Why didn’t we learn from the last swine flu debacle?

The Obama administration may be facing a credibility problem due to its apparent inability to anticipate the current shortage of vaccine to inoculate millions of Americans against the swine flu. 

As the Washington Post noted,  the Obama administration officials had projected in July that companies would make 80 million to 120 million doses of the vaccine by this month. They outlined an aggressive response to the current flu pandemic and promised to inoculate every American.

But only about 16.5 million doses have become available so far, putting the administration in the uncomfortable political position of appearing unprepared for what President Obama declared last week was a national emergency.

The Associated Press reported that federal Health and Human Services Secretary Kathleen Sebelius was blaming the manufacturers, who provided “overly rosy” numbers on the amount of vaccine that would be available.  It seems the Centers for Disease Control, however, did not anticipate the slower-than-expected growth of the virus in eggs in the manufacturing process for the vaccine.

Why are these things such a surprise?  Why didn’t the administration assume that the production might be slower than initially projected?

In Thinking in Time, their book on presidential decision making, historians Richard Neustadt and Ernest May analyzed the Ford administration’s mistakes in the previous swine flu fiasco of 1976.   It makes for interesting reading today.  After I re-read their account of the fiasco, which is one of several case studies sprinkled throughout the book, it seemed to me at least some of the Ford administration mistakes  may have been repeated this time around.

There were, to be sure, many differences between the situations then and today — the main difference being that in 1976, the flu refused to appear outside of 13 cases in a crowded Army camp.  Today, the flu is spreading rapidly, of course.  Compounding  the credibility problem resulting from the lack of the flu in 1976 was a severe neurological side effect that was statistically associated with the vaccine.  The mass immunization program was stopped.  So far, no side effects have shown up associated with the new vaccine.

But Neustadt and May contend that had a flu pandemic actually occurred in 1976, the supplies of the vaccine would have been inadequate to cover anywhere near all Americans, as Ford had promised.  Had that been the case, the Ford administration’s credibility problem could have been far worse than it was.  Sound familiar?  

In March 1976, David Sencer, the head of the then Center for Disease Control, had recommended that a new vaccine for the swine flu be developed, produced, tested, and distributed in the next three months, according to Neustadt and May.  His projection was that innoculation efforts would begin after Independence Day and that everyone would be reached by Thanksgiving.   President Ford agreed to the program after he received an endorsement from an ad hoc panel of experts.

Sencer and other Ford administration officials failed to ask many hard questions, Neustadt and May contended, including questions about tradeoffs between side effects and flu, distinguishing severity from spread, and stockpiling.

Neustadt and May maintained that a key reason why the Ford administration’s loss of credibility may have been far worse had swine flu erupted in this country or abroad had to do with the limitations at the time on the supply of the vaccine.  The Ford administration had managed to inoculate 40 million Americans — an amount apparently far higher than what has so far been accomplished today.  Yet, in what now sounds prescient, Neustadt and May wrote:

For down at the low level where shots actually were given, everything depended on the ingenuity and skill with which state plans had been prepared and local services enlisted…all those would have intersected wth supplies of vaccine insufficent to inoculate adults once and children twice if the demand ran high…

Unfortunately, that appears to be exactly the situation we are finding ourselves in today.

On polls about government and health care

The trouble with basing political decisions on polls, as many elected officials and politicians do these days, is that most polls don’t seem to be very good at measuring people’s real opinions. 

The reason may be that those opinions are likely to be mixed–even among the same people on the same issues.

For instance, a New York Times  poll in July found “a nation torn by conflicting impulses and confusion”  about health care reform.  In the poll, 75 percent of the respondents said they were concerned health care costs would skyrocket if the government didn’t step in to provide a health care system for all Americans.  Yet the same poll also found that 77 percent were concerned costs would go up if government did create such as system.

How do you base political and policy decisions on results like that?

That same confusion and ambivalence appears to characterize American’s feelings about government in general.   PA Times, a monthly publication of the American Society for Public Administration,  reported that 79 percent of Americans say they would encourage young people to work for the federal government.  This finding came out of a George Washington University Battleground Poll, conducted in July.  

Yet, according to the same poll, only 21 percent of the respondents had a great deal or a lot of confidence in federal civilian employees.

