This is a guest post written by Eric Newstadt, the GM of the Ryerson Student Centre. This post highlights why P3s are a preordained and preplanned market failure.
For some years now, Ryerson University has been pouring millions of dollars into its food services program so as to support the operation of that program. What is stunning about this situation is not that Ryerson’s food services program has been running at a massive loss for years, or that students, faculty, and staff have continued to complain about the high prices and poor quality that are legendary when comes to food at Ryerson.
No, what is stunning about the fact that Ryerson has been spending millions to support its food services program is that for the last fifteen years Ryerson has not been running that program – Aramark has. As is normally the case, Ryerson’s contract with Aramark stipulates that, in the event that food services at Ryerson run at a loss, Aramark – not Ryerson – will absorb that loss. Indeed, this is the argument for contracting out: the transfer of risk.
So the situation at Ryerson is most curious because it stands in rather sharp contrast to the paradigmatic reasons why public institutions are supposed to wisely contract to private-for-profit organizations.
To be fair, food services at Ryerson are difficult to deliver profitably. The University has – laudably I think – committed to paying front-line staff a high and well-above minimum wage. This means that front-line service staff, even those serving the coffee, are generally long-serving employees who make in excess of $17 an hour. Not surprisingly, it is difficult to merely break-even in running any kind of food service outlet in a hyper-competitive market when your service staff gets paid such great wages. No surprise then that Ryerson’s food services program would operate at a loss. Sources inside the University have indicated that Aramark, after taking a couple of initial hits, went to the University and said that high labour costs made food services at Ryerson a big money loser – they threatened to walk unless Ryerson kicked in some cash. Again, to the University’s credit, the decision was made to support good jobs rather than a campaign to move to a lower-wage work regime (which would have required some kind of union-busting effort). But it appears as though nothing was done to adjust the level of profit that Aramark was taking from its contract. In other words, in choosing to support good jobs, Ryerson also opted to support Aramark’s profits! And it also appears as though that the University never stopped to consider how it might leverage its financial commitment to its workers to the benefit of its students, its faculty, and its staff, who have, as was mentioned, continued to complain about high prices and low quality.
As industry insiders will tell you Aramark’s model is built upon its ability to negotiate rebates and charge cost-plus on everything that it provides to the institutions it serves. It’s a bit of a shell game, so pay attention, this next bit is important. The standard contract language in the sector sets out that all operating costs, for things like food and insurance, and labour, are charged as “direct costs” to an institution’s food services program. The contract also outlines that gross profits, which are split between the contractor and the institution (in this case Ryerson), are essentially gross revenues minus direct costs. In most cases the contract says nothing about how food costs are to be calculated or regulated.
Because contractors like Aramark are so massive, they are able to negotiate lucrative rebate programs with the industrially sized food suppliers and producers with whom they uniformly do business (small and medium sized producers can’t afford to pay rebates, supply a large national network, or pay for the liability insurance that the big contractors require). When their suppliers pay these rebates, they pay them to the contractor nationally – individual food services operations/contractees never see the benefit of a rebate. In other words, Aramark Ryerson pays full wholesale for whatever food items it sells and this cost is what is used in the calculation of gross profits. But because of the lucrative rebates it has negotiated, Aramark Canada, gets a slice of that action before gross profits are calculated. Industry experts indicate that such rebates amount to well over 10% of food costs. And other experts indicate that the food services giants attempt to run gross margins of over 15% on their contracts, which implies that the ‘well over’ part of the 10% estimate is a rather gross understatement. But then companies like Aramark do the same thing for every single aspect of their operation. For instance, the negotiate a huge umbrella insurance program that covers all of their individual contracts, and then parcel that out on a pro-rata plus profit basis. Need their in-house nutritionists to do nutritional analysis – same thing: the “direct cost” that is charged to each individual operation is at a cost-plus healthy profit price.
This model doesn’t just limit what Aramark can provide to consumers in terms of prices, it also has huge and disastrous consequences for workers and the environment; because of their dependence on rebates, and large, industrial sized food supplier/producers, the Aramark’s of the world tend to support the very forms of agri-business that have been linked with soil-erosion, water and air pollution, the unethical treatment of farm labour, and massive drops in the nutritional value of our food. In terms of food security, companies like Aramark support a regime that is terrorizing our environment, abusing workers, and generating shitty, highly processed, simulacra that are said to resemble food.
In most cases companies like Aramark can operate an institution’s food services program at a small profit – even given their cost and profit inflating rebate shell game. For reasons already outlined this is not the case with Ryerson. In most cases then, institutions could be forgiven for not really giving a shit about the fact that across the country those institutions that self-cater (i.e. contract-in), out-perform those that contract out along every key measurable criteria (higher retail sales, higher average cheques, less staff sickness, lower food costs). Operating food services programs, especially ones that do a good job, is no easy task, and a University might tell itself that it is an institution of higher learning, not a food services provider (forget about fueling good performance or the pedagogical importance of good food, or the environmental impacts of such behaviours). Still, those institutions that contract out and get a profit could perhaps be forgiven for ignoring the fact that, at schools like Ryerson, self-contractors uniformly out-perform those that contract out!
But one would think that the administrators at Ryerson, those charged with being prudent and wise financial managers of public money and tuition-fees, would give more of a shit about those facts. They don’t. Nope, not one little nugget of shit. Aramark’s contract with Ryerson is up and the University is simply not interested in meaningfully exploring alternatives. In fact, when offered a viable not-for-profit alternative, Ryerson simply said, “not for us”. Why? They didn’t really say.
What they did say is that they were committed to putting out a request-for-proposals document that was detailed, something that would lead to a contract that would provide the University with the flexibility to try new and innovative things in areas of the campus that don’t yet have food services outlets. And they also committed to “holding the contractors feet to the fire” by including in their contract a set of performance criteria against which they could measure Aramark’s future performance. But when pressed on how they would overcome the structural barriers that prevent large contractors like Aramark from being more flexible on price and quality, on things like sourcing ethically and sustainably produced food, the University was utterly silent. With but a few scant weeks before the RFP goes out, the University just is not ready to discuss in that kind of detail, as they put it.
The conclusion, it would seem, is a foregone one: without time to prepare a detailed and rigorous RFP, Ryerson will have to live through another five-years of shitty food, food that will cost both students and the University millions and millions of dollars.