Features: September 20th, 2002

An American Tale: Modernising Public Services Containing Privatisation

By Brendan Martin

Reproduced by permission of The Catalyst Forum www.catalyst-trust.co.uk

Downing Street was said to be perplexed that, not 48 hours after the Spending Review committed larger budget increases to public services than had any government since the 1970s, local government workers responded with a display of union power also unseen since that decade.

Yet both the government’s long-awaited commitment of resources, and the determination of local government employees to begin to reverse years of deterioration in relative earnings, are manifestations of the same political trend. It is marked by widespread determination, cutting across social class, to transform not only public services but also the lives of those who provide them. If it is to succeed, it needs also to be guided by a judgement that those two goals, so far from being mutually antagonistic, are indivisible.

The emerging mass movement for better public services could power their modernisation in ways capable of raising their standards to those of Europe’s best. That is what both government and unions want, but they will get it only if they are committed to the same route as well as the same destination. That might require both to return to their road maps, not only with a view to agreeing a way ahead but also to see what new trails have been blazed since they last had a good look.

Lessons from America

The Nordic countries and others in the European Union can provide many an example of approaches to public service modernisation founded upon new forms of participatory democracy and social partnership. However, should there be people of high influence in this endeavour more inclined to look across the Atlantic than the North Sea for inspiration. The following story could be of interest. No less likely an authority than the senior domestic policy advisor to George W. Bush’s presidential campaign can vouch for the benefits of working with rather than against public service unions if the goal is to get more bang for the buck.

Stephen Goldsmith is a Professor of Public Service Management at Harvard University’s Kennedy School of Government. But all he knows about what makes public service workers tick, and why their active involvement in redesigning and managing their work can hold the key to improving quality and efficiency, was taught to him by the Indianapolis American Federation of State, County and Municipal Employees (AFSCME) during his two terms as Republican mayor of the US’s 12 largest city.

Goldsmith arrived in office in 1992 on a platform of privatizing everything except the city’s police and fire departments and running the city through four purchasing agents. By the end of his second four-year term, fewer services were contracted out than when he took office. But he had not failed; on the contrary, Goldsmith had made a name for himself by sharing with AFSCME an “Innovations in American Government Award” from the Ford Foundation and Harvard’s Kennedy School. In acknowledgement that the honour was the product of their shared commitment to building human resources, they decided to spend much of the $100,000 prize on employee training, which both saw as having been a key ingredient of their success.

Between them Goldsmith and AFSCME ended up showing how much more can be accomplished by enlisting the workers in a joint approach to change rather than enraging them with contracting-out. They developed an approach that improved the workers’ earnings as well as the services they deliver, but the key to the success was the way in which it improved their working lives. As Fantauzzo puts it: “Our members are no longer expected to park their rains at the door.”

There are legitimate worries about what the union did have to park at the door as a result of the process that enabled Goldsmith to keep the service improvement and cost-cutting promises he made when first seeking the major’s office back in 1991. To what extent has the union’s role in protecting members against management been compromised by its role in management? By collaborating in driving up labour productivity, has the union colluded in the exploitation of its members? Can the union maintain its preparedness or fight the employer when necessary? Union leaders do not duck those questions, which remain open, but can point to their militancy over water privatisation and insist that what has been accomplished through co-operation is far better than what would have happened otherwise. Given Goldsmith’s campaign pledges, “you didn’t have to be a rocket scientist to figure out that it meant half our Indianapolis membership going out of the door”, remarks Fantauzzo. Instead, not a single union member’s job has been sacrificed; indeed, AFSCME had more members in Indianapolis when Goldsmith left City Hall than when he had arrived with such determination to break them.

Goldsmith, by the end of the 1990s a regular on the conference circuit, and with two books to his name (including one in which he presents Indianapolis as being on its way to becoming the model 21st century city), says he transformed Indianapolis by learning that competition rather than privatisation holds the key to efficiency. Another way to explain the same experience, however, is that it was co-operation rather than either privatisation of competition that did the trick. True, the context was competitive tendering, but what made the city’s direct workforce more competitive than those of the private sector was co-operation founded on, employment security.

