Entrepreneurs Can Do Everything Government Can Do, Only Better;
Chuck Walbridge and Ron Jensen both see themselves as solid businessmen. There is a certain irony in this perception: Although both may be solid, Jensen is not a businessman at all, but a government bureaucrat.
That hasn't kept him from competing with Walbridge, however. Last year, for example, the two bid on the same contract, with Walbridge coming up the winner. Jensen has vowed that it won't happen again."We will be analyzing every cost to see where we might have gone wrong," he says. Walbridge, for his part, admits that Jensen is a tough competitor, as well as a good sport. He points proudly to a letter he received recently from Jensen's organization, congratulating Walbridge's people on the way in which they had started up their operation.
As it happens, that letter was more than the sportsmanlike gesture of a gracious loser, for Jensen is director of the Public Works Department of Phoenix -- a city that regularly invites private companies to bid against its own agencies on various contracts. It was such a contract, the one for garbage collection, that was awarded in the summer of 1983 to Walbridge's company, National Serv-All Inc. of Fort Wayne, Ind. Even though Jensen's department lost out on that particular bid, it still monitors the quality of National Serv-All's work.
Garbage collection is a distinctly unglamorous business, and Chuck Walbridge brings to it no glitzy, high-tech wrinkle. Nor is he much interested in public policy or great social experiments except as they might affect his business. And yet he is involved in a small but intriguing aspect of what is, by any measure, a big idea.
The idea is called privatization, a word that refers to the private delivery of public services -- specifically, to the transfer of those services from public to private control. Lately, that has become an increasingly popular thing to do. Thus, several states will soon have private minimum-security prisons. In California, there is a private post office. In Arizona and Georgia, some communities are served wholly or in part by private fire departments. On the federal level, the Army and Air Force Exchange Service recently contracted with Burger King Corp. to supply food at some of its bases. And, in September 1983, the President's Private Sector Survey on Cost Control, better known as the Grace Commission, issued its "Report on Privatization," outlining $28.4 billion in savings that the federal government might achieve by privatizing various services.
For all this recent activity, the concept behind privatization is not as new as it may seem. U.S. government administrations have long vacillated between providing services themselves and contracting them out. During the early 1800s, for example, privately operated bridges, tollroads, fire departments, and street lights were commonplace. Subsequently, gross abuses by both private contractors and public officials led to an outcry that caused governments to start providing the services themselves. Now the wheel has turned full circle, and privatization is seen as a solution to the problem of governmental bloat -- a way for governments to provide improved public services and reduce expenditures at the same time.
As widely accepted as that view may be nowadays, it remains largely untested at the federal level and in most of the newer arenas of privatization. Garbage collection, however, is one service that many local governments have been contracting out for years, and it provides a broad sample of experience in privatization.
E. S. Savas is more familiar with that experience than most people. He became interested in garbage collection about 15 years ago, when he was first deputy city administrator to New York Mayor John Lindsay. At that time, he did a study of garbage collection in two contiguous neighborhoods. One neigborhood was in Queens and was serviced by the city; the other was in Nassau County and was serviced by a private contractor. Savas found that the private contractor in Nassau County was collecting garbage three times a week, while the city sanitation department collected garbage from Queens only twice a week. Moreover, the private contractor picked up the garbage from each resident's backyard; in Queens, residents had to take their garbage to the curb. Despite the inferior service, garbage collection in Queens was costing $207 per household per year. Nassau residents, on the other hand, were paying a mere $72 per household per year -- about a third as much as their Queens neighbors.
Savas drew the obvious conclusion, and suggested that the city try contracting out garbage collection, whereupon he became embroiled in a rancorous debate that drew national attention in the early 1970s. The debate concerned the relative merits of private versus public delivery of services, and Savas found himself pitted against an entrenched constituency of government workers at all levels. He lost.
Subsequently, however, he went on to participate in a massive, four-year study of the issue. The study, funded by the National Science Foundation, looked at solidwaste collection in 2,200 U.S. cities, and found that municipal services generally cost from 29% to 37% more than privately delivered services. Moreover, those numbers didn't reflect the fact that private contractors pay taxes, while municipal sanitation departments do not. Taking taxes into account, Savas figured that municipal garbage collection generally costs 71% more than would private garbage collection.
