Privatization lessons

June 26, 2011 

When his own agency released a report showing that a pilot program to turn school bus operations over to a private company was an expensive, unmitigated disaster, privatization cheerleader and Education Superintendent Mick Zais attributed the problems to a bad contract and a bad bidding process and a company that wasn't qualified for the job.

It's tempting to add in something about the dog eating his homework, but for the fact that all of his excuses appear to be on point. The state's procurement process does sometimes mitigate against getting the best deal, and appears to have done so in this test case. The contract does appear to have been written in a way that almost asked for poor service at high prices. And the company that won the contract was simply out of its league. All of which should remind us that turning government operations over to a private company takes a bit more work than advocates usually admit.

The fact that the state spent far more to have the private company keep school buses operating than it paid to do it in-house ($9,578 per bus vs. $8,097) was actually the smallest problem identified in the review of the first three years of a pilot program in Mount Pleasant. The big problem was the inability of the company to do the main thing that S.C. taxpayers were paying it to do: get kids to school on time.

The State Education Department negotiated a contract with General Diesel of Charleston after the company submitted the low bid to open a new bus maintenance shop and maintain 78 regular-route buses and 10 spares. The terms were quite generous: The company had six months to evaluate the buses and bring them up to whatever standard it desired, at state cost; after that, it would be required to maintain them, at a fixed rate per bus.

But according to the report prepared for the Education Department by TransPar Group, which provides consulting services and operates school bus systems in five states, "the six-month conversion period was not utilized to bring the buses up to their 'standard.'" And while things worked OK through most of the first school year, "Major problems began to surface" toward the end of that year, when two buses experienced drivetrain failure. Rather than repairing them over the summer, General Diesel ignored them.

As a result, the report continued: "The 2009-10 school year did not begin well. As is typical for school year start-ups, various unforeseen operational demands and constraints put the transportation system under pressure. From the first day of school, General Diesel failed to provide the number of service-ready buses that the contract demanded.... Starting in August and increasing in September, the state received a number of complaints ... concerning bus availability." By the end of September, the state had to provide the company with two more buses, and send a state employee to "begin direct involvement" to correct the problems. By early November, "On-time service for students and schools had suffered" - that is, the buses weren't getting students to school on time - and the state gave the company two spare engines and a transmission and even started paying it in advance so it would stay afloat.

The company ignored routine maintenance. For example, at one inspection in 2010, the state found that most of the buses "had tires with insufficient tread depth." General Diesel blamed the bus drivers, who work for another company under a separate contract with the Charleston schools. The other company had a long list of grievances about General Diesel, including its disturbing charge that the company "does not appreciate the critical nature of a down Special Education bus."

These problems specific to General Diesel drove up the costs, while driving down the quality. But the report also cited other reasons for high costs that are more general to privatization: The company had to pay workers much more than the state did, and it had to pay for "certain costs that might not be borne" by state shops. "This includes property ownership, taxes, and commercial business insurance. Additionally, General Diesel is trying to make a profit and also has a cost of capital relating to its investment in receivables, property, and inventories."

Given all this, the report said, it will always cost more for the company to do the work "unless General Diesel performs maintenance much more efficiently than the SCDE, thus expending less labor to achieve the same result." That, of course, is the key to privatization. And it is not a given.

And that's the point that pragmatists keep coming back to: Privatization saves money - except when it doesn't. Privatization provides better service - except when it doesn't. Privatization, in short, works just fine - except when it doesn't.

What's essential is to explore the benefits and drawbacks in each case, to do that without preconceived notions, and to make decisions based on the actual results, rather than ideology. Of course, the same could be said about most decisions that politicians are called on to make.

Contact Scoppe, a columnist for The (Columbia) State, at cscoppe@thestate.com.

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