Problems will arise as government privatizes a growing number of services to improve quality and reduce costs. This is especially true in areas where government hopes to retain both discretionary decision making powers and ultimate control while contracting out functions once performed by public sector employees.


Contracting out by government to private companies carries the same risks and benefits that private businesses assume when subcontracting to outside firms.


Contracting out by government to private companies carries the same risks and benefits that private businesses assume when subcontracting to outside firms. For example, a private company might contract with a janitorial service because it believes the service can clean at less cost and higher quality than the company’s in-house janitors. The company in essence transfers to the janitorial service payroll costs including wages, Social Security, unemployment insurance, Medicaid, and benefits. If the janitorial service fails to properly clean the building or if the company fails to pay the negotiated price, the contract may be breached and become a matter of litigation.

When government contracts out, it carries some special risks not encountered by private businesses. Public sector employees often lack the expertise and training required to effectively contract out for services. When contracts are not awarded through competitive bidding and followed through with proper monitoring, they can become fertile ground for political kickbacks and cronyism. If union or other artificially high wage rates are mandated, or other nonessential requirements are added to favor certain groups, the bidding process will be frustrated. Little may be gained by trading public sector employees for state-favored private sector employees. But special bidding and contract extension requirements are often in everyone’s best interest because they can assure that acceptable quality is not sacrificed for the cheapest bid. There must be a neutral, nonpartisan means of determining valid contract requirements.

Contracting with private firms is not an immediate cure-all for government inefficiency. Private firms often do not have access to accurate information upon which to base a bid. Since public sector services are usually free of the discipline of competition, government is seldom forced to determine its true costs of providing a service. It may not be able to provide bidders complete information about how it provides the service or how much it costs.

Government must ensure accountability and reliability when it contracts out for services, but contracts should be flexible to allow all parties to work together and make appropriate decisions that benefit government, the contractor, and citizens.

The state of Michigan recently learned a $500,000 lesson in contracting out services when the state privatized its campground reservation system. Many are calling the soured deal between DPCS International of Livonia and the state of Michigan a textbook example of why privatization does not work.

Critics are right to point out certain red flags involved in awarding this contract. Some of them go too far by insisting that the contract is evidence that privatization itself does not work. Instead, the DPCS debacle underscores the need for designing an effective bidding and monitoring system to minimize problems in state competitive contracts.

DPCS was awarded a contract with the state travel bureau in 1993 to provide a toll-free tourism telephone service and fulfill requests for travel brochures. The travel bureau reportedly gave high marks to DPCS. When the Department of Natural Resources and Department of Management and Budget sought to contract out the state’s campground reservation system, DPCS was awarded the work by an extension of the travel bureau contract.

After many callers complained that they could not get through to the reservation system, officials began to rethink the contract with DPCS. When the state threatened to pull the plug on the contract, DPCS responded by submitting a bill to the state for over $1 million. Although the state refused to pay that amount, the matter was settled for $500,000.

Critics claim that the contract extension was awarded to DPCS because its CEO, Wilhelm Kast, has close ties to the Engler Administration and is a heavy GOP contributor. Rep. Karen Willard (Algonac) said that the deal was based on favoritism and called for a full investigation of DPCS’s contracts with the state. State officials responded by noting that the contract was bid competitively and DPCS was the winner. However, state officials say that DPCS then failed to perform well in its role as reservation system manager.

Kast countered by claiming that the DNR insisted that DPCS use specific software provided by Info 2000 Corp., which proved to be faulty. Kast also stated that his political ties to the governor had nothing to do with the contract award and that DPCS lost money trying to implement the reservation system.

Rep. Deborah Cherry (Burton) has suggested that privatization should not occur unless it saves taxpayers significant funds and provides equal or better services. Rep. Cherry pointed to the DPCS contract as a primary example of the "adverse effects of privatization," and stated that "state employees were doing a better job than a private company."

Flawed attempts to privatize government services will only inflame such antiprivatization rhetoric and sabotage attempts to provide exactly what Rep. Cherry demands—significant taxpayer savings with equal or better services.

A chief advantage of the competitive marketplace is choice. If an organization fails to perform its tasks, one may freely look elsewhere and establish beneficial relationships with different organizations. The Department of Management and Budget has exercised this flexibility by requiring greater accountability from Info 2000 and by contracting with Consolidated Market Response for campground reservations.