Outsourcing Bridge and Road Maintenance

Competing for Highway Maintenance:
Lessons for Washington State

by Dennis Lisk, Research Analyst
September 1998


Executive Summary

Today, current law bars Washington State from tapping the energy and talent of the private sector to maintain its highways. Established research demonstrates that the state could save at least ten percent each biennium over current operations if it contracted highway maintenance with the private sector. That amounts to almost $25 million out of a $248.6 million budget for 1997-1999.

Almost every state and Canadian provincial highway and transportation agency contracts with the private sector for some or all of their highway maintenance service. Five jurisdictions where private sector competition is used extensively are Massachusetts, British Columbia, Virginia, Texas, and Indianapolis.

The Washington Institute Foundation has undertaken a major study that examines in-depth these five communities. Our study found that, for the most part, these governments have seen highway maintenance costs decrease dramatically, while levels of service simultaneously increased.

Each government employed different methods to involve the private sector in highway maintenance work. Massachusetts and Indianapolis used "managed competition," where private companies and public employees competed against each other to provide service. British Columbia privatized one hundred percent of their highway maintenance in a year's time. Virginia and Texas implemented private sector involvement in different forms after receiving directions from their legislatures.

Washington State has much to learn from the experiences of the communities described in our study. Until current legal barriers fall, Washington taxpayers will never realize the benefits of cost savings, innovations, and choices the marketplace can offer.

Introduction

Maintenance of Washington's roads and bridges may seem inconsequential in the perpetual debate over the proper role of government in our daily lives. Whether we are talking about pavement resurfacing, snow removal, landscaping, or bridge repair, there is no argument that these functions protect public safety and are government's legitimate domain. But determining the function to be performed by government only begins the analysis. Next, government must consider the best way it can provide its service. That requires answering this question: Can the function be provided as well or better by the private sector?

Between 1997 and 1999 the State of Washington will spend $248.6 million on highway maintenance. This is approximately 9 percent of the state Department of Transportation's (WSDOT) total budget of $2.2 billion. During the current biennium, the state will employ 1,427 full-time employees to maintain a network of 7,035 miles of roads and bridges. Today, Washington State performs almost all highway maintenance work through a legally protected monopoly. It is against current law for WSDOT managers to choose from more cost effective and efficient options in the private sector to maintain state highways. In the 1998 state legislative session, State Representative Maryann Mitchell (R-Federal Way) offered a bill to exempt WSDOT from the provisions of state law currently barring them from using private companies. Although the bill did not survive the 1998 Legislature, this issue will return for the 1999 Legislature.

This paper is the first part of a two-part study that will look at how citizens of Washington State can get better value for their tax dollars by giving the private sector an opportunity to compete for highway maintenance. Part One of our study examines the experiences of several governments around North America that have incorporated private sector competition into their highway maintenance programs. This Fall, we will publish Part Two of our study, which will focus on Washington State's current highway maintenance program, legal barriers against private sector competition, the legislative attempts to remove those barriers, and the private sector's capability to provide maintenance services.

Competitive Government

During the 1990s a revolution has been occurring in the way state and local governments deliver services to their citizens. Political leaders today face tight spending constraints and taxpayers who are not satisfied with governments that deliver low levels of service with even lower levels of quality. In order to survive politically, many elected officials are learning the same, age-old lesson which businesses have found to be key to their own prosperity: to succeed you must provide the highest quality goods and services at the lowest possible prices.

Today, a new breed of political leaders is asking fundamental questions: What services should we perform? Are there services we currently offer that could be performed better by the private sector? When we do perform services, how can we deliver a high level of quality for the lowest possible price to our citizens? Across the country, these questions increasingly are being answered through recourse to market principles.

Competitive government is a simple concept. It substitutes the creativity of the marketplace for centralized decision making, employing the challenge of the private sector to stimulate public sector employees to meet cost and performance standards in order to retain the work (and their jobs).

Our examination revealed four goals an effective competitive government tries to achieve. Those goals are discussed in detail below:

Lower Costs: Lower costs for effective and quality service are the paramount goal of any competitive government. Private companies are disciplined to seek efficiencies through the need to operate at a profit while providing a service at a competitive price. Traditional, tax-supported government organizations lack that guiding discipline. By employing the techniques of competition, governments force themselves to find efficiencies within their operations and lower their costs of performing a service.

