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When Outsourcing Public Services to Private Companies Goes Wrong

(Photo: Washington State Dept of Transportation / Flickr)

The point of carpooling is to save some gas money while reducing traffic congestion and air pollution, but in Virginia, taxpayers could be on the hook when commuters try to do just that.

The Australian company Transurban recently teamed up with a construction firm to build new express toll lanes in a congested part of the Washington, DC-area beltway. Under a 40-year contract with Virginia, the state must reimburse the private companies up to 70 percent of toll revenues lost when the number of carpoolers in the express lanes exceeds 24 percent of the total traffic, making taxpayers foot the bill when carpooling cuts into contractor revenues.

It’s unclear if the carpooling rate will ever hit that mark. But whether they like it or not, Virginia taxpayers are stuck with the toll reimbursement deal for the next four decades, or until the firms post $100 million profit, according to In The Public Interest (ITPI), a policy group that examines government contracting. Voters can’t vote the consortium of private companies out of public service if carpooling becomes popular.

The Virginia carpooling toll deal is just one example on a list of “failures” that illustrate the problems that can arise when cash-strapped governments outsource public services to private companies that put profit before the public interest, according to a recent ITPI report.

Perhaps the most alarming outsourcing nightmare is the CityTime scandal in New York City. In 1998, the New York City contracted Science Applications International Corporation to modernize the payroll system that tracks the hours clocked by city workers. The project, known as CityTime, initially was projected to cost $63 million. But by 2010, the city had spent $700 million on the project.

New York City Comptroller John Lui, a Democrat who recently lost a bid for mayor amid a fundraising scandal, helped expose broad mismanagement and fraud in the CityTime project in 2010. Lui told reporters last week that the project was supposed to be a simple one if not a complete “boondoggle,” but because of mismanagement, lack of oversight of outside consultants, automatic contract extensions and outright fraud, CityTime ended being the most expensive outsourcing disaster in New York City history.

“The breadth and depth of what can go wrong when we hand over public services to for-profit corporations is staggering,” Lui told re porters last week.

Last year, Science Applications International Corporation, a defense contractor, agreed to pay $500 million back to the city to avoid federal prosecution, and eight people have been convicted in the CityTime scandal, including three computer programmers who were found guilty of defrauding the city of millions of dollars in November 2013.

“It’s hard to argue against transparency. It’s hard to argue against managing a contract well,” said ITPI Executive Director Donald Cohen, who told reporters his organization does not oppose outsourcing but pushes policies that would ensure that contracting and public services management is done well.

ITPI’s recent report, “Out of Control: The Coast-to-Coast Failures of Outsourcing Public Services to For-Profit Corporations,” details outsourcing failures that undermine transparency, accountability, “shared prosperity” and competition in the sphere of public services. Here are some highlights:

– In 2006, Indiana signed a lucrative contract with IBM to manage the state’s food stamp and Medicaid eligibility screenings. Thousands of low-income and elderly residents were dropped from the public service systems erroneously, including an Evansville man who died of heart problems in 2009, more than a year after being denied Medicaid benefits. His wife told Indiana lawmakers that he was denied Medicaid after repeatedly mailing in information requested by IBM. In another story that received media hype, a nun fighting cancer lost benefits after failing to call an eligibility hotline while being treated for congestive heart failure in the hospital. She tried several times to reschedule without success. In 2009, Indiana tried to end its working relationship with IBM amid the controversy, but a costly court battle over the contract continues today.

– An estimated 80 percent of the 5.4 million people working for federal contractors in 2008 earned less than a living wage for their city or region. Low-wage workers often rely on public assistance such as food stamps to make ends meet.

– A consortium of private companies holds a 99-year contract over a toll road in Denver. In 2008, the consortium objected to planned improvements for a free local road near the parkway, arguing that the contract prevents the city from maintaining roads that “might hurt the parkway financially” by providing an alternative route around the tolls.

As Truthout has pointed out in the past, private jail and prison contracts often include “occupancy quotas” that require state and local governments to maintain high occupancy levels in facilities or pay fees for empty beds. A recent report by ITPI found that 65 percent of for-profit state and local prison contracts include such quotas. Such contracts run counter to many states’ goals of reducing prison population and increasing inmate rehabilitation.

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