Privatization: The Motor CityÕs · Privatization: The Motor CityÕs Renaissance Engine ... from Privatized Garbage Pickup ... Detroit city government must

Mackinac Center for Public Policy Michigan Privatization Report • Winter 2001 1

Privatization: The Motor City’sRenaissance Engine

The Conventionsof Privatization

For Whom thePrivate “Belle” Tolls

Water Privatization Can HelpDetroit Avoid Drowning in Debt

Privatization Should DriveDetroit Transportation

Looking overPrivate Inspections

and more...

Michigan Privatization Report • Winter 2001 Mackinac Center for Public Policy2

MICHIGAN PRIVATIZATION REPORT

Editor:Managing Editor:Assistant Editor:

Graphic Designer:Circulation Manager:

David BardallisMichael LaFaiveSamuel WalkerDaniel MontgomeryAmy Kellogg

Michigan Privatization Report is published quarterly by the Macki-nac Center for Public Policy, a nonprofit, nonpartisan, tax-exemptresearch and educational organization devoted to analyzing Michi-gan public policy issues. Michigan Privatization Report isdistributed to state senators and representatives and policy staff;department directors and staff; municipal officials and adminis-trators; school superintendents and school board members.Additional copies are sent to Michigan radio and television newsdirectors, print news editors and select industry leaders. Totalcirculation is over 14,000. Copyright © 2000 by the MackinacCenter. All rights reserved. Permission to excerpt or reprint ishereby granted provided that Michigan Privatization Report, theauthor, and the Mackinac Center for Public Policy are properlycited, and a copy of excerpt or reprint is sent to the editor. Pleasecontact the Mackinac Center for Public Policy at 140 West MainStreet, P.O. Box 568, Midland, MI 48640; Phone: (517) 631-0900;Fax: (517) 631-0964; e-mail: [email protected]; or WorldWide Web: http://www.mackinac.org if you wish to receiveMichigan Privatization Report.

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www.mackinac.org/pubs/mprCheck out Michigan Privatization Report on-line at


FEATURES4Privatization: The Motor City’sRenaissance EngineDetroit’s economic future depends onthe city’s willingness and ability to cutonerous taxes, reduce wasteful spending,remove barriers to economic opportu-nity, and improve core services to attractand retain residents and businesses.Privatization can help public officialsaccomplish all of these things.

5Motor City Needs Budget Boost:Privatizing Detroit City ServicesDetroit’s latest budget figures yieldsome good news, but they also raisemany red flags about the city’s financialhealth and its ability to thrive in theevent of a state or national economicdownturn.

6Asset Sales:Accounting for PrivatizationA new bookkeeping procedure forgovernments may help Detroit andother cities keep better track of theirassets as well as facilitate win-win salesof unnecessary properties and posses-sions to private buyers. Asset saleswould not only provide a much-neededcash infusion to the city treasury, butalso new revenue streams in the form ofproperty taxes.

7The Conventions ofPrivatizationDetroit’s impressive Cobo ConventionCenter unfortunately loses millions ofdollars each year. The good news isthat Cobo could thrive under privateownership, while providing the citywith new revenues.

8Detroit Could Collect Savingsfrom Privatized Garbage PickupResidents in many cities throughoutMichigan and America rely on privaterefuse haulers for curbside garbagepickup. Detroit officials coulddramatically improve services andsave scarce dollars by privatizinggarbage collection.

10For Whom thePrivate “Belle” TollsBelle Isle could become Michigan’snext great tourist attraction, providedDetroit officials have the courage toallow private developers to enhanceand build upon the island’s naturalbeauty and historic landmarks.

14Water Privatization Can HelpDetroit Avoid Drowning in DebtDetroit’s antiquated water distributionsystem faces costly new federal mandatesand other challenges. Privatization of thesystem could help meet the growingneeds of the metro area’s citizens whilekeeping expenses down.

16Privatization Should DriveDetroit TransportationThe Detroit Department of Transporta-tion is by all accounts costly andinefficient. Officials should consider thebenefits of privatizing D-DOT’s fleet ofbuses to provide citizens with better andmore reliable service at less cost.

18Nine Steps toSuccessful OutsourcingTo outsource or not to outsource?Here are the answers on how to usethis privatization tool to successfullymaximize the benefits of betterservices and lower costs.

19The Power to PrivatizeThe city of Detroit’s Public LightingDepartment provides needlesslyexpensive and notoriously unreliableservice to such vital centers as thepolice and fire departments. Privateutility companies, including DetroitEdison, can do the job far better forless money and ensure that citizensand officials are never left in the dark.

20Looking overPrivate InspectionsThere’s no inherent reason whyDetroit city government mustconduct inspections to enforcebuilding and other codes whenprivate inspectors already do abetter job at lower cost. No fewerthan eight private, for-profit codeinspection services operate in othercities throughout Michigan.

22Don’t Waste Water TreatmentPrivatization OpportunitiesEnvironmentalists, consumeradvocates, business owners, andratepayers can all agree thateverybody benefits from cleanerwater and lower rates. Privatizationof Detroit’s wastewater systemcould provide both of these goals

23Privatization: A Cure for WhatAils Detroit’s EmergencyMedical Services?Privatization of Detroit’s sluggishEmergency Medical Servicessystem could save not only dollars,but also precious lives.

28Westwood SchoolsWestwood Community Schoolsdistrict is bleeding students. TheMackinac Center has offered to helpstanch the flow.


Privatization:The Motor City’s Renaissance Engine

By Michael LaFaive

Antoine de la Mothe Cadillacnever could have guessed that the smallfort he established in 1701 along thestrait between Lake St. Clair and LakeErie would become home to millions ofpeople—including people like HenryFord, whose vision transformed the en-tire world.

Indeed, Detroit has nearly threehundred glorious years of history to lookback upon with pride, but it is the city’s

future that is the focus of this issue ofMichigan Privatization Report. Andthat future is in some doubt.

When Mayor Dennis Archer tookoffice in 1993, public officials and me-dia figures heralded the dawn of a “De-troit renaissance” that woulddramatically improve the city and itsnegative image. Today, while there issome good news to report, crime andtax rates remain high and poor schoolsand a crumbling infrastructure continueto pose barriers to a full-fledged eco-nomic recovery.

What is needed in Detroit is noth-ing short of a fiscal-policy and pub-lic-management revolution; one thatcuts wasteful spending and punitivetaxes across the board, reduces bu-reaucratic regulation, and improvesservices for the city’s residents and

businesses. In short, Detroit needs acomprehensive privatization program.

Heavy burden of government

Since 1950, Detroit has lost 46percent of its population to its suburbs,other Michigan communities, and otherstates. While its tax base has eroded,the size of city government has not de-creased correspondingly: The number ofcity employees has shrunk only 30 per-cent. Remaining residents are left toshoulder a heavier tax burden.

The city govern-ment is in fact the second-largest employer inDetroit, behind only De-troit Public Schools. Ofthe city’s 25 biggest em-ployers, state, county andcity governments providea combined 40 percent ofjobs. By contrast, thesame government unitsprovide only 30 percentof jobs in Chicago. Thistop-heavy bureaucracyhas placed an enormous

burden on city taxpayers.

To reverse the flow of people,jobs, and entrepreneurial talent out ofthe city, Detroit officials must work todramatically reduce the crushing tax andregulatory burden on citizens and busi-nesses. If they do not, the next reces-sion could bring financial disaster in theabsence of a state or federal bailout.

What can privatization do?

This issue of MichiganPrivatization Report is divided into twomajor sections that detail ways Detroitcan set its financial house in order: di-vestiture (selling city assets outright)and outsourcing (contracting out for par-ticular services). Proposals show howofficials could cut spending by morethan $207 million, allowing the city toreduce onerous and economically de-

structive personal and corporate incometaxes. The sale of certain city-ownedassets also could generate an enormouswindfall of $2.4 billion, and annualproperty tax revenues from the subse-quent private ownership of Belle Isleand Cobo Arena alone could total over$15 million.

Critics of many of these propos-als likely will argue they are too “radi-cal” or that they will harm cityemployees.

However, these criticisms are ei-ther overblown or unfounded. First, tocomplain of the boldness of a measureis not to refute its efficacy. And sec-ond, while it may be true that some cityemployees will be adversely affected bychange—in the short term, as the city’seconomy adjusts to better, more efficientways—in the long term, all Detroitworkers will benefit from living andworking in a city that promotes and en-courages economic prosperity, ratherthan strangling it.

Detroit has many talented and car-ing people who are just waiting for thecity’s mind-boggling maze of tax andregulatory barriers to be removed so thatthey can unleash their creative powersto build better lives for themselves, theirfamilies, and their neighbors.

Michigan Privatization Report isdedicated to a bold vision that will in-spire the kind of financial and culturalrenaissance that many have long hopedMichigan’s largest city would experi-ence. Failure to act can mean only thatDetroit’s people will continue to depart,taking their money and entrepreneurialand artistic talents with them.

Michael LaFaive is managing editorof Michigan Privatization Report.

Residents per City Employee

Detroit Chicago Houston L.A. Indianapolis

200

150

100

50

0

Num

ber

of R

esid

ents

per

City

Em

ploy

ee

City

The city of Detroit has a very low municipal resident-per-employee ratio(50 to 1). This should suggest that city residents are getting the very bestservices for their tax dollars, but it would be hard to make that case.

◆

◆

223

107.5

786850

Source: MPR Survey, Fall 2000

Feature


See “Budget Boost ” on page 13

• Detroit’s Housing Fund and ResourceRecovery Authority also have defi-cits. The Housing Fund deficitshould be made up by money fromvarious federal programs over a pe-riod of time. Meanwhile, the Re-source Recovery Authority’s deficithas actually been reduced from 1998to 1999, in part, due to subsidies fromthe General Fund.

• In 1999, the Detroit Fire and PoliceDepartments as well as the 36th Dis-trict Court and other public protec-tion agencies spent a combined $69million less than their revised oper-ating budgets, which totaled $570.5million. The slightlymore than $501 millionspent for public protec-tion in 1999 was almostexactly the amount ex-pended in 1990 ($501.1million). This means thatreal spending on publicprotection in the citydropped during the 1990s.

• Detroit lost an estimateda $294 million worth ofresidential property to firein 1999, more than thecombined economic valueof all new residential con-struction in the city for theprevious decade.

• Detroit relies excessivelyupon two sources of in-come: municipal incometaxes and the shared taxesand grants from the state of Michiganand the federal government. Thesetwo sources represent 78 percent ofGeneral Fund revenues, which is$1.26 billion for the Fiscal Year 2000-2001. Should America and Michigansuffer even the slightest economicdownturn, the city’s ability to financeits operations would be in doubt.

• Pension plans for some city employ-ees are in good shape. Police and fire

Motor City Needs Budget Boost:Privatizing Detroit City Services

By Michael LaFaive

The charter of Detroit requiresthat the city have not only a budget planfor proposed spending, but also a reportshowing what was actually spent aftera particular year’s budget has beenclosed out. This latter document isknown as the Consolidated Annual Fi-nancial Report (CAFR).

An examination of Detroit’sCAFR for the fiscal year (FY) endingJune 1999 and the current FY 2000-2001 city budget shows some goodnews, but unfortunately, that news isoutweighed by other issues that may sig-nal rough financial times ahead for thecity and its residents.

The following is a snapshot of thecurrent state of Detroit’s financial health:

• The “unreserved equity” (i.e., moneyavailable for general operating uses)of the city’s General Fund is declin-ing. It dropped from $102 million in1998 to $71 million the followingyear. This fact is significant becausethe status of the General Fund, whichoffers city leaders the greatest spend-ing discretion, is often used by pub-lic accountants as a benchmark for agovernment unit’s overall fiscal integ-rity. A declining General Fund mayindicate poor fiscal health. At the veryleast it may reveal a city’s inability tocope with future emergencies.

