Governments are Outsourcing Asset Management to Private Sector
You are driving along a state highway when all of a sudden you feel a heavy lurch and a distinct THOOM! once, then again, as you drive over an almost crater-sized pothole. “There goes my front-end alignment,” you mutter to yourself. Then you angrily exclaim to anyone who will listen, “With all of the taxes I pay, why can’t they keep the roads fixed?”
Few assets owned and maintained by the government illicit as much passion from taxpayers as the condition of paved roads. But even as the need for more and wider thoroughfares goes largely ignored due to shrinking budgets and changing political climates, state and local governments across the nation also are finding it increasingly difficult to maintain preexisting transportation infrastructure. And it doesn’t stop there. The management of buildings, building-maintenance equipment, real estate, vehicles, office equipment, etc., is becoming a burden governments are discovering is more than they can bear. As a remedy, many are turning to asset management outsourcing.
In the case of road maintenance, Adrian Moore, who monitors trends in government outsourcing for the Reason Public Policy Institute, cites the advantages of a private company taking on the task. “They’ll maintain the road for you. Not just go out and fix the pothole, but take responsibility for keeping that road at a certain level of quality.” Moore adds that, in some cases, the private company may guarantee a specific level of quality. If the quality isn’t achieved, the company does not get paid.
The Cost Factor
Maintaining fixed assets is tough for government because there are always multiple budget priorities. For instance, if it has to decide whether limited funds will go to asset maintenance or public education, asset maintenance will lose every time. Many cash-strapped municipal and state governments are finding out that outsourcing the management of their assets smoothes out the entire process for them. They pay one predictable fee that guarantees an acceptable level of service. They don’t have to concern themselves with how the assets are being managed and they usually enjoy cost savings the contractor can provide because it is operating in a highly competitive market and can offer economies of scale.
“A state agency,” Moore says, “can be a pretty big purchaser and get a pretty good deal if they go out and buy 100, 150, 200 computers. But if you hire a contractor who’s doing this all over the country, buying thousands or tens of thousands of computers a year, the deals just get better.”
In addition to managing government assets more cost effectively than the government can, the private sector can do it better. A government’s reason to outsource is no different from any private company’s need to outsource: acquiring the expertise and resources of a company that specializes in performing an important but non-core function. “A company that specializes can often do it for a lower cost,” Moore maintains. “When you look at both road maintenance and information technology, the private sector has big advantages in keeping up on the latest technology and having the most experienced people. How many miles of road does the state of Wisconsin build in a year? Very few. Private road-building companies are building thousands of miles of road a month. Specialization is a crucial part of it, not just in terms of cost savings, but in the ability to bring the latest techniques and technology to bear.”
Burden Transferred to Private Sector
Government outsourcing is growing across all sectors, though in varying degrees depending on the industry. There is a greater likelihood of seeing it in the service areas of garbage collection, wastewater management and public transportation than in the area of asset management. There are reasons for this. An asset management contract for information technology may last five years instead of one or two years. In the case of roads, where the nature of the work involved requires a longer period of time, it could possibly be 15 to 20 years in duration. And typically there are ironclad warranties included in the contract. If there are any breakdowns in the building or maintenance of the roads, repairs are made free of charge.
However, Moore sees an emerging trend. “Over the last year it’s starting to look like it’s taking off. The first road project that we’ve seen in this style was in Colorado and New Mexico. And now Virginia and Florida have signed similar contracts and a lot of other states are looking at it as well.” Like information technology outsourcing, Moore foresees road asset management outsourcing evolving into a “best practice” among government officials.
More Than Trimming the Lawn
Governments are finding it increasingly difficult to maintain not only roads but also real estate. Outsourcing the maintenance of government-owned buildings is not new but Moore says the nature of the contracts is beginning to change. Instead of service contracts where the private company keeps the interior clean and maintains the grounds, the company takes over full responsibility for the building almost as if it owned the building and is leasing it to the government. Moore believes outsourcing building maintenance makes a lot of sense because buildings suffer a lot of the same problems as infrastructure: they deteriorate in value and quality if not maintained, and it’s really easy for government to overlook spending money to keep them up to date.
As government outsourcing continues to expand, we will begin to see more government assets being managed in this way. A new breed of government professional is populating the landscape. For them outsourcing is an important and familiar tool in achieving their objectives. Consequently, better processes for monitoring and managing contracts are being developed. More appropriate service level agreements that serve both the client and supplier equitably are being devised. And government finally may be learning what the captains of private industry already have figured out: the best people for the job may not be under your own roof.
Lessons from the Outsourcing Primer:
- Governments are finding it increasingly difficult to maintain assets, especially infrastructure. They can relieve this burden by outsourcing asset management.
- Governments have multiple budget priorities, and many are cash strapped. In this challenging environment, maintenance often lands on the bottom of the list.
- By outsourcing the management of assets like roads and buildings, governments can save money and reap the benefits of private-sector expertise.