Privatization: Lessons Learned by State and Local Governments (Letter
Report, 03/14/97, GAO/GGD-97-48).
Pursuant to a congressional request, GAO provided information on lessons
learned by, and the related experiences of, state and city governments
in implementing privatization efforts. GAO did not evaluate
privatization results or independently verify the accuracy of the
information provided by the governments.
GAO noted that: (1) the six governments GAO visited tailored their
approaches to privatization to their particular political, economic, and
labor environments; (2) on the basis of GAO's literature review, the
views of a panel of privatization experts, and GAO work in the six
governments, GAO identified six lessons learned that were generally
common to all six governments in implementing privatization initiatives;
(3) privatization can be best introduced and sustained when there is a
committed political leader to champion it; (4) in the six governments, 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; 5) governments need to establish an
organizational and analytical structure to implement the privatization
effort; (6) this structure can include commissions, staff offices, and
analytical frameworks for privatization decisionmaking; (7) governments
may need to enact legislative changes and/or reduce resources available
to government agencies in order to encourage greater use of
privatization; (8) reliable and complete cost data on government
activities are needed 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; (9) most of the governments GAO surveyed used estimated cost
data because obtaining complete cost and performance data by activity
from their accounting systems was difficult; (10) 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; (11) governments need to develop strategies to
help their workforces make the transition to a private sector
environment; (12) among the six government GAO visited, four permitted
at least some employee groups to submit bids along with private sector
bidders to provide public services; (13) when a government's direct role
in the delivery of services is reduced through privatization, a need is
created for enhanced monitoring and oversight that evaluates compliance
with the terms of the privatization agreement and evaluates performance
in delivering services to ensure that the government's interests are
fully protected; and (14) however, officials from most governments said*
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-97-48
TITLE: Privatization: Lessons Learned by State and Local
Governments
DATE: 03/14/97
SUBJECT: Privatization
State programs
Cost accounting
Municipal governments
Government employees
Human resources training
Contract monitoring
Contractor performance
State governments
Service contracts
IDENTIFIER: Georgia
Massachusetts
Michigan
New York
Virginia
Indianapolis (IN)
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO report. Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved. Major **
** divisions and subdivisions of the text, such as Chapters, **
** Sections, and Appendixes, are identified by double and **
** single lines. The numbers on the right end of these lines **
** indicate the position of each of the subsections in the **
** document outline. These numbers do NOT correspond with the **
** page numbers of the printed product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
** A printed copy of this report may be obtained from the GAO **
** Document Distribution Center. For further details, please **
** send an e-mail message to: **
** **
** **
** **
** with the message 'info' in the body. **
******************************************************************
Cover
================================================================ COVER
Report to the Chairman, House Republican Task Force on Privatization
March 1997
PRIVATIZATION - LESSONS LEARNED BY
STATE AND LOCAL GOVERNMENTS
GAO/GGD-97-48
Privatization Lessons Learned
(410032)
Abbreviations
=============================================================== ABBREV
ABC - activity-based costing
CCC - (Virginia) Commonwealth Competition Council
CEO - chief executive officer
DMB - (Michigan) Department of Management and Budget
ESOP - employee stock ownership plan
GPRA - Government Performance and Results Act of 1993
GSE - government-sponsored enterprise
ITMRA - Information Technology Reform of 1996
JLARC - (Virginia) Joint Legislative Audit Review Commission
NPR - National Performance Review
OMB - Office of Management and Budget
PBO - performance based organization
PERM - (Michigan) privatize, eliminate, retain, or modify
Letter
=============================================================== LETTER
B-271979
March 14, 1997
The Honorable Scott Klug
Chairman, House Republican Task
Force on Privatization
Dear Chairman Klug:
State and local governments have increased their use of privatization
over the last several years, and Congress and the administration have
indicated an interest in having the federal government also increase
its use of privatization. In light of this interest, you asked us to
identify major lessons learned by, and the related experiences of,
state and city governments in implementing privatization efforts.
This report, which responds to your request, discusses privatization
lessons learned by, and the related experiences of, the states of
Georgia, Massachusetts, Michigan, New York, and Virginia as well as
the city of Indianapolis, Indiana. Each of these governments made
extensive use of privatization over the last several years.
BACKGROUND
------------------------------------------------------------ Letter :1
Privatization is commonly defined as any process aimed at shifting
functions and responsibilities, in whole or in part, from the
government to the private sector. Privatization can take various
forms. The most common form is contracting, which typically entails
a competition among private bidders to perform government activities.
With contracting, the government remains the financier and has
management and policy control over the type and quality of services
to be provided. Another form of privatization occurs when a
government transfers ownership of assets, commercial type
enterprises, or responsibilities to the private sector. This is
called an "asset sale," and generally the government would have no
role in the financial support, management, or oversight of a sold
asset.
Another, more recent variation of privatization is "managed
competition." Under it, the contracting process permits an agency
(e.g., the highway department) of the government to prepare a work
proposal and submit a bid to compete with private bidders (e.g.,
highway construction contractors). The government may award the
contract to the bidding agency or to a private bidder. (App. I
shows various forms of privatization and the frequency of their use
by state governments as reported by the Council of State Governments
in 1993.)
