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Smaller Government Prescriptions for Big City Problems

by Stephen Goldsmith

Aren't we glad we're not getting all the government we're paying for?
—Will Rogers

Twenty-five years ago under the leadership of a really progressive mayor named Dick Lugar, Indianapolis—which, although much smaller than Toronto, is now the twelfth largest city in the United States, at a little less than a million people—consolidated its city and county governments. The city became the county; it took over a number of cities and townships and other governments, and set us on the road to prosperity.

Twenty-some years later when I was elected, I found myself facing the same set of challenges that my predecessor Dick Lugar had faced a quarter of a century earlier. That was because in the United States, over that quarter of a century, mayors, especially of larger cities, had uniformly raised their taxes, had watched their infrastructure deteriorate, had seen crime grow, and had predictably watched citizens leave. The decline came about because people, and their wealth, go where they are most wanted. In many of the United States' major cities, there had been enormous population losses, and even greater losses of wealth. In response, mayors in the United States tried to buy their way out of the problem. They attempted to fix poverty-stricken areas of their cities by raising taxes on people who had money, in order to redistribute it to people who didn't have money. When you redistribute wealth, somebody figures out they can leave. When they leave, by definition, you have a little less wealth, so again you have to increase taxes a little bit more in order to buy yourself out of the hole. If you keep doing that, you dig yourself into a downward spiral, which is what happened in many American cities. In response, the cities became a little too dependent on federal government.

But suddenly, four or five years ago, everything changed.

A new breed of mayors and a new group of city councillors has emerged in the United States over the last five years—as is obviously the case in Canada as well. These people are saying, “Maybe there's a better way to do things. Maybe we ought to look at how to create wealth in our communities, not just at how to redistribute it.”

What are the essentials of creating wealth? They are the same ideas that everyone here shares: the need to take care of our core business, the need to invest in our infrastructure, the need to have a competitive tax structure, and the need to have regulations that don't burden businesses so much that they take their job development elsewhere. If we deal with these core issues well, then the private sector will invest.

This group of US Republican and Democrat mayors believes in the free market as a place to create wealth. Let me just go through a few of our experiences. I think you will find that they are consistent with the principles of The Fraser Institute.

Establishing activity-based costing

When I was elected in 1991-92 on the platform of reducing taxes, the Chamber of Commerce (the business group in Indianapolis), essentially said: “We're happy to have you as our mayor, and we're a billion dollars behind on infrastructure—roads, bridges, street, sidewalks, sewers, parks, and police stations. Thanks for promising to reduce taxes, and get started on the billion.”

This seemed like a small incongruity. We decided to look at how to change the way government was run because our competition really wasn't New York, or Detroit, or Chicago. It was really ourselves, because we were sending investment out of our community, particularly out to the suburban communities, because we weren't doing our core job well. We came up with some principles of effective government which included: break up government monopolies, push authority down, reduce the size of government, and measure everything.

I am a lawyer by trade, and when I was elected mayor, I'd never really run any business. (Mayors in many cities, including Indianapolis, are essentially the city manager as well.) But I'd read a couple of articles, so I said to the people around me: “Would you get me the financial reports?” It seemed like the thing to do, but people kind of looked at me blankly. Eventually they brought me a report that was better looking than any Fortune 500 report. The quality of the colour separations, and the quality of the paper was really wonderful. It was tremendous, with really great glossy pictures of the mayor, which is most important in these financial reports. However, there was nothing in the report that reflected how much it cost to clean out a mile of sewers, how much it cost to clean a million gallons of water, or how much it cost to fill a pothole.

I found myself running 200 businesses I knew nothing about—airport businesses, water businesses, road business, swimming pool businesses, and the parks business. But not only did I not know how to run them, I didn't have any cost accounting to tell me how much it cost to run these businesses. So we began a process of figuring out how many activities we were involved in. To do this, we brought in outside financial assistance—in our case, Peat Marwick—and asked them to help us establish activity-based costing, so we could find out how much it cost to do each one of these activities.

Privatization or competition?

