WEEKEND EDITION

Beyond CityTime: Privatization’s Risks Involve More Than Money

| November 15, 2011 2:00 PM

It was a scandal so big, it pushed an IT deal into the headlines of New York City’s sexed-up tabloids: CityTime, a software system that was supposed to modernize the city’s payroll administration, turned out to be riddled with fraud.

A $63 million contract with Science Applications International Corp. (SAIC) that began in 1998 and was to be completed by 2003 had ballooned to at least $700 million and remained unfinished. But that was, in a way, the good news. The bad news was that at least some of the millions had allegedly been embezzled by the very people the Bloomberg administration trusted to oversee the work. Eleven people and one subcontractor, TechnoDyne, have so far been charged in the case, and two have fled the country with millions in allegedly stolen cash. Preet Bharara, the U.S. attorney for the Southern District of New York, called CityTime one of “the largest and most brazen frauds ever committed against the city of New York.”

This timeline shows the history of troubled private contracts in New York City. Image courtesy of City Limits.

CityTime might be in the spotlight, but it’s far from the only contracting deal to go sour during the Bloomberg administration. NYCAPS, another personnel information- tracking system, developed by the management company Accenture, has so far cost taxpayers $363 million (and is also incomplete), despite being initially budgeted for $66 million in 2002. The Emergency Communications Transformation Program (ECTP), a contract that started out as an $380 million deal with Hewlett-Packard to upgrade the city’s 911 system, had by early 2011 mushroomed to $666 million without any discernible change in the scope of the project, according to Comptroller John Liu. A deal to give Snapple access to all city schools and many municipal buildings fell apart after it was learned that bidding for the deal was overseen by a consultant who favored the beverage-maker, with whom it had a long-standing relationship.

In the complex world of New York City politics, some might call this the cost of doing business — or rather, of having private companies involved in the public’s business. Indeed, scandals involving the interplay of public money and private businesses aren’t new. As far back as 1969, there was outrage when Mayor John Lindsay commissioned a traffic study by the management-consulting firm McKinsey & Co. and appointed two of its consultants to city positions as an apparent thank-you for polling the company did during his re-election campaign. In the mid-’80s, the exposure of a scam to sell nonexistent computers to the Parking Violations Bureau plunged the Koch administration into crisis.

Today’s scandals are different, however, because the role private companies play in New York’s government has changed. From 1996, when the city began publishing a contracts budget, inflation-adjusted spending on outside work —  everything from IT consultants to foster care agencies — has swelled from $5.7 billion to $10.5 billion, its share of the city budget growing by 33 percent. The contract budget this year is $3 billion more than it was when Bloomberg was first elected.

Free-market rhetoric aside, there is often little real competition under privatization.

More important, under the current administration, there has been a steady shift in the way private companies are being used by the city. It’s no longer just about putting the delivery of individual government services — say, fixing roads or providing school food — in the hands of private companies. These days, tech firms are being hired to perform huge and hugely complex IT projects that not only cost an enormous sum but raise issues around how dependent the city might become on these high-tech wizards: A January report commissioned by the city comptroller found that the CityTime contractor had done such a poor job training city employees on how to run the system that, despite outrage over the project’s cost to date, the city might have to keep paying the contractor to run the thing once it’s finally done.

Meanwhile, other private firms are being hired not to provide services or IT know-how, but to tell the city how to run its existing programs — crafting its policy, strategy and management. Accenture, Alvarez & Marsal, Boston Consulting Group and McKinsey have been summoned to guide the city through everything from rebranding city departments to restructuring the budget for city schools. It’s not the first time private firms have been brought in to help craft policy — the fire department used Rand studies to site firehouses in the 1970s — but it’s the first time so many agencies have spent so many millions asking outsiders how they should do their jobs. Spending on “professional services” contracts has nearly tripled under Bloomberg.

Getting advice from consultants or help from private IT experts is sometimes a good idea. But an investigation by City Limits into recent contracts led by just three city agencies uncovered a host of issues — beyond cost concerns — that pop up when private entities take on public work:

  • Free-market rhetoric aside, there is often little real competition under privatization. A national survey of local governments found that in most locations and for most public services, the average number of private firms that could possibly take on government work was less than two — not exactly perfect competition. When it comes to getting strategic advice, governments tend to seek help from only a handful of companies with big enough names to offer credibility.
  • There’s little accountability for failure. When a consultant’s report is done, the consultant moves on and the flaws in its ideas are the city’s to deal with. Consultants can indemnify themselves from any problems that crop up when an idea is implemented.
  • Transparency is also a concern. City Limits sought to find out exactly what Boston Consulting Group was doing for the two multimillion-dollar contracts it won this year from the New York City Housing Authority, but our Freedom of Information Law request was rebuffed because BCG’s advice is considered private. Even a request to see the BCG contract itself was not fulfilled. NYCHA chairman John Rhea, who once worked for BCG, insists the consultant’s project “is open to public disclosure — ultimately.”
  • Consultants often use data they’ve derived from other situations and cities that might not suitably match the problems of a city the size of New York. Rather than getting innovative ideas, New York gets concepts repurposed from Atlanta or Chicago.
  • The contracts, notably the ones in the IT sector, can cost a huge amount of money for a technological fix to what is not a wholly technological problem. We find that a project to improve special education case management produced a better (if imperfect) tracking system, but did not address other, underlying problems that might be more important.

Despite the high-profile problems of contracts under its watch, the Bloomberg administration at press time was threatening to veto a City Council measure, the Outsourcing Accountability Act, which would require a cost-benefit analysis of each outsourcing move. City Hall’s apparent objection? The bill would create too much red tape.

Preet Bharara, U.S. attorney for the Southern District of New York, called the CityTime scandal one of the largest frauds ever committed in New York. Private contract projects, like CityTime, can introduce more problems than just fraud into government. AP/Mary Altaffer.

Even as the details about the scope of the CityTime disaster unfolded earlier this year, Mayor Bloomberg defended the project, saying on his weekly radio show in May that “We actually did a pretty good job here, in retrospect … The FAA hasn’t been able to get their new traffic control system and the IRS — at the federal level some of these programs go on for decades, cost billions and billions of dollars and never come up with anything.” The mayor added:

“The one thing here there’s no excuse for is we didn’t catch fraud, which we should have. But having said that, the project is done, it is working. It will stop fraud and it will be efficient.”

Indeed, CityTime might end up working well. But whether CityTime succeeds or fails, it is far from the only test of whether private contractors are worth their costs — financial and otherwise — to the city of New York.

  • JKland

    The problem with using private companies is that their bottom line is profits for themselves and their stockholders. Large, important projects should be run by and for the city, hiring workers by the city, and closely overseen by the city. The oversight is an expremely important aspect and people should be hired and carefully vetted – and paid well for their expertise. Private companies have no place in social welfare organizations, schools, finance, and road and bridge building unless a very large staff is watching “the store”. The mayor ‘s background in business has blinded him to a proper use of funding. Just look at Haliburton and the Iraq War – criminals.

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