Cities Can Improve Services by Freeing Employees to Compete

Commentary, Public Sector, Steve Lafleur

How should municipal services be delivered to citizens?

The political right argues that outsourcing services is usually most efficient, while the left argues that “privatization” of services such as waste management or wastewater treatment would lead to lower quality services.

In actuality, many municipal services are delivered by both public and private employees. Sometimes public employees are best positioned to provide better services sand sometimes private contractors have the edge. Neither public nor private delivery is always the best option.

Whether services are publicly or privately delivered is typically determined by short term political calculations and the ideological commitments of local politicians. Rather than debating the virtues of public or private delivery, municipalities should examine the costs of both options in each scenario. Fortunately, one mid-sized American city has created a model for doing just that.

Indianapolis was a hotbed for municipal innovation during the 1990s. Mayor Stephen Goldsmith sought out ways to reduce service delivery costs while revitalizing the downtown core without cutting public services. He managed to shave $100 million from the city government’s budget while attracting $3 billion in new investment to the central city.

Goldsmith’s philosophy was that if a service was replicable by a company in the phone book, the city probably didn’t need to do it in house. For instance, the city outsourced all of its printing, saving $400,000 per year. Other services were more complicated.

Fleet Services, which maintains city vehicles, was one area where Goldsmith believed he could find further savings. One of the difficulties is that it is hard for a city to determine what a reasonable price for many services should be. His solution was to introduce “managed competition”. Rather than simply outsourcing, Goldsmith allowed municipal agencies to bid against private contractors. By accepting bids from both the private and public sectors, the city got a more accurate idea of what the true cost should be.

As it happens, Fleet Services employees were able to outbid private contractors. In fact, over 6 years they decreased the costs by $8 million, and the percentage of vehicles repaired within 8 hours increased  from 71 to 82 percent. They didn’t do it by cutting corners. They were able to find common sense ways to decrease costs by working smarter and eliminating wasteful overhead. Union representatives who initially opposed the approach came to support it. Employee moral increased leading annual employee complaints to plummet from 149 to 5.

The second element of Goldsmith’s approach that was “gain-sharing.” In order to incentivize public sector cost savings, Goldsmith offered cash rewards for employees who found ways to save money without reducing service quality. All of a sudden, employees had incentives to put their knowledge to work making things run more efficiently. For instance, in 1994, city garbage workers were able to beat their previous bid price by $15 million over five years. As part of their gain-sharing program, the city issued bonuses at averaged $1750 per employee. This benefitted both city employees and taxpayers.

While managed competition and gain-sharing haven’t taken off across the continent, some cities have used these ideas effectively. Tulsa, Oklahoma undertook a gain-sharing project that won an award for municipal innovation from the Bloomberg Foundation. San Diego introduced managed competition in 2006 and municipal employees have won every single bid. In 2012, Winnipeg City Council voted to use managed competition to stem losses at city golf courses.  But, the plan was eventually derailed by opponents.

Neither managed competition nor gain-sharing require an ideological shift. They are both tools to better manage mixed public-private delivery of services. They succeed by introducing transparency and competition into the procurement and delivery process. The threat of entry by the private sector motivates the public sector to perform efficiently, and vice versa. It isn’t a win for the public or private sector. It’s a win for residents.