Wednesday, July 8, 2009

Failed Privatization at FSSA; My Rules on Privatization

The Indianapolis Star reports this morning that Indiana officials are considering scrapping the $1 billion privatization contract Indiana Family and Social Services entered into a couple years ago. According to the article, written by Will Huggins:

Nearly two years into the privatization of Indiana's welfare system, state officials are considering scrapping it amid widespread concerns that include the mishandling of nearly one in five food-stamp cases.

State welfare officials acknowledge that in about three-quarters of those cases, eligible Hoosiers are being denied aid they should be receiving.

"It's possible we'd have to cancel the contract," said Anne Murphy, secretary of the Indiana Family and Social Services Administration, referring to a $1.16 billion deal with IBM. She said the company will have until September to make improvements.


Under the 10-year contract, one of the richest in state history, IBM Corp. and its subsidiary Affiliated Computer Services agreed to manage the state's system for doling out food stamps, Temporary Assistance to Needy Families and Medicaid payments to about a million Hoosiers. Critics' complaints are systemwide, though TANF and Medicare statistics were not readily available Tuesday.
First of all, kudos to Anne Murphy for doing a terrific job at addressing problems with this contract. She's brought the agency a long way in just a few months. I remember early last session when the Governor sharply criticized legislators like Rep. Vanetta Becker from Evansville, who insisted that the situation at FSSA with the privatization contract be reviewed closely. Now we have the Governor's own appointee taking action to possibly cancel the contract.

As a side note, I like Gary Welsh at Advance Indiana, am amazed that Mitch Roob, the former FSSA director, continues to land high-level positions in government wherever he goes. Roob, who used to work for Affiliated Computer Services immediately before landing at FSSA, clearly had a conflict in supervising the privatization effort at FSSA. When a conflict concerns a matter that is so central to the operations of an agency, it is a conflict that simply can't be realistically waived. Like the conflict Bob Grand has as attorney for the Simons and president of the Capital Improvement Board which contracts with the Pacers, the conflict Roob had was too significant to believe it could be addressed by walling him off some how.

I have preached on the issue of privatization on these pages many times before. Privatization is a good idea in theory but has been bungled horribly in practice. The original purpose of privatization was to bring the market completion into the delivery of public services. I was a huge fan of the concept in the 1990s and run numerous books on the subject.

The trouble is we have gotten away from that original purpose. Not every government service is the kind that lends itself to successful privatization. Also, when there is only one or two private companies that are able to provide service and then you hand that company a 10 year contract, where exactly is the market competition that was the purpose of privatization? All you're doing is creating a government sanctioned monopoly for a private company.

Unfortunately money has also corrupted the original idea of privatization. In addition, to campaign contributions from vendors seeking privatization contracts, you also have government employees moving to and from private companies bidding on privatization contracts. The revolving door in reverse - where a government official like Roob moves from the private sector to government is a situation that our revolving door/conflict of interest laws do not adequately address.

As a Republican, I would like to see privatization not only be a great idea on paper, but one that can succeed in practice. Every day though I grow less optimistic that our elected officials can put aside politics and implement privatization as it was intended.

Previously I have published a list of my privatization rules that should be applied whenever government is considering the privatizing a service.


1) Are there several vendors who are capable of and interested in providing the service?--If there is only one or two vendors that can provide the service, then you're not instilling market competition into the delivery of the service. You're exposing taxpayers to a monopoly mandated by government.

2) Is the contract for a service that will be bid out?---A contract that will be subject to bidding rules is less likely to be one where the vendor gets the service because of political contacts or campaign contributions.

3) Is the vendor going to be given a long term contract?---When you give a vendor a long term contract, then the vendor doesn't have to worry about market competition if they don't provide the service well. The whole idea of privatization is defeated.

4) Is this a service that is going to be provided out in the open, so the public can judge the quality of the service provided by the vendor?---Garbage collection everyone sees. The running of a maximum security prison is done behind closed doors. The public knows if the company picking up the garbage is doing a good job. The public knows little about how well the prison is being run.

5) Are the individuals who are receiving the service which might be privatized, people who are politically powerless or unpopular?---Classic example is correctional privatization. A sizable portion of the population doesn't care if private correctional companies cut corners on medicine or medical treatment of inmates. So even though the company may not be living up to their obligations under the privatization contract, that contract often is not enforced by public officials who do not have to worry about the powerless constituency receiving the service. By the way, I would say another example of people without much political power are welfare recipients. Witness the recent FSSA privatization effort here in Indiana.

6) Is the company providing the service going to be properly supervised and held accountable if the vendor doesn't live up to the contract?---Too often services get privatized and government does not do adequate monitoring of compliance with terms of the contract. The tendency for government is to just pass blame along to the private company. It doesn't work like that though...government is still legally responsible for the provision of the service, even if it's contracted out to a private vendor.

7) Is the company bidding on the privatization contract willing to subject itself itself to the open records law and disclosure requirements public agencies providing that service would have to follow?---Although providing a public service paid for with taxpayer dollars, many companies insist on operating in secrecy. They claim the secrecy is to protect itself from having the company's secrets stolen. Don't buy that nonsense. The real reason for the scrutiny is that the companies do not want to provide information that could be used to show they are not doing a good job.

8) Did the company or its top employees make large campaign contributions to elected officials and candidates who were in a position to influence the privatization decision?---Privatization has unfortunately become a vehicle by which elected officials and candidates can generate large campaign contributions from companies interested in currying favor. Even after the decision is made, the money train continues because the companies want to keep the elected officials happy and avoid the scrutiny and criticism of their performance.

9) Is the company hiring local politicians in an attempt influence the privatization decision or reduce the criticism of their performance under an existing privatization contract?---It's the oldest game in privatization. A private company which offers a service hires the elected official who was responsible for the government providing that service to the public. The person isn't being hired for his or her expertise. The person is being hired for political influence.

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