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Weighing the Watchmen: Evaluating the Costs and Benefits When Outsourcing Correctional Services
Jeffery F. Segal and Adrian T. MoorePart 1: Employing a Best-value Approach to Procurement
This is a summary of A Cost Comparison Primer: Evaluating the Costs and Benefits When Outsourcing Correctional Services
Part I - Best Value Procurement, Policy Study No. 289, January 2002, www.rppi.org/ps289.html.
Introduction
Prison populations in the United States have swelled over the last 20 years. Fiscal constraints at the federal, state, and local levels have left few funds available for the accommodation of new prisoners, and overcrowding is a serious problem at many of the nation’s jails and prisons. In response, correctional authorities have turned to the private sector by contracting for the construction, financing, and operation of private prisons.
Factors Behind the Privatization Decision
Traditionally the debate over privatization has been whether or not privatization saves money. This was particularly an issue with correctional services. The concept of cost is easy to grasp and the figures are usually large, while other issues are more subtle and less sensational for either proponents or critics to use in arguments. However, research suggests that cost no longer is the dominant driver of privatization in corrections.
Several other factors have become as important as cost savings in justifying privatizing, but they are harder to measure and even harder to hang an argument on in a political debate. These factors include:
Privatization to Achieve Improved Quality
Quality outcomes from outsourcing arise from the appropriate safeguards that governments write into contracts. There is thus increased incentive for the contractor to produce high-quality work and to ensure proper performance.
Contracts can be performance-based (focusing on outputs or outcomes) and can include quality assurances or quality- control assurances.
Privatization to Manage Capacity
Prison overcrowding continues to plague many correctional facilities across the country. Because of the urgent need for new or expanded facilities, over 21 percent of state agencies say speedy project delivery is a key driver in the decision to privatize.
Construction of a prison or jail takes governments an average of two and one-half years, while private firms complete the same type of project in about half the time.
Privatization to Improve Accountability and Better Manage Risks
If written properly, a privatization contract gives policymakers morecontrol and flexibility. To realize these benefits: 1) contracts have to be written with measurable criteria for success and mechanisms for termination where appropriate; 2) the government has to monitor compliance and be able to demonstrate non-compliance if it occurs; and 3) procurement laws have to allow selection criteria other than lowest bid so that a firm with a record of terminations can be excluded from bidding even if its bid is the lowest. Privatization allows governments to shift the risks to the contractors, which helps achieve both the most efficient risk allocations and allows risk to be used as a management tool. The power of the contract is often overlooked by public officials, who thus miss the opportunity to build quality assurances or quality controls into project delivery as a means of managing risk.
Privatization to Spur Innovation
Competitive outsourcing can produce innovative solutions. The freedom to invent allowsws for new processes that integrate relevant technological advances.
Privatization to Gain Access to Expertise and Acquire New Services
With the ability to draw inmates from a large populationion pool, private corrections companies can specialize in unique facility missions. Examples of unique private facilities include those devoted to geriatric inmates or terminal and chronically ill inmates, those devoted to teen offenders, or even regional jails that circumvent barriers to joint-operating agreements between governments. By privatizing, in effect, governments can purchase a service inherently different than what is provided by their own in-house resources. As such, policymakers can tailor their privatization initiatives to meet their specific goals and specific needs, and acquire services that are otherwise not available in-house.
Privatization to Improve Efficiency and Flexibility
Private firms must compete to win the right to manage a facility or or for contracts to house inmates. Thus, private corrections firms have strong incentives to run efficient operations. Some means by which they improve efficiency include controlling legal liabilities, reducing use of overtime, managing to prevent injuries and workers’ compensation liabilities, and improving labor productivity.
Moreover, competition and the fear of privatization drive efficiency in both the public and private corrections marketplace, because government facilities are pressured to become more efficient and to provide better services to compete with private prisons.
Cost Savings in Corrections Privatization
Even though cost savings is becoming less central to privatization decision-making, it nonetheless is important. A preponderance of evidence suggests that private prison facilities do create cost savings. We identified 28 studies that analyze cost data, and while none of these studies is without their flaws, many do a good job of achieving comparable results. Virtually all of the studies nd private prison costs to be lower - on average between 5 and 15 percent.
Comparing the cost of privatized services relative to government services is a complex undertaking that requires making initial assumptions that partly shape the outcome.
The simple fact is that cost comparison is more an art than a science - a fact that pains many who would prefer cost comparisons to be simple matters of data analysis. It is a fundamental tenet of cost comparisons that the work requirements, physical plant, quality measures, etc. must be identical for a cost comparison to be accurate. This means ignoring different factors that may include inmate population characteristics, facility age, design, and layout, to name but a few. In order to eliminate the situation of "comparing apples to oranges," specific adjustments must be made to cost comparisons that take these differences into account.
Not only is comparing identical facilities, populations, and conditions impossible, but postulating identical situations puts the cart of cost comparison before the horse of motivations for privatization in the first place. If a government prison and a private prison are identical in every detail that could affect cost, what is the point of privatizing? Many of the driving factors for privatization (such as quality, innovation, and cost savings) are necessarily lost in this postulation. Arguably, no pure "apples to apples" comparison is possible.