• The city’s Airport and TransportationFunds have deficits of $4.5 millionand $15.9 million, respectively. Bothdeficits have remained unresolved forquite some time and have been in-creasing in recent years. A recentbankruptcy of city airport’s principalcommercial carrier will exacerbatethis situation. Fuel price increaseswill also adversely impact Transpor-tation Fund operations. These twodeficits exceed the entire “unreservedequity” of the General Fund by a sub-stantial amount.

pensions are fully funded with excessassets of $349 million.

• The city’s health insurance plan forretirees, on the other hand, is not ac-tuarially sound. It is funded on apay-as-you-go basis. There are pres-ently 19,800 retirees, 118 percentmore than in 1950, when city em-ployment was at its peak. The li-ability that has accrued to the city forDetroit’s current and future retireesfor health care lies between $1.75billion and $3 billion.

• The City of Detroit Library Fund isdoing well, with $8.2 million in eq-

uity and an additional reserve for in-ventory (more books, for instance) of$3 million. These figures represent ahealthy 27 percent of revenues.

• The Water and Sewer Fund opera-tions will have to expend billionsover the next decade to upgrade thesystem to comply with new federalmandates. The infrastructure (drain,water, and sewer pipes) are aging and

In 1999 Detroit’s public protection agencies spent a combined $69 millionless than their revised operating budgets. After adjusting for inflation, Detroitis spending less on public protection today than it spent ten years ago.

Feature


Pros and Cons of Asset Sales(From the Government’s Perspective)

PROS

Receive value of asset asimmediate cash for other uses

Reduce risks and liabilities

Reduce annual operating andmaintenance costs

Receive property, income,and sales tax revenue

from use of asset

Reduce responsibility for capitalimprovements

Reduce problems with not-in-my-backyard (NIMBY) and other

pressures that come withundesirable facilities

Asset more likely to be putto most productive use

CONS

Lose control of the asset

Lose control of development andplanning related to asset

Lose organizational knowledge ofasset and of related budget

expenditures

May have to pay for future use ofasset

May retain somelong-term liabilities associated

with the asset

May have difficulty calculatingvalue of asset

Conducting asset sales requireskills and funding

Asset Sales:Accounting for Privatization

By Adrian Moore

On a given day, somewhere in theworld there is an electric utility, a tele-communications company, an airline, aroad, a building, or other former pub-licly owned entity on the private auc-tion block. Overseas, by far thedominant form of privatization is sell-ing assets outright.

By contrast, federal, state, andlocal governments in the United Stateshave never owned whole industries theway most foreign governments have.Therefore, privatization here more of-ten involves service contracting thanasset sales.

But asset sales still happen. In thelast few years, the federal governmentsold the Elk Hills petroleum reserve inCalifornia; USEC (the firm that pro-vides enriched uranium fuel for nuclearpower plants); the Alaska Power Admin-istration; and dozens of electric, water,and sewer utilities on military bases.State governments have sold park andrecreation facilities, buildings, unusedland, and prisons. Local governmentshave sold landfills, water and sewer

utilities, buildings, unused land, jails,tax liens, and more.

Studies, articles, and even bookshave examined government asset salesand usually extolled their virtues, whichinclude cash infusions for governmen-tal units and an increase in the produc-tive value of the assets. In 1992, theBush Administration recognized thevalue of government asset sales, too.President Bush issued an ExecutiveOrder on Infrastructure Privatizationthat reformed a practice regarding fed-eral grants that was serving as a disin-centive to selling off government assets.When state and local governments sellassets that were partly funded by fed-eral grants, the grants have to be repaid.The Executive Order allowed the valueof the grants to be sensibly depreciatedso that the obligation to pay them backin full would no longer discourage as-set sales. The order also directed therelevant federal agencies to adjust theirpolicies to facilitate state and local ef-forts to sell or lease assets.

Accrual accounting

Asset sales will soon become amore important issue for state and localgovernments. Starting in June 2001,state and local governments will beginswitching to new accounting standardsbased on “accrual accounting.” Thismeans the value of assets and liabilitieswill appear on government balancesheets for the first time. From that timeforward, all state and local governmentswill have to determine the value of allthe assets they own and will have to de-preciate that value each year unless theyallocate sufficient maintenance funds tokeep their assets in shape.

When it comes time to do budgets,our elected officials won’t simply belooking at revenue and expenditure wishlists. They also will be faced with a listof assets, those assets’ respective values,and bottom-line funding requirementsthat must be met in order to maintain

those assets. The choice, on each andevery item, will be: Spend money tomaintain it, ratchet its value downwardanother year, or sell it to avoid the firsttwo choices. For the first time, all acrossthe country, choice number three will beon the table for every asset, every year.

In the political and economictradeoffs that ensue, the tendency toentertain the idea of selling assets as akind of afterthought to the budget pro-cess will become a thing of the past.Government pros and cons of sellingassets, listed in the table accompanyingthis article, will play a role in the deci-sion to fund each budget item. In thepast, without asset values or costs ontheir balance sheets, for most govern-ments the cons outweighed the pros.But with the new accounting standards,this may change dramatically.

And that is a good thing. Sellingassets shifts resources from government,where assets are harder to measure interms of value, to a realm of privateownership in competitive markets. Thiscreates opportunities where before therewere none: Governments rarely receivemarket signals such as prices for assetsor proposals for alternative uses untilthey set about selling them. An assetauctioned to private buyers is scruti-nized for possible uses, and the valueof these is reflected in bid prices.

In the end, government asset salesshift assets away from non-productivepolitical uses and toward their most pro-ductive economic uses. At the sametime, such sales reduce the costs taxpay-ers must pay for the maintenance andimprovement of government-owned fa-cilities. Government asset sales are justone of privatization’s many win-winscenarios.

Adrian Moore is director ofprivatization and government reform at theReason Public Policy Institute, a nonprofitresearch organization based in Los Angeles.

Feature

Divestiture


Feature

tain or improve quality, and end the an-nual cash bleed?

The fact that many hotels andother private businesses own and suc-cessfully run their own convention cen-ters suggests that Cobo could indeed besafely entrusted to the private sector. In-deed, nearly every major private hotelchain in America maintains conventioncenter-style accommodations, which in-clude services to host the same types oftrade shows, banquets, special events,and cultural events provided by CoboCenter. Cobo maintains five exhibit

halls, 84 meeting rooms, and four ban-quet facilities.

Real estate and urban econom-ics professor Edwin Mills of North-western Universi ty notes that,“Convention centers are naturallycompetitive . . . [I] have yet to see aconvincing demonstration that theprivate sector in a given communitywill fail to supply enough conventioncenter space.”

How much could the city expectto receive in a sale of Cobo? An articlein the February 1991 issue of Detroitermagazine suggested Cobo Center couldfetch $50 million. At that price, a pri-vately owned Cobo could actually be-

The Conventions of Privatization:Selling Cobo Center

By Michael LaFaive

When people think of “city ser-vices,” a number of things immediatelycome to mind, such as police, fire pro-tection, and roads. Few, if any, peoplewould imagine convention centers at thetop of the list of essential city functions,and yet many municipalities own andoperate such centers.

Yet Detroit owns the Cobo Con-ference/Exhibition Center, a 2.4 millionsquare-foot meeting and convention fa-cility located in downtown. Cobo hosts

over 7,000 events each year—everythingfrom the North American InternationalAuto Show to rocker Ted Nugent’s NewYear’s Eve “Whiplash Bash.”

Since 1980, the city has spent$182.5 million to subsidize the CivicCenter department, which runs CoboCenter. That works out to an annualaverage bill to taxpayers of $9.1 mil-lion, and in fiscal year 2000-2001, thecity budgeted more than $15.5 mil-lion to subsidize the Civic Center’soperations.

Why does an important and im-pressive facility such as Cobo losemoney each year, and could a privatecompany take over its operations, main-

Divestiture

Cobo hosts activities ranging from Ted Nugent’s New Year’s Eve“Whiplash Bash” to business conventions and does so at a loss—every year. Indeed, Cobo operations have required an annualaverage subsidy of $9.1 million since 1980.

‘80 ‘81 ‘82 ‘83 ‘84 ‘85 ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00

18

16

14

12

10

8

6

4

2

0

Subsi

dy

in M

illio

ns

Year

Annual Subsidies for Cobo Convention Center

gin generating revenue for the city, tothe tune of $1.9 million in propertytaxes annually.

The one Achilles’ heel of thisprivatization effort is debt. The cityowes $169 million on funds borrowed

for the Civic Center. A sale would notcover the amount owed. Still, sellingCobo at a loss and paying off the debtfrom the proceeds of other privatizationefforts is a better option than the cur-rent $15 million annual drain on the citytreasury.

Detroit need not own its own con-vention center. There are plenty of pri-vate businesses who do, or are willingto provide the same service and do itwithout government subsidies. The cityshould sell off Cobo Center and use thesavings to pay off debt, improve infra-structure, and enhance the truly essen-tial services that citizens and businessesneed to bring prosperity back to theMotor City.


Source: Detroit City Budget 1980-2000


FeatureDetroit Could Collect Savings fromPrivatized Garbage Pickup

To put things in perspective,shaving 30 percent from Detroit’s to-tal refuse collection bill would savethe city more than $6.4 million out ofan annual budget that currently standsat $21.3 million.

Even the threat of outsourcinggarbage collection can force city ser-vices to do better. A great example ofthis took place in Flint, where bulkpick-up—garbage consisting of large

and odd-sized items such as mattressesand refrigerators—used to cost the cityan additional $400,000 annually.

Why? Because city publ icworks employees would pick up only

small and regular sized trash duringnormal working hours and return onovertime to collect bulk items. In1994, to end this practice and to savemoney for the city, Mayor WoodrowStanley solicited bids to collect anddispose of refuse from five privatecompanies. The bids Stanley re-ceived confirmed his suspicion:Privatization could cut the city’s to-tal garbage collection cost by about$2 million.

Flint’s city employee unionsknew the mayor was serious andworked with him to develop a planthat would shave about $1.4 millionfrom the budget. In addition toagreeing to collect bulk items during

By Steven T. Khalil

There are many different types ofprivatization. One of the most com-mon is “contracting out,” or“outsourcing,” a process whereby aunit of government contracts with aprivate firm to provide some service.Another common form of privatizationis when a government gets out of pro-viding a service entirely.

Refuse col lect ion providesgood examples of both of these typesof privatization. In Traverse City, forexample, citizens privately contractwith any one of four private, for-profit companies for their garbagecollection. In fact, municipalitiesthroughout Michigan and more than50 percent of U.S. cities contract outsome or all of their refuse services.

There is no reason why Detroitcouldn’t do the same. To save moneyand improve service, Detroit shouldeither outsource its garbage collectionservices, shed the responsibility en-tirely, or piece together some hybridof these two forms of privatization.

Collecting the savings

There is a large and growingbody of empirical research showing thesubstantial savings cities can achieveby either outsourcing garbage collec-tion or getting out of the business alto-gether. The largest study everconducted on outsourced garbage col-lection, conducted by the federal gov-ernment in the 1970s, reported 29 to37 percent savings in cities with popu-lations over 50,000. A 1994 study bythe Reason Foundation discovered thatthe city of Los Angeles was payingabout 30 percent more for garbage col-lection than its surrounding suburbs, inwhich private waste haulers were em-ployed. A 1982 study of city garbagecollection in Canada discovered an as-tonishing 50 percent average savingsas a result of privatization.

Divestiture

The Greater Detroit Resource Recovery Authority (Detroit’s trash incinerator) was sold toprivate investors in 1991 for $634.9 million.


Feature

hired by the city in 1998, that Detroittaxpayers were forking over morethan $150 per ton in garbage disposalcosts alone. That’s compared to anurban average of $33-$36 per ton.The report went on to state thatDetroit’s waste disposal ought to costno more than around $17 million, yetin actuality cost $72 million in 1998,a $55 million overcharge imposed onDetroit taxpayers.

