On Privatization—Competitive Sourcing in State Government
Richard D. Young
Introduction
A recent admonition from the U.S. Office of Management Budget is both terse and
insightful, “To reform government, we must rethink government.”1 Most reformists
would agree that this admonition is a good one, especially with regard to state
governments, and is premised on three cogent principles. “Government should be 1)
citizen-centered, 2) results-centered, and to the extent possible, 3) market-based, i.e.,
actively promoting innovation through competition.”2 3
Over the past decade state governments have increased their use of privatization of
functions, activities and services. Though there are recent signs of stabilization of
privatization measures, still new privatization efforts are being undertaken by the states.
For example, Florida’s Governor Bush initiated a multi-year $280 million contract with a
private contractor in August 2002 to provide human resource functions for state
government. Over a seven-year period, the State of Florida is expected to save $80
million.4 Additionally, New York’s Governor Pataki has proposed to sell state assets or
property to lower Medicaid costs, and has leased properties of the Port Authority of New
York and New Jersey that are estimated to save over a billion dollars. And finally,
Nevada’s Governor Guinn privatized the state’s workers compensation program, which
resulted in a significant decrease in state personnel costs and reduced the liability of the
state by $2 billion.5
Privatization is a management approach that is of widespread interest to many—
academicians, politicians, state employees, private sector vendors, and the public at-large.
According to some experts in the field, privatization’s competitive nature offers
flexibility, innovation and, in many cases, cost-savings. Other experts argue contrarily
that privatization can lower state employee morale and bring fear of displacement, and
additionally, can bring about concerns related to accountability and quality. It is both
these advocates and critics that make the topic of privatization a controversial one, one
which requires careful scrutiny for public policy makers in weighing its merits and
possible disadvantages.
In this article, privatization will be reviewed briefly on several fronts. Initially,
privatization will be defined and looked at in a historical context. Next, privatization and
its various forms or methods will be enumerated (contracting out, grants, etc.).
Privatization activities in state governments will then be examined for the period 1998
through 2002, the most recent data and information available. Here also, some review
will be given to statewide privatization initiatives in Michigan, Virginia, Florida and
Texas. Following this, a discussion of “how to make privatization work” will be covered
offering sound advice from a General Accounting Office6 report on privatization among
the states. And finally, the pros and cons of utilizing privatization in state government
will be touched upon, focusing on the archetypal or “classic” arguments for and against
its use.
Definition and Background of Privatization
According to the literature, the definition of privatization varies. There are, for instance,
more than 20 differing applicable definitions of privatization on Google’s Website
dictionary at http://www.google.com/search?hl=en&lr=&oi=defmore&q=define:Privatization.
However, privatization (or alternately “competitive sourcing”) is defined best by two
organizations—the U.S. General Accounting Office (GAO) and the Council of State
Governments (CSG). The GAO defines privatization simply “as any process aimed at
shifting functions and responsibilities, in whole or part, from government to the private
sector.”7
The Council of State Governments offers a range of definitions. Each of these definitions
gives meaning and largesse to the term privatization. These include:
▪ The transfer of government functions or assets to the private sector.
▪ The shifting of government management and service delivery to private
providers.
▪ A shift from publicly- to privately-produced goods and services.
▪ Government reliance on the private sector to satisfy the needs of society.
▪ A movement from collective action to private control.8
Historically, privatization or the “interactions between public and private sectors in the
United States” dates back to the beginnings of the republic. Thomas Jefferson is quoted
as saying in 1808 that “it is better for the public to procure at the market whatever the
market can supply; because there it is by competition kept up in its quality, and reduced
to its minimum price.”9
For example, much of the growth and expansion of America was due to public-private
ventures like that of the transcontinental railroad in the mid-19th century. Additionally,
electricity was made originally, and remains largely today, available to homes and
businesses alike by private sector means, yet regulated by government. Moreover, many
functions or activities considered strictly “governmental” today were initially private
sector enterprises, including education and transportation.
In reality, the concept of government being the chief provider of “essential” services had
its beginnings during the Great Depression of the 1930s. It was then that President
Franklin Roosevelt began his New Deal programs and public works programs burst onto
the national scene.10
It was not until 1969 that management guru Peter Drucker proposed that privatization be
given serious attention by governments. He stated that “government should spend more
time governing and less time providing, should either purchase services from the private
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sector, or simply stop producing.”11 Then, in the 1970s, dozens of papers, books and
reports were published supporting the concept of privatization. Prestigious think-tank
organizations like the Urban Institute and the Rand Corporation began to argue for
privatization initiatives as more efficient and cost-effective ways to provide certain
governmental services.
With the passage of Proposition 13 in California,12 and the growing discussion of
privatization as an alternative to strictly public service delivery approaches, cities and
counties started to explore and initiate privatization efforts as a way to reduce operational
costs. In the 1980s, President Reagan energized the privatization movement by instituting
policies favoring competitive sourcing. States quickly began to implement privatization
measures in the late 1980s and, considerably so in the 1990s, due to several reasons.
These reasons included a string of recurring budget deficits, anti-tax sentiment and the
imposition of tax limitations, the devolution of federal programs and aid to states, and the
increasing acceptance of privatization as an effective and efficient management tool.