Over the past several years, state and local governments have
increased their use of various types of privatization. The 1993
Council of State Governments' survey found that state agencies
responsible for social services, transportation, mental health care,
corrections, health, and education had all increased privatization
activities since 1988. The Council reported that the survey results
indicated a trend toward expanded privatization across major state
agencies.\1 According to the International City/County Management
Association, city governments have also increased the number and
types of services contracted, such as child welfare programs, health
services, street maintenance, and data processing.\2
Recent federal laws, rules, and initiatives--especially the
Government Performance and Results Act of 1993 (GPRA);\3 the
Clinger-Cohen Act of 1996;\4 the revised handbook to Office of
Management and Budget (OMB) Circular A-76;\5 and the Clinton
Administration's major management reform initiative, the National
Performance Review (NPR)--have given new impetus to federal agencies
to operate more effectively and efficiently. One helpful approach in
reaching this goal, according to NPR, is privatization. Certain of
the cited laws and initiatives direct federal managers to review
their programs by first considering whether government should be
performing an activity, a step that can lead to privatization.
--------------------
\1 State Trends and Forecasts: Privatization, Vol. II: No. 2
(Lexington, KY: November 1993).
\2 International City/County Management Association Municipal Year
Book 1994: Alternative Service Delivery in Local Government,
1982-1992 (Washington, D.C.: 1994), p. 28.
\3 GPRA requires agencies to develop strategic plans, obtain input on
desired goals from key stakeholders, and measure and report progress
toward achieving those goals.
\4 The Clinger-Cohen Act was originally the Federal Acquisition
Reform Act of 1996 and the Information Technology Management Reform
Act (ITMRA) of 1996. It was renamed by section 808 of Public Law
104-208, enacted on September 30, 1996. ITMRA introduced new
requirements for how information technology-related projects are to
be selected and managed. These requirements closely parallel
investment practices of leading organizations.
\5 OMB Circular A-76 sets forth federal policy for using commercial
services. In March 1996, OMB revised the A-76 supplemental handbook
to enhance federal performance through competition and choice, seek
the most cost-effective means of obtaining commercial products and
support services, and provide new administrative flexibility in
agencies' decisions to retain services in-house or contract them out.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
The six governments we visited tailored their approaches to
privatization to their particular political, economic, and labor
environments.\6 On the basis of our literature review, the views of a
panel of privatization experts, and our work in the six governments,
we identified six lessons learned, as shown in figure 1, that were
generally common to all six governments in implementing privatization
initiatives.
Figure 1: Lessons Learned From
Our Review of State and Local
Privatization Efforts
(See figure in printed
edition.)
Source: GAO analysis.
(See figure in printed
edition.)
First of all, privatization can best be introduced and sustained when
there is a committed political leader to champion it. In the six
governments, 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.
Second, 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 decisionmaking. For example, five of
the six governments established governmentwide commissions to
identify privatization opportunities among government activities and
to set policies to guide privatization initiatives.
Third, governments may need to enact legislative changes and/or
reduce resources available to government agencies in order to
encourage greater use of privatization. Georgia, for example,
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 us, enhanced privatization and sent a signal
to managers and employees that political leaders were serious about
implementing privatization.
Fourth, reliable and complete cost data on government activities are
needed 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. Most of the governments we surveyed used estimated cost
data because obtaining complete cost\7 and performance data by
activity from their accounting systems was difficult. 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.
Fifth, governments need to develop strategies to help their
workforces make the transition to a private-sector environment. Such
strategies, for example, 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.
Among the six governments we visited, four permitted at least some
employee groups to submit bids along with private-sector bidders to
provide public services. All six governments developed programs or
policies to address employee concerns with privatization, such as job
loss and the need for retraining.
Finally, when a government's direct role in the delivery of services
is reduced through privatization, a need is created for enhanced
monitoring and oversight that evaluates compliance with the terms of
the privatization agreement and evaluates performance in delivering
services to ensure that the government's interests are fully
protected. For example, Indianapolis officials said their efforts to
develop performance measures for activities enhanced their monitoring
efforts. However, officials from most governments said that
monitoring contractors' performance was the weakest link in their
privatization processes.
--------------------
\6 The predominant form of privatization that occurred in these six
governments was contracting for goods and services, followed by asset
sales and managed competitions.
\7 Complete costs are generally defined as the fully allocated costs
of an activity. These include all direct and indirect personnel
costs, as well as the costs of materials and supplies, equipment,
capital depreciation, rent, maintenance and repairs, utilities,
insurance, personnel travel, operations overhead, and general and
administrative overhead.
OBJECTIVE, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :3
Our objective was to ascertain the lessons learned by, and the
related experiences of, state and local governments in privatizing
government activities. To meet this objective, we went through a
multistep process to identify the governments to survey, developed an
information collection framework refined with the assistance of a
panel of experts, and then contacted various officials from the
selected governments to obtain information and insights on their
privatization experiences.
To develop a list of potential states and cities to survey, we first
surveyed 50 individuals whom we identified as knowledgeable on
privatization topics from congressional testimony, studies, and other
published literature on the privatization of government activities.
We asked the 50 individuals to name states and cities that had
undertaken notable privatization efforts, and 33 of the individuals
responded. From their responses, we compiled a list of 10 state
governments and 10 city governments that the respondents had named
most often as undertaking notable privatization efforts.