Higher Service Levels: The genius of the competitive process is that it rewards innovators who discern new or better patterns of service delivery as a way to distinguish themselves from their competitors. Monopolies - government or private - frequently lack the stimulus to improve. By opening themselves to the challenge of competition, governments can learn to upgrade their services within existing budgets and even, experience shows, achieve cost savings at the same time.

Better Management: The competitive process rewards efficient management. Governments can streamline their operations by using the same accounting procedures and productivity measures that the private sector uses, which are more accurate and comprehensive than traditional government methods. Businesses know very well that they must be lean and efficient to compete in the marketplace.

Changed Government Culture: The culture of government changes when it chooses competition over monopoly. Instead of performing more functions with less expertise and effectiveness, competitive governments liberate themselves to perform a smaller set of core functions better than ever before. Instead of being the adversary of the private sector, competitive governments become partners with the private sector.
To see how competitive government works in practice when applied to highway maintenance we selected five case studies of governments from across North America - Massachusetts, British Columbia, Virginia, Texas, and Indianapolis. Some have had more success than others in achieving the goals set out above, but all are important examples for Washington State to consider for the future of its highway maintenance program.

Competitive Highway Maintenance in Other Communities

According to a recent audit of Washington's Department of Transportation (WSDOT), "Nearly all [U.S.] state and Canadian provincial highway and transportation agencies, as well as many counties and cities, contract for some portion of their highway maintenance work." After analyzing examples of other communities and looking at past studies of the market in Washington, the audit concluded that by contracting out highway maintenance work, WSDOT could achieve "real cost savings of 10 percent or more over current expenditures and at the same time [improve] service levels." Savings would amount to almost $25 million dollars, slightly more than what Washington State taxpayers will spend in the current biennium on capital expenditures for high-speed passenger rail between Vancouver, B.C., Seattle and Portland.

Our study found several examples of competitive highway maintenance in other communities:

The Commonwealth of Massachusetts and City of Indianapolis gradually implemented systems of managed competition for road maintenance after determining that there was a clear need to reduce unnecessary costs. After initial reluctance by government employees, the amount of services provided increased, while costs dramatically decreased.

The Province of British Columbia, on the other hand, privatized 100 percent of highway maintenance service in 1988, with the assumption that private sector provision of the service would lower costs. Since then, a number of reports have not been able to determine whether costs have either increased or decreased.

The Commonwealth of Virginia contracts out a number of maintenance services and also "has undertaken the nation's first major roadway all-inclusive routine maintenance outsourcing." Essentially, they have given a five-year contract to one private vendor to perform maintenance on three Interstate highways, with the vendor guaranteeing the Commonwealth $22 million in cost savings.

The State of Texas has been contracting with the private sector for highway maintenance since 1989, when the state legislature mandated that the Texas DOT contract out a minimum of 25 percent of maintenance services and achieve at least 10 percent cost savings.

Case Study #1: Massachusetts - State Level Managed Competition

The Massachusetts Highway Department (MassHighway) manages 12,500 miles of highway, 3,000 bridges, 60,000 roadside acres, 80,000 catch basins, and 3.6 million feet of guardrail. In 1992, Massachusetts' roads and bridges were in dire need of basic maintenance. According to Massachusetts' Transportation Secretary James Kerasiotes, "A notable lack of management...contributed to needlessly high costs in the maintenance of the state's roads and bridges." This situation led to incredible waste and abuse: one foreman for every two laborers in the Maintenance Division; "average sick day totals...as high as 23 days in some maintenance sections," when MassHighway's stated goal was six days or less per year ; and a productivity monitoring system that left management with hardly any idea of what its own employees were doing on a daily basis. The situation was so bad that MassHighway management believed fundamental change was necessary.

The injection of competitive forces revived the Massachusetts highway maintenance program. In October 1992, Secretary Kerasiotes initiated a year long pilot project in Essex County in eastern Massachusetts to test how competitive contracting with the private sector would work. The project's main component was a transfer of all normal highway maintenance to a single private contractor. Some state employees were assigned to monitor the progress of the contract, while the bulk were transferred to other sections of the department.