Although challenged by many in the public sector, such statistics have encouraged a wide range of municipalities to contract out garbage collection to private vendors both large and small. The way governments have gone about that process, however, varies widely from place to place, and that variation has created pitfalls as well as opportunities for private garbage-collection companies -- as Chuck Walbridge discovered en route to Phoenix.
Walbridge's company, National Serv-All, is a 27-year-old, family-owned garbage-collection and -disposal business, which last year had revenues of $5.5 million. In an industry dominated by the likes of Waste Management ($1.04 billion), Browning-Ferris Industries ($844 million), and SCA Services ($334 million), it is a midget among giants. And yet it has managed in the past year or so to move out from its base in Fort Wayne and establish a toehold in the national market for private garbage-collection services.
It was Chuck Walbridge's father, Glen, who launched the family in the garbage business back in the 1950s. He owned a car wash in Anderson, Ind., and used to complain so much about trash pickup that the woman in city hall who handled his complaints suggested he bid for the contract and do it himself. Walbridge took her up on the idea, founded a company called Anderson Refuse Co., and won the contract in 1957.
Anderson Refuse was, quite literally, a mom-and-pop operation in those days, and remained so until 1966 when the Walbridges landed their first major municipal contract, under which they were to collect garbage and operate a landfill in Fort Wayne. Overnight, the company quadrupled in size, becoming a serious business complete with a management structure and a significant amount of debt. In recognition of the change, the Walbridges incorporated the company as National Serv-All.
In the following years, National Serv-All continued to grow, acquiring other mom-and-pop garbage companies in the area, but -- its new name notwithstanding -- it generally confined its operations to Fort Wayne until 1983. During that time, Chuck Walbridge, who took over in 1979, concentrated on learning the business: how to deliver the service and how to keep the customers satisfied. "Garbage is perhaps the most visible public service," he notes. "The city fathers hire us, but we work for the taxpayers. . . . They are the ones who complain if service is bad." He adds parenthetically that more than one Fort Wayne mayor has given National Serv-All partial credit for his reelection.
Small as the company was, Walbridge was keenly interested in efficiency and innovation, and he constantly searched for ways to lower costs and improve service. Toward that end, he struck up a relationship with International Harvester Co.'s engineering division, which was located in Fort Wayne, and began testing Harvester's new trucks, making suggestions about improvements. He also began designing his own vehicles, trying out different bodies and control systems. In his quest to keep up-to-date with the latest advances in garbage collection, he made his first trip to Phoenix in 1975.
At the time, Phoenix had not yet begun to contract out its garbage collection, but it did use an innovative collection system designed to minimize labor costs and beat the desert heat. The system was built around a fleet of one-person trucks with mechanical arms that could pick up large, standardized containers. (Today, such containers are so big that transients occasionally take up residence in them, and Walbridge instructs his men to shake the containers before dumping them.) Walbridge was fascinated by the idea and inquired where it had come from. He was told that Phoenix was working with a system developed by a small Arizona company with the unlikely name of Government Innovators Inc.
Government Innovators is a story in its own right. Founded in 1971, it had grown out of the lunchtime bull sessions of a group of entrepreneurially minded bureaucrats in nearby Scottsdale, Ariz. For entertainment, they had often brainstormed about how they would improve their departments if they could keep the money they saved. Among the ideas they came up with was one for automated garbage trucks. The idea seemed like a natural -- so much so that they even designed the equipment and went looking for a company to produce the system.When they found no solid offers, they decided to do it themselves, building the nation's first automated garbage-collection system within the Scottsdale Publi Works Department. Subsequently, some of them left public service and formed Government Innovators.
Curious about the possibilities of such a system, Walbridge purchased one of Government Innovators' trucks and took it back to Fort Wayne. Over the next few years, he experimented with various modifications, which he discussed with people at the company. They were duly appreciative. "Chuck has a lot of good ideas, and he has been extremely generous with both his time and his equipment," says Marc Stragier, president and general manager of Government Innovators. Then again, altruism was not his only motive: Walbridge's knowledge of equipment and systems stood him in good stead in 1983, when National Serv-All suddenly found itself competing nationwide against the giants of the garbage-collection industry.