But before getting too discouraged about government, big business, newspapers, and HMOs fared as badly or worse in a similar poll conducted by Gallup in June, according to PA Times.  In June, Gallup asked a similar question about confidence in employees of several professions.  Among the following institutions, the level of confidence held by respondants was:

Newspapers (25 percent), TV news (23 percent), banks (22 percent), organized labor (19 percent), HMOs (18 percent), Congress (17 percent), and big business (16 percent).  On the other end of the spectrum were the military (82 percent), small business (67 percent), the police (59 percent), and organized religion (52 percent).

The question Gallup asked was:  “Thinking about the civilian employees of the federal government and your view of them, would you say that you have a great deal of confidence, a lot of confidence, some confidence, or very little confidence in these employees?”   The George Washington University poll excluded the military, which tends to draw higher public confidence than other institutions.

This type of question and the responses to it illustrate some inherent weaknesses in polling.  People’s feelings and beliefs about these issues are clearly mixed.  They are based on presumptions that may not always be examined or questioned.  On the one hand, the George Washington University poll shows that people have little confidence in the federal workforce.  Yet, they endorse it as a profession for young people.

Similarly, polls, such as the Gallup poll, show people hold Congress in the lowest esteem among practially all institutions.  Yet, late last month, we saw an  outpouring of public emotion at the passing of Senator Ted Kennedy,  albeit a famous and unusually productive member of Congress.

Like statistics, polls can be made to say just about whatever you want them to.  We should pay far less attention to them than we do.

A role for nonprofits in the subprime crisis

Nonprofits have come off looking a lot better in the subprime mortgage scandal than their counterparts in the for-profit banking industry and the federal government, says Rick Cohen of The Nonprofit Quarterly. 

Cohen maintains that community development corporations (CDCs) and other nonprofit housing development organizations have been careful not to push new homeowners into risky mortgages.  And while the federal government has largely been interested in protecting investors, nonprofit organizations have been busy, trying to help homeowners in trouble. 

Cohen cites the work already done of groups such as Neighborhood Assistance Corporation of America (NACA), which he contends is “among the most aggressive and most successful national nonprofits engaged in refinancing the mortgages of families facing subprime-induced foreclosures.”  In addition, the Center for American Progress in partnership with Enterprise Community Partners has proposed the Great American Dream Stabilization (GARDNS) Fund, to be capitalized by a $10 billion Community Development Block Grant appropriation.  The fund would be used to help low and moderate-income homeowners purchase foreclosed and abandoned properties.

As a January report on the GARDNS Fund plan by the Center for American Progress notes:

…debating whether subprime borrowers were more at fault than unregulated mortgage companies is no more productive than arguing about whether the negligent camper or the neglected forest clearance practices contributed more to the rapid spread of a wildfire-
the first order of business is putting out the fire before it consumes more homes.

Cohen also suggests in ”How Foundations Can Heal the Housing Crisis,” that nonprofit charitable foundations will have an increasing role to play in financing the rehabilitiation of abandoned properities across the country due to foreclosures.

Foundations can help now before federal money starts flowing, Cohen suggests, by providing grants to municipalities and nonprofits to begin rehabilitating properties and to manage rental units and rebuild neighborhoods.  Cohen maintains that:

now is the time for them (foundations) - and other organizations with vast tax-exempt endowments – to put billions of their dollars to work as a capital base for groups that are trying to stimulate new investments in financially challenged neighborhoods.

Cohen adds that smaller and medium-sized cities, in particular, that have been hit hard by the property-foreclosure crisis, don’t have access to large foundations with “signficant track records in housing and community-development investment.”

How not to undertake a public project

(Part 2 in a comparison of public projects)

In the previous post on this site, I described a successful project to design and construct a new public library in my hometown of Harvard, Massachusetts.  It’s interesting to compare some of the key managerial decisions and actions in that case with a public construction project in Iraq.

Clearly, the construction of the Basrah Children’s Hospital in Iraq, now three years behind schedule, is being done under much more difficult conditions than was the Harvard town library.  Yet, many of the basic management decisions involved in these two public projects are the same.  The Basrah Children’s Hospital project in Iraq is an example of a public project beset by managerial problems, and in many ways it seems to symbolize the overall U.S.-led reconstruction effort in Iraq.