In just one year, the Essex County contract saved MassHighway approximately $4.4 million, while the value of services performed increased by over $2 million. In plain English, this meant that services like lawn mowing, which state workers performed once a year along highways in Essex County, were completed at least five times a year by the private contractor. Efficiency does not just mean getting things done quicker - it means increased productivity at a cost that is the same or less than the original expenditure. This is exactly what happened in Massachusetts.

The success of the Essex County pilot project led Massachusetts to expand their program in 1993 to maintenance districts' four and five, which encompass all of eastern Massachusetts. The state awarded seven contracts for this area; private sector companies won four and the state employees union three. Massachusetts saved $7.8 million with these contracts , seeing service levels rise by an additional $10.2 million. Finally, in 1996, MassHighway expanded its maintenance program across the rest of the Commonwealth with similar positive results.

There were efforts by opponents of competitive highway maintenance to stop its extension and to discredit the claims of cost savings Massachusetts received from the Essex County pilot project. Secretary Kerasiotes responded to that criticism by commissioning an independent accounting firm, Coopers & Lybrand, to perform an audit that confirmed that significant cost savings did, in fact, occur from the Essex County contract. As a result of the success of the project, Boston's Pioneer Institute awarded MassHighway its 1995 Better Government Award for Innovations in State Government.

There were several keys to Massachusetts' success. First and foremost, there was strong executive commitment and leadership. Transportation Secretary James Kerasiotes, a former businessman, had full backing from Governor William Weld to pursue competitive bidding in the face of entrenched political opposition.

Second, once the initial suspicion of motives on both sides dissipated, management and labor learned to cooperate. State workers began to exercise peer pressure to see that they performed their tasks in a timely and effective fashion. The competitive process removed poor management procedures and empowered workers to suggest better methods for performing their tasks and managing themselves. Some workers feared the elimination of their jobs, but those fears disappeared as 31 promotions were issued to public employees working on the three competitive contracts the union won. At the same time, management learned to appreciate the expertise of their own workers and share valuable information with them to make their jobs more effective. U.S. Labor Secretary Robert Reich recognized this kind of cooperation in 1996 when his Task Force on Excellence in State and Local Government Through Labor-Management Cooperation awarded Massachusetts for their program.

The final key to Massachusetts' success was the willingness and capability of private sector companies who were given a chance to compete. In Essex County, seven companies bid for one $3 million contract. A study by graduate students at Harvard's Kennedy School of Government stated that competition for the highway maintenance market in Massachusetts was "robust." The reasons for this high level of healthy competition were fairly simple according to the Harvard students: first, there will always be a need for maintenance of the public's roads and bridges, and second, private contractors were already thriving by servicing non-government markets like parking lots, housing development roads, and other projects.

Case Study #2: British Columbia - 100 Percent Privatization

Since 1989, the Province of British Columbia has contracted out all of its highway maintenance to the private sector. The Provincial responsibility for highway maintenance includes all the roads and bridges outside of municipal jurisdictions. The Province is divided into 28 separate maintenance service areas, which total over 42,000 kilometers of roads and over 2,800 bridges. Recent figures place the total value of maintenance activities in the Province at $290 (Canadian) million annually.

During the 1980s the Ministry of Transportation and Highways contracted a growing amount of maintenance to the private sector, and finally in 1988 the ruling Social Credit Party (a conservative party), led by Premier Bill Vander Zalm decided to privatize the entire maintenance program. According to Maintenance Programs Manager John Newhouse, "The decision was made on philosophical grounds, in the general belief that the private sector could provide the services more efficiently." The government hoped that privatizing highway maintenance would reduce costs, but it had no established data to support this belief prior to making its decision. Essentially, a political decision was made before any examination of the actual government costs of providing highway maintenance were assessed.

In 1988, the Ministry of Transportation and Highways hired 20 private firms for service contracts totaling almost $756 (Canadian) million over three years. The contracts were lump-sum agreements, which paid contractors for the satisfactory completion of all work in the maintenance district over the three-year life of the contract. In addition, the private contractors performing government maintenance work were required to offer employment to almost all of the approximately 2,500 Ministry employees (at the same wage rates) assigned to highway maintenance before privatization. Government equipment, machinery, offices and maintenance facilities were sold or leased to private contractors as well.

