Making Democracy Work

Privatization of Governmental Services

This was a national LWV study in 2012.

Part 1: Privatization Downsizes Government's Role

Adrienne Pauly, LWVMPC Privatization Study Chair

Do not confuse privacy with privatization. One is strictly for the individual. The other relates to the common good.

Individual privacy is well protected in the United States by the Constitution and myriad supporting laws at all levels of government. Privatization, in contrast, involves the transfer of an asset from public to private ownership or the transfer of the management of a public service or activity to private entities. Its proper function requires full transparency and accountability to the public and is best closely monitored by representatives of the public.

Historically, the United States has lagged other nations in the use of privatization. This is largely because our government owns proportionately fewer assets than in other countries. Broadly speaking, the U.S. held a rather liberal bias from the time of Franklin Roosevelt up to the 1980s, and government services expanded considerably during that time. However, the election of Ronald Reagan in 1980 began a conservative tide that has dominated in the years up to the present, with a resulting call for more privatization at all levels of government--federal, state, and local.

Privatization takes many forms

Privatization is a complex subject and its implementation can take many forms. There are five basic ways to privatize. Complete privatization entails the outright sale of a government asset or property to private interests. This form of privatization is used almost exclusively by emerging countries that need help to build basic systems such as water supply. Another form of privatization is having the operations of a public service provided by private operators. The management of city-owned sports stadiums is often in private hands.

Perhaps the most common privatization technique is to contract with individuals or groups to perform a public service. Contracts are often let for waste management services, security services, and consulting work. There is a trend today to turn into private hands the management of national parks, some state universities, even libraries. Franchises give exclusive rights for a private company to operate in a specific geographical area; for example, airwaves are allotted to various television companies to operate in certain areas. Finally, privatization can be achieved through an open competition process. Again, television and telephone companies compete for the use of airwaves in various regions of the country.

The most common areas for privatization to date have been toll roads, utilities, corrections facilities, lotteries, airports and, in recent times, the military.

There are several reasons to privatize

The reasons most often cited for the need to privatize include cost reduction--the private sector can perform a function more economically. Risk transfer absolves the government's taxpayers from liability if a project fails or incurs large cost overruns.

Privatization can also prove a revenue source for the government. And often the need for expertise not available within government is cited as a need go outside and contract with private experts for specific projects.

It is a mistake to think of privatization as all good or all bad. It can be either. Many public-private arrangements produce positive results. Some have resulted in disaster. (We will look at one local example--Salem's transit mall.)

The way to ensure a privatization project's success is to be very, very careful when drafting the original contract. It must deal in detail with two key issues: transparency and accountability. To ensure transparency, officials should include clauses that ensure oversight rights. The people have an inherent constitutional authority over government. They have the right to know and they have the ultimate say because the goal of privatization should be to provide the best possible service for the common good.

In future articles we will look more deeply into transparency and accountability, and we will look at examples that worked very well and some that did not. These real life stories will help League members clarify in their own minds what makes privatization work and what doesn't.

League members will discuss the Privatization of Governmental Services, Assets and Functions at unit meetings in January and February and will also come to consensus on the topic. The following background papers prepared by the LWVUS study committee make interesting reading. If you are reading this on your computer, you can click on the title of each article you want to read.

Part 2: Privatization Requires a Complicated Procedure

Adrienne Pauly, LWVMPC Privatization Chair

Today many nations are faced with financial challenges. In the United States these problems are apparent at the federal, state and local levels. Encouraged by proponents of a conservative political philosophy, many people look to privatization as a simple answer to these financial challenges, a way to shift the burden of government to the private sector while reducing the size of government itself. However, privatizing a government function or service is not simple, nor is its outcome assured.

To work successfully, privatization requires expertise at the design level and throughout the process with capable governmental oversight.

Three Crucial Components

Three elements must be present throughout a successful privatization program. 1) The goal of privatization must be "for the common good." 2) The program must be subject to transparency, allowing the general populace full access to its performance history. 3) And those administering a privatization effort must be accountable at all stages of its existence. It could be a mantra: the common good, transparency, accountability.