I campaigned on a platform of privatization. On my first day in office, I went to see the guys who pick up the garbage because I envisioned that having a garbage strike on my first day as mayor would not be a good idea. So I said to these garbage guys, “Just relax, it will all work out.” Now, I don't know what it's like in Toronto, or in your communities, but in Indianapolis, the people who pick up garbage are all seven feet tall and weigh 300 pounds. They are really big guys, and they were really quite angry, and they said: “You know, you promised to privatize, and we promised to strike,” and they expressed themselves in severe language.

I left there that day still committed to changing the way we did business, but I thought I'd try something different, and each week after that I went out, with a different city union crew, and did a different city job: picking up the garbage, cutting the grass, working behind the permit counter, whatever the job was, to see how city workers did their jobs. I found it remarkable that every one of these work groups had some good idea about how to improve their productivity: change their equipment, change their management, change how they did their job. They had many good ideas that they shouldn't really have to shop to the mayor because there ought to be somebody between me and them who listens to what they're doing.

So we switched from a privatization model to a competition model. In the transition we said: “Listen, the problem is not that public employees are inherently inferior to private sector employees. The problem is that public systems are inherently inferior to private systems because they're monopolistic, they're bureaucratic, and they lack the stimulation of competition that creates innovation. So instead of assuming that we were going to outsource, we began to compete out city services one at a time. We provided consulting services to our union workers, gave them a 90-day window to bid, and watched what happened. We've now done 80 of those services, we've dramatically reduced our non-public safety workforce, and we've saved $400 million which we have reinvested in infrastructure.

What is the optimum level of service delivery?

The problem with consolidation or amalgamation and privatization, is that the optimum scale of service delivery is different for every city service. It is one level for airports, one level for waste water, one level for roads, and another level for a parks community centre. There is no magical answer to what the perfect scale is for a service, and in fact, there's a fair amount of public policy literature that reflects that there are diseconomies of scale in the delivery of public services. The larger they get, if they're bureaucratic, the worse they get, not the better. It doesn't have to be that way, but it often is. We began to look at these services to figure out what the optimum scale for each was.

The waste water example

I won't examine all eighty services here, but I'd like to take you through a couple, just to give a sense of how the procedure works. The first and probably the most instructional is the waste water business. When I became mayor, I said: “Let's privatize the waste water treatment plant.” The City Council of the City of Indianapolis said: “Let's not.” We entered into a discussion which was not entirely pleasant, and we resolved it this way.

The City Council had a cost accounting study done which showed that we were terrifically efficient. We had the most efficiently run waste water treatment operation in the United States at the time. (Waste water was all government-operated business then. There was essentially no private waste water business in the United States in 1992. There were some small private waste water plants, but no big ones.) When the accounting study was done, we said, let's do this differently. Let's ask anybody in the world who wants to bid on the right to run our plants to bid, and let's let the market determine what the optimum price is.

Well, the winning bidder reduced our costs by 44 percent, or $250 million dollars over the term of the contract. The City of Indianapolis retained ownership of the plant, but we contracted out its management.

We had the most efficiently-run plant in the United States, and our costs were 44 percent too high. From that, you have a scale of inefficiency, because we were benchmarked against other government monopolies—an irrelevant exercise. We needed to be benchmarked against the competitive industry. We were able to derive an extraordinary amount of public value through the competitive process.

What did the winning company have to offer the City of Indianapolis?

The business of processing water is a world-wide one, and there is no way that Indianapolis, Indiana, is going to be able to manage that plant as well as a world-wide company. They employ virtually as many PhD engineers as I have employees, so there's no way that I can keep up in terms of technological advancement. The good news for our regional communities is that since this is a regional issue, and since the surrounding communities buy from us, because our costs are lower than what it would cost these communities to go into the same business, we can sell them services for less than they would have to pay to produce them themselves. Because we sell the services for a little bit more than it costs us to provide them, a privately operated plant gives us a win-win situation.

The road paving example

Now let me switch to the public side. Our employees can be competitive in certain industries. When we announced that we were going to make road-paving competitive, the city union president came in, and said, “You know, in this one work unit there are 128 drivers, labourers, supervisors, administrative people, and others, and if your activity-based costing is going to really load their costs onto our bid, we want all of them gone except for four.” Now, he didn't miss the fact that all the union workers opposed me in the election, and all the managers, who were patronage workers from a previous administration, supported me. At any rate, he was obviously testing me to see whether we were going to be faithful to the model. We really had no choice, so we worked at retiring and moving some of those folks, until all but four were gone. Then he came back and said, “Listen, you know, we've got 4 guys on each of two trucks, and we could really do just as much work if we had 5 guys on one truck if we moved a piece of equipment from truck two onto truck one.”

