The pros and cons of managed competition

This post is by Courtney Baker, a summer intern with Oklahoma Policy Institute. Courtney is a senior at Oklahoma State University majoring in political science.

In June, government workers at Tulsa’s city hall successfully fought to keep their jobs in a process called managed competition. Unlike typical privatization, managed competition allows government employees to bid against private sector firms.

The city of Tulsa had previously sponsored a report by the consulting firm KPMG to review all city services and look for ways to improve efficiency. In total, KPMG listed 298 city services that might benefit from managed competition.

The report suggests that the Department of Public Works has the most opportunities for managed competition, with tasks including street maintenance services, building operations services and golf course administration. The report states that through competitive bidding of these tasks, the city could potentially generate revenue and fund capital assets replacements.

For its first attempt at managed competition, Tulsa’s asked private companies and city employees to submit bids for complete maintenance of the city hall building for one year. Four private companies submitted bids, but the existing city hall workers beat the competition with a bid that saved $115,818 from the original $1 million that was budgeted for maintenance of the building. However, economic policies like managed competition have their benefits and shortcomings.

Pros:

• Tulsa has already found savings from managed competition. If the state renews the contract with city workers, they can continue saving $116,000 each year. This is especially important in a time of fiscal tightening and budget slashing everywhere.
• Competition is the basis of the American economy; it keeps companies and workers striving to achieve the best quality of work for the lowest price. In this case, it kept the workers of city hall focused on finding ways to make their services more efficient.
• Employees from private and public firms have an equal chance to win the jobs at stake. This may alleviate some problems with privatization, which can eliminate government workers’ jobs without giving them a fair chance to show they can work more efficiently than private firms.
• If the organization running the competition participates in “gain sharing,” the benefits for the city and staff can keep coming even after winning the initial bid. Gain sharing allows workers to earn up to fifty percent more than their original pay if they complete the tasks under budget. The difference between the submitted bid and the actual cost to complete the project becomes profit for the workers.

Cons:

• The city loses control and has less oversight when they chose to hire a private firm. With public workers, the government can more easily monitor what is being done to complete a project.
• In the example of Tulsa’s City Hall bidding war, the second lowest tender was a private New York City firm. If the state employees had not won the bid, the profits of the winning company would go to a different state, taking money out of the local economy.
• If the state workers did lose the bid, they might file for unemployment, become more reliant on state supports, and stop contributing as much to the economy. This may create a greater strain on government funds that reduces some of the savings from choosing the lowest bid.

Experiments with managed competition have begun in cities across the U.S. In San Diego, voters approved managed competition in 2006, but it took the city until 2010 to get the program up and running. In order for a private company in San Diego to win the business, the bid must be 10 percent lower than the city workers’ estimate. The 10 percent threshold provides the government workers of San Diego more security than Tulsa’s workers, ensuring a private company’s bid that is only slightly lower won’t trump the locals’ bid.

Arizona’s Republican Governor Jan Brewer recently vetoed a bill that would have required cities to open all services that exceed $500,000 to managed competition. Public workers said the bill would hurt the quality of public services if they were handed out to low bidders simply looking for a profit. In her letter explaining the veto, Brewer said the bill was “riddled with shortcomings,” omitted vital definitions for determining costs for public services, and risked eliminating accountability over crucial justice and public safety functions like court administration and crime labs.

As the Arizona example shows, managed competition should not be implemented carelessly. While it does have potential to cut costs, it needs to be carefully designed and selectively implemented to avoid sacrificing quality and accountability.