Contrast this with San DiegoCounty, which sold all of its solidwaste assets to Allied Waste Indus-tries for $184 million in 1994. Thesale included four landfills, a recy-cling facility, and 10 rural bin sta-tions. Most of this money was usedto pay off high-interest debt, whichnow saves the county between$280,000 and $700,000 annually.While Detroit owns none of its ownlandfills, it does own valuable assets

regular working hours, city employ-ees agreed to increase the number ofstops on each route, reduce the num-ber of shifts from two to one, cut thesanitation staff, and require workersto work a full eight-hour day insteadof going home early as they often haddone in the past. The result: betterservice for less money. Total spend-ing on waste collection dropped 31percent the first year after the con-cessions took place.

Another example of the powerof privatizing garbage collection tookplace in Indianapolis in 1993. Thecity divided itself into 11 waste col-lection districts and contracted withseveral private firms for collection.But it also allowed the city’s already-in-place waste hauling service to bidfor contracts against the privatefirms. In fulfilling its contract, thecity agency outperformed its ownbid, saving $2.1 million more than ithad originally believed would beneeded to do the job. As a reward,each employee got a cash bonus ofmore than $1,700. Citywide, India-napolis residents had to pay less than$9.00 per month per household forthe service.

If this type of competition canwork in Indianapolis and elsewhere,it can work in Detroit.

Disposing of wasteful spending

According to the InternationalCity/County Management Associa-tion, which surveys local govern-ments about how they conduct avariety of services every year, in1997 U.S. municipalities contractedwith private firms to dispose of solid-waste 67 percent more often than theydid a decade earlier.

The fact that Detroit was notone of those municipalities may ac-count for the fact, reported by an Il-linois public-sector consulting firm

Divestiturethat could be sold to private vendors,such as the garbage trucks used forcollecting the refuse.

Cities from around the state ofMichigan—and around the country—are saving taxpayers millions of dol-lars by turning to the private sectorto provide municipal services. De-troit officials must be willing to makethe tough political decisions neces-sary to improve city services and torelieve citizens and businesses of un-necessary expenses and poor service.Privatizing refuse collection and dis-posal would be a great place to start.

Steven T. Khalil is a Detroit busi-nessman, freelance writer, and adjunctscholar with the Mackinac Center forPublic Policy.

The city of Detroit houses its refuse collec-tion and disposal within the confines of its Depart-ment of Public Works (DPW). The “net tax cost” tothe city for operating this entire department is$136.5 million. There is no reason why other ser-vices provided by DPW could not also be provided bya for-profit firm.

DPW functions are contracted out in their en-tirety with great frequency. The suburb of PleasantRidge, in Oakland County, improved its services whilesaving 22 percent in each of its first two years bycontracting out with for-profit City Municipal Ser-vices. Shaving just 20 percent from Detroit’s DPWbill would yield an annual savings of $27.3 million.

One function of note in this fiscal year’s bud-get is a $1.3 million appropriation for “rodentcontrol.” According to the International City/CountyManagement Association , municipal contracting forrodent control increased 90 percent from 1989 to1999, by far the largest area of growth in municipaloutsourcing during this 10-year period.

Privatization Sidebar


For Whom the Private Belle Tolls:Is It Time to Sell Belle Isle?

Belle Isle Land Value EstimateSale Value Improvement Net value Total

Acres per acre costs per acre per acre value*

Residential (60%)Single Family (20%) 197 $500,0001 $75,000 $425,000 $82.45Condominium (30%) 296 750,0002 100,000 650,000 188.50Apartments (10%) 96 350,0003 100,000 250,000 24.00

Commercial (20%)Retail (10%) 96 435,0004 incl 435,000 41.76Office (10%) 96 350,0005 incl 350,000 33.60

Roads, Walkways,etc. (12%) 118 incl

Parks (8%) 79 incl

Total 985** $370.31

Notes:1 Sale price per lot of $250,000 at 2 lots per acre 2 Sale price per site of $150,000 at 5units per acre 3 Sale price per unit of $20,000 at 17.5 units per acre 4 $10.00 per squarefoot, plus improvements 5 $8.00 per square foot, plus improvements 6Above prices arebased on typical pricing in upscale neighborhoods. Reduction in government servicesin favor of private ones could significantly increase these estimates. *In millions.**Numbers do not add to 985 due to rounding.


Feature

Divestiture

The table shown above lists possible values for the sale of land on Belle Isle. These are conservative estimatesbecause they do not take into consideration assets that would come with the island (such as two golf courses) ifit were sold to a private investor.

By Michael LaFaive

Of all of Detroit’s assets, BelleIsle, the 985-acre island park situatedin the Detroit River just inside the U.S.border with Canada, could very well bethe city’s most attractive privatizationopportunity.

The park was designed byFredrick Law Olmstead (designer ofNew York’s Central Park) in the late1800s. Once referred to as “Detroit’sJewel,” Belle Isle fell prey to neglectduring the 1970s and 80s. Poor stew-ardship on the government’s part nearlydestroyed the park until recent effortswere made to restore its originalbeauty. Today, dredging and cleaning

operations are helping restore the se-ries of inland lakes and waterways, andnative fish are being restocked andmanaged. Statues and sculptures arebeing cleaned and repaired.

But the island has so much moreto offer. Handled properly, Belle Islecould become one of the great “right de-cisions” Detroit’s leaders make on theroad to revitalizing the city. Those whowould disparage the idea of privatizingthe island and opening it to commercialdevelopers forget that some ofAmerica’s most beautiful landscapes arekept and maintained in their pristinecondition precisely because that’s whatthe market demands.

Currently, the island contains fourmarinas, two pavilions, two city-ownedgolf courses, a driving range, a conser-vatory, a beach area, a zoo, and a 32,000gallon aquarium with 146 species of sealife (by contrast, Shedd Aquarium in

Chicago has 600 species). Most of thesecomponents would enhance the overallsales value of the island, particularly ifsold to a developer interested in build-ing an entertainment/tourism mecca.

If a private developer or group ofdevelopers purchase the island outright,this would provide a huge one-time cashinfusion for the city of Detroit. Theycould then divide the island into an ap-propriate mix of commercial, retail, andresidential properties. As these smallerlots were purchased and improved, asteady stream of property tax revenuewould begin to flow into city coffers onan ongoing basis.

Indeed, Belle Isle could becomethe private-sector equivalent ofChicago’s Navy Pier, complete with abuilt-in Shedd-style aquarium, and per-haps even a special theatre district,which might include a Shakespeare the-atre, opera house, and permanent Cir-que du Soleil facility, similar to thatadorning Disney World in Florida. Thepossibilities are endless. Allow for un-limited gaming (casino and sportsbooks) and Belle Isle could become aMidwest Monaco.

How could the city facilitate suchgrowth and development? By exempt-ing the island from the host of economi-cally debilitating regulations thathamper the rapid growth of businesseselsewhere in the city.

It would not be the first time De-troit got out of the island-runningbusiness. In 1920 the (then) 52-year-old Detroit Yacht Club received theright to build on a small island just offof Belle Isle. The Yacht Club becamethe official owner of the land in aland-swapping deal with the city. Theclub operates there to this day andpays a steady stream of property taxesto the city.

Island sales are not unheard of inthis day and age. The privately ownedGrass Island, a 45-acre undeveloped is-land in the Detroit River near the Am-bassador Bridge, is being sold by aCanadian family for at least $192,000,according to reports. Worldwide thereare 100 islands currently for sale.


A private Belle Isle need not be a fantasy.Ricardo Montalbon from the famed seventies

show “Fantasy Island” raises a glass to hisguests (and to privatization, we hope).

continued on next page

The Belle Isle Conservatory needs drastic improvements. The city had promised to spend$1 million restoring its splendor, but has failed to live up to that promise.

Michigan Privatization Report • Winter 2001 11

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Worldwidethere are 100islandscurrently forsale.

How much might Belle Isle sellfor? A conservative estimate would beabout $370 million. To come up withthat number, Mackinac Center for Pub-lic Policy analysts examined the landand measured it against the local real-estate markets. The table on the previ-ous page shows the results.

These estimates should be re-garded as conservative for a couple ofreasons. First, there are assets on BelleIsle including the two golf courses, adriving range, and several buildings thatare not included in the estimated valua-tion. Second, the city of Detroit recentlyraised its offer to purchase a six-acre siteon the Detroit River for $2.1 million peracre. This suggests a far higher valuefor island acreage than is reflected inthe economic assumptions used by theCenter’s real estate analysis.

But working with the $370 millionfigure, without any development on theisland whatsoever, Belle Isle would gen-erate $13.8 million (at current millagerates) in property taxes per year. With de-velopment of the kind discussed in thisarticle, that figure could easily double. Bylaw, the way sales of city property aredivvied up among Detroit’s spending pri-orities, $13.8 million in new propertytaxes each year would mean $488,000more for city libraries, $2 million forWayne County, $4.4 million for DetroitPublic Schools, $1.1 million for the stateof Michigan, and $5.8 million more eachyear for the city of Detroit todo with as it pleases. The cityalso would also be relieved ofits $6.6 million annual ap-propriation for Belle Isle.

Author and Ameri-can Enterprise Institutescholar Charles Murray offers a nintriguing plan for deregulation that, ifit were adopted for Belle Isle, could turnthe island into a showplace for the ben-efits of privatization and deregulation.Applied to Belle Isle, the idea wouldwork out something like this:

• The island could be sold to a builderor group of builders under a guar-antee that the city of Detroit wouldexempt all commercial activity onthe island from past or future cityregulation.

• The owner(s) could then prominentlyadvertise to interested businesses andthe general public the island’s free-dom from city regulation. Patrons

coming to the island woulddo so with the knowl-edge that they were vol-untarily entering uponunregulated territory.

The attraction:bargain base-ment prices forvirtually all

goods ands e r -vices.

• Specific deed restrictions could beplaced in each sales or lease con-tract, mandating a minimum level ofpublic safety and health necessities.For example, one deed might man-date that every building or home-owner must contract directly with afire and rescue service rather thanhaving one blanket, city provision.Similar deed restrictions could man-date that each owner contract out forrefuse collection and other services.

• The owner or owners also coulddraw up zoning ordinances and is-land speed and noise limits, andhire a private security force, possi-bly through Wackenhut Corpora-tion, a private, for-profit securityfirm already under contract with thefederal government. A Belle Isleprivate police force could be armed,make arrests, and book suspectswhere necessary, just as city law en-forcement does now. Seriouscrimes, such as homicide, could behanded over for adjudication bycity police.


The owner orowners also

could draw upzoning

ordinances,island speed

and noiselimits, and hire

a privatesecurity force.

“Belle Isle” continued from page 11

A recent study by Hamilton Anderson Associates, Inc. of Detroit reported that about $180million is needed for the city to improve Belle Isle. One improvement may be the removal ofeyesores such as this abandoned horse stable. A private owner would have incentive totear this down without a cost to the city.


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The Detroit skyline graces a good portion of Belle Isle’s shore, raising the value of its property.This photo was taken from the bridge of the Detroit Yacht Club, which owns land just offBelle Isle and pays property taxes to the city.

One added benefit of a private po-lice force is that its officers are not ex-empt from liability to the same degreegovernment police are. Private policeofficers, for example, likely would befar more careful in their handling of al-tercations than Detroit city police havebeen in several well publicized trag-edies. (For more on private security, seethe winter 1996 and winter 1998 issuesof Michigan Privatization Report atwww.mackinac.org).

• Another deed restriction the island’sowner or owners could insist uponis that businesses operating on theisland handle civil disputes withother commercial vendors usingonly the mechanism of arbitration.The lack of the threat of lawsuitswould dramatically lower the costof doing business on Belle Isle andprovide further incentive for entre-preneurs to locate there.

