Alternative Service Delivery Needs to Meet Stringent Criteria

June 15, 2011

Alternative service delivery refers to any process that shifts some or all of the functions, risks or responsibilities for delivering a service from the primary government to the private sector or another public entity. When the function is transferred to the private sector it is commonly referred to as privatization. Alternative service delivery can take many forms such as an asset sale or lease, contracting out the management of an asset or service, franchising, vouchers and a variety of other structures. Managed competition, a method of alternative service delivery, allows government employees to competitively bid against private contractors to provide services.

The term Public-Private Partnership or P3 is often used synonymously with alternative service delivery and privatization. Some definitions of P3 distinguish it from other forms of privatization in that the private sector is providing services for an extended period of time while others point to the sharing of the risk and reward potential in the delivery of the service. The City of Chicago’s lease transactions involving the Skyway, metered parking system and downtown parking garages are often cited as groundbreaking P3 transactions. However, privatization does not have to involve long-term lease concession agreements as was done in those high profile transactions. It can be also mean outsourcing a minor service or function. Since 1990 the City of Chicago has privatized at least 34 different services and programs such as airport parking operations, custodial services and tree planting.[1] 

The Civic Federation recommended in its Financial Challenges for the New Mayor of Chicago report that the City of Chicago pursue alternative service delivery to reduce costs with the crucial caveats that any efforts include safeguards and strong and sustained management oversight. This recommendation was characterized by some as a proposal for the City to privatize virtually all functions. While the Civic Federation does recommend that all City services be examined for efficiency opportunities to help Chicago address its large structural imbalances, the Civic Federation has not recommended that all services be privatized.

The Civic Federation has traditionally supported alternative service delivery or privatization efforts, but only if they meet stringent criteria and contain sufficient safeguards. The Civic Federation has developed the following criteria to evaluate alternative service delivery proposals:[2]

• A competitive bidding process for operator selection must be used. Transferring responsibility for service delivery to a private firm or nonprofit organization can be beneficial only if there is a marketplace of competitive, qualified vendors or service providers.
• There must be strong and sustained management oversight by the government. The government must protect the public interest by including management oversight provisions in any concessionaire or service contracts.
• All potential costs must be considered including direct and indirect costs, transition costs, short-term and long-term costs, oversight costs, the impact on outstanding debt and future grant eligibility and long-term impacts on rates or charges. Governments should be cognizant that substantial overhead costs may continue to exist even in a contractual environment and therefore should identify which costs are truly avoidable through outsourcing.
• When transferring responsibility for service delivery by means of a long-term lease or sale, governments must carefully consider the policy implications of matters such as limitations on competition and eminent domain. For example, the long-term leasing of a toll road should not preclude a government’s ability to plan for future transportation needs in the vicinity of that toll road, including the ability to plan, acquire land and construct new roads.
• There should be a full and deliberate public discussion and review of significant proposals and there must be requirements for public reporting of financial and operational results.
•  Any proceeds generated from asset sales or leases must be appropriately used. The proceeds should not be used for recurring expenditures or as a temporary fix to a structural fiscal challenge. Proceeds should be used to invest in capital facilities, establish long-term reserves that generate interest earnings or reduce existing obligations, such as long-term debt or unfunded pension obligations.
• Communities should also examine what are core public functions and what are non-essential services. This has been an issue in the metered parking concession agreement. A lawsuit has been filed alleging that the City unconstitutionally gave up control of its policing powers and the ability to set traffic and parking policies, both core public functions. There are also non-legal considerations and these value judgments will cause variation amongst cities in what they define as a core public function.

Alternative service delivery is not a panacea for a government’s financial problems and can present risks, but it can be a useful tool to increase efficiency and reduce costs. Competition from private, nonprofit and even other public entities can help reduce operational inefficiencies that can develop in a system of monopoly service provision by a single government.  In a time when the City of Chicago and other local governments are facing enormous financial challenges it is one option that should be explored when it can produce cost savings and meet rigorous standards.