As cities and states look for creative ways to solve budget shortfalls, predatory private companies always seem to pop up claiming to have the perfect answer. They claim that if governments sell off their assets and services, the private sector can deliver the same services in a way that is better, faster and cheaper. Predictably, that promise is too often broken, leaving taxpayers holding the bag when the for-profit product turns out to be slower, costlier and worse.
Two recent studies on the outsourcing industry, released just this month, show how dire the full range of consequences can be, and the need to ensure privatization projects receive appropriate accountability and oversight.
First comes a study from Rutgers University, authored by Janice Fine, Patrice Mareschal, David Hersh and Kirk Leach. The Fine study analyzes how a lack of oversight in New Jersey contracts places residents and public assets at risk. The report provides case studies that illustrate just how poor oversight in New Jersey has resulted in out of control contracting.
For example, following Hurricane Sandy, New Jersey was put under a state of emergency that relaxed outsourcing rules for the recovery efforts. Certainly, these types of emergencies call for moving quickly, but the Fine study shows that errors in Sandy recovery were the product of broader oversight shortcomings.
New Jersey's contracting office lacked the basic capacity to oversee Sandy recovery projects and outsourced the oversight (in addition to outsourcing the actual construction) to multiple companies. The largest contract (three years, $67.5 million) went to a company called Hammerman & Gainer (HGI). Analysis conducted by the Fair Share Housing Center later found that 79 percent of residents who appealed grant denials for housing recovery were successful, which raises the question of how well HGI and the other contractors did their job. Even more disconcerting, the analysis found troubling racial and ethnic disparities, with African-Americans being rejected for recovery funds at a rate two and a half times that of whites.
The Rutgers Study has several others cases that illustrate how taxpayers lose when proper oversight isn't an integral part of outsourcing, including child protection, services for the disabled and operation of halfway houses. The study also offers several recommendations for governments to ensure the proper level of oversight that helps taxpayers get what they pay for.
When governments consider outsourcing, it is important to count all the ways the public will pay for contracts. A new study from the University of Colorado, authored by Daphne T. Greenwood, reminds us that those costs go beyond the line items of the contract.
Greenwood points out that when outsourcing contracts lower the wages and benefits of workers, the entire community suffers. Workers making less spend less in their own communities. That leads to declines in retail sales and impact in the housing market, a larger share of "at risk" children in lower-income families, and more workers on public assistance which amounts to even greater costs for taxpayers.
All of these social impacts should be considered, along with the basic math of contracts: if a company says it can perform the same service as public service workers, but cheaper taxpayers should be wary. To achieve that goal, corners must be cut to make room for business profit. That means increased fees, reduction in services and reduction in wages and benefits that weaken the regional economy and increase economic inequality.
The Greenwood and Fine reports add to the wealth of empirical, academic data that back up what experts in public management have been saying for years. Governments need to weigh the full cost of contracting, because corporate promises are often too good to be true. And when governments do outsource, it should only be with rigorous accountability and oversight that ensure taxpayer dollars aren't going to waste. The evidence is in, and now it is up to lawmakers to protect their constituents.