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Competition Watch
Vol. 3,
No. 3 September 1998
NEW
MEMBERS APPOINTED TO THE COUNCIL
With
the Council membership expanded to 15 members, new members appointed
to the Council include: Senator Emmett W. Hanger, Jr.; Delegate
Kathy J. Byron; Robert A. Archer of Salem, a member of the Small
Business Commission; J. Granger Macfarlane of Roanoke; Ewin
A. Ottinger of Norfolk; and Bernice E. Travers of Richmond,
a member of the Small Business Commission. Two vacancies are
currently awaiting appointment by the Governor.
VIRGINIA
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) PRE-ASSESSMENTS
With funding provided
by the Administration, a RFP was issued to contract with an
ESOP technical advisor to pre-assess a variety of broad-based
executive branch functions across the spectrum of government
services. On September 14, 1998, ESOP Services, Inc. presented
its final report to the Council pertaining to employee stock
ownership plan (ESOP) pre-assessments. A copy of the Council
staff’s executive summary of the final report is available
by calling the Council office at (804) 786-0240.
DO
ESOPS MAKE CENTS?
They do to the 700
former federal government employees who created their own employee
stock ownership plan (ESOP) company, US Investigations Services,
Inc. (USIS), in July 1996. USIS performs personnel investigations
for the federal government that were previously conducted by
the same employees when they worked for the federal Office of
Personnel Management. In addition to its major contract with
the federal government, USIS has been successful in growing
the business into both public and private markets and the value
of the individual participant ESOP accounts have increased over
1000 percent in two years.
They also make sense
to the employees of national companies who use stock incentives
to attract and retain employees. Crystal Hanlon, who started
as a $5.00 per hour cashier and now manages an Atlanta store
at Atlanta-based Home Depot, estimates that her stock holdings
will hit seven figures in a few years. She has worked for the
company for 13 years and is one of an estimated 1,000 plus employees
with significant holdings at Home Depot. Its chief rival, Lowe’s,
also has numerous employees and retirees with seven figure accounts.
Employees with one year of seniority at the North Wilkesboro,
N.C.-based company are rewarded with Lowe’s stock at the
rate of 13 percent of pay.
"Creating a
good culture where people feel like they have a stake hold in
the company they work for is attractive." says Mike Keeling,
president of The ESOP Association, the Washington-based trade
group for employee stock ownership plans. Mr. Keeling says that
"stock compensation programs are becoming incredibly commonplace
and they are becoming conventional wisdom."
Mr. Keeling recently
met with members of the Administration and the Council staff
to initiate the Appropriation Act requirement to study the necessary
resources, staffing, and other requirements to establish an
employee stock ownership plan (ESOP) information and resource
service within the executive branch. A report is to be made
to the Governor and the 1999 General Assembly.
ESOP
PROMOTION ACT
Twenty-four sponsors
have now signed on to H. R. 1592, introduced in May 1997, which
would improve and update rules for ESOPs by amending the Internal
Revenue Code of 1986 and the Employee Retirement Income Security
Act of 1974. The bill would expand the current law to provide
a tax deduction for dividends paid on ESOP stock if the dividends
are voluntarily reinvested into more ESOP stock. Currently,
the law permits dividends paid on ESOP stock to be deductible
if paid in cash to employees, or if used to pay the acquisition
loan.
ESOP
OWNERSHIP INDICES
Employee ownership
beats the U.S. market - An index of publicly traded U.S.
companies with more than 10% employee ownership outperformed
all other market indexes in 1997 gaining 32.5% for the year.
This compares to 31% for the Standard & Poors 500, 22.6%
for the Dow Jones, and 29.2% for the Russell 5000. Since the
employee ownership index was first compiled in 1992, it has
grown 193% through 1997 while the the Dow was up 145% and the
S&P 500 was up 150%. The index is compiled by American Capital
Strategies, Ltd.
British Employee
Ownership Index - Since 1992, an equal investment in the
50 companies that make up the Employee Ownership Index for the
United Kingdom would have increased 331%, while an investment
in Britain’s FTSE Index would have grown by only 194%.
The index is compiled by Capital Strategies, an ESOP investment
banking firm in London.
GAINSHARING
REWARDS EMPLOYEE INVOLVEMENT
Canadian companies
are redefining incentive plans to focus attention on success.
