Sunday, February 01, 2009

"TxDOT's outsourced contractors are more expensive — at times, vastly more expensive — than having state employees do the same work."

TxDOT contracting more, at higher costs

State says highway agency now outsourcing 75% of road work, though own employees do it cheaper.


By Eric Dexheimer
Austin American-Statesman
Copyright 2009

As the state's largest user of contract services, the Texas Department of Transportation has embraced outsourcing more than any other state agency, putting almost three of every four dollars it spends in the pockets of private companies. In 2007, that amounted to about $6 billion, according to a 2009 Texas Sunset Advisory Commission report.

TxDOT has always hired out its road construction. But in recent years, it has steadily increased the number of private contractors it hires to do other work, such as road maintenance and repairs, and engineering and design work.

And, as a review of recent TxDOT contracts and internal audits shows, in many cases the contractors are more expensive — at times, vastly more expensive — than having state employees do the same work.

The agency often has no choice: It farms out work because the Legislature restricts the number of workers it can have.

"Whether we contract out is not something we decide," said Zane Webb, director of the department's maintenance division, who retired from the state Friday after 26 years.

A basic tenet of outsourcing is that private-sector employees work more cheaply and efficiently. But in 50 out of 60 repair and maintenance categories in the agency's 2008 Statewide Detailed Maintenance Efficiency and Analysis Report, an internal audit, in-house work was cheaper than hiring out.

Take potholes: According to the report, the nearly 13,800 potholes that TxDOT employees filled during the past fiscal year cost an average of $23 each to repair. The 2,000 potholes repaired by private contractors, meanwhile, cost an average of $129 each — about five and a half times the state worker rate.

The report also shows that TxDOT spent about $17 million sealing cracks on state roadways last year. When state employees did the work — on about 8,000 linear miles — it cost $327 per mile. Private contractors repaired about 17,000 linear miles at a cost of $812 per mile — more than double the state'scost.

Why the difference? The state's repair costs generally are lower because of reduced overhead, explained Webb. Because the Transportation Department maintains offices statewide, assembling local crews is a relatively simple matter.

In addition, he said, the state has no built-in profit margin: "We don't have shareholders. We have taxpayers."

Hiring private engineers and designers often is more expensive than using the state's professionals, too. An internal analysis comparing the cost of in-house engineering work with contract engineers on nearly $10 billion worth of road projects between December 2005 and November 2008 shows that private engineers charged about three times what the state employees cost, as a percentage of the total contract.

"I can tell you without question it is substantially more costly to turn out a set of plans with a consultant than with in-house engineers," Webb agreed.

So how does the Transportation Department justify hiring expensive private labor when the work could be done cheaper in-house?

"Sometimes, it's not always about saving money," said Webb. "It can be about politics."

Almost since the 1917 inception of its predecessor, the Texas Highway Department, the state transportation agency has used private contractors to build state roads; their quality was historically a source of Texas pride.

By comparison, state workers traditionally handled most road maintenance and repair jobs. No longer. "The number of our employees has declined since the late 1970s and early '80s as we've outsourced more and more to the private sector," said John Barton, TxDOT's assistant executive director for engineering operations. Now about 80 percent of the repair and maintenance work is contracted out.

Today, TxDOT has fewer full-time employees per capita of statewide population — and per miles of roads — than most other states. Much of the downsizing has been at the direction of privatization-minded lawmakers.

A 1995 law, for example, required that "the department shall use private sector engineering-related services to assist in accomplishing its activities in providing transportation projects." Legislators set the minimum outsourcing level at 35 percent of the agency's engineering workload.

Today, about 60 percent of the Transportation Department's engineering work is outsourced. Between 2003 and 2007, the number of all professional services contracts — agreements in which the Transportation Department hires outside engineers, architects, surveyors, etc., to do its work — jumped 70 percent, according to the sunset commission, which regularly assesses state agencies' need to continue existing. The value of those professional services contracts to private firms soared 255 percent over the same period.

"The will of the Legislature is to use private contractors and consultants to the greatest extent possible," Barton explained.

Not surprisingly, contractors often are behind pushes for more transportation spending. The Safer Roads Coalition, a political action committee made up largely of road engineers and contractors, spent more than $100,000 successfully promoting Proposition 12 in the three months leading up to the November 2007 election, according to Texas Ethics Commission reports. The measure authorizes the state to borrow up to $5 billion to spend on highway improvements, nearly all of which will flow to private contractors.

Even functions at one time thought to be undeniably reserved for government employees now are being outsourced — final inspections of newly constructed roads, for instance. "It's always been our philosophy that it's our last chance to make sure the road is safe and done right," Barton said.

But, he added, "We're starting to think about" putting that work out for bid, too. Private companies have already handled some final inspections, such as on the Texas 130 tollway.

The agency's zeal for contracting out work has sometimes landed it in hot water. In 2001, the Legislature authorized the Transportation Department to enter into comprehensive contacts with private companies to design, build and operate toll roads, as was conceived for parts of the $175 billion Trans-Texas Corridor originally proposed by Gov. Rick Perry.

But TxDOT's speedy embrace of the idea generated widespread concern over its accounting and oversight of the deals, and subsequent legislation restricted its authority to outsource operation of the toll roads. "Early concerns about the department's approach to toll roads and its interest in public-private partnerships have become a deep-seated distrust of TxDOT's motives and direction," the sunset commission concluded in its recent report on the agency.

In early January, state officials announced they were killing off the Trans-Texas Corridor name and concept, although many of the individual projects continue to be developed. "Using the private company model for everything clearly is still something the government and public is grappling with," Barton said.

Still, the fact that hiring out the work often costs taxpayers more has not found a receptive audience at the state Capitol.

"We can produce these reports all day long," said Webb. "But as long as the perception is out there that private contracts are cheaper, that's what they'll do."; 445-1774

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