Privatization's Risks Involve More Than Money

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."

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 a $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 Mayor Bloomberg was first elected.

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 be come 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.