The list of options for turning theneglected Belle Isle into a thriving spotfor play, entertainment, and tourism is

practically endless. Privatization andthe curtailment or elimination ofDetroit’s onerous regulations couldturn the island into a commercial gi-ant. Indeed, Belle Isle could quickly

become for Detroit what Hong Kongis to China, or what Manhattan is tothe rest of New York.

All it would take is courage onthe part of policy-makers to championa great idea and allow the private sec-tor to find the best and most produc-tive use of the city’s underperformingassets.


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“Budget Boost” continued from page 5

also will require replacement, add-ing more expenses to the city’s re-maining residents and commercialestablishments.

If Detroit’s future expenditureswere relatively stable, this financialsnapshot still would be cause for con-cern. But the city is looking at two newoutlays of monstrous proportions:funding the pension obligations of cur-rent and future city employees, whichcould cost up to $3 billion, and fulfill-ing requirements under several federalenvironmental acts, which will costbillions more. Indeed, Mayor Archerhas noted that upgrading the city’swater and wastewater infrastructurecould cost as much as $10 billion overthe next ten years.

With less than $500 million in le-gal debt margin left, the Motor Citymay soon have its financial back to thewall. If there is one thing we knowfrom history, it is that recessions hap-pen. A recession for the rest of the na-tion, combined with demands on thecity to comply with huge federal envi-ronmental mandates, could spelltrouble for Detroit.

If properly implemented, an ag-gressive privatization campaign includ-ing sales of city assets could provideDetroit with the revenue it needs to paycreditors, improve services, and main-tain its infrastructure during the nextdecade. Privatization of city servicesalso could prevent Detroit from becom-ing the first major American city to have

its democratically elected leadershipreplaced with an appointed financialoversight panel—a fate that befell oneof its suburbs, Ecorse, in the 1980s.

Detroit holds its future in itshands. Will public officials and citizenscling to the status quo, or will they em-brace privatization as the engine thatdrives the Motor City to a new era offinancial security and economic pros-perity?


Divestiture


Water Privatization Can HelpDetroit Avoid Drowning in Debt

the International City/County Manage-ment Association between 1988 and 1997showed that the service of water distri-bution by private companies (operatingunder contract or as an investor-ownedutility) increased 84 percent.

There are even government-owned water utilities that are payingthemselves “profits” out of the equityearned by the utility. That is, they oper-ate very much like a private company.Cities with such an arrangement includeCincinnati, Ohio; Lancaster andBethlehem, Pa.; Baltimore, Md.; andEdmonton, Alberta.

By several measures, Detroit’swater distribution system is operatinginefficiently. Consider how Detroitcompares with Chicago, according toseveral commonly used standards of ef-ficiency. Detroit produces an averageof 673 million gallons of water per day.That works out to approximately 3.5 wa-ter department employees per milliongallons daily (MGD). By contrast, Chi-cago produces 1 billion gallons of wa-

ter per day. Its numberof employees per milliongallons daily is a meretwo. Economies of scaleprobably account forsome of Chicago’s supe-rior efficiency, butPhiladelphia’s water sys-tem is half the size ofDetroit’s and still outper-

forms Detroit’s department.

The National Association of WaterCompanies reverses the above ratio tomeasure efficiency. That is, it divides thenumber of employees into the millions ofgallons per day figure (see Table 1.)

Some observers note that Detroitcharges less money per gallon of waterthan other major cities, such as Phila-delphia or Boston, which charge $15 and$20 per 7,500 gallons, respectively. Bututility expert and consultant Hank Mulleof H.G. Mulle and Associates doesn’t

believe this necessarily indicates greaterefficiency. He notes that every systemtreats its water differently, dependingupon local environmental factors.Philadelphia, for instance, has severepurification problems and Boston’s wellfields suffer from saltwater intrusion.The costs for treating these unique geo-graphical distinctions are passed alongto consumers in the form of higher rates.

One way for Detroit to operate amore efficient, money-saving water dis-tribution system would be to retain own-ership of the system but contract out forthe various services it involves. Thereis no shortage of examples of how thismight be done. As of 1997, there wereover 400 privately operated but publiclyowned water utilities in America. Thereare 10 in Michigan. These are based oncontractual arrangements between mu-nicipalities and private companies foroperations and management servicessuch as maintenance and billing. TheLos Angeles-based Reason Foundationreports that savings from such contractsaverage between 10 and 25 percent.Shaving just 20 percent from Detroit’s$236 million water budget could save$47.2 million annually, assuming wa-ter rates and fees remain the same.

Earth Tech, Michigan’s largest pri-vate water and wastewater managementfirm, might be a good place to start. Itholds seven water distribution contractsin the state. Typically, Earth Tech hassaved its Michigan clients between 10and 30 percent on water distribution. Thecompany’s largest Michigan client, thecity of Portage, contracts for water andwastewater operations. The firm oper-ates the entire system with only 22 em-ployees. This works out to anemployee-to-millions of gallons per dayratio of 1.1, far below Detroit’s 3.5. EarthTech also handles 13 wastewater con-tracts in Michigan and performs billingfor three clients.

Another option for Detroit offi-cials would be to sell off the water sys-

By Brennan Brown

Water may be essential to humanlife, but is it essential that municipalgovernments own and operate water dis-tribution systems and departments?

There is little question that a cen-tralized source of water distribution isan efficient and effective way for peopleto obtain this life-sustaining resource.It need not, however, be a full-time jobfor the city of Detroit.

Detroit’s water system servicesapproximately 4.2 million people in 122Michigan communities, pumping asmuch as 700 million gallons of waterper day through 3,400 miles of trans-mission and distribution mains, all overa service area of 981 square miles.There are 15 pumping stations and fivebooster stations in the system, accord-ing to the Detroit Water and SewerageDepartment’s Web site.

Contracting out the city’s water sup-ply operations—even selling them to a

private utility provider—could result inlower water bill rates and improved, moreefficient services that save the city much-needed dollars. Detroit could best serveits many customers by either contractingout for operation and management of thewater system or by selling the system toan investor-owned utility and relinquish-ing the role of water provider altogether.

Privatization of water systems isnothing new. Nationwide, the practiceof involving the private sector in munici-pal management has grown substantially.Indeed, a series of surveys conducted by

Table 1Table 1Table 1Table 1Table 1

Municipally Run Water Comparisons

Location Detroit Philadelphia Chicago

Employees per MGD* 3.47 3.41 2

Customers per Employee 113.5 510 250

MGD* per Employee 288,000 293,000 500,000

*Millions of Gallons per Day


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tem to private investors in the form of autility. As of 1997, 15 percent of theAmerican population got its water frominvestor-owned utilities. The nearestexamples are the water distribution sys-tems in Indianapolis, Ind., and Calumet,Mich. In France and Britain, a respec-tive 75 and100 percentof citizensget theirwater fromi n v e s t o r -o w n e dcompanies.Firms inboth countries have been trying to get afoothold in the giant $300 billion Ameri-can water distribution industry, and cur-rently own water utilities in New Jersey,Connecticut, and portions of utilities inother locales.

Detroit’s water efficiency does notstack up well against other municipali-ties. How does it fare against investor-owned utilities? The first two columnsin Table 2 represent data from a 1996Reason Foundation study entitled, Re-structuring America’s Water Industry:Comparing Investor-Owned and Gov-ernment- Owned Water Systems. Thethird column reports Detroit’s water ex-

penses per connection, and em-ployees per connection. As thedata suggests, Detroit could maybe able to improve its efficiencydramatically if it would sell thesystem to a private concern.

Using industry norms forcalculating value and subtractingliabilities, the Mackinac Centerfor Public Policy calculates thatDetroit’s water system would sellfor a price ranging anywherefrom $1.775 billion and $2.285billion. The size of such a salewould probably limit potentialbidders to America’s Earth Techand several European companies.

There are many advantagesto selling Detroit’s water system. First,it would result in substantial savings forthe city. Second, it would create a newsource of revenue, since its ownerswould pay substantial property and in-come taxes into the municipal treasury.Third, it would mitigate the city’s need

to borrow money for any kind to sup-port repairs and upkeep, much of whichis mandated by the federal government.

The latter reason is all the moreimportant to Detroit because the citywill soon be forced to upgrade its wa-ter operations in order to comply withnew environmental legislation. At aSept. 12 federal court hearing on wa-ter compliance, Jim Murray, directorof Wayne County’s Department ofEnvironment, said it would cost $3billion to bring the city’s water sys-tem into compliance with federalmandates emanating from the CleanWater Act.

Mayor Archer reported in aspeech earlier this year that Detroit’swater system would need an annual in-vestment of $1 billion per year for thenext 10 years to comply with these man-dates and to maintain or improve infra-structure not covered by federalmandates.

Detroit is not the only city suffer-ing from the burden of these new federalmandates. The Environmental Protec-tion Agency and other organizations es-timate that municipalities nationwide willhave to spend over $500 billion to $1 tril-lion in compliance costs by 2005.

However, a tax increase on Detroitcitizens to pay for environmental man-dates is unlikely because the city doesnot fund its water operations from prop-erty taxes and because two-thirds of thoseusing the city water system live outsidethe city limits. Therefore, the most likelysource of funds will come from a ratehike. But this would be tantamount toforcing nonresidents to subsidize city

residents because suburban water-supplysystems require much less work.

These factors make waterprivatization far more than just an op-tion for the city of Detroit. To deal withthe costs that loom on the horizon, theMotor City will have to do everythingin its power to save money.Privatization offers not only a way todo this, but opens up possibilities formore efficient and better water servicefor the city and its suburbs.

Brennan Brown is pursuing hismaster’s degree in business administrationfrom Central Michigan University.


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These giant pumps at Detroit’s northeastern waterplant move treated water from the plant to consumers.

Table 2Table 2Table 2Table 2Table 2

Location and Type of Operation Investor-owned Government-owned Government-owned

(California) (California) (Detroit)

Total Operating Expense Per Connection $273 $330 $475

Employees per 1,000 Connections 1.62 3.49 8.80

Salaries as percent of operating revenue 13.4 percent 37.13 percent Not Available


FeaturePrivatization Should DriveDetroit Transportation

By Wendell Cox

With any government service,the public is best served when qualityis provided at a cost that is no higherthan necessary. Sadly, this is not thecase with respect to the Detroit De-partment of Transportation, a city-runsystem of buses that operates ineffi-ciently at great cost to Detroit’s strug-gling taxpayers. But this need not be.

Privatizing Detroit’s public transpor-tation system could result in vastly im-proved service and could even reduceoverall operating costs by as much as40 percent.

The privatization options are mul-tiple. The city could competitively fran-chise the system, competitively contractindividual routes, or simply repeal theprohibition on “jitneys,” sell its buses,and contract only for those services notprovided by private companies. Therealso are opportunities to involve em-

ployees by making them ownersthrough a stock ownership plan.

Background

The Detroit Department ofTransportation (D-DOT) is the largestpublic transit system in Michigan. Itoperates approximately 450 buses thatspan 1,300 route miles throughout thecity. Each year the fleet travels 23

million miles delivering 42.5 millionpassengers.

In the 2000-2001 budget, the cityappropriated $172 million to operatethis system, $68.4 million of which isan operating subsidy that will comefrom Detroit’s cash-strapped GeneralFund. This is up substantially from $53million in 1998.

These financial problems areamong the reasons that D-DOT is push-ing hard for a full-scale merger with the

Suburban Mobile Authority for Re-gional Transportation (SMART) bussystem, which serves suburban countieswith routes largely radiating fromDetroit’s downtown and New Centerareas. A merger is also supported bystate legislators who have threatened towithhold state funds to each transporta-tion system unless a merger takes place.

