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In the Public Interest? Safeguarding New Jersey’s Public Investments

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The New Jersey Privatization Task Force, led by former Congressman Richard Zimmer, issued its report to the governor on May 31, 2010. The report proposed a variety of privatization projects that it predicted would result in $210 million in savings; however, it provided few details about how these projects would actually achieve this level of savings. Only a small number, if any, of the Task Force’s proposals will meet its key standard of “achieving efficiency through private sector competition.” While the Task Force’s report argues that successful privatization can be achieved only through a combination of best practices for project analysis, vendor selection, and contracting and performance monitoring and oversight, the Task Force fails to heed its own advice when making its privatization recommendations.

The Task Force’s report presumes that privatization will inevitably produce costs savings. The current empirical research on privatization however, which was largely ignored by the Task Force, suggests otherwise. Recent rigorous and comprehensive evaluations of privatization projects do not find significant benefits from privatization. A variety of explanations have been advanced to explain the lack of returns to privatization, including: government, itself, through process improvement can achieve more significant cost savings; monitoring and contracting costs for privatization can be as high as 20%, often making privatization an uneconomical alternative; competitive bidding markets for government contracts often do not exist; and private contractors collude causing price differences to erode (Bel and Warner 2007).

Arising from poor service quality and insufficient savings arising from privatization, many privatization projects result in reverse contracting (in-­‐sourcing), where government reclaims work formerly privatized. Reverse contracting is growing. A combination of increased government efficiency, reverse contracting, and market failures, has stalled the shift toward privatization in the United States. Government service delivery remains the dominant method for the provision of two-­thirds of local public services.

Although the Task Force never considered the potential benefits, there are large potential cost savings for in-­‐sourcing currently privately contracted work. Government has a substantial advantage in supplying its own professional work since it pays its professional employees considerably less than the private sector, giving it a substantial economic cost advantage in providing professional services, such as engineering, law, informational technology and accounting.

While the Task Force did recognize the importance of public employee involvement in a competitive contracting process, it failed to understand employee and union incentives that motivate incumbent at-­‐risk employees through their union to collaborate with public managers to improve service processes. These collaborations often result in internal efficiencies greater than those achieved through privatization. The federal government now requires a public incumbent employee bid for all competitive contracting processes. Federal employees have won 90% of all of these competitions.

The Task Force’s report fails to provide any methodology, accounting, or data sources for their savings estimates. According to our review, the Task Force oversells potential savings, while very little of its privatization savings can be attributed to increased efficiency. Rather we believe whatever “savings” are achieved will come from a reduction in services, higher fees, fares, and user costs, and the substitution of bad jobs with low wages and few benefits for good jobs with decent wages and benefits.

New Jersey offers a multitude of negative examples of privatization, public corruption and politically motivated misallocations, including E-­‐ZPass, EnCap, schools construction, motor vehicle inspections, tax collections, inmate health services and municipal utilities. While the Task Force believes it has learned the appropriate lessons, it demonstrates naivety by asserting that the problem can simply
be resolved by creating a centralized state agency able to write clear contracts.

What the State needs is a comprehensive framework to evaluate projects for privatization and reverse privatization. This framework should cover all levels of government in the State, since State funds flow to county, municipal, school district, and special entity units. Over 80% of the State’s budget passes through to other governmental units or private entities, which need to be brought under a unified effective framework of transparency, oversight, and enforcement.

New Jersey must be guided by a system with standards and rules for transparency, arms-length independent contracting, oversight, evaluation, and enforcement with clear lines of authority and
accountability. Adequate budget resources and qualified staff are needed to implement these essential functions if New Jersey is to get value from government and provide a bulwark against public corruption. However, our initial research suggests that resources for state oversight are shrinking, and the State is presently incapable of overseeing its current vast array of contracts.

The state should make fair competitive bidding a cornerstone of its privatization policy. The standards listed below should be incorporated into the State’s privatization activities but