Walbridge says that the company's decision to go national was a matter more of necessity than of choice, growing out of the hard times that gripped Fort Wayne in the early 1980s. The first blow was the downturn in the automobile industry, which hurt a number of the company's commercial customers. Then came the crisis at International Harvester, a mainstay of the local economy. As the crisis deepened, Harvester began hinting that it might transfer a substantial portion of its operations out of Fort Wayne. (It eventually did so in July 1983, a move that "put the city on the ropes," according to Walbridge.) Uncertain about the company's future in that precarious environment, Walbridge took a deep breath and entered the rude, competitive world outside of Fort Wayne.
He began tentatively, scouting cities for contracts that National Serv-All would find manageable and for competitive situations that did not unduly favor another bidder (situations, for example, in which another bidder controlled the landfill and therefore the disposal rates). There was no grand strategy, he says. The goal was simply "to broaden our base."
That was not an easy task. As Walbridge soon discovered, contracts that were manageable for National Serv-All were also manageable for the giants of the industry, and -- when he started actively bidding on contracts in 1981 -- he found himself losing time and time again to more experienced companies. He says now that the process taught him "everything you need to know about the way the big boys bid contracts." At an average of $30,000 per bid, however, it got to be an expensive education.
On the other hand, Walbridge also learned a lot about the market, about how cities structure bids, and about their motives. Cities that invite bids, he discovered, don't always want privatization. "Lots of cities invite you to bid, then they take your ideas, say, 'Thanks a lot,' and do it themselves," he says. "They use the bidding process to keep themselves honest."
Then there are places like San Diego, where National Serv-All and the other private contractors found themselves underbid by the county on a landfill contract. Noting that the department's bid was also lower than what it had been charging previously, the county commissioners threw it out.
More often, however, Walbridge came up against the sheer incompetence of the governments he was dealing with. Many had no idea of the real costs of the services they were contracting out, and therefore had no way to do a realistic evaluation of the bids. In some cases, the specifications were so vague that the government found it impossible to come up with a satisfactory formula for determining who had won. Alternatively, the government might deliberately use the vagueness of the specifications to leave open the option of retaining the contract, or giving it to a favored contractor.
With experiences like these under his belt, Walbridge was all the more impressed with the situation he encountered when he returned to Phoenix in 1982.
There had been changes since his first visit seven years earlier. For one thing, the city had begun inviting bids for city contracts, largely in response to the budgetary constraints arising from the tax revolt of the late 1970s. That was a situation faced by government officials all over the country, but, unlike many others, the city fathers of Phoenix viewed the fiscal crisis as an opportunity rather than a problem, a chance to make government more businesslike. "Privatization was part of a larger program to get more productivity . . . more results for the dollars," says Marvin Andrews, Phoenix's city manager. "And so we did a lot of programs to stimulate efficiency and employee involvement. Privatization was just one of the things we tried."
Fortunately, Phoenix had a relatively efficient -- and honest -- government to begin with, having switched to the council/city manager system following a period of rampant corruption in the 1940s. This has made life difficult for local reporters, who complain that the city administration is a colorless, unaccountable technocracy. But the citizens don't seem to mind.
The center of privatization activity in Phoenix has been Ron Jensen's Public Works Department, which began inviting bids on garbage-collection contracts in 1978. From the beginning, the city stipulated that the Phoenix Sanitation Division would hold onto 50% of the business, to ensure that garbage collection would continue in the event that a private vendor proved unable to deliver service for one reason or another. The other 50% was put out for bidding, with the sanitation division competing against private vendors for two of the four available five-year contracts.
To keep the department's bids honest, Phoenix arranged to have them prepared by the city auditor, who made sure that they represented costs fairly on a basis comparable to those used by the private contractors. This task was easier in Phoenix than elsewhere because the city uses cost accounting. Thus, for example, the city's equipment fleet is centralized in one division of the Public Works Department and then "rented out" to various departments at a per-mile or per-hour rate calculated to reflect overhead. Management overhead is likewise apportioned among the department, right down to a fraction of the city manager's salary.
All of these systems were in place in 1982 when Walbridge returned to Phoenix, this time to attend a conference. He took the opportunity to study changes in Phoenix's automated refuse-collection system. He liked what he saw. "I have never encountered or read a more detailed set of specifications," he says. "We would always prefer to bid in a city that knows what it's doing. The smarter they are, the better off we are."
"Whoever in Phoenix had the foresight to say, 'You guys don't know what your costs are, so we're going to make you bid,' did the city a real service," adds Walbridge's son, Kevin, who is now in charge of the company's Phoenix operation.