However, the merger has beendeemed inadvisable by KPMG, an in-ternational accounting and consultingfirm called in to determine the feasibleoperating alternatives. KPMG’s judg-ment has been endorsed by six transit-expert evaluators hired to assessKPMG’s finding. This is the same ad-vice provided by this author while un-der retainer to Oakland CountyExecutive Daniel Murphy in 1985,which became the basis for the policyagainst merger that lasted into the 1990s.

Privatization on wheels

So how can D-DOT be mademore cost-effective and reliable? Thereare four privatization options city offi-cials might consider:

Option 1: Competitive Fran-chising. The city could competitivelyfranchise the entire bus system to oneof a number of large bus companies, fora period of up to 20 years. Under suchan arrangement, the private companywould provide a basic level of servicespecified by the city of Detroit, chargefares within a broad range authorizedby the city, and renew the bus fleet andfacilities. Like D-DOT today, the pri-vate company would have an exclusiveright to operate service along the city’sroutes.

Melbourne, Australia, recentlyimplemented such a program. The fran-chises began officially in 1999. Eachof two competitively selected firms nowhave 20-year contracts to provide ex-panded and upgraded transit services fora fixed fee—an amount less than it

Divestiture

The People Mover is just one component of Detroit’s overall transportation system. It should beeliminated in favor of jitney cabs or some other form of transportation. Published reports indicatethat Detroit must subsidize each passenger fare by $3.44. In 1999 the total People Mover subsidywas $9.3 million.


Detroit couldreduce thecost of itsoperationsby at least 40percentusingcompetitivefranchisingorcompetitivecontracting.

Feature

would have cost the former governmenttransit agency to provide the same ser-vice. The government expects savingsto be substantial.

Option 2: Competitive Con-tracting. In England, London Trans-port, which is twice the size of NewYork City’s public transit system and15 times the size of D-DOT, competi-tively bids out to private contractors allof its bus services. Competitive con-tracting has reduced operating costs 45percent, inflation adjusted. In addition,service quality and the number of pas-sengers using the system are bothhigher than before. London Transportmaintains its right to establish routes,fares, and service standards. It eventells the private contractors how topaint their buses.

The service is operated throughhundreds of individual contracts that arere-bid at least every five years. Serviceoperators are still provided with subsi-dies, but they are far smaller than whenthe system was under government op-eration. In some recent years, no sub-sidy was required.

London is not the only major ur-ban area to competitively contract itstransit services. Other cities that havecompetitively contracted transit ser-vices, or are in the process of doing so,include Stockholm, Sweden;Copenhagen, Denmark; Adelaide andPerth, Australia; and Helsinki, Finland.The European Union is issuing regula-tions that will require most public tran-sit systems to be subject to competition.In America, the cities of Denver and SanDiego have saved 35 percent and 40percent, respectively, thanks to competi-tive contracting for transit services.

Detroit could reduce the cost of itsoperations by at least 40 percent usingcompetitive franchising or competitivecontracting. This estimate is based onhourly operating costs. Detroit spendsmore than $75 per service-hour per ve-

hicle, whereas competitively contractedbuses cost approximately $45 per hour,a 40-percent difference. Savings of thismagnitude could exceed $60 million an-nually.

Either of these alternatives—competitive franchising or competitivecontracting could be implemented inDetroit though skillful design would benecessary to accommodate highly intru-sive federal labor regulations.

Option 3: Employee Stock Own-ership Plan (ESOP). An ESOP is anarrangement like that existing in manycorporations, in which employees are is-sued stock in the company as part of theircompensation package. ESOPs have fa-cilitated privatization around the globe.

How do they work? Usually,stock is sold to employees at a discount.In some cases it is given to employeesin exchange for their cooperation. Cre-ative approaches could combine anESOP with competitive franchising orcompetitive contracting.

The city of Fort Wayne, Ind., con-sidered converting its transit system toan ESOP approximately 10 years ago,but the effort was abandoned due tounion opposition. However, a federalreport concluded that it was feasible.

Option 4: Legalize Jitneys. De-troit outlaws the use of “jitney” servicesby private vendors. A jitney may be ataxicab, van, or minibus that charges aflat fee while operating along estab-lished routes. In New York, jitneys areproviding low-cost, flexible service tolow income residents that is less costlythan transit service and more convenientfor many riders. Many will providedoor-to-door service for repeat custom-ers. If legalized, they could supplementcurrent transit service, reduce subsidyrequirements, and provide a new sourceof income for city residents who couldbecome jitney entrepreneurs. All of thiswould benefit the community by in-creasing employment and providing

higher levels of service to people whodo not have ready access to automobiles.

Privatization of Detroit’s publictransit system should be part of the city’soverall campaign to hold down costsand make the city more “user friendly.”City officials should get started soon,before the state imposes an intrusive andless effective solution from Lansing.

Wendell Cox is principal of WendellCox Consultancy, an international publicpolicy firm. He has provided consulting as-sistance to the United States Department ofTransportation, among others.

Divestiture


FeatureNine Steps to Successful Outsourcing

By Michael LaFaive

Whether you run a business or arethe head of a public or nonprofit orga-nization, “outsourcing” offers one of thebest ways to provide better services forless money.

Outsourcing is simply hiring an-other company to take over and run aservice it can perform better and moreefficiently than you can. Private com-panies can outsource services to otherprivate companies. Public entities suchas city governments or governmentagencies can outsource services to otherpublic agencies, to private for-profitcompanies, or to private nonprofit com-panies or organizations.

Outsourcing is growing as a man-agement tool for officials and executivesin both government and the private sec-tor. Spending by U.S. organizations—public and private—on outsourcedbusiness services is expected to triple

from its 1996 level of $100 billion, to$318 billion by 2001.

Many municipalities routinelycontract with private companies for such

work as debt collection, property tax as-sessment, housing and community devel-opment, legal services, librarymanagement, motor vehicle mainte-nance, janitorial services, refuse collec-tion, security, rodent control, parkingmeter enforcement, and security, to namea few.

Just the possibility that a city mayoutsource a service can give governmentservice providers the incentive they needto improving service and efficiency. Forexample, when Flint Mayor WoodrowStanley told city refuse collection work-ers that unnecessary expenses were forc-ing the city to consider outsourcing, theystopped their practice of picking up bulkitems only during overtime, when theywere paid more by the city. The Flintcity employees increased the number ofstops on their rounds and ended up sav-ing the city 31 percent of what it spenton refuse collection the previous year.

But there are right and wrong waysto outsource ser-vices. For ex-ample, in order tobe successful—that is, in order tosave money andprovide better ser-vices at the samet i m e — t h eoutsourcing pro-cess must includeopen, competitivebidding for con-tracts that are sub-ject to periodicrenewal. The con-tract terms mustbe written care-fully to incorpo-rate clear andappropriate safe-guards. There

also must be effective monitoring of per-formance to ensure the contract is beingcarried out as specified. Specifically,there are nine key steps to successfuloutsourcing, and they are as follows:

1. Do your homework. Thewhole point of outsourcing is to get themost for your money. If you do not pickthe service provider that delivers this—and monitor whether the provider hasmade good on its promise—you willfail. This means designing two systems:a bidding system that delivers the rightprovider and a monitoring system thattracks performance.

2. Involve key parties. Alertinggroups that will be affected byprivatization—students, parents, teach-ers, and local public school unions—isessential. When constituencies under-stand that they are part of the process,they often are more willing to work withadministrators.

3. Issue Requests for Proposals(RFPs). An RFP is your signal to ser-vice providers that you are open forbusiness. It lays out the requirementsof the service you need someone to pro-vide, and requests that contractors makebids after assessing how much it wouldcost them to fulfill the contract require-ments. Many top-flight, standard-for-mat RFPs for various services can befound on the Internet. These can beadapted to almost any city’s needs.

4. Ensure a competitive envi-ronment. Perhaps the most importantaspect of outsourcing is ensuring com-petition among vendors. Aggressivelyadvertising your municipality’s desire tobid out services increases the likelihoodof drawing a large number of talentedvendors.

5. Ensure quality work. Make itclear that the contractor’s work will be in-spected. Some contracts specifically enu-merate the number of surprise andscheduled inspections a vendor can expect.

6. Employ a skilled attorney. Intoday’s litigious world, you can’t be toocareful. The counsel of a business at-torney is a sound investment. Too many

See “Nine Steps” on page 24

Outsourcing

A November 5 Detroit News report on Detroit’s fire department found that 21 residents ofthe city lost their lives to poor equipment and closed stations. Outsourcing this function toa private business might save lives and provide the city with management expertise thatappears to be lacking.


Feature

Moreover, the PLD’s claim on thepublic pocketbook doesn’t end with theseexcessive operating costs. According toa July 2000 article in the Detroit FreePress, the PLD will require an additional$150 million to upgrade a power stationand its leadership has requested another$50 million for new and better equip-ment. The City Council has since hiredan outside consultant to determine if thiswould be the best use of resources.

The benefits of privatization

Selling Detroit’s electrical powersystem to an investor-owned utility suchas Detroit Edison would benefit the cityin several ways. First, sale of the PLDto a private company would generate ahuge, one-time influx of much-neededcash. One Detroit utility expert says elec-tric utilities commonly sell for 1.5 to 2.5times their book value (also known as“equity”), which could place the privatesale of Detroit’s PLD at between $301million and $501 million. It should benoted, however, that Detroit’s PLD is soinefficient that it likely would sell forsomewhat less than what an operation ofits type otherwise might go for.

Another benefit of selling the util-ity would be the steady flow of new rev-enue into city coffers through propertytaxes paid by the utility. But perhapsmost important of all is that the salewould result in better service to custom-ers, who could rest in the knowledge thatthose providing their power are doingso on the understanding that failure isnot an option, as it unfortunately can bein a public-sector operation, which con-tinues to receive funding regardless ofhow efficient or inefficient it is.

What to do about Detroit’s light-ing and power service has been the sub-ject of ongoing criticism and debate formost of the last decade. Recognizing thata reliable power source is one of themany improvements that must be madeif the city is to attract and retain jobs and

By Ronald D. Utt, Ph.D.

Since 1950, the city of Detroit haslost 48 percent of its population to safer,cleaner, and better-serviced suburbs. Asit embarks upon a new century, theMotor City would like to polish its im-age and create the kinds of neighbor-hoods that might lure families back tosafe, wholesome neighborhoods and acongenial atmosphere.

A step in the right direction mightbe to privatize electrical power. Althoughmany blame factors beyond Detroit’scontrol for the relentless flight of middle-class families and businesses to the sub-urbs and elsewhere, recent dramaticreversals of fortune in other Americancities demonstrate that good governmentand quality public services are the keysto holding on to people and commerce.

Detroit runs its own electricpower company—poorly. Because thecity’s Public Lighting Department(PLD) operates with far less efficiencythan private, investor-owned utilities, itmust of necessity feed on the economiclifeblood of the city. This drains fundsaway from other city services that mightotherwise improve. Private utility com-panies—of which there are many—cando the job far better for less money.

Detroit’s lighting department

Detroit has appropriated $67 mil-lion to fund PLD operations and capitalimprovements during fiscal year 2000-2001, which includes a $12.7 millionsubsidy to cover the shortfall in ex-pected revenues. In other words, farfrom operating at a profit like a privatecompany must in order to survive, thecity currently is operating its power gridat a nearly 19-percent annual loss. Thisperpetually hemorrhaging arrangementis what generates the more than 318million kilowatt-hours of electricity that1,578 public entities and private busi-nesses are forced to use because it istheir only choice. Detroit’s energy cus-

tomers include city departments, pub-lic schools, police stations, fire houses,libraries, the Joe Louis Arena, theMichigan Department of Transporta-tion, Wayne State University, Cobo Cen-ter, City Airport, and the People Mover.

