Recommendations of the Joint Legislative Committee on Privatization

              RECOMMENDATIONS
of the
JOINT LEGISLATIVE COMMITTEE ON PRIVATIZATION
January 10, 1990
January 11, 1990
The Honorable Jane Dee Hull
Speaker of the House
Arizona House of Representatives
1700 West Washington
Phoenix, Arizona 85007
Dear Speaker Hull:
The attached report by the Joint Legislative Committee on Privatization provides
background on the Committee's work, as well as recommendations put forth by the
Committee at its last meeting on January 3, 1990.
If you have any questions regarding this report, please contact our offices.
Sincerely,
7 -.'----,
- I Representative Robert L. Burns Senator Tom Patterson
KH/ ar
attachment
January 11, 1990
The Honorable Robert B. Usdane
President of the Senate
Arizona State Senate
1700 West Washington
Phoenix, Arizona 85007
Dear President Usdane:
The attached report by the Joint Legislative Committee on Privatization provides
background on the CommiLteefs work, as well ds recommendations put f o r t h by the
Committee at its last meeting on January 3, 1990.
If you have any questions regarding this report, please contact our offices.
/ Representative Robert L. Burns Senator Tom Patterson
KH/ ar
attachment
JOINT LEGISLATIVE COMMITTEE ON PRIVATIZATION
BACKGROUND
The Joint ~ egislative committee on Privatization was
established with the permission of House Speaker Jane Dee
Hull and Senate President Robert Usdane. The Committee,
consisting of five members from each house, has no
reference in statute. The co- chairmen, Representative
Robert llBoblBlu rns and Senator Tom Patterson, requested
that such a committee be established to:
* Review and recommend possible solutions to invasions
by government into areas which ha. j. e or are presently
served by private enterprise.
* Identify goods and services which at present are
being provided by government, which could be
provided more efficiently by private enterprise.
* Design and document potential methods fortransferr-ing
present government functions to the private
sector.
COMMITTEE PROCEDURE
The Committee held five meetings at which the members
heard from several privatization experts and other
concerned parties both public and private. Listed below
are the meeting dates along with the subjects addressed
on those dates.
October 17, 1989 Overview of privatization
Robert Poole, President ofthe Reason
Foundation, introduced the concept
of privatization with his presenta-tion
on the three types of privatiza-tion
(" the sale of government
enterprises and assets1I, " build,
operate, and transfer", and " contrac-ting
servicesI1).
Jim Schmitz, Director of the Arizona
Federation of State, County and
Municipal Employees ( AFSCME) ,
presented an opposing view on
privatization.
Wendell Cox, Principal of Wendell Cox
Transportation Consultancy, discussed
the principle of I1competitive
contractingI1.
November 8, 1989 Problems of annexation in the solid
waste manasement industry
Jr, e Abate, an attorney representing
the Arizona Chapter of the National
Solid Waste Management Association,
outlined for the Committee the
problems that private waste haulers
face when annexation occurs.
Philip MacDonnell, an attorney
representing Waste Management, Inc.,
supported Abate's testimony.
Several people in the solid waste
industry were on hand to support the
testimony and to answer questions.
Contract maintenance in the Arizona
Department of Transportation ( ADOT)
Tom Bryant, State Engineer for ADOT,
discussed many areas for which ADOT
currently lets contracts.
November 28, 1989 Privatization of prisons
Richard Carr, Principal of Westrends
Environmental Group, introduced the
idea of a private/ public partnership
with a proposed prison to be located
in Cochise County, near Willcox.
Wayne Calabrese, Vice President of
Business Development for Wackenhut
Corporation, gave an overview of
prison privatization, and Wackenhut's
experience in the field. He outlined
certain issues of which the legisla-ture
must be mindful when considering
the private prisons issue.
Dave Horwitz, Legislative Director
of AFSCME, disagreed with the idea
that prisons could be privatized
successfully.
December 19, 1989 Overview of privatization in British
Columbia
Peter Clark, Assistant Deputy
Minister of Privatization, Communica-tion,
and Support Services within
B. C.' s Ministry of Government
January 3, 1990
Management Services, discussed
privatization and employee ownership
in British ~ olumbia.
John G. Fraser, a management
consultant for Peat, Marwick,
Stevenson & Kellogg of Vancouver,
B. C., offered technical information
on the transition from the public
sector to the private.
School bus ~ rivatization
Gary Witledge, Senior operations
Manager for Mayflower Contract
services, provided an update on
school bus privatization in Arizona.
~ ichael Kennedy, Vice President of
operations for National School Bus
Service Inc., discussed the ad-vantages
of contracting for student
transportation.
Review and committee recommendations
Co- chairmanBurnsofferedanoverview
of the Committee's work, and the
Committee adopted motions for
recommendations.
COMMITTEE RECOMMENDATIONS
Based upon the weight of testimony received by the
members during the hearing process, the committee made
the following recommendations:
that the petition of interest concept be pursued by
the Legislature;
that when annexation occurs, any private companies
who are providing services in the area to be
annexed, either be continued or appropriately
compensated;
that the Department of Corrections be mandated to
utilize the private sector where possible, con-centrating
on new facilities and private financing
of construction;
that further study of the '' British Columbia
Privatization Action Plan1', or similar plans, be
carried on;
that recommendation be made to the Speaker of the
House and the President of the Senate that the Joint
~ egislative committee on Privatization be continued
indefinitely.
IV. ATTACHMENTS
Attachment A -- Letter from Representative Robert Burns
to Speaker Jane Dee Hull requesting the
establishment of a Joint ~ egislative
Committee on Privatization
Attachment B -- Minutes from the Committee meetings
May 25, 1989
The Honorable Jane Dee Hull
Speaker
Ar i zona House of Representatives
1700 West Washington
Phoenix, Arizona 85007
. RE: Privatization Committee
Dear Vadam Speaker:
Please accept this as my formal request to establ ish an " off- session"
privatization comittee. As we have discussed previously, this request
is for a joint legislative comittee with Senator Patterson and myself
as co- chairs. The number of members preferred is five from each
c harnber .
Goals of this committee would be, but not be 1 imited t o , the following:
* Review and recomnd possible solutions t o invasions by
government into areas which have or are presently served
by private enterprise.
* Identify goods and services which a t present are being
' provided by government, which coul d be provided more
efficiently by private enterprise.
* Design and document potential methods for transferring
present government functions to the private sector.
House members I have contacted who have expressed an interest in
serving are as follows:
Representatives - Lesl ie Johnson, Bill Mundel 1 , Henry Evans,
Herb Guenther, Brenda Burns, Stan Barnes, Don A1 dridge,
Candice Nagel, and Mike Palmer
I. ett? r to ?;> zker l l u l l
Page 2
Ray 25, 1989
I have been in contact with the following organizations which have
provided or pledge varying 1 eve1 s of support:
The Privatization Council, Inc. Local Representative -
1101 Connecticut Ave., N. W. Joseph P. McDonald
Suite 700 ( 602) 275- 0601
Kashington, D. C. 20036
( 202) 857- 1142
Reason Foundation
2716 Ocean Park Boulevard
Suite 1062
Santa Monica, CA 90405
Barry Go1 dwater Institute Local Represen t a t i ve -
1109 S. Plaza Way Michael Sanera
Suite 375
Flagstaff, AZ 86001
American Legislative Exchange Council Local Representative -
214 Massachusetts Ave., N. E. Russel 1 Smol don
Suite 400 ( 602) 236- 2834
Washington, D. C. 20002
( 202) 547- 4646
I t i s my understanding that your off ice schedules off- session cornnittee
meetings. I am available a t your convenience to discuss schedul ing if
necessary.
The following is a partial 1 i s t of p o s s i b i l i t i e s f o r the cormittee to
address:
* Review possible protections for services by providers which
have been, or may be, el irninated or handicapped by annexations.
* Possible sale of the maintenance division of ADOT.
* Possible sale of the Grand Canyon Airport.
* Privatization of prisons and j a i l s .
* Review contracting 1 imitations with intent of stream1 ining
same.
Letter t o Spcaker Hull
Page 3
May 25, 1989
If there is anything I can do to help expedite the forrdtion of
this cormittee, please l e t me know.
ROBERT " BOB" BURNS
State Representative
District 17
RB/ ar
cc: Senator Tom Patterson
Joseph P. McDonald
Michael Sanera
Russel 1 Smol don
Joseph Abate
ATTACHMENT B
MINUTES OF
JOINT LEGISLATIVE OVERSIGHT COMMITTEE
ON PRIVATIZATION
October 17, 1989
Co- Chairman Robert Burns c a l l e d the meeting t o order at 9: 15 a. m. i n House
Hearing Room 1.
Committee Members Present: Committee Members Absent:
M r . Williams M r . McLendon
Mrs. Updike Mr. Ortega
Senator Arzberger Senator Corbet '
Senator Hardt Senator Wright
Senator Patterson, Co- Chairman
M r . R. Burns, Co- Chairman
S~ eakers
Robert W. Pool e, Jr., President, Reason Foundation
Jim Schmitz, D i r e c t o r , Arizona Public Employees Association/ AFSCME
Wendell Cox, P r i n c i p a l , Wendell Cox Transportation Consultancy, S t . Louis,
M i ssouri
Guest L i s t ( Attachment 1)
PRESENTATION
M r . Robert Poole, Jr., President o f the Reason Foundation explained t h a t the
Reason Foundation i s a Cal i fornia- based pol i c y research i n s t i t u t e . He f u r t h e r
stated t h a t it i s a n o n - p r o f i t organization which was founded i n 1978 t o look
at questions t h a t r e l a t e t o the e f f i c i e n t operation o f government. He said t h a t
p r i v a t i z a t i o n has been one o f t h e i r major research themes f o r the eleven years
t h a t they have been i n business. They have looked at how p r i v a t i z a t i o n operates
at l o c a l , state, and national l e v e l governments, not only i n the United States
but around the world. He stated t h a t p r i v a t i z a t i o n i s a worldwide trend today.
M r . Poole presented the l a t e s t e d i t i o n o f an annual r e p o r t produced by the Reason
Foundat ion on the status o f p r i v a t i z a t i o n around the world, t i t l e d P r i v a t i z a t i o n
- 1989 ( Attachment 2). He stated t h a t i n over 65 countries government enterprises
t h a t have been sold t o p r i v a t e e n t i t i e s i n the l a s t f i v e years has not reached
$ 160 b i l l i o n . Last year alone, $ 43 b i l l i o n o f state- owned enterprises were sold
and M r . Poole i n d i c a t e d t h e r e w i l l probably be an equal number when t h i s year's
f i g u r e s are i n .
M r . Poole described three types o f p r i v a t i z a t i o n a c t i v i t i e s which may have an
a p p l i c a t i o n i n Arizona:
1. The sale o f aovernment e n t e r ~ r i s e s or assets. For example, n a t i o n a l i z e d
i n d u s t r i e s i n Europe, pub1 i c u t i l i t y operations, B r i t i s h and Mexican
governments telephone systems, B r i t i s h a i r p o r t s , and other forms o f
t r a n s p o r t a t i o n and u t i l i t i e s which are being sold o r considered f o r sale
i n dozens o f countries around the world and i n some c i t i e s i n the United
States.
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
October 17, 1989
" Build, O ~ e r a t e , Transfer" ( BOT). R e l a t i v e l y new i n the United States but
has been operating i n Europe f o r about twenty- f ~ v eye ars. Such projects
as wastewater treatment plants ( Chandler, Arizona), sol i d waste disposal
plants, highways, bridges, tunnels, and other 1 arge, complex publ i c
i n f r a s t r u c t u r e s are examples o f f a c i l i t i e s which lend themselves t o the
BOT process. Under long- term government contracts or franchise, p r i v a t e
companies finance, b u i l d and operate f a c i l i t i e s , then eventually t r a n s f e r
the operation t o the state. Cost i s defrayed by d i r e c t users, as t o l l
charges for highways, per diem payments by governments under contract to
send prisoners t o the f a c i l i t y , etc. This helps governments who have
d i f f i c u l t y with bond issues i n a f f o r d i n g c o s t l y i n f r a s t r u c t u r e s .
3. Contractins services. Most common i n Arizona. The C i t y o f Phoenix i s
known nationwide f o r success i n t h i s program. Many s t a t e s c o n t r a c t for
maintenance and food services, etc.
M r . Poole explained t h a t money i s the number one reason governments are t u r n i n g
t o p r i v a t i z a t i o n , and the p r i v a t e sector i s able t o produce and del i v e r the same
or b e t t e r services f o r s i g n i f i c a n t l y less money. For example, i n s e l l i n g a
municipal' a i r p o r t , he said two main f i n a n c i a l benefits would r e s u l t , a one- time
major i n f l o w o f revenue and the 1 ong- term property tax payments. Contracting
services proves successful, he added, because a d i f f e r e n t set o f incentives
e x i s t s i n p r i v a t e business and, also, the competitive f a c t o r enters i n t o the
bidding process.
Competition leads t o innovations i n the way services are provided, such as
d i f f e r e n t uses o f equipment, d i f f e r e n t mixes o f supervisors and s t a f f , d i f f e r e n t
s k i l l l e v e l s , and the redesigning and r e t h i n k i n g o f work t o be done more cost
e f f e c t i v e l y . M r . Poole stated t h a t t h i s i s not j u s t theory, t h a t t h i s has been
measured over the l a s t decade f o r many d i f f e r e n t services i n many parts o f the
country i n c o n t r o l 1 ed experiments.
M r . Poole summarized r e s u l t s from a few o f these s c i e n t i f i c a l l y v a l i d studies
which i n d i c a t e t h e publ i c sector i s more c o s t l y by the f o l l o w i n g percentages:
s t r e e t maintenance, 16 percent ; bus service, 20- 50 percent; garbage col 1 ect ion,
28- 50 percent; s t r e e t t r e e maintenance, 37 percent; t u r f maintenance, 40 percent;
s t r e e t cleaning, 43 percent; fi r e f i g h t i n g , 40- 50 percent; wastewater treatment
p l ant operations, 20- 50 percent; t r a f f i c signal maintenance, 56 percent;
j a n i t o r i a l services as much as 73 percent; and asphalt paving; according t o one
study i n southern C a l i f o r n i a , 96 percent more c o s t l y when done by c i t y crews i n -
house than when done by competitively b i d o u t s i d e c o n t r a c t o r s . M r . Poole
emphasized t h a t those are represented numbers not from a s i n g l e case, but from
s t a t i s t i c a l l y v a l i d studies o f large numbers o f cases.