Other examples of cost distortions appear during the contract-award process. Contracting agencies often micromanage service delivery, dictating staffing patterns, prison design, style and type, the wages employees are to be paid, and other details. This level of input may appear to give the contractor more control, but it also directly raises the costs of the outsourced services and at the same time slams the door on opportunities to do things in new ways that save money.
Quality: The Flip Side of Privatization?
The major charge against privatization is that quality and security are sacrificed by reducing costs. Yet there is clear and significant evidence that private facilities provide at least the level of service that government-run facilities do. Private correctional facilities have measured well against governmentrun facilities in almost all criteria of quality, including:
Quality-comparison Studies
We identified 17 qualitycomparison studies, and all but two found the private facilities to performrm as well or better than government-run facilities. Overall, the research supports a pattern of high-quality services in private facilities.
American Correctional Association (ACA) Accreditation
Independent accreditation by the ACA designates that a facilityity meets nationally accepted standards for quality of operation, management, and maintenance. There are currently 5,000 government and privately managed detention facilities located around the United States.Only 532 are accredited by the ACA - 465 of 4,800 government-managed facilities (10 percent ACA accredited) and 67 of 150 privately managed facilities(44 percent ACA accredited).
Contract Terminations and Renewals
As Dr. Charles Thomas wrote, "This indicator evaluates quality by measuring the willingness of contracting agencies to renew
existing contracts. The hypothesis behind this first indicator is that contracts would be terminated for cause or not renewed if the
contracting agency was dissatisfied with the caliber of services they received.” Since the first modern private prison opened in 1985, there have been only a handful of contract terminations and virtually every contract has been renewed.Court Orders and Prisoner Litigation
In 2001, of the 50 state correctional departments, 13 entire departments were under a court order to relieve unsatisfactory conditions, and 15 states had at least one facility under court order. In comparison, no privately operated prison has ever been placed under a court order for problems with conditions. In fact, several states have had tremendous success in getting facilities out from under court orders by contracting with a private firm to run it, and incorporating the court-imposed standards into the terms of the contract. At the same time, while private prison companies and correctional officers are much easier for inmates to sue than are governments and public employees, they appear to suffer fewer lawsuits.
Policy Alternatives to Cost Comparisons
Correctional-services privatization needs to catch up with best practices of privatization of other services nationwide by adopting a "best-value selection" criteria. "Best value" is rooted in the simple concept of value - selecting firms to provide services or projects based on qualifications and technical merits, not just on lowest cost - as long as the price is the true value of what is promised. Governments are becoming better shoppers and realize that the best value is not always the cheapest. Selecting simply the cheapest alternative assumes all other things are equal, which they rarely are. The more complex the privatization process is, the more important a best-value selection criterion is. When the goal of privatization is a mix of cost savings and other objectives, best-value procurements still allow all factors to be weighed appropriately in making the privatization decision. Policymakers now recognize that with privatization they are often buying something different from the services traditionally provided in-house. Best-value selection allows these differences to be properly weighed in context of desired outcomes.
Conclusion
Cost comparisons are only part of the data needed to evaluate the merits of privatization, and the measurable data alone cannot paint the complete picture. The full measure of worth of privatization has to be assessed in a policy context, with full due given the broader goals that can be achieved, including quality and performance. Most important is recognizing that cost savings from privatization is itself a product of competition, and that competition has beneficial effects on the entire system.
About the Authors
Geoffrey F. Segal is the Director of Privatization and Government Reform Policy with RPPI. He is co-author of several reports on government management, including Privatizing Landfills: Market Solutions for Solid-waste Disposal and Infrastructure Outsourcing: Leveraging Concrete, Steel, and Asphalt with Public-private Partnerships. Segal is also editor of RPPI’s monthly newsletter Privatization Watch and Annual Privatization Report. He has a Masters in Public Policy from Pepperdine University.
Adrian T. Moore is Executive Director of RPPI. He is author of many studies and articles on government management, and he is co-author of Curb Rights: A Foundation for Free Enterprise in Public Transit, published in 1997 by the Brookings Institution Press. He has a Ph.D. in economicsReason Public Policy Institute (RPPI) is a nonpartisan public policy think tank promoting choice, competition, and a dynamic market economy as the foundation for human dignity and progress. RPPI produces rigorous, peer-reviewed research and directly engages the policy process, seeking strategies that emphasize cooperation, flexibility, local knowledge, and results. Through practical and innovative approaches to complex problems, RPPI seeks to change the way people think about issues, and promote policies that allow and encourage individuals and voluntary institutions to flourish. RPPI research focuses on education and child welfare, environmental policy, land use and economic development, privatization and government reform, and transportation.
Reason Public Policy Institute (RPPI) is a nonpartisan public policy think tank promoting choice, competition, and a dynamic market economy as the foundation for human dignity and progress. RPPI produces rigorous, peer-reviewed research and directly engages the policy process, seeking strategies that emphasize cooperation, flexibility, local knowledge, and results. Through practical and innovative approaches to complex problems, RPPI seeks to change the way people think about issues, and promote policies that allow and encourage individuals and voluntary institutions to flourish. RPPI research focuses on education and child welfare, environmental policy, land use and economic development, privatization and government reform, and transportation.
3415 S. Sepulveda Blvd., Suite 400, Los Angeles, CA 90034, 310-291-2245, 310-391-4395 fax, www.rppi.org
Copyright © 2002, Reason Foundation.
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