In August 2004, the U.S. Agency for International Development issued a job order to Bechtel National, Inc. to construct the 50-bed pediatric facility in the city of Basrah. The construction of the hospital was to be part of the overall U.S.-led effort to rebuild the Iraqi infrastructure following the invasion of the country in 2003. Congress authorized $50 million in funding for the hospital project, which was intended to improve the quality of care and life expectancy for women and children in that war-torn country. 

The hospital project was apparently one of some 20 projects being undertaken by USAID under a single $1.4 billion contract with Bechtel.

The scope of work was expanded in July 2005 to increase the number of beds to 94 and to upgrade the faciity to be an oncology center, according to a 2006 report by the Special Inspector General for Iraq Reconstruction.  The schedule and projected cost of the project, however, remained the same.  The hospital was projected to be complete as of December 2005.

According to a July 2006 report by the Special Inspector General, USAID’s accounting systems and processes were inadequate, and the agency failed to identify and report project costs to the U.S. Chief of Mission in Iraq and to Congress.  The Special IG noted that the completion date of the hospital had slipped by nearly 270 days as of March 2006, and the projected construction cost had risen to between $150 and $170 million.

Corner view of Basrah Children's Hospital, March 2008 (SIGIR)

 Here are some highlights from the Special IG’s report on the construction of the hospital through July 2006:

• USAID did not establish an appropriate program management structure for the hospital or for its other reconstruction projects.  The agency relied on one “administrative contracting officer” and one “cognizant technical officer” to manage the entire $1.4 billion in projects under contract with Bechtel, and never appointed a program manager with sole responsibility for the hospital project.
• Even though Bechtel briefed USAID in March 2006 that the hospital project was 273 days behind schedule, USAID’s report to Congress the following month reported no problems with the project schedule.  In addition, the agency continued to report the project cost as $50 million, even though Bechtel was estimating the cost at $98 million by April 2006.
• USAID did not include the installation of medical equipment in its cost estimate for the hospital.
• A consultant to USAID recommended that the agency discontinue Bechtel as the prime contractor for the hospital project.  The consultant, Louis Berger Group, projected that discontinuing Bechtel would reduce costs by some $8 million, primarly from the reduction in contractor overhead.

In the wake of the Special IG’s report, the U.S. Mission in Iraq transferred the the hospital project from USAID to the U.S. Army Corps of Engineers.  In addition, the U.S. Mission ordered Bechtel to stop work on the project, at least until the Corps of Engineers could take over management.

As of now, the hospital is still not finished.  An April 2008 quarterly report by the Special IG listed the project as 85 percent complete.  The total cost of the project, now projected to be finished by February 2009, is pegged by the Special IG at $163.6 million–a roughly 227 percent increase over the original cost estimate.

To me, a key difference between the hospital project and the Harvard town library that jumps out is the level of involvement by public managers in each case.  It appears there was a higher actual number of public-sector managers overseeing the construction of the $7 million Harvard library than were overseeing the entire $1.4 billion USAID reconstruction effort in Iraq, including the $163.6 million Basrah Children’s Hospital.

Undertaking a successful public project

The new library in the center of the town of Harvard, Massachusetts, where I live, is a clear example of a successful public project.

Construction of the library was completed a little over a year ago, on time and on budget.  CBT, a Boston-based architect, came up with a design that seamlessly matched a new brick structure to the existing historic Old Bromfield school.  Inside, the refurbishing of the old has been done with sensitivity and the new has been matched to it just as flawlessly.  The project recently won an award from the Massachusetts Historical Commission.

Heading the project were three longtime town residents, two of whom chaired a volunteer town building committee that shepherded the project to completion.  A couple of months ago, I had the opportunity to interview the three citizen managers for a book I’m writing for the American Society for Public Administration on managing public projects.  Given that the prevailing perception of public projects is that they are plagued by cost overruns, schedule delays, and poor quality construction, I was curious to find out what steps were taken to ensure that the Harvard library project didn’t end up fitting that prevailing view.

