Problems with Fixed Cost Outsourcing Contracts
This is the kind of public management of private operations contracts that really drives me crazy
Phoenix gave away more than $3 million – so far – to Veolia Transportation, a transit company that operates buses throughout the city.
It’s $3,295,573.86, to be precise.
That’s how much Phoenix would have collected in fines from the French transit company had city officials not agreed to waive four month’s worth of penalties for things like late, broken or unkempt buses.
A significant savings for the Veolia executives who have Phoenix Mayor Phil Gordon’s girlfriend on their payroll as a consultant and Gordon’s good friend Billy Shields as a paid lobbyist.
And that $3.29 million tally only covers July, August and September, according to records obtained by New Times. Given that Veolia has racked up about $1 million worth of fines each month, it is likely that Phoenix also lost out on another million bucks for October.
The parties can argue back and forth about the justification for waiving of fines in this case (it was part of a settlement on a different issue). But the fact is that, whether the fines should have been waived or not, the contractor in this case is providing measureably inferior customer service and the city is not fulfilling its oversight function to keep things on track.
Of course, before privatization opponents fall over themselves to use this as an example of why privatization should not happen, they will need to answer the question of how the city could be expected to provide quality service operating the buses itself when it fails on the fair less complicated task of monitoring an outside agency providing the service. If the city cannot bring itself to enforce quality standards on a third party, it is unlikely it could have enforced the same quality standards on itself.
This in a nutshell is why our company only provides third part operations under concession arrangements where our revenue is 100% paid by the end user (without any government appropriations). This way, while the public agency still must exercise oversight, the first line of accountability is provided by our desire to keep revenues up — if we do a poor job, visitors don’t come back and we lose money. In a fixed cost relationship, which we generally won’t accept, the private company’s incentives are 100% focused on cost reduction rather than customer service — in fact, the more customers one drives off in such a relationship, the more profitable the contract. In these arrangements (as in the example here with Violia) 100% of the accountability for quality comes from the public agency enforcing certain metrics, and as one can see, public agencies vary greatly in their ability and will to do so.
(Note: The kind of concession-based revenue share relationship we operate under is pretty much impossible for Phoenix to use in their bus system, at least as long as they insist on running so many empty buses around town).