Forms of Privatization
There are several privatization methods or techniques that are discussed in the literature.
William Eggers, a recognized authority on privatization, states that more than 20 different
privatization techniques have been identified.13 The Council of State Governments (CSG)
identified ten methods of privatization in a report published in 1998 which surveyed all
50 states.14 Contracting out is by far the most common form of privatization. This method
is followed in frequency by grants, vouchers, volunteerism, and public-private
partnerships.
Contracting out. The CSG defines “contracting out” as a method of privatization wherein
“the state enters into agreements with private sector firms, for profit or nonprofit, to
provide goods or manage services. In this regard, the state funds the private provision of
public services.”15
The contracting out of specified governmental functions is again the most frequently used
form of privatization. For example, as regards state correctional services or functions, the
GAO reports that “contracting out occurs in 92.09% of the cases vis-à-vis other forms of
privatization.” Other functional areas of state government which most often utilize
contracting out—as opposed to other forms of privatization such as grants and subsidies,
vouchers, etc.—include general administrative services (91.67% of the time),
transportation (83.51%), education (81.29%), and social services (71.32%).16 It should be
acknowledged also that state facilities associated with computer data centers as well as
park and recreational facilities are regularly contracted out to private firms.17
Grants. Grants and subsidies are likewise privatization methods that are utilized
relatively often (though considerably less percentage-wise than contracting out) by state
governments. The use of grants, using GAO data again, occurs on average among states
as a privatization method 8.48% of the time. The functional areas of state government
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using grants most often include mental health and retardation (15.64% of the time),
health (14.31%), social services (12.48%), and education (8.63%).18
Grants are distinguished from contracts in that grants usually involve only the most
“general requirements” (e.g., provide school bus transportation, provide specialized
educational services, promote health prevention measures, support the arts, provide
counseling services to the poor, etc.).
Vouchers. Vouchers are another form of privatization. Vouchers allow eligible clients to
purchase services in the private sector while the government pays for the service. The use
of state government vouchers to pay for services averages around 4.11% of the time as
compared to all other forms of privatization, according to the GAO. But experts believe
that this will increase in the future.
Currently, most government vouchers are used by individuals to receive services
connected with health, mental health and retardation, and social services. But education
and vouchers “for purposes of school choice” are becoming more widespread though it
should be noted that this is an issue area of considerable debate. Proponents argue that
government-financed school vouchers promise to improve consumer choice while still
providing the public funding needed for families to invest adequately in their children's
education. Political conservatives and reformists are generally proponents of school
voucher systems, but the public education establishment, school teachers and
administrators, almost universally oppose vouchers and other school choice options.19
Volunteerism. This is simply the method of using volunteers to provide public services.
State governments actively recruit volunteers to help in providing essential services to
individuals. For instance, volunteers provide various integral emergency services in the
wake of natural disasters. Volunteers also lend a helping hand to the state courts and
correctional systems. This includes the provision of probation and parole mentors,
counselors, teachers and trainers, and foster parents. “Adopt-a-highway” programs, tax
preparation assistance, “meals on wheels,” hospital care giving, and literally dozens of
other state government-sponsored volunteer programs exist.
The benefits of volunteerism are widely praised and are several. One study states that
greater than 50% of management in the public sector believes that volunteers provide
substantial cost-savings and productivity gains to organizational endeavors, including
community goodwill and other intrinsic benefits. The Independent Sector, a prestigious
coalition of philanthropic and charitable organizations, states that volunteering—among
many other things—adds value to services, promotes social harmony, and creates public
trust.20
Other privatization methods. A few other methods or forms of privatization deserve
mentioning. Though utilized by states less frequently, they are important to state
governments by virtue of the utility and commonsense approach they offer in the service
delivery of public programs or functions. These “other” privatization methods include:
4
▪ Public-private partnerships. The state conducts projects in cooperation
with private firms, relying on private resources instead of spending tax
monies.
▪ Private donation. The state relies on private sector resources for
assistance in providing public services.
▪ Franchise. The state gives monopoly privileges to a private firm to
provide a service in a given geographical area.
▪ Service shredding. The state drastically reduces the level of a service or
stops providing a service so that the private sector can assume the function
with private resources.
▪Deregulation. The state removes its regulations from a service previously
monopolized by government in favor of private provision of the service
and competition against government agencies.
▪ Asset Sales. The state sells or “cashes out” its assets to private firms to
raise revenues and enlarge the tax base.21
State Trends in Privatization
The Council of State Governments, a non-profit, multi-state research and support
organization established in 1933,22 has studied privatization among the states since the
1980s. In 1997, and again most recently in 2002, the CSG conducted nationwide studies
of state privatization practices. The comprehensive 2002 survey was sent to 450 state
budget and legislative entities, including agency heads in five areas—personnel,
education, health and human services, corrections, and transportation. The response rate
to the 2002 CSG survey was roughly 77%.