 

View of Harvard library with Old Bromfield building on left and new building on right

Sitting down in the library’s elegant first-floor conference room, Roy Moffa, Pete Jackson, and Mary Wilson had a lot to say about how they were able to make the library project succeed.  It came as a shock to me to find out a few days later that Moffa, a retired software company executive and entrepreneur, library trustee, and avid bicyclist, had suddenly passed away, at the age of 65. I’m glad he was able to realize the biggest dream of his retirement and to know it was a success.

Speaking in our interview specifically about the private funding that supplemented the library project’s public funding (private funding was, in itself, a key reason for the project’s success), Moffa noted:

We raised this money…on the commitment that we were going to build something extraordinary, something that was worthy of their contributions. We’d made a lot of promises. ‘We’re going to take your money, but we’re going to treat the money well and we’re going to communicate with you and show you what we’re going to do,’ and I don’t think we’ve disappointed a donor yet.

Here are some highlights of the planning and construction process for this project:

• Moffa, Jackson, and Wilson exercised maximum due diligence in selecting the architect.  They personally visited and toured more than 30 libraries in Massachusetts that had been designed by four architects they picked as finalists in the selection process.
• The three citizen managers, building committee, and other key project supporters undertood, involved, and satisfied the potential stakeholders in the project.  For instance, they agreed to cap the town’s financial exposure at $2.6 million, no matter what happened during construction.  This forced the managers to critically assess the project’s risks and take steps to keep costs under control.
• The managers and the entire building committee stayed involved in the library design process and  established an effective partnership with the architect, CBT. That partnership was characterized by frequent brainstorming of design alternatives. One example of that was a decision to redesign the planned children’s room, which had originally been designed to be split between the old and new buildings, and locate it entirely within the new building.
• The three managers attended all of the weekly construction meetings with representatives of the general contractor, architect and project manager. The three were at the site so often, in fact, that they got to know all the subcontractors.
• The three pushed hard in support of moving forward with construction in the fall of 2005, rather than waiting until spring when costs, particularly for steel and glass, were expected to be much higher. The brainstorming over the design had to come to an end. “My words to the rest of the building committee was ‘it’s time for pens down’” Jackson said.
• The three developed an effective and quick process for analyzing and approving change orders.  Jackson, a former project manager with the U.S. Army Corps of Engineers, was given discretion to approve changes in consultation with a professional project manager.  The process was done via email.

In the end, the undertaking of successful public (and private) projects comes down to effective leadership and teamwork, and it’s clear that was the case with the Harvard library project.  As Wilson, a former town librarian, who became library director in 2002, put it:

This was the last shot.  In our lifetimes, this was the only chance we would have and we wanted to make sure we did it right.

Do companies do well by doing good?

Three academic researchers have produced the most comprehensive review to date of 35 years of studies on a question that seems to have become more timely and pressing than ever—do efforts by corporations to benefit society also benefit their bottom lines?

A draft version of their paper, “Does it Pay to be Good?”, by Joshua Margolis, Hillary Anger Elfenbein, and James Walsh, can be found on The Economist website and has been discussed in The New York Times.  Margolis said the authors are continuing to revise the paper.  Last year, Margolis asked me to hold off in posting a blog entry about the paper, but yesterday he extended permission to cite the paper and post this blog entry.  He said he hopes to have an updated version of the paper by May.

The authors have so far produced an analysis of 167 studies, and concluded that, in general, these studies found there was a mildly positive relationship between corporate social and financial performance.

So, what does that really mean?  The attention to that question is the real strength of this analysis.

First of all, the authors note the stakes involved in the three decades of research they reviewed:

If only doing good could be connected to doing well, then companies might be persuaded to act more conscientiously, whether in cleaning up their own questionable conduct or in redressing societal ills….A positive link between social and financial performance…would license companies to pursue the good…

In 1970, they note that Milton Friedman laid down the gauntlet by criticizing any firm that made so-called socially responsible investments, arguing that such activities amounted to theft from the shareholders.  As a result, at least 167 studies have been conducted since 1972 to study the effect of corporate social performance on corporate financial performance, and there have been 16 reviews of this research.   Margolis et al. are the first to offer a comprehensive appraisal of all these studies, and to suggest an entirely new path for future research.