I told him I really didn't care what he did, just bid and see what happens. Well, they bid, and they won, but their prices came down by 25 percent. These were the same group of individuals who were doing the work before, but they were not stimulated by the competitive marketplace. There had been no reason in the past for them to come up with these suggestions.

I have an interesting addition to this story. About six months later, a film crew came out from one of the “reinventing government” books to film us, including the road paving crew. When the cameraman had turned the camera off, I turned to the paver next to me, and I said, “Okay, really, how mad were you? How mad are you about what we did to you?” I knew the guy was polite enough not to tell this national television crew that I was a jerk, so with the camera off, I said to the guy, “What do you think?” His answer was very reassuring. He said, “Listen Mayor, I don't care how many times you compete out this business, we know how good we are, and we're going to win every time.”

It was probably a tangential benefit, but we had been able to change the mentality of this public employee. He had gone from seeing the city as the employer of last resort—where he worked for the city because he couldn't get a job anywhere else—to having pride in his city to the point that he decided to help take care of the city services, and where he worked to show us all that he could do his job well. This employee had developed a sense of self-pride in his work, he had more discretion in his work, he had fewer people telling him what to do in his work, and he had produced more public value for the dollar. We've done the same thing with 78 other services, some of which are won by the private sector, and some by the public sector. However, in each case, competition has driven down costs an average of 25 percent.

Spending the savings

Our goal wasn't just to save money, although I like to save money. The goal was to better invest tax dollars. With the money we saved, we had choices. We could invest in crime-fighting, which we did to some extent. We could reduce taxes, which we did to some extent. Or we could invest in buying down the billion dollars of infrastructure, which we did with probably 75 to 80 percent of the money. We had $800 million of roads and bridges and streets and sidewalks and sewers built, and we let people see the benefits of privatization and competition because, even in Indianapolis where we have a pretty high approval rating from our public, privatization as a word generates only about a 50 percent approval rating. What we've done has garnered about an 80 percent approval rating.

People don't really care whether I privatize or run a public service organization. What they want is a good return on their tax dollar. And when they see better quality roads, parks, and infrastructure, and when the business community sees support for investment, then the benefits of competition and privatization have a tangible face to them, and that face makes a difference. We're proud of our results.

Messages for Canada

We started the process of competition because we wanted to stimulate change in the public sector, and acquire the management talents of the private sector. In the United States, and probably to almost an equal extent in Canada, public employees are severely restricted by a series of bureaucratic rules. These rules restrict what they can do, how they're hired and under which job classifications, how they're paid, and a whole series of other restrictions.

As we have tried to push competition, we have tried to liberate our employees, blow up our bureaucratic systems, change the way we do business. The same garbage collectors who booed me when I became mayor had a very different attitude about three months ago. We bid out our garbage work. We have ten routes that were assigned through the competitive process. Our collectors won half the routes, and they have profit sharing. So if they bid and get the job, and then come in below their bids, they share in their success by receiving half the money they save. So when I brought out the $1,000 bonus cheques for that year's bonus, the attitude of the employees was substantially different than it was four years prior. I use that as an example because we had to change pay systems, hiring systems, and purchasing systems, in order to liberate our employees to compete. We cannot expect them to work effectively in a bureaucratic system that suffocates their initiative.

One of the messages here is that we've pushed authority down in the organization, and even though our labour force is down considerably, our union line level labour force isn't down at all. In some cities, if you drive down the freeway, you'll see three guys watching three guys repair the road. The three guys watching aren't there any more in Indianapolish. The three guys working are there, but they are better paid. What we've seen is a work force that is more rational in the way it approaches its work.

We've privatized waste water, airports, a jail, and many others, but the privatizations that excite me the most are the micro-privatizations. They are the twenty urban churches that now have contracts to maintain their urban parks. They are the not-for-profits that are now doing community programming. They are the social service organizations that now are paying attention to performance as they get people jobs. We have encouraged neighbourhoods to buy-in as we have pushed authority down, because many neighbourhood organizations now have the ability to produce their own services. And in a large, consolidated government—yours in Toronto will be larger than ours, but even in ours—the more services we decentralize, the more neighbourhood groups we connect with, then the more people will have choices and investments in their community and the pride that goes with that. We've tried to use decentralization at the same time we've used consolidation in order to produce these values.