One 1996 analysis found that thePLD spent $57 to produce one mega-watt-hour of electricity, compared to$22 spent by private Detroit Edison.This suggests that the city’s cost to pro-duce electrical power is as much as 160percent higher than what it costs in theprivate sector. One department officialonly added to the city’s embarrassmentwhen, although he could not verify theestimate, he insisted that the PLD’s costper megawatt-hour was really “only”$36.57, or 66 percent higher than theprivate-sector cost.

With this kind of attitude, it’s nowonder Wayne State University and“other unnamed PLD customers” may“flee” PLD services in favor of investor-owned Detroit Edison, as recently re-ported in The Detroit News. Whicheverfigure is correct, it is clear that Detroit’scitizens are paying more than is necessaryfor electric power (through high rates andcostly tax subsidies) and that these over-payments represent funds that could bebetter spent on core public functions suchas education, police, or road repair.

The Power to Privatize

Detroit owns and operates a power company,pictured here. Several of its clients haveinvestigated opting out of the city system.Detroit should sell its plant and get out of thepower generation business.

Outsourcing

See “Power to Privatize” on page 24

One 1996analysisfound that thePLD spent$57 toproduce onemegawatt-hour ofelectricity,compared to$22 spent byprivateDetroitEdison.


Public Act 245 of 1999 makesclear that fees generated from servicemay only be used “for operating theagency, the construction board of ap-peals, or both.”

If enough evidence accumulatesthat local governments are redirectingrevenues to purposes unrelated to build-ing safety, the state could order offend-

ing municipalities to lower inspectionfees. Instead, why not fix the problemand save money at the same time byprivatizing inspection services?

For the 2000-2001 fiscal year,Detroit’s city budget designates morethan $24.5 million to the Building andSafety Engineering Department. Sixty-seven percent of these funds pay for in-spections of a mechanical, electrical,plumbing, or building nature. A sizeable$4.2 million of the total budget appro-priation is designated as a “net tax cost”to the city. This means the revenue De-troit is expected to derive from chargesfor its inspection services doesn’t coverthe expense of conducting them, to thetune of $4.2 million this fiscal year. Thecity simply charges this cost to the tax-payers, who unknowingly suffer the loss.

Looking over Private InspectionsBy Michael LaFaive

One of the least publicized servicesthat municipal governments hire privatecompanies to perform is mechanical,electrical, plumbing, and building codeinspections. In Michigan, regions as di-verse as Clinton County and the city ofRockford contract with private inspec-tors to enforce code regulations.

There are at least seven private,for-profit firms in Michigan that caterto this niche market. Several also con-duct city planning and zoning reviewsunder contract and can issue citationsto code violators.

Detroit and other Michigan mu-nicipalities should seriously consider theadvantages of contracting with the pri-vate sector for these services. This wouldnot only save the taxpayers money, it alsowould alleviate a growing problem withregard to municipalities’ use and possibleabuse of inspection fees.

For example, one private inspectionservice owner told Michigan PrivatizationReport that a municipal client mandatesthat he return an “administration fee”equal to 10 percent of his inspection feeto the municipality that hired him. This isostensibly being done under the guise offunding court costs when a judge is nec-essary to enforce building codes, but feesare apparently covering more than costsin many municipalities. The difference—or “kickback” as some would call it—canthen be spent on whatever municipal of-ficials fancy.

In March, state treasury officialsinformed municipalities they wouldhave to establish a special revenue fundto designate how inspection fees arespent. This new demand is being madepursuant to recent changes in the StateConstruction Code Act, which requireslocal governments to establish “reason-able fees” which “bear a reasonable re-lationship” to the cost of operating acode-enforcing agency.

To the city’s credit, it has beenworking to improve the speed at whichinspections are completed. Indeed, of-ficials in Detroit inform MichiganPrivatization Report that the number ofbuilding permits issued by Detroit’sBuilding and Safety Engineering De-partment increased from 2,500 in 1994to 8,000 in 1999. The increase in num-ber of building permits issued is impor-

tant because it suggests that city offi-cials were conducting more inspections.

Privatizing the inspection servicescurrently performed by Detroit’s Build-ing and Safety Engineering Departmentwould probably eliminate this net taxcost to city residents and perhaps wouldreap even greater savings. After all, timeis money. And private inspectors whoare paid according to how much workthey do tend to move faster than gov-ernment employees who are paid re-gardless of what speed they work.

By contrast, when builders useprivate inspectors, they save hugeamounts of precious time. The cityof Fort Worth, Texas, learned thiswhen it began supplementing its mu-nicipal inspectors with private ones in

This Detroit city waiting area is its own argument for privatization. Citizens trying to build orexpand their businesses or homes, and reporters trying to obtain public information, canexpect to spend mind-numbing hours waiting for government officials to assist them.

FeatureFeature

Outsourcing

To the city’scredit, it has

been workingto improve

the speed atwhich

inspectionsare

completed.


March 1999. One Fort Worth contrac-tor, Ron Forrnby, reported thatprivatization caused a dramatic dropin the inspection time required forbuilding plan reviews for 80 to 100homes. Before privatization the re-views took from 30 to 40 days. Afterprivatization, they took only three tofour days.

There is nothing about private,for-profit inspections that would makethem of less quality than public ones.Private inspectors simply cannot affordto do shoddy work because it would hurttheir profits. Government inspectors, onthe other hand, have no such obviousincentive.

One recent case in point wasshowcased by the Detroit Free Presson Oct. 20, 2000. The story, “We WantA Safe House,” told of a family thatbought a house through a federal pro-gram. Both federal and Detroit inspec-tions reported only minor problemswith the house and allowed the familyto move in. After experiencing prob-

Feature

lems with the home, the family hiredits own private, for-profit inspectionservice, which found 181 building codeviolations. The family moved out af-ter the private inspector told them thehouse was not safe to live in.

Time savings enable builders tomake the same amount of profit on lessrevenue. This means they can chargemunicipalities less for their services. Re-sult: The taxpayers save money.

For example, three years ago, thecity of Battle Creek contracted withAssociated Government Services ofMichigan, a private inspection firm, forsupplemental plumbing, electrical, me-chanical, and building inspection ser-vices. To date, Battle Creek has savedroughly $600,000.

Extrapolating such savings toDetroit, it is possible to conceive of sav-ings to the tune of $5.1 million per yearas a result of contracting out for just halfof the city’s mechanical, electrical,plumbing, and building inspections.

But why stop there? Detroit couldalso save the taxpayers even moremoney by contracting out city planning,zoning and housing responsibilities tocompetent private-sector experts.

There’s no inherent reason whythe government should conduct inspec-tions and enforce building and othercodes when the private sector can do abetter job for less money. This is espe-cially true since the private sector has amore motivating incentive—the eco-nomic one—to conscientiously enforcethese standards of excellence.


Outsourcing

Afterexperiencingproblemswith thehome, thefamily hiredits ownprivate,for-profitinspectionservice,which found181 buildingcodeviolations.

Private Building Codes?

If private inspection is cheaper and more efficient, why not also privatize thebuilding, plumbing, machine, and electrical codes themselves? Private codes wouldplace a huge area of economic activity off-limits to government regulators, preventingtheir use as a tool for expansion of government intrusiveness (since 1970, the book thatoutlines these codes for U.S. developers has more than quadrupled in size).

Who would enforce a private code? Insurance companies have a strong incentive tomandate, as a condition of insurance, that strict codes be enforced. Other interestedparties would be the construction industry itself and Underwriters Laboratory, a pri-vate, nonprofit standards and testing institution.

Walt Disney World in Florida has largely promulgated its own building and fire code(and enforcement) since 1969. It maintains over 22 million square feet of buildingspace. So successful has Disney been that many of its innovations have been adopted as“model code” for other municipalities.

For more on the concept of a “free market” in building code regulation, see BuildingRegulation, Market Alternatives, and Allodial Policy, by John Cobin.

Privatization Sidebar


The city is expected to spend morethan $366 million from July 2000through July 2001 on operations andmanagement of its wastewater treatmentsystem. It could spend less and meet itsown goals for “meet[ing] federal, state,and local requirements for the clean airand clean water standards,” which thedepartment lists as its number one goalin the city budget, if it would be willingto contract out for the operations andmanagement of its system.

This past September much ofMetro Detroit was underwater becausethe system couldn’t handle the rainfall ofa major storm. Although Mayor DennisArcher has been charged by the U.S. Dis-trict Court with solving the pollutionproblems, there is little reason to expectthings will get better. City employeeshave no real economic incentive to pro-vide better wastewater treatment servicesand there is little the mayor or city coun-cil can do about the situation unlessprivatization becomes an option.

Indeed, besides getting better ser-vice for less money, one of the majoradvantages of privatization is that gov-ernments can discover—sometimes forthe first time—how much it actuallycosts to provide a given service. With-out private contracting, a mayor mustrely solely on city employees and theirrespective unions for information on thecost of wastewater treatment or anyother city service. When city employ-ees are forced to bid against privatefirms, on the other hand, the mayor orcity council can make a more-informeddecision as to whether the city shouldcontract out for operation and mainte-nance or engage in some other form ofpublic-private partnership.

There is a good deal of evidencethat privatizing city wastewater treat-ment service would result in significantsavings. The results of a 1999 NationalAssociation of Water Companies sur-vey of 29 public-private water-sewerfacilities found that: (1) Prior to pri-

Don’t Waste Water TreatmentPrivatization Opportunities

By Gary Wolfram, Ph.D.

The time has come for the city ofDetroit to privatize its wastewater treat-ment facilities. The environmentalhealth of the Great Lakes is at stake, tosay nothing of the pocketbooks of MetroDetroit citizens.

The Detroit Free Press has edito-rialized that, “It’s an embarrassment tothe city that for almost two years, untilMarch 1999, the [city treatment] plantdumped untreated sewage into the De-troit River because equipment was tooworn out or insufficient to handle thevolume of gunk running through it.”

U.S. District Court Judge JohnFeikens appointed a committee to inves-

tigate the problems of the Detroit Waterand Sewage Department. It found evi-dence of poor management, chronic de-lays, inefficient purchasing and hiringrules, lack of training, and a general tar-diness and absence of leadership in re-acting to problems known to thedepartment.

vate contracting, 41 percent of the sys-tems were not in compliance with EPAregulations, while within one year ofthe contract all were in compliance; (2)All of the privatizations resulted inlower rate increases than were foreseenprior to privatization; (3) In 17 percentof the facilities, cost savings were be-tween 10 percent and 40 percent; (4)Investor-owned facilities improvedcustomer service at a lower cost; and(5) In 24 percent of the facilities, pri-vate firms provided investment capitalfor system improvement or purchasedthe facilities from the municipalities.

A partnership betweenMilwaukee’s wastewater treatment sys-tem and United Water, a private firm, hasreduced the system’s annual operatingcosts by 30 percent. This has allowedthe city to reduce sewer fees by 15.5 per-cent, even as it improved discharge com-pliance 50 percent beyond the WisconsinDepartment of Natural Resource’s mini-mum requirements. This earned the com-pany a $50,000 bonus from the city.

Knocking just 20 percent off theDetroit’s current sewerage bill (not in-cluding this year’s capital expendituresfor improving the system) could save thecity and/or its rate payers $42 million an-nually. (Editor’s Note: This figure isbased on 1999 revenue figures from cityand suburban customers of $210 million,which can be found in the city’s Com-prehensive Annual Financial Report .)

Detroit will be forced to upgradeits wastewater treatment system in thenear future to comply with environmen-tal legislation that has been passed byCongress. According to Gary Fajita,assistant director of wastewater opera-tions, capital costs are expected to reach$2 billion in the next five years alone.

Detroit has little ability to securesuch financing at a reasonable cost,given legal constraints on its borrowingcapacity and the fact that the city’s debt

Feature

Outsourcing

See “Waste Water” on page 24

The city appropriated $366 million for the 2000-2001 yearto run the Sewerage department. Much more will beneeded to make necessary improvements to the system.


