Privatization in Practice: Case Studies of Contracting for TANF Case Management. Decisions that Affect the Degree of Competition


To some extent, competition in the sites reflected the importance placed on it by the public agency administering the contracts. In Delaware, for example, competition was viewed as key to the success of privatization. In contrast, public agencies in Hennepin County felt the need for diversity in providers was at least as, if not more, important than promoting competition. Other public agencies view the advantages of privatization accruing from performance standards and performance-based contracts and downplay the need for competition. The cost of contract turnovers may also limit public agencies desire to promote competition.

The experiences of agencies in the study sites suggest that four factors may increase competition: (1) using a competitive rather than sole-source procurement; (2) reducing the advantage of the incumbent contractor; (3) increasing the pool of qualified potential bidders; and (4) giving clients a choice of provider.

Using Competitive Rather than Sole-Source Procurements. The biggest obstacle to competition is sole-source procurement. Among the study sites, only Wisconsin had any sole-source procurements for contracts that covered TANF case management. In all other sites, the procurements were competitive.

Wisconsin awards the "right of first selection" to contractors who, at the end of their contract, meet certain performance standards. These contractors are awarded the new contract without competition if they submit an adequate plan. If, based on performance, a contractor does not win the right of first selection, the state conducts a competitive procurement for the new contract in which the incumbent contractor can compete. For the first procurement, counties could receive the right of first selection if they achieved a certain reduction in AFDC caseloads and met specific job placement, work activity, and AFDC expenditure targets. Most of the states counties won the right of first selection, and most of these went on to bid for contracts. Milwaukee County, which administered about 60 percent of the AFDC caseload, did not win the right of first selection and did not bid for any contracts in the county.

The right of first selection was created as a compromise between the states desire to privatize and the counties concern about job loss and surrendering control of cash assistance. It was also seen as a way to ensure that the better performing counties continued to play a role in providing cash assistance and remained motivated to perform in the period running up to privatization. Other proponents of this right argued that it provided stability of service provision  why change contractors if they are performing?

On the other hand, client advocates argue that the right of first selection is too easy to meet and removes competition. Contractors agreed it was not difficult to achieve the right of first selection; during the last procurement, all but 7 of the over 60 agencies met it. The state is currently considering whether the right of first selection should be included in future contracts.

Reducing the Advantage of the Incumbent. A contractor that performs at least satisfactorily has several advantages at the next competition. First, a public agency averse to risk may take a "better the devil you know" approach and avoid changing a satisfactory contractor for another that may provide better and/or lower-cost services. Second, the public agency may want to avoid the costs to both itself and the clients of a change in contractor. When such changes occur, the public agency must develop new relationships and address any issues specific to the new contractor. And clients may have to receive services from a different case worker in a different location. Finally, the incumbent may also gain political influence and be willing to use it to increase its chance of winning a contract.

This incumbent advantage makes it difficult for other providers to compete effectively. It diminishes, however, if there are two or more incumbent contractors holding similar contracts. Although these contractors retain an advantage over new bidders, they face competition from other incumbents. In Delaware, for example, a contractor for one county could easily expand to provide services in another. In Wisconsin, there was intense competition among several incumbents for a new contract to provide services to two regions of Milwaukee. In Palm Beach County, in contrast, no bidder competed against the one incumbent at the last procurement.

The incumbents advantage is also decreased, and competition enhanced, if the cost of changing contractors is not perceived as large or if the public agency is willing to bear the cost. Turnover costs are typically lower with smaller contracts, and when no accompanying changes in the case workers or office are required. In Lower Rio Grande Valley, despite having only one TANF case management contract, the public agency signaled its willingness to change providers by awarding the second contract to a nonprofit organization rather than the incumbent, Lockheed Martin. Although the turnover was not without cost, new contractors have tended to hire most of their employees from the previous contractor, and the workforce board owns the facilities where services are provided.

Increasing the Pool of Qualified Potential Bidders. One factor that may contribute to a lack of competition is a limited number of qualified providers. If contracts are large, risky, or require considerable financial reserves, many smaller organizations will be unable to compete. Small community-based organizations, for example, could not compete for the large contracts in Palm Beach County, which may be one reason that ACS was the sole bidder during the most recent procurement. A representative of the countys workforce development board noted that even at the first procurement, only one of the three bidders had the financial resources to perform the required services. Similarly, the large size of the single contract in Lower Rio Grande Valley and the necessity that the contractor fund its own start-up costs effectively precludes all but large organizations from competing. In contrast, in Delaware, the contracts are small enough that even small community-based organizations can compete.

One way to encourage providers to enter the market for the provision of TANF services is for the public agency to provide funds to smaller organizations to hire staff or purchase facilities (Cohen and Eimicke 2001). One representative of the Texas Department of Human Services expressed her concern with the degree of competition and recommended that the state invest in developing a provider community. However, none of the public agencies in the Lower Rio Grande Valley or other study sites had done any significant capacity building of this type.

Although a contracts size and degree of risk affect the level of competition, large contracts do not preclude competition, nor do small contracts guarantee it. In San Diego County, for example, there is considerable competition for contracts worth many millions of dollars. In contrast, the largest contract in Hennepin County is only about $2 million, and yet there is much less competition.

Giving Clients a Choice of Provider. Public agencies may also foster competition by allowing clients to choose from different providers and paying providers for only the clients they serve. Only one study site  Hennepin County  gives clients a choice of provider. Clients in Hennepin County are given a 12-page brochure that describes the 21 different providers at 36 locations, and asks them to rank their three preferred providers among those that have slots available. The brochure provides information about the services, office location, hours, and parking availability, and some information on the extent to which the contractor has met the performance standards (such as the percentage of TANF cases closed due to earnings). Case workers then assign clients to one of their top three choices. In practice, client choice, and hence competition, is limited because many providers do not have any available slots. In August 2002, for example, only 12 of the 36 provider locations were open to new clients.

To increase competition and specialization of contractors, Wisconsin is considering creating an "open district" within Milwaukee County in which clients can choose their TANF contractor. While MAXIMUS, one of the contractors in the county, supports the idea of an open district, two others interviewed for this study felt that the logistics of such a plan would be difficult, and that some clients would make "rash" decisions based on their frustration with TANF rules common to all contractors rather than contractor performance.

View full report


"report.pdf" (pdf, 925.3Kb)

Note: Documents in PDF format require the Adobe Acrobat Reader®. If you experience problems with PDF documents, please download the latest version of the Reader®