Decision Making for Outsourcing and Privatization of Vehicle and Equipment Fleet Maintenance (2011)

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52.1 Characteristics of State DOT Vehicle and Equipment Fleets The state DOT fleets and equipment are unique in that they offer certain operational challenges that are not common to over-the-road fleet operators, delivery fleets, relatively homog- enous transportation fleets (e.g., police, taxis, van services), or motor pools. In addition, the heterogeneous fleet mix and usage, dispersed storage, and availability are some aspects in which DOT fleets and equipment differ from the conventional fleet operations. • Fleet mix: State DOTs typically operate a wide variety of fleet vehicles and equipment, ranging from light-, medium-, and heavy-duty vehicles to specialized equipment, small- engine equipment, and seasonal vehicle attachments. These categories can account for most—if not all—of the units operated and maintained by state DOTs. • Usage: Vehicle and equipment usage varies daily and sea- sonally for individual units in each fleet class. The vehicles can be inactive for significant periods from day to day and may tend to accumulate low mileage. Nevertheless, they must be available when needed to support work crews and emergencies. • Storage location: The fleets and equipment may be based in various operating centers deployed throughout various urban, suburban, and rural regions, with seasonal consid- erations playing a major role in the fleet mix stored in any particular location. • Availability: The local availability needs for vehicles and equipment are also variable due to scheduled and unsched- uled work requirements. For example, the availability of trucks, spreaders, and plows during emergencies can directly affect how quickly agencies can respond to clear snow or debris to ensure safe movement of goods and traffic. Regular road maintenance activity is often variable due to weather factors and unanticipated events. Table 1 displays some example characteristics found in local (or district) DOT fleets. It also identifies the common main- tenance activities that are outsourced and the adequacy of private-sector vendors. 2.2 Challenges for Outsourcing Fleet Maintenance Operations Fleet management is not typically considered a core line of business for state DOTs; however, the fleet is a resource that must be available as needed and must perform reliably for DOTs to accomplish their operational missions. For enterprises located in or near business centers, with established services available in the market, outsourcing decisions for non-core activities or processes may not be simple, but they do involve straightforward considerations. The potential for fleet manage- ment cost savings and better utilization of available resources plays a major role and is particularly enticing to the public and policymakers. However, DOTs must carefully consider in the overall decision-making process a variety of challenges connected with the non-reversibility of some outsourcing decisions, workforce factors, relinquishing of ownership and control, and procurement constraints. • Reversibility of outsourcing decisions: The long-term effects of outsourcing decisions need thorough study because future reversals of major outsourcing decisions may involve significant new capital investments and unwanted budget impacts. Furthermore, although an outsourcing strategy can have predictable short-term effects, supporting assump- tions must be carefully examined for long-term conditions and risks. • Market for services: The availability of experienced and well-qualified vendors in the local markets to adequately provide fleet maintenance and support services is an impor- tant variable that affects potential local outsourcing strate- gies and risks—if implemented, the services may require C H A P T E R 2 Background

special procurement approaches to manage the limited competition found in some areas. A familiar worst-case situation in outlying areas is when only two sources exist for a particular service. One source is selected on price and then builds capability and competitive strength in the local market through increased scale, and other sources become noncompetitive and may not stay in business. After the agency is committed to outsourcing, only one dominant provider may remain, and buyer leverage on cost or qual- ity is lost. • Scale: The volume of demand for specific maintenance activities at specific operating centers plays a key role in decision making. If the demand for maintenance activities is low, then outsourcing is a viable alternative, possibly an imperative. For example, the demand for certain services in smaller-scale operations may not be sufficient to economi- cally justify a full mix of needed capabilities or certain spe- cialized resources in-house. However, with larger-scale serv- ice demand, efficient in-house maintenance activities may be supported. • Workforce considerations: Outsourcing fleet and equip- ment maintenance activities could contribute to an under- utilized staff capability. Within the constraints of union and civil service rules, it may be possible to reassign displaced staff to perform other activities less suited to staff capabil- ity. Also, because some local operational staffing levels may be sized for peak needs (e.g., emergencies or seasonal peaks) rather than steady-state needs, staff time availability may be used for other productive routine work. In