Competition
Watch
Vol.
3, No. 2 March 1998
VIRGINIA
LEADS AGAIN
In its February/March
1998 newsletter, the ESOP Report, The ESOP Association
features an article reporting that the Commonwealth of Virginia
became the first state in the union to commission a feasibility
study (Senate Document No. 12, 1998) looking at whether government
functions and services could be privatized through an employee
stock ownership plan (ESOP).
"The importance
of this is that for the first time, a state is recognizing ESOPs
as a way to privatize government functions due to the benefits
that employees moving to the private sector and state taxpayers
will receive," said J. Michael Keeling, president of
The ESOP Association, the national trade association for companies
with employee stock ownership plans.
The article quotes
the final report to the Governor and General Assembly which
states: "In the ESOP process, opportunities for everyone
to gain is present. The state may realize a fair selling price
from the new private entity to perform the service, taxpayers
can look forward to a reduced cost of providing the service,
and the private entity can offer the potential of significant
financial rewards to the former government employees that have
become employee owners."
GENERAL
ASSEMBLY SUPPORTS EMPLOYEE STOCK OWNERSHIP PLANS
The 1998 General
Assembly unanimously passed a resolution recognizing the importance
of employee stock ownership plan (ESOPs) as a financial tool
to promote employee-owned companies. Senate Joint Resolution
No. 103, introduced by Senator Walter A. Stosch, expresses the
support of the General Assembly for ESOPs as an effective and
viable privatization method to provide state and local government
services and functions to the citizens of the Commonwealth.
A copy of the resolution can be printed from the General
Assembly website.
ALL
ABOARD THE AMTRAK ESOP
Congress and President
Clinton jumped aboard the ESOP train late last year with the
Amtrak Reform and Accountability Act of 1997. The
bill, introduced by Representative Bud Schuster of Pennsylvania,
and signed into law on December 2, 1997, encourages an Amtrak
employee stock ownership plan.
The law calls for
Amtrak redeeming before October 1, 2002, all common stock previously
issued at its fair market value. "This measure shows
the Congress' and the President's support of employee ownership,"
said J. Michael Keeling, president of The ESOP Association.
REINVENTED
INVESTIGATIONS UNIT PRODUCES BIG PAYOFF FOR TAXPAYERS VIA AN
ESOP
A recent government
performance report highlights the results of the first federal
ESOP privatization experiment. Total gains to the public of
this ESOP privatization of a U.S. government organization amounted
to $20.4 million during the first 15 months that US Investigations
Services, Inc. (USIS) was created, according to the U.S. Office
of Personnel Management (OPM).
USIS is a private,
employee stock ownership plan (ESOP) company created in July,
1996 as a spin-off of OPM's former Office of Federal Investigations.
OPM decided to create the ESOP for more than 700 employees because
of dwindling demand and high costs. The results have exceeded
expectations: in its first 15 months, USIS generated $20.4 million
in financial gains to the public including $10.4 million in
new tax revenues, $3.5 million in indirect personnel cost savings,
and cost of service savings of $6.5 million from reduced investigations
costs for government agencies. The cost of service savings came
in the form of $1 million in cuts in the price of investigations
provided under the service contract between USIS and OPM, $4.6
million in new investigative procedures, and USIS's refusal
to take an annual increase equal to the cost of inflation for
two years, a savings of $900,000. A top-of-the-line investigation
cost was reduced $570, a 14 % reduction.
All of OPM's former
investigative personnel received compensation packages that
are equal to or better than the pay they received from the federal
government. In addition, employees have received company stock
equal to about 10 percent of their salaries in the firm's ESOP
retirement program. The stock value has increased ten-fold since
the creation of USIS. Employees can also participate in the
company's 401(k) program.
USIS, which is now
valued at more than $30 million dollars, had a 25 percent growth
rate in revenue last fiscal year. Phil Harper, USIS CEO, projects
the company will be a $50 million company in another 12 to 16
months. In addition to its contract with the federal government,
USIS has negotiated contracts with state and local governments
and with some Fortune 100 companies. Its product offerings have
expanded to include workers' compensation investigations, background
checks for state and municipal workers, EEOC investigations,
and fact-finding investigations of all types.