One of the other major changes in the Province's maintenance program was the implementation of a different set of standards for how maintenance work was to be done. Before privatization, the Ministry operated with process-oriented standards that did not describe the results to be achieved, but rather gave detailed instructions for maintenance workers to follow. In contrast, the privatization policy set out end-result standards, making it easier for contractors to perform without day-to-day micromanaging from the Ministry. In other words, the Province is paying for good roads, rather than putting down defined quantities of asphalt. These standards enhanced final accountability by placing the entire responsibility for performance on the contractor. By all accounts the new standards are a substantial improvement. In 1991, the New Democrat Party (a socialist party) took power in British Columbia. The New Democrats were highly critical of the original privatization policy. Therefore, it was not surprising that once entering office they raised concerns that the Province was not receiving the savings hoped for from privatization. In 1993, the Provincial government appointed a review team to investigate the results of privatization. The team's June 1994 report reached several conclusions:

The Province's complete privatization was but one method of involving competition from the private sector, and not necessarily the best method.

Except for the changed maintenance standards, the "privatized approach [was] essentially a mirror image of the Ministry of Transportation." Going further, the report stated that it could not "subscribe to the notion that a full 'privatization' had actually occurred..."

Finally, the primary conclusion of the review team was "that there [was] strong evidence to indicate that the privatized highway maintenance program...cost substantially more than the predecessor program and a cost reduction program should be explored."

According to the report, the Ministry did not first accurately estimate the costs it would incur in administering the program. Furthermore, no attempts were made to estimate what it had actually cost the Ministry to perform highway maintenance before privatization. There were similarly no attempts to measure the potential costs for the Ministry to administer the new contracts until after the political decision was made to go forward, and no pilot project was attempted to test the Ministry's privatization approach.

The charge that full privatization had not occurred makes sense when one considers that private companies were forced to hire at the same wages almost all the government's maintenance employees. According to the report, this policy "severely constrain[ed] contractors' normal abilities to control input costs and obtain efficiencies." Additionally, a 1995 report of a committee of Ministry representatives, the contractors' trade association, and organized labor suggests that one reason contractor costs appeared higher than the previous government costs was because employee benefits were now expressed as actual costs, instead of being hidden as they had been previously in government budgets.

Despite the New Democrats' philosophical hostility toward it, they have made no move to end privatization of highway maintenance since coming to power in 1991. The Ministry's report of 1994 concluded that a return to government operation would "have more counter productive consequences." Despite significant and positive changes in the standards by which highway maintenance is performed, complete privatization of the service in British Columbia has not succeeded in achieving the foremost goal of competitive government: better service at lower costs. Although private contractors exclusively perform highway maintenance in British Columbia, they do so within a heavily regulated environment that shuts out the cost-saving benefits of the marketplace. In British Columbia, true competition has not yet been tried.

Case Study #3: Virginia - Public-Private Partnerships

The Commonwealth of Virginia is responsible for maintaining a transportation network of 55,600 miles of Interstate, state, county and local highways. The system includes more than 12,800 bridges, several underwater and mountain tunnels, and 41 Interstate rest areas. Virginia's Department of Transportation (VDOT) employs over 4,000 maintenance workers, divides the state into nine different highway districts, and keeps one maintenance headquarters in each of the Commonwealth's 95 counties. Virginia allocates $798 million for highway maintenance, about 38 percent of VDOT's $2.1 billion annual budget.

According to a 1996 Maintenance Management Evaluation done for WSDOT by the Dye Management Group, Virginia contracts out a number of "specialty services" like maintenance of rest areas, movable bridges, and tunnels. For a number of years Virginia contracted out maintenance and operation of some of their rest areas by selecting companies based on the lowest bid. The state subsequently found it received inadequate service with this approach and has since adopted a contracting out process in which cost is only one of several criteria for selection of the winning proposal. Since then, according to Dye Management, contractors have cut costs and simultaneously increased service levels at rest areas, which now provide 24-hour operation, with "contractors...very responsive to the rest area user's needs."

Another way the private sector has become involved in highway maintenance in Virginia is through the Public-Private Transportation Act of 1995, which encourages the use of public-private partnerships to design, build, maintain and operate roads in the Commonwealth. Soon after passage of the act, VDOT found that there was great interest from the private sector in putting together all-inclusive highway maintenance proposals.

