Category: Privatization

Public-Private Power Grab

As unemployment rates remain stubbornly high around the country, the Republican winners of November’s gubernatorial races face a dilemma: How do they respond to the clamor for more job creation while holding true to their opposition to government activism. The answer, apparently, is to go with a gimmick.

In at least four states, the gimmick consists of proposing that the state agency responsible for business recruitment—and other functions such as awarding subsidies that come under the rubric of economic development—be handed over to the private sector. Governors in Wisconsin, Ohio, Iowa and Arizona are calling on legislators to approve the dismantling of commerce or development agencies and the transfer of their responsibilities—and their funding—to public-private partnerships (PPPs).

It turns out that economic development privatization is nothing new. My colleagues and I at Good Jobs First have completed an analysis of the subject, which we’ve just published in a report titled Public-Private Power Grab.

We found that the idea is far from new but it is not a common or standard practice. Economic development PPPs date back more than 20 years, but only seven states currently allow private entities to control their business recruitment functions: Florida, Indiana, Michigan, Rhode Island, Utah, Virginia and Wyoming. Several other states previously employed PPPs but abandoned them because of performance problems.

Most of the seven states that currently make use of economic development PPPs have experienced a variety of performance problems. These include the following:

  • Misuse of taxpayer funds
  • Excessive executive bonuses
  • Questionable subsidy awards by the subset of PPPs that have a role in that process
  • Conflicts of interest in subsidy awards
  • Questionable claims by the PPP about its effectiveness
  • Resistance to accountability

Two of the features of the PPPs that promote corruption are that, in addition to public funding, they accept contributions from corporations and that their boards are often chosen by the governor will little or no legislative oversight. What this means is that the PPPs may end up favoring those contributors in making subsidy awards, and those awards are likely to go to the governor’s major corporate campaign donors.

Such sleazy practices have been seen most clearly in Texas, where the state’s Emerging Technology Fund is run by a public-private partnership controlled by Gov. Rick Perry and has a tendency to give its subsidy awards to Perry’s donors. According to an investigation by the Dallas Morning News, those donors have collected more than $16 million from the fund.

In 2006 the St. Petersburg Times published a 6,000-word investigation on Enterprise Florida, finding a pattern of conflicts of interest among the PPP’s board. In a follow-up editorial, the newspaper wrote that Enterprise Florida “has shown itself to be a public-private venture only in the sense that the public pays and the private receives. Despite critical audits, legislative questions and gubernatorial promises of reform, the group has proved to be virtually immune to the normal checks and balances.”

Aside from corruption, the PPPs tend to be characterized by incompetence or poor judgment. For example, the Michigan Economic Development Corporation (MEDC) found itself in hot water last year when it was revealed it had approved a $9 million subsidy to a company headed by a convicted embezzler and scam artist.

The Indiana Economic Development Corporation, which is often cited as a model by today’s privatization proponents, lost much of its luster last year after a TV station found that many of the jobs IEDC had taken credit for creating did not in fact exist. A former Indiana budget official recently told a reporter that “most of the numbers [IEDC] gave us were either not true or could not be substantiated,” adding that he considered IEDC “a political organization that really only served to make it seem like the governor was doing something about the economy.”

When challenged about their poor record, the chief executives of the PPPs tend to complain about the criticism rather than addressing their substance. In the wake of a series of scandals in 2010 about the MEDC’s handling of tax credit awards, the entity’s executive committee issued an open letter of complaint to the media and the legislature.  Rather than addressing MEDC’s shortcomings, the letter made the dubious claim that the controversy might prompt companies to shun the state. “Political in-fighting is a clear warning to business that a state lacks a cohesive climate for economic development,” the letter stated, “and a clear signal to invest elsewhere.”

Not surprisingly, our report concludes that economic development PPPs are a bad idea. Unfortunately, advocates of privatization in this area and others have a tendency to ignore evidence and persist in their misguided belief that the private sector can always do everything better.

Is the Recovery Act Stimulating Privatization?

AFSCMEKey portions of the $787 billion American Recovery and Reinvestment Act, especially the state fiscal stabilization fund, are designed to prevent job loss among teachers and other state and local government employees. But what about the rest?

The assumption seems to be that most of the job creation and retention will take place in the private sector. Yet one question that has received little attention since ARRA was signed by President Obama in February is whether the spending will contribute to the process of privatization and contracting-out of functions previously performed by public sector workers.

On October 15 the Recovery Accountability and Transparency Board released the first batch of recipient reporting data covering some $15 billion in direct federal contracts. Although this is a small portion of overall ARRA spending (information relating to the much larger realm of federal grants to states and others will be released on October 30), it begins to shed some light on the privatization question.

My colleagues and I at Good Jobs First have been examining the universe of around 9,000 recipient reports summarized in a national spreadsheet available on the Recovery.gov website. Many of the entries are unremarkable. They involve contracts for functions such as manufacturing and construction that have traditionally been concentrated in the private sector. It is not surprising that the federal government gave an ARRA contract to Chrysler to supply vehicles and one to Clark Construction to build a new headquarters for the Coast Guard.

Yet many of the other entries appear to be part of the contracting-out phenomenon. You can tell this, first, by looking at the names of the contractors: one firm called Federal Contracting Inc. leaves little doubt as to its orientation. There are others that have a reputation for being involved in high-profile outsourcing deals. An example is IAP Worldwide Services, a politically connected firm (former Vice President Dan Quayle is on its board of directors) that got a controversial contract to take over management of the Walter Reed Army Medical Center in Washington.

Or else you can look at the description of the projects. A company called 4W Solutions got a contract from NASA for “administrative activities, configuration management of documents, procurement-related analysis and support for report integration/administrative support for Cross-Agency Support construction contracts.”

To be a bit more systematic in our analysis, my colleagues and I decided to match the Recovery.gov list of contractors to the membership list of the Professional Services Council, the leading trade association for the federal outsourcing industry.

PSC’s members range from large and notorious contractors such as KBR (formerly the Halliburton subsidiary Kellogg, Brown and Root), Xe Services (formerly Blackwater) and CACI International (linked to the Abu Ghraib torture scandal) to small and obscure consulting firms. During its 27-year history, the association has sought to banish the use of the term “Beltway Bandit” to refer to federal contractors and has pushed for legislation that would maximize the amount of federal work that gets outsourced. It has also resisted the recent move toward insourcing.

We found that, of the 382 PSC members listed on the association’s website, about 50 are on the list of ARRA federal contract recipients (name variations make an exact count difficult). In all, these members and their affiliates have been awarded about 250 ARRA contracts with a total value of more than $800 million.

Some of these involve engineering and construction services, but others deal with functions that are more inherently governmental, such as a contract given to Deloitte Consulting to provide “program management oversight” for ARRA grants made by the Federal Aviation Administration.

In an economic crisis such as the current recession, all job creation is to be welcomed. But it would be a shame if some portion of Recovery Act money is being used in ways that do little more than shift work from the public sector to the private sector.

(Thanks to Tommy Cafcas, Caitlin Lacy and Leigh McIlvaine for their research help.)

Update: I should have mentioned that KBR and Xe Services are not among the recipients of ARRA contracts, but CACI has two.

Further update: We spent more time analyzing the spreadsheet and found many more ARRA contracts that can be attributed to PSC members through joint ventures, affiliates, etc.  Our tally is now about 470 contracts worth a total of about $3.5 billion. These include some huge contracts associated with clean-up projects at Department of Energy nuclear facilities.