M r . Poole stated t h a t the Reason Foundation believes t h a t one o f the most
promising areas f o r p r i v a t i z a t i o n i n the 90' s i s going t o be the area of
i n f r a s t r u c t u r e . He said t h a t prison p r i v a t i z a t i o n i s one o f the f a s t e s t growing
areas o f p r i v a t i z a t i o n i n the United States, and e x i s t s i n nine or t e n s t a t e s
according t o the l a t e s t count. M r . Poole explained t h a t t h e r e a r e two types of
prison p r i v a t i z a t i o n . One i s operating contracts, where the management of an
e x i s t i n g f a c i l i t y i s turned over on a competitive bidding bases t o a p r i v a t e
, sector f i r m . I n such s i t u a t i o n s , there i s a savings o f approximately 10 percent
i n operating costs. The bigger p o t e n t i a l savings i s i n the p r o v i s i o n o f new
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
2 October 17, 1989
f a c i l i t i e s , where a f a c i l i t y can be designed from the outset for e f f i c i e n t
operation by the f i r m t h a t i s going t o be operating it. M r . Poole coatended that
i n such cases, a 25- 30 percent or more cost savings i s r e a l i z e d .
As an example, he stated that i n 1986, Bay County, F l o r i d a contracted out the
operation and expansion o f the Bay County J a i l . A 20- year contract was signed
with Corrections Corporation o f America. On a comparative cost basis, the
savings were going t o be 23 percent compared t o what t h e c o s t would be i f the
Sheriff's Department, which had been operating the j a i l , d i d the same expansion
and then continued t o operate it. I n an a r t i c l e from The Palm Beach Post,
w r i t t e n by the Bay County D i r e c t o r o f Emergency Services, it i s stated, " The
company offered t o h i r e a l l the employees who were c u r r e n t l y employed i n the
j a i l , and provided them with 40 hours o f t r a i n i n g , a 7 percent pay r a i s e , annual
cost o f 1 i v i n g increases, more personal leave time, more s i c k leave, and f i v e
more paid hol idays than offered by the S h e r i f f ' s Department. A d d i t i o n a l l y ,
employees may buy the company stock at reduced cost. O f the 79 j a i l employees
who were at the S h e r i f f ' s O f f i c e at the time o f the t r a n s i t i o n , 78 were employed
by the company, and one was reassigned w i t h i n county government. " Mr. Pool e s a i d
t h a t the a r t i c l e stated t h a t the performance has met a l l the requirements o f
the contract i n the three years since then. Not only has it successfully passed
each inspection by the F l o r i d a State Department o f Corrections, but it has not
sustained a s i n g l e major discrepancy. I n December o f 1988, the j a i l won
a c c r e d i t a t i o n from the American Correctional Association and received a 99.4
percent score from the American Correctional Association.
M r . Poole went on t o say t h a t t h e o t h e r area o f p r i v a t i z a t i o n t h a t i s
p a r t i c u l a r l y e x c i t i n g , and which i s being pioneered i n C a l i f o r n i a today, i s
p r i v a t e t o l l roads. He stated t h a t the Cal i f o r n i a l e g i s l a t u r e passed a b i l l i n
June t o authorize four p r i v a t e t o l l projects i n C a l i f o r n i a on t h e " b u i l d , operate
t r a n s f e r " model. The winning bidders f o r these four contracts, which can be
anywhere i n the state, w i l l have 35 year franchises from t h e s t a t e . They w i l l
finance, design, b u i l d and operate these t o l l f a c i l i t i e s , which can be bridges,
highways, or tunnels. M r . Poole pointed out t h a t t h i s i s p a r t o f a growing trend
across the country, the f i r s t such p r o j e c t w i l l be breaking ground i n V i r g i n i a
i n December o f t h i s year. He f u r t h e r stated t h a t a major f e d e r a l l y funded
f e a s i b i l i t y study i s underway on a proposed 400 mile p r i v a t e t o l l road from
Chicago t o Kansas City. This road would be exempt from federal speed 1 i m i t s
because i t s p r i v a t e , would o f f e r very s u b s t a n t i a l t i m e savings t o trucks and
automobile passengers, and would a1 so be a r a i l , pipe1 ine, and u t i l i t y c o r r i d o r ,
with a l l sorts o f revenue sources other than t o l l s because a r i g h t - o f - w a y i s a
very valuable and important thing.
M r . Poole added t h a t t h i s year the I l l i n o i s l e g i s l a t u r e enacted a measure t h a t
amends the s t a t e publ i c u t i l i t i e s law t o c r e a t e a new category o f publ i c u t i l i t y ,
namely highway u t i l i t y companies. These u t i l i t y companies w i l l be regulated j u s t
l i k e e l e c t r i c u t i l i t i e s , telephone u t i l i t i e s or railroads; w i l l be p r i v a t e
business i n the highway and especially i n the r i g h t - o f - w a y business, because they
w i l l have the a b i l i t y t o do a l l sorts o f projects w i t h i n those r i g h t s - o f - w a y .
M r . Poole concluded by saying t h a t what he hoped he had conveyed i n h i s comments
i s t h a t p r i v a t i z a t i o n i s not one s i n g l e technique. It i s a t l e a s t three
re1 a t i v e l y new ways o f harnessing the ski1 1 s, d r i v e , and bottom- 1 i n e o r i e n t a t i o n
o f the p r i v a t e sector t o b r i n g about benefits f o r the p u b l i c and the p u b l i c
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
3 October 17, 1989
sector i n a way t h a t i s less c o s t l y and more e f f e c t i v e than the t r a d i t i o n a l ways
o f doing business. He emphasize^ t h a t p r i v a t i z a t i o n i s not the answer t o every
problem, but it i s something that a m a j o r i t y o f the world's national governments
and a great many state and l o c a l governments throughout the United States are
embracing very enthusi a s t i c a l l y , primari l y because they know t h a t publ i c
resources are 1 imited, and i t ' s t h e i r responsibil i t y as publ i c servants t o make
those taxpayer d o l l a r s go as f a r as possible. He stressed t h a t t h e e m p i r i c a l
record of p r i v a t i z a t i o n i s t h a t it does indeed do t h a t and t h a t accounts f o r i t s
tremendous growth i n the l a s t ten years.
M r . Poole thanked the committee, and offered t o answer any questions.
Senator Arzberger asked i f the savings he had mentioned come from labor, b e t t e r
management, o r other areas.
M r . Poole answered t h a t i n most types o f p r i v a t i z a t i o n , the savings come from
b e t t e r management i n terms o f redesigning how the work gets done, b r i n g i n g about
a b e t t e r mix o f supervisors t o s t a f f , b e t t e r use o f equipment and technology,
and so f o r t h . He stated t h a t i n a few i s o l a t e d cases, there i s a s i t u a t i o n where
publ i c sector pay scales are way out o f 1 ine with the p r i v a t e sector, publ i c
t r a n s i t being one o f those areas. He maintained t h a t the exception i s i n service
areas, where r e c r u i t i n g comes from the same general labor market, and the pay
scale i s competitive. M r . Poole f u r t h e r stated t h a t the p r i v a t e sector generally
does not provide q u i t e as a t t r a c t i v e a package o f f r i n g e b e n e f i t s t o the
employees, compared t o what publ i c employees have been able t o negotiate over
the years. M r . Poole said t h a t t h i s may be due i n p a r t t o the f a c t t h a t the
publ i c employees have been negotiating from some s o r t o f a monopoly p o s i t i o n ,
there hasn't been the competitive d i s c i p l i n e there, which may account f o r the
d i f f e r e n c e . M r . Poole f u r t h e r emphasized that the savings i n p r i v a t i z a t i o n do
not u s u a l l y come from major differences i n wages.
Senator Arzberger asked M r . Poole t o c l a r i f y h i s statements regarding employees
o f the p r i v a t e prison i n Bay County, F l o r i d a being paid s u b s t a n t i a l l y more and
government e n t i t i e s having f r i n g e benefits. Senator Arzberger asked i f these
were p a r t o f the wage package.
Mr. Poole answered t h a t the t o t a l compensation package has t o be looked at
because t h a t i s what i s u l t i m a t e l y emerging. For example, one o f the f r i n g e
b e n e f i t s t h a t the p r i v a t e sector often can and does o f f e r t h a t the publ i c sector
cannot i s stock ownership, which publ i c employees are not used t o at t h i s p o i n t .
M r . Poole contended t h a t due t o t h i s f a c t , p u b l i c employees may not seriously
look a t the package o f f e r e d by the p u b l i c sector versus the p r i v a t e sector. He
added t h a t when stock benefits are factored i n the p r i v a t e sector package it i s
more a t t r a c t i v e , even i f i t s pension program and health care b e n e f i t s may not
be q u i t e as generous as the p u b l i c sector t y p i c a l l y offers.
Senator Arzberger asked M r . Poole whether the taxes on the p r i v a t i z e d f a c i 1 i t i e s
were taken i n t o consideration i n h i s figures and percentages o f savings.
M r . Poole answered t h a t most o f the figures he gave were from competitive
c o n t r a c t i n g s i t u a t i o n s , not a major real estate f a c i l i t y going from the publ i c
sector t o the p r i v a t e sector, but l a b o r i n t e n s i v e operations such as refuse
c o l l e c t i o n o r s t r e e t sweeping. He stated t h a t when dealing w i t h t h e t r a n s f e r
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
4 October 17, 1989
o f property t o the p r i v a t e sector and p u t t i n g it on the tax r o l l s , those tax
f i g u r e s have t o be taken i n t o account, but there are two ways t o look at t h a t .
He explained t h a t on the one hand, t o the p r i v a t e company t h a t ' s having t o decide
what it can a f f o r d t o bid, property taxes have t o be included as one o f i t s
costs; but on t h e o t h e r hand, from the public sector standpoint, they w i l l now
be d e r i v i n g a stream o f property tax revenue from t h a t property t h a t helps t o
o f f s e t what they are paying f o r the service. M r . Poole noted t h a t there are
l e g i t i m a t e questions as t o how you look at those numbers; there i s the savings
o f the cost o f the contract with in- house, versus the o u t s i d e c o n t r a c t , and there
i s an o f f s e t t i n g new revenue stream from p u t t i n g the f a c i l i t y on the property
tax r o l l s . He emphasized t h a t both factors should be taken i n t o account - the
savings i n the contract costs, and the a d d i t i o n a l revenue t h a t comes from the
new property taxes.
Senator Arzberger asked M r . Poole who assumes the 1 i a b i l i t y i n the case o f
p r i v a t e prisons, the p r i v a t e f i r m or the government e n t i t y . Mr. Poole responded
by s t a t i n g ' t h a t the p r i v a t e f i r m does assume the primary l i a b i l i t y and has t o
insure against t h a t . The size and amount o f l i a b i l i t y coverage t h a t the p r i v a t e
company must assume i n order t o be e l i g i b l e f o r the contract can be made a p a r t
o f t h e c o n t r a c t . He f u r t h e r stated t h a t legal opinion i s d i v i d e d on t h i s
question i n terms o f whether the state can s h i r k the u l t i m a t e r e s p o n s i b i l i t y ,
and generally the answer i s no. He s a i d t h a t , standing behind the p r i v a t e
company, t h e s t a t e s t i l l bears some u l t i m a t e l i a b i l i t y , but. the f i r s t l i n e of
defense i n any kind o f l a w s u i t i s the p r i v a t e company and i t s insurance c a r r i e r .
Senator Arzberger asked M r . Poole who h i r e d the Reason Foundation t o have the
presentation today.
Mr. Poole answered t h a t no one had hired them, he was being paid only h i s normal
salary by the Reason Foundation, which i s a non- prof i t, tax- exempt organization.
M r . Poole stated t h a t the Reason Foundation has t e s t i f i e d before the President's
Commission on P r i v a t i z a t i o n , the C a l i f o r n i a Department o f Transportation, and
has a1 so served as consultant t o the White House on t h i s subject.
Senator Arzberger asked M r . Poole f o r f u r t h e r c l a r i f i c a t i o n as t o who pays h i s
sal ary .
M r . Poole answered t h a t about 4,000 i n d i v i d u a l donors, and a l a r g e number o f
p r i v a t e foundation and corporate contributions, such as many o f the Fortune 500
companies i n c l u d i n g Shell, Mobil, and Security P a c i f i c National Bank, pay h i s
sal ary .
Senator Patterson asked Mr. Poole what the c r i t e r i a would be o f a government
service o r agency t o make it a good candidate f o r p r i v a t i z a t i o n .
M r . Poole answered t h a t the easiest, i n terms o f s e r v i c e ' c o n t r a c t i n g , are
services f o r which there are l o t s o f p r i v a t e firms i n the market. He said t h a t
when a municipal or s t a t e government begins p r i v a t i z i n g by contracting o u t , they
t y p i c a l l y s t a r t w i t h a v a r i e t y o f maintenance types o f services from which there
are l o t s o f p r i v a t e sector firms t o choose. He stated f i r e p r o t e c t i o n as an
example o f an area i n which there are not many companies i n t h a t business, so
it i s not t h a t easy t o g e t a number o f competitive bids i f a government wants
t o go i n t o t h a t area. He noted t h a t Rural Metro F i r e Department i n Scottsdale
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
5 October 17, 1989
i s a p r i v a t e company. He commented t h a t consideration must be given t o what kind
o f opposition there might be from those who p r e f e r the status quo, and the
decision be based on whether it i s worth dealing with t h a t degree o f opposition.
M r . Poole stated there are c e r t a i n functions t h a t are i n h e r e n t l y governmental,
and therefore, not good candidates f o r p r i v a t i z a t i o n . He r e l a t e d t h a t the pol i c e
force and the operation o f the municipal court are examples o f functions that
do not lend themselves t o p r i v a t i z a t i o n . He said that the care o f inmates at
the county or s t a t e l e v e l has been demonstrated t o be something t h a t p r i v a t e
sector firms can do s k i l l f u l l y and e f f e c t i v e l y . M r . Poole added t h a t criminal
j u s t i c e and publ i c safety functions, organizations such as Emergency Ambul ance
Service, have a good t r a c k record across the United States for performing these
services e f f i c i e n t l y and e f f e c t i v e l y . He emphasized t h a t the new trend i n
p r i v a t i z a t i o n i s i n f r a s t r u c t u r e , p a r t l y because the d o l l a r needs are so great
and the resources are i n h e r e n t l y q u i t e l i m i t e d .