Aside from the precisencess of job specifications, the Walbridges found the Phoenix situation attractive in other ways. For example; the city was willing to supply trucks to the winning bidder. In addition, the contracts contained a cost-of-living escalator clause to cover inflation. "They said to us, 'We want you to bid in today's dollars," says Kevin Walbridge. "They went out of their way to eliminate any advantages [the specifications] might hold for their own department."
Moreover, Walbridge believed National Serv-All would be in a strong position vis-a-vis other competitors, thanks to his own knowledge of the city's equipment and collection system. "I had helped to design the [Harvester] trucks Phoenix was using," he says."We knew more about them than anyone else. While Waste Management and the others buy their equipment, we custom design our own. . . . One of the reasons we beat [both the giants and the city] was that we planned to take their bodies off and put our [more efficient] bodies on." Although the city did have an advantage in knowing the actual costs of maintaining the equipment, says Walbridge, "I felt we had about a 15% advantage in productivity. Our system would load barrels faster, and our compactors gave our bodies more capacity."
In the end, that proved to be the difference. Walbridge's winning bid for contained garbage was a mere penny lower than the city's (on a unit-per-household-per-month basis).Waste Management came in third, SCA Services fourth, and Browning-Ferris Industries fifth. The thinness of the margin notwithstanding, the city conceded defeat and awarded the contract to National Serv-All.
For Walbridge, the Phoenix contract marked a turning point in his effort to take his company national. He has already begun to expand his base in the area, looking for commercial and industrial customer, as well as other governmental accounts. To some extent, he views these relationships as a hedge against the possibility that National Serv-All might lose the Phoenix contract when it comes up for bid again in four years.
Not that Walbridge expects to lose. "Phoenix is exceptional as far as cities go," he says. "They have a better understanding of business, and they are fair." But, in a fair contest, he believes he can usually underbid a government agency. "A city is hobbled by a low-bid requirement in the purchase of equipment, which sometimes forces them to take equipment that may not be the best. I can buy what I want." That means, for example, that a city might be unable to purchase Government Innovators truck bodies, which cost 10% more than other models, but reduce overall costs by about 20%.
Adds Kevin Walbridge, "We're motivated, while cities are still cities. They will always be bureaucratic."
Marvin Andrews and Ron Jensen don't agree.They believe that government workers can be motivated to keep costs down, if only because they want to hold on to their jobs. "Quite frankly, we learn from the experience of going through the contracting process," says Jensen. "When we lose a bid, it's up to us to figure out why we lost it. Where were our costs too high? Was it equipment costs? Labor costs? And this whole feeling of competition gets to the unions, too."
This past August, Jensen's department demonstrated just how serious it was about the process, turning in the low bid on a major contract for both contained and uncontained refuse. The city's bid, moreover, was low by a substantial margin, thanks in part to its planned purchase of a fleet of new trucks. National Serv-All -- which came in fourth in the bidding -- was taken by surprise. "What they did," says Walbridge, "was to tighten up their specs on their trucks. It was smart on their part -- the new truck is a first-class piece of machinery." Walbridge says he is now working on an experimental truck that will allow National Serv-All to do better the next time around.
While stimulated by the competition, Walbridge is still not thrilled by the Phoenix approach to privatization. Granted, it works in Phoenix, but elsewhere -- he says -- it is subject to abuse. After all, many governments are less scrupulous than Phoenix's, and Walbridge would prefer not to spend $30,000 preparing a bid only to find that the competition is rigged, or that the process is so murky that he cannot figure out what is going on."I understand a private bid, but it is very difficult to know how a city formulates its bids."
Walbridge's cautions notwithstanding, it is precisely the competitive discipline imposed by Phoenix's system that makes the city an attractive place for National Serv-All to do business. Only by applying private-sector standards to its employees and departments -- and by subjecting them to competitive pressures -- is the city government able to keep track of its real costs, and thereby to come up with detailed job specifications. Without competition, privatization in Phoenix would be subject to all the problems and pitfalls that Walbridge encountered in other cities.
From that perspective, the Phoenix system -- a system of sound management leavened with a touch of entrepreneurism -- may well hold the key to the future of privatization in America. If it does, Chuck Walbridge is liable to find himself competing with government bureaucrats like Pon Jensen for years to come.