In 1996, such a proposal was offered - unsolicited - to VDOT by Virginia Maintenance Services (VMS), to maintain several hundred miles of Interstate highways running through Virginia. Prior to their proposal, VMS had been contracting for a large percentage of the rest area maintenance in Virginia. VDOT was interested in the proposal and decided to make a pilot program out of it. A competitive bidding process was undertaken, which, not surprisingly, VMS won. VMS was given a five and one-half year renewable, fixed-price contract for a total of $131.6 million to perform all maintenance functions on 101 miles of I-95, the main north-south corridor on the Eastern seaboard, and 150 miles of I-81 and I-177. VMS is bearing full risk for "losses due to budgeting errors, weather, and other risks," and understands that they will be paid only when they have met VDOT's specific performance standards. This contract is expected to save Virginia $22 million over five years.

According to VDOT, "the VMS work is progressing satisfactorily. They are responsive to service requests from VDOT staff and citizens. When they make mistakes, they appear quick to correct them, and...learn from them quickly." Costs were higher in the first transitional weeks of the contract, but by the end of 1997, the total cost of the contract was running within the budget. Acceptance by VDOT personnel was guarded at first, as well as from other government groups such as police and fire departments, which already had a good working relationship with VDOT on matters of emergency response, but their skepticism has diminished as VMS' work has improved. No VDOT workers have been laid-off as a result of the contract with VMS. State workers who had previously been maintaining Interstate highways shifted their jobs to county road maintenance operations (Virginia maintains almost all county roads and bridges in the Commonwealth) that had been sorely neglected.

Case Study #4: Texas - Legislatively Mandated Competition

The Texas Department of Transportation (TxDOT) is like many things in Texas - very big. In the 1995-1997 biennium over 14,000 full time employees administered a $6.3 billion budget for TxDOT. Unfortunately, according to one recent analysis of TxDOT by the Texas Public Policy Foundation, "the entire agency suffers from a monopolistic culture that is hostile to the private sector and to the needs and desires of local communities." The report says that the costs of administering such a massive organization contributes to its inefficiency - over ten percent of all spending on highway construction and maintenance goes purely to administrative costs, nearly three percent above the national average of 7.4%.

In 1988 the government-sponsored Texas Transportation Institute (TTI) analyzed and compared the costs of selected TxDOT services with the cost of using private contractors. TTI's researchers selected four maintenance functions to study: guardrails, rest stops, pavement markers and road striping, and chip sealing. Except for pavement markers, TTI found that costs would decrease in all areas by as much as one third if private contractors were used.

In 1989, the Texas Legislature took action on these findings and required TxDOT to contract out 25 percent of the state's highway maintenance work, and to reach at least 10 percent cost savings in the process. To reach this goal, TxDOT directed its district offices each to achieve a set percentage of contracted work, with the Amarillo district at the low end with 11 percent and the Houston district at the top with 53 percent. A year after the 25 percent goal was mandated, TxDOT had actually exceeded this percentage and was contracting with the private sector for 27.2 percent of it's highway maintenance, saving over $10 million in the process. In 1991, the Legislature directed TxDOT to increase the level of contracted highway maintenance to 30 percent by 1992 and 50 percent by 1995. By 1996, TxDOT was contracting for 52.1 percent of highway maintenance.

Despite the apparent success TxDOT has had in achieving the percentages of contracting out and cost savings set by the Legislature, the agency continues to resist real change and cooperation with the spirit of the mandates set by the Legislature. According to the study published by the Texas Public Policy Foundation, TxDOT inflated the amount of maintenance operations they say they had contracted by counting activities in their budget that "are not directly related to highway maintenance." Furthermore, the annual report requested by the Legislature on the status of contracted maintenance operations "has never been submitted." At the recommendation of the Texas Public Policy Foundation, the Legislature passed a bill into law in 1997 stopping TxDOT from including activities not directly related to highway maintenance in contracted operations.

Case Study #5: Indianapolis - Municipal Managed Competition

The story of street maintenance in Indianapolis is about two virtues voters often complain are missing in politics today: trust and courage. Republican Mayor Stephen Goldsmith was elected in 1992 with an ambitious agenda and privatization was a big part of that agenda. However, after just a short time in office, he realized his campaign's emphasis on privatization was misdirected. It quickly became clear, as Mayor Goldsmith describes in his recent book, that

"competition, not privatization made the difference. Competition drives private firms - and, as we soon discovered, public agencies - to constantly seek ways to reduce costs and improve service."