The common good represents a goal beyond mere efficiency or economics to include a reflection of the goals of a society. What actions best serve the citizenry at large?

Today's modern practice of open government is considered a key feature and necessary condition of the contemporary democratic state, according to Gretchen Knell in her paper on transparency (see web link). In this thinking, only the people have the constitutional role as overseers of government action. For that purpose a number of public transparency laws have been enacted throughout the United States at both the federal and state levels. Such laws include sunshine or open meetings laws and the Freedom Of Information Act (FOI) giving public access to government documents and records. The conflicting rights to privacy or transparency often lead to legal wrangles unless clearly defined when designing a privatization project.

Accountability cannot be separated from transparency. From design of a project through completion each person or group exercising a function or service must be accountable for their actions and open to public scrutiny.

More Thorny Issues

In addition to these basic functions, there are many other issues that arise in a privatization program. A few are listed below; they will be expanded upon in the unit meetings.

● What happens to public employees when their service or function is privatized? ● Who designs the contract? (Hopefully, veteran lawyers who know the process.) ● How is ownership of assets defined? ● What's involved with a franchise? ● When and how are open competitions held and for whom? ● Who assumes the risk of cost overruns or other malfunctions? ● Is there an exit strategy?

Time magazine in a disturbing article in its December 19, 2011, issue, reported drastic cuts in the postal service--up to 200,00 jobs to be lost (counting attrition) and thousands of post offices closed. But that will only reduce the post office debt load by two percent. As some point out, that's a penny-wise, pound-foolish solution. In the end, the article states, "The debate about the USPS is simple: It's about privatization of a service that is supposed to be universal." Enough privatization could well redefine a nation's character, so citizens need to consider the ramifications.

Privatization Is Everywhere

Don't think the subject of privatization is abstract or for others: there is a lot of it in Oregon and Salem itself. In fact a recent study reported in the Statesman Journal indicates the whole issue of state contracts has been poorly reported and is currently under legislative review. Among a few of the questionable contracts that came to light are a number of lucrative contracts with former state or government employees for consulting work in areas where they previously worked as government employees. Some of these contracts may well be justified, but they should be reviewed. Conversely, the Oregon Department of Transportation has been praised for its controls and oversight of highway construction projects that have kept on budget.

Clearly, privatization has to be judged on a case-by-case basis, but it should be approached with a sense of caution. Many who have studied the subject find that, although privatization works in some cases, more often it fails to achieve the expected cost savings and efficiency. Sometimes it can be an outright disaster.

One who has reservations is Paul Starr who, at the end of a lengthy study of The Meaning of Privatization (see website address below) published in the "Yale Law and Policy Review," writes: "To alter the public-private balance is to change the distribution of material and symbolic resource . . . in the process we are likely to narrow our involvements, interest, and vision of a good society and a good life."

So the subject is timely and important and promises to be with us for the foreseeable future.

The League's website (lwv.org) has three excellent articles:

Government Privatization: History, Examples, and Issues
Paul Starr, The Meaning of Privatization, Yale Law and Policy Review 6 (1988): 6-41.
Privatization: A Seattle League Study

If you only have time to read one paper, choose the Seattle League Study.

Part 3: Privatization: The Story of Courthouse Square

Susan Gray, LWVMPC Privatization Study Committee

In September 2010, ten years after its completion, the $34 million Courthouse Square office building and transit mall were vacated after an evaluation by an engineering firm determined that the transit mall could collapse under its own weight and that the building was unsafe to occupy. How did this happen?

How it began

In November 1995, Salem Transit Authority manager and former mayor R. G. Anderson-Wyckoff proposed Courthouse Square to enlarge the bus mall downtown and provide additional office space for county offices along with some retail space on property owned jointly by Marion County and the Salem-Keizer Transit District. The county and transit district entered into a public partnership for the development of Courthouse Square, with the management of the site set out in a "condominium agreement." This agreement required the building to be repaired if damage is less than 75%. The transit authority owns about 31% and Marion County owns the rest of the project.