Representative Williams asked Mr. Poole whether experience has shown a need t o
l i m i t any p a r t i c u l a r length o f time.
M r . Pool e answered t h a t generally two t o four- year service provision contracts
( f i v e - y e a r maximum) such as maintenance or publ i c del i v e r y services 1 i ke garbage
c o l l e c t i o n , are the kind t h a t experience has shown make the most sense. He
emphasized the need t o have the periodic rebidding and genuine competition i n
order t o keep bad re1 ationships from developing, and t o keep p r i v a t e f i r m s from
taking advantage o f the s i t u a t i o n . He stated t h a t there i s an inherent problem
w i t h large, c a p i t a l investment projects, since a f i v e - y e a r c o n t r a c t i s not
r e a l i s t i c . He said t h a t i n these cases, such as highways and bridges, it i s
necessary t o have a l i f e t i m e contract s u f f i c i e n t t o have the cost o f the
investment recovered by the investors. Mr. Poole explained t h a t a l o t more care
i s needed i n s t r u c t u r i n g the contract arrangement and s e l e c t i n g the contractors
t o be sure t h a t the p u b l i c i n t e r e s t i s protected i n these i n h e r e n t l y long- term
s i t u a t i o n s . He reemphasized that service d e l i v e r y contracts should be three to
f i v e years, and b i g i n f r a s t r u c t u r e contracts, twenty t o t h i r t y years.
Representative Updike asked M r . Poole i f he i s aware o f any circumstances where
a contract had been established, and then the contractor walked away from the
p r o j e c t because the p r o f i t wasn't there; and how t h i s type o f s i t u a t i o n i s
hand1 ed.
M r . Poole answered t h a t there are some cases l i k e t h a t , where a company wins a
b i d and i s not able f i n a n c i a l l y t o handle it, o r where t h e c o n t r a c t i s badly
w r i t t e n and the contractor bids on a p a r t i c u l a r p r o j e c t which i s much bigger and
more c o s t l y than f i r s t thought. He explained t h a t the best way t o protect
against t h a t i s by use o f large performance bonds t h a t w i l l indemnify the c i t y
i n the event o f some problem or f a i l u r e o f t h e c o n t r a c t o r . He stated t h a t if
a company cannot get such a bond, it i s a poor r i s k . The performance bond
screens out contractors who are not f i n a n c i a l l y q u a l i f i e d o r have enough
experience t o be re1 i a b l e . He said t h a t i f a company has been given such a
performance bond and does get i n t o trouble, at l e a s t the s t a t e or c i t y i s
protected by having the cash available t o q u i c k l y h i r e replacement service.
Senator Hardt asked M r . Poole whether there i s a problem w i t h long- term bids,
since once a contractor has equipment and employees he has a big advantage,
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
6 October 17, 1989
making it almost impossi ble for someone t o outbid him. This causes prices t o r i s e
t o where even the c i t y cuuld f i n d it hard t o retake one o f these services.
M r . Poole answered t h a t t h i s has been the case i n a few selected areas, but that
people i n c i t y management and t h e c o n t r a c t services business have learned a l o t
about t h i s i n the l a s t decade. He said that the I n t e r n a t i o n a l City Management
Association has handbooks and sample contracts; the Council on Municipal
Performance, l i k e w i s e . He explained that i n most cases there i s genuine
competitive b i d d i n g and a f a i r amount o f replacement when contracts come up f o r
renewal. He pointed o u t t h a t i n the C i t y o f Phoenix there are many examples i n
which p u b l i c sector employee u n i t s have reacquired the r e s p o n s i b i l i t y t o provide
c e r t a i n p u b l i c works services from p r i v a t e contractors who l e t t h e i r costs get
too high. He added t h a t i n Hall County, Georgia, one o f the p r i v a t e companies
t h a t had been contracting t o provide f i r e service r e c e n t l y l o s t the b i d t o the
county because the p r i v a t e company had l e t t h e i r costs get out o f l i n e .
Senator Hardt asked M r . Poole f o r examples o f services i n the City o f Phoenix
t h a t had been returned t o the p u b l i c sector.
M r . Poole answered t h a t garbage c o l l e c t i o n i s one example, and t h a t there are
other examples w i t h i n the publ i c works area i n the C i t y o f Phoenix. He suggested
t h a t Ron Jensen from the C i t y o f Phoenix be i n v i t e d t o t e s t i f y at a subsequent
hearing t o provide other examples o f t h i s .
Representative Bob Burns asked M r . Poole whether he i s aware o f any p r i v a t i z a t i o n
i n the area o f the data processing services o f the government.
M r . Poole responded by s t a t i n g t h a t there are a great many c i t i e s and counties
which have contracted o u t some or a l l o f the data processing operations w i t h good
success, p a r t i c u l a r l y where there i s a 1 arge, central data processing system
serving many d i f f e r e n t government departments. He noted t h a t there seems t o have
been a greater a b i l i t y on the p a r t o f computer s e r v i c e organizations t o keep
current w i t h the s t a t e - o f - t h e - a r t i n both hardware and software, and t o develop
ways o f motivating and keeping good programmers and software systems analysts.
He said t h a t those p r i v a t e firms are able t o provide career paths f o r people t h a t
are broader than staying with, f o r example, t h e S t a t e o f Arizona f o r twenty-f
i v e years, thus developing a more enriched work experience f o r computer
professionals by having more options and d i f f e r e n t types o f contracts and
p r o j e c t s on which they can work.
Representative Williams asked Mr. Poole what the experience has been i n other
states w i t h p r i v a t i z i n g low and medium- risk prisons and i f t h i s has i n j e c t e d
competition or not.
M r . Poole answered t h a t it i s too early t o t e l l since there are very few cases
of j a i l o r prison p r i v a t i z a t i o n t h a t have been i n operation more than two or
three years. He stated t h a t it i s a good p r e d i c t i o n , however, t h a t a competi t i v e
environment w i 11 be created when some f a c i l i t i e s are run by p r i v a t e firms t r y i n g
d i f f e r e n t ways o f motivating personnel, d i f f e r e n t systems f o r s e c u r i t y , and
d i f f e r e n t designs o f f a c i l i t i e s . He added t h a t eight o r ten years ago, Peter
Greenwood, a long- time criminal j u s t i c e researcher, said at a conference and i n
some publ i shed w r i t i n g s t h a t he, a f t e r studying various types o f c o r r e c t ions
programs f o r more than a decade, he was unable t o f i n d anything t h a t worked.
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
7 October 17, 1989
M r . Poole r e l a t e d t h a t M r . Greenwood said at that time that the only hope that
he saw f o r g e t t i n g some innovative programs t h a t might make a d i f f e r e n c e would
be t o encourage competition and get the p r i v a t e sector i n t o try new ways o f
running prisons. M r . Poole emphasized t h a t it i s too early t o see whether that
i s proving c o r r e c t , but t h a t it i s another good reason f o r t r y i n g p r i v a t i z a t i o n
i n the corrections system.
M r . Jim Schmitz, D i r e c t o r o f AFSCME, opined that some o f the committee members
were sold on p r i v a t i z a t i o n from the outset, but he hoped t o p l a n t some seeds o f
doubt and encourage looking beneath the hype o f p r i v a t i z a t i o n . He said h i s
presentation w i l l deal with contracting out, r a t h e r than with asset sales.
M r . Schmitz stated t h a t he wonders whether some p u b l i c managers and p r i v a t e
entrepreneurs have forgotten the fundamental notion o f p u b l i c goods covered i n
Economics 101. He stated t h a t with increased competition f o r the consumer
d o l l a r , corporate America has set i t s sights on a huge source o f p o t e n t i a l
p r o f i t s , and t h a t i s taxpayers' d o l l a r s . He said t h a t the trends i n
p r i v a t i z a t i o n t h a t M r . Poole discussed are mainly overseas, i n terms o f asset
sales - s e l l i n g o f f government e n t i t i e s i q Great B r i t a i n , and p r i v a t i z a t i o n o f
production i n communist societies. Mr. Schmitz f u r t h e r stated t h a t h i s t o r i c a l l y ,
American government has provided many p u b l i c ' s e r v i c e s d i r e c t l y , although there
has always been some degree o f p r i v a t i z a t i o n . He added t h a t i n the e a r l y years
o f t h i s century, c i t i e s and towns around the country turned t o p r i v a t e companies
t o run l o c a l s t r e e t car systems, t o c o l l e c t garbage, t o provide f i r e p r o t e c t i o n ,
and t o perform other basic p u b l i c services, often because t h e i r communities
lacked the needed p u b l i c resources. He maintained t h a t then, as now, there were
problems, i . e. c o n t r a c t o r s f r e q u e n t l y overcharged municipal i t i e s , under- the-t
a b l e payoffs by contractors were common, and contracts were often o f poor
q u a l i t y . He f u r t h e r stated t h a t municipal contracts became a favored way o f
1 i n i n g pockets and rewarding pol i t i c a l cronies. He explained t h a t because o f
those abuses, the reform movement o f the 1920' s t r i e d t o p r o f e s s i o n a l i z e the
del i v e r y o f qua1 i t y publ i c services by making them p a r t o f municipal government.
M r . Schmi t z s a i d t h a t , prodded by reformers, many municipal i t i e s decreased t h e i r
dependence on contractors, del i v e r i n g more services by using the publ i c work
force. He said t h a t now, however, the pendulum does seem t o be swinging back,
i n l a r g e p a r t due t o a convincing market strategy by p r i v a t e companies and the
need t o expand sales. He alleged t h a t many i n the publ i c sector have bought
p r i v a t i z a t i o n as a " q u i c k f i x " f o r strained budgets.
M r . Schmitz stated t h a t AFSCME's contention i s t h a t p r i v a t i z a t i o n i s n o t a
panacea, there are s o l i d reasons t o keep p u b l i c services p u b l i c . He said t h a t
i n a d d i t i o n t o being concerned about saving t h e i r members' jobs, AFSCME contends
t h a t there are other p o l i c y questions t h a t deserve s c r u t i n y . He c i t e d four
exampl es :
M r . Schmitz stated t h a t p r i v a t i z a t i o n may a c t u a l l y lead t o higher costs. He said
t h a t c o n t r a c t i n g out can r e s u l t i n higher costs, e s p e c i a l l y when a l l the true
costs o f c o n t r a c t i n g are considered. He maintained t h a t good, e f f i c i e n t p u b l i c
managers should be able t o provide services at the same o r lower costs than
p r i v a t e providers, because there i s not a p r o f i t margin tacked on t o the p r i c e
i n the publ i c sector. He s t a t e d t h a t , at t h e u r g i n g o f h i s organization, New
York C i t y ' s Human Resources Admini s t r a t i o n undertook a review o f i t s contracts
with p r i v a t e vendors. The C i t y found t h a t a number o f custodial and p r i n t i n g
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
8 October 17, 1989
contracts were costing it i n excess of h a l f a m i l l i o n d o l l a r s more than with
using i t s own employees. M r . Schmitz explained that frequently a contract which
was o r i g i n a l l y awarded at an a t t r a c t i v e cost becomes more expensive, a p r a c t i c e
called " buying i n " o r " low b a l l i n g " . He said t h a t , contrary t o the notion of
bidding competition, a f i r m often offers a very low price to perform a p a r t i c u l a r
service, i n order t o get a f o o t i n the door. He added that, as contract
performance continues, however, the j u r i s d i c t i o n may f i n d i t s e l f dependent on
that p a r t i c u l a r contract, t o such an extent that it cannot change contractors
or take back the service. He maintained that i n such situations the j u r i s d i c t i o n
i s , i n effect, held hostage, and often has stripped i t s e l f o f the capital
equipment necessary t o take back the service. M r . Schmitz explained that
a d d i t i o n a l l y , when contracting out i s considered, some publ i c managers forget
the hidden costs, such as contract preparation, contract administration,
monitoring the contractors performance, and the free use o f publ i c f a c i l i t i e s ,
equipment, s t a f f time, and legal fees. He maintained that there i s convincing
evidence t h a t when these hidden costs are accounted for, supposed savings can
vanish. He c i t e d an example i n the State o f Tennessee recently, where the state
l e g i s l a t u r e was the object o f a " hard s e l l " by p r i v a t e contractors seeking to
take over the prison system. Mr. Schmitz stated that when the l e g i s l a t u r e passed
a law t o require the inclusion of costs f o r contract monitoring and
administration, none o f the private companies could compete, and no contracts
were awarded.
Mr. Schmitz stated t h a t the City o f Phoenix has no idea of the true cost o f i t s
p r i v a t e contracts. He said that a member of AFSCME who works f o r the City of
Phoenix recently won an award from the City Council f o r her suggestion t o
accurately account f o r contractor costs. He said she realized t h a t much o f the
City's costs f o r routine maintenance was actually work t o r e p a i r or bring
contractor's work i n t o specifications. He c i t e d an example o f the time when City
maintenance crews had t o go t o Sky Harbor Airport t o f i x v e n t i l a t i o n dampers that
were i n s t a l l e d backwards by a private contractor. Mr. Schmitz contended that
t h i s i s a cost that should c e r t a i n l y be charged t o the contractor, and not to
the City.
M r . Schmitz suggested t h a t it i s very d i f f i c u l t t o make cost comparisons i n the
area o f prison p r i v a t i z a t i o n because of the technology requirements. He said
that publ i c sector corrections systems notoriously are saddled with very old
prisons, old c a p i t a l structures that have the c e l l blocks which require a very
1 abor- intensive e f f o r t t o monitor. He explained that new prison design involves
the use o f a c e n t r a l observatory location, with c e l l blocks emanating out as
spokes from a wheel. He stated that it i s much cheaper t o operate a prison
designed with the l a t e s t technology than t o s t a f f and operate a prison that was
b u i l t at the turn o f the century. Mr. Schmitz f u r t h e r stated t h a t the only v a l i d
study o f cost comparison i n the area o f private prisons was done by the National
I n s t i t u t e o f Corrections, a nonpartisan, independent board appointed by the U. S.