Competition in the social services

The effort to reduce the size of government bureaucracy has some other benefits I haven't yet mentioned. The same issues affect social services that affect other government agencies, so four or five years ago I brought a for-profit company called America Works to Indianapolis. America Works receives a performance payment if they take somebody off welfare, by which I mean the person gets and keeps a job in the private sector for six months. If the person doesn't keep the job, America Works doesn't make anything. This payment method for United States social service operations was very atypical at the time. America Works came in, and the social service industry complained bitterly. They complained because they are a for-profit organization, because America Works is from outside the community, and because they didn't want to be measured on performance.

About 90 days later, I called America Works and said: “How are you doing?” And they said: “Not very well. We've got plenty of employers who want our employees, but we can't get very many referrals from the state-run welfare department.” So I called the state welfare director, and I said: “You know my little job of the week? I'd like to go to the welfare department and watch you all work.” And he said: “No thanks. We don't want you there.”… I went anyway, and I stood behind the desk, and I watched the state welfare workers. And it wasn't as if the workers were indolent or laying down on the job. The state employees were behind desks, and asked the people lined up in front of them whether they were eligible for welfare benefits and administered a standard questionnaire. They asked the applicants if they'd gone out to look for a job, got the answer, then qualified them for a cheque and moved them out of the line, because their job was to get these people out of the line. They were evaluated on how many errors they made in signing people up for welfare. There was nothing in the state employee's performance, or pay, or evaluations, that was affected by whether or not the welfare applicant actually found a job. While we said that the most valuable thing for people who are poor is a job, we created a public bureaucracy where the performance of the employees was in no way related to the values that we thought were critical.

Over the years, the America Works experiment has stimulated the social service industry to fight back. Where people complained about America Works when that organization arrived, now the not-for-profits have taken the attitude that they are not going to let America Works take their business. They are going to compete for the same business. They are going to show everyone that they are just as good as America Works at getting people off welfare and into jobs. Now people actually go around door-to-door, asking people if they would come out and go to work, struggling to get them from where they are into the workforce. The social service workers activity is now performance driven. If it's not, it doesn't work very well. I use this as an example because I think the same thing we've talked about in terms of streets and water, can apply to social services, and job training, and post welfare reform as well.

Conclusion

Inherently, what we're doing is measuring performance. We are not paying people money for activities, but buying performance. And it works across the board. As we look at what has happened in Indianapolis, maybe there are some lessons. We have a great process. We've had 3,500 visitors from around the world come to look at what we've done; we've asked them what they've done that's great, then we copy what they've done, and we tell the next guy about it—it's an effective way to learn.

In the United States over the last five or six years, we have seen a tremendous change in the way cities operate, and a tremendous change in the attitudes of mayors. We've had 30 or 40 years of failure, failure in fighting crime, failure in fighting high taxes and regulation, and failure in city
service delivery. Centrifugal forces have thrown people out of cities. But in the last five or six years there has been a resurgence in investment and jobs. The economy has boomed, and crime rates have dropped. We understand that there are some basic simple principles that work, and I think perhaps they have the same application in Canada as in the United States.

Questions for Mayor Stephen Goldsmith

Michael Walker: How satisfied are you with the performance of the US GOP congress, and what kind of reforms should they be pushing for?

Stephen Goldsmith: I am just a local politician, and don't profess to be a United States political expert. It is worth noting that the US mayors who have undertaken reforms represent different parties. In the Republican Congress, one theme has emerged: anybody can save money by reducing services and running the risk of people being hurt as a result of the reductions. But the challenging activity for managers and legislators is to redirect money in order to better fulfil their citizens' needs.