As agreed with your office, we focused the rest of our selection
process on state governments rather than city governments. We
focused on states because data indicated that states were generally
involved in privatizing a wider variety of activities than were
cities, and because lessons learned by state governments would be
more likely than local government experiences to be instructive in
the federal context. However, as agreed with your office, we
included the city of Indianapolis in our survey because it was cited
more frequently than any other city or state named by our experts.
A panel of 8 privatization experts reviewed our list of state
governments and agreed that the 10 state governments and Indianapolis
were the most appropriate candidates to survey. The panel members,
most of whom were drawn from among the 33 respondents to our survey,
are listed in appendix II. They were selected on the basis of their
practical knowledge of privatization or their scholarly knowledge on
the issue of privatization.
We contacted the 10 state governments to update privatization data
that were reported on them and other states in a 1993 Council of
State Governments report. On the basis of information in the 1993
report and the updated data from the 10 states, we selected Georgia,
Massachusetts, Michigan, New York, and Virginia for visits and
further research. We chose these states because they had the most
extensive privatization efforts involving activities that correlate
with those performed at the federal level. Their privatization
efforts, and those of Indianapolis, covered a variety of
mission-related activities, such as prison health care, delinquent
tax collection, and vehicle maintenance.
Before meeting with various officials from the six governments, we
developed from the relevant literature a list of key privatization
factors that our panel of eight experts agreed were critical or
important when considering whether to privatize public functions.
These factors gave us a framework for collecting information on
privatization experiences. We pretested this framework and data
collection approach and made minor adjustments.
Using our framework of privatization factors as a guide, we
interviewed, and obtained documents from, 117 officials in the 6
sites that we visited. These included policymakers (such as cabinet
officers and directors of privatization offices), agency managers,
and labor representatives who were involved with or knowledgeable
about the privatization efforts of the six governments. To obtain an
independent perspective, we interviewed audit and legislative
oversight officials who had knowledge of their governments'
privatization efforts. We obtained from these various officials
information on such topics as (1) the reasons for using
privatization; (2) approaches taken to introduce, implement, and
manage privatization efforts; and (3) barriers to privatization and
strategies employed to overcome the barriers. In our interviews and
document reviews, we focused attention on privatization efforts that
occurred since 1991, were reported to have had high cost savings,
were reported to have resulted in continued or improved service, and
involved activities similar to those performed by the federal
government.
In addition to our interview data, we reviewed such state, city, and
agency documents as commission reports, planning documents, policy
and procedural guidance, budget documents, legislative analyses,
agency performance reports, audit reports, and pertinent legislation.
From our analysis of the information obtained, we distilled a list of
major lessons learned in privatizing state and local government
activities. The list was not intended to be an exhaustive
compilation of all possible or actual lessons learned or experiences
in privatizing government activities.
Because our objective was to identify lessons learned by the six
governments we visited, we relied on their own evaluations and
assessment of their experiences. Using information they gave us, we
summarized a number of the six governments' privatization projects
that they selected (see app. III). We did not evaluate
privatization results or independently verify the accuracy of the
information provided by the governments. Because this report uses a
wide variety of privatization terms, we also prepared a privatization
glossary so that the types of privatization we refer to in this
report can be understood in the context of the range of privatization
efforts that can occur. The glossary appears at the end of the
report.
We did our work at the selected states' capitals, Indianapolis, and
Washington, D.C., from April 1996 through December 1996 in accordance
with generally accepted government auditing standards. In February
1997, we provided the chief executives of the six governments with a
draft of this report for review and comment. These governments
concurred with the message of our report and provided clarifying
comments, which we have included where appropriate.
PRIVATIZATION REQUIRES A
POLITICAL CHAMPION
------------------------------------------------------------ Letter :4
According to our panel of experts and officials of the six
governments we surveyed, privatization can best be introduced and
sustained when a political leader champions it. The panel and
officials said that, in introducing and sustaining privatization
initiatives, political leaders should anticipate a need to develop
and communicate a privatization philosophy and to garner public,
business, and political support.
According to the government officials that we interviewed, the chief
executive (the governor or mayor) was the political champion for the
most recent privatization efforts in Georgia, Massachusetts,
Michigan, New York, and Indianapolis. In Virginia, key state
legislators and the Governor worked together to introduce new
privatization initiatives. The political champions faced a variety
of political and economic environments. In some cases, the political
leaders introduced and built support for privatization within
government workforces that were unionized and, in other cases, within
workforces that were not unionized. Similarly, some political
leaders introduced and built support for privatization during times
when their respective governments were experiencing fiscal problems,
and other leaders did so during times when their governments were
stable financially. For example, the Governor of Massachusetts
introduced privatization during a period when the state, which had a
heavily unionized workforce, was experiencing a severe budget crisis.
On the other hand, Virginia's leaders introduced privatization into a
largely nonunionized workforce and saw it as an approach that could
help the state government more effectively deliver services and
maintain its sound fiscal condition.