Generally speaking, based on responses from state budget and legislative staffs, the 2002
CSG survey found that privatization activities among the states have remained constant
or increased somewhat for the period 1998 through 2002. Privatization has remained
about the same for 52.6% of the states, while 25% of the states have increased
privatization. Decreases in privatization among states were only 11.8%. Similarly, agency
heads indicated that privatization had remained about the same at 52.8%; increased
36.2%; and, decreased by 5.0%. Overall, these trends contrast with the 1997 CSG survey
(for 1993-1997) where privatization was found to remain about the same at 32.8%;
increased 58.7%; and, decreased by 1.7%.23
Figure 1—Trends in Privatization (1998-2002)
No Response
60.00%
40.00%
Decreased
20.00%
Increased
0.00%
Trends In
Privatization
Rem ain the
Sam e
5
Overall, the key reason for utilizing privatization among the states was cost-savings
(68.4% of all respondents). This was followed by lack of state personnel or expertise
(53.9%), flexibility and lack of red tape (32.8%), speedy implementation (14.4%), high
quality service (9.2%), increased innovation (1.3%), and increased support from political
leadership (1.3%). Most budget and legislative staff believed that the primary reason for
privatization was due to cost-savings, while a majority of agency heads felt that the lack
of state personnel or expertise was the main reason for privatization.
Figure—2 Reasons for Privatization (2002)
Political
Leadership
70.00%
Increased
Innovation
60.00%
High Quality
Service
50.00%
40.00%
30.00%
Speedy
Im plem entation
20.00%
Flexibility
10.00%
Expertise
0.00%
Reasons for Using
Privatization
Cost Savings
The survey also pointed out that budget and legislative staffs believed that most cost
savings due to privatization were 5% or less. These staffs additionally responded that
3.9% resulted in cost savings of 15% or greater, while 23.6% could not estimate the
amount of savings. No savings were gained by privatization 18.4% of the time for the
period 1998-2002. In contrast, agency heads stated that 29.1% of savings “more than
15%” were gained by privatization initiatives, that 6% were unknown, and that 32.6%
resulted in no savings.
In terms of forms or methods of privatization, the 2002 CSG survey found that states
used contracting out most often (86.9% of the time). Public-private partnerships were the
next favorite method used by states (44.9%). These were followed by grants and
subsidies (31.8%), asset sales (14.4%), and volunteerism (11.5%).24
Privatization of Personnel or Administrative Services
The 2002 CSG survey questioned state agency heads and/or directors about trends in
privatization in four separate areas, namely personnel (administration), education, health
6
and human services, and corrections. In this section, the following discussion relates to
agency responses concerning personnel.
Privatization activity trends in personnel services for the five-year period, 1998-2002,
remained about the same since the 1997 survey report, at 63.2%. (Note: In the 1997
survey, there was a 77.1% increase.) Activity increased at 10.5%, decreased by 2.6%, and
with regard to “no privatization” the percentage was 23.7. Those personnel or
administrative services most privatized were worker’s compensation claims processing,
flexible spending benefits, training consultants, and information technology services.25 26
Figure 3—Trends in Personnel Privatization (1998-2002)
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Decreased
Increased
No
Privatization
Trends In
Personnel
Privatization
Stayed the
Sam e
The foremost reason for personnel privatization among states was the lack of “personnel
expertise,” as indicated in the CSG survey by 36.8% of the respondents. Other primary
reasons included were cost savings (21.0%) and high quality of service (18.4%).
Finally, contracting was the main method or form of privatizing personnel services
(57.8%). Public-private partnerships were also used 7.8% of the time.27
Privatization of Educational-related Services
Again for the timeframe 1998-2002, trends in the privatization of educational services
(K-12) remained constant or increased slightly (in comparison to the prior five-year CSG
survey period). CSG indicates that 60.0% of privatization activities in education
remained about the same and that 34.3% increased. Those services privatized numbered
more than 20 separate and distinct types. The primary services which were privatized
included, for example, testing and assessment, program evaluations, bus transportation,
information technology, and facilities management (Figure 4).
In terms of the percentage of educational services privatized (2002), 18% of services
were privatized less than 1%, 26% were privatized 1-5%, 6% were 6-10%, and 8% were
11-15%. Notably, Michigan and Nebraska privatized greater than 15% of their
educational services.
7
Figure 4—Trends in Education Privatization (1998-2002)
60.00%
No
Privatization
50.00%
40.00%
Decreased
30.00%
20.00%
Increased
10.00%
0.00%
Trends in Education
Privatization
Stayed the
Sam e
The “lack of expertise” was the chief reason for privatization of educational services at
71.4%. Other reasons included cost savings (25.7%), flexibility and less red tape (22.8%),
and speedy implementation (20.0%).28
Contracting out was the most utilized method for the privatization of educational services
(80.0%). This privatization method was followed by grants and subsidies (42.8%),
deregulation (28.0%), and public-private partnerships (25.7%).29
Privatization of Health and Human Services
Trends in health and human services, like personnel and education, remained steady or
about the same for the 1998-2002 period, or at 64.9%. Privatization efforts in these areas
increased by 29.7% and decreased by 5.4%. The key services which were privatized
included case management, child support enforcement services, mental health and drug
treatment programs, and AIDS programs.
Figure 5—Trends in Health and Human Services Privatization (1998-2002)
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Decreased
Increased
Trends in Health &
Hum an Services
Privatization
Stayed the
Sam e
For 2002, the percentages of health and human services privatized were as follows:
▪ Less than 1% privatized were 17%.