The Courthouse Square project included a 163,000 square foot five-story office building, a transit mall and a future development site called the North Block. In Spring 1995, two bids were received for building Courthouse Square. The winning bid was submitted by Dan Berrey, a commercial real estate agent in Salem, whose team included Arbuckle Costic Architects and Pence/Kelly Construction as general contractor. In a dispute with the county and transit authority over his fee, Berrey left the project with a mediated settlement of $360,000. Arbuckle Costic and Pence/Kelly remained on the project, although they had little experience with a project the size and scope of Courthouse Square. In the summer of 1997, Melvin Mark Development Company of Portland was hired as the Project Manager, and two project coordinators, one each from the county and the transit authority, were appointed to oversee the project. During the planning stages of the project, allegations of mismanagement led some taxpayers to call for the project to be abandoned.

Financing the project

In 1997, the Federal Transit Administration issued two grants to the transit authority totaling about $9 million given with the expectation of a full project life of the transit mall. Since the mall is no longer useable, the FTA can recoup some or all of that money. The county's share of the costs came from bonds that are payable annually through 2023 costing about $1.55 million per year.

Engineering on the project

The structural engineering firm was Century West Engineering. The structural engineer on the project was Mike Hayford, an experienced engineer. Hayford died of natural causes in 2001 at age 55. Century West had been the structural engineering firm and Hayford had been the structural engineer on a 7-story parking garage built by Salem Hospital in 1998. Salem Hospital sued Century West over structural defects in the parking garage, which was subsequently torn down. In January 1999, Hayford left Century West and by June 1999, Century West no longer had a full-time structural engineering department.

The county and transit authority had building and safety officials of the City of Salem review the engineering plans for Courthouse Square. Their "review" of the plans consisted of verifying that there was the stamp of a licensed engineer on the plans. Salem's building and safety officials lacked the expertise to evaluate the engineering plans and no peer-review by a structural engineer was required. The method chosen for building the concrete slabs at Courthouse Square was post-tension construction, presented to the county and transit officials as "leading edge and highly efficient," but the design team and contractors were relatively inexperienced in post-tension construction.

Problems observed

Construction commenced in 1999. Revisions to the plan were made during construction. On February 18, 2000, Melvin Mark Development, the project manager, wrote to architects Arbuckle Costic about several cracks it had observed in critical locations beneath the bus mall. Melvin Mark recommended a second engineering opinion and stated that the transit authority and county agreed that a second opinion was desirable. The second opinion was never sought. Instead, the county and transit authority asked Mike Hayford, the project engineer, whether there was a problem because of the cracks. In a letter dated July 11, 2000, Hayford stated that the cracks were merely cosmetic in nature. By this time, he was no longer employed by Century West.

Construction of Courthouse Square was completed and opened in September 2000. By 2002, problems with the building began to be noticed, and several engineering firms were hired over the years to evaluate the condition of the building and transit mall. In July 2010, engineering consultants recommended closure of the transit mall and the office building.

What went wrong

In 2010, the county and transit authority hired Golder and Associates, an engineering consulting firm, to determine what went wrong and established a citizens' task force to decide whether Courthouse Square should be rebuilt, repaired or torn down. In May of that year, Golder concluded that the causes for the problem included: a flawed structural design that was not peer-reviewed prior to construction and government officials that lacked the technical expertise to evaluate the design; the departure of the structural engineer from Century West in January 1999 and no replacement was hired; concrete that failed a strength test; the lack of experience of Arbuckle Costic and Pence/Kelly with a project the size and scope of Courthouse Square, all of which resulted in poor construction practices.

What happens now

Due to limitations in the insurance coverage of the contractors, to date the county and transit authority have recovered about $1.8 million in lawsuits from Arbuckle Costic and Pence/Kelly. A lawsuit against Century West is pending. The Condominium Association had insured Courthouse Square for about $29 million. The insurance claim is pending.