Mayor Goldsmith decided to make street repair one of his administration's first laboratories of competition and assigned Mitch Roob, the Director of Transportation, to put together a pilot project competitively bidding a 10-block section of streets in northeast Indianapolis. At the outset they sought to determine how much it cost the city to fill its potholes, but they were unable to get a straight answer to this simple question. Roob decided that simply knowing how much it cost to fill a pothole was not as important as asking managers, "What is your cost of putting down a ton of asphalt?"

To answer Mitch Roob's question, the city hired the accounting firm of KPMG Peat Marwick to implement activity-based costing (ABC) for Indianapolis' government. Activity-based costing is an accounting system that measures every cost of providing a government service. Once all the costs of providing a service are known, efficiency can finally be brought to areas where resources are being wasted. As Mayor Goldsmith describes, "amazing things happened" when ABC was instituted.

In order to insure a level playing field between the city and the private sector in the bidding process, the city's maintenance division was required to determine the total cost for their work that included all the costs for equipment, material, labor, and overhead. For the first time, factors like the costs of heating and lighting city facilities and the depreciation on those buildings were included in the government accounting process. This process resulted in the union workforce streamlining their operations by cutting street crews from eight workers to five and two trucks to one per job.

Even after adopting workforce efficiencies, the city's costs were high, in comparison to what the city expected from the private sector. The workers knew the problem lay with bloated, unproductive management. To oversee 94 line workers in the maintenance division, the city employed 32 highly-paid supervisors (most of them Republican political appointees). The workers challenged Goldsmith to remove some of those supervisors to prove that he was serious about competition. Although the supervisors had supported Mayor Goldsmith's election, and the line workers were primarily Democrats, who mostly voted against Goldsmith, the mayor was not deterred. He laid-off or transferred half of the supervisors, winning the workers' respect and trust in the process, and making it clear that the city department would now sink or swim in a competitive market.

City employees won the initial contract by reducing the projected cost of pouring a ton of asphalt from $407 to $301 - a 25 percent cut. They also increased their productivity, from working 3.1 lane miles per day to 5.2 lane miles per day - an efficiency increase of 68 percent. Since the competitive policy began, city workers have won about 80 percent of all bids for street maintenance.

Although Indianapolis city employee union leader Stephen Fantauzzo differs with Mayor Stephen Goldsmith on most issues, his words about competition are strikingly similar to the Mayor's views about competition:

"The competitive model is a means to an end. It requires that line employees be involved in not only the performing of the work, but in deciding how the work is performed. It is a program that forces the city and the process to stop asking workers to park their brains at the door."

Lessons Learned

The experiences of these five governments illustrate several elements needed for successful competition. The five elements discussed in detail below are:

1. Committed Leadership
2. Accurate and Comprehensive Accounting
3. Performance Standards and Monitoring
4. The Existence of Competition
5. Empower Government Workers

1. Committed Leadership - A central factor in implementing private sector competition is the commitment of elected officials and agency managers to making competition work.

Of the examples studied, leadership was best displayed in Massachusetts and Indianapolis, where both the chief executives and their subordinate agency directors saw eye to eye on what needed to be done and were willing to back each other up when faced with opposition. It is also interesting to note that prior to their government service, agency directors in both Massachusetts and Indianapolis were not career government bureaucrats, but successful private businessmen.

In British Columbia, privatization was instituted under very committed political leadership, but the program has been administered for 8 out of its 10 years of existence by governments that probably would never have initiated such a policy on their own. Results have been mixed.

The Texas Legislature led the way in opening up highway maintenance to the private sector and achieving cost savings, but without leadership from the agency, it has required the legislature's constant oversight to see that the spirit of the reform is being obeyed.

2. Accurate and Comprehensive Accounting - If governments adopt the managed competition process to make themselves more competitive, instituting systems like activity-based costing will help them focus on finding efficiencies within their operations while creating a level playing field for public employees and private contractors.

Both Massachusetts and Indianapolis replaced outmoded and inadequate accounting systems in order to find out exactly how much it cost their governments to perform road maintenance.

When privatizing its entire system all at once, British Columbia did not feel it necessary to institute a new accounting system. As a result, British Columbia lacks the demonstration of cost savings required to drive competition forward.