▪ 1-5% privatized were 11%.
▪ 6-10% privatized were 6%.
▪ 11-15% privatized were 4%.
▪ More than 15% privatized were 26%.30
8
The reasons for privatizing health and human services were mainly four. Lack of
personnel or expertise was clearly the primary rationale at 51.3% of those responding to
the CSG survey. This was followed by flexibility and less red tape (40.5%), cost savings
(27.0%), and speedy implementation (21.6%).
Lastly, the key methods used to privatize health and human services were contracting out
(89.1%), grants and subsidies (40.5%), public-private partnerships (40.5%), and vouchers
(10.8%).31
Privatization of Corrections
State correctional services have been a focus area for privatization initiatives for many
years. Several private firms specialize in the provision of correctional services, including
Correctional Services Corporation, Corrections Corporation of America, and Wackenhut
Corrections Corporation.
The 2002 CSG survey found that trends in corrections privatization activity for 19982002 were as follows: stayed the same (39.6%); increased (43.8%); and, decreased
(12.5%). Those services privatized most in corrections were medical and dental services,
alcohol and drug treatment, facilities construction, mental health services, prison
operations, laboratory services, and food services.
Figure 6—Trends in Corrections Privatization (1998-2002)
50.00%
40.00%
Decreased
30.00%
20.00%
Stayed the
Sam e
10.00%
0.00%
Increased
Trends in
Corrections
Privatization
In 2002, 1-5% of corrections services were privatized 24% of the time. Next percentagewise, more than 15% of services were privatized 22%. Those states which privatized
correctional services most included Alaska, Colorado, Hawaii, Kansas, and Louisiana.
The primary reason for privatization was cost savings (68.7%). Other reasons for
correctional privatization included lack of personnel or expertise (39.5%), flexibility and
less red tape (29.1%), increased support of political leadership (25%), and speedy
implementation (22.9%).
The principal methods used to privatize correctional services were contracting out
(95.8%), volunteerism (31.2%), and public-private partnerships (18.7%).32
9
Statewide Privatization Entities
A GAO study on privatization recommends strongly the following:
Governments need to establish an organizational and analytical structure
to implement the privatization effort. This structure can include
commissions, staff offices, and analytical frameworks for privatization
decision making… to identify privatization opportunities among
government activities and to set policies to guide privatization initiatives.33
Fourteen states have established various boards, commissions and councils to promote,
assist and advise on matters related to privatization. While most states plan and
implement privatization on a piecemeal or ad hoc basis, these various privatization
entities systematically identify and implement competitive sourcing on a statewide
basis.34 These privatization entities include:
▪ Arizona – Private Enterprise Interview Board
▪ Colorado – Commission on Privatization of Personal Services
▪ Florida – Center for Efficient Government (formerly the Council on Competitive
Government)
▪ Georgia – Governor’s Commission on Privatization
▪ Kansas – Kansas Council on Privatization
▪ Kentucky – Governor’s Commission on Privatization
▪ Maryland – Council on Management and Productivity
▪ Michigan – Michigan Public-private Partnership Council (Recently rescinded.)
▪ New Jersey – Advisory Commission on Privatization
▪ New York – New York State Research Council on Privatization
▪ Texas – Council on Competitive Government
▪ Utah – Privatization Policy Review Board
▪ Virginia – Commonwealth Competition Council
▪ Wisconsin – Commission on Privatization35 36
Eggers states that establishing a structured privatization organization and process has
several advantages. One advantage is that a statewide privatization entity increases the
possibility that privatization will be successful. Another advantage is that statewide
privatization efforts increase the likelihood of reiterative, multiple incidences of cost
savings. Finally, structured privatization approaches decrease the occurrence whereby
cost savings in one program or service do not “prop up” the inadequacies in another
program or service area.37
Eggers also points out that to develop an institutional framework for privatization, two
things must happen. First, at the beginnings of establishing a privatization entity, either
the governor or the legislature, or both, should work with all interested parties to gain
input and support. These interested parties might include legislative leaders, business
persons, public employees, and management or government experts. This would set the
10
stage for cooperation and long-term “buy in” or commitment. Secondly, there should be
instituted a public education campaign. This would provide for the communication to the
public at-large (including the media) the reasons for privatization, a structured approach,
issues and benefits. Understanding and support from the public is ultimately crucial,
according to experts, to any successful privatization effort.38
In the following discussion, four states that have instituted statewide privatization
initiatives will be briefly touched upon. These include Michigan, Virginia, Florida, and
Texas.
Michigan’s Public-private Partnership Council (Rescinded April 2004.)
In 1992, Michigan put into place a privatization structure and process to evaluate
governmental activities to determine what action would be most appropriate; namely, to
privatize, eliminate, retain as is, or modify (thus the acronym PERM). Until recently, the
Public-private Partnership Council, through the Privatization Division of the Department
of Management and Budget, conducted three-part analytical studies of agency activities
to determine if privatization was viable.
The first step of the analytical process was a historical examination. This involved
examining the factors that first created the governmental activity and, most importantly,
if those factors were still relevant. This examination additionally gave a historical
analysis of activity responsibility, scrutinizing any changes through time.