The citizens' task force met several times and then requested proposals for repair of the building. By late December 2011, four firms had filed a letter of intent to submit formal proposals to repair the building. The proposals must be submitted by March 6, 2012, and proposal evaluations and interviews with the firms will begin in late March.

Sources:

Interim Report of the Courthouse Square Solutions Task Force dated May 23, 2011 "Courthouse Square's red flags" by Michael Rose, Statesman Journal, August 14, 2011 "4 interested in repairing Courthouse Square" by Michael Rose, Statesman Journal, Dec. 23, 2011 "Courthouse Square deadline extended" by Michael Rose, Statesman Journal, Dec. 29, 2011

Part 4: Privatization Contracts Out of Sight

Adrienne Pauley, LWVMPC Privatization Study Chair

State contracts with private providers have rocketed to an estimated $100 million in the 2011-12 biennial budget with little government or citizen oversight. Of this total, about one-third is going to out-of-state contractors. Some of these include no-bid contracts. Both the Statesman Journal and The Oregonian have been covering this subject in detail. [Statesman Journal, September 4, 11, and 25; The Oregonian, September 13, 2011.]

Because no one knows just how many contracts there are or for how much, the Secretary of State's office is now conducting an audit with a report due to the Legislature in mid-February. After it has seen this review, the Legislature is expected to take some action. Other states are grappling with this issue as well.

The practice of former state employees retiring and then rehiring on as highly paid consultants has prompted the audit. A spokesperson for the Secretary of State said that the audit will take special focus on these arrangements. Two examples illustrate why.

  • A leasing manager for the state Facilities Division left her job in 2008 and returned to work on a no-bid contract basis. Several contracts later she was making $90 per hour. The state finally ended its contracts with her consulting firm in April of this year but not before it had generated $394,845 in payments.
  • The Office for Oregon Health Policy and Research signed a one-year contract with the Institute for Health Policy Solutions in Washington., D.C., to help analyze new federal and state health care laws. A year later the agency extended the contract and raised the payout to $650,000. It is paying the nonprofit $290 an hour for a specific consultant's time. All this may be justified, but it should be open to public review.

It is harder to find "success" privatization stories, perhaps because, when they work well, they do not draw attention. Oregon's Department of Transportation recently drew kudos for a project that stayed on budget. Cited specifically was the agency's 2003-2008 project that replaced seven bridges and widened Interstate 5 between Highway 22 and Kuebler Boulevard exits. Yet that same agency was taken to task by The Oregonian for hiring a retired Department of Human Services employee as a contractor at $40.36 an hour in 2005; that mushroomed into a three-year contract in 2008 for $292,489--or $97,496 a year for part-time project management. Analysts figure it cost taxpayers an additional $182,163 over what it would have cost using staff employees to do the same job.

Some states are calling for regulations such as a block of time required between retirement from a government job and hiring on as a contractor/consultant.

Undoubtedly there are many examples where state agencies have to bring in outside expertise that they do not have in-house.

Privatization is a subject that will draw a lot of attention in coming months and the public has every reason to demand that the process be transparent, that those in charge are accountable (with consequences if their efforts fall short), and that private performance will benefit the common good.

Unit meetings: At the upcoming unit meetings in February we will offer more examples drawn from the League's national website and ask the attendees to discuss why each example worked or did not. We will also begin discussing the consensus questions, which accompany this Focus.

Privatization Blog: An online discussion of privatization is at http://statesmanjournal.com; type privatization in the paper's "search" bar to bring up comments on various aspects of privatization.

Part 5: Privatization: The Public Policy Debate--Executive Summary

Nora Leech, LWVUS Privatization Study Committee

The purpose of this article is to provide a description of the evolution of the public policy known as "Privatization." Privatization is a movement to deregulate private industry and transfer many government services, assets and functions to the private sector.

Claims and Concerns

Those promoting privatization claim that:

  • the private sector can provide increased efficiency, better quality and more innovation in services than the government;
  • a smaller government will reduce costs to the taxpayer; and
  • less regulation will provide a better environment for business, thus creating more jobs.