Texas and Virginia do not use the managed competition approach, but contract out portions of highway maintenance work with the private sector alone, counting on competition in the private marketplace to drive down costs.

3. Performance Standards and Monitoring - Perhaps the most difficult lesson to learn and implement is that performance standards and the capability to monitor those standards are absolutely crucial if competitive government is to succeed.

In its first street repair pilot project, Indianapolis retained KPMG Peat Marwick to monitor city employees against cost overruns. With proper monitoring "the pothole job came in on time and on budget."

British Columbia's outcome-based standards are a key to improved maintenance service.

Strict standards were written into the contract for Virginia's Interstate maintenance pilot project that will save the state $22 million over 5 years. If the private contractor doesn't meet those standards, it will be financially responsible.

4. The Existence of Competition - As Mayor Goldsmith learned, contracting to a private monopoly rarely produced significant results. An essential part of successful competitive procurement is the existence of flourishing competition.

In its Essex County pilot project, Massachusetts chose an area where there were already many companies willing and able to compete for highway maintenance work.

Texas uses a "Contractibility Rating Analysis System" to determine an overall cost-effective contracting percentage for the state. This system sets a contracting percentage goal for each local maintenance district based on things like unit cost, availability of contractors, volume of work, and administrative costs. This rating system has determined that it is less cost effective to contract out in more remote districts than it is in urban districts.

One reason British Columbia required private companies to hire government maintenance employees was to prevent unemployment in remote communities of the Province. Serving this political goal deprived the Province of the flexibility, innovation and savings full competition can bring.

5. Empower Government Workers - Freed of monopolistic barriers to innovations, government employees can be as creative as the private sector and will respond to the stimulus of competition with intelligent ways to save dollars, improve service, and win the contracts.

When Stephen Goldsmith announced that maintenance on Indianapolis' motor pool would be competitively bid, Indianapolis Fleet Services asked for one more chance to improve the poor service they were providing. Faced with competition, IFS cut its workforce by 29% and trimmed its budget from $11.1 million to $9.1 million. As in the street maintenance division, most of these cuts were achieved by removing unneeded layers of management and rearranging work crews. The story doesn't end there, though. In exchange for previously negotiated pay raises, union workers agreed to a plan that allowed them a share of any additional savings gained on top of the original savings they already promised to the city. This gave public employees a direct financial reward ($800 on average per worker) for decreasing their costs.

According to Massachusetts union leader Frank Borges, competition "energized" state maintenance workers. By winning and retaining competitive contracts, public employees are now free from the restrictive and inefficient management practices of the past. They, like their private sector competitors, are now responsible for organizing and managing their own work. Public employees finally feel they are performing valuable and appreciated work.

Conclusion

As stated at the beginning of this paper, the goal of governments today should be to deliver high quality services at the lowest possible price to the taxpayer. This paper examined how five governments across North America applied this lesson in their street and highway maintenance programs. For the most part, those governments achieved major cost savings after careful application of competitive principles. Equally important, however, is that those savings freed up money for other transportation needs.

Competition in the marketplace is the best way to provide the highest quality goods and services for the lowest possible price. As it does for so many other things, competition will work for highway maintenance too. In the final analysis, we should remember again Mayor Goldsmith's dictum that competition makes the difference.

[This Fall the Washington Institute Foundation will publish Part II of our study, which will examine how competition would benefit Washington's highway maintenance program, the potential industry for highway maintenance work in Washington, and legislative efforts to implement competition.]

About the Author

Dennis Lisk is Research Analyst at the Washington Institute Foundation, where he works on issues like transportation, privatization, and state and local tax and budget matters. A native of Washington State, he has been with the Washington Institute since graduating from the University of Washington in 1993, with a Bachelors Degree in History. He and his wife live in Redmond, Washington.

