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A Good Example of Problems That Can Arise from Privatization
Tuesday, June 7th, 2011
Robert Wechsler
It's nice when something you write about in a blog shows up on the
front page of the New York Times the following day. Yesterday, in a
post called "Privatization
and Transparency," I discussed new types of privatization involving
nonprofits, which raise new sorts of problems. One type of nonprofit
operates government-funded facilities or
programs, such as schools. These nonprofits are sometimes a way for
organizers to make money by selling property or services to the schools. It
is easier for such self-dealing to occur when the entities are not
subject to transparency or ethics laws.
The Times article reports on a nonprofit charter school company whose 33 schools in Texas receive over $100 million a year in taxpayer funds. The charter school company, actually a foundation, is part of a group of foundations, affiliated with a religious movement, that operate 120 schools in 25 states.
Besides transparency issues, these schools foundations appear to have problems involving preferential treatment and self-dealing that would not be accepted were they to happen with respect to public schools.
Nearly all the schools' recent construction has been contracted to companies owned by people originally from the same country as the people who run the foundations and the religious movement they are affiliated with. Even many of the teachers are brought over from that country on special visas.
Although contracts, at least in Texas, must be competitively bid, there is a great deal of room for the schools to reject the lowest bidders, and the specifications can be written so as to favor companies they want to win contracts. In addition, change orders can increase the contract payments after bids are accepted. With little oversight from an overburdened state agency, with no school board to set policies and provide oversight, and with limited transparency, it is easy to provide preferential treatment to one's countrymen, friends, and associates.
Self-dealing seems to be common. For example, an owner of a contractor that has done a great deal of construction work for the schools is president of an umbrella group of the religious movement's foundations. The owner of another construction contractor for the schools had been a business manager at one of the schools immediately before forming the company. Yet another of the schools' construction contractors is affiliated with the religious movement. And the CEO of a foundation that provides services to the schools purchased property that he leased and then sold to the schools foundation.
In other words, using U.S. tax dollars and American nonprofits, foreign nationals have managed to give themselves enormous construction contracts and the ability to give jobs to many other countrymen.
This is no different than, say, ethnic groups that bind together to buy motels, diners, or newstands throughout a city or a region. The difference is that this involves public money, and it can be done only by getting around ethics and competitive bidding laws that prevent this sort of preferential treatment and self-dealing in the public sphere.
It should come as no surprise that the same network is providing gifts to government officials and other "influential" Americans. The article gives the example of a free trip abroad given to a Texas state senator last year. In January, the state senator co-sponsored a state senate resolution commending the religious movement's leader, who does not live in Texas, for “his ongoing and inspirational contributions to promoting global peace and understanding.”
I haven't mentioned the country or religion involved only because it isn't relevant. What is important is that a network of individuals have helped themselves to public funds without responsibly handling their conflicts and without showing any interest in public trust. They have also provided little transparency, so that only investigative reporting could let the public know how its funds are being spent.
One lesson that should become clear is that when government services are privatized and there is little oversight or transparency, unethical behavior is inevitable. The most important element in preventing unethical behavior is ethical leadership. When government services are privatized and taken out of the hands of government, even the most ethical government leaders cannot make much of a difference.
The only thing ethical leaders can do is require of the charter schools, and related entities, all that is required of government officials, with jurisdiction over their behavior given to the same bodies, with regular auditing, with the same training and advice available, and with the possibility of having their contracts voided for failure to deal responsibly with conflicts on the level of the self-dealing presented in the Times article.
Robert Wechsler
Director of Research-Retired, City Ethics
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The Times article reports on a nonprofit charter school company whose 33 schools in Texas receive over $100 million a year in taxpayer funds. The charter school company, actually a foundation, is part of a group of foundations, affiliated with a religious movement, that operate 120 schools in 25 states.
Besides transparency issues, these schools foundations appear to have problems involving preferential treatment and self-dealing that would not be accepted were they to happen with respect to public schools.
Nearly all the schools' recent construction has been contracted to companies owned by people originally from the same country as the people who run the foundations and the religious movement they are affiliated with. Even many of the teachers are brought over from that country on special visas.
Although contracts, at least in Texas, must be competitively bid, there is a great deal of room for the schools to reject the lowest bidders, and the specifications can be written so as to favor companies they want to win contracts. In addition, change orders can increase the contract payments after bids are accepted. With little oversight from an overburdened state agency, with no school board to set policies and provide oversight, and with limited transparency, it is easy to provide preferential treatment to one's countrymen, friends, and associates.
Self-dealing seems to be common. For example, an owner of a contractor that has done a great deal of construction work for the schools is president of an umbrella group of the religious movement's foundations. The owner of another construction contractor for the schools had been a business manager at one of the schools immediately before forming the company. Yet another of the schools' construction contractors is affiliated with the religious movement. And the CEO of a foundation that provides services to the schools purchased property that he leased and then sold to the schools foundation.
In other words, using U.S. tax dollars and American nonprofits, foreign nationals have managed to give themselves enormous construction contracts and the ability to give jobs to many other countrymen.
This is no different than, say, ethnic groups that bind together to buy motels, diners, or newstands throughout a city or a region. The difference is that this involves public money, and it can be done only by getting around ethics and competitive bidding laws that prevent this sort of preferential treatment and self-dealing in the public sphere.
It should come as no surprise that the same network is providing gifts to government officials and other "influential" Americans. The article gives the example of a free trip abroad given to a Texas state senator last year. In January, the state senator co-sponsored a state senate resolution commending the religious movement's leader, who does not live in Texas, for “his ongoing and inspirational contributions to promoting global peace and understanding.”
I haven't mentioned the country or religion involved only because it isn't relevant. What is important is that a network of individuals have helped themselves to public funds without responsibly handling their conflicts and without showing any interest in public trust. They have also provided little transparency, so that only investigative reporting could let the public know how its funds are being spent.
One lesson that should become clear is that when government services are privatized and there is little oversight or transparency, unethical behavior is inevitable. The most important element in preventing unethical behavior is ethical leadership. When government services are privatized and taken out of the hands of government, even the most ethical government leaders cannot make much of a difference.
The only thing ethical leaders can do is require of the charter schools, and related entities, all that is required of government officials, with jurisdiction over their behavior given to the same bodies, with regular auditing, with the same training and advice available, and with the possibility of having their contracts voided for failure to deal responsibly with conflicts on the level of the self-dealing presented in the Times article.
Robert Wechsler
Director of Research-Retired, City Ethics
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