The second step of the analytical process was referred to as the PERM analysis. A
determination is made here to privatize, eliminate, retain or modify an agency activity.
This was accomplished by evaluating the effects or outcomes of the activity and the
extent to which these results were needed or effective. PERM also determined the effect
on clientele should changes to the activity be recommended or occur. Additionally, any
barriers to privatizing, eliminating or altering the agency activity were analyzed.
The third and final step of the analytical process was a cost analysis. Essentially, this
involved the breaking down of all costs, both direct and indirect, of an agency activity.
Once current costs were determined, the costs associated with any PERM were
developed. Comparisons were then made of possible alternatives (privatized or modified
activities) for purposes of identifying the greatest cost savings.39
Though the PERM process was and remains highly praised by experts and observers
alike, political and other recent occurrences have shut down its 12-year implementation.
Executive Order 2004 – 17, issued by Governor Jennifer Granholm, abolished the
Michigan Public-private Partnership on April 15, 2004. The official reason cited was that
the Partnership “had completed its work.”40
11
Virginia’s Commonwealth Competition Council
The Virginia Government Competition Act was passed in 1995. Since 1996, the
Commonwealth Competition Council, made up of legislators and gubernatorial
appointees, has instituted a process “to guide state agencies and departments in reaching
appropriate competitive decisions.”41 The Council’s statutory mission is broad or
multifaceted, and may be summed up in the following way: “To examine and promote
competitive contracting, reduce costs without harming the public, implement a process to
evaluate privatization options, and advise the governor, legislature and executive branch
agencies as to appropriate findings and recommendations for the competition of public
activities.”42
The Council utilizes a five step process to determine the possibility of privatizing
governmental activities.
▪ Step 1 – Input: The Council holds hearings to gain input from citizens,
businesses, and government employees. The Council then develops an inventory
of functions and services for privatization.
▪ Step 2 – Selection: Agencies and departments then conduct a “public-private
performance analysis” to assess whether or not to privatize. This analysis consists
of a thorough review of the governmental activity and private sector capacity, a
cost analysis, an evaluation of issues related to public safety and welfare, a look at
personnel and transition issues, and finally, an assessment of implementation
issues.
▪ Step 3 – Competition: Agencies issue an RFP(s) and then evaluate bids (with
Council oversight).
▪ Step 4 – Award: Contracts are awarded, yet can not exceed five years. Appeals
are considered as necessary.
▪ Step 5 – Monitor: Agencies or departments then monitor contractor performance
and provide for quality assurance. A final post performance review is conducted
at the end of the contract period.43
Governor Mark Warner issued Executive Order 5-2002 that created the Commission on
Efficiency and Effectiveness to augment, among several other reforms, privatization
efforts in Virginia.44 The Commission report was supportive of the continuing
privatization efforts of the state and offered recommendations for improvements.45
Florida’s Center for Efficient Government
As a result of critical reports issued by Florida’s Inspector General, and based on
Governor Jeb Bush’s long-standing commitment to foster accountability, competition,
efficiency and innovation, the Center for Efficient Government was established March
11, 2004 by executive order (EO# 04-45). With regard to privatization, the Center is a
“statewide effort to evaluate Florida’s competitive sourcing initiatives, identify
opportunities for additional initiatives, and oversee the execution of all new outsourcing
efforts.”46
12
The Center’s initial goals are twofold. First, the Center will develop a statewide
privatization model, specifically focused on outsourcing standards and a “business case
template.” Secondly, the Center will review existing privatization plans and
implementation.
Florida’s privatization model has essentially been developed. Called the “Gate Process,”
based on the United Kingdom’s successful competitive sourcing model, it is a five step or
phase process. These phases include 1) business case development, 2) procurement
process, 3) contract management, 4) transition management (training, communications
and workforce), and 5) post implementation (performance measurement and
evaluation).47
In a recent interview with the Reason Foundation, Governor Bush said that “if we can
find a better way to send out payroll, handle purchasing, get licenses renewed online,
provide medical services in public institutions, and save money and add value to services,
I will look at it.”48
Texas’ Council on Competitive Government
In 1993, H.B. 2626 was passed by the Texas legislature to create the Council on
Competitive Government. According to the most recent financial data available, through
FY 2002, the Council has helped the state to save more than $84 million.49
The Council is made up of six council members. These include the governor, lieutenant
governor, the speaker of the house, the comptroller of public accounts, and two other
designated state officials. Designees are permitted to serve and this has generally been the
case. The Texas Building and Procurement Commission provides both administrative and
analytical staff resources to the Council to carry out its work.
The Council chiefly reviews “state services to identify the most efficient and effective
provider of those services.” Generally, such a review results in one of four results. These
include:
▪ Reengineer and reorganize services within the same agency or agencies.
▪ Reengineer and reorganize services to another agency or agencies.
▪ Reassign services to the private sector.
▪ Reassign services through a partnership between the public and private
sectors.50
One significant point of interest here is that the Council on Competitive Government was
created by statute. This stresses the support of the legislative branch for looking at ways
to improve government on a continuous basis and in a systematic or methodical way. It
also clearly shows an appreciation and understanding for the possible benefits of
privatization.
