Public Private Competition in the City of Phoenix, Arizona

Article excerpt

Whether the private or the public sector is selected, the competitive bidding process is a means to improve performance and enhance customer satisfaction.

There are very few beliefs or expectations more widely held than that government, in general, is inefficient. The City of Phoenix belies this expectation: It has created a process that pursues productivity in government-delivered services by involving city departments in competition with private contractors in a public-bid situation to determine who can best provide services to customers. The city invented the public/private competitive process in 1979 and has used it to compare service delivery in 13 service areas as diverse as refuse collection and public defender services. Benefits are numerous, ranging from increased attention to customer satisfaction to documented cost savings of more than $27 million. The benefits, the process, and managerial issues are described in this article.

The competitive process began in response to severe economic conditions. Inflation rates were very high in the late 1970s, revenue and expenditure limitation laws were being imposed on local and state governments, and the City of Phoenix continued to experience a population growth rate much higher than average. Private firms approached the city council and promised cost savings if they were awarded contracts to provide particular services. Rather than make a decision to privatize services, city officials chose to compare city cost of service with private-sector costs - and in a public arena.

The competitive process has been initiated at times by city staff and in other instances by citizens or private businesses. Used in 13 service areas, it has involved 56 service delivery decisions. As shown in Exhibit 1, the private sector was selected 34 times and the public sector 22 times. Services that have been open for bids range from small landscape areas to such large or complex services as landfill operations, public defender services, refuse collection, and emergency medical transportation. The provider has changed in some cases and remained the same in others. In every case, valuable information and insight about the service has surfaced.

Benefits of Competition in Phoenix

The greatest benefit of the competitive process is the ability to positively influence expectations about government and gain public support. The competitive process ignores the prevalent image of government and enables it to pursue a full range of service delivery options, as would any private firm or individual. Efficiency and customer satisfaction are established as important values in a very clear, unambiguous way. Citizen surveys have validated service level improvements in the areas opened up to competition. The historical trends of customer ratings given to refuse collection and ambulance service in the most recent citizen surveys conducted by independent research firms are tracked in Exhibit 2.

More than one process is needed to change individual experiences with government and expectations about government services, but competition moves the government in the right direction. As focusing on the customer increases in the private sector, government reliance on bureaucratic and monopoly power cannot be a long-term survival strategy, even if sanctioned by the law. Looking outside the government organization to provide the best service at least cost is now a luxury - in the future it will be a necessity.

A related and similar benefit of the competitive process is the self-directed attention to cost and customer satisfaction that occurs throughout the organization. Discussions of unit costs, customer complaints, down time, and other production-line events occur with interest and energy. There is no need to build bureaucratic reporting, regulatory, and oversight devices. Internal and external studies, citizen committees, cheerleading, and other public management tools are weak mechanisms when compared to the capability of real competition to sustain self-directed attention. The attention to performance also leads to creative approaches to equipment design, staffing, cross training, and cost containment that otherwise might not occur. For example, the city purchases a high-quality refuse collection vehicle when the competitive process selects the Phoenix Public Works Department. Without the process, it is very unlikely that a city department would be successful in pushing for this level of expenditure.

Exhibit 1

CITY OF PHOENIX COMPETITIVE PROPOSAL PROCESS: 1979-1994
TYPES OF SERVICE

                                              Contracts Awarded to
                                                           Private
Service                                      City        Contractor

Ambulance service                              1               0
Billing services                               0               2
Data entry                                     1               0
Fuel distribution                              1               0
Instrumentation
maintenance                                    1               0
Landfill operation                             0               1
Landscape maintenance                          7              23
Public defender                                0               1
Refuse collection                              5               7
Senior housing
management                                     1               0
Street repair                                  2               0
Street sweeping                                2               0
Water meter repair                             1               0

Total                                         22              34

Cost reduction is also a major outcome of the competitive process. The clearest specific example is the comparison of refuse collection data shown in Exhibit 3. While the different districts have elements that generate different unit costs, the overall direction of cost over a 13-year period is very persuasive. Highly efficient vehicles, routing, and staffing have emerged.

Demonstrable improvement in service level has been related to the competitive process in Phoenix. When the city opened the operation of one of the municipal landfills to competition and the private sector was selected, the contract was written to provide significant monetary incentives for increased density at the landfill. The private sector was able to extend the life of the landfill years beyond what was expected. This service-level improvement provided the city additional time to develop a transfer station and accumulate reserves to fund the transfer station. In the case of emergency ambulance service, significant decreases in response time were achieved through the competitive process. In 1984, when the city fire department was selected through a competitive process to become the single provider, the rate of ambulance responses within 10 minutes was 48 percent. Today an ambulance responds within 10 minutes 95 percent of the time.