Battle-lines drawn

AFSCME had campaigned vigorously against Goldsmith’s election: indeed, the union’s Indiana state council and the five locals representing the city’s manual workforce pretty much ran the defeated Democrat’s campaign. Not that they expected for a minute that Goldsmith would be beaten in the polls. He was succeeding a four-term Republican in a city that the Wall Street Journal once called the “last bastion” of urban Republican machine politics. The city council was dominated by Republicans too.

But AFSCME’s electoral efforts were far from wasted. They sent Goldsmith a clear message that if he wanted one, he had a fight on his hands, not only before, but also after the election. It told him the union could organize and mobilise and that they had access to top quality research on the perils of privatisation to service users as well as public employees. So, once he was inaugurated, Mayor Goldsmith knew he had only done the easy bit. The next round was on AFSCME’s turf, and the union was ready.

Battle was joined, and it wasn’t pretty. “Our relationship with the city of Indianapolis was as bad as any I had worked with”, recalls Stephen Fantauzzo, then AFSCME’s Indiana state executive director and now a national union official. “The relationship was nothing but adversarial even before Mayor Goldsmith came in. During the election, we became the darlings of the media – whenever they wanted some quote against this Republican candidate they came to us. Which didn’t get relations off to a great start after Goldsmith won.”

Fantauzzo goes on: “The first three months of his administration were exactly what we expected they would be: extremely controversial and extremely aggressive. Grievances trebled in those three months. The only communication was in the newspapers or through the rumour mill. We were spending all our time filing grievances or responding to rumours.”

Meanwhile, Goldsmith was pushing ahead with privatisation, and when he got around to the city’s water services the union not only took industrial action to protect jobs but also took the mayor to court. They won a judgement that, while privatisation was lawful, labour agreements still had to be respected.

The more Goldsmith had set about trying to implement his privatization mandate, the more he encountered AFSCME’s resilient resistance. After a while, he accepted he was going to have to come to terms with the union. “They approached us six months into the administration”, Fantauzzo recalls. “We were initially approached by the director of transportation who had been the mayor’s campaign manager. The proposition was simple. If they would be prepared to back away from privatisation and allow the unions a level playing field, would we be prepared to participate (in a competitive process)? He said something like: ‘You keep saying you can be just as efficient as the private sector. Will you walk the talk?'”

This was powerful vindication of AFSCME’s determined opposition to his plans, but it also put the union on the spot. Fantauzzo goes on: “We called a meeting of the leaderships of the five locals to decide whether to continue in the adversarial labour relations or try something different. Our activism had put us in a position where we had to be dealt with. Now we had an opportunity to try this new way.”

Many AFSCME members were sceptical that they would be given a fair shot at competing for their jobs. Some took the view that if resolute opposition to privatisation had brought Goldsmith to the table, it could also make him retreat further, away from forcing them into competition with the private sector at all. But there was no way the mayor would do that and the majority shared their leaders’ view that the best way to consolidate and build upon the success of their efforts would be to demonstrate that the in-house workers could indeed be as innovative and efficient as their union maintained – if the playing field was level.

That was a big “if”. “We had no textbook or consultant to tell us how to do it,” Fantauzzo points out. “Common sense goes a long way, but they wanted to talk about a couple of particular projects and we felt we weren’t yet ready for that. We decided initially that rather than go and talk about specific projects at that point, we should go and talkabout what a level playing field would look like. So we spent a lot of time talking information, training, ability to deal with job redesign, equipment, rather than just the usual labour issues like pay and benefits. We wanted an upfront agreement on what we were entitled to expect across a range of issues.”