Gainsharing plans are a good example. By rewarding specific
achievements, they can move an organization ahead dramatically.
Gainsharing answers
the common question--"What’s in it for me ?"
It tells employees that their organization is prepared to pay
for improvement. The gains, which are measured by a pre-determined
formula, are shared with eligible employees, often as cash bonuses.
Gainsharing is becoming popular in various industries in Canada.
In the U.S., where gainsharing is better established, the American
Compensation Association reports that the payback for group
incentive plans averages $2.22 earned for the organization for
every dollar spent on the payout. That works out to a net return
on plan investment of 122%.
For organizations
looking to foster greater employee involvement, gainsharing
is a win-win situation: when there is improvement in specific
business measures, the employees share in those gains monetarily.
Gainsharing should not be considered pure profit sharing since
it can extend beyond just financial measures to include operational
improvements, such as safety and customer satisfaction. It starts
with senior management deciding to create a corporate culture
that encourages employee involvement, usually to build a high
performance organization. (Adapted from an article in Shared
Ownership published by the Employee Share Ownership &
Investment Association of Canada).
Editorial Note:
Item 58 C of the Appropriation Act requires a gainsharing study
to be reported to the Governor and the 1999 General Assembly.
PRIVATIZATION
PROMISES TO BUILD MILITARY HOUSES BETTER AND FASTER
Mention the word
privatization and many listeners expect to hear about a city
farming out its garbage collection or turning over its cafeteria
operation to a private company. Yet real estate remains one
of the government’s greatest untapped resources, and provides
fertile ground for various types of public-private partnerships
to flourish.
One of the country’s
largest real estate privatization efforts currently underway
is the U.S. Department of Defense’s Military Housing Privatization
Initiative (MHPI). The MHPI takes a bold approach to addressing
housing needs and constraints. It uses a variety of legislative
authorities to leverage limited military housing budgets with
private sector resources and expertise to significantly improve
and expand the stock of military family housing.
The Tools.
The MHPI tool box provides authority that Defense can use to
accommodate various housing needs, local market conditions,
land cost and availability, and developer incentives. The primary
tools include: loan guarantees to private sector lenders; direct
construction and permanent loans to builders; differential lease
payments for the difference between market rates and housing
allowances to service members; and investments which allows
Defense to invest directly in military housing projects in the
form of limited real estate partnerships, stock or bond purchase,
or other debt or equity instruments.
Private Sector
Commitment. For its part, the private sector will finance,
build, own, and manage the housing projects. The private sector
is also responsible for high quality construction or renovation
at a cost that is market-based while charging rents that are
affordable to military personnel.
The Outlook.
Privatization of real estate provides significant opportunities
for public entities to use limited resources more effectively,
to increase the level and quality of services to constituents,
and to concentrate energies on core functions. Defense’s
initiative is but one example of how real estate based partnering
may offer the greatest unexplored potential for government to
work with the private sector.
A
CASE STUDY - THE BENEFITS OF AIRPORT COMPETITION
Mayor Stephen Goldsmith
has become renowned as one of the United States’ most innovative
mayors. In the 1990s, Indianapolis International Airport beat
tough competition to secure a $800
million United Airlines
maintenance facility, a $350 million Federal Express hub, and
a $60 million United States postal hub. Yet despite these successes,
there were challenges on the horizon. The airport’s cost
per passenger was rising fast, up 38 percent in the last ten
years. Revenues remained flat from concessions and, finally,
the airport faced significant capital needs.
To establish the
airport as a premier distribution hub in North America, it was
necessary to change the equation and create incentives to operate
efficiently. The airport authority created the Managed
Competition Committee to oversee a competitive initiative.
The first step was
a Request for Qualifications from companies interested in submitting
proposals. The committee received responses from some of the
world’s premier airport operators and the existing airport
management team decided to compete as well. Five prospective
vendors, including the existing management team, were then invited
to submit proposals that would meet four goals: ideas for providing
improved service at the same or lower cost; ideas for attracting
new economic development at the airport; long-term plans for
positioning the airport in the 21st century; and, how to increase
the expertise and diversity of the airport staff.
Although the existing
management team submitted an excellent proposal with substantial
improvements over previous operations, it could not match the
resources and creativity of the private vendors. The field was
narrowed to two finalists, both of whom proposed a management
fee that included a fixed annual payment and an incentive payment
based on performance. During final negotiations, both eliminated
the fixed annual payment and agreed to be paid on performance
alone.