Finally, an important benefit of using the competitive process is the development of management information systems. Government accounting, with its traditional emphasis on the need for public accountability, accounts for assets by fund and character but without a focus on efficiency or outcome. In a competitive environment, operating departments need efficiency and outcome information in order to stay competitive. The competitive process initially requires a careful calculation of unit cost (e.g., cost per household, per acre), service-level indicators, and subsequent management and reporting of that information. The management information system that has evolved, due to the needs of the competitive process, is very useful in other areas, such as the city's user fee program, and is, in turn, reinforced by its many other applications. Having a management information system that focuses on efficiency and outcome provides a critical strategic advantage.

Steps in the Competitive Process

The steps and responsibilities during the public/private competitive process in Phoenix are shown in Exhibit 4. In general, it is similar to the traditional purchasing process except for the fact that a proposal from a city department is included. Because a city operating department is participating in the competition, two additional steps are taken by the city auditor's office to establish the credibility of the city proposal: a certification of the city cost proposal and a post-implementation audit of the service provider. Following is a detailed description of the process.

Identify Improvements. The first step is also the newest step in the city process. The operating department is responsible for forming a team composed of management, supervision, and employees to identify ways to improve. The purpose of the step is to build teamwork, to focus employees at all levels on providing quality services at the lowest cost, and to be competitive. Even though the specific service area may not yet have been identified for the competitive process, it is important to adopt a continuous-improvement approach so that all employees are in a position to compete successfully. This step also serves as a communication point to city employees and labor unions that the city is very interested in and strongly supports internal operations.

The competitive process is a tool for the city to use to evaluate service delivery decisions. Sometimes the operating department suggests the use of the competitive process, other times private companies request city management or city council to initiate the process, and other times an audit or budget review will highlight areas where competition is desirable.

Identify Service and Associated Costs. Operating departments often are faced with resource-allocation decisions and limited funds. They are interested in providing the most service they possibly can to their customers. When resources become tight, they sometimes use the competitive process to help stretch their resources. Private companies often are interested in promoting the process so they can expand their service delivery. If they believe they can provide a service at lower cost than the current service delivery method, they approach city management or the city council and request the opportunity to compete.

The city auditor conducts performance reviews of city operations, and the budget and research department conducts budget reviews of departments. The idea of competition often is raised during these reviews. Once an area is highlighted for competition, the approval of the mayor and city council is sought before proceeding.

When the decision to use the competitive process has been made, the operating department specifies the service to be evaluated, for example household refuse collection in the North District of the city. That department then is responsible for notifying the parties that will be affected by the process; these include, at a minimum, the finance department, city council, city manager's office, city auditor, city attorney, and the budget and research department. All of these departments will need to prepare for their roles in the process.

The next step undertaken by operating department personnel is to identify costs by determining the resources required and the method to be used for delivery of the service. If the service is currently provided, decisions need to be made whether to propose the current delivery method or whether to offer a different system. The involvement of the team formed to evaluate improvements is crucial. In cases where the service has never been delivered by city staff, it is necessary to make a convincing case that the proposing city department is competent to provide the service.

The accounting division of the finance department then assists the operating department in identifying the cost of resources that will be needed to deliver the service. Preparing the city proposal is a cost-finding exercise quite different from the government accountability function. In the early years of competitive bidding, operating department staff generally needed assistance in cost accounting, but over time much of the expertise has been cultivated within operating departments. Once the detailed specifications have been developed and the operating department completes its cost proposal, it is forwarded to the city auditor for testing. This occurs at the same time that private firms are developing their bids.

The cost proposal needs to include all operational changes proposed by the department. Major elements of the cost worksheet include a tie to the city accounting system (if the service or a similar service is currently provided by the city), separate identification of adjustments and price level (inflation) adjustments, and a distinction between avoidable and unavoidable costs. Exhibit 5 is an example of a cost proposal that could be prepared for the refuse collection service.

The preparation of the city proposal includes a review by the budget and research department of cost implications of the city proposal. This review determines whether cash is available or debt financing will be necessary.

The operating department also begins to plan for possible changes that may result from the process. If the department currently provides the service, it will look at staffing adjustments that will need to be made if the bid is not selected and the department loses the service. Department staff begin looking at options to accomplish necessary changes without layoffs and planning for a possible new role as contract monitor. If the service is currently provided by a contract, they identify the operational events that will have to take place to provide the service with city staff and equipment.