They found that most of the 167 studies did not find statistically significant relationships between corporate social and financial performance.  Yet, certain conclusions can be drawn from the studies, among them that companies do not appear to suffer financial harm due to socially responsible investments.  Only 2 percent of the studies reported a significant negative effect on financial performance in undertaking socially responsible activities.   This appears to negate Friedman’s warnings that companies that undertake these activities will destroy shareholder value in the process.

As the authors put it:

Companies can do good and do well, even if companies do not always do well by doing good.

And, on the negative side, companies that act irresponsibly and are caught, often suffer costly consequences.

Yet, the authors also note that the studies have shown that the next marginal dollar spent on a socially responsible investment is not necessarily going to provide as great a financial return as other types of investments.  Therefore, there should be reasons other than just the potential financial benefits for pursuing corporate social performance.  Those conclusions would seem to jibe with those of David Vogel, author of “The Market for Virtue,” who has argued that Corporate Social Responsibility initiatives are an “insurance premium” for businesses rather than a consideration at the core of a business’s processes.

In fact, Margolis et al. suggest that the studies they reviewed show corporate social performance is a legitmate activity that may not produce hugh financial returns; and yet, companies ignore it at their own peril.  The authors cite the case of Wal-Mart, which found its investment plans disrupted because its corporate and marketing policies generated so much opposition.

The authors further conclude that one of the most under-explored effects of corporate social performance is whether those policies actually result in measurable benefits to society as a whole.  And they suggest that it may now be time for researchers to stop trying to find a causal link between corporate social performance and corporate financial performance, and turn their attention to three possible questions for future research:  1) why do firms pursue corporate social performance?  2) how do they go about it? and 3) how can they pursue both corporate social performance and corporate financial performance at the same time?

In other words, the question shouldn’t be: do firms do well by doing good, but rather, how can firms do good and do well at the same time?

Iraq and the Bay of Pigs

Looking back on this five-year anniversary of our occupation of Iraq and its catastrophic cost in American and Iraqi blood and treasure, one can only hope that our future leaders draw some lessons from it.

But will they?

Whoever among the three remaining candidates is elected president in November, he or she might start by reading a book that I’m pretty sure George W. Bush never read.

That book, Thinking in Time: The Uses of History for Decision Makers, by Richard E. Neustadt and Ernest R. May, was published in 1986.  Its recommendations remain timely and common sensical, particularly the central recommendation that presidents should carefully examine the historical and political presumptions on which they base their decisions. 

Had Bush, Cheney, and Rumsfeld read Thinking in Time after 9/11 and taken its recommendations about presumptions seriously, it seems to me we wouldn’t be in the mess we’re in today in Iraq.  They might, first of all, have come to realize that some of their presumptions about Iraq resembled presumptions in the Kennedy administration that led to the disastrous Bay of Pigs invasion in Cuba in 1961.

Neustadt and May conclude that the Bay of Pigs was perhaps the classic case of unexamined presumptions by American presidents.  One of those presumptions that Kennedy and his advisers held was that there would be prompt uprisings against Castro throughout Cuba once the Cuban exiles who were recruited for the invasion landed on the beach there and proclaimed a rebel government.

There were high-level officials within the CIA who would have scoffed at the notion that the Cuban population would have welcomed the American-sponsored invasion.  But Neustadt and May note that Kennedy wasn’t even aware that the organizers of the invasion had walled themselves off from colleagues who might have challenged their presumptions.  They add that most of those whose comment or advice Kennedy asked were too inhibited to question his underlying presumptions or to spell out theirs.

The Kennedy administration’s presumption that the Cuban people were waiting for deliverance from Castro in the form of American-style democracy may have been more far-fetched than the the presumption of the Bush administration 40 years later that the Iraqi people were waiting for the Americans to deliver them from Saddam Hussein.  Hussein was a far more despotic ruler than Castro.  But the Bush administration was equally wrong in assuming that American-style democracy would be welcomed with open arms in Iraq.

As Rajiv Chandrasekaran notes in his own 2006 book, Imperial Life in the Emerald City: Inside Iraq’s Green Zone, Bush and his advisors, and some top officials in the Pentagon, also wrongly presumed that the Iraqis would “quickly undertake responsibility for running their country and rebuilding their infrastructure.”