such cases, some fleet maintenance work could be considered very low cost because available off-peak or off-season staff time might otherwise be idle or underused. • Performance expectations: State DOT vehicle and equip- ment fleet management realities sometimes challenge con- ventional fleet-management wisdom. Performance mea- surement is an example of this. Mileage utilization and cost per mile are often primary measures of performance for over-the-road fleet operators, delivery fleets, and relatively homogenous transportation fleets that generate revenue through travel. A small reserve of vehicles usually ensures efficiency and sufficient availability. On the other hand, although DOT fleets do provide inter- mittent transportation, the DOTs use light-duty vehicles more often as platforms for work projects, supervision, or staging of tools and material. A consequence of this opera- tional duty is often fairly low mileage, and therefore utiliza- tion may appear low by conventional measures. During an emergency, there may be a need to mobilize all available fleets and equipment of a certain type. For DOT fleet oper- ators, concerns over reliability, vehicle and equipment avail- ability, and the pattern of needed use are important con- siderations while measuring performance. 6 Example Fleet Units Fleet / Equipment Class Typical Uses — Frequency Typical Measure of Utilization Availability Risk Common Insourcing or Outsourcing Practices Local Service Market Issues Sedans Light duty Transport, platform—anytime Miles/year, days used Low IN: preventive maintenance (PM), light repair OUT: warranty Usually adequate Pickups, SUVs Light or medium duty Transport, platform—anytime Miles/year, days used Low IN: PM, light repair OUT: heavy repair, warranty Usually adequate Dump trucks Heavy duty Hauling, snow — intermittent days used High at times IN: PM, light repair OUT: heavy repair, warranty Sometimes limited Mowers Small engine Work machinery— scheduled Operating hours Usually low (seasonal) IN: PM, repair OUT: warranty Usually adequate Loaders — backhoes Specialized Work machinery, snow—anytime Operating hours High at times IN: PM OUT: repair, warranty Sometimes limited Graders Specialized Work machinery, snow—anytime Annual calls for use High at times IN: PM OUT: repair, warranty Sometimes limited Distributor s —rollers Specialized Work machinery— scheduled Annual calls for use High at times IN: PM OUT: repair warranty Sometimes limited Specialty equipment, spreaders, plows Seasonal attachments Work machinery— scheduled Annual calls for use High at times Mixed Sometimes limited Table 1. DOT Vehicle and equipment fleets—example characteristics.

• Ownership and control: Loss of control over resources (personnel, fleet, and equipment), work practices, and qual- ity is a common objection or perception about outsourcing. This concern is lessened for vehicles and equipment that are interchangeable and for which full required availability can be reliably scheduled. For more-specialized vehicles and equipment that may be in high demand at short notice, out- sourced off-site maintenance can increase the risk to core operations. Cost or performance benefits from outsourcing (if they are small) may not be worth this risk. At a minimum, the costs and benefits of mitigating any risk exposure for the core business need to be considered when making outsourc- ing decisions. For example, outsourced, off-site maintenance might require either larger numbers of fleet reserve units or special performance specifications to address emergencies. • Cost development: Developing reasonable and valid true cost factors for activities on both sides of the outsourcing tradeoff is a common challenge for typical outsourcing deci- sions. Most agency financial management systems do not have sufficient activity-based financial and performance data to make this a simple and easily supportable process. Thus, there is often a need not only to recognize factors that may not be obvious, but also to develop and apply approxi- mate cost and performance estimates. For example, in addi- tion to the simple invoiced cost of outsourced services, there is procurement expense, cost of administering and paying for services, and inspections/quality management to con- sider on the outsourced side. For in-house work, the full, loaded cost of employee labor (today, some public-sector organizations have established load factors to apply for this purpose), tools and equipment needed, and parts/supply management should be considered. • Procurement policy constraints: Outsourcing options in the public sector may be limited by the constraints of specific procurement regulations and the particular policies that apply in a given organization. For example, if procurement regulations or policy mandate strict lowest-bid approaches for maintenance service procurement, it may be difficult for agencies to limit risk by managing the market. For instance, it would be prudent to ensure the continuity of multiple mar- ket sources by awarding work to more than one vendor or using other performance-based procurement approaches. Depending on the extent of the outsourcing alternatives (ranging from single activity to turnkey), fleet maintenance outsourcing options may call for multiple contracting pos- sibilities or combinations such as: – Multiple-award contracts for same services at different prices, – Indefinite-quantity ordering agreements, – Performance-based incentive contracts, – Award-fee contracts, and – Time-and-materials contracts. Historically, transportation agencies have used service con- tracting approaches that are highly prescriptive and often include detailed method specifications. However, in recent years, state DOT experience has increased with performance- based strategies that focus on the quality of results. Public– private partnership initiatives have evolved that employ a number of business models relevant to this study, including franchising, competitive joint ventures, and concessions. These approaches may offer creative outsourcing options to consider for fleet management. 