Prepare Bid Specifications. The materials management division of the finance department prepares the bid specifications. Since this division is independent of the operating department, it is in a position to develop a fair and objective set of criteria for the procurement. Preproposal conferences are held to address questions from the private sector and city staff concerning the bid specifications. After the preproposal conference, amendments can be made to the bid specifications. This way, both the public and private sector are involved in the specification process. Bid specifications also are reviewed by the city attorney and city auditor departments.

Certify City Cost Proposal. The city auditor department receives and tests the city proposal prior to competitive submission. This independent review was built into the process by elected officials to provide assurance that the city proposal is fairly presented. The city auditor department tests the city proposal for the reasonableness of proposed cost.

One test of reasonableness is whether the proposed costs are supported by historical information. If the service is currently provided by city staff, historical accounting and budgeting information are reviewed to identify the resources required to deliver the service. Differences, if any, are investigated. If the city has not provided the service previously (e.g., emergency transportation services, public defender), similar operations in other governments or private firms are researched to test the reasonableness of the city proposal.

As the costs in a city proposal always involve a future period or periods, a step is taken to insure that the costs reflect appropriate inflation adjustments. In those cases where the bid stipulates that the city will provide a general inflation adjustment (such as the Consumer Price Index) to service providers, inflation adjustments are not needed in the city proposal. Conversely when the bid does not provide for general inflation adjustments, the city proposal is tested to assure that it includes that cost. In some situations, labor agreements stipulate future increases different from the general inflation rate, or the city merit system may generate a different rate of increases. The city proposal is tested to be sure these special price-level changes are included. After the inflation adjustments are reviewed, the cost proposal is tested for proper inclusion of avoidable costs and exclusion of unavoidable costs.

The city makes a distinction between avoidable and unavoidable costs since each competitive proposal is considered basically as a make-versus-buy decision. The goal of the process is to provide the specified service at the best price; therefore, costs that will be borne by the government, whether the government provides the service or not, are considered to be unavoidable and irrelevant for this determination. For example, if the city were to contract an activity that would result in the reduction of 100 positions, this would not change the cost of support services such as accounting, payroll, etc., since these services currently serve 11,000 city employees. Support service cost, in this example, is unavoidable. If, on the other hand, the city were to contract an operation where 1,000 positions would be eliminated, some support-service costs would be avoided. Unavoidable costs are excluded from the city proposal, while avoidable costs are included.

Testing for avoidable costs involves identifying all costs and then reviewing each of the support service areas within the division, the department, and the city. The larger the service-delivery system, the more likely that support-service costs can become avoidable costs.

The results of the audit of the city proposal are reviewed with the operating department. Although there usually are differences of opinion about the resources required, the cost of the resources, and whether costs are avoidable or unavoidable, agreement always has been reached between the operating department and the city auditor department. The city proposal is then forwarded for competitive submission.

Open Bids and City Cost Proposal. On the filing date for proposals, the materials management division opens and announces the proposals, including the city proposal. The city manager appoints an evaluation committee that reviews all the proposals and provides advice on the recommendation to be forwarded to the mayor and city council. The evaluation committee is usually composed of managers from the operational, accounting, and budgeting areas of the city government.

The evaluation committee assesses the cost, service level, and management control issues after studying all bids and the city proposal. This step provides a focus on all issues involved. For example, in the case of services for optical character reading bill processing, the city submitted the lowest bid; however, the next lowest bid, submitted by a bank, was very close in terms of cost. The evaluation committee recommended the bank provide the service because of rapidly changing technology in the field. It believed there was an advantage in someone else assuming responsibility for technology changes. The mayor and city council adopted the committee's recommendation.

Award Contract. The mayor and city council make the selection decision after reviewing the bids submitted, the city cost proposal, and the recommendations of the evaluation committee. If the selected service provider is different from the one currently providing service, transition of service responsibilities will begin in accordance with the bid requirements. If the service will be provided by the private sector, [TABULAR DATA FOR EXHIBIT 5 OMITTED] contracts are signed. If the service will be provided by city staff, the city proposal and bid specifications will serve as a performance contract.

Monitoring or Supervision. The operating department is responsible for monitoring the contract if a private proposer is selected or for supervising the service delivery if city staff are selected to provide the service. Contract monitoring involves an inspection function, a system for providing feedback to the contractor on service levels, coordination of payments to the contractor, and recordkeeping on contract requirements, such as insurance. In all cases, the operating department retains responsibility for providing the service to the citizen.

Postimplementation Audit. The last step is to review and report on the implementation of the service, regardless of whether the public sector or the private sector is selected. This phase is conducted by the city auditor department and is particularly important for the credibility of the competitive process. The review is done within 12 months of commencing operations. Cost is of great interest, but service level is of equal importance. The results of the audit are submitted to the operating department, city management, and the elected officials.