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Source Notes

1. Joint Legislative Audit Review Committee, Department of Transportation Highways and Rail Programs Performance Audit Preliminary Report, prepared by Cambridge Systematics, Inc., February 9, 1998.
2. Ibid.
3. Ibid.
4. James Kerasiotes, A Proposal for Contracted Highway Maintenance: 1995 Better Government Award, p. 101, The Pioneer Institute for Public Policy Research, Boston, MA, November 1995.
5. Ibid.
6. Ibid.
7. Ibid.
8. Ibid.
9. David Gow et al, Privatization in Massachusetts: Highway Maintenance Services in Essex County. Excerpted from: From Public to Private: The Massachusetts Experience 1991-1993, p. 40, John F. Kennedy School of Government, Harvard University, Cambridge, MA, April 1993.
10. Nicole Crawford, "We Thought You'd Never Ask!" Union, p. 8, March/April 1995.
11. James Kerasiotes, A Proposal for Contracted Highway Maintenance... p. 108.
12. Independent Assessment of Massachusetts Highway Maintenance Privatization Program, Coopers & Lybrand L.L.P., June 1996.
13. Working Together for Public Service: Report of the U.S. Secretary of Labor's Task Force on Excellence in State and Local Government Through Labor-Management Cooperation, p. 28, U.S. Department of Labor, Washington, DC, May 1996.
14. James Kerasiotes, A Proposal for Contracted Highway Maintenance...p. 111.
15. David Gow et al, Privatization in Massachusetts: Highway Maintenance Services in Essex County. Excerpted from: From Public to Private: The Massachusetts Experience 1991-1993, p. 40, John F. Kennedy School of Government, Harvard University, Cambridge, MA, April 1993.
16. Ibid.
17. Ibid.
18. John Newhouse, An Overview of the B.C. Road and Bridge Highway Privatization Experience, p. 1, Ministry of Transportation and Highways, Victoria, British Columbia.
19. Correspondence from John Newhouse, Maintenance Programs Manager, Ministry of Transportation and Highways, March 30, 1998.
20. The Operational, Human Resource and Financial Implications of the Privatized Highway Maintenance Program of the Province of British Columbia - A Preliminary Report, p. 15, Ministry of Transportation and Highways, June 1994.
21. Ibid.
22. Ibid.
23. Ibid.
24. Ibid.
25. Ibid.
26. Ibid.
27. Ibid.
28. Ibid.
29. Report of the Tripartite Committee in Regard to Road and Bridge Maintenance, p. 35, Ministry of Transportation and Highways, January 1995.
30. The Operational, Human Resource and Financial Implications..., p. 60.
31. Dye Management Group, Inc., WSDOT Maintenance Management and Administration Evaluation, p. VI-18, Bellevue, WA, June 30, 1996. 32. Ibid. The Dye Management study did not comment on why the quality of contractors' work was inadequate under the low-bid contracting approach. So it remains unclear whether their work simply was of low quality or if VDOT wrote contracts with low performance standards and did not monitor those contracts well enough.
33. Ibid.
34. Dennis Shea, Public-Private Transportation Act Interstate Maintenance Contract: The First Year's Experience, Virginia Department of Transportation, December 1997.
35. Privatization Watch, p. 7, Reason Foundation, Los Angeles, CA, July 1998.
36. Dennis Shea, Public-Private Transportation Act Interstate Maintenance Contract: The First Year's Experience...
37. Ibid.
38. Cynthia Thomas, Sundown on Big Government, p. 28, Texas Public Policy Foundation, San Antonio, TX, January 1997.
39. Ibid.
40. Alberto Garcia-Diaz and Fernando Cediel-Franco, Evaluation of In-House Maintenance Contract Costs for Guardrail, Rest Areas, Pavement Marker, Striping and Seal Coats, Texas Transportation Institute, Texas A&M University, College Station, TX, July 1988.
41. Sundown on Big Government, p. 34.
42. Ibid.
43. Stephen Goldsmith, The Twenty First Century City: Resurrecting Urban America, p. 19, Regnery Publishing, Washington, DC, 1997. (Emphasis added.)
44. Organizing Competition in Indianapolis: Mayor Stephen Goldsmith and the Quest for Lower Costs (B), p. 2, John F. Kennedy School of Government, Harvard University, Cambridge, MA, 1995.
45. Ibid.
46. Organizing Competition in Indianapolis..., p. 3.
47. William D. Eggers and John O'Leary, Revolution at the Roots: Making our Government Smaller, Better, and Closer to Home, p. 110, The Free Press, New York, NY, 1995.
48. The Twenty First Century City, p. 20
49. Ibid.
50. Organizing Competition in Indianapolis..., p. 5.
51. "Pushing Back Privatization: The Indianapolis Story," AFSCME in the Public Service videotape, American Federation of State, County, and Municipal Employees, Indianapolis, IN.