Justice Department. He said t h a t they examined a juvenile f a c i l i t y i n Florida,
and there was no recommendation f o r the use o f the p r i v a t e sector i n providing
that kind o f service.
M r . Schmit
services .
maximize t
wages, cut
, z stated t h a t p r i v a t i z a t i o n i n e v i t a b l y leads t o diminished or poor
He explained t h a t contractors looking f o r ways t o reduce costs and
. heir p r o f i t margins frequently h i r e inexperienced personnel at 1 ow
corners on contract requirements, or provide inadequate supervision.
Joint Legislative Oversight
Committee on P r i v a t i z a t i o n
9 October 17, 1989
He emphasized that governments may discover that it i s extremely d i f f i c u l t to
w r i t e a contract which insures that the government gets what it wants f o r the
agreed upon price; or they learn that the work tasks performed as a matter of
course by public employees turn out not t o be covered under the agreement with
the contractor. M r . Schmitz alleged that publ i c managers d i r e c t i n g a publ i c work
force have a 1 arge degree o f f l e x i b i l i t y t o respond to unforeseen circumstances
and emergencies. He said that, on the other hand, a contractor has the clear
r i g h t t o refuse t o do anything that i s not i n black and white i n the contract.
M r . Schrnitz c i t e d an example i n Maricopa County, when the Board o f Supervisors
entered i n t o a computer contract with Systems and Computer Technology Corporation
( SCT). Mr. Schmitz explained that SCT was i n i t i a l l y hired by the County Board
t o do a study o f the County's computer o f f i c e . The r e s u l t s predictably concluded
t h a t the o f f i c e was i n e f f i c i e n t and losing m i l l ions of d o l l a r s . M r . Schmitz said
that, based on t h a t report, the County awarded SCT the contract t o run the
County's computer system. He maintained that problems soon developed, such as
c r i t i c i s m o f some expenses b i 11 ed t o the County, numerous programming errors
which produced errors i n delinquent tax notices, and also caused the shredding
o f County employees' paychecks on at least three occasions. He said that
independent auditors chastised SCT and County o f f i c i a l s f o r permitting the
company t o w r i t e i t s own contract and f o r not developing long- range plans. M r .
Schmitz said t h a t as problems mounted, the County Board o f Supervisors became
increasingly concerned, and i n February, 1985 voted unanimously t o terminate the
contract, one year ahead o f schedule. County Supervi sor George Campbell
estimated t h a t the county government could save at least a m i l 1 ion do1 1 ars a year
by bringing computer operations back in- house.
M r . Schmitz stated that the p o s s i b i l i t y o f corrupt or questionable a c t i v i t i e s
such as bribery or kickbacks needs t o be considered. He alleged that contracts
have been a tool o f p o l i t i c a l patronage. He c i t e d a recent example, when the
Justice Department began a nationwide investigation o f highway contract bid-r
i g g i n g . M r . Schmitz stated that by l a t e 1982, t h i s had burgeoned i n t o the
1 argest p r i c e - f i x i n g case i n U. S. h i story. He said that investigators estimated
i l l e g a l p r o f i t s i n p r i c e - f i x i n g on the state and local government highway
contracts t o be i n the hundreds of m i l l i o n s of d o l l a r s . Mr. Schmitz added that
another recent example took place i n New York City, involving a 1986 federal
i n v e s t i g a t i o n o f payoffs t o public o f f i c i a l s on behalf o f companies seeking c i t y
contracts t o track down parking t i c k e t v i o l a t o r s . He added t h a t federal probes
are also under way i n Chicago and Washington D. C., and that due t o these probes
it i s no coincidence that Mayor Koch did not survive i n his primary b a t t l e t o
be reel ected.
M r . Schmitz said t h a t contracting out can lead to a l o s s o f public c o n t r o l , i . e .
l e s s a c c o u n t a b i l i t y by the government t o the c i t i z e n s , and t h a t c i t i z e n s can
often do l i t t l e more than complain t o the contractor or enter i n t o costly
contract renegotiations or termination proceedings. He emphasized t h a t state
and local managers should be able t o effect the same kinds o f e f f i c i e n c i e s that
good p r i v a t e managers achieve, and without the added probl ems t h a t contracting
out brings. He stressed t h a t i f there i s d i s s a t i s f a c t i o n ' w i t h the performance
of a given service, public managers should not automatically assume that
p r i v a t i z a t i o n i s the answer to the problem. Public managers should be w i l l i n g
t o explore the a l t e r n a t i v e s t o contracting out, because much can be done i n -
house t o improve cost and q u a l i t y o f services.
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
10 October 17, 1989
M r . Schmi t z concluded by emphasizing that responsible publ i c pol i c y requires
improving the qua1 i t y o f management i n publ i c services and promoting excel 1 ence
w i t h i n the system. He suggested that good management s k i l l s , the source o f
a l l e g e d c o s t savings, can be t r a n s f e r r e d i n t o the p u b l i c sector.
M r . Schmitz thanked the committee, and offered t o answer any questions.
Senator Patterson asked M r . Schmitz whether he f e l t t h a t there i s ever any
circumstance i n which p r i v a t i z a t i o n o f government services may be advi sabl e.
M r . Schmitz answered t h a t construction i s a good area f o r p r i v a t i z a t i o n , since
b u i l d i n g c a p i t a l structures i s not an ongoing need. He said t h a t AFSCME i s not
taking the p o s i t i o n t h a t any expenditure by a governmental e n t i t y must always
be performed by publ i c employees, but t h a t there are too many instances where
d i s s a t i s f a c t i o n w i t h a c e r t a i n service r e s u l t s i n the immediate assumption t o
contract out.
Senator Patterson asked Mr. Schmitz about h i s statements w i t h regard t o hidden
costs. He said t h a t free legal services, free b u i l d i n g s , e t c . which p r i v a t e
sector companies would have the advantage of, would also be f r e e t o the p u b l i c
or governmental agency t h a t i s using those services. He asked M r . Schmi t z
whether t h a t advantage evaporates when put on an equal basis.
M r . Schmi t z answered t h a t t h i s was only one o f many hidden costs, and h i s p o i n t
was t h a t i f a l l o f the costs o f an operation are taken i n t o account, cost f o r
space would be one o f them. He said it i s h i s understanding t h a t governmental
agencies r o u t i n e l y have an item i n t h e i r budget f o r space.
Senator Patterson asked M r . Schmitz whether he thought t h a t i n the normal
contract f o r p r i v a t e services there would be no comparable accounting made.
M r . Schmitz answered t h a t i n those instances, it would depend on what t h e c o s t
comparison i s . He said t h a t i f a governmental agency requires t h a t a c o s t f o r
space be included, whether or not it i s charged as a c o s t o f doing business, the
comparison must be consistent or there i s t h a t hidden cost.
Senator Patterson asked f o r c l a r i f i c a t i o n from M r . Schmitz w i t h regard t o h i s
imp1 i c a t i o n s t h a t the s t a t i s t i c s c i t e d by M r . Poole were based on a series o f
fa1 1 aci es.
Mr. Schmi t z stated t h a t there are many cases where an adequate compari son i s not
made. He explained t h a t i f comparing the costs o f a c e r t a i n governmental
j u r i s d i c t i o n providing a s e r v i c e as opposed t o what i s being b i d by a p r i v a t e
contractor, p a r t o f the cost o f providing t h a t service i s n o t o n l y the cost o f
t h e c o n t r a c t , b u t t h e a d d i t i o n a l tasks t h a t the agency w i l l continue t o have t o
provide t o monitor the contract, i . e. the time and e f f o r t t o prepare the contract
s p e c i f i c a t i o n s , t o enter i n t o negotiations, and t h e monitoring and a d m i n i s t r a t i o n
costs.
Senator Patterson asked M r . Schmitz what the s o l u t i o n i s when a person i s unhappy
with t h e s e r v i c e provided by a government agency, since t h e c o n t r a c t cannot be
canceled as i n the case o f the p r i v a t e sector.
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
11 October 17, 1989
M r . Schmitz answered t h a t there are no easy solutions. He suggested t h a t i f the
supposed cost savings are derived from b e t t e r management ski 11 s, those kinds o f
s k i l l s are applicable i n both the p r i v a t e and p u b l i c sectors. He said t h a t i f
savings through b e t t e r management practices are achieved, those practices should
be t r i e d i n the p u b l i c sector.
Senator Arzberger stated he believes t h a t c e r t a i n things should be handled by
the government r a t h e r than the p r i v a t e sector, and the government should run
prisons. He suggested t h a t if i n f r a s t r u c t u r e i s what the big cost i s , prisons
should possibly be b u i l t by p r i v a t e industry, and leased and run by a government
e n t i t y . Mr. Schmitz stated t h a t he had no objection t o t h a t .
Representative Williams commented t h a t there are no i d e a l s o l u t i o n s on e i t h e r
side. It i s the duty o f the state t o search f o r ways t o perform c e r t a i n
functions more cheaply, and t h a t a mixture o f the two solutions may well be the
answer. He stated t h a t prisons are one o f the s t a t e ' s most disastrous costs,
so t h a t i s an area t h a t needs t o be considered and it i s an area t h a t can be
returned t o government i f p r i v a t i z a t i o n i s not working.
Senator Arzberger asked Mr. Poole whether p r i v a t e industry o f f e r s any
r e h a b i l i t a t i o n programs f o r prisoners.
M r . Poole answered t h a t there are a few cases o f work programs being started,
but using p r i v a t e firms t o operate prisons i s new so there has not been very much
time t o do t h i s . He stated t h a t p r i v a t e contractors have been asked mainly t o
provide custodial care t o prisons at a lower cost, and t o meet the growing
shortage o f spaces f o r inmates. He suggested t h a t Arizona break some new ground
i n making r e h a b i l i t a t i o n programs a major emphasis o f a prison p r i v a t i z a t i o n
program.
Senator Arzberger asked M r . Poole whether there were any cases where a p r i v a t e
i n d u s t r y has b u i l t the i n f r a s t r u c t u r e and leased it t o a government e n t i t y ; and
i f so, how t h a t works.
M r . Poole answered t h a t he i s not aware o f any, although t h a t i s c e r t a i n l y a
possible way t o go. He emphasized t h a t when the same f i r m i s going t o be
responsible f o r the operation o f a f a c i l i t y designs it and b u i l d s it, they have
an even stronger i n c e n t i v e t o make sure that it i s designed using the new
technologies and design techniques t o make it a l l work together f o r low- cost
operation.
M r . Wendel 1 Cox, P r i n c i p a l , Wendel 1 Cox Transportation Consul tancy, stated t h a t
he i s a c o n s u l t a n t headquartered i n the S t . Louis area. He explained t h a t i n
1977, Mayor Bradley o f Los Angeles appointed him t o the Los Angeles County
Transportation Commission. He said t h a t he was appointed twice more t o the
Commission, which oversees the development o f the t r a n s i t and highway program
throughout Los Angeles County. He explained t h a t i n 1985, he went i n t o p r i v a t e
consulting t o work i n the f i e l d o f designing competitive contracting systems and
f o r the l a s t f o u r years has worked with p u b l i c agencies and p r i v a t e companies
i n the United States, Canada, New Zealand and A u s t r a l i a . M r . Cox affirmed M r .
W i 11 i ams' previous statement t h a t it i s sometimes appropriate t o c o m p e t i t i v e l y
' c o n t r a c t and sometimes it i s not. He stated t h a t he believes the record suggests
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
12 October 17, 1989
it works more often than not, but i n no case should it ever be used i f it i s
going t o be more expensive or i f public service i s going t o decline. He
emphasized t h a t the purpose o f p r i v a t i z a t i o n i s publ i c service, not p r i v a t e gain.
M r . Cox explained t h a t there were problems with monopol i s t i c contracting i n
corrupt environments i n the 20' s and before i n the United States, and t h a t the
basic problem was t h a t they were not competitive contracts. He stated t h a t the
movement since then has been from noncompetitive or monopolistic contracting t o
competitive c o n t r a c t i n g .
Mr. Cox stated the basic reason t h a t i n some cases t h e c o s t o f competitive
contracting i s less than the cost o f p u b l i c provision o f the same services i s
t h a t competition provides b e t t e r r e s u l t s than monopoly. He stated' t h a t
management techniques are not the issue; managers i n a noncompetitive environment
are not able t o manage as well as i n a competitive environment, where there i s
i n c e n t i v e t o control costs and where costs tend t o r i s e lower than i n f l a t i o n .
Mr. Cox explained t h a t competitive contracting provides a " middle ground" which
permits t h e i n f u s i o n o f competition i n t o government services and at the same time
meets the needs o f the people.
Mr. Cox stated t h a t competitive contracting i s a fundamental philosophical issue,
which comes down t o a s i n g l e question, " Shall we pay more f o r a publ i c service
than i s necessary?". He said he believes t h a t the answer t o t h a t i s " no". He
f u r t h e r suggested t h a t lower taxes are b e t t e r than higher taxes, since people
have more a b i l i t y t o do what they want with t h e i r money, and the s t a t e i s i n a
b e t t e r p o s i t i o n t o entice businesses t o come from other states. He said t h a t
because competitive contracting i s not a panacea, it i s important t o set up a
system whereby an analysis i s done t h a t t e l l s when t o do it and when not t o .
M r . Cox s t a t e d t h a t , i n the p r i v a t e sector, the term f o r t h i s i s " make or buy
analysis". He emphasized t h a t economics should be the determining f a c t o r as t o
whether t o use the p r i v a t e sector or the p u b l i c sector f o r services. He stated
t h a t , through competitive c o n t r a c t i n g , a competitive environment i s established
wherein publ i c agencies begin t o perform b e t t e r economical l y .
M r . Cox s t a t e d t h a t , i n p u b l i c t r a n s i t , i n every case where a t h i r d party i s
buying service from a p r i v a t e company under competitive contracting t h a t used
t o buy service from a publ i c agency service, qua1 i t y i s at l e a s t as good i f not
b e t t e r , c o n t r o l over the service i s higher, and there i s more f l e x i b i l i t y . He
stated some other areas i n which services are c u r r e n t l y being provided publ i c l y ,
but which could be provided by p r i v a t e contractors at s u b s t a n t i a l savings. These
areas include school bus service, trash c o l l ection, f l e e t maintenance, s t r e e t
l i g h t i n g , as well as a number o f other areas.