Those concerned about privatization suggest the following.
  • Profits: The mandate to make a profit will endanger public safety and reduce services available to the general public.
  • Costs: There will be increased costs to consumers.
  • Transparency and Accountability: Private companies will lack transparency, adequate oversight and accountability.
  • Corruption: There will be increased corruption between government and for-profit, private companies.
  • National Defense: Privatizing sectors such as ports, utilities and defense can result in foreign control and will put the country at risk in the event of war.
  • Inequality: The scale of privatized programs will result in chronic high unemployment, low wages and abusive labor practices, leading to growing inequality between the wealthy and poor.

Larger than the United States

The privatization movement is an international movement. Outside the United States, prominent divestitures of government assets have included Russia's natural gas (Gazprom), Bolivia's municipal water system in Cochabamba and the United Kingdom's British Rail. Inside the United States, privatization has taken the form of deregulation, e.g., the deregulation of the financial services industry; redistribution of the taxes "burden," e.g., efforts to reduce individual taxes on capital gains and inheritances and reductions of corporate taxes; and privatization, the shifting of government programs to the private sector, e.g., the prisons and highways.

History

In the 1970s, disillusioned with the Progressive Era vision, leadership in the increasingly global private sector became more active, asserting that burgeoning tax rates and government regulations of industry were inhibiting free trade. Efforts were launched to dismantle many Progressive programs such as restrictions on financial lending, elimination of worker's compensation, elimination of control over food and environmental safety, and a revamping of the tax system by eliminating progressive taxes and replacing them with a flat tax.

Competing Theories

Milton Friedman: The intellectual inspiration behind the public policies to privatize in the United States has come from the Public Choice and Property Rights schools of thought. Prominent leaders advocating these theories include Milton Friedman, the Chicago School of Economics, and Fredrick Von Hayek whose book, Road to Serfdom, warned of the growing welfare state. The basic assumptions include:

  • Democratic political systems have inherent tendencies toward government growth and excessive budgets.
  • Expenditure growth is due to self-interested coalitions of voters, politicians, and bureaucrats.
  • Public enterprises necessarily perform less efficiently than private enterprise.
  • The more individuals stand to gain from tending to their property, the better it will be tended.

John Maynard Keynes: The dominant economic theory after WWII was that of John Maynard Keynes. Keynes believed that to break a depression, the government needed to stimulate demand. It was necessary to get money into the hands of consumers to jumpstart growth. Businesses would not borrow and build if no demand was in sight, no matter how low the interest rates might go. Keynesian theories were later refuted by economist Milton Friedman and this dispute is at the core of the ongoing debate regarding how to break the current recession/depression.

Privatization in Practice

The key strategies as to how to downsize government and transfer programs to the private sector are described as:

  • Privatization by attrition
: Cessation of public programs and disengagement of government from specific kinds of responsibilities. Example might be the U.S. postal system.

  • Transfer of assets: 
Direct sale or lease of public land, infrastructure, and enterprises. Examples might be federal and state parks, state-owned liquor stores, and the proposed privatization of public libraries.

  • Contracting out (public/private partnerships) or vouchers: 
Instead of directly producing some service, the government may finance private services, for example through contracting out or vouchers. Examples might be charter schools, prisons.

  • Deregulation
: Deregulation of entry into activities previously treated as public monopolies. Examples might be utilities, water, waste management, air traffic control and ports.

Role of Government


The public agenda of privatization requires a close examination of the proper relationship between government, business and civil society. What should the role of government be in protecting the environment, helping the poor, defending the nation, providing justice, ensuring democracy, protecting public health, ensuring public safety, providing education, promoting a thriving economy, and ensuring safe work environments and a living wage? Our country must seek a pragmatic balance between social and economic returns.


The following Tables 1 and 2 present the Advantages and Disadvantages of Privatization.

