Privatization Done Right

Cross-posted to bluejersey.com

New Jersey’s experience with privatization has been unblemished by success.  Nevertheless, the state is in serious financial difficulty, and any potential solutions to provide state services more efficiently and at a lower cost should be seriously considered.

Unfortunately, Governor Christie is approaching privatization initiatives in a way that will not help, and will probably harm, the taxpayers.  He is repeating many of the mistakes that plagued the privatization of New Jersey’s 1998 motor vehicle emission inspection initiative, and he probably is inventing some new mistakes of his own.  Of course, his politically-driven Privatization Task Force report emphasizes the “success” stories and gives, at best,  lip service to the failures, both in New Jersey and elsewhere.

Privatization of some state services can save money if done right.  But doing it “right” does not mean firing state workers and employing a private company to do the same job with lower-paid  (and most likely less qualified) employees while the politically-connected contractor skims off a handsome profit at the taxpayers’ expense.  Since the contractor is accountable to shareholders and not voters, steps must be taken to ensure that the taxpayers’ interests are being addressed appropriately.  This requires oversight and insight by qualified and empowered state employees.  That cost must be included in the equation when considering privatization.

An important consideration is what services should be considered for privatization.  Services that are provided as commodities in the private sector are prime candidates if their implementation in the public sector is essentially identical.  An example would be payroll services where several vendors compete across a broad range of customers to provide compensation to a client's employees.  There must be adequate competition for these services in order to be considered for privatization.  After all, the ultimate goal is to provide more service for fewer dollars, and if the economies of scale and the pricing pressure of real competition in the private sector can be leveraged, then there’s a potential for a benefit to the taxpayer.  Privatization of critical infrastructure initiatives (like Governor Whitman’s failed Motor Vehicle Emissions contract) should receive extra scrutiny and non-partisan expert oversight, if done at all.

Even more important is how privatization initiatives are conducted.  Requests for Proposal (RFPs) should be carefully written and reviewed by independent, knowledgeable experts, not politicians or bureaucrats.  RFPs should be complete, down to the draft Service Level Agreements that will become part of the contract.  Incentives for exemplary performance, and penalties for poor performance, provide the State with leverage to ensure that our needs are met.  And of course, one of the most difficult but important aspects of choosing a potential private partner is the absence of political influence over that selection.

While ISO:9001 Quality Management System certification does not guarantee that a contractor will meet expectations, lack of such certification should also indicate that the potential supplier does not give quality  management adequate attention.  Thus, only potential contractors with a current ISO:9001 certification should be allowed to bid on major contracts.  Similarly, outsourcing of any programs that are IT or software-intensive should require at least a Level 3 (and preference should be given to Level 5) certification against the appropriate Capability Maturity Model Integrated process standard.

Industry-standard Risk and Opportunity Management processes should be implemented and rigorously followed even before the RFP is developed.  Properly implemented, Opportunity Management coupled with Six-Sigma initiatives can help improve cost, schedule, and technical performance of the outsourced services.    Coupled with this, frequent and in-depth technical and programmatic reviews by independent experts should be conducted for the larger initiatives.  The reports from these reviews for the largest initiatives (e.g. for those valued over $100 million) should be provided directly to the Governor, unfiltered by intermediate bureaucrats.

Is all of this oversight and insight expensive?  Sure – and it needs to be factored into the privatization equation.  But as Christie Whitman’s Motor Vehicle inspection initiative has proven, lack of such standard project management practices is even more expensive.

So if privatization is to work for the New Jersey taxpayer, the process must be robust and transparent.   Realistic cost estimates must include those for effective oversight.  Unfortunately, oversight and transparency are not in the current vocabulary of the state’s executive branch.  So before the taxpayer is asked to support significantly more privatization, there needs to be a culture change in Trenton.