One State's Key To Efficiency: Private Sector

BY MITCH DANIELS
Posted 8/15/2006

In an apparent epiphany, ex-New York Gov. Mario Cuomo is recorded as having said, "It is not government's obligation to provide services, but to see they're provided." However sensible and straightforward this notion seems, it remains heresy in much of American public administration.

The Indiana state government we inherited last year was still cooking its own food, cleaning its own buildings and running its own power plants. Six departmental print shops sat side by side a few blocks from the nearest Kinko's; the state owned one vehicle for every three employees. Dysfunction and inefficiency were rampant.

Shortly after taking office, our new corrections commissioner asked me, "Did you know we're cooking our own food in 26 separate kitchens, and we're paying $1.41 a meal to feed the offenders?" "No," I answered. "Is that a lot?" "It cost us only 95 cents where I worked last," he said. So I authorized immediate competition.

A well-established food service company won most of the business, at a cost of 98 cents per meal (nutritional quality and consistency improved, by the way, by the terms of the contract). But, in one delightful outcome, the employees of one facility trimmed middle management, reorganized their processes and won the right to continue while cutting a minimum of 30% from the previous costs. At this writing, they are doing even better, and seem sure to qualify for substantial bonus checks.

We've applied the Yellow Pages test (if you can find a service there, maybe government should not try to do it itself) to a host of activities, ranging from janitorial service (annual savings of $500,000) to debt collection of delinquent taxes (achieving a return of 16-to-1).

Next, we hope to contract for the more accurate adjudication of entitlement claims — Medicaid, food stamps, welfare, and so forth — to improve upon a system in which error rates average 25%, and administrative costs are exorbitant while deserving citizens are stuck on long waiting lists.

Over and over, these reforms demonstrate that those specializing in delivering a given product or service, and spurred to constant improvement by competition and the profit motive, can achieve their goal better than the best-intentioned administrators of the best-organized government bureaucracies.

To date, the most noteworthy of Indiana's new initiatives involved our approach to transportation infrastructure. In a problem almost universal among the states, we faced a shortage of $3 billion, equal to 10 years of new road construction at the current level, between road-building needs and projected revenue.

Meanwhile, a 40-year-old Indiana Toll Road across the northern part of our state continued losing money and deferring maintenance and expansion, while charging the lowest tolls of any comparable highway. Tolls hadn't been raised in 20 years; at some booths the charge was 15 cents. With politicians in charge, neither sensible pricing nor businesslike practices were likely.

Without knowing what level of interest to expect, we offered to lease our toll road long term to any interested operator willing to pay for the privilege. Independent estimates of the road's net present value in state hands ranged from $1.1 billion to $1.6 billion, the latter figure aggressively presuming that all future politicians, unlike all their predecessors, would raise tolls at least in line with inflation. I had resolved that only a bid far beyond that would be worth advocating to my fellow citizens.

We received a best bid of $3.8 billion. Upon closing, we will cash a check in that amount and commence the largest building program in our state's history, while transferring the burden and the risk of running the toll road to the private firm.

At one stroke our seemingly insurmountable transportation gap will be closed. Needed projects that have sat around in blueprint stage for years will now become reality. The jobs generated by the construction alone will be measured in the tens of thousands, and the permanent payoff in incremental economic activity should far exceed that.

Any businessperson will recognize our decision here as the freeing of trapped value from an underperforming asset, to be redeployed into a better use with higher returns. We viewed it as critical that the dollars liberated from one capital asset must all be reinvested into long-term capital uses, and not dribbled away on any short-term operating purpose.

However strong the philosophical case for freedom and a limited state, it is the relentless march of the evidence, through statism's many spectacular failures, that has discredited big government in the minds of our ever-practical fellow Americans, and that furnishes the template for progressive proposals of better ways forward against our common challenges.

— Daniels is the governor of Indiana. He was director of the Office of Management and Budget from 2001 to 2003. The full version of this column is available in Reason Foundation's just-released 20th Annual Privatization Report (reason.org).