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How to Make Privatization Work
An all-important question is, of course, “How can states make privatization work?” In
order to answer this question, the GAO conducted an extensive review of state
privatization efforts. In the GAO review, it identified privatization initiatives that were
most successful and why. From this, the GAO documented six steps that it considered as
essential for state privatization efforts to succeed. Each of these six steps is discussed
below.
The first and perhaps most important step in establishing a workable and successful state
privatization effort is to have a political champion. Privatization is not only a process; it
is also a public policy. For the idea of privatization to be introduced into public affairs
and to be sustained as a feasible public policy, it must have a political leader(s) who
believes in its aims and purposes and is committed to seeing it carried out. Governors are
mainly the political champions of privatization, though state legislators may also be
strong supporters of competitive sourcing and/or public-private partnerships. Political
champions communicate the significance of privatization to others, build long-lasting
support (both within and outside governmental spheres), sustain momentum for
privatization methods or processes, and modify implementation strategies as needed.51
The second step is to create a new or to tap an existing organizational structure, along
with the proper resources, to identify, implement and monitor governmental functions or
activities for privatization purposes. This would include establishing a formal analytical
or decision making process similar to Florida’s Gate System or Michigan’s former PERM
process discussed above. The organizational and procedural measures comprising a
statewide privatization effort should be carefully thought out and adjusted to maximize
performance and results. Additionally, emphasis should be placed on the provision of
guidance and technical assistance to state agencies in the implementation of privatization.
The third step recommended by the GAO, and one that is somewhat controversial,
consists of proactive actions taken by the state legislature to reorganize state agencies or
to reduce agency budgets in order to force disinclined or apathetic agencies to seriously
undertake privatization efforts. Such actions—in the form of resolutions, joint resolutions
and bills—taken by the legislature, send a strong message that it is serious about
achieving cost savings and improving the quality of services through privatization.
The fourth step involves a cost analysis. This analysis should determine what it costs for
government to perform an activity (i.e., an activity-based cost analysis) and what future
costs government can avoid by privatizing the activity. The costs considered for
comparative analysis of public vs. private delivery should include personnel costs
(including fringes and overtime), operating costs (repairs, maintenance, vehicles,
equipment, rent or lease, materials and supplies, etc.), capital costs, insurance, all
overhead expenses (personal and operational services), and any other related costs.
Actual cost data should be used vis-à-vis estimated data whenever possible.52
14
The fifth step to establishing and maintaining a successful statewide privatization effort is
to develop processes to assist state employee workforces in adjusting or transitioning to
privatization initiatives. Such processes may involve recruitment, counseling, re-training,
and placement services for workers unable to transfer to privatized services.
Finally, the sixth step entails monitoring and oversight. While an activity, function or
service is privatized, it is still the responsibility of some governmental body and official
to ensure compliance and performance of the private contractor. In other words, the
government is still responsible to the taxpayer for the expenditure of public funds and the
results obtained. Hence, a monitoring and oversight system is necessary to see that no
waste, fraud, or other negative actions or outcomes occur by a contractor or publicprivate enterprise.53
The Pros and Cons of Privatization
The literature is replete with discussion of the issues pertaining to privatization—i.e., the
pros and cons of competitive sourcing. Proponents argue mainly that privatization will
save money, while opponents dispute this saying there are no guarantees that savings will
in fact occur. In most instances, the divide between supporters and detractors of
privatization is wide and frequently non-compromising.
Proponents believe avidly that privatization can lead to cost savings and that with careful
cost analysis, this can be determined accurately before implementation. Cost analysis is
key to determining cost savings, and when applied correctly, experts assert that state
governments or governmental units considering privatization can have solid evidence or
data that indicates the precise amount of savings within a narrow and clear-cut range of
dollars (or percentages).
Proponents also argue strongly that privatization provides administrative expediency.
Privatized services, it is argued, are more customer friendly in the sense that red tape is
eliminated. Paperwork and program processes are streamlined. Clientele receive services
faster with a focus on quality and customer satisfaction. Proponents of privatization
believe generally that “private sector organizations are less bureaucratic than government
agencies and can make decisions rapidly to assign the necessary resources where the
greatest need occurs.”54
Opponents state that cost savings analysis is not often performed prior to privatization,
and if done, the methodologies utilized are generally questionable. Opponents also argue
that service quality does not improve simply because of privatization but is likely to
suffer due to private companies “cutting corners” to maximize their profits. Opponents
stress that if cost savings is the principle reason for privatization that existing
governmental agencies, programs or activities should be restructured or reconfigured
(including process improvement strategies and techniques) to achieve savings and
eliminate any identifiable waste.
Below are the common arguments for and against privatization.
15
Arguments in favor of privatization include:
▪ Helps governments save money in management and delivery of public
services.
▪ Allows for speedy implementation of certain programs.
▪ Provides high-quality services in some areas.
▪ Becomes necessary when government lacks the expertise or personnel to
carry out certain programs.
▪ Uses more innovative approaches and technology.
▪ Helps dissolve unnecessary government service monopolies.
▪ Offers services more effectively due to flexibility and reduced red tape.
▪ Slows the growth of government or downsizes government.