M r . Cox stated t h a t from 1970 t o 1986 i n the United States, p u b l i c t r a n s i t costs
per m i l e went up 65 percent a f t e r adjustment f o r i n f l a t i o n . He said t h a t over
the same period o f time i n the p r i v a t e sector, the p r i v a t e bus i n d u s t r y ' s cost
declined 10 percent r e l a t i v e t o the i n f l a t i o n r a t e . M r . Cox said t h a t if publ i c
t r a n s i t had gone competitive, the 65 percent increase would have been a decl ine
r a t h e r than an increase. He stated t h a t the increase was due t o the non-competitive
environment.
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
October 17, 1989
M r . Cox stated t h a t average cost savings from p r i v a t i z a t i o n i n p u b l i c t r a n s i t
are 30 percent, even a f t e r deducting the 2- 5 percent monitoring costs. He said
t h a t Price Waterhouse has j u s t issued a report i n Los Angeles which states that
on t h e i r p r i v a t i z e d bus services they are saving 41 percent and t h a t v i r t u a l l y
a1 1 o f the qua1 i t y i n d i c a t o r s have been improved under p r i v a t e operation.
M r . Cox added t h a t i n San Diego, 20 percent o f the p u b l i c t r a n s i t system i s
contracted o u t . He said t h a t t h e i r costs have gone down 20 percent a f t e r
adjustment f o r i n f l a t i o n , and that n o t a single employee has been l a i d o f f . He
pointed o u t t h a t the biggest cost savings was not from lowering t h e c o s t o f the
p r i v a t i z e d services 50 percent, but was from cost reductions occurring at the
p u b l i c agency t h a t was now involved i n a competitive s i t u a t i o n .
M r . Cox explained t h a t the answer t o the problem o f " l o w - b a l l b i d d i n g " i s solved
by f i x e d - p r i c e contracts. He stated t h a t problems o f f l e x i b i l i t y can be solved
by good c o n t r a c t development.
M r . Cox stated t h a t corruption i s a problem t h a t i s not r e l a t e d t o contracting.
Mr. COX explained two basic p r i n c i p l e s on the subject o f competitive c o n t r a c t i n g .
The f i r s t i s t h a t the p u b l i c agency always r e t a i n s control by d e f i n i n g the
service s e t t i n g t h e s p e c i f i c a t i o n s , and monitoring the c o n t r a c t .
Mr. Cox explained t h a t the second, and j u s t as important, p r i n c i p l e i s t h a t it
a1 l depends on a competitive market - p r i v a t e monopoly i s no b e t t e r than publ i c
monopoly. He said t h a t i n order t o f o s t e r a competitive market, requests f o r
proposals a r e w i d e l y d i s t r i b u t e d t o a l l p o t e n t i a l providers, the size of
contracts i s l i m i t e d , contracts are r o t a t e d so t h a t the contracts are coming up
a t d i f f e r e n t times, the work i s spread out f o r the p u b l i c agency, and the a b i l i t y
o f p r i v a t e companies t o compete on the smaller contracts i s increased. He
affirmed M r . Poole's statement t h a t contracts should never be f o r more than f i v e
years and re- bidding i s a must i n the competitive market. He stressed that
contracts are awarded t o the lowest bidder who i s responsible and responsive.
Mr. Cox emphasized t h a t subsequent p r i c e negotiations are never held w i t h the
c o n t r a c t o r .
Mr. Cox addressed the subject o f hidden costs. He said t h a t worldwide, the
biggest problem many publ i c agencies have faced has not been hidden costs, but
" l o w - b a l l bidding". He stressed the importance o f having the cost proposal
prepared by people other than those evaluating it, such as has been done i n the
C i t y o f Phoenix.
M r . Cox said t h a t with regard t o c a p i t a l f a c i l i t i e s , an option f o r government
i s t o provide them t o e i t h e r the publ i c agency or the p r i v a t e company winning
the b i d . He said t h a t t h i s i s a very simple and successful method being used
i n a number o f a p p l i c a t i o n s t o solve t h a t problem.
Mr. Cox presented The Local Government Act o f 1988 o f the B r i t i s h Parliament
( Attachment 3), which requires a l l m u n i c i p a l i t i e s w i t h i n the United Kingdom t o
c o m p e t i t i v e l y c o n t r a c t s i x s p e c i f i c services.
M r . Cox presented the d r a f t o f Senate B i l l 201 from Colorado ( Attachment 4 ) , a
general s e r v i c e s competitive contracting b i 11, which passed out o f the Government
J o i n t L e g i s l a t i v e Oversight
Committee on P r i v a t i z a t i o n
14 October 17, 1989
Committee but failed on the Floor. He explained the bill which state that every
branch of the state, city, county, or other public agancy has an obligation to
keep private service providers aware of what is going on at the agency through
the use of a mailing 1 ist. This would allow a private company to challenge the
pub1 ic agency with respect to the provision of services, by filing a petition
of interest with the public agency. He added that the public agency can have
a make- or- buy analysis once a year, opening up competitive bidding on services
where private companies have indicated an interest in providing services, seeking
proposals, and comparing the costs of those proposals to the internal cost of
operations.
Mr. Cox urged the committee members to require that any expansion of bus or other
transit service in Phoenix be subject to competitive bidding. He referred to
a book that he wrote with a colleague for the American Legislative Exchange
Counci 1 , which out1 i nes the principles of competitive contracting Movi ns America
Comoet i t i vel 1, ( Attachment 5) .
Mr. Cox concluded by emphasizing that government should not pay more for a public
service than is necessary. He said that through a mechanism which fairly
compares public and private costs routinely, the cost of government will row more
slowly. Mr. Cox thanked the committee for the opportunity to speak, and said
that he would be happy to answer any questions.
Representative Updike asked about the privatization of school transportation in
other areas, stating that her district had looked at doing that and determined
it would be more cost effective, but were reluctant to give up their fleet of
buses since it would cost $ 600,000 to get them back if the service was
unsatisfactory.
Mr. Cox suggested the district retain ownership of the fleet, lease it to the
winning contractor and require them to maintain it. He stated that this has
been done successfully around the country.
Representative Burns thanked Mr. Cox and asked for closing comments from the
committee members. Senator Patterson invited committee members to suggest
specific directions and topics for future speakers.
Senator Arzberger requested that Ron Jensen ( City of Phoenix) be present at the
next meeting, and suggested that some of the cost savings be detailed. He said
that he does not see how money can be saved in the area of school bus
transportation for schools, and that those people will be contacted to address
a future meeting.
Without objection, the meeting adjourned at 11: 30 a. m.
7 . ( l n j e < i?- ia. iiil
Annette Reiley, Secretary , /
( Attachments are on file in the Office of the Chief Cl- erk.)
Joint Legislative Oversight
Committee on Privatization
15 October 17, 1989
MINUTES OF
JOINT LEGISLATIVE COMMITTEE ON PRIVATIZATION
DATE: Wednesday, November 8, 1989
TIME: 9: 00 a. m.
PLACE: House Hearing Room 4
SUBJECT: Presentation by Arizona Chapter of the National Solid Waste
Management Association - Problems of Annexation in Solid Waste
Management Industry
Presentation by Tom Bryant, State Engineer, Arizona Department o f
Transportation ( ADOT) - Contract Maintenance
Co- Chairman R. Burns called the meeting to order at 9: 10 a. m. and roll call was
taken:
MEMBERS PRESENT:
Representative R. Burns, Co- Chairman
Representative Ortega
Representative Updi ke
Representative Williams
Senator Patterson, Co- Chairman
Senator Arzberger
Senator Corbet
Senator Hardt
Senator Wright
MEMBERS ABSENT:
Representative McLendon
SOLID WASTE MANAGEMENT PRESENTATION
JOE ABATE, an attorney representing the Arizona Chapter of the National Sol id
Waste Management Association, explained when annexation occurs, private waste
industries become unintentional casual ties because contracts are canceled and
equipment must be sold at a loss. He concluded they were in the process of
drafting legislation based on North Carol ina and Georgia statutes that provide
for just compensation if cities do take over private concerns.
JAMES S. TURPIN, JR., Manager of State Government Affairs for the National Sol id
Waste Management Association, stated hi s organization represents 2,200 members
nationwide. He explained that as municipal budgets continue to decrease, many
cities have turned to private waste service companies and, according to a
Columbia University study, have decreased their costs by more than 40%. He
stated that in contrast, those cities using their own systems incur expenses 29%
JOINT LEGISLATIVE COMMITTEE
ON PRIVATIZATION
November 8, 1989
Page 2
higher than those using private collection.
Mr. Turpin explained over 80% of this Country's garbage is collected by private
firms using one of the following forms of privatization:
Contracts - Qua1 i fied contractors are selected, usual ly through competitive
bidding, and are paid directly by the local government.
Franchises - Private companies bill and collect from each household.
Private Subscription - Each household hires a collection company and pays
directly.
Mr. Turpin stated pub1 ic offici a1 s prjvatize their residenti a1 coll ection
services because of its efficiency, effectiveness and equity. He explained that
private companies, in general, provide greater efficiency because they use
smaller pick- up crews; they have lower absenteeism; higher productivity; better
morale; and experience less downtime with their equipment.
Mr. Turpin explained another national trend that will pose problems for local
governments is curbside recycl i ng programs 1 i ke those required in Oregon,
Connecticut, New Jersey, Florida, North Carol ina, Virginia and Rhode Is1 and.
He said private refuse haulers have a1 ready demonstrated their effectiveness in
meeting the complex demands of these type of programs.
In regard to problems the waste industry is facing in Arizona, Mr. Turpin
explained that when annexation occurs, private companies find their investment
jeopardized and equipment purchased to honor contracts becomes surplus, with its
market value often less than its indebted worth. He stressed that because of
this, the burden of servicing unincorporated areas falls upon the governments
if these private sectors find it financially unrewarding to provide service.
Mr. Turpin said California, Montana, Oregon, Washington and North Carolina have
" just compensation" statutes and his Association will be presenting proposed
legislation at a later date regarding this area.
Mr. Turpin concluded that as local governments look for additional ways to trim
operating costs, the advantages of private contracts for waste collection and
disposal wi 11 grow.
In response to Senator Wright and Representative Burns, Mr. Turpin stated the
proposed legislation would be based on the North Carolina statutes which were
passed in 1985 and address the problem best.
In response to Senator Arzberger, Mr. Turpin explained there's a distinction that
can be made between an annexation which is unplanned for and a thought- out pol icy
decision by a local government, where the government has the opportunity to do
a cost- benef i t analysis. Senator Arzberger questioned whether the 1 oss of funds
on the sale of equipment by the cities was taken into consideration when
JOINT LEGISLATIVE COMMITTEE
ON PRIVATIZATION
November 8, 1989
Page 3
considering cost savings. M r . Turpin said he would research that information
and l e t him know.
Representative Ortega asked how private industry sal ary and benefit packages
compare t o local government. Mr. Turpin answered that they are competitive,
but do vary among the markets.
I n response t o Representative Ortega, Mr. Turpin stated he would research and
provide him more information regarding recycling.
JOHN GARDNER, President o f Suburban Sanitation Service o f Yuma, Arizona,
explained he i s one o f the companies impacted severely by annexation. He stated
i n the l a s t two years the City o f Yuma has annexed 20% o f his actual work which
represents almost $ 600,000 per year. He added t h i s resulted i n t h e l o s s o f f i v e
empl oyees and $ 500,000 worth o f equi pmenf .
Mr. Gardner explained, i n answer t o Senator Arzberger, that a p r i v a t e company
normal l y keeps a piece o f equipment i n operation f o r seven years, as opposed t o
four t o f i v e years with a municipality.
Mr. Gardner stated his company pays i t s employees an average o f $ 22,000 per year,
with a f u l l benefit package o f vacations, insurance and uniforms, which i s 5%
higher than the City o f Yuma pays.
With regard t o annexation, Mr. Gardner stated because o f encroachment by the
City o f Yuma, he w i l l be forced t o park another $ 700,000 worth o f equipment and
eliminate f i v e jobs. He said that w i l l probably break his company.
M r . Gardner stated a county resident pays h i s company an average o f $ 7.00 per
month, w h i l e t h e City budget f o r 12,000 r e s i d e n t i a l units i s $ 1,800,000.
In response t o Senator Patterson, Mr. Gardner said usually 30 days notice i s
given before annexation and they are not given an opportunity t o bid t o keep
t h e i r business. Mr. Gardner explained t h a t he has been expanding his company
i n t o the State of California, which has a " j u s t compensation" law t o keep his
business a1 i ve.
ROBERT PARKS, Hanager o f PSI Waste Systems o f Page, Arizona, explained that his
family managed a company i n the Phoenix area i n 1966 through 1968 with
r e s i d e n t i a l and commercial routes throughout the Valley. He said they were
annexed by Peoria, Phoenix, Scottsdale and Mesa and were given notice sometimes
the day before and l o s t several thousand customers.
LEE SCHOON, Director o f Environmental A f f a i r s f o r BFI, explained because his
company i s large they are not affected as d r a s t i c a l l y as smaller companies but
they do support the concept o f compensation f o r annexation f o r smaller firms.
I n addition t o agreeing with the other speakers, he said customers on the
o u t s k i r t s o f the communities are also affected.
JOINT LEGISLATIVE COMMITTEE
ON PRIVATIZATION
November 8, 1989
Page 4
I n response t o Senator Wright, Mr. Schoon stated BFI Arizona has not been
affected by annexation t o a point o f bringing 1 i t i g a t i o n and they steer away from
t h a t type o f c o l l e c t i o n because it i s an unstable market. Mr. Abate state there
i s currently a case which has been pending f o r over a year on t h i s subject, and
l e g i s l a t i o n i s needed i n t h i s area regardless o f how the court rules.
I n response t o Senator Patterson, Mr. Gardner explained that Cal i f o r n i a Statutes
provide the p r i v a t e contractor with an opportunity f o r a five- year phase out,
which at least gives them a chance t o bring t h e i r equipment down t o a marketable
level and the p r i v a t e company has t o provide the same comparable service f o r the
same d o l l a r the municipality does. To that point, Mr. Turpin explained that
around the Country it depends on the contract, the p a r t i c u l a r state statutes and
the local government. He noted t h a t North Carolina simply pays o f f the value
o f the contract.
