples they can find
of fraud, corruption, service failure, and public employee layoffs to bolster
their arguments (Poole, 1983). Often these cases are decades old, and the
problems cited could have been avoided if modern contracting techniques
that emphasize outcome monitoring had been used, or if plans for reducing
the impact of privatization on public employees had been in place. Proponents use case examples of success from leading cities or cite national
survey results to support their contentions that privatization saves money,
produces better service, and has a minimal impact on the livelihood of public
employees (O'Leary & Eggers, 1993; Eggers, 1994). Unfortunately, some
of these surveys merely ask government officials to state their opinions
on whether privatization has improved service and reduced costs. Actual
performance and savings usually are not verified through independent evaluations
or audits. The most frequently cited studies of the impact of privatization
on public employees are ones conducted in the 1980s, which may not be completely
applicable to today's labor market (see for example, U.S. Department of
Labor, 1989). Currently, there is no body of literature on the impact of privatization
on child support enforcement. Until there is, the arguments for and against
privatization presented above can be used to prompt thoughtful discussions
about whether to privatize child support functions. WHAT IS COMPETITIVE GOVERNMENT? Some experts on public management promote the view that the debate should
not be about privatization per se, but about how to make government
more competitive. A competitive government is one that fosters competition
among service providers-including public sector agencies-for the
right to deliver services. The rationale for competitive government is that
when providers must compete with others in an open marketplace they will
keep their costs down, respond quickly to changing demands, and strive hard
to satisfy their customers. Advocates of direct competition between the public and private sectors
assert that it is really the monopoly on service delivery that causes inefficiency
and the shortchanging of the public. The issue, they claim, is not "public
vs. private" but "monopoly vs. competition." Without competition,
any service provider-public or private-has little incentive to keep service
quality high and costs down. David Seader, a senior manager for Price Waterhouse, observes, "[We]
have a paradigm shift from privatization to competitive government"
(Seader, 1995). He likens the direct competition approach to the process
by which private industry decides to "make or buy" a needed product
or service. Through careful analysis of costs and results, a management
decision is made about whether it is better for the company to make a product
in-house or to outsource production to a qualified, capable outside organization.
David Osborne and Ted Gaebler in their book Reinventing Government
(1992), which has been called the bible of government reinvention, write:
"Competition will not solve all our problems. But perhaps more than
any other concept in this book, it holds the key that will unlock the bureaucratic
gridlock that hamstrings so many public agencies." Drawing mainly on
the experience of municipal governments, they classify competition into
three categories:
Public-Private Competition
May Improve Child Support Enforcement State and local child support enforcement directors who are considering
privatizing services will want to consider more than just contracting with
private firms. The privatization movement, which threatens both the livelihood
and sense of self-worth of public managers and employees, has led to significant
resistance, resentment, and backlash. Public employees and their unions
want an opportunity to prove that they are the best providers of service.
They believe that they can outproduce private organizations if they are
given greater flexibility and control over operations and are allowed to
benefit from increases in their productivity. In many areas of government, public employees in head-to-head competition
with private contractors have proven that they can deliver services better,
faster, and cheaper. Independent governmental and academic studies on the
effects of competition on service delivery at the municipal level have recorded
cost savings in the range of 20 to 40 percent (Hilke, 1993). The cities
of Phoenix and Indianapolis have demonstrated cost savings of 25 percent
or more when city units beat out private firms in the bidding process (Eggers,
1994). Moreover, the threat of competition can create a ripple effect throughout
government. To avert privatization of a number of municipal functions, in-house
units in Philadelphia discovered ways to cut 20 to 30 percent from their
previous costs. The city's mayor, Ed Rendell, concludes, "Ironically,
privatization is the most effective way we know to restore [public sector]
productivity and the taxpayers' faith in government" (Eggers, 1994). A number of states-including Tennessee, Virginia, Nebraska, Mississippi,
and Colorado-have already established the groundwork for public-private
competition in child support by completely privatizing services in selected
jurisdictions. Most of these privatized sites have been in operation for
several years, and data will soon be available on their long-term performance.
Preliminary reports indicate that, at least during the first year or two
of operation, privatized sites usually outperform publicly operated sites
on important measures such as parent location, paternity and support order
establishment, and child support collections. However, on-site interviews
conducted for this book indicate that some of the early advantage enjoyed
by private providers may be slipping as public agencies complete the process
of automating their case record systems and implement other statewide initiatives
that make public units more effective than they were previously. More will
be said about these results in later chapters. It is important to note, however, that these are not examples of true
public-private competition in the sense that Osborne and Gaebler propose.
In a truly competitive system, public employees in the government-operated
sites would be allowed to re-engineer their services and take any other
steps necessary to compete successfully against private companies. For the
most part, service delivery in the non-privatized sites remained unchanged.