In Indianapolis, this is important because we have a fair amount of poverty. I wanted to create opportunity for people in long-neglected neighbourhoods. I wanted to remove regulations so they could go in the taxicab business. I wanted to repair their streets so that people would again invest in their businesses. I wanted to reduce their crime rate so they had a safe place to live. I wanted to change the school monopoly so their kids would have an opportunity for the twenty-first century economy. And so I think the problem that Republicans have in Congress is that they are labelled as the people who say, “Well, the way we're going to save money is by cutting services. Whose service are we going to cut today?” Politically this is quite a problematic theme. If the theme is that we want to create opportunity by offering better, more effective government, then that message is more persuasive.

MW: Where the tenders on public services were won by private groups, what happened to the municipal work force?

SG: There a variety of answers about the municipal workforce on the private side, and I don't think any one model is necessarily correct. Sometimes the private company hires the city workers, but some cities insist that this not happen. We've encouraged private companies to interview the city workers, and most of the good companies will take the better city workers because they know the job. The companies won't take all of them, but they often take the better city workers. In most large city governments, the rate of attrition exceeds whatever you could possibly gain on outsourcing. So just a flexible hiring freeze that inventories jobs will take care of surplus workers. When we started to introduce competition to the waste water service, we were worried about shrinkage in the labour force, so about a year in advance of that, we essentially froze all the jobs that came open, and began to eliminate the job classifications that precluded a labour pool within government, so that we had places to put people when the number of jobs shrank. Government used to erect barriers that made such measures difficult, as did the unions. So, some excess people were dealt with by early departures, some were employed in the private sector as city employees, some were employed by the city in other capacities, and occasionally we've laid off managers, although we've been able to handle the line workers without doing so.

MW: What do you feel are the absolute core responsibilities of the municipality? Where would you draw the line between what should be a government-run program and a private sector-run program?

SG: The mayor's job would be the cut-off, I'd say. In a burst of enthusiasm I once told Forbes magazine that you could run city government with a mayor and four purchasing agents. The city police are city employees in Indianapolis, and the president of the police union reminded me that he didn't think my idea would be prudent. I quickly agreed that we'd leave police out for both public safety and, most importantly, political reasons!

I'm not sure that there's a right answer to this question, but I think a lot depends on the city, its labour force, and its equipment. Remember, too, that cities buy from each other. We may be really good at one thing, and another city may be really good at something else, so we may buy from each other. The core responsibilities vary a lot, but I'd say that public safety, budgeting, and land use are probably core city functions.

MW: There is quite an interest in Toronto in your presentation because of the recent municipal amalgamation here. What can people expect from amalgamation? What are your views on the optimum level of amalgamation.

SG: I don't want to take a position on this issue since half the room is avidly for it and half is avidly against it. However, how this is established will have significant long-term implications for the Greater Toronto area. It is a very complicated management issue, because there is a level where the new Toronto scale of service provision will be beneficial. But as far as policy, infrastructure, and land-use planning go, there is also a level which will be quite counterproductive. That can be overcome by decentralization, geographically designed work crews, local participation, wise spending of infrastructure dollars, and treating the consolidated cities as customers. I like the idea that many of our included cities we treat as customers in our waste water plant. They're not prisoners, they're customers. So, how it's set up, to the extent that it recognizes individual locales as important customer contact points, could make the experiment quite successful. However, over time, as the experience gets older, and if those are customers, then it's difficult to exert pressure on a large bureaucracy to be responsive. So, I think that the structuring of the transaction can guarantee a long-term success or quite significant failure.

MW: But in Indianapolis, didn't you break up the metropolitan area into different service areas, and subcontract them, or subject them to competitive tender, and so on?

SG: We have. Not only do we bid out the 80 industries, but we bid them out geographically. We have a lot of work crews that were functionally specialized. One guy used to go out and fix the curb, another guy would go out and check on drainage, somebody else would do something else.… So we had specialized labour, but nobody viewed any neighbourhood as their neighbourhood. I couldn't figure out why I was the only one calling in complaints when I drove to work in the morning, such as, the streetlight's out, the building is dilapidated, there's a crack dealer on the corner. I mean, I was responsible for 80 percent of the phone calls. I kept trying to figure out why nobody else was calling in. Well it turns out that wasn't their job. Their job was to fix the curb, or to inspect hygiene. Looking after the city per se wasn't their job. Nowhere was their piece of real estate. So we needed to become geographically specific and functionally general. I don't want to be too abstract. But the problem is that we had two different issues happening. One was scale: national, regional, local. The other was public versus private. They cut across each other, but how they did so is different for each one of the services.