Five of the key demands which ended up forming the basis of the way in which the workforce prepared for competition, and of the structure within which the competitive process went ahead, were that:

• the union would have the right to participate from the very beginning and to nominate, without interference by management, the employee representatives on the labour-management team that would run the project;

• the city would arrange for and fund the provision of training for all employees involved in the process, and enable them to submit several practice proposals prior to the real thing;

• the workforce would be entitled to examine not only personnel issues but all aspects of a job and to change them as they saw fit;

• the administration would help the workforce to release themselves from bureaucratic systems inhibiting their attempts to be more competitive;

• overheads would be examined and reduced, or, if reducing them were not feasible, at least attached to private and in-house bids equally.

Above all, the union insisted, no AFSCME member was to involuntarily lose his or her job (mainly “his”: the workforce in the services concerned is overwhelmingly male) as a result of the process. Any overall reductions in the unionised workforce were to be made through attrition, and displaced workers who wished to remain were to be redeployed and provided with a range of supports to enable them to adapt to new roles.

A 21st century city

Fast forward seven years, to a crisp spring midwest American morning in 1998. Inside Indianapolis City Hall, in room 2460, a white-collared, shirt-sleeved man was standing at a screen, pointing at tabulated numbers projected on it. In front of him sat a dozen or so others, absorbing the information, commenting on it, asking questions. Indianapolis has about 200,000 residences and these men were responsible for managing the collection and disposal of their waste. For this purpose, the city was divided up into 11 districts, each with a separate contract for providing the service. The man with the pointer was responsible for the financial administration of those still provided by city employees – which was most of them, despite Goldsmith’s campaign pledges about privatisation.

The other men in the room were responsible for leading the workers who actually deliver those services. They had gathered to discuss how to further cut already reduced costs so that they could not only keep within their budgets but make additional savings too. But their scope was limited by factors such as the law, environmental regulations and agreements with staff about employment levels and pay. Examining the numbers on the screen, they were homing in on a couple of ways within these parameters to increase their competitiveness in relation to their private rivals. Some of the tabulated numbers on the screen had the dollar sign in front of them; others signified variables such as personnel, load weights, and distances. These men did not need their colleague with the pointer to explain the numbers to them – they could see at a glance what the numbers meant and they were there to make decisions. They could do so because they had all been on courses, funded by the city, to learn an accounting system called Activity-Based Costing (ABC), which measures the costs of particular outcomes, such as filling a hole in a road, through breaking down inputs into constituent parts – equipment, material, labour, depreciation and overheads – and counting the cost of each. Whereas, in the past, only a division’s overall budget would be visible, now there was much more openly available information about what that money buys, and how it could buy more.

The issue exercising them that morning was that they suspected their disposal costs were higher than those in the privatised districts for reasons which, while not entirely clear, gave rise to suspicion the contractors were dumping the waste. They resolved to urge the city’s inspectors to look into that, but could also see another cost-reduction avenue – reducing their vehicle maintenance charges by renegotiating their deal with Indianapolis Fleet Services (IFS), like themselves a division of the city’s Department of Public Works. They decided to explore that possibility too.

This might appear to have been a conventional and routine management meeting, but the difference is that that these men were AFSCME shop stewards, and they and their members are the ones who get out there among the muck and the slime and the rats to clear up after their fellow citizens. They are the ones whose power Mayor Goldsmith set out to break when he took office back in 1992. Now they were running much of the service.

A new kind of power

They would probably have been running more of it but for Goldsmith’s continuing fixation with competition and privatisation. As part of the reorganisation of the service that led to the labour-management cooperation, no provider, private or in- house, was permitted to hold contested contracts in more than three of the 11 districts at the same time. The exception was that one of the 11 was always to be retained in-house so that the city could maintain some capacity of its own even in the unlikely event that its own workforce lost all 10 of the other contracts. In practice, therefore, the in-house operation was only permitted to provide the service in at most four of the 11 districts, and they were doing just that with great success. As well as claiming service quality improvements, their efforts had reduced costs by an average of $1m per year in each of them.