▪ Introduces competition between government employees and private
providers.
▪ Provides an alternative to traditional ways of improving government
productivity.55
The arguments against privatization include:
▪ Does not save taxpayers' money.
▪ Does not guarantee market competition and can result in private
monopolies.
▪ Leads to corruption.
▪ Causes policymakers and managers to lose control over privatized
services.
▪ Diminishes accountability of government.
▪ Private gain and public good do not always correspond.
▪ Is unnecessary given other productivity approaches available to public
service providers.
▪ Compromises quality because of private vendor profit motive.
▪ Lowers state employee morale and contributes to fear of displacement.
▪ Destabilizes economically marginal communities.56
Conclusion
In the beginnings of the 21st century, governments are faced with new and significant
challenges. Government leaders must determine how to provide a wide-range of public
services that are cost-efficient and effective. This includes service areas such as
education, transportation, health and human services, public safety, and so on. Raising
taxes is often not an option in today’s political climate. And government budgets can be
cut only so much. Other options or innovations must be seriously considered. One such
option/innovation is privatization.
Privatization, when planned and properly implemented, can be a cost-efficient and
effective alternative to the traditional dependencies of governmental delivery of public
16
services. Studies have shown that privatization is both a logical and valuable tool in
providing needed government services and several competitive sourcing models exist that
have proven to be highly useful and productive.
Though barriers and objections to privatization exist, governmental reformists believe
that these can be overcome. Careful study, the application of acceptable cost analysis
methodologies, and new or positive findings relating to privatization are giving both
confirmation and scientific evidence that privatization can work.
Finally, one of the most important responsibilities of a governor or state legislator is to
ask tough questions about governmental entities, functions and activities. Is this function
or activity needed? Can it be modified to improve its performance? Can cost savings
result and be shifted to greater needs? Is there duplication of effort? And finally, can the
private sector perform the government function or activity cheaper, increase productivity,
cut red tape, improve management flexibility, maintain or increase quality, and satisfy
client, constituent or customer needs?
President Bush states:
What matters in the end is completion. Performance. Results. Not just
making promises, but making good on promises… My vision for
government reform is guided by three principles: citizen-centered, not
bureaucracy-centered; results-oriented, and market-based… actively
promoting competition.57
References
Chi, K., et al. (2003, October). Privatization in state governments; Trends and issues.
Lexington, KY: Council of State Governments.
Chi, K. & Jasper, C. (1998). Private practices: A review of privatization in state
government. Lexington, KY: The Council of State Governments.
Drucker, P. (1969). From The age of discontinuity. Quoted in Op. cit. Chi, et al.
Eggers, W. (1993, January). “Designing a comprehensive state-level privatization
program.” From the How to guide #1: State government privatization. Los Angeles, CA:
The Reason Foundation.
Executive Office of the President, Office of Management and Budget. (2002). The
president’s management agenda. Washington, DC: Author.
Higgins, G. (n.d.). “A review of privatization definitions, options, and capabilities.” A
report for the Business, Labor, and Agricultural Committee. Helena, MT: Montana State
Legislature. See
http://leg.state.mt.us/content/publications/research/past_interim/defined.pdf.
17
Jefferson, T. (1808). Quoted in Didrickson, L. (1998, September). “Cover story: What is
privatization?” Fiscal focus. Springfield, IL: Office of the Illinois Comptroller.
National Council for Public-Private Partnerships. (2003). Critical choices: The debate
over public-private partnerships and what it means for America’s future. Washington,
DC: Author.
U.S. General Accounting Office. (1997, March). Privatization: Lessons learned by state
and local governments. Washington, DC: Author.
Young, R. (2004). Volunteerism: Benefits, incidence, organizational models, and
participation in the public sector. Columbia, SC: USC, Institute for Public Service and
Policy Research. Available at
http://ipspr.sc.edu/publication/Volunteerism%20FINAL.doc.
About the Author
Richard D. Young, B.A., M.A.
Richard Young is director of governmental research with the Institute for Public Service
and Policy Research at the University of South Carolina. He conducts research on a
myriad of public policy and public administration topics relating to state and local
governments. Mr. Young can be reached at young-richard@sc.edu.
Endnotes
1
Executive Office of the President, Office of Management and Budget. (2002). The president’s
management agenda. Washington, DC: Author, pp. 3 and 4.
2
Ibid.
3
President Bush recommends these reform principles in the OMB report cited above.
4
According to the St. Petersburg Times, October 23, 2004, auditors issued a report that was critical of the
handling of a multi-million dollar contract to privatize the state personnel system. The audit reported that:
“Officials at the State Department of Management Services failed to provide adequate safeguards in the
contract with Convergys Customer Management Group, the state audit said. And they allowed improper
relationships between officials responsible for the contract and personnel who left the state agency and
started lobbying it on behalf of their new employer within days.” Retrieved October 25, 2004 from
http://www.sptimes.com/2004/10/23/State/Pet_Bush_privatizatio.shtml.
5
Chi, K., et al. (2003, October). Privatization in state governments; Trends and issues. Lexington, KY:
Council of State Governments, p. 1.
6
The U.S. General Accounting Office was reconstituted as the U.S. Government Accountability Office in
2004.