MW: Who served as consultants to your unionized staff for bid competition? Were you contracted or did you provide any consulting or financial support for the public sector?

SG: Clearly, the accommodation to the unions to allow them to bid was somewhat of a deviation from my free-market philosophy, but one I thought recognized their investment in the city. However, they were not particularly well-equipped to bid. They didn't have the tools, and often their management was not very enlightened. In fact, many times the workers were more enlightened than the management, so we had to provide consulting services so that in this 90-day period they could put together their bids. It didn't cost us a lot.

I found out something else when we bid out the waste water plan. Two or three years after we first bid out the waste water plan, I realized I had done it wrong. Waste-water is a utility, a group of pipes that collect the sewage. A plant cleans the sewage. I privatized the plant but I kept the pipes, the collection system, which made no sense. I didn't realize this at the time. So I went to bid out the collection system, because I was in the sewer maintenance business—that's all I had left of this service. The union workers came in and said: “We're going to bid. But we're going to go to the private company that manages the plant, and we're going to bid with them against our management, because they're better than our management.” This was true, and they did, and they won. So your concept of privatization can get a little distorted because the public guys become private guys. What they essentially did was, instead of getting consultants, they just found those in the business who were really good and said, “If you take us, we'll support you.” And it worked out to be a pretty good marriage.

MW: In public sector bidding, how did the public sector bidders establish their corporate overhead charge?

SG: We established a separate office in city government to do this, because, even though ours is what's called a “Strong Mayor” form of government, and I appoint my department directors, they still become captive to their own systems. So we created an office attached to mine called Enterprise Development that runs the bid process, verifies the numbers, writes the quality controls in the contracts, and sets up the contract monitoring, which is also a problematic matter. We have external activity-based costing that verifies the numbers; we don't accept at face value the inside numbers until we can look at them, because government has a great way of tricking itself about numbers.

MW: How large is your council? How many elected officials make up your council? (There are 57 in Toronto.) How often do you have elections? Another question synopsizes these: How do you get the elected officials to cooperate as a team in order to make decisions?

SG: I've had the fortune of visiting a great number of wonderful cities, including this one, but I don't think I've ever seen quite so many city councillors in one place as I did today in Toronto.

MW: Frightening, wasn't it?

SG: Well, I don't want to comment, but there were a lot. We have 29, and our situation is somewhat similar to yours. When they combined the city and county governments in Indianapolis, they just took all the city councillors and all the county councillors and made a city/county council so that nobody lost their job. The number hasn't proved to be a big problem, but it's a bit unwieldy.

The bigger issue is how you drive reform in a system where there are lots of niches. In our city, instead of seeing themselves as advocates for the customers, the chairmen of the various committees began to view themselves as the protectors of the enterprise. The chairman of the public works committee became the advocate for the public works employees, the chairman of the parks committee became the advocate of the parks employees, and so on.

In the transactions we undertook, a majority of the council was for them, except, generally, the chairman of the committee. It became very confusing. So we asked the council to establish a policy committee to which the major privatizations and competitions could be taken so that they could decide: do we want $200 million in savings in the waste water treatment plant, or do we want to raise our rates, or what do we want to do? Because it was necessary to raise the level of debate, we also formed a public citizens group in front of which we tested these ideas, because we didn't want to have the press accuse us of sweetheart contracts. Remember, competition, not privatization, drove us. So we had a lot of public profile, and we asked the city council to establish a separate mechanism to hear many of the larger issues.

MW: Were there any cases where municipal bids actually displaced a service that was being privately provided? Do you actually have some return of services into the public service?

SG: We didn't have any municipal services that took in private business in the first instance. However, occasionally our workers have won back some of the business they lost. In our bus system, for instance, I privatized some of the routes. Our bus drivers' union got very aggressive, literally. (This story leads to another message: If the union worker is closer to the customer than the mayor is, watch out. Every day, when citizens got on the bus, the driver would say: “This is the route the mayor is going to cut.” This generated a fair amount of ill will.) We went ahead with some of the privatizations despite the union annoyance to give us a mix of public and private transportation providers. It turned out that a couple of the small providers didn't do a very good job in terms of timeliness and quality; we rebid those contracts because we were dissatisfied, and the union won a couple of them back.