While forceful leadership was reported to be an important ingredient
in the success of privatization initiatives by the six governments,
they also came to recognize a need for flexibility. When
implementing privatization, political leaders found that they could
encounter barriers that might require them to adjust their
privatization strategy to maintain support. For example, when
Indianapolis's initiative encountered early opposition from employee
unions, the Mayor began formally involving the unions in the
privatization process. In doing so, he moved from an approach that
solely emphasized competing public activities among private-sector
firms to one that included using managed competition, which gave city
employees the chance to compete with the private sector. This change
in approach, according to city and union officials, won employee
support and allowed the privatization initiative to proceed.
According to Indianapolis officials, competition in the marketplace
rather than privatization per se produces the most value for the
taxpayer. This view was shared by most state officials we spoke
with. A top Indianapolis official said that the primary advantages
of managed competition were reduced costs, improved services,
improved employee morale, and increased innovation. Massachusetts,
New York, and Virginia now permit government agencies to bid on
certain contracts that are open to the private sector.
IMPLEMENTATION STRUCTURE NEEDED
TO GUIDE PRIVATIZATION EFFORTS
------------------------------------------------------------ Letter :5
According to officials in the six governments, once political leaders
introduce privatization, they need to establish a formal structure to
ensure effective implementation. Such a structure can include a
governmentwide commission to identify privatization opportunities and
set privatization policy, a staff office that can support agencies in
their privatization efforts and oversee implementation, and a
framework for making privatization decisions.
Five of the six governments used governmentwide commissions to
promote privatization, identify privatization opportunities, and
establish policies and procedures to guide privatization initiatives.
Massachusetts did not use a commission; instead, cabinet secretaries
selected the government activities to privatize. The commissions
were created either by the chief executive (Georgia, Michigan, New
York, and Indianapolis) or jointly by the state legislature and chief
executive (Virginia).
The memberships of the four state commissions included
representatives of both government and the private sector.
Indianapolis's commission was composed of private sector
representatives, assisted by both private and public-sector
employees. Although officials in the five governments saw
commissions as useful, a former senior official from Michigan who
studied his and other states' commissions\8 cautioned that a
commission's effectiveness can be limited if it does not have a clear
mission and a membership that reflects a balance between the public
and private sectors.
Five of the six governments established offices or support staffs,
which were attached to the privatization commissions, to provide
guidance and technical assistance to agencies in the day-to-day
implementation of privatization.\9 New York's office, the Empire
State Development Corporation, was unique among the supporting
organizations in that it was a government corporation. Massachusetts
did not establish a separate support office. Instead, individual
departments initially used internal teams to design and implement
specific initiatives. Later the Executive Office for Administration
and Finance provided guidance to departments.
These support units, according to officials and documents we
reviewed, typically used an analytical framework to evaluate the
costs and performance of government activities and the risks and
benefits of privatizing a particular activity. These analytical
frameworks typically included a step-by-step decisionmaking process.
Having a framework that provides a consistent approach for analyzing
government activities was considered highly desirable by key
officials in all six governments. Many of the frameworks established
by the six governments shared common elements such as providing
criteria for selecting activities to privatize, an inventory of
privatization candidates, cost comparison and evaluation methods, and
procedures for monitoring the performance of privatized activities.
The frameworks used by Michigan, Virginia, and Indianapolis are
described in more detail in appendix IV.
--------------------
\8 John M. Kost, New Approaches to Public Management: The Case of
Michigan (Washington, D.C.: The Brookings Institution, July 1996).
\9 Michigan established a Privatization Division as part of its
Department of Management and Budget in 1991, before the governor
established a public-private partnership commission in 1992. The
Privatization Division provided staff support to the commission
before the commission was abolished in late 1992.
LEGISLATIVE AND/OR RESOURCE
CHANGES MAY BE NEEDED TO
PROMOTE THE USE OF
PRIVATIZATION
------------------------------------------------------------ Letter :6
According to some officials, governments may need to enact
legislative and/or resource changes to encourage or facilitate the
use of privatization. These changes, the officials said, are
necessary to signal to managers and employees that the move to
privatization is serious and not a passing fad.
All five states and the city of Indianapolis used some combination of
legislative changes and resource cuts as part of their privatization
initiatives. For example, Virginia enacted the Virginia Government
Competition Act of 1995, which created a permanent independent state
council to promote privatization. The state also initiated an effort
to reduce its workforce by 15 percent over 3 years. According to
state officials, some departments, such as transportation, began
facing work backlogs following this reduction. To ease this backlog,
Virginia looked to the private sector to perform the work. Virginia
officials said enabling legislation and staffing cuts together
signaled the seriousness of Virginia's effort to increase the use of
privatization and managed competition.
Georgia's legislature, with the Governor's support, passed civil
service reform legislation that made it easier for the state to hire
and fire employees. Georgia officials told us that this measure
facilitated the use of privatization by state managers. In addition,
the Governor instituted a budget redirection program in 1996 that
required all agencies to prioritize their current programs and
activities and identify those programs that could be eliminated or
streamlined to the extent that the agencies would be able to make at
least 5 percent of their total state-funded budgets available to be
redirected to higher priorities. Each agency was asked to recommend
how the 5 percent would be redirected to existing programs or to new
programs within the agency. According to the Executive Director of
Georgia's Commission on Privatization, the Governor, as part of his
budget development process, reviewed these recommended redirections,
as well as other statewide priorities, and shifted those identified
funds within and among the agencies as determined to be most cost
beneficial. This budget redirection initiative, according to the
Executive Director, will continue for the remainder of the Governor's
term, which ends in early 1998. According to a Georgia Privatization
Commission official, agencies were given a 6-month notice that their
budgets would be cut. State officials said these cuts required
managers to rethink how they could perform the same activities for a
lower cost. This led to contracting out more activities, such as
vehicle maintenance and management services for a war veterans
facility.
