Stopping Privatization Profiteering

Monday, August 14, 2006


Stopping Privatization Profiteering

A number of state leaders have been promoting what seems like a free lunch. Hand over control of government services to private industry and those companies promise better service at a lower price. Like most promises of a free lunch, privatization has mostly ended up being a deceptive boondoggle, a point the non-partisan news emphasized this past week:

[I]n practice, privatization has failed more than it has succeeded, says Mildred Warner, a privatization expert at Cornell University. In an analysis of privatization of state and local services over the last 20 years, Warner concluded that the majority of projects failed because of deteriorating quality of service. And in more than half the cases, the projects did not save taxpayer dollars, she said.

The poster child for the failure of privatization has been Texas' attempt to hand over management of social services in that state to Accenture, a Bermuda-based consulting firm. Computer systems have failed, costs have mounted, and, worst of all, the result has been tens of thousands of children being dropped from health insurance rolls because of bungling by the private contractor. After the initial takeover of the system by Accenture, 30,000 children were dropped from CHIP [the children's health program] just since last December with the total enrollment in the state health system seeing its lowest numbers ”“ below 300,000 ”“ since the program's earliest stages five years ago.

If degraded services is one problem, the other damages are back-room deals and private profiteering that seem all too common when large private companies lobby for these kinds of deals. As this Dispatch will highlight, whether in Texas, Massachusetts, or Indiana, opening the public contracting system to privatization has too often been a recipe for corruption.

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TX: Accenture and the Billion-Dollar Texas Boondoggle

How bad is the Texas social services deal? Republican State Comptroller Carole Keeton Strayhorn began investigating the deal and declared, "The Accenture contract appears to be the perfect storm of wasted tax dollars, reduced access to services for our most vulnerable Texans, and profiteering at the expense of our Texas taxpayers."

Faced with massive backlogs and endless waits for people needing help, state Health and Human Service Commissioner Albert Hawkins had to tell Accenture to reverse gears and return to older procedures for approving social service benefits. 1,000 state workers slated to be laid off were held onto to help clean up the mess.

And the root of the problem is that corruption flowed from the top.

  • To set up its privatization system, Texas brought in Gregg Phillips as Deputy Health and Human Services Commission to oversee bids on the project. Phillips had previously headed the human services system in Mississippi, where he had handed out a major state contract to a company and then gone to work for the firm-- a move denounced by Mississippi state legislators.
  • Phillips hired as a private consultant Chris Britton, a former deputy chief of staff to Texas Gov. Rick Perry. Britton used his connections to land the consulting deal with Phillips and then, after helping to design the bidding process, went to work for Accenture.
  • After Phillips himself left government service, Britton's company joined with one founded by Phillips to land a $670,000 state contract in January 2004 from the Texas government.
  • Another official, Hazel Baylor, was deputy commissioner for planning, evaluation and project management in 2004 with insider knowledge about the request of proposals-- and she would leave government to set herself up as a contractor for Accenture.
  • The revolving door is still operating: the commission's chief information officer is Gary Gumbert, who used to work for Maximus, a company that partnered with Accenture on the Texas project proposal.

When public officials know that favors for private contractors means a sweatheart job when they leave government service, it's hardly surprising that privatization is often a ripoff for taxpayers.

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MA: Bechtel and the Big Dig Debacle

When ceiling panels came loose in a Boston tunnel, part of the multi-billion dollar "Big Dig" construction project, and killed motorist Milena Del Valle, it brought to a head two decades of questions over the role and power of the Bechtel corporation, which oversaw much of the work done on the project.

"State agencies and auditors were like fleas on this big giant," said State Senator Marc R. Pacheco, who convened a panel in 2003 to investigate Bechtel whose report criticized conflicts of interest, secrecy, and weak state supervision of the Big Dig project. Attorney General Thomas F. Reilly has launched a criminal investigation into the company's negligence in Ms. Del Valle's death.

The $14.6 billion reconstruction of Boston's downtown roadway system overseen by Bechtel has been mired for years in cost overruns, a leaky tunnel, and now a death due to poorly designed ceiling panels. As far back as 1994, the Boston Globe detailed criticisms of the privatization of supervision of the project:

The conflict of interest, critics say, is that Bechtel is overseeing a project that it designed itself. Bechtel, as the lead firm in the joint venture responsible for managing the project, is also responsible for completing up to 40 percent of the engineering design work in some sections.

This kind of independent power over public projects is par for the course for the company, one of the largest private construction and engineering companies in the country. Like the Halliburton Corporation, Bechtel has been a vanguard player in the political trend of private actors taking over supervision of government money. It was those political connections that helped Bechtel get the job back in the 1980s. For example, former Secretary of State George Shultz was president of the Bechtel group before he went to Washington under President Reagan and then returned to that job after he left DC. Former Secretary of Defense Caspar Weinberger was also a Bechtel alumni, a vice president and general counsel of the Bechtel Group before going to Washington in 1980.

Bechtel has never been shy about using political money to grease local political wheels. Peter Berlandi, who was chief campaign fund-raiser for William Weld, the Massachusetts governor William Weld in the 1990s, was hired at the same time by Bechtel. Berlandi made $200,000 dollars working for the construction company, money that was billed to the state government. De facto, public money was being funneled to the chief fundraiser of the state Governor to help lobby the government to funnel more money to Bechtel. Only in 2000 when a memo emerged detailing the arrangement was the money paid back to the state. This is on top of the hundreds of thousands of dollars contributed by Bechtel executives to government officials in the state -- a small price to pay for a company that, despite multiple scandals, has landed government projects that netted its shareholders over $18 billion in profits last year alone.