The state of Maryland recently initiated a course of public-private competition
when it privatized nearly all child support functions in Baltimore City
and rural Queen Anne's County. Costs and impacts in the privatized sites
will be compared via an independent evaluation to results from a demonstration
county in which public employees were allowed to redesign their operations
for better service. Unfortunately, the results of this direct competition
will not be known for several years. Discussing privatization without also considering the competitive government
approach would be to ignore a large and important part of the change that
is occurring in government today. Therefore, while the following chapters
focus on the steps to successful privatization of child support enforcement,
they will also remind the reader throughout that many of these steps apply
equally well to improving the performance of publicly operated programs. WHAT IS A PUBLIC-PRIVATE
PARTNERSHIP? Before turning to the steps for successful privatization, the concept
of "public-private partnership" must be addressed. While this
term is widely used, its meaning is not always clear. For some it is a synonym
for privatization. They reason: if government joins with the private sector
to provide a service, then a partnership exists. For others it is a mutually
beneficial working relationship that can only exist among equals
(Hale and Williams, 1989). In human services, the term has been used loosely
for nearly two decades to describe almost any joint venture between a government
agency and a non-government entity, including for-profit businesses, nonprofit
organizations, religious institutions, and citizen groups. Despite a lack of agreement on its definition-or perhaps because of this-many
people are beginning to use the term public-private partnership instead
of privatization. Politicians often use the term to avoid sounding like
antigovernment ideologues when they propose privatizing some service or
other. Businesses use it to convey the sense that they do not want to take
over government's legitimate functions, but merely want to help it do a
better job. Agency heads use it to indicate that, while they are turning
over some duties to the private sector, they have not abdicated their public
oversight responsibilities. Even the Privatization Council, a national organization
founded in the 1980s to promote the transfer of government functions to
the private sector, has changed its name to the National Council for Public-Private
Partnerships. This guide advocates the development of solid partnerships between the
public and private sectors when child support functions are contracted out.
As will be seen, however, true public-private partnership in child support
is more an ideal than a reality at present. Public-Private Partnership
in Child Support Enforcement Part of the research for this guide involved conducting site visits,
interviews, and focus groups with Title IV-D administrators, agency directors,
and contractors who were engaged in privatizing child support enforcement
services. The hope was to identify exemplary partnerships between the public
and private sectors. What we found instead-at least in the areas of full-service
privatization, locations, collections, and payment processing-was that most
of the "partnerships" were uneasy relationships in which the parties
displayed some level of mutual distrust. In focus group discussions, speakers from both sectors frequently slipped
into a "them" versus "us" mode of speaking when describing
their working relationships. The public sector representatives at times
expressed the views that private contractors were more interested in profits
than in serving the consumer, had therefore focused their energies on the
easiest or most profitable cases, and generally had oversold their services
in order to win contracts. Private contractors, in turn, complained that
they were not given promised support and direction by the Title IV-D agency,
were often compelled to follow outmoded policies and procedures that hampered
effectiveness, and had been misled by the state during the contract bidding
process-either in regard to the amount of work to be done under the contract
or as to the potential for profit. The public administrators feared becoming
dependent on contractors' proprietary systems and having service costs soar
uncontrollably in future contracts. Contractors feared the state would commandeer
their systems and innovative practices for use in other child support offices,
thus depriving them of potential markets. Some contractors, particularly those involved in collecting overdue support
payments, claimed that the current competitive procurement process, which
tends to award contracts of 1-3 years to the lowest bidder, hampers the
development of true public-private partnerships. They felt that there was
little opportunity to develop trust and loyalty under this system. They
wanted longer initial contracts and more credit for a job well done when
contracts are rebid so they could go from being "hired hands"
to actual partners. Their competitors, of course, saw these proposed changes
as an attempt to freeze them out of the market. Despite these complaints and differences of opinion, program outcomes
have generally improved-at least in the short haul-in the areas of child
support that have been privatized. This offers hope that real and productive
public-private partnerships can be achieved. Guidelines for Creating Public-Private
Partnerships The following are some guidelines for creating strong public-private
partnerships for child support enforcement. Taken together, these suggested
rules express a philosophy on partnering that underpins the rest of the
material presented in this guide.
While these guidelines are designed to promote better public-private
partnerships, they also can be applied to partnerships between the Title
IV-D agency and other public agencies. State and local child support offices
enter into contracts or cooperative agreements with many other public agencies
to help them deliver child support services. These can include contracts
with the sheriff's office to serve summonses, with the district attorney
to provide legal representation for custodial parents, and with the state
treasurer to distribute support payments. Cooperative agreements, such as
those governing the matching of records between the child support agency
and the motor vehicles department or state employment service, are yet another
form of partnership. Even the relationship between the state-level Title
IV-D agency and the local child support office can be seen as a partnership.
By working within the structure of these guidelines, the child support
agency should be able to develop productive partnerships with private companies
and public agencies that are characterized by trust, openness, fairness,
and mutual respect. |