In Indianapolis, the Mayor eliminated selected middle-level
management positions. According to the remaining supervisors with
whom we spoke, this action sent a clear message that the city's
privatization program was serious and that the city workforce would
have to work differently and use new methods if it were to
successfully compete to retain city work. Union officials said that
these selective management cuts helped to build union support for the
competition initiatives.
RELIABLE AND COMPLETE COST
INFORMATION NEEDED TO SUPPORT
PRIVATIZATION
------------------------------------------------------------ Letter :7
According to officials in the six governments and our panel of
experts, reliable and complete cost data on government activities are
needed to ensure a sound competitive process and to assess overall
performance. Reliable and complete data, they said, simplify
privatization decisions and make these decisions easier to implement
and justify to potential critics.
All six governments developed information on the cost of government
activities. Four governments made "best estimates" of a service's or
function's cost because obtaining complete cost and performance data
by activity from their accounting systems was difficult.
Indianapolis and Virginia attempted to go beyond best estimates by
making extensive efforts to identify all costs associated with
performing a government function or service.
Indianapolis was nationally recognized for using an activity-based
costing (ABC) approach. Indianapolis used this approach to help
analysts derive the complete costs of providing a service or
performing a function. Following ABC procedures, analysts were to
identify all activities associated with producing a service or
function and to evaluate the resources these activities consumed to
achieve various levels of performance.
Virginia introduced a comprehensive cost analysis method based on the
federal government's A-76 program and the state's contracting
experiences to try to capture the complete costs associated with
performing a service or function. Virginia reported that in fiscal
year 1996 it was able to identify complete costs for 45 percent of
the government activities identified as privatization candidates.
Since 1995, Virginia has piloted an ABC approach in a number of
agencies as a possible replacement for its existing analysis method.
According to officials in Indianapolis and Virginia, obtaining more
complete data was more time consuming but enhanced their governments'
ability to identify cost savings and evaluate bid proposals.
Indianapolis officials told us they were able to obtain the
information they needed to do ABC analyses from their current
accounting system even though it did not provide cost data by
activity. Officials used a system that took cost data (e.g.,
salaries, overhead) associated with a function (e.g., street
maintenance) and assigned it for cost analysis purposes to activities
(e.g., filling potholes, cleaning streets, repairing curbs). The
city was assisted in this exercise by a private-sector firm with
cost-analysis expertise.
Indianapolis and Virginia officials also said that working before
privatization occurs with private firms with expertise in an activity
slated for privatization was very beneficial in getting a better
understanding of the cost and performance issues likely to be
encountered during a privatization. For example, when Virginia's
Department of Corrections planned its prison privatization project,
the department publicly discussed its plans with private firms to
better understand the issues that needed to be addressed and resolved
in order to successfully privatize prisons. According to the
Director of Virginia's Commonwealth Competition Council, after the
department consulted with private firms, it better understood what
the needs of the private sector were in terms of writing specific
statements of work and better realized the potential cost-benefit to
the state of the proposed prison privatization.
Attaining precision in cost data has tradeoffs, according to a number
of government officials that we interviewed. In general, while cost
estimates can be made more quickly and at less cost than more precise
approaches such as ABC, their use also may have negative
consequences. For example, Massachusetts, according to senior state
administration and audit officials, used estimates because complete
cost data on state activities were difficult to obtain from the
state's accounting system. However, reports by the Massachusetts
State Auditor called into question the reported savings of some
privatization activities, citing inadequate cost analysis before
privatization as well as a lack of substantiating data on the
benefits claimed following privatization.
STRATEGIES NEEDED TO MANAGE
WORKFORCE TRANSITION
------------------------------------------------------------ Letter :8
According to most officials in the six governments and our expert
panel, moving governments into privatization requires (1) employee
involvement in the privatization process, (2) training to provide
skills for either competing against the private sector or monitoring
contractor performance, and (3) creating a safety net for displaced
employees. Most officials said these strategies were necessary to
mitigate employees' concerns with, and to bolster their support for,
the privatization changes as well as to aid in the transition to a
competitive environment.
All six governments developed workforce transition strategies to
complement their privatization efforts. These strategies varied
depending on local political factors and the relationship between the
governments' top leaders and employee groups.
EMPLOYEE INVOLVEMENT
---------------------------------------------------------- Letter :8.1
In the six governments, management of employee involvement in the
privatizations was not only important to initial efforts but also set
the tone for future privatizations. For example, Massachusetts
officials said that their initial failure to involve state employee
unions in their privatization plans led the unions to contest and
block these plans. State officials said that following this initial
confrontation, Massachusetts sought to improve labor-management
cooperation by allowing unions to compete for several highway
maintenance contracts. Nevertheless, according to state officials,
union and state legislature concerns that employee protections were
not being observed under privatization contributed to the passage of
legislation in 1993, over the Governor's veto, that made
privatization more difficult.\10 For example, the law required
private firms that win state contracts to offer jobs to qualified
state employees who were terminated because of the contracts and to
compensate them at a rate comparable to their government pay and
benefits. The Massachusetts State Auditor said that in the 2 years
before the law, 6 Massachusetts departments privatized approximately
20 services, but only 2 privatizations occurred between the law's
enactment and December 1996.