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IN: Highway Privatization and Social Services Scandals

This year, Indiana looked to be going for a twofer: conducting a massive privatization of its highway system and handing over control of its social services system to private contractors a la Texas.

Despite large protests, the state did vote to hand over control of its toll highways to an Australian-Spanish consortium for $3.8 billion, part of a trend across the country of decades-long leases of highways to private corporations. The Indiana deal was sold based on the state getting the $3.8 billion up front, but the catch is that the new corporation gets to keep all tolls for the next seventy-five years, meaning the company will recoup the purchase price in seventeen years, then make $21 billion in profits over the next 58 years. So the state has given away tens of billions of dollars in future toll revenues in exchange for less than $4 billion up front-- typical of the short-sighted in many privatization deals.

Texas is also moving forward on an even larger privatized toll road project, the so-called Trans-Texas Corridor, a network of tens of billions in roads, trains, pipelines and related projects all sold to private corporations. Since 2004, private companies have bids on about $35 billion in toll roads across the country, with 17 states pursuing privatization of highways in some form.

However, when Indiana looked ready to duplicate Texas' social services privatization, opposition derailed the scheme, at least temporarily. When Indiana received bids from two consortium, both were tainted with scandal. One was Accenture, mired in scandal from Texas. The other was led by IBM and a partner, Affiliated Computer Systems (ACS), which had lost part of a Georgia contract two years earlier because of problems in dealing with customer claims.

And the real controversy erupted when it emerged that ACS was the former employer of the state's Family and Social Services Administration head, Secretary E. Mitchell Roob, who had overseen the privatization bidding. In the face of public backlash, Gov. Mitch Daniels ordered the bidding process to be delayed and reviewed, both at the state level and by various federal agencies.

While these delays haven't ended the attempt to privatize Indiana's social services system, it's a first step to taking a hard look at the solutions needed to avoid the endemic corruption of privatization.

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Avoiding Corruption in Privatization

As we detailed in our April issue on Ending "Pay to Play" on Government Contracts, there are a number of ways to stop these kinds of privatization scandals.

  • Measuring Costs of Privatization: One of the first steps is to ask whether privatization is even cost-effective. Too few states even bother studying whether keeping the work in-house would save state taxpayers money. In the wake of contracting scandals, including the early stages of the Big Dig, Massachusetts enacted a law prohibiting private contracting of government services unless private companies prove they can perform those functions more efficiently than government workers.
  • Campaign Finance Reform: Prohibiting campaign contributions by government contractors and their executives is another crucial step to reform. Last minute amendments in the Indiana legislature banned the private consortium from making any campaign contributions for the life of the lease. Ultimately, some form of public financing of elections is the best way to make sure decisions on government contracts are being made with an eye on collecting campaign contributions for the next election.
  • Ending the Revolving Door: While many states have made progress in restricting the revolving door between state legislators and lobbying firms, there is far less scrutiny of corporate officials moving back-and-forth to government positions between former and future employers in the private sector. States need to implement tough rules to bar contractors with any financial relationship with public officials from bidding on public contracts and impose at least a two-year moratorium on awarding public contracts to any firm where a former government official has been hired as a lobbyist--the only effective break on firms trying to buy insider influence.

These are basic reforms, but the larger question the public has to ask of the trend towards privatization is not just the costs to taxpayers of corruption but the loss of democratic accountability when oversight of essential public services is put in the hands of private companies operating largely in secret and not subject to most open meetings laws.

Businesses pay out millions in campaign contributions to get these public contracts because they know they can make large profits, often at the expense of the taxpayer and government clients. Recent scandals should be a wake up call to legislators and advocates to take the steps needed to stop this privatization profiteering.

More Resources

Legislative Models

AFSCME: Legislative Approaches to Responsible Contracting
Public Citizen: Pay-to-Play and State Governments
Progressive States, Ending "Pay to Play" on Government Contracts

Background Research

AFSCME Privatization Update has day-to-day excerpts from relevant news articles from around the nation.
Economic Policy Institute: Privatization: Trends, evidence, and alternatives- materials and papers from a conference on privatization of public services.
Contracting Back In - When Privatization fails and Applying Market Solutions to Public Services: An Assessment of Efficiency, Equity and Voice -- a few key scholarly papers by Professor Mildred Warner who has studied privatization extensively.

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Eye on the Right

The Reason Foundation is one of the biggest promoters of privatization around the country, backed by a range of rightwing foundations and corporate funders. David Koch of the Koch Family Foundations, a prime source of funding and support for rightwing institutions, serves on the Reason board of directors as well as serving as the chair of the board of directors of FreedomWorks, another institution funded by conservative corporate money and dedicated to scaling back social services. If the Reason Foundation sounds familiar, it should. The Dispatch has previously highlighted their efforts to exploit concern over the Kelo decision to push a hard-right regulatory takings theory and their efforts at the local level.

Outrages of the Week

South Carolina's Governor outsources his gift bags, Romney causes another Big Dig headache, Colorado proves the high cost of uninsuring children, and Schwarzenegger is trying a Nixonian approach to health care.

It's all in the latest Outrages of the Week.

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Monday, August 14

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