FeaturePrivatization: A Cure for What AilsDetroit’s Emergency Medical System?

By Charles D.Van Eaton, Ph.D.

It is possible to argue that ErrolShaw, Sr. might be alive today ifDetroit’s Emergency Medical Services(EMS) system were as efficient as EMSsystems in other American cities. Thegeneral reports surrounding Mr. Shaw’sdeath following his fatal encounter withDetroit police indicate that EMS re-sponse was severely deficient. Accord-ing to news reports and admissions fromcity fire officials, an EMS unit did notarrive until 28 minutes after the first 911calls for help. When an EMS vehicledid arrive, smoke was rolling from un-der its hood.

There is solid evidence to supportthe argument that what happened to Mr.Shaw after being shot by police wouldnot have happened in a similar event inChicago, Los Angeles, San Diego, orseveral other large American cities.These cities, and a number of other largecities in America as well, have muchfaster EMS response times than seemsto be the case in Detroit.

Chicago, with a population of 2.8million, reports EMS response times av-erage 4 to 6 minutes. Los Angeles, nowthe second largest city in America with apopulation of 3.8 million, reports EMSresponse times average 5 to 8 minutes.

Yet, unlike Detroit, these citieshave completely restructured their EMSsystems to make use of private EMSproviders working in concert with tra-ditional public fire departments to as-sure maximum efficiency. There can bedo doubt that this restructuring has notonly contributed to more rapid EMSresponse, but to lower per-capita EMScosts as well.

In response to the charge thatDetroit’s EMS system is in a state ofdisrepair, Charles E. Wilson, executivefire commissioner of Detroit’s Fire De-partment—within which all EMS activi-

ties are placed—stated that of the EMSsystem’s 41 vehicles, only 12 were outof service for repair and maintenanceand the remaining 29 “revealed no ma-jor disrepair or other problems” thatwould endanger technicians or patients.

But Wilson’s response was at vari-ance with official Detroit Fire Depart-ment records. Official records show 44total EMS units with 13 vehicles out ofservice and 14 in service with problemssuch as bad brakes; no air-conditioning(considered vital when patients are suf-fering heart failure), out-of-alignmentwheels, and inoperative communicationcomputers (essential to getting reportsto and from trauma centers).

The reported cost of providingEMS services, based on official citybudget data, is $21.2 million in positionsalone. With a reported 69,600 medicalruns in 1999, this comes to $300 per run.However, these data understate the realcost of operating Detroit’s EMS sys-tem because, unlike a for-profit entity,governments do not include fringe ben-efits (including retirement costs), capi-tal costs, or maintenance costs whenreporting the costs of running a particu-lar department.

If, as is generally the case in theprivate sector, complete labor costs are35 percent greater than simple wage andsalary reports, true personnel costs inthe EMS division are closer to $28.6million. Assuming that capital costs(maintenance and depreciation) are,conservatively, $1.4 million per yearyields a full cost of $30 million. Withreported medical runs of 69,600 in 1999,the true cost per run is closer to $431.

Detroit has not performed well incollecting for the EMS services it ren-ders. It is averaging a 27 percent col-lection rate on its EMS billings. Withoverall operations costs expressed veryconservatively at the $21.2 million per-sonnel cost figure (this excluded main-tenance, fuel, medical supplies for each

unit, depreciation on units, and em-ployee fringe benefits, $300 per-runcost, and a collection rate of only 27percent), Detroit’s taxpayer subsidy ofthe city’s EMS system places the citynear the top of the inefficiency scale at$15.71 per-capita.

Privatizing EMS

Privatization is one way Detroitcould overcome the problems with itsEMS system. One of the first issues acity should address when consideringwhether to wholly or partially privatizea service currently being provided bygovernment is to ask the following ques-tion: “Is this a service now being pro-duced by private firms for privatecustomers or by private firms on con-tract to a public entity?”

The 1993 Journal of EmergencyMedical Services’s annual survey ofEMS providers in America’s 200 larg-est cities (also known as “The Alma-nac”) suggests the answer is yes. Thesurvey identified six EMS providertypes: fire department; hospital-based;private; public utility model (wherein aregulated monopoly ambulance systemcontracts with a private provider); anda non-police-or-fire department munici-pal service funded and operated by a cityor county government. In this mix ofsix possible models, four involve sig-nificant or total provision of the EMSservice by a private provider and ac-counted for almost two-thirds of totalEMS service provision.

The Almanac reports on howEMS services are provided using eitherprivate providers alone or private pro-viders in partnership with public agen-cies in America’s 200 largest citiesincluded a number of Michigan cities.Grand Rapids, the most populated of theMichigan cities listed relies on privateproviders. Flint used private providersworking in concert with the public firedepartment. Other Michigan cities were

Outsourcing

See “EMS” on page 27

Detroit hasnotperformedwell incollecting forthe EMSservices itrenders. It isaveraging a27 percentcollectionrate on itsEMS billings.


Feature

deals have soured due to poorly writtenand/or misunderstood contracts.

7. Keep good, clear records. If youdon’t have a benchmark for where youstarted and where you expect to go, youcan’t measure whether you actually gotthere or whether there could be improve-ment in the process. Perhaps worst of all,you can’t crow about your outsourcing suc-cess unless you have a record of what im-proved and by how much.

8. Make progress reports. Peri-odic progress reports on the contractor’sperformance should be disseminated not

just within your organization or thecontractor’s, but with parties that havean interest in the success of youroutsourcing venture. It might also beshown to others who might be interestedin contracting with the particular vendor.

9. Do your homework—again!Successful contracting involves master-ing many details. The more you pre-pare, the better off you will be shouldcriticism emerge or a crisis erupt.

Always remember: Outsourcingis no longer new. You have plenty ofsuccessful examples to follow. No

longer is there any reason why city ser-vices need to operate on a running defi-cit, when private contractors are waitingin the wings to provide better servicesat lower cost.

Detroit officials, take heart—andtake note!


“Nine Steps” continued from page 18Outsourcing

rating is barely “investment grade.” Someinstitutions are not allowed to invest inbonds that are not investment grade becausethose bonds are considered too risky. Whilethe city’s rating has been improving, manyinstitutions are still precluded from buyingits bonds, which limits its buyers and raisesits costs. On the other hand, private firmswould be both willing and able to supplythe capital needed to replace and repairaging facilities and construct new ones.

The initial political instinct willbe for suburban municipalities to at-tempt to seize control of the wastewa-ter system from Detroit. This push for

suburban takeover will increase as ratesfor Metro Detroit residents rise to fundsystem upgrades. The political battlewill be divisive, and no matter how itturns out the fundamental problem—thefact that the government holds a mo-nopoly—will not be solved until taxpay-ers and ratepayers have the opportunityto choose their service provider. Con-tracting out and competitive bidding fora properly drafted contract will discoverwhat the most efficient mix of private-public ownership and operations is.

This is one of the few issues uponwhich environmentalists, consumer ad-

vocates, business owners, and ratepayerscan agree. Everyone benefits fromcleaner water and lower rates. Ratherthan engage in wasteful and destructivepolitical battles over turf, the mayor andcity council of Detroit should begindrawing up contracts for operations andmaintenance of the city’s wastewatersystem and let the bidding begin.

Gary Wolfram, Ph.D., is GeorgeMunson Professor of Political Economy atHillsdale College in Hillsdale, Michigan.

“Waste Water” continued from page 22

residents, a variety of reforms have beenproposed, including some form ofprivatization. But so far, such discus-sions have bogged down in haggling overdetails, including labor issues.

To minimize such resistance toprivatization efforts, officials should bevery vocal about their intention to ac-commodate workers displaced byprivatization. They should offer guar-antees of employment elsewhere in the

city government, and/or generous sev-erance payments and early retirementpackages. The cost of follow-throughon these promises will be far out-weighed by the economic benefits ofprivatizing the city’s power system.

While Detroit already has ex-plored the possibility of “partnering”with private utilities for improving thepower system, why tinker around theedges? Private, for-profit utilities suc-

cessfully deliver energy to their clientsin many cities across America.

Ronald D. Utt, Ph.D is a senior re-search fellow with the Heritage Foundationin Washington.

“Power to Privatize” continued from page 19


Around the State

Detroit Quietly OutsourcesPolice Oil Changes

DETROIT—In summer 1998,Michigan Privatization Report (MPR) pub-lished “Detroit DPW on Cruise Control,”a story based on published reports aboutthe cost of changing oil in Detroit’s policecruisers. It appears as though Detroit offi-cials may have read the work, becauseshortly after its publication, the cityoutsourced at least some of its police oilchanges to the private firm Urban Man-agement (now called On Site Oil).

Reports had suggested that the De-troit Department of Public Works wasspending $1 million annually to changethe oil in 500 police cars. MPR editorJoseph G. Lehman estimated then that,if private garages were performing theoil and filter changes, at $30 per car, ev-ery one of Detroit’s 500 units would needits oil changed about 67 times a year tohave the service cost $1 million. In or-der to need that many oil changes eachcar would need to drive 200,000 milesannually—an unlikely figure.

Details of the contract are sketchy.Repeated telephone calls to the city po-lice and the Detroit Department of Pub-lic Works over a two-week period failedto locate the official who representedDetroit in its contract with On Site Oil.An employee of On Site Oil, however,informed MPR that the firm does indeedchange the oil in Detroit police cars.MPR was unable to determine if On SiteOil is the only contractor to do so.

On Site Oil charges $32.95 per ve-hicle per change. The charge includesevery service that other private garagesperform for civilians. If all 500 policevehicles had their oil changed 10 timeseach year at On Site Oil, the bill wouldcome to $164,750, an astounding 507-percent drop in the cost to the city ofperforming this maintenance operation.

Detroit Schools Hungry forFood Privatization?

DETROIT—Last summer Detroitschool officials issued requests for pro-

posals (RFPs) to private food vendorsto take over the district’s food services.The RFPs asked vendors what it wouldcost the district to provide cafeteria ser-vices for students in the Detroit schoolsystem. Robert I. Brown, the district’sexecutive director of special projects, di-vision of business operations, informedMPR that, after reviewing the propos-als, district officials became convincedthat “a fixed price contract was not theway to go.” The district intends to re-bid the service. It is expected to issue anew RFP by the middle to the end ofNovember.

Flint Gives PrivatizedArena Management aSporting Chance

FLINT—The city of Flint mayenter into a public-private partnershipwith businessman and doctor KhaledShukairy to run its IMA Sports Arena.Under the arrangement the city wouldreceive a $250,000 annual paymentfrom Shukairy plus 25 percent of all newrevenues exceeding $1.9 million. Thepartnership would last eight years.

State Charts Coursefor Privatization of BoatInspections

LANSING—State lawmakerson the Senate Hunting, Fishing, andForestry Committee voted unani-mously Oct. 5 to support a bill thatwould privatize the inspection of char-ter boats on Michigan waters. The billwas introduced at the request of offi-cials at the Michigan Department ofNatural Resources (DNR). “We initi-ated it,” said Lt. Lyle Belknap, a boat-ing law administrator with the DNR.“It goes along with privatizing gov-ernment programs better served by thepublic than by us. There’s a wholehost of firms that do this for their live-lihood.” The DNR performs about750 inspections each year, only 25 ofwhich are of a for-profit, commercialnature.

Hamtramck Avoids StateReceivership

H A M T R A M C K —Embattled Mayor GaryZych of Hamtramck, whowants to solve his city’sfinancial problems byprivatizing many cityservices, narrowlyaverted a state takeoverof his city’s finances inOctober after a five-member state review paneldecided to give Hamtramckmore time to clean up its finan-cial difficulties.

The panel decided Oct. 5 to takeno immediate action to remedy the city’sbudget troubles, said Fred Headen, chiefof the Bureau of Local Government forthe state Department of Treasury.Headen also heads the review team,which could have recommended thatHamtramck be put into receivership andthat Gov. John Engler name a financialmanager for the 17,000-resident citythat is $2 million in debt. TheHamtramck City Council still must cutcity spending by $630,000 during thefiscal year ending June 30, 2001.