After a thorough
evaluation, the airport authority signed a ten-year contract
with BAA USA, the American subsidiary of a British company that
manages seven airports overseas. Interestingly, BAA is the product
of privatization--it is the former British Airport Authority,
converted to private ownership by Margaret Thatcher in 1987.
BAA identified cost
savings and non-airline revenue increases totaling more than
$100 million over ten years of the contract. The contract guarantees
savings of $32 million, and the company is not paid until after
it saves $3.2 million each year. BAA and the airport authority
share all savings beyond the contract price, with the authority
receiving 60 percent in the first year, 65 percent in the second
year, and 70 percent thereafter. BAA hired all of the existing
airport employees at comparable wages and benefits.
More than a year
into the contract, BAA reduced the airport’s cost per passenger
from an average of $6.70 to $3.87. Concession and parking revenue
per passenger increased by 50%. As a result, BAA reduced airline
landing fees by 70% and taxpayers will benefit from lower airport
costs because Indianapolis’ low fees and professional approach
will be a magnet for increased economic activity.
NEW
HIGHWAY PUBLIC-PRIVATE PARTNERSHIPS
Highway travelers
in Florida and New Jersey will soon be receiving new services
from the private sector--with no increases in taxes or user
fees--thanks to innovative public-private partnerships.
In Florida, the new
service is called Traveler Information Radio Network (TIRN).
A private firm, TIRN Broadcasting, has signed an agreement with
the Florida Department of Transportation to
permit it to erect
up to 4,600 signs advertising the system on interstate highway
rights-of-way throughout the state. TIRN has signed up 19 AM
and FM stations to carry the programming. Each 10 minute block
of air time will include one minute of area-specific traffic
incident and roadway condition information from the state DOT,
four minutes of local traveler information, and five minutes
of statewide information on such things as tourist attractions
and historic sites.
Local ad revenues
will go the participating stations, while statewide ad revenues
will go to TIRN. The DOT retains the right to preempt normal
broadcasting in the event of a major traffic accident or an
impending natural disaster.
New Jersey’s
new public-private partnership involves outfitting more than
700 lanes of tollroads with electronic toll collection(ETC)
without either raising tolls or using tax money.
The key to doing
this is the projected increase in toll violation fines that
the new system will make it possible to collect via enhanced
enforcement capability. MFS Network Technologies will install
a fiber-optic backbone along the tollways, along with ETC equipment
and a video-enforcement system.
MFS has arranged
a $300 million, 10-year debt issue, backed by a portion of the
projected toll violation revenues. Its contract to install and
maintain these systems is with a consortium of five toll authorities
led by the New Jersey Turnpike Authority.
IOWA
TAPS PRIVATE PARTNER FOR REST AREA
Tourism is the third
largest industry in Iowa and is critical to both local and state
revenues. State officials believe it is imperative that welcome
centers make as strong an impression as possible on tourists
entering the state.
So when the state’s
most important rest area became decrepit, officials in the Department
of Transportation and the Department of Economic Development
decided they must find a way to remedy the situation.
DOT’s initial
review determined that it would cost $6.5 million to build a
new facility. Top of Iowa Welcome Center, a local 501(c)3 non-profit
corporation stepped in and began negotiations with DOT and the
Division of Tourism. They offered services for $2.5 million
at a new site with lower yearly operational costs.
The agreement between
the state and the non-profit is a 30-year management contract
and the non-profit retains possession of excess real estate.
When the state sought land for the project, it had to buy large
parcels of land to get the sections it wanted and thus ended
up with more land than was required for the rest area and welcome
center. The non-profit is allowed to sell or lease the excess
real estate to help offset its construction and operational
costs.
The project will
benefit the state and localities in terms of increase sales
and property taxes and employment opportunities.
"Privatization
is a tool that can help public officials provide essential services
in a cost-effective manner. introducing competition and
privatization to government services requires real cost imformation.
Privatization increases competition and competition increases
productivity."
Competition
Watch is published quarterly by the Commonwealth Competition
Council. Information appearing in this newsletter is gathered
from various sources. The Commonwealth Competition Council does
not attest to the accuracy or authenticity of the information
provided.
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