Competitive Sourcing

Throughout North Carolina, state and local governments struggle with two conflicting demands: a plea for lower taxes and a desire for better services. However, under the traditional model of public sector management, these two goals are diametrically opposed.

In order to lower taxes, government must reduce the number and quality of its services. But to improve services, citizens must be willing to "invest" more tax dollars. With competitive sourcing, this problem is solved. Competitive sourcing benefits taxpayers by reducing costs for government and improving the quality of services provided.

What is Competitive Sourcing?

Competitive sourcing is the competitive process for determining the most efficient and effective source — private or public — for performing specific governmental functions or services. Competitive sourcing is not the same as privatization.

Instead, the state defines a service or a function and takes bids from private and public providers. The lowest bid wins. Whether the service stays in-house with government employees or is contracted out to a private provider, taxpayers are the victors.

The competitive process ensures that the service is provided at the lowest price. As such, it provides a powerful tool for state officials to cut costs while providing essential governmental services. Savings of 5 to 50 percent due to competitive sourcing have been reported, with savings in the amount of 20 to 30 percent being common.

How Competitive Sourcing Saves Money

The general public knows almost by instinct two essential and interrelated economic principles: competition and specialization save money. But these principles are often forgotten when it comes to providing governmental services. There is a misguided belief that state services can be provided only by state agencies operated by state employees. Additionally, there is a misconception that large state agencies can operate efficiently even though they don't face competition.

Competition is essential in both the private and public sectors to ensure that goods and services are provided at the lowest cost. The quality of services is also improved due to the threat of competition. The introduction of competition into a formerly public-sector market helps taxpayers by providing better services at lower costs.

Many states have implemented competitive sourcing in an effort to lower taxes and improve services. The results have been positive in these states and have saved taxpayers a great amount of money.

Examples From Other States

Indiana. Indiana Gov. Mitch Daniels first introduced competitive sourcing through the state's prison system. After the previous governor built an expensive new prison, Indiana didn’t have the money to house inmates and had to send them to a private facility in Kentucky.

When Governor Daniels was elected, the state contracted with private firms to manage the prison Indiana had already built. This resulted in an increase in jobs and taxpayer savings of $2 million a year. The prison's food service contract was awarded to a private company, as well. That saved the state $0.43 per meal and allowed the prison to cut out middle management positions.

Indiana also leased the Indiana Toll Road, which had been losing money for many years, to a private company for $3.85 billion. This allowed the state to decrease the size of government by 3,000 jobs and seven departments. It also gave Indiana the chance to focus on badly needed transportation projects that had previously been ignored due to budget shortfalls.

Indiana has used competitive contracts with the private sector for a number of other services, as well. The state is saving $500,000 every year with private janitorial services. By hiring a private firm to collect delinquent taxes, the state receives a 16:1 return. As of 2006, Indiana was also considering competitive bidding for the administration of entitlement programs, including Medicaid, food stamps, and welfare.

Florida. During his tenure as governor, Jeb Bush saved Florida taxpayers approximately $600 million through competitive sourcing. He also was able to cut taxes by $20.3 billion in eight years. With bidding, Gov. Bush's goal was to improve the performance of state-run services.

With 2006's Florida Efficient Government Act, the legislature encouraged state agencies to provide their services in the most efficient manner possible. It promoted the employment of private firms when they could supply services in a more cost-effective manner. The act also established the Council on Efficient Government to advise on possible outsourcing projects and explore ways to increase government productivity and decrease costs for taxpayers. Under Gov. Bush, Florida used private providers for more than 138 public services.

South Carolina. South Carolina Governor Mark Sanford has also led the way for state-based competitive sourcing initiatives, helping his state save $100 million dollars in 2005. When South Carolina saw a drop in the number of mental health patients (from thousands to only 200), the state sold the $50 million property where it had formerly institutionalized patients.

The state also contracted with private companies to provide services for mental health patients. This has benefited not only the patients, but the taxpayers, as well.

Competitive sourcing also saved taxpayers money when South Carolina sold Port Royal, which moved very low volumes of goods compared to the state's busier port in Charleston.

In addition, the state has used bid contracts to provide many other services, including government car fleets, golf courses, and bait-and-tackle shops formerly run by the state.

Virginia. Virginia has used competitive sourcing in various aspects of its transportation system. In 2006, the General Assembly passed a bill to allow the state to contract out toll operations.

Virginia has since leased the Pocahontas Parkway, a Richmond toll road, to the Australian company, Transurban, for 99 years. This contract allowed the state to pay back the debt incurred from the construction of the toll road. It also allowed Virginia to build an important connector road to the Richmond airport. The state has contracted with private companies to do highway maintenance, as well. All of this has resulted in savings for taxpayers and improvements on Virginia's transportation system.

Recommendations

1. The state should establish an aggressive competitive sourcing policy that includes most, if not all, government services.

2. Lawmakers should establish competitive sourcing offices that will set up a framework for introducing competition to government services. These offices should accept unsolicited bids from private companies who believe they could provide a publicly run service in a more efficient, less costly way. By doing so, many cities and counties, as well as the state, may find ways to reduce taxes and decrease the strain on government that comes from operating these services.

3. State and local governments should also eliminate the barriers that prevent private companies from entering the market for these types of services. Many laws and regulations stand in the way of private sector involvement. Lawmakers should remove these hurdles in an effort to encourage competition.

For example, Wake County chose not to open up its school bus operation to competition because the county found it would be more expensive than leaving it as a public service. However, state regulations on insurance and other issues hid the true cost of public-sector provision. Had these regulations not been in place, taxpayers may have been able to save money through competitive sourcing.