Representative Ortega asked what BFI's position would be regarding a mandatory
or voluntary recycl ing program. Mr. Schoon stated they would be i n favor of one
and explained they did not usually make money on such a program, but rather broke
even.
I n response t o Senator Arzberger, Mr. Schoon explained t h a t t h e i r l a n d f i l l s
charge on a tonnage basis l i k e governmental bodies do and it varies with
d i f f e r e n t l o c a l i t i e s . He also responded he thought presently Arizona does not
p r o h i b i t p r i v a t e l a n d f i l l owners from accepting contracts from other states, but
he said he would research it and report back.
PHILIP MACDONNELL, Attorney representing Waste Management, Inc., stated they
support the testimony heard by the Committee today and the proposed l e g i s l a t i o n
s i m i l a r t o North Carol ina's.
M r . MacDonnel 1 , regarding how t o combat u n f a i r governmental i z a t ion, expl ai ned
there was l e g i s l a t i o n proposed i n Colorado t o establ i sh a Comparati ve Contracting
Commission, whose job i s t o oversee the process o f free enterprise r e l a t i n g to
government. He said t h i s l e g i s l a t i o n would i n i t i a t e a free enterprise
p a r t i c i p a t i o n process t o allow companies who want t o bid on a service t o f i l e
a p e t i t i o n o f i n t e r e s t . A f t e r t h a t the municipality would have 90 days to
analyze the company, and i f they concluded the company was okay, then they would
perform a make or buy analysis where they would decide i f the government could
do it cheaper or the company wanting t o contract. If they decided f o r private
enterprise, then it would go out f o r bid. Representative Burns stated they were
looking i n t o t h a t piece o f l e g i s l a t i o n and i f it f i t s with Arizona statutes it
would hopefully be brought up at a l a t e r point.
I n response t o Representative Updi ke, Mr. MacDonnell stated he thought Arizona
had not gone along with the national trend f o r p r i v a t i z a t i o n because o f rapid
growth over the past twenty years and because o f annexation, the c i t i e s saw an
opportunity t o expand from a business point o f view.
I n response t o Representative Williams whether the a b i l i t y o f a p r i v a t e firm to
JOINT LEGISLATIVE COMMITTEE
ON PRIVATIZATION
November 8, 1989
Page 5
challenge a government agency had been t r i e d i n other states, Mr. MacDonnell
explained other than the proposed Colorado l e g i s l a t i o n , he was not aware o f any
other state t r y i n g it.
Mr. MacDonnell said he wanted t o warn the Committee members o f S u b t i t l e D which
i s new federal requirements which go i n t o e f f e c t i n March of 1990 requiring
1 andfi 11 s t o increase regulation and control and consequently the vast majority
of 1 andfi 11 s i n Arizona open now won't be open i n a few years. He explained the
c r i s i s has already been f e l t i n Eastern states, and there i s a coming l a n d f i l l
c r i s i s f o r t h i s State.
ADOT PRESENTATION
TOM BRYANT, the State Engineer with the Arizona Department o f Transportation
( ADOT), stated i n 1981 the Arizona Legislature passed S. B. 1001 requiring the
Director of ADOT t o appoint a technical advisory committee t o review and
recommend the use o f private contractors t o perform highway maintenance
a c t i v i t i e s . He said eight a c t i v i t i e s were selected f o r a p i l o t program t o t e s t
the f e a s i b i l i t y of contracting with the p r i v a t e sector: patching with pre- mix,
crack seal ing, swath machine mowing, 1 i t t e r pickup, urban curb sweeping,
1 andscape maintenance, guardrai 1 maintenance, and r e s t area maintenance.
M r . Bryant explained that o f the eight a c t i v i t i e s , only guardrail maintenance
and 1 andscape maintenance were unsuccessful . He stated the problem with
landscape maintenance was with the wording o f contracts which has since been
resol ved, however, guardrai 1 maintenance s t i 11 i s having probl ems, one o f which
i s response time.
I n response t o Senator Patterson, Mr. Bryant said he thought contracts could be
made today t h a t could make guardrail successful and what he was reporting was
from a 1982 report when he was not working f o r the State.
Representative Burns asked i f any e f f o r t was being made f o r a current task force
report t o take another look at problems that presently e x i s t . Mr. Bryant said
the charge o f the Committee was t o go ahead and continue t o expand and they now
have twenty- five a c t i v i t i e s w i t h i n contract maintenance.
In response t o Senator Corbet, Mr. Bryant stated prisoners have been used f o r
quite some time f o r l i t t e r pickup, gauge channel cleaning and brush c u t t i n g .
He explained that presently there are no prisoners working because the Department
o f Corrections has run out o f money t o pay t h e i r guards f o r t h i s program. He
s a i d t h e prisoner program i s a break- even s i t u a t i o n f o r ADOT.
Mr. Bryant explained t h a t ADOT's current budget only allows them t o complete 90%
o f work needed t o keep the road system completely up- to- date.
Senator Corbet asked if consideration was given t o p r i v a t i z i n g Sunset Point and
places such as that. Mr. Bryant stated he be1 ieved a l l the r e s t areas were under
private contract at the present time.
JOINT LEGISLATIVE COMMITTEE
ON PRIVATIZATION
November 8, 1989
Page 6
In response to Representative Burns, Mr. Bryant stated federal law prohibits
asset sales of rest areas.
Mr. Bryant presented a slide show which included an indication of ADOT total
expenditures, new types of maintenance contracts, and developments in contract
maintenance for 1989- 90.
Mr. Bryant explained an interstate logo sign program brought about by legislation
where the erection of signs is allowed bearing the logo of businesses offering
food, gas, lodging or camping near an interchange. He stated these businesses
have to meet certain standards concerning their location and services offered.
In response to Representative Ortega, Mr. Bryant stated the decision on who
obtains the logo signs is made by the contractor the State has hired for that
program, which he bases on a set of rules compiled by ADOT. He added that the
legislation is written very well and consequently has not proven to be unfair
to local " mom and pop" businesses. Mr. Bryant stated he would report back to
Representative Ortega on the details of the program.
In response to Senator Wright, Mr. Bryant explained logo sign contracts are
simi 1 ar to engineering contracts, rather than 1 ow bidder contracts.
Mr. Bryant summarized his slide show by stating they are increasing the amount
of work accomplished through maintenance contracts and the number of maintenance
activities they contract for and are proud of the logo sign program as an example
of a successful privatization contract.
Senator Arzberger, in questioning the logo program, asked if ADOT made some of
those signs for the Highway Department. Mr. Bryant stated the Department of
Corrections has in the past made some signs for ADOT, however they have had
difficulty with quality and they are working on improving the quality of their
signs.
Representative Wi 11 i ams questioned, since the number of employees has not
decreased since private contracts were started in ADOT, how that would represent
a cost savings for ADOT. Mr. Bryant explained that in 1981 there was one ADOT
employee per 1,000 of the population; presently there is 1 employee for 1,388
of the population, which represents a savings of 160 employees who were not hired
to meet the increase in population. To that point, Senator Corbet questioned
how savings would be calculated. Mr. Bryant explained that he had prepared a
report on contract maintenance last January and he would 1 ike permission to
prepare another report detailing what it would cost to do these activities with
State employees.
Senator Wright asked if there had been situations where a private contractor was
in actuality responsible for an accident that the State was ultimately held
1 iable for. Mr. Bryant explained that the problem of a contractor not building
a project according to specifications is non- existent because an ADOT engineer
must go out personally and inspect the roadway and confirm that it was built
according to State specifications and he then accepts it from the contractor,
JOINT LEGISLATIVE COMMITTEE
ON PRIVATIZATION
November 8, 1989
Page 7
thus accepting maintenance responsi b i l i t y and 1 i a b i l i t y .
Senator Hardt stated he hoped a careful watch was being kept on the private
contracts f o r maintenance because they are so costly. Mr. Bryant explained
foremen are responsible f o r contract work i n t h e i r area and State employees who
work under the foremen would complain i f the work was not done r i g h t because i f
the contractor doesn't do a good job, then the State employee would be able to
do it and get an increase i n money. He added it r e s u l t s i n a system of checks
and balances that works very we1 1 .
Representative Burns stated i n England they have t r i e d stock ownership programs
where they s e l l assets back t o employees, and questioned what would prevent the
State o f Arizona from s e t t i n g up an employee stock ownership program f o r the
Grand Canyon Airport, f o r example. Mr. Bryant explained t h a t was not his area
but would have someone contact him regarding that subject.
Representative Burns questioned whether vehicle maintenance i s contracted out.
Mr. Bryant explained a f t e r the warranty period, very few i tems are contracted
out. He added they were having problems with the supply o f parts because of
purchasing requirement problems.
In response t o Senator Corbet, Mr. Bryant stated ADOT does lease equipment
occasionally, which they rent through a State approved vendor, and it has
resulted i n substanti a1 savings.
Representative Burns adjourned the meeting at 11: 19 a. m.
Respectfully submitted,
~ omdti t ee secretary u
MEETING OF COMMITTEE ON
Hearing Room No.
Date / l4hi y3.+ c:;
- N- AME REPRESENTING BILL N -
I
b.
-
MINUTES OF
JOINT LEGISLATIVE COMMITTEE ON PRIVATIZATION
DATE : Tuesday, November 28, 1989
TIME; 1: 00 p. m.
PLACE ; House Hearing Room 2
SUBJECT: Presentation by Richard Carr, Westrends
Environmental Group
Presentation by Wayne Calabrese, Wackenhut
Correction Corporation
Co- Chairman R. Burns called the meeting to order at
f: 15 p. m. and roll call was taken:
MEMBERS PRESENT:
Representative R. Burns, Co- Chairman
Representative Williams
Representative Updike
Senator Patterson, Co- Chairman
Senator Wright
Senator Corbet
Senator Hardt
MEMBERS ABSENT:
Representative McLendon
Representative Ortega
Senator Arzberger
Richard Carr, Principal in Westrends Environmental Group,
presented the idea of a private/ public partnership with a
proposed prison to be located in Cochise County near Wilcox.
Westrends would build and lease a facility to Cochise County
who, in turn, would offer use of the facility to the state
at a rate that is less than the state currently pays to
house its prisoners. The concept being that Westrends
Environmental Group, a private company, would build and
Cochise County Sheriff's Department would operate the
facility. He explained that the advantages are that this
would assist the state in a partial resolution of the prison
overcrowding problem and reduce the costs in development and
operation of this facility. Mr. Carr pointed out that this
does not require changes in existing legislation. This
facility would benefit Cochise County in stimulating
economic growth and allow the county to obtain revenues
which would partially offset its cost of operating the
facility. He stated that this preliminary proposal has been
JOINT LEGISLATIVE COMMITTEE
ON PRIVITIZATION
November 28, 1989
Page 2
reviewed and approved in general by the Board of Supervisors
and staff of Cochise County, subject to the interest level
of the state of Arizona. Mr. Carr asked the Committee to
refer to Figure 1, Section I11 of the Preliminary
~ easibility Report supplied by Westrends ( see Attachment A),
for a transaction summary as he explained the figures.
Accordingly, it would cost the state approximately $ 10 less
per day than it currently costs to maintain the level of
facility that the state is currently planning for their 400
bed facility.
In response to a question from Mr. Burns, Mr. Carr stated
that ownership of the building at the end of a 30- year lease
is subject to agreement at the time the contract is
negotiated.
Senator Patterson observed that there is really nothing
integral about the counties role to the Westrends proposal.
He suggested that the legislature could elect to lease
directly from Westrends and arrange for operation in
whatever manner they wished. Mr. Carr replied that is
technically correct, but noted the advantage of decentral-izing
the running of prisons and that it also appears less
expensive for the counties to run the prisons as compared to
the state.
Mr. Wayne Calabrese, Vice President of Business Development
for Wackenhut Corporation, discussed the Wackenhut story,
privatization in general and legislative issues ( see
Attachment B). Their corporation provides professional
facility management at nine facilities in seven states. He
stated that the cost for a 500 bed prison, on average in the
U. S., to construct and operate over a 30 year period,
exceeds $ 350 million, not including interest on bonds. He
stated that the record on privitization is replete with
examples of cost savings. Money is saved through financing,
speed in construction, design in facility, reducing the
number of staff to manage and operate and efficient
personnel practices. The legislature must set the
population, level of security, minimum, medium or maximum
facility and what standards they expect to be met. Also
needed is specific language which allows tax exempt
financing. The legislature should require specific cost
savings and put administrative type of service in charge
rather than Department of Corrections. They need to
incorporate specific insurance requirements and a
performance bond, and there should be a rating system for
the contract award.
JOINT LEGISLATIVE COMMITTEE
ON PRIVITIZATION
November 28, 1989
Page 3
In response to a question from Mr. Burns, Mr. Calabrese
stated that Wackenhut does not have a testing model in any
of their facilities for longer than a year as it regards to
education/ rehabilitational programs. As to how much freedom
Wackenhut has in design, Mr. Calabrese responded that the
private sector performs best when it can be creative and
bring new solutions to old problems.
In response to questions from Senator Wright, Mr. Calabrese
stated that Wackenhut has no experience managing a
correctional industry at this point. Also there have been
no escapes in the 4- 5 years they have been in business.
in response to a question from Senator Corbet, the normal
required cost savings for the state by Wackenhut is 10%.
Dave Horowitz, Legislative Director for AFSCME, disagrees
with the premise of the state abrogating its authority to
incarcerate prisoners, in an institution other than state
run, and to use deadly force. He quoted several reports
that supported his objections to successful privatized
operations as well as cost savings for the states involved.
In response to a question from Rep. Burns, Mr. Horowitz
stated that they would like to be involved in formulating
the concept of the state competing with the private sector
in a contract to provide operational services.
In answer to a question from Mrs. Updike, Mr. Calabrese
stated that private facilities, at this point, probably
house less than 1% of all adult offenders. He also noted
that the majority of open juvenile facilities are run by the
private sector.
Representative Burns adjourned the meeting at 3: 45 p. m.
Respectfully submitted,
i
Lee Brown
Committee Secretary
MINUTES OF
JOINT LEGISLATIVE COMMITTEE ON PRIVATIZATION
DATE : Tuesday, December 19, 1989
TIME: 9: 00 a. m.