TABLE 1--Potential Advantages of Privatization (1)

Proponents of Privatization Often Cite the Following as Reasons to Privatize:

Cost Saving Measure

  • Private enterprises are more efficient than government.
  • Competition among private enterprises provides an incentive to offer the best services at the lowest price.
  • Taxpayers will save money because the private sector may not require as many employees to provide a service and will pay less in employee benefits.

Greater Flexibility

  • Privatization offers options unavailable to government for financing expensive construction projects.
  • Privatization can help meet demands that exceed existing government capacity.
  • Private enterprises can respond to market conditions more quickly than government.

Increase Choice Among Providers

  • Clients usually have fewer options for services when the services are provided only by the government.
  • Alternative approaches for service delivery such as vouchers and non-exclusive franchises give clients more service delivery options (provider, level of service, location).

Greater Efficiency

  • Outsourcing can provide a quicker response to changing demand for labor and services.
  • Private enterprises can implement cost cutting measures that may not be available to the government.
  • Greater efficiency often leads to faster completion times.

Greater Productivity

  • Private enterprises have a profit incentive to increase productivity.
  • Privatization allows public administrators to focus on planning instead of managing day-to-day operations.
  • Private enterprises often have more leeway than government managers to increase productivity.

Lower Startup Cost

  • Private enterprises having capital investments in equipment, facilities, and/or training can often implement new programs quickly and without significant capital outlays.

Lower Unit Cost

  • Large private firms can take advantage of greater economies of scale and centralize the purchase of supplies and equipment.
  • Private firms can procure and employ new state of the art equipment and management information systems better than public agencies.

Greater Risk Sharing

  • Risks to the taxpayer (e.g., cost overruns) can be shared with the contractor.

Increased Services

  • Private enterprises may offer services that are not provided by the government.

Specialized Skills

  • Private contractors may provide specialized skills that are not normally required by the government.
  • The expense of recruiting, hiring and retaining government personnel with specialized skills may be too costly compared to outsourcing.

More Jobs

  • Privatization can create jobs in the private sector.

Less Government Bureaucracy

  • Private enterprises are not required to adhere to as many restrictive procedures and policies.
  • Private enterprises can respond more quickly to the market because the private sector is less restrained than the government.

Increased Tax Revenues

  • Private businesses are taxed and generate revenue for municipal, state, and the federal governments.

Competitive Pressure

  • Outsourcing provides a competitive pressure on public employees that remain following privatization.
  • Competitive pressures tend to motivate competitors to lower their prices and improve service quality.

Ideology

  • Privatization reduces the size of "big government."

(1) Mark J. Rosen, Researcher, "Privatization in Hawaii," p. 27-30 (Honolulu: Legislative Reference Bureau, December 2007).

2011 League of Women Voters: Privatization Study

TABLE 2--Potential Disadvantages of Privatization (1)

Opponents of Privatization Often Cite the Following as Reasons to Oppose Privatization:

Reduced Service Quality

  • A decrease in service quality may occur because government loses control over service delivery.
  • For-profit businesses will be tempted to cut corners (e.g., hire inexperienced staff, ignore contract requirements, use cheap equipment and materials) to increase profitability.

Higher Cost and Illusory Cost Savings

  • Reasons why private enterprises can be more costly than government include:

o Corruption;

o Lack of competition in the private sector;

o Certain types of contracts (e.g., cost plus fixed fee) provide no incentive for savings;

o Unemployment benefits are a cost to the taxpayer when employees are laid off.

  • Financial benefits of privatization are often exaggerated due to hidden costs associated with contract preparation, contract administration, privatization transition cost, and increased oversight cost.

Increased Service Interruptions

  • Unlike government, private vendors are subjected to influences (e.g., low profitability, bankruptcy, labor strikes) that can lead to service interruptions.

Loss of Flexibility

  • Government contracts for services must be written in very specific terms. This could result in less flexibility for public officials who are restricted by contract requirements when responding to unforeseen circumstances.

Loss of Capital

  • Capital investments in equipment and training are often lost when they are subject to privatization.