So far, Mayor Zych has been un-able to persuade the council to brave theobjections of local public employeeunions and vote in favor of plans thatinvolve privatization. The city currentlyowes money to Detroit Edison, Michi-gan Consolidated Gas Co., andAmeritech, as well as Waste Manage-ment, which hauled rubbish to the citydump, and the Detroit Department ofWater and Sewerage for water service.

State Mental Health Plan MayNot Meet Federal CompetitionRequirements

LANSING—Although the fed-eral Health Care Financing Administra-tion (HCFA) has issued rules requiring“free and open” competition amongpublic and private mental health care

continued on next page


Around the State

providers for Medicaid-funded con-tracts, the plan submitted Oct. 1 to theHCFA by the state of Michigan backsoff from that requirement.

Caving in to pressure from publicmental health providers, the state modi-fied its original plan, which called for all-out competition, and instead proposedthat it would give “initial consideration”for contracts to “qualified CommunityMental Health services (CMH) pro-grams” that serve at least 20,000 Medic-aid clients. To save on administrativecosts, counties with CMH services serv-ing smaller communities would have tocombine with their neighbors in order toreceive state funding.

The new proposal also requiresCMH programs to meet an extensive listof qualification requirements beforebeing selected for Medicaid funding.These include administrative efficiency,establishing a network of service pro-viders, and offering “consumerchoices.” If an existing CMH programcan’t meet these requirements, both pub-lic and private companies will be al-lowed to bid on services for that area.

It remains to be seen whether thisplan will be approved by the HCFA.Meanwhile, the state has applied for awaiver from all competition requirements,on the grounds that it’s impractical.

Critics Say Private PrisonCompany Has a Record

LANSING—Gov. Engler’s at-tempt to use privatization to controlMichigan’s prisoner health care costs—some of the highest in the nation—iscoming under fire because of the state’suse of a company that stands accusedof failing to provide quality care hereand in other states.

The administration recently agreedto pay $250 million over five years, with-out bid, to St. Louis-based CorrectionalMedical Services, Inc. (CMS), in an ex-pansion of the company’s contract crit-ics say is unwarranted because of thecompany’s track record.

Although inmate health-care costs

have stabilized since 1998 when CMStook over, critics cite numerous lawsuitsagainst the company, both in-state andin 11 other states, alleging medical neg-ligence. Others involved in the contro-versy say CMS is under fire because theMichigan Legislature granted it thepower to privatize government medicaljobs under its purview, which threatensthe power of public-sector unions.

Federal, State GovernmentsSquabble over Michigan PublicBroadcasting

LANSING—Under an orderpassed three years ago by the FederalCommunications Commission (FCC),Michigan’s 14 public broadcasting sta-tions must convert from analog to a digi-tal broadcast system by 2003.

Why? The feds say it’s becausedigital systems transmit better pictures,can carry more than one signal at a time,and are easier to transmit to computers,none of which necessitates the switch.The real reason is more likely that com-munications technology is overtakingthe government’s controlled system ofbroadcast spectrum allocation, and thefeds are scrambling to accommodate it.The FCC wants to sell the airwave spacepublic radio and television stations cur-rently occupy to wireless communica-tions companies.

Unfortunately, the public broad-cast stations want the state of Michi-gan—i.e., the taxpayers—to pay for theconversion, which may cost an esti-mated $44 million. Gov. Engler so farhas refused, blaming stations for notmodernizing their facilities the way pri-vate stations do in response to marketpressures, and the federal governmentfor mandating the upgrade without pro-viding funds for it.

Some observers note it would beeasier for the government to simply getout of the broadcast business, open thespectrum market to all bidders, serve asauctioneer, and let the broadcastingmarket work these issues out in a vol-untary fashion.

States Do Business withFirms Banned fromFederal Contracts

LANSING—More than half thestates hire private contractors withoutreviewing whether the companies havebeen barred from doing business withthe federal government, the AssociatedPress recently found.

Fourteen states, including Michi-gan, told AP that their contracting officesdon’t check the federal government’sInternet-accessible list of companies itsays it will not hire because of variousinfractions. Twenty other states said theyconsult the list only occasionally, andJohn Truscott, spokesman for Gov.Engler, said Michigan doesn’t check thelist because it conducts its own checks.

Of the 700 Michigan individualsand companies that made the federal list,a computer analysis of state transactionsfrom 1995 to April of 1999 revealed onlysix that had received any money from thestate. Michigan officials claim none cur-rently receives state funds.

About 24,000 companies and in-dividuals are barred from doing busi-ness with the federal government forinfractions that range from violation ofdrug-free workplace laws to embezzle-ment and contract fraud.

New Detroit Computer CostsTwice As Much, Fails to SolveProblems

DETROIT—When the city ofDetroit decided that it was time to dosomething about rising anger and dis-satisfaction over its confused account-ing and billing practices, officialsdecided privatization was too radical.

Instead of turning its accounting sys-tem over to a private company that wouldsolve the problems or not get paid, a yearand a half ago, city officials decided to buya new computer system. Today, the $70-million system has actually cost city tax-payers $126.5 million and still hasn’t solvedthe accounting problems.

While the system has eliminated


Around the State

Sterling Heights, and Ann Arbor. Morerecently, smaller cities such as TraverseCity, Kalamazoo, Grand Ledge, Por-tage, and Jackson as well as WexfordCounty have moved to full private pro-vision. Cost savings have been reportedas high as 50 percent. Saving 25 per-cent from Detroit’s EMS bill wouldknock $5.3 million annually from thecost of providing this service.

There is significant room for im-provement in the way Detroit providesEMS services. The appropriate rede-sign of the system should be one thatfollows the successful path taken by asignificant number of other Americancities in bringing the expertise and eco-

nomic efficiency of private providersinto the overall operations of emergencymedical services.

Clearly, the health and well beingof many citizens depend upon how wellan EMS system operates. Privatizationnot only can help Detroit save dollars,but even more importantly, it can helpthe city save more lives.

Charles Van Eaton, Ph.D, is profes-sor of economics and public policy atPepperdine University in Malibu, California.

“EMS” continued from page 23

manual record keeping and other clericalwork, it hasn’t been able to cause city billsto be paid on time, nor has it resulted instandardized business practices through-out the departments of government.

To cite just one example, the cityis still paying some contractors twice forthe same job because city employeesdon’t know how to use the system tosee if a vendor has already been paid.

Probe Finds Metro AirportFinancial Irregularities WorseThan Expected

ROMULUS—A report byMichigan’s auditor general in Augustfound that the management and financialirregularities at Detroit Metro Airport arefar worse than even critics expected.Enormous cost overruns were discoveredin 23 of the 59 consulting contracts atthe airport. One contract was discoveredto have gone $43 million over budget.Vehicle supplies cost 379 percent morethan originally budgeted; janitorial sup-ply costs jumped 890 percent; and em-ployee fringe benefits increased 3,949percent beyond what taxpayers had beentold they would cost.

Asked about the overruns, airportofficials described them as a “fact oflife.” Wayne County Executive EdwardH. McNamara has called the inquiry a“witch hunt.” But documents obtainedunder threat of a subpoena revealed thatthe airport’s parking garage contractwith APCOA/Standard Parking, Inc.,had been extended on a month-to-monthbasis without bids since 1992, in viola-tion of county contracting procedures.And McNamara’s brother-in-law, it wasdiscovered, had received several lucra-tive contracts from the company as well.The company was fired in Septemberfor alleged overcharges for shuttle vanleases to the tune of $400,000, and itscontract awarded to another company.

In the face of continued resistanceby airport officials to producing requesteddocuments, the investigation, sponsoredby a Joint Legislative Select Committeeof the Michigan Legislature, is ongoing.

Life Better at Youth Prison SincePrivatization, Warden Says

BALDWIN—Officials atMichigan’s only privately run prison forviolent juvenile offenders told a stateHouse committee in August that thereare fewer problems at the facility nowthan when it opened a year earlier.

Michigan Youth Correctional Fa-cility (MYCF) Warden David Trippettdisputed reports in the Grand RapidsPress of overextended personnel andincidents of prisoners attacking prisonofficers, both of which incidents arebecoming less frequent, Trippett said.

Marsha Foresman, an official withthe state Department of Corrections,which oversees the MYCF contract withWackenhut Corrections Corp., told law-makers the prison has the most oversightof any Michigan prison. “I think youwill find these prisoners are well-kept,”she told the committee.

Will Edison Run Detroit’sWorst Schools?

DETROIT—In August, EdisonSchools, the for-profit school manage-ment firm, proposed to Detroit Schools

CEO Kenneth Burnley that it manageup to 45 of the district’s worst perform-ing schools.

The fact that Burnley himself an-nounced the approach to reporters saysnot only that he and the district are opento the idea, but that the plan could actu-ally be implemented. The question is,when? Since then, there has been nopublic word on the plan.

Edison runs 108 public schoolsnationwide with a total student enroll-ment of around 59,000 students. Thecompany already runs the Inkster schooldistrict, traditional public schools inFlint, Pontiac, Battle Creek, and MountClemens, and charter schools inFerndale, Lansing, and Detroit.

Under contract with Detroitschools, Edison would receive the fullper-pupil payment from the state forevery child enrolled in a school it man-aged. Edison has even offered to opena teachers’ college in the city “if it wereassured of a broad presence in the De-troit school system,” according to TheDetroit News.


140 West Main Street • P.O. Box 568 • Midland, Michigan 48640

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PERMIT #275

Overton said his first step in im-proving the school would be to surveyparents to find out why they were send-ing their children elsewhere. A DetroitNews editorial urged school officials tomeet with the Mackinac Center.

School district attorney DanielFerrera told the News, “We’re becom-ing a (segregated) district for no reasonat all.” Overton responded, “If we pre-vent school choice, parents will simplymove out of the district, possibly leav-ing both the school and the communitymore segregated.”

In addition to public policy re-search, the nonprofit Mackinac Centeroffers legal and financial consulting toMichigan schools to help them be morecompetitive.

This fall, Westwood’s neighbor-ing district of Inkster becameMichigan’s first school system to con-tract all its operations to a private firmto restore fiscal health and improve edu-cational quality.

Joseph Lehman is Executive VicePresident of the Mackinac Center for Pub-lic Policy.

By Joseph Lehman

A Detroit-area public school dis-trict is suing the state to stop studentsfrom transferring to other schools andkeep the state money that comes witheach pupil. A private group has offeredto help the school solve its problemswithout litigation.

Westwood Community Schoolsdistrict, whose boundaries enclose a ra-cially diverse mixture of 2,200 students,has seen 150 students transfer to charteror other public schools since 1996. Thedistrict’s attorney claims school choicelaws threaten its racial balance and have

cost it more than $1 million in per-pupilfunding. The district is not required topay for the education of the pupils whonow attend school elsewhere.

Publicity surrounding West-wood’s effort to prevent students fromcrossing its district borders promptedthe Mackinac Center for Public Policy

to offer to contract withthe district to run its op-eration and stem the lossof students.

Mackinac CenterSenior Vice President Jo-seph Overton said, “In-stead of legally barringstudents from choosing aschool, we want to helpWestwood become theschool that studentschoose, no matter whatdistrict they live in.”

In a Detroit Newsstory, School Board Presi-

dent Sandra Rich said the board would“certainly have a discussion over this”and added that the district is “alwayslooking for ways to improve.” The storydid not state what the district is doingto determine why students had left orwhat might convince them to return.

Private Group Offers to ManageWestwood Schools

The Mackinac Center for Public Policy has offered to help Westwood Schools(pictured) in Dearborn Heights become the school parents choose for their children’seducation. The district has been losing students to competing schools and wantsthe migration to end.

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