PLACE : House Hearing Room 3
SUBJECT: Presentation by Peter Clark, Assistant Deputy Minister,
Privatization, Communication and Support Services, Ministry of
Government Management Services, B r i t i sh Col umbi a
Presentation by Michael Kennedy, Vice President, Operations, National
School Bus Service Inc.
Presentation by Gary W i tl edge, Senior Operations Manager, Mayfl ower
Contract Services
Co- Chairman R. Burns called the meeting t o order at 9: 10 a. m.
MEMBERS PRESENT:
Representative Margaret Updi ke
Representative Robert Burns, Co- Chairman
Senator Gus Arzberger
Senator A. V. " B i l l " Hardt
Senator Pat Wright
Senator Tom Patterson, Co- Chairman
MEMBERS ABSENT:
Representative Ruben Ortega
Representative Robert McLendon
Representative Robert W i l l iams
Senator Leo Corbet
Peter Clark, Assistant Deputy Minister, Government o f B r i t i s h Columbia,
introduced John Frazer a colleague o f h i s from Vancouver, Canada who traveled
with him. Mr. Frazer i s i n the private sector and a partner with the f i r m of
Peat, Marwick, Stevenson & Kellogg. He had worked extensively with M r . Clark
i n the development o f the work and the material on highways
p r i vatizationlhighways maintenance.
Mr. Clark presented a b r i e f overview o f the magnitude o f the program. In 1987
the Premier o f the Province announced a p r i v a t i z a t i o n , a massive program that
affected approximately 5,000 public service employees. Since that time
approximately 5,500 pub1 i c sector employees have been moved t o the p r i v a t e sector
with asset sales t o t a l i n g over 800 m i l l i o n d o l l a r s . The program i n B r i t i s h
Col umbi a focused t o a 1 arge degree on employees. Government wanted t o encourage
employee p a r t i c i p a t i o n and ownership i n whatever new firms were established i n
the p r i v a t i z a t i o n process.
JOINT LEGISLATIVE COMMITTEE ON PRIVATIZATION
December 19, 1989
Page 2
Programs were established t h a t gave advantages t o employees; namely, they were
t r a i n e d , given one weeks free consulting with a large accounting f i r m f o r
business advice and a preference was given t o employees regarding negotiations
t o buy the business. Negotiations were made with the p r i v a t e sector only a f t e r
employee groups were not able t o be obtained, and a proposal c a l l was used rather
than a tender c a l l . This afforded f l e x i b i l i t y i n dealing with companies and the
terms and conditions t h a t were established t o sign a contract. One o f the terms
and conditions being t h a t a l l o f the employees who were presently with the
government were t o be offered jobs with the new employer. Over 90 percent o f
the employees t h a t were i n the highways maintenance program p r i o r t o
p r i v a t i z a t i o n went with the new employer. A contract would not have been
negotiated with a company t h a t would not have taken the government employees.
Senator Wright asked Mr. Clark i f there had been any buyouts o f employee formed
companies? M r . Clark responded " no". The contract contained a provision that
ownership cannot be changed d u r i n g t h e term o f the c o n t r a c t w i t h o u t government
approval.
Questions followed regarding the c o s t f a c t o r i n p r i v a t i z a t i o n . M r . Clark
responded t h a t contracts were not signed unless cost was reduced. I n the
highways area d i r e c t cost savings were 25 m i l l ion d o l l a r s .
The question was posed regarding the length of a t y p i c a l contract. Most
contracts were f o r at l e a s t three years and some f i v e years. I n the highway
maintenance area a l l contracts were issued for three year periods. No contracts
were w r i t t e n f o r more than f i v e years.
Senator Hardt questioned Mr. Clark regarding the d i s p o s i t i o n o f equipment when
they were p r i v a t i z e d . L i g h t equipment; trucks, vans, etc. were put up f o r sale.
Heavy equipment and specialized road equipment was leased. That enabled the
employee groups and the p r i v a t e sector the b e n e f i t o f not having t o come up with
large amounts o f c a p i t a l t o buy heavy equipment. It also allowed government, .
i f the company d i d go bankrupt, the benefit o f having the special ized equipment
available t o keep the roads c l e a r .
Senator Hardt wanted t o know what happens when an employee- owned company f a i l s .
M r . Clark responded t h a t they would then go t o a p u b l i c proposal c a l l f o r
bidding.
Senator Patterson questioned whether or n o t c o n t r a c t i n g with the employee groups
versus the p r i v a t e sector, had developed a pattern with regard t o one group being
i n any way superior t o t h e o t h e r . Mr. Clark responded t h a t there had not been
any s i g n i f i c a n t d i f f e r e n c e i n terms o f the actual operation, r e c a l l i n g that
b a s i c a l l y a1 1 the employees t h a t were with the government went t o the new
contractor. Therefore, you do have the same people maintaining t h e highways
except one works f o r an employee- owned f i r m and one works f o r a p r i v a t e sector.
JOINT LEGISLATIVE COMMITTEE ON PRIVATIZATION
December 19, 1989
Page 3
Senator Patterson asked Mr. Clark what kind of controls are i n the contracts for
q u a l i t y . Mr. Clark responded that the proposal c a l l was an eight volume
document. One o f those volumes contains the standards f o r a l l the work t o be
done. These specifications were worked out with the technical people from the
M i n i s t r y of Highways, with them establishing the standards t o be used. Highway
inspectors are also used f o r q u a l i t y control, t o insure that the work i s being
done t o contract specifications. A three m i l l ion do1 l a r performance bond i s put
up by each company and a ten m i l l i o n d o l l a r l i a b i l i t y bond. The key issue i s
contract management, therefore inspection i s o f utmost importance.
Senator Patterson asked f o r information regarding how the termination clause of
the contracts works. John Fraser, o f Peat, Marwick, Stevenson & Kel logg
responded t o t h i s point. Small penalties and remedy periods were used to correct
the problems o f performance.
Senator Arzberger voiced his concern regarding employee benefits, namely medical
and retirement plans. Can employees negotiate t h e i r own plans with the employer
based on what they want? Mr. Clark stated that it was his understanding that
they had a l l moved t o a self- administered pension fund where i f the employer
goes broke that does not mean that the pension plan goes down as well. The
employees that had been government employees f o r ten or f i f t e e n years were t o l d
that they could leave t h e i r money i n the government pension plan i f they wished.
It would be frozen and they could draw it l a t e r , or they were offered the f u l l
value o f both the employer and employee contributions t o achieve the same type
of pension through the private sector. They could, therefore, put that i n the
locked- in pension plan i n the private sector and it would be a protected pension
plan. It was s t r i c t l y an employee choice as t o what decision they made.
John Fraser, o f Peat, Marwick, Stevenson & Kellogg spoke b r i e f l y concerning
points t h a t had made the p r i v a t i z a t i o n o f highway maintenance a success.
1) Went t o employee groups f i r s t , they were given prefere& al treatment.
Private sector was ready t o come i n through the proposal bidding
process, and t h i s enabled them t o achieve the savings that they did
achieve.
2) There was a p o l i t i c a l concern f o r government t o do something.
3) Low c a p i t a l was c r i t i c a l . Genuine e f f o r t by the Premier t o give the
employees f i r s t choice at forming employee- owned businesses.
Contracts were purposely structured so that they d i d n ' t require
excessive amounts o f working capital t o begin. This was also
achieved by leasing and renting of equipment. The government went
out o f i t s way t o give the employees f i r s t chance i n p r i v a t i z i n g .
JOINT LEGISLATIVE COMMITTEE ON PRIVATIZATION
December 19, 1989
Page 4
Peter Clark had one final comment that he felt was a critical factor in the
success of privatizing. The private sector needed to be involved in terms o f
business valuators, people who are used to neogotiating contracts and sell ing
things. It was not something publ ic servants were used to doing.
Michael J. Kennedy, Vice President Operations, National School Bus Service, Inc.
spoke on the advantages of contracting with the private sector for student
transportation. A handout outlining his Company's services was given to each
Committee member ( attached to original minutes). Mr. Kennedy also gave a slide
presentation along with his comments regarding student transportation.
The measure of success as to whether the taxpayer dollars are buying the highest
possible 1 eve1 of service is in management control, that is producing the maximum
benefit. The transportation system must be efficient and cost effective. Mr.
Kennedy felt that the private sector school bus contractors were best qualified
to deliver safe, dependable service while controlling cost.
Two fundamental differences between the private sector contractors and their
publ i c sector counterparts were:
1) Structure of incentives.
2) Specialized expertise.
National's approach to school busing:
1) System support matching your needs.
2) Coordination by top- notch management.
3) Skilled driving teams.
4) Highest quality fleet.
5) Superior maintenance.
6) Efficient facilities.
Questions were asked specifically regarding contracting with rural school
districts. Mr. Kennedy responded that they do contract with rural and suburban
school districts. The average bus run across the country is between 50 - 60
miles. Some of National's buses travel over 100 miles during the course of one
day.
In regard to questions regarding 1 iabil i ty insurance, Mr. Kennedy maintained that
his company, in most of the city school districts they serve, posts a 100 percent
performance bond. Meaning that the bond is equal in face value to the total
amount of the contract for one year. Also in the area of insurance, National
carries 21 mill ion dollars insurance per vehicle. This protects the company as
JOINT LEGISLATIVE COMMITTEE ON PRIVATIZATION
December 19, 1989
Page 5
well as the school d i s t r i c t . The school d i s t r i c t i s always a named co- insured
on the pol icy, which i s a very a t t r a c t i v e feature f o r the schools served.
Senator Patterson asked whether Mr. Kennedy had any experience with servicing
more than one c l i e n t at a time with the same bus? Mr. Kennedy responded that
over the years as busing has become more o f a way of l i f e the schools themselves
have become more e f - zient i n w r i t i n g routes and they better u t i l i z e the
equipment. Generally the equipment i s t i e d up f o r that window i n which the
school transportation has t o take place by one d i s t r i c t , and there i s very 1 i t t l e
opportunity t o reuse the same f l e e t . The one area i n which there i s increased
u t i l i z a t i o n out o f the buses i s i n e x t r a c u r r i c u l a r a c t i v i t i e s , but other than
that the buses are generally dedicated to the d i s t r i c t it services.
Representative Updike asked what the school d i s t r i c t would do with t h e i r f l e e t
o f buses should they decide t o p r i v a t i z e t h e i r transportation services. M r .
Kennedy stated that it depends on how the d i s t r i c t specifies that the incoming
contractor would deal with it. They could be bought from the d i s t r i c t . The
company would then provide the d i s t r i c t with a f u l l - s e r v i c e contract where they
would be providing the buses, drivers, mechanics and f a c i l i t i e s . Representative
Updike asked what would happen i f suddenly the school d i s t r i c t could no longer
afford the service and then the d i s t r i c t would no longer have a f l e e t o f buses
t o meet t h e i r transportation needs. Mr. Kennedy stated that i f the contract
prices were t o creep up, that would only a t t r a c t new competition during the
bidding process. The d i s t r i c t could also specify i n t h e i r contract that there
be some cancel 1 at ion procedure whereby the d i s t r i c t could re- purchase the
vehicles with a depreciated value i f the contract d i d n ' t work out. There are
a l l kinds o f options t h a t could be included i n the contract.
Gary W i tl edge, Senior Operations Manager, Mayflower Contract Services currently
a school bus transportation contractor w i t h i n the state o f Arizona, presented
a progress report o f the services they are providing i n the state at the present
time.
Mr. Witledge outlined some things that consistently occur i n the conversion
process from public sector t o p r i v a t e sector.
1) Cost.
2) Fleet age, s p e c i f i c a l l y removing the pre- 1977 model vehicles .
3) Disposition o f employees.
These are addressed d i f f e r e n t l y depending on the needs o f the specific d i s t r i c t .
Mr. Witledge itemized the school d i s t r i c t s that Mayflower i s currently servicing
i n the state o f Arizona as follows:
Phoenix Union - 3 year contract - 1986- 89
Rebid t h i s year and now has a 5 year contract
JOINT LEGISLATIVE COMMITTEE ON PRIVATIZATION
December 19, 1989
Page 6
Showlow School D i s t r i c t - 1987
Wilson School D i s t r i c t - 1988
Horse Mesa Accommodation School - 1988
Miami Public Schools - 1988
Payson Public Schools - 1988
Snowflake School D i s t r i c t - 1989
Cottonwood - Oak Creek School D i s t r i c t - 1989
MayYlower currently has w i t h i n the State i n excess o f 130 school buses, of which
no model i s older than 1978. The following has occurred i n most instances with
the inception o f the contracts:
1) Upgraded the age o f the f l e e t s i g n i f i c a n t l y .
2) Mandatory drug screening f o r a1 1 employees.
3) For r u r a l f a c i l i t i e s , Mayflower leases the e x i s t i n g physical
f a c i l i t i e s ; parking area, garage, shop, etc. ( This has not been done
i n Maricopa County.)
4) Offered employment t o every previous employee.
5) Mayflower does the contracted mechanical maintenance work.
6) Costs have been at or below what the d i s t r i c t s had projected t h e i r
costs would be.
7) Offered a buy- back option at a f a i r market value.
8) Extensive d r i v e r t r a i n i n g offered.
9) Offered 10 m i l l ion d o l l a r s 1 i a b i l i t y , with the board and i t s o f f i c e r s
and the school d i s t r i c t named as additional insured.
Senator Hardt questioned how the State enters i n t o the p r i v a t i z a t i o n o f school
transportation? Representative Updike responded t o Senator Hardt's question.
Since the State pays f o r t h e t r a n s p o r t a t i o n costs of school children, responsible
school board members should be concerned i n the most e f f i c i e n t ways t o use our
t a x d o l l a r s . Senator Hardt stated that he f e l t a l e t t e r could be sent to each
school board t e l l i n g them that we have been l i s t e n i n g t o presentations on
p r i v a t i z a t i o n o f school transportation and that it i s i n our opinion a more cost
e f f e c t i v e method, but t h a t the Legislature r e a l l y does not have any control over
what procedure the school d i s t r i c t follows.
JOINT LEGISLATIVE COMMIlTEE ON PRIVATIZATION
December 19, 1989
Page 7
Senator Arzberger asked Mr. W i tl edge i f his company has experienced anything i n
the Arizona Revised Statutes that has given d i f f i c u l t y i n negotiating contracts
with the local school d i s t r i c t s ? Mr. Witledge's response was " no".