Each year, the city auditor department compiles a report that provides a life-to-date comparison of the expected and actual cost reduction accomplished through the competitive process. Exhibit 6 is the portion of that report that summarizes life-to-date savings. The report provides an annual discussion of performance and results. It has provided a historical record that is used to share and evaluate the competitive process. It is also a way to assess the improvement that has occurred through opening up the organization to take advantage of competition.

Managerial Issues

The above description belies the complexity that frequently surfaces in the competitive process. The competitive process - like any improvement, innovation, or invention - requires change, especially changes in philosophy and practices. Over the 13-year period of developing the city's competitiveness, the more difficult issues have been:

* accomplishing the purpose of the competitive process,

* managing employee relationships, and

* managing organizational relationships.

Purpose. The stated purpose of the City of Phoenix is to provide the best service at the least cost. That purpose has to be clear and effectively communicated. The competitive process has never been an effort to replace public-sector service delivery with private-sector service delivery or vice versa. When the city has been recognized for conducting a privatization program, city management has been quick to point to the expressed statement of purpose: the competitive process is a means to improve performance and enhance customer satisfaction. In some cases the private sector is selected, and in other cases the public sector is selected. Continuous reflection on the purpose of the competitive process is needed to stay on course.

Employee Relationships. The issue of greatest complexity is the impact of the competitive process on people. The competitive process sometimes eliminates positions or changes positions. Sometimes people are required to move to new positions. This kind of change affects employee relationships, and the importance of those relationships cannot be overemphasized. As pointed out very clearly by organizations focusing on quality, employee and supplier relationships are absolutely essential to achieving quality.

As difficult as it is to balance a commitment to employees with competition, it is a reality today that would be inappropriate for the city to ignore. The best thing to do for employees is to help them be in the best possible position to compete. The city also takes steps to mitigate the impact of job displacement: it forecasts personnel changes so that any displaced personnel can be moved into new positions created by economic growth. In years when growth has not been high, the city manages the hiring process by freezing vacancies in anticipation of possible displacement. Bid specifications also provide that if winning the contract causes the private-sector firm to create new jobs, these are to be offered first to any displaced city employees. Minimum health insurance benefits provided to contractor employees are specified in recent bids. The city is sensitive to the impact of the competitive process on employees and seeks to minimize the disruption.

Exhibit 6

COMPETITIVE PROPOSAL PROCESS: SUMMARY OF ACTUAL COST SAVINGS
LIFE-TO-DATE JUNE 30, 1994

Aviation

Airport landscaping                                   $     1,000
Nursery/plant maintenance                                  14,400

Fire

Emergency transportation                                2,898,000
Billing and collection services                           280,000

Housing

Low-income housing maintenance                             23,000
Senior housing management                                  48,000

Neighborhood Services

Lot maintenance                                             5,200

Parks, Recreation, and Library

Median maintenance                                        470,000

Public Works

Refuse collection                                      15,592,000
Landfill operation                                      7,711,000

Street Transportation

Street sweeping                                            36,000
Street repair                                             109,000
Landscape maintenance                                     270,000

Water Services

Water meter repair                                        176,000
Wastewater instrument
calibration                                                57,000

Total                                                 $27,690,600

Organizational Relationships. Finally, organizational relationships need management consideration and attention. An operating department that is successful in competing to deliver municipal services continues to receive services from some city departments that are not focused on competition and cost management. In such cases, when an internal service department increases expenditures (e.g., a new computer system) without recognizing the cost impact on its client departments that are in a competitive position, it may experience resistance, even though the appropriation has been funded. It is easy to overlook these internal relationships, which can have a very negative impact on a department that is in a competitive position.

Summary

As customer expectations increase and resources diminish, reliance on bureaucratic monopoly power is not likely to be a survival strategy for service delivery. The development of the competitive process is a strategic advantage in this evolving marketplace of government service delivery: It challenges a government to find the effective use of competition and cooperation in the same manner as a private firm.

JIM FLANAGAN, city auditor for the City of Phoenix, Arizona, recently sewed on the advisory committee for the Governmental Accounting Standards Board's project on measuring service effort and accomplishment and was a member of the National Performance Review team chaired by Vice President Al Gore. In September 1993, he traveled to Germany with a City of Phoenix delegation to receive the Bertelsmann Prize awarded to Phoenix for Democracy and Efficiency in Local Government. SUSAN PERKINS is a deputy city auditor for the City of Phoenix, Arizona, and manages the division responsible for audits of the public/private competitive process. She has been involved in auditing the competitive process for more than 10 years. The authors would like to acknowledge the contributions of Ron Jensen, the public works director of the City of Phoenix.

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