Chandrasekaran further points out that there was little coordination in pre-war planning between the State Department and the CIA or even with post reconstruction experts within the Pentagon, and there was “an aversion to dwelling on worst-case scenarios that might diminish support for the invasion.”

Neustadt and May contend that presidents facing difficult decisions should:

…pause to define their concerns.  They should take precautions to avoid being misled by analogies of one stripe or another.  Then to the extent possible, they should try to see their concerns in historical context…

The invasion at the Bay of Pigs was clearly not directly analogous to the invasion of Iraq.  There were many significant differences between the two events.  But it seems that had Bush, Cheney et al. stopped to “see their concerns in historical context” before acting, they might have realized they were basing their projections about the aftermath of the Iraq invasion on some very faulty presumptions.

Vogel: The business case for corporate responsibility will always be about to be proven

In 2005, David Vogel, a professor at the University of California, Berkeley, wrote a book called The Market for Virtue, which concluded that the corporate social responsibility movement had only a limited potential to bring about significant change in the way companies do business.

In a seminar last week at the Kennedy School of Government, Vogel didn’t change his message much.

Corporate social responsibility (CSR) is alive and well by every possible dimension, he conceded.  There has been an expansion in private codes of ethics; and private, voluntary regulation—so-called soft regulation—has expanded significantly.  It’s all very encouraging, but what does it mean?  Are companies behaving more responsibly?  It’s very difficult to say because the boundaries of what constitutes CSR keep shifting and companies are multifaceted, Vogel maintained.

British Petroleum, for example, has been applauded for addressing climate change issues in its business policies, but has been criticized for oil spills in Alaska, he noted.  Merck has been praised for providing drugs to cure river blindness disease in Africa, yet criticized for marketing Vioxx.  Exxon has an exemplary health and safety compliance record regarding its own employees, but hasn’t been good on global climate issues.

In the financial sector, the subprime loan mess has eclipsed much of the progress made along corporate responsibility indexes.  The fact is that while the risks and opportunities of CSR have become more important to managers in recent years, their importance relative to other business processes have not increased, Vogel argued.  CSR is an “insurance premium” for businesses, rather than a consideration at the core of a business’s processes. 

Yet, Vogel acknowledges, there remains an irresistable attractiveness in the concept of CSR and the belief “that you can make money and make the world a better place.”  The problem, he maintained, is that “the business case for CSR will always be about to be proven, but will never be proven.”

One thing that has changed about CSR is the relative importance advocates place on public policy and government regulation.  In the recent past, there was a view that government had become irrelevant as an actor in the sphere of social responsibility, but that view is now seen as naive and there is an awareness that there are limits to CSR.  Global climate change is an example.  Without government regulation and support, companies are not going to make the investments needed to begin to address that problem, he maintained.

Vogel disagreed with a comment from a member of the audience that CSR initiatives continue to be hampered by the “command and control” nature of government regulation.  “I like command and control,” he said, pointing out that advances since the 1960s in clean air, civil rights, and consumer product safety in this country have been the result of command-and-control government intervention and regulation.

Yet, Vogel was sanguine about the potential for government to resume its former pre-eminent role as a regulator of the corporate sector, arguing that government’s role in that regard constantly fluctuates.   I’m not sure I agree with him there.  It seems that since the Reagan years, there has been a long and steady slide in the political willingness in this country to use government in that command-and-control function.  The trends seem largely to have been downwards, and I’m not sure there’s a clear consensus for a reversal in the foreseeable future.

Performance, accountability, rules, and the Mount Hood-Big Dig dirt case

When I was with the Massachusetts Office of the Inspector General, we reviewed an interesting case in which hundreds of thousands of tons of fill from the ongoing “Big Dig” tunnel project underneath Boston were delivered to Melrose, a small city a few miles to the north.

It was done under an unusual arrangement in which a contractor actually offered to pay the city of Melrose to take the stuff.  The offer was made in April 2000.  City officials estimated they would garner more than $200,000 in revenues from the fill.  The then parks superintendent suggested to the then mayor that they could use the fill to make long-needed improvements to the 12th fairway of the city’s Mount Hood Memorial Park and Golf Course.