Although the firm's
core contract is still with OPM, USIS currently has 29 different
contracts with clients ranging from public schools, a Maryland
county public safety department, to a Michigan Gaming Commission.
CEO Harper says that an employee survey conducted by USIS showed
that only one in four employees would prefer to be still working
for the federal government and that 80 percent of the respondents
said they were proud to work at USIS.
UPDATE
ON FEDERAL COMPETITION LEGISLATION
Congressman Stephen
Horn, Chairman of the Subcommittee on Government Management,
Information, and Technology, has circulated for comment a substitute
bill for HR 716, the Freedom from Government Competition Act
of 1997. The substitute bill is named the "Competition
in Commercial Activities Act." The bill, which
is in mark-up, has not yet been assigned a bill number will
be heard at a public hearing on March 24th. The proposed
bill states that it is the policy of the Federal government
that the goods and services required by an agency to carry out
a commercial activity should be provided by the most competitive
source. Some of the main components of the proposed bill require
the following:
- The head of each
agency shall develop a list of each activity performed by
the agency and shall determine whether the activity is commercial
or inherently governmental;
- The head of each
agency shall ensure that the performance of each commercial
activity is subjected to a competition;
- The establishment
of a Center for Commercial Activities and Privatization within
the executive branch to coordinate agency implementation of
the Act;
- The Director of
the Office of Management and Budget shall ensure that any
savings generated by a competition conducted by an agency
are directed to other priority programs of that agency.
THE
COUNCIL OF STATE GOVERNMENTS HIGHLIGHTS VIRGINIA'S PROGRAM
Virginia is featured
in the January/February 1998 issue of State Government News,
the publication of The Council of State Governments (CSG). The
article titled Competition by the Book opines that
states can succeed in privatizing government functions by taking
a systematic approach.
CSG's survey showed
that privatization is growing in popularity. Most state officials
reported they had expanded privatization activities in recent
years, and more than half said they expected privatization activities
to increase in the next five years.
The article reports
that Virginia, Michigan and Kansas are among the few states
that have taken a systematic approach to privatization/competition.
An official of the Virginia Governmental Employees' Association,
is quoted as saying "If this competitive government
is the wave of the future, Virginia is doing it the right way."
PRIVATIZATION
AND COMPETITION IN ILLINOIS
The Illinois Center
for Competitive Government, a partnership between the Office
of Comptroller and the Illinois Institute for Rural Affairs,
recently published a report titled "Privatization in
Illinois Municipalities". Information from the report's
survey indicates that nearly one-fifth of Illinois municipalities
plan to expand privatization in the near future with more than
40 percent of larger cities planning to increase contracting.
The services most likely to be privatized include building and
grounds maintenance, street repair and maintenance, and water
and sewer services.
Approximately two-thirds
of the cities reported privatization to be a success and employees
were not adversely affected to the degree that many opponents
claim. The report summarizes that municipal officials indicate
general satisfaction with privatized services with resulting
cost savings. Few cities experienced employee displacement.
Many have monitoring systems in place to ensure contract compliance
and accountability.
LEVELING
THE PLAYING FIELD: MAKING MANAGED COMPETITIONS FAIR
Increasingly, when
governments decide to test the market for the best price and
quality for delivering a service, in-house units are also given
the opportunity to bid. This model of public-private competition,
referred to as "managed competition," is
predicated on the notion that allowing the widest possible range
of competition between different types of providers is the best
way of ensuring high-quality services at the lowest price. The
Reason Public Policy Institute (RPPI) has released a study,
"Competitive Neutrality: Ensuring a Level Playing Field
in Managed Competitions," that looks at how managed
competitions are being implemented and develops a practical
guide to making them successful and fair.
Managed competition
has brought competition to many jurisdictions where public employees
had long enjoyed a protected monopoly. At the same time, by
giving public employees the opportunity to compete for contracts,
managed competition has reduced political opposition to competitive
contracting, according to the RPPI study. Jim Flanagan, city
auditor for Phoenix, which pioneered managed competition, says,
"No reporting process, auditing procedure, or budget
procedure has ever gotten a public organization to put anywhere
near the energy into improvement that competition has. Enormous
energy goes into getting prices down for bids."