Co- Chairman Burns announced that t h i s Comi t t e e has one more meeting scheduled
f o r the purpose o f reviewing what has been done t o date, and t o make any
recommendations they f e l t needed t o be made t o the Legislature. Representative
Burns has spoken with Speaker Hull, and she i s w i l l i n g t o continue the Committee
i n order t o look i n t o other areas o f p r i v a t i z a t i o n . He also stated that Senator
Patterson w i l l undoubtedly be t a l k i n g t o the President t o see how he feels about
continuing t h i s Committee. There w i l l apparently be no meetings held by t h i s
Committee during the regular 1 egi s l ative session.
The meeting was adjourned at 11: 05 a. m.
~ g ~ Gno1 1ni h are
Hearing ? ocm ' 40. - 3- .
Date! q/~,~, 7 / ,
- NAME REPRESENTING BILL N r
MINUTES OF
JOINT LEGISLATIVE COMMITTEE ON PRIVATIZATION
DATE : Wednesday, January 3, 1990
TIME: 9: 00 a. m.
PLACE : House Hearing Room 2
SUBJECT: Final Review and Committee Recommendations
Co- Chairman R. Burns c a l l e d the meeting t o order a t 9: 10 a. m. and r o l l c a l l was
taken.
MEMBERS PRESENT:
Representative R. Burns, Co- Chairman
Representative Williams
Representative Updike
Representative Ortega
Senator Patterson, Co- Chairman
Senator Wright
Senator Corbet
Senator Hardt
Senator Arzberger
MEMBERS ABSENT:
Representative McLendon
Co- Chairman Burns reviewed and summarized the previous meetings o f the committee
and stated t h a t he would hope t h a t t h i s would not be the f i n a l meeting o f the
committee, since he f e e l s there i s some r e a l b e n e f i t s t o the s t a t e through
p r i v a t i z a t i o n and there are other areas t o be studied.
REVIEW OF PREVIOUS MEETINGS
The f i r s t meeting had the f o l l o w i n g speakers:
1. Robert Poole, Jr., president o f the Reason Foundation, explained
three types o f p r i v a t i z a t i o n :
a. The sale o f government enterprises or assets
b. The BOT ( b u i l d , operate and t r a n s f e r ) concept
c. Contracting out
Mr. Pool ' s presentation dealt p r i m a r i l y w i t h the contracting concept.
2. Tim Schmitz, AFSCME, presented the downside o f p r i v a t i z a t i o n and gave
Wednesday, January 3, 1990
Page 2
JOINT LEGISLATIVE COMMITTEE
ON PRIVATIZATION
some examples o f areas where it doesn't work.
3. Wendall Cox, private consultant, gave a philosophical view of the
benef i t s o f p r i v a t i z a t i o n and presented a proposal which he c a l l ed a " p e t i t i o n
o f i n t e r e s t . " M r . Cox emphasized the importance o f competitive contracting with
government and p r i v a t e enterprise competing, f o r the benefit o f the citizens of
the state.
A t the second meeting representatives of the s o l i d waste industry outlined
problems they have had with c i t i e s annexing areas t h a t p r i v a t e companies were
servicing and the adverse e f f e c t t h i s has on private companies.
Representatives from ADOT gave an overview o f the d i f f e r e n t areas where they
are using p r i v a t e contracting at the present time.
A t the t h i r d meeting representatives from companies involved i n p r i v a t i z a t i o n
i n prisons spoke and one proposal presented was the county/ private partnership -
where the p r i v a t e industry would b u i l d the f a c i l i t y and then have the county
operate it i n contract with the state.
Representatives from B r i t i s h Columbia Canada, explained t h e i r experience i n
contracting and turning over certain functions o f government t o the employees
and also t o p r i v a t e companies, at the fourth meeting.
Representatives o f p r i v a t e school busing companies explained the benefits that
could be realized i n contracting with private companies t o run school bus routes.
Senator Hardt commended Co- Chairman Burns on the report and Senator Patterson
stated that the key point of a l l they had heard was that philosophically it i s
unconscionable f o r government t o pay more f o r services than i s necessary to
provide the same level o f services. He stated t h a t he i s very interested i n t h i s
committee recommending further investigation o f the " p e t i t i o n o f i n t e r e s t "
concept. He said he feels it i s important that there not be monopolies where "
they are not needed and that anyone who could provide the same services at less
money should be a1 1 owed t o do so.
Senator Patterson then moved:
" That the Committee recommend t o leadership that the " p e t i t i o n o f i n t e r e s t "
concept i s one t h a t should be pursued by the Legislature."
Representative Williams seconded the motion.
Senator Wright asked i f the " p e t i t i o n o f i n t e r e s t " concept could be explained
i n w r i t t e n form, f o r those who had missed that meeting. Co- Chairman Burns said
nothing was available today but promised t o have it f o r future meetings. He
explained b r i e f l y that the " p e t i t i o n o f i n t e r e s t " i s a p e t i t i o n by private
i n d i v i d u a l s or companies t o the government s t a t i n g t h a t they can perform a
service o f equal qua1 i t y at a lower cost. The governing body i s then placed i n
JOINT LEGISLATIVE COMMITTEE
ON PRIVATIZATION
Wednesday, January 3, 1990
Page 3
the p o s i t i o n o f responding t o t h a t p e t i t i o n , e i t h e r negatively or a f f i r m a t i v e l y
and i f a f f i r m a t i v e l y it i s then put out for bids. There would be an appeals
process i f the p e t i t i o n e r f e e l s the negative r u l i n g was u n j u s t i f i a b l e .
Senator Wright commented t h a t she f e e l s there should be some expansion i n the
discussion regarding how p r i v a t e industry i s t o become aware o f what the
government does and how p r i v a t e industry would be s o l i c i t e d t o p e t i t i o n , when
they do not know what services are being performed.
At t h i s p o i n t Co- Chairman Burns had d i s t r i b u t e d a " Flow Chart" o f the B r i t i s h
Col umbia P r i v a t i z a t i o n Action Plan. ( F i l e d w i t h o r i g i n a l minutes)
Senator Arzberger agreed t h a t c e r t a i n areas o f government could be p r i v a t i z e d
very well, i . e . waste management, school bus t r a n s p o r t a t i o n systems, e t c . , b u t
he f e e l s there are c e r t a i n areas t h a t the state i s responsible f o r and should
continue t o be responsible f o r , and t h a t prisons i s one o f these areas. He
stated t h a t he had no problem w i t h p r i v a t e industry b u i l d i n g the prisons and then
leasing them t o some government e n t i t y t o operate. He f u r t h e r stated t h a t he
f e e l s the schools, financed by the taxpayers, should be run by the government.
He emphasized t h a t he i s not i n favor of a blanket proposal.
Co- Chairman Burns responded by saying t h a t the main p o i n t i s " competitive
contracting." He explained t h a t it was not proposed t h a t p r i v a t e industry come
i n and take over everything.
Senator Arzberger commented t h a t there i s probably more p r i v a t e contracting than
even these committee members are aware o f and t h a t there i s competitive
contracting i n state government, but he r e i t e r a t e d h i s p o s i t i o n t h a t there are
c e r t a i n areas t h a t should only be run by government.
Senator Hardt asked what the " p e t i t i o n o f i n t e r e s t " would accomplish and Co-
Chairman Patterson explained the Committee would be recommending t h a t p r i v a t e
industry be given a chance t o show they could do the job cheaper and w i t h t h a t
assumption i n place they should be given a chance t o prove t h a t and i f they
cannot, then there i s no other reason t o contract w i t h them. He agreed with
Senator Arzberger t h a t there are some areas o f government t h a t are not s u i t a b l e
f o r p r i v a t i z a t i o n , but t h a t he doesn't f e e l prisons i s one o f those areas. He
summarized t h a t i f p r i v a t e industry can provide a service for less there should
be no a r t i f i c i a l b a r r i e r s ( government r u l e s and regulations) t o prevent them from
bidding f o r t h a t service.
Senator Hardt remarked t h a t most instances would require l e g i s l a t i o n , so Senator
Patterson's motion r e f l e c t s the t h i n k i n g o f the Committee and t h a t he had no
problem with t h a t . He stated he i s q u i t e interested i n the proposal o f Cochise
County ( he said he d i d n ' t know whether t h i s was p r i v a t i z a t i o n or not) where they
claimed they could perform the services 10% cheaper than the cost at the present
time.
Co- Chairman Patterson pointed out t h a t special l e g i s l a t i o n would not be needed
f o r each instance. He explained t h a t comprehensive enabl i n g l e g i s l a t i o n could
Wednesday, January 3, 1990
Page 4
JOINT LEGISLATIVE COMMITTEE
ON PRIVATIZATION
be enacted t o allow t h i s type o f contracting t o take place i f a l l the conditions
are met. He said there was a b i l l i n Colorado which was used as a model f o r the
l e g i s l a t i o n presented t o t h i s Committee that said that each s i t u a t i o n did not
have t o pass the l e g i s l a t u r e separately.
Representative W i l l iams remarked that one o f the p r i n c i p a l comments o f the cost
e f f i c i e n c y study made several years ago was lack o f p r o d u c t i v i t y i n government.
He pointed out that there i s a tendency t o " go t o sleep" when there i s no
challenge and t h i s concept would allow private enterprise t o challenge the
government and t h i s w i l l keep government people " on t h e i r toes." He continued
that there i s an enormous psychological benefit here that hasn't been mentioned
before. He stated t h a t he believed t h i s was a healthy working of the market
p l ace.
Senator Wright commented that she would l i k e t o see recommendations come out of
t h i s Committee t h a t areas where government has successfully privatized certain
functions be " looked at" very closely - areas where there has been no
displacement o f employees, areas where it would not be necessary t o defend the
action t o AFSCME, assuring them that employees would not be put out o f jobs.
She stated t h a t it would be her hope that the enabling l e g i s l a t i o n would be
something dealing with the B r i t i s h Columbia model. She said she i s currently
having a study done o f the state motor pool and the p r i n t shops. She stated
there are f i v e p r i n t shops i n the capitol mall, and she i s amazed t h a t she hasn't
had more c a l l s from p r i n t e r s objecting t o the government owning rooms f u l l of
expensive equipment f o r work that could be done by the p r i v a t e p r i n t e r s . She
repeated t h a t she f e e l s t h a t private industry doesn't always know what the
government i s doing.
Senator Wright continued by commenting regarding the motor pool, that Lou Grubb,
or many others, would be glad t o take over the f l e e t , and manage it, and do it
a l o t cheaper than i s being done by government r i g h t now.
Co- Chairman Burns said he agrees with Senator Wright but he feels that a l o t of
the folks i n the p r i v a t e sector do know about government a c t i v i t i e s , and i f they
had an opportunity t o come forward they would do so. He stated he had heard of
p r i n t e r s i n the past who had come forward only t o be turned away and therefore
did not keep t r y i n g .
I n response t o concerns about employees being displaced, Co- Chairman Burns
referred t o the B r i t i s h Columbia Plan Flow Chart and said the people there made
every e f f o r t t o make sure t h i s didn't happen t o t h e i r employees; that employees
were given a 5% preference on contracts and were given an opportunity to
p a r t i c i p a t e i n the system. He stated he f e l t Arizona could learn some good
things from what has been done i n B r i t i s h Columbia.
A f t e r f u r t h e r discussion Senator Wright called f o r the question on Senator
Patterson's motion and the motion carried by a vote o f 8- 0- 2:
Voting Aye: Representatives Burns, W i l l i ams, Updi ke and Ortega
Senators Patterson, Wright, Corbet and Arzberger
JOINT LEGISLATIVE COMMITTEE
ON PRIVATIZATION
Wednesday, January 3, 1990
Page 5
Absent: Representative McLendon and Senator Hardt
Senator Arzberger, i n explaining h i s vote, r e i t e r a t e d h i s concern t h a t the
enabl ing 1 egi s l at ion being discussed was too broad. Co- Chai rman Burns expl ai ned
t h a t any proposed l e g i s l a t i o n would be brought t o t h i s commi t t e e f o r review and
t h a t it would go through the committee process and be reworked then.
A t the request o f Representative Williams, Senator Arzberger explained h i s
concern again, saying t h a t he i s opposed t o a " one package" s i t u a t i o n , t h a t it
was too broad. He said he f e e l s it should be s p l i t up i n t o d i f f e r e n t i n d u s t r i e s .
He stated again t h a t he be1 ieves there are c e r t a i n functions t h a t government must
perform t o take care o f i t s c i t i z e n s and t h a t he f e e l s it i s up t o the
Legislature t o make sure they do t h i s i n an e f f i c i e n t and economical manner.
SOLID WASTE INDUSTRY PROBLEMS
Co- Chairman Burns brought up the proposal by the s o l i d waste industry as the
next item on the agenda, and Senator Patterson explained t h a t the problem i s ,
when c i t i e s perform annexation procedures they o f t e n b r i n g i n t h e i r municipal
sol i d waste haulers, etc., and the people who have had p r i v a t e contracts i n those
areas are dismissed with sometimes very minimal notice and are l e f t with a
problem o f what t o do with t h e i r equipment and with everything they have
invested. He stated he feels t h i s i s j u s t an extension o f condemnation
proceedings genera1 l y . He emphasized t h a t when annexation takes place and people
are being deprived o f t h e i r property and t h e e q u i t y they have i n equipment, they
should be properly and f a i r l y compensated f o r it.
Senator Patterson made t h e f o l l o w i n g motion:
" That t h i s Committee recommend t o t h e L e g i s l a t u r e t h a t s o l i d waste
contractors be compensated o r t h a t t h e i r contracts be continued, when annexation
occurs. I'
Representative Updike stated t h a t she f e l t it was too general t o put i n t o a
recommendation. She suggested t h a t the wording be t h a t when annexation occurs
a c i t y could not d i s r u p t an e x i s t i n g c o n t r a c t w i t h o u t making compensation.
Representative Williams agreed with Representative Updike and said t h i s could
apply, not only t o trash pick- up, but t o many other areas t h a t would be affected
by annexation. He stated he agrees with the p r i n c i p l e .
Senator Patterson explained t h i s would apply t o any service being affected when
t h a t service was taken over by a m u n i c i p a l i t y . A f t e r discussion Senator
Patterson restated h i s motion as follows:
" That t h i s Committee re