The problem was that those city officials failed to first do a project plan, design, or cost estimate.   As the truckloads kept coming, wetlands in the park became flooded and sediment from the fill got into resource areas.  Trees and other vegetation in a number of areas died or were stressed.  A partially installed drainpipe in the fairway failed, resulting in the need to install a new one, and the built-up fairway slopes had to be stabilized.  Rather than completing the project with $200,000 in revenues from the fill, as planned, the project was now projected to cost $1.8 million.  The parks superintendent was fired from his position and the mayor himself left office soon afterwards.

The IG’s office was called in to do an assessement.  We found, among other things, that in six instances, the city procured site preparation and other work without complying with the state’s public works bid law.  In 16 instances, the city failed to comply with a law requiring written contracts. 

I discuss this case and three other “design-build” contracting cases in which traditional bidding rules were bypassed, in an article in the March/April 2008 issue of Public Administration Review.  The purpose of the article is to offer a rebuttal to a view among some public administrators and academics since the 1980s that bidding, contracting and other rules are largely bureaucratic red tape and that they stifle innovation by public managers and hamper their performance.

On the contrary, these cases appear to me to show that there is a certain amount of wisdom inherent in public procurement laws and regulations, and that when managers evade those rules, their projects can implode.  Conversely, when they follow rules, they may well be rewarded with successful and accountable projects.

Public works bidding rules, in particular, require public managers to do a certain amount of up-front planning for their projects in developing their bid requirements.  Contracting laws help protect public entities by ensuring that legal agreements are drafted with private contractors.

In the Mount Hood case, the city of Melrose jumped at the offer to be paid for accepting the Big Dig fill.  Within weeks, the fill began arriving from Boston.  Between May of 2000 and July 2001, roughly 700,000 tons of Big Dig fill were dumped in the center of Mount Hood park.

In the case of the drainpipe installation in Mount Hood’s 12th fairway, the city had hired a contractor for the job without having sought bids as required by the state’s public works bid law.  The law would have required the city to prepare a full set of specifications for the drainpipe installation—in other words the city would have had to do some up-front planning for the job.  The city also failed to execute a contract for the drainpipe work—a violation of another state law requiring that contracts be used in municipal transactions with vendors with values over $5,000.

The drainpipe was partly installed by the contractor in an area of the fairway where peat was present.  According to the IG’s report on the project, portions of the pipe became dislodged when the peat moved, or “heaved,” underneath the drainpipe.  An excavating machine belonging to the contractor became buried in the fairway.  A decision was later made by the city to abandon the pipe and start all over again with a new one.  Not only did the drainage system have to be redesigned, but the city was forced to spend money to pump silt deposits out of nearby wetlands areas.  The silt deposits were found to have been caused by the drainpipe failure.

In the PAR paper, I conclude that in the drainpipe case alone, had the city complied with the bid law and hired an engineering firm to prepare plans and specifications, those plans would have been likely to have been based on existing conditions of the fairway and the presence of peat there, and presumably those conditions would have been disclosed to all of the bidders.  The expensive environmental problems could have been avoided.  Moreover, without a contract in the drainpipe case, the city had no legal means to protect its interests.

Interestingly, the city was not required to seek bids for the overall fill delivery contract because the city was not specifically paying for the fill.  Nevertheless, the city’s lack of plans and specifications for the overal project appears to have had a direct impact on the city’s ability to prevent the environmental problems that occurred.

The lesson here is that to the extent that rules encourage planning for major projects, it’s often a good thing to follow them.

How to Steal from a Nonprofit

Articles should try not to promise more than they actually deliver, and that may be a problem with a piece in the current issue of The Nonprofit Quarterly, titled “How to Steal from a Nonprofit: Who Does It and How to Prevent It.”

The article, written by Janet Greenlee, Mary Fischer, Teresa Gordon, and Elizabeth Keating, asks the following question in the first paragraph: “Is it easier to steal from a nonprofit organization than from a business?”   The article implies that the answer is yes because it states in the following sentence that:

…an atmosphere of trust, the difficulty in verifying certain revenue streams, weaker internal controls, a lack of business and financial expertise, and a reliance on volunteer boards all contribute to increased nonprofit vulnerability.

