Wednesday, July 14, 2010

Privatization Done Right

Cross-posted to

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.


  1. Interesting philosophy you propound:
    1) The government is competent to run the health industry
    2) The government is competent to run the auto industry
    3) The government is competent to run the energy industry
    4) The government is competent to run the banking industry
    5) The government is NOT competent to write or review RFPs. For that you need experts.

  2. @Glen H:
    1) The government does not run the health industry. All that has been done is to establish some relatively weak regulations for the health INSURANCE industry. The insurance lobby is still in control.
    2) The government does not run the auto industry. GM is a private company that got tons of taxpayer dollars, and the government temporarily participated in its management - a good fiduciary responsible action
    3) The government DID run the energy industry (see: Dick Cheney's secret energy task force), but my comment on insurance lobbyists applies to energy lobbyists, also.
    4) Ditto for the banking lobbyists
    5) The government COULD be competent to write and review RFPs, but the present crew in Trenton is too politically motivated.

    Thanks for your comments. It was good to see you last night - hope you and the family enjoyed the event as much as we did.

  3. 1) I did not say that the government runs the health industry. We have fortunately been able to prevent that so far. I did say you believe the government is competent to do so. Or are you no longer in favor of a single payor system run by the government?

    2) Obama fired the head of GM, apparently without any consultation with its board of directors. I suppose you can argue that GM is technically still a private company. But answer these two questions. If GM decides there is no financial sense in developing and marketing a "green" car, are they free to not do so? If GM decides it makes financial sense to close a plant in the district of a prominent (Democrat) congressman, are they free to do so? If the answer to both questions is 'yes', they are still a private company. I don't believe the answer to either question is 'yes'.

    3) This is more interesting logic. Cheney solicits the expertise of energy executives, and this is the government running the energy industry. Obama orders BP to do certain things, publicly claiming there is no purpose to meeting with the head of BP, and this is government not running the energy industry.

    It just cracks me up that you advocate a greater government role in, well, everything, but when it comes to something you apparently have expertise in, you want no part of government bureaucrats doing it. Your cop out is that you don't want Christie's bureaucrats doing it. Governors come and go. The bureaucrats are forever. Christie's bureaucrats are no better or worse than anybody else's.

    I am hoping a few comments might draw readers to your blog. It is well written, in the sense that the writing flows, and the ideas are laid out clearly. The only flaw, from my point of view, is that I disagree with virtually everything you write.

  4. Glen,

    I am not against privatization, as long as it is done correctly, and for the right reasons. Christie's privatization report is full of holes and doesn't make a compelling financial or operational case. Apparently, the Inquirer has come to the same conclusion:

    My comments on another blog on this topic are at

    The governor's recent actions regarding his shadow organization "Reform New Jersey Now" indicate that he is well on his way to be as corrupt as any previous Trenton administration, and so I would be very wary of efforts to fund taxpayer money to his cronies in the name of privatization.

  5. Nice write-up. I am going to link to your article. I agree with you 100%. Keep up the good work. I am at