2.3 Applicable Forms of Fleet Maintenance Outsourcing There are various terms used interchangeably when address- ing the outsourcing or privatization issues, such as asset trans- fer, managed competition, turnkey contracting, and public– private partnership. Although these terms have overlapping meanings, they have distinct implications with respect to crit- ical aspects of outsourcing decisions (e.g., asset ownership, extent of government and contractor responsibility for per- formance). For example, the distinction between “privatiza- tion” and “contracting out” has been a source of some con- fusion. Privatization is often interpreted as the transfer of responsibility for public assets to the private sector. However, under some situations, it also refers to contracting the private sector to improve the performance of an activity that would remain, in some sense, public. This report adopts the follow- ing definitions provided in the Governmental Accountability Office (GAO) report, Privatization: Lessons Learned by State and Local Governments (5). • Asset transfer: “Another form of privatization occurs when a government transfers ownership of assets, commercial type enterprises, or responsibilities to the private sector. In general, the government will have no role in the financial support, management, or oversight of a transferred asset.” • Franchise–external service: “In the franchise–external serv- ice approach, the government grants a concession or privi- lege to a private-sector entity to conduct business in a par- ticular market or geographical area (similar to concessions, lodging, and other services provided in certain national parks). The government may regulate the service level or price, but users of the service pay the provider directly.” • Managed competition: “Under managed competition, a public-sector agency competes with private-sector firms to provide public-sector functions or services under a con- trolled or managed process. This process clearly defines the steps to be taken by government employees in preparing their own approach to performing an activity. The govern- ment may award the contract to the bidding agency or to a private bidder.” 7

• Outsourcing: “Under outsourcing, a government entity remains fully responsible for the provision of affected serv- ices and maintains control over management decisions while another entity operates the function or performs the service. This approach includes contracting out, the grant- ing of franchises to private firms, and the use of volunteers to deliver public services.” • Privatization: “Privatization is commonly defined as any process aimed at shifting functions and responsibilities, in whole or in part, from the government to the private sec- tor. Privatization can take various forms.” • Public–private partnership: “Under a public–private part- nership, sometimes referred to as a joint venture, a contrac- tual arrangement is formed between public- and private- sector partners, and can include a variety of activities involving the private sector in the development, financing, ownership, and operation of a public facility or service. It typically includes infrastructure projects and/or facilities. In such a partnership, public and private resources are pooled and their responsibilities divided so that each partner’s efforts complement one another. Typically, each partner shares in income resulting from the partnership in direct proportion to the partner’s investment. Such a venture, while a contrac- tual arrangement, differs from typical service contracting in that the private-sector partner usually makes a substantial cash, at-risk, equity investment in the project, and the public sector gains access to new revenue or service delivery capac- ity without having to pay the private-sector partner.” Table 2 illustrates applicable privatization options for state DOT fleets and equipment. This report focuses on exploring the logical thinking behind decisions on maintenance outsourcing with consideration of the risks and expectations for the various privatization approaches that might be used and not on how to implement these various forms of outsourcing and privatization. 8 Forms FleetOwnership Role and Responsibility Consideration in Study Maintenance Service Performed By DOT Management and Policy Responsibility Financial Responsibility Asset transfer Private sector Private sector Limited, case by case Private Strategic alternative Outsourcing State DOT Private sector Full control—state DOTs State DOT Primary alternative Insourcing State DOT State DOT State DOT State DOT Primary alternative Managed competition State DOT Public or private depends on competition outcomes Full control— state DOT State DOT Strategic alternative Public–private partnership Joint Private sector Joint Joint Strategic alternative Table 2. Forms of state DOT fleet maintenance privatization.