According to privatization experts, Indianapolis presents a
comprehensive example of how a government benefited by engaging
employees and their unions in the privatization process.
Indianapolis's management employees were involved in the
privatization process when it began but union employees were not
formally involved. Soon after introducing privatization, the Mayor
moved to address employee concerns raised by unions about not being
formally involved in the city's privatization efforts. According to
city and union officials, the city used a multifaceted approach to
effectively address the unions' concerns. This approach included the
use of new management tools (such as ABC), training in use of the
tools, a cooperative union-management effort, and permitting and
enabling the workforce to compete against private vendors. This
cooperative effort, we were told, was built on (1) empowering
frontline workers to make decisions and act on their own initiative,
(2) providing training and pay incentives for performance, (3)
fostering a partnership with unions, and (4) establishing an employee
safety net for displaced workers.
--------------------
\10 Commonwealth of Massachusetts Privatization Law, Chapter 296 of
the Acts of 1993.
TRAINING
---------------------------------------------------------- Letter :8.2
The majority of the top government officials and experts whom we
surveyed said that having qualified employees with specific skills
related to privatization was important to successfully implementing
privatization. However, some officials said the need for new skills
should not impede privatization since the skills could also be
contracted for if not available within the government workforce.
Officials from the states and Indianapolis pointed out that to move
into a more competitive environment, their governments had to improve
the skills of their employees so they could (1) participate in
managed competition and/or (2) prepare for and monitor contracting
efforts. Public and union officials identified the following as
helpful to employees involved in privatization: (1) knowledge of the
existing government program, (2) ability to analyze work flows and
processes, (3) ability to develop methods to eliminate
inefficiencies, (4) knowledge of cost-estimation techniques, (5)
ability to apply methods of financial analysis, (6) ability to
determine and write concise and specific contract requirements to
delineate exactly what the contractor is responsible for, and (7)
knowledge of methods for monitoring the performance of contractors.
SAFETY NET
---------------------------------------------------------- Letter :8.3
Providing a safety net for displaced workers was a component of the
six governments' workforce transition strategies. These strategies
included offering workers early retirement, severance pay, or a
buyout, or, if the activity was taken over by a private firm,
ensuring that employees' concerns about compensation issues involved
in this transition were addressed.\11 Other strategies included
placing workers in other government units if their jobs were
eliminated and offering job transition assistance, such as career
planning and training, to workers moving to the private sector.
According to Virginia officials, for example, employees' concerns
were one of the biggest barriers in that state's privatization
efforts. The Governor directed state officials to examine and
recommend measures to provide the opportunity for departing state
workers to compete in the private sector. According to state
officials and employee representatives, this led to the passage of
the Workforce Transition Act, which mitigated some of the employees'
concerns with privatization, such as job loss, training, and
benefits.
In New York, according to state officials, new collective bargaining
agreements were negotiated that allowed the state to lay off affected
employees, provided they were accorded certain considerations such as
60 days written notice of intended separation, placement on a
redeployment list, and an offer of redeployment if a fillable vacancy
became available elsewhere in state government. If redeployment was
not possible and the employee had no displacement rights under the
state's Civil Service Law, the employee had the option of receiving a
financial stipend for an identified retraining or educational
opportunity, severance pay, or preferential consideration for
employment with the contractor. Redeployment would ensure that the
affected employees maintained their salary and titles comparable to
former positions.
--------------------
\11 To the extent that resources are provided by a government for
services such as severance pay or training, the net financial savings
resulting from the privatization may be diminished.
ENHANCED MONITORING AND
OVERSIGHT OF PERFORMANCE IS
NEEDED WHEN PRIVATIZATION IS
USED
------------------------------------------------------------ Letter :9
According to officials with the six governments, monitoring and
oversight that not only evaluates compliance with the terms of the
privatization agreement but also evaluates a private firm's
performance in delivering services is needed when a government's
direct role in the delivery of services is reduced through
privatization. This is necessary to help ensure that the
government's interests are protected and that accountability of both
the government and the private party is maintained.
MONITORING PRIVATIZATION
---------------------------------------------------------- Letter :9.1
Officials in all six governments told us that monitoring of
privatized activities is critical. According to experts, such
monitoring consists of contract auditing and technical or performance
monitoring. Contract auditing aims to ensure that contractors are
paid as mandated by the contract and that all contractual obligations
are fulfilled. Contract auditing also serves as an independent check
on contractors and on the government's contract managers. Technical
and/or performance monitoring aims to ensure that contractor-provided
services are meeting contract specifications for quantity and
quality.
The majority of the state and city officials we interviewed said that
performance monitoring is more difficult than contract auditing and
that their governments faced a much greater need to develop employee
skills for performance monitoring than for contract auditing.