Whether or not, all things considered, the power of AFSCME and its members had been enhanced or undermined, the way in which it was exercised had certainly changed. Most refuse collectors would not be able to make immediate informed judgements from tables showing costs – indeed, manual workers in most other cities would not get even to see the numbers.

More than that, the workers, through their union representatives, had been involved in determining the criteria by which costs were measured and allocated, and in managing the cost reductions, especially of overheads, which that process enabled. Their involvement had extended also to the definition of performance standards and the creation of “infrastructure balance sheets”.

It was a far cry from the confrontation with the new mayor with which AFSCME had begun his term of office. As one AFSCME local official, Paul Irish, as put it: “We had a very bad relationship with management both organisationally and personally. Now, because of training and opening up the books (previously they wouldn’t give us budgetary information), we understand each other increasingly well. ABC has done this – it’s been nothing short of fantastic. In the old days, management held information for themselves. Accountability for everyone has gone way up since it was introduced.”

On that particular spring morning, the participants in the meeting – senior managers as well as the union representatives – were guided by the knowledge, revealed from the tabulated numbers, that lopping one cent per week off the cost of dealing with every unit of garbage would cut $32 000 off the annual cost of running the service. That information, and what these men did with it, was keeping them and their members in work. It was also increasing the workers’ earnings, as a result of a “gain sharing” programme that delivered substantial bonuses in return for cutting costs.

Many public service unions have research capabilities that allow them to point to alternative sources of savings rather than cutting labour costs. The difference in Indianapolis is that, having made decisions about how to improve the service or reduce its cost, the workers’ representatives do not need to persuade a politician or manager to back their proposals, as even the best informed shop steward would normally have to do. These shop stewards had executive authority in their own right, as do their fellow AFSCME representatives in the fleet management division with whom they were to go away and negotiate.

Blurring the lines?

Many public service unionists will instinctively distrust such arrangements, on the grounds that they blur the line between representation and management. Undoubtedly, the roles merged considerably in Indianapolis, with long-term consequences that are not entirely predictable. Some significant cultural change within the union organisation has occurred, as Paul Irish suggests in a comment about AFSCME’s role in protecting its members from disciplinary troubles. “One of the negative things in the past was that he majority of people felt the union only represented the bad employees. We are focusing on the good things for 95 per cent of the workforce who are good employees.

“We no longer look at it, right or wrong, we’ll defend you anyway. We are running the union more like a business, like the city. We are more self-directed and need less management now. We no longer fight over small arguments – in the past we could have had 20 people arguing about a person being a few minutes late. Now we have a system: each employee has twelve minutes grace per week – from the 13th minute, the worker is held accountable and employees accept the punishment. Once we have been educated in ABC, we can about run the business ourselves.” Those comments undoubtedly beg the question: if the union is running the city’s services, and as a business at that, and if they see their own organisation in similar terms, to whom can an employee turn for independent representation?

In Indianapolis, the shop stewards are certainly alert to the hazards, and some are sensitive and even a little defensive about the issue, while others are more bullish. However, none to whom I was introduced have much doubt that they have represented their members’ interests about as effectively as the circumstances facing them allowed and that they have achieved much ore than seemed likely back in 1992 when the newly elected Mayor Goldsmith strode around town with his new broom.

“The gains have not come without a price”, Fantauzzo admits. “While employees work smarter, they also work differently, leading to membership criticism. The process is very time consuming and we don’t win every bid, leading to scepticism. We have had to look at all aspects of the job, including long-standing work rules, and controversial work systems. We continue to develop a system without an outside model or comparable experiences to draw upon. At times it feels as if we create two problems for every one we solve.”