Less Control and Accountability

  • Government officials are able to respond to citizens when government is in total control of a service.
  • In contrast, the response by government officials is subject to contractual limitations when a service is outsourced to a private contractor.

Dual System

  • Privatization creates government inefficiency by creating a dual system government; one in which public workers are subject to strict procedural regulations, pay and benefit schedules and another system where outsourced labor is working on behalf of the government but are subject primarily to rules established by their private employers.

Increased Potential for Corruption

  • When large sums of money are involved, there is a temptation for government workers to accept or demand offers of kickbacks for awarding a contract to a private business.
  • When large sums of money are involved, there is a temptation for private entities to offer patronage if awarded a government contract.

Increased Potential for Discrimination

  • Private enterprises often do not have a policy for hiring minority and disadvantaged populations.
  • Private businesses may avoid serving clients who are minority or disadvantaged or perceived to be less profitable clients.

Displaces Public Employees

  • If displaced, government employees may lose their jobs and/or benefits and/or collective bargaining rights.
  • There may be a decline in morale among the remaining government employees.
  • Civil service policies and merit principles are weakened.

Lack of Competition in the Private Sector

  • The advantages of privatization will be lost if there is little or no competition in the private sector for outsourced services.

Weakened Policies and Values

  • Important values such as worker safety, quality, and integrity will be diminished or lost when government services are entrusted to corporations that are obligated to maximize profitability for stock holders or private owners of the company.

(1) Mark J. Rosen, Researcher, "Privatization in Hawaii," p27-30 (Honolulu: Legislative Reference Bureau, December 2007).

2011 League of Women Voters: Privatization Study

Glossary of Privatization-Related Terms

Asset Sale-- An asset sale is the transfer of ownership of government assets, commercial type enterprises, or functions to the private sector. In general, the government will have no role in the financial support, management, or oversight of a sold asset. However, if the asset is sold to a company in an industry with monopolistic characteristics, the government may regulate certain aspects of the business, such as the regulation of utility rates.

Competition Competition-- occurs when two or more parties independently attempt to secure the business of a customer by offering the most favorable terms. Competition in relation to government activities is usually categorized in three ways:

(1) public versus private, in which public-sector organizations compete with the private sector to conduct public-sector business;

(2) public versus public, in which public-sector organizations compete among themselves to conduct public-sector business; and

(3) private versus private, in which private-sector organizations compete among themselves to conduct public-sector business.

Contracting Out-- Contracting out is the hiring of private-sector firms or nonprofit organizations to provide a good or service for the government. Under this approach, the government remains the financier and has management and policy control over the type and quality of services to be provided. Thus, the government can replace contractors that do not perform well.

Divestiture-- Divestiture involves the sale of government-owned assets or commercial-type functions or enterprises. After the divestiture, the government generally has no role concerning financial support, management, regulation, or oversight.

Employee Stock Ownership Plans-- Under an employee stock ownership plan (ESOP), employees take over or participate in the management of the organization that employs them by becoming shareholders of stock in that organization. In the public sector, an ESOP can be used in privatizing a service or function. Recently, for example, the Office of Personnel Management established an ESOP for its employees who perform personnel background investigations.

Franchising of Internal Services-- Under the franchising of internal services, government agencies may provide administrative services to other government agencies on a reimbursable basis. Franchising gives agencies the opportunity to obtain administrative services from another governmental entity instead of providing them for themselves.

Franchising-External Service-- In the franchise-external service technique, the government grants a concession or privilege to a private-sector entity to conduct business in a particular market or geographical area, such as concession stands, hotels, and other services provided in certain national parks. The government may regulate the service level or price, but users of the service pay the provider directly.

Government Corporations-- Government corporations are separate legal entities that are created by Congress, generally with the intent of conducting revenue-producing commercial-type activities and that are generally free from certain government restrictions related to employees and acquisitions.

Government-Sponsored Enterprises-- Government-sponsored enterprises (GSE) are privately owned, federally chartered financial institutions with a nationwide scope and limited lending powers that benefit from an implicit federal guarantee that enhances a GSEʼs ability to borrow money in the private sector. They are not agencies of the United States but serve as a means of accomplishing a public purpose defined by law.