Many now say that
if managed competition is to become a major tool for driving
change and increasing efficiency in the public sector, governments
must do a better job of creating a level playing field for public
and private bidders. The RPPI study is available for $15
by calling 310/391-2245.
Editorial
Note: To level the playing field, the Council has developed
two effective tools - the Public-Private Performance Analysis
and the Cost Comparison Program "COMPETE".
REPORT
ON PRIVATE PRISONS
A just released report,
"Private Prisons: Quality Corrections at Lower Cost,"
reveals that private prisons save money--10 to 15 percent average
savings on operational costs, based on 14 independent cost comparisons.
Private prisons provide at least the same quality services that
government prisons do--based on six independent quality comparison
studies. The report concludes that the evidence is overwhelming
that the private sector delivers quality correctional services
at lower cost. A copy of the report can be ordered from the
Reason Public Policy Institute by calling 310/391-2245.
PRIVATIZATION
BRIEFS
Detroit
Sylvan Learning Systems is contracting with six Detroit schools
to help students deficient in reading, science, or math skills.
Sylvan charges $1,500 per student, and the district uses Title
I funds to pay for the service.
Washington,
D.C.
(1) The D.C. Revitalization and Self-Government Act
of 1997 requires that at least 50 percent of the
district's felon population be housed in private facilities
by September 30, 2003.
(2) Congress approved
the 1998 Defense Authorization Bill that
increases the ceiling on the amount of depot maintenance that
can be contracted out to private firms to 50 percent compared
to the old limit of n 40 percent. It also put new restrictions
on outsourcing--full and open competition now applies only
to "noncore," or secondary maintenance.
Los Angeles
(1) The Los Angeles General Services Department has created
an Internet site offering detailed information about city
properties to be sold at auction.
(2) The poor performing
schools in Los Angeles are each authorized to spend up to
$100,000 to contract with five private providers to set up
learning centers to provide special instructional services
in math, reading, science, and social studies. The programs
will serve 150 to 200 students at each center.
Cincinnati
The city is considering privatization of city golf courses
that lost over $700,000 in the each of the past two years.
Portland,
Oregon
The city sold the Bath Country Club to B&B Golf Holdings
for $1.6 million.
Florida
According to Public Works Financing, the nations's
first statewide design-build procurement law recently became
effective in Florida, allowing local governments and authorities
to use professional-service contracts based on qualifications
for the selection of turnkey contractors for all types of
projects.
A recent study
of 350 projects by the Construction Industry Institute found
that the speed of construction for design-build projects was
twice the median rate for design-bid-build projects: 9,000
square feet per month versus 4,500 square feet.
Sacramento
National Testing Service has signed a contract with the U.S.
Air Force to take over and operate the science and engineering
laboratory facilities at McClellan Air Force Base.
New York
City
The City has a signed a long-term lease with the Central Park
Conservancy turning management operations of the park over
to the conservancy. Under this new public-private
partnership, the city will provide about $3 million
each year and match some of the private money the conservancy
raises. It is expected that the new arrangement will assist
fundraising and allow the new management to expand the park's
budget and make substantial improvements.
Milwaukee
The Milwaukee Metropolitan Sewerage District (MMSD) signed
a 10-year, $350 million operation and management contract
with New Jersey-based United Water Services. This is the largest
wastewater agreement ever signed in the United States. It
guarantees savings to ratepayers of $145.8 million over the
term of the contract.
With the backing
of its unions and Milwaukee's City Council, MMSD is seeking
a private-letter ruling from the IRS and permission from the
U.S. Department of Labor to allow employees who sign on with
the private operator to continue to participate in the city's
defined-benefit pension plan.
"Privatization
is a tool that can help public officials provide essential services
in a cost-effective manner. Introducing competition and privatization
to government services requires real cost information. Privatization
increases competition and competition increases productivity."
Competition
Watch is published quarterly by the Commonwealth Competition
Council. Information appearing in this newsletter is gathered
from various sources. The Commonwealth Competition Council does
not attest to the accuracy or authenticity of the information
provided.
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