Officials at all of the governments we visited said that one of the
most important--and often most difficult--tasks in privatizing
government activities was writing specific work statements for the
privatization contracts. Officials noted that when contract
requirements were vague, contractor performance was not easily
evaluated, even if the government used sufficient and effective
monitoring techniques. Given the importance of being able to specify
work requirements and outputs, most of the six governments reported
that they took steps to mitigate their risk. For example, Georgia
and Virginia's guidance for evaluating whether a service should be
considered for privatization focused on the ease with which the
service's objectives could be defined and measured for monitoring
purposes. Indianapolis officials said that its use of performance
measures enhanced the writing of contract terms because they focused
at the activity level (e.g., air and water quality assurance) and
measured each activity's outputs (e.g., water samples collected and
evaluated).
Officials from all but Indianapolis said that performance monitoring
was their weakest link in the privatization process. Officials from
all the governments said that they were working to enhance their
employees' skills so that they could undertake more sophisticated
monitoring. For example, officials said that monitoring the
performance of complex activities, such as wastewater treatment or
the medical care of prisoners, can require analytical skills that go
beyond compliance checklist-type reviews. Monitoring performance,
they said, sometimes required new or innovative approaches. For
example, Virginia used a newly designed approach to measure the
performance of its two contractor-operated child support enforcement
offices. Because the offices were newly created, Virginia could not
compare pre- and post-privatization costs. Instead, Virginia
established quarterly and semiannual reporting requirements in the
contract and used sophisticated statistical measures to compare the
performance of its child support offices with a hypothetical average
office with similar characteristics, such as size and demographics.
In addition to having performance measures, the new system required
new data collection skills for state employees, such as doing
customer satisfaction surveys.
OVERSIGHT OF PRIVATIZATION
---------------------------------------------------------- Letter :9.2
Officials in all six jurisdictions and our expert panel told us that
independent oversight of privatization efforts was critical.
Independent oversight by an office that is outside the control of the
unit responsible for operating the activity provides a more objective
and unbiased evaluation of privatized activities than is possible by
senior government managers or program-level monitors. Virginia's
Auditor of Public Accounts, for example, said that independent
oversight can focus on such areas as automatic contract extensions to
ensure that costs do not escalate without limit and that the program
manager attempts to maximize competition in the award of contracts.
Each of the six governments had independent oversight functions, and
these functions played different roles in the privatization process
and provided varying degrees of oversight coverage. For example,
beginning in December 1993, the Massachusetts State Auditor had
formal review and approval powers related to proposed privatizations
for activities costing over $100,000. Virginia's legislative and
executive branches, according to officials of both branches, provided
extensive oversight. In the executive branch, Virginia had an agency
network of internal auditors, coordinated by the Department of the
State Internal Auditor, to review privatized activities within their
respective agencies. Virginia's legislature had the Joint
Legislative Audit Review Commission (JLARC) and the Auditor of Public
Accounts. JLARC's actions on a proposed privatization demonstrate
the value of independent oversight. In 1996, JLARC raised concerns
about a proposed computer systems privatization that was begun before
the state government established its current privatization process.
As a result of these concerns, the General Assembly subsequently
delayed the proposed privatization and directed JLARC to conduct a
more complete study of the project.
---------------------------------------------------------- Letter :9.3
We are sending copies of this report to the Chairman and Ranking
Minority Member of the Senate Committee on Governmental Affairs and
the House Committee on Government Reform and Oversight; the Director,
Office of Management and Budget; the Director, Office of Personnel
Management; and other interested parties. Copies will be made to
others upon request.
The major contributors to this report are listed in appendix V.
Please contact me on (202) 512-9039 if you have any questions.
Sincerely yours,
Michael Brostek
Associate Director, Federal Management
and Workforce Issues
FORMS OF PRIVATIZATION AND
FREQUENCY OF USE IN STATE PROGRAMS
AND SERVICES
=========================================================== Appendix I
Agencies' frequency of use
-----------------------------------------------------------------------------------------------------
Administration
/General Mental Health/ Social Average by form
Forms of privatization Services Corrections Education Health Retardation Services Transportation of privatization
---------------------------- -------------- ------------ ----------- ---------- -------------- ------------ ---------------- ----------------
Contracting out 91.67% 92.09% 81.29% 69.57% 64.67% 71.32% 83.51% 78.06%
Grants 0.56 1.19 8.63 14.13 15.63 12.48 4.50 8.48
Vouchers 3.06 0.40 0.72 4.89 5.35 9.31 0.43 4.11
Volunteerism 1.39 3.56 1.44 3.26 3.64 2.98 5.35 3.32
Public-private partnerships 1.67 2.37 5.04 5.43 3.85 2.23 2.57 2.95
Private donation 0.56 0.40 0.72 .00 2.57 0.19 1.28 0.96
Franchise 0.28 .00 1.44 1.09 1.71 0.37 1.50 0.91
Service shedding 0.28 .00 0.72 1.09 0.86 0.74 0.43 0.58
Deregulation .00 .00 .00 0.54 1.50 0.37 0.21 0.46
Asset sales 0.56 .00 .00 .00 0.21 .00 0.21 0.17
-----------------------------------------------------------------------------------------------------------------------------------------------------
Source: State Trends and Forecasts: Privatization, Council of State
Governments, 1993.