Joint Ventures-- See public-private partnership.

Leasing Arrangements-- Leasing arrangements are a form of public-private partnership. Under a long-term lease, the government may lease a facility or enterprise to a private-sector entity for a specified period. Maintenance, operation, and payment terms are spelled out in the lease agreement. Under a sale-leaseback arrangement, the government sells an asset to a private-sector entity and then leases it back. Under a sale-service contract or lease-service contract, an asset sale or long-term lease is coupled with an arrangement with the purchaser to furnish services for a specified period.

Leases in which the government leases a facility (e.g., a building lease) are considered a form of contracting out, rather than a public-private partnership.

Managed Competition-- Under managed competition, a public-sector agency competes with private-sector firms to provide public-sector functions or services under a controlled or managed process. This process clearly defines the steps to be taken by government employees in preparing their own approach to performing an activity. The agencyʼs proposal, which includes a bid proposal for cost-estimate, is useful to compete directly with private-sector bids.

Outsourcing-- Under outsourcing, a government entity remains fully responsible for the provision of affected services and maintains control over management decisions while another entity operates the function or performs the service. This approach includes contracting out, the granting of franchises to private firms, and the use of volunteers to deliver public services.

Performance Based Organizations-- Under a performance based organization (PBO), policymaking is to be separated from service operation functions by moving all policymaking responsibilities to a Presidential appointee. The service operations are moved to an organization to be headed by a chief executive officer (CEO), hired on a competitive contract for a fixed term. The CEOʼs contract defines expected performance and in exchange for being held accountable for achieving performance, the CEO is granted certain flexibilities for human resource management, procurement, and other administrative functions. As of March 1997, several PBOs had been proposed but no PBO had been authorized in the federal government.

Privatization-- The term privatization has generally been defined as any process aimed at shifting functions and responsibilities, in whole or in part, from the government to the private sector.

Public-Private Partnership-- Under a public-private partnership, sometimes referred to as a joint venture, a contractual arrangement is formed between public- and private sector partners, and can include a variety of activities involving the private sector in the development, financing, ownership, and operation of a public facility or service. It typically includes infrastructure projects and/or facilities. In such a partnership, public and private resources are pooled and their responsibilities divided so that each partnerʼs efforts complement one another. Typically, each partner shares in income resulting from the partnership in direct proportion to the partnerʼs investment. Such a venture, while a contractual arrangement, differs from typical service contracting in that the private-sector partner usually makes a substantial cash, at-risk, equity investment in the project, and the public sector gains access to new revenue or service delivery capacity without having to pay the private-sector partner.

Service Shedding-- Divestiture through service shedding occurs when the government reduces the level of service provided or stops providing a service altogether. Private sector businesses or nonprofit organizations may step in to provide the service if there is a market demand.

Subsidies-- The government can encourage private-sector involvement in accomplishing public purposes through tax subsidies or direct subsidies, such as the funding of low-income housing and research and development tax credits.

User Fees-- User fees require those who use a government service to pay some or all of the cost of the service rather than having the government pay for it through revenues generated by taxes. Charging entry fees into public parks is an example of a user fee.

Volunteer Activities-- An activity in which volunteers provide all or part of a service and are organized and directed by a government entity can also be considered a form of outsourcing. Volunteer activities are conducted either through a formal agency volunteer program or through a private nonprofit service organization.

Vouchers-- Vouchers are government financial subsidies given to individuals for purchasing specific goods or services from the private or public sector. The government gives individuals redeemable certificates or vouchers to purchase the service in the open market. Under this approach, the government relies on the market competition for cost control and individual citizens to seek out quality goods or services. The governmentʼs financial obligation to the recipient is limited by the amount of the voucher. A form of vouchers are grants, which can be given to state and local governments that may use the funds to buy services from the private sector.

Source: GAO Report to the Chairman, House Republican Task Force on Privatization, March 1997