MW: What system did you use to ensure the private sector would provide exactly the same service?

SG: This question is very important. Anybody can save money by doing something worse, and the goal is to do things better. The process of establishing quality standards is quite difficult, and so we have a separate group that tries to measure quality. Measuring quality is always, even in hard services, more difficult than it appears. I have an example.

We decided to bid out our grass mowing along the medians on our freeways. And we decided we wanted this grass cut once a week. So the interested parties bid on it, and the private guy won. Well, the first year we did this there was a drought in Indianapolis, so, once a week, this cloud of dust would rise from the median as the lawnmower would go along mowing where there used to be grass. We then had an argument about how to measure the service, and made more mistakes. In the end, about three years later, we finally figured out that what we really wanted was grass that was two-and-a-half inches tall, and let the bidders figure out how to buy down the risk from rain or lack of it, rather than us do it. So now we have a contract that makes more sense. We specify exactly what performance we want.

When we measure performance, one of our main problems is that we think we're buying performance, but sometimes we're just buying activity. Buying performance is different than buying activity, and we've had a fair amount of confusion on this issue.

MW: How do you convince generally risk-averse civil civic staff and politicians to embrace new ways of doing the same old business?

SG: It's a question that faces every city, particularly elected officials. First of all, it's very difficult to convince bureaucrats to voluntarily accept risk. It's difficult to change the way people think about their jobs. I do have a final example.

As I mentioned, we implemented activity-based costing. We give an award each month to the public employee who identifies the greatest waste in government. Once I had a fellow write in and say: “I run the training sector in our public works department. I want to close my video tape operation. I want to get out of that business.” I'd never before had someone suggest that his job be eliminated, but obviously, we had to transfer him and not fire him because he had the idea, so we gave him a little award, and we went out to see what he was up to. The press came out as well, because they found this curious. And they said to this fellow: “Why did you do this? You've been here for 10 years. Why did you recommend this?” He explained: “Listen, it wasn't until the city did activity-based costing, and loaded up the cost of the equipment, the depreciation of the space, and the lease-hold cost into my numbers, that I realized that I could buy training tapes cheaper than I could make them myself.” We had created the structural change, the incentive for a public bureaucrat to think differently, and once we had done so, they did. But we can't expect them to do so if it is a lose-lose situation.

Second, for politicians, I really think that the answer is that we can never sell privatization. What you can sell is the benefit. If the waste-water treatment plant is privatized, your rates won't go up. If the community centres in your parks are privatized, the number of people who are allowed to participate in programming will go up. If some of the street work is privatized, twice as many miles of roads will get resurfaced. When I asked my city council for permission to do these activities, I never asked them for permission to privatize. I said: “What we're going to do is ask for bids. I'll bring you the bids, I'll tell you what we're going to do with the savings, and then you can tell the public: a) forget it, we're going to keep the status quo, and we don't care about your extra $20 million in roads, or, b) sure we'll accept the benefits, and we're happy to have the $20 million in roads, because there has to be a tangible face on the benefits of privatization.

In closing, I envy Toronto and the Greater Toronto area—the quality of your environment, and the spirit of your people—and I hope these few stories from the midwest United States will stimulate you to be even better in the twenty-first century than you are today. 

Stephen Goldsmith graduated in Law from the University of Michigan with honours in 1971. Elected mayor of Indianapolis in November 1991, he has earned a reputation as one of the United States' most innovative mayors. As a mayor of America's twelfth largest city, he has reduced government spending every year in office, cut the city's bureaucracy, held the line on taxes, eliminated counterproductive regulations, and identified more than $250 million in savings for his city. Mayor Goldsmith has reinvested the savings by putting more police officers on the street, and implementing a $700 million infrastructure improvement program called “Building Better Neighbourhoods.” In addition, Indianapolis has enjoyed four consecutive years of record-breaking job creation and set a record pace for new construction. Stephen Goldsmith has just finished writing a new book called The Twenty-first Century City: Resurrecting Urban America.

He spoke to a Fraser Institute Round Table Luncheon on April 28, 1998 in Toronto, chaired by Fraser Institute Executive Director Michael Walker.

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