Turning the privatisation tide

Above all, perhaps, European union sensibilities might be offended by the competitive background to the cooperation that has produced the cost and service improvements in Indianapolis. The fact is, however, that the threat of privatisation – or, at least, a shared awareness that the status quo is not an option – also forms the backdrop to the extension of social dialogue into the redesign and day-to-day management of public services that have been pioneered by public service unions in Sweden, Denmark and elsewhere in Europe. (Case stories from those countries, like a fuller account of the Indianapolis experience, can be found in my forthcoming book, In the Public Service.)

Moreover, AFSCME has persuaded the employer that, once the workforce has proved its efficiency by winning successive contracts, it is wasteful to keep repeating the exercise every three years, and that further savings could not be made without harming the services. So tendering has been left behind in some departments, although the other aspects of the project continue. The latter development underlines that, while competition played a part in kick-starting the process, it is co-operation that has been responsible for the sustainable gains it has produced.

Developing partnership projects to mobilise and develop employee knowledge more effectively, and so improve service efficiency and quality, is not an alternative to political and industrial action against privatisation, as the Indianapolis experience demonstrates. Rather, the city’s story suggests that stubborn and organised resistance can be a necessary precondition of creating the political and managerial space for the development of alternatives – and that developing those alternatives is crucial to sustaining and building upon the gains won by more traditional oppositional strategies.

In Indianapolis, at the same time as developing the labour-management project, AFCSME maintained its political commitment to publicly provided public services, and continued to mobilise in support of that goal. The problem AFSCME had with Goldsmith was that, despite all the lessons of his partnership with the union, his privatisation fixation persisted to the extent that he left office tainted by that because of evidence that businesses that supported the Republicans had benefited from contracting-out.

Partly for that reason, in 2000 the city returned to Democrat control for the first time in 32 years, and one of the first acts of the new mayor, Bart Peterson, was to take steps to bring water supply under municipal control. The city’s experience with privatisation – along with the contrast between that experience and the achievements of labour-management cooperation – had secured a bipartisan 26-0 vote on the city council for buying out the Indianapolis Water Company, set up under Goldsmith’s watch. The cost would soon be recovered, the new mayor pointed out, as the city will “be able to pay less for improvements because a city-owned water company could borrow money at a much lower interest rate than a private owner”. The same applies in the UK, where the extra cost of private finance is held, by PFI’s proponents, to be less than the efficiency gains private management produces. In Indianapolis, that argument is no longer taken seriously.

In fact, as Petersen said, Indianapolis had been alone among the USA’s biggest dozen cities in having privatized water, and more than five out of every six US citizens is served by “community water systems that are publicly owned and operated”. Raj Rao, president of the Indiana Municipal Power Agency, notes that [www.indygov.org/mayor/iwc/raj_letter.htm]: “Across Indiana and across the country, many cities and towns have realised the importance of owning and controlling their own utilities. Whether those utilities are electric, water, wastewater or natural gas, municipalities have found that local ownership benefits not only the community as a whole, but also each of its citizens and businesses.”

Learning the lessons

It’s a common refrain: why can’t Britain be more like America? We must indeed look carefully at the US experience of public service reform – and make sure that the right lessons are learned. Those are not necessarily the ones Goldsmith himself would draw – that competition rather than privatisation is the key – but rather those that the union would emphasise: that the knowledge of its members could be mobilised to great effect on the basis of participatory processes rooted in employment security. If a hard-line Reaganite mayor and a public employees’ union in the United States can find common cause in quality services and quality jobs, a Labour government and the UK’s unions could surely do likewise. The combined energy could take us a very long way. If it leads instead to collision, not only would the explosion do a lot of damage, we could lose a generation’s opportunity to transform this country through building service quality and workforce capacity in the same strategy. What could be less prudent than that?

(c) Brendan Martin, 2002

Brendan Martin has carried out policy and research consultancy projects about public service reform in more than 50 countries and is the author of In the Public Interest? Privatisation and Public Sector Reform, Zed Books/PSI, 1993, which has recently been reprinted for the third time in English and has also been published in five other languages. His new book, In the Public Service, will also be published by Zed later this year.

Contact: bmartin@publicworld.org