After the city decided to contract out all garbage service west of Yonge Street on Monday, I wrote a post outlining how some customer-service trouble the city recently uncovered with another of its private contractors points to an area of possible worry. Blogger Matt Elliott of Ford for Toronto has an excellent post summarizing what it means (risk) and what it doesn’t mean (more money in the budget for other things, better service).I want to explore the idea of risk a bit, partly because some advocates of contracting out services scoff at the possibility it exists. As the reliably cartoonish Sue-Ann Levy of the Sun put it, “We kept hearing that the bid was too low — as if the idea of a contractor being efficient was beyond their grasp.” But then some of her other arguments involved calling Councillor Krystin Wong-Tam “Wrong-Turn” and suggesting that Councillor Ana Bailao’s failure to conduct proper due diligence on the entire contract in three working days was some kind of sign she cares only about pandering to unions. Perhaps we’ll not take Sue-Ann’s arguments too seriously. But still, what exactly is it—other than the concept of efficiency—that these people who suggested taking a bit more time to study the bid were afraid of?
Well, for starters, there are the concerns raised in an audit of the bid raised by the forensic accounting firm Rosen and Associates. Buyer beware: the investigation was commissioned by CUPE, who represent public sector garbage workers, so one would expect it to show downsides of the bid. That said, I’m still interested by the findings, and think they merit further questioning. It says that the savings Rob Ford and city staff say will result from this contract—some $11.2 million per year—might be overstated by as much as $10.75-$12.75 million. Specifically:
- They claim that the city is failing to consider $3 million in efficiencies that are available under the current public collection scheme.
- They say the city’s current cost estimate also overstates the cost of garbage collection by the public sector by $5.75 million because they are including costs paid for out of the collection budget that are not actually included in the curbside pickup contract–$75,000 for picking up litter bins in parks and $5 million for workers who are modified duties (not collecting garbage).
- They say that a contingency fund of $1 million per year that has already been set up by staff to deal with unexpected requests of the contractor has not been factored into the cost of the contract to the city.
- They say the city has under-budgeted for compliance monitoring by $2 million.
“Well, so what?” you might ask. If it’s too low, then the contractor fails to make money, and that’s their business, right? This is how it works in an entirely private market, of course—businesses that underprice their products soon go out of business, everybody buys from someone else, and no one except the stupid business, its owners and staff suffer. But there are some wrinkles in big public contracts, partly because they don’t operate in a truly private market (one company has a time-specific monopoly on all the business, which changes the competitive options) and partly because the reason the government has taken responsibility for the service in the first place is that we cannot do without it (that is, we do not have the option of just letting the company fail and doing without service for a while). Bidders have an incentive to underestimate their costs and chintz on contingency and risk plans in order to win the contract. We’re in a position, once we sign, where we need the contractor to be profitable, or at least to break even, or else we wind up with garbage rotting in high piles on streets across the city.
There just aren’t dozens of competitors waiting around with hundreds of trucks and employees sitting idle, waiting to step in at a moment’s notice if the current contractor fails to do its job, which means we as a society become invested in ensuring that the company we’ve contracted is able to continue doing its job, even if that means we wind up paying more than we agreed to pay. Contractors may fail to deliver all that they said they would, they may attempt to renegotiate the contract to deal with “unforseen” cost overruns (hello, MFP scandal), or worse.
The big “or worse” example that gets trotted out to illustrate how this can go bad out in the real world is in the London, England transit system. The government contracted out maintenance on the Underground subway system to two different companies. One of them, Metronet, went bankrupt, which cost London taxpayers a reported 410 billion pounds (about $1 billion). Since then, the government has taken back control of the responsibilities that were contracted, even buying out the other of the two companies that had originally been hired.
This may contribute to why Mike Challis, a London, England transit executive who lived in Toronto for a time told the Toronto Star last year:
That risk, in reality, always remains with the taxpayer…Government had lulled themselves into the belief that the private sector is far more efficient than it is. Taking the huge amount of investment off the government books — it’s just creative accounting, and in the long run it costs the taxpayer more.A quick Google search will lead you to hundreds of such cautionary tales—many of them conveniently curated by public service unions who have a vested interest in opposing contracting. But it is not just pinkos who point to such potential problems, and it isn’t just governments who encounter problems after hiring contractors. Just ask a few people who’ve hired home renovation contractors and you’ll hear a few stories. The Economist noted this summer that “There are signs that outsourcing often goes wrong, and that companies are rethinking their approach to it.”
Which isn’t to suggest it’s never a good way to go, just that it is very important to recognize the problems that can arise and to do due diligence to try to prevent them. Many people—including me—are unsure that a satisfactory consideration of the risks has taken place. It will be interesting to see how the contract works out.
As a final note, I’ve put in some calls to experts to try to determine just how common lowball bid problems with either service and cost arise, just to help sort through the ideological counter-claims one finds when searching out information. I’ll let you know if and when I’ve had a chance to get some informed views on that.
Origin
Source: the Grid TO
No comments:
Post a Comment