7
U.S. General Accounting Office. (1997, March). Privatization: Lessons learned by state and local
governments. Washington, DC: Author, p. 1.
8
Op. cit., Chi, et al., p. 2.
9
Jefferson, T. (1808). Quoted in Didrickson, L. (1998, September). “Cover story: What is privatization?”
Fiscal focus. Springfield, IL: Office of the Illinois Comptroller, p. 1.
18
10
National Council for Public-Private Partnerships. (2003). Critical choices: The debate over publicprivate partnerships and what it means for America’s future. Washington, DC: Author, p. 9.
11
Drucker, P. (1969). From The age of discontinuity. Quoted in Op. cit. Chi, et al., p. 2.
12
Proposition 13 was a ballot initiative by the voters of the State of California on June 6, 1978. Its passage
resulted in a cap on property tax rates in the state, reducing them by an average of 57%. Proposition 13
received an enormous amount of publicity, not only in California, but throughout the United States. Its
passage presaged a "taxpayer revolt" throughout the country. Retrieved October 13, 2004 from
http://www.fact-index.com/c/ca/california_proposition_13__1978_.html.
13
Eggers, W. (1993, January). “Designing a comprehensive state-level privatization program.” From the
How to guide #1: State government privatization. Los Angeles, CA: The Reason Foundation, p. 10.
14
Chi, K. & Jasper, C. (1998). Private practices: A review of privatization in state government. Lexington,
KY: The Council of State Governments, p. 3.
15
Ibid.
16
Op. cit., GAO, pp. 22-23.
17
Op. cit., Eggers, p. 10.
18
Op. cit., GAO, pp. 22-23.
19
Ibid.
20
Young, R. (2004). Volunteerism: Benefits, incidence, organizational models, and participation in the
public sector. Columbia, SC: USC, Institute for Public Service and Policy Research, pp. 3-5. Available at
http://ipspr.sc.edu/publication/Volunteerism%20FINAL.doc.
21
Op. cit., Chi & Jaspers, p. 3.
22
See http://www.csg.org/csg/default.
23
Op. cit., Chi, et al., pp. 3-4.
24
Ibid., pp. 4-7.
25
Ibid., p. 6.
26
“States that have privatized more than 10% of their personnel services include Connecticut and Florida.
On the other hand, 10 agencies surveyed by CSG stated that their agencies did not privatize more than 1%.”
Data for year 2002. Chi, et al., p. 7.
27
Op. cit., Chi, et al., pp. 6-7
28
Maryland and Montana were, for example, states that realized estimated savings from 11% to 15%.
29
Op. cit., Chi, et al., pp. 8-9.
30
Ibid., p. 10.
31
Ibid.
32
Ibid., pp. 11-12.
33
Op. cit., GAO, p. 5.
34
Op. cit., Eggers, p. 2.
35
Op. cit., Chi & Jaspers, p. 6.
36
It should be noted that some states have promoted statewide privatization efforts without establishing
formal boards, commissions, or councils. California, Illinois and Massachusetts have, for example, issued
executive orders endorsing and encouraging privatization.
37
Op. cit., Eggers, p. 3.
38
Ibid., p. 6.
39
Op. cit., GAO, p. 37-38.
40
Retrieved October 18, 2004 from http://www.michigan.gov/gov/0,1607,7-168-21975-90929--,00.html.
41
Retrieved October 18, 2004 from http://www.vipnet.org/ccc/process.htm.
42
Virginia Code of Laws, as amended, 9-342.
43
Op. cit., GAO, p. 40-41.
44
Retrieved October 18, 2004 from
http://www.governor.virginia.gov/Press_Policy/Executive_Orders/html/EO_05.html.
45
See Governor's Commission on Efficiency and Effectiveness Final Report at
http://www.governor.virginia.gov/Initiatives/EffCommission/presentations/FinalDocs/FinalReport.pdf.
46
Retrieved October 20, 2004 from
http://dms.myflorida.com/administration/center_for_efficient_government.
19
47
See
http://dms.myflorida.com/dms/administration/center_for_efficient_government/center_for_efficient_gover
nment_quick_links/project_gate_management_process_overview.
48
Retrieved October 20, 2004 from http://www.rppi.org/apr2004/stateprivatizationtrends.shtml.
49
Retrieved October 20, 2004 from http://www.ccg.state.tx.us/.
50
Retrieved October 20, 2004 from http://www.ccg.state.tx.us/about.html.
51
Op. cit., GAO, pp. 4-6 and 8-18.
52
Virginia has an excellent cost analysis method established and is based on the federal government’s
OMB Circular A-76. See http://www.vipnet.org/ccc/pppa.pdf and http://www.dla.mil/j-3/a76/OMBCircularA-76NewTOC.html.
53
Op. cit., GAO, pp. 4-6 and 8-18.
54
Higgins, G. (n.d.). “A review of privatization definitions, options, and capabilities.” A report for the
Business, Labor, and Agricultural Committee. Helena, MT: Montana State Legislature, pp. 2-3. See
http://leg.state.mt.us/content/publications/research/past_interim/defined.pdf.
55
Ibid.
56
Ibid.
57
Op. cit., GAO, pp. 1 and 4.
20