In March 1996, Rep. Scott Klug, chairman of the House Republican Task Force on Privatization, released a General Accounting Office (GAO) report that reviews lessons state and local governments have learned in privatizing public functions.
State and local officials look at the enormous federal deficit with concern that they will be forced to pick up the tab somewhere down the road. Despite the best financial picture in years, states and cities are increasingly turning to competition and privatization. Privatization: Lessons Learned by State and Local Governments should help other cities and states learn from the experiences of prominent privatization programs. It should also help extend those lessons to the federal level.
In an effort to balance the budget, Congress and the executive branch are looking at privatization as one of the tools to downsize government, obtain efficiency gains and cost savings, eliminate obsolete processes and redundant layers of bureaucracy, and obtain new technologies and capital management techniques. Proponents of privatization have had some difficulty making this happen in the federal government, in part due to uncertainty about what really works in privatization and an unwillingness to experiment on large federal agencies and programs. The GAO report is in part intended to reduce this uncertainty by examining what has worked at the state and local levels.
Rep. Klug asked the GAO to look at states and cities because, unlike the federal government, most states and cities must balance their budgets. These governments, particularly states, perform functions similar to those in the federal government and are widely viewed as laboratories for innovation and change. Furthermore, there has recently been a dramatic increase in privatization efforts in both states and cities, a trend which will no doubt continue given forthcoming devolution efforts such as state-run welfare programs.
The six governments the GAO visited (Georgia, Massachusetts, Michigan, New York, Virginia, and Indianapolis) tailored their privatization approaches to their particular political, economic, and labor environments. The GAO identified six lessons learned that were generally common to all six governments in implementing privatization initiatives.
1. Political Champion. Privatization can be best introduced and sustained when there is a committed political leader to champion it. In the six governments studied, a political leader (the governor or mayor) or, in one case, several leaders working in concert (state legislators and the governor) played a crucial role in introducing privatization. These leaders built internal and external support for privatization, sustained momentum for their privatization initiatives, and adjusted implementation strategies when barriers to privatization arose.
2. Implementation Structure. 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. Five of the six governments established government-wide commissions to identify privatization opportunities among government activities and to set policies to guide privatization initiatives.
3. Legislative and Resource Changes. Governments may need to enact legislative changes and/or reduce resources available to government agencies in order to encourage greater use of privatization. Georgia enacted legislation to reform the state's civil service and to reduce the operating funds of state agencies. Virginia reduced the size of the state's workforce and enacted legislation to establish an independent state council to foster privatization efforts. These actions, officials told the GAO, enhanced privatization and sent a signal to managers and employees that political leaders were serious about implementing privatization.
4. Reliable and Complete Cost Data. To assess the overall performance of activities targeted for privatization, to support informed privatization decisions, and to make these decisions easier to implement and justify to potential critics, policy makers need reliable and complete cost data on government activities. Most of the governments the GAO surveyed used estimated cost data because obtaining complete cost and performance data by activity was difficult with their accounting systems. However, Indianapolis and, more recently, Virginia used new techniques to obtain more precise and complete cost data. While the use of estimated cost data can save a government the time and cost associated with preparing more accurate data, the resulting imprecision can have negative consequences. For example, in Massachusetts, the state auditor questioned savings reported from privatized activities because an "inadequate cost analysis" was done before the privatization.
5. Workforce Transition Strategy. Governments need to develop strategies to help their workforces make the transition to private-sector employment. Such strategies might seek to involve employees in the privatization process, provide training to help prepare them for privatization, and create a safety net for displaced employees. All six of the governments developed programs or policies to address employee concerns with privatization, such as job loss and the need for retraining. Four of the governments permitted at least some employee groups to submit bids for service contracts along with private-sector bidders.
6. Monitoring and Oversight. When a government reduces its direct role in the delivery of services, it creates a need to enhance monitoring and oversight that evaluates compliance with the terms of the contract and evaluates performance in delivering services to ensure that the government's interests are fully protected. According to Indianapolis officials, their efforts to develop performance measures for activities was crucial to their monitoring efforts. However, officials from most governments said that monitoring contractors' performance was the weakest link in their privatization processes.
by Don Bumgardner, General Accounting Office
To obtain copies of the report Privatization: Lessons Learned by State and Local Government (GGD-97-48), call (202) 512-6000 or fax (301) 258-4066.