The problem is that the article never really makes the case that nonprofits are more vulnerable to theft than are for-profit companies, and it doesn’t examine whether nonprofits are particularly hampered by an atmosphere of trust, weaker internal controls etc.  In fact, the article is largely based on a 2005 survey done by the Association of Certified Fraud Examiners (ACFE), which reported that of a sample of 508 cases of occupational fraud, only 58, or 12 percent, occurred in nonprofit organizations.  That actually doesn’t seem to be too bad a record for nonprofits.  Seventy-two percent of the fraud cases occurred in publicly and privately held companies and 16 percent occurred in government agencies.

Greenlee et al. state that the survey found that median losses per incident among nonprofits were actually similar to the losses suffered by businesses (though they were significantly higher than those suffered by government).  Also, they note that both payroll and check tampering fraud were more common in the nonprofit sector than in the business sector, while false invoices and skimming from revenues were more common in for-profit entities.  Thus, the comparison of the levels of stealing in nonprofit versus the for-profit spheres  sounds like a bit of a wash.  The authors further note that the sample size is too small to draw firm conclusions about fraud in the nonprofit sector.

The article does provide some helpful information about the common types of fraud perpetrated on nonprofit organizations and ways to prevent it.  For instance, the authors note that the survey found that the typical nonprofit fraud case was committed by a female with no criminal record.  She earned less than $50,000 a year and had worked for the nonprofit for at least three years.  

According to the article, more than 25 percent of the reported nonprofit frauds were conducted by managers, while 9 percent of the perpetrators were executives.  What about the remaining 66 percent?  Were they administrative staff, direct-care workers?  The article doesn’t say.

The authors state that there are three types of occupational fraud: asset misappropriation, corruption, and financial statement fraud, with asset misappropriation accounting for the vast majority of all reported frauds.  The article doesn’t define corruption, which would be helpful here.  It defines asset misappropriation as involving cash skimming, larceny, and fraudulent disbursements.  Fraudulent disbursements include inflaton of invoices, overstating hours worked, and falsifying claims for expenses.

As the article notes, fraudulent financial statements were a major feature of the Enron and Worldcom scandals in the private sector.  Those scandals led to the passage in 2002 of the Sarbanes-Oxley Act, which was intended to curb those abuses.

Citing the ACFE survey, the authors state that contrary to what some might believe, it was relatively rare for fraud to be discovered by the audit process.  They state that 43 percent of the frauds were detected by tips, 25 percent through internal audits, 12 percent through external audits, and 22 percent “by accident.”  Actually, the internal and external audits together detected 37 percent of the frauds, which isn’t all that far behind the fraud detection record for tips.

The authors suggest that to prevent stealing from nonprofits, every organization needs property insurance and, depending on size, may also need to buy employee dishonesty coverage.  For this coverage, insurance companies may require that a nonprofit’s bank accounts are reconciled by someone not authorized to deposit or withdraw.  In addition, they state, officers and employees should be required to take annual vacations of at least five consecutive business days (financial personnel who don’t take vacations is a red flag for possible fraud) or the organization should be required to have an annual audit.

Fraud, however, is not the only employee-perpetrated financial problem that nonprofits, in particular, are subject to.  There is also waste and abuse—activities which don’t necessarily rise to the level of fraud, but which may cause even greater financial losses.  For instance, nonprofits are often involved in transactions with nondisclosed related parties—transactions that can secretly benefit relatives, friends and business associates of the executives of the nonprofits.  Executives of nonprofits are also sometimes known for using organization funds to buy expensive personal cars, take unnecesssary trips etc. 

A more comprehensive article on how to steal from a nonprofit might also examine whether there are different levels of fraud between nonprofits that primarily depend on government revenues and those that don’t.  It would also be helpful to have an article that considers the questions suggested in the first paragraph of this NPQ article:  do nonprofits really have weaker internal controls than for-profit businesses; do nonprofits have less financial expertise than their business counterparts; and do volunteer boards exercise less financial control and oversight than do paid boards?  Who knows, the answers to those questions might be surprising.