EXPERT PANELISTS ON GAO'S REVIEW
OF STATE AND LOCAL PRIVATIZATION
EFFORTS\1
========================================================== Appendix II
Keon S. Chi, Director, Center for State Trends and Innovations,
Council of State Governments. Author, State Trends and Forecasts:
Privatization, 1993, and Privatization and Contracting Out for State
Services: A Guide, 1988, The Council of State Governments.
John D. Donahue, Professor, John F. Kennedy School of Government,
Harvard University. Author, The Privatization Decision: Public
Ends, Private Means, 1989.
William D. Eggers, Director of Privatization and Government Reform,
Reason Foundation. Coauthor, Revolution at the Roots: Making Our
Government Smaller, Better, and Closer to Home, 1995.
David Seader, Senior Manager, Privatization and Infrastructure Group,
Price Waterhouse. Former Executive Director, Privatization Council,
Inc., a nonprofit educational organization devoted to developing and
expanding the concept of privatization and public-private
partnerships.
Dennis Houlihan, Labor Economist, Department of Research and
Collective Bargaining Services, American Federation of State, County,
and Municipal Employees.
Ronald W. Jensen, Private Consultant. Former Public Works Director,
Phoenix, Arizona. Developed city program on privatization;
specifically initiated the innovative process of various city
operations competitively bidding against private contractors.
Linda Morrison, Private Consultant. Former Director of the Mayor's
Competitive Contracting Office, Philadelphia, Pennsylvania, and
former competitive contracting advisor to the State of New Jersey.
Larry Gupton, Deputy Auditor, State of Colorado. Coauthor of
Privatization in Colorado State Government: Performance Audit, 1989,
and the follow-up performance audit report, 1993.
--------------------
\1 The panel helped us identify governments to visit and validated
our framework of privatization factors, which we used as a guide in
data collection.
OVERVIEW OF RECENT PRIVATIZATION
EFFORTS IN THE SIX GOVERNMENTS
========================================================= Appendix III
This appendix provides an overview of selected recent privatization
efforts in the six governments we surveyed. Officials from the six
governments provided the following key initial actions, primary
reasons for governmentwide privatization efforts, and an overview of
select projects.
Overview of governments' select projects
-----------------------------------------------------------------------------------------
Type of
Primary reasons for privatization
governmentwide privatization Project Primary reason \a Reported results\b
Government Key initial action efforts -------------- ------------------ ------------- --------------------------------------
Georgia Governor created commission on Limit growth of government. Milledgeville Privatization Outsourcing Estimated cost savings of 57 percent
privatization of government services War Veterans Commission for 5 years.
in 1995. Reduce scope of government. Home analysis showed Staff are more responsive to family
that costs were concerns and inquiries.
Improve government much higher than Quality of life enhancements
efficiency. in six benchmark include: cleaner home, better food,
states. and cable television.
State Not a core Outsourcing Estimated cost savings of $300,000
maintenance function of state. per year. Estimated savings represent
of autos a projected 40 percent savings over
government provision of service.
Lake Lanier Not a core Outsourcing Projected revenue of $300 million to
Islands function of state. $350 million over the 50-year
recreational contract.
area
Massachusetts Governor called on department managers Reduce state budget Prison health Reduce prison Outsourcing Estimated annual cost savings of $8
to privatize functions and services in deficit. care health care costs million over 5-year contract.
1991. and improve Expenses for state employee benefits
Reduce costs of government medical care and have been reduced.
services. access to care. State shielded from liability
because single vendor has become
Improve quality of responsible for all inmate patient
government services. care and held responsible for all
malpractice awards and legal
costs.
Ten of 20 state prisons now meet
National Commission on Correctional
Health Care accreditation standards
(previously none of the prisons met
these standards).
Trips by prisoners to outside
hospitals have been reduced from over
100 every day to 100 per week.
This has reduced personnel and
transportation costs.
Essex County Improve quality of Outsourcing/ Dollar savings from the first year
highway highway managed of the contract were $2 million in
maintenance maintenance. competition direct operating costs, $1 million in
reallocated equipment, and $1.5
million in
reallocated personnel.
Maintenance overtime costs reduced
by $252,000 in the first year of the
contract.
Highway maintenance services have
improved and include new bridge
washing service, increased mowing of
grass, roadway sweepings, and
guardrail maintenance.
Social Apply private- Outsourcing Overall increase in collections of
services sector technology $87 million during
revenue to increase first 2 years of contract (federal
management revenue fiscal years 1994 and
operations collections. 1995).
Before privatization an estimated
$49 million to $70 million was not
collected annually.
Agency has increased its annual
level of revenue generation by 40
percent and reduced its per-dollar
cost of revenue collection by 30
percent.
Additional revenue has been used to
boost the agency's preventive
services, adoption, foster care
and other child welfare initiatives.
Michigan Governor created public-private Reduce the state's budget Workers State determined Asset sale The state gained $261 million from
partnership deficit. Compensation that the fund the sale of the Accident Fund.
commission in 1992. Accident Fund should no longer The private Accident Fund Company
Shrink size and scope of be a government has reduced rates by an average of 9.2
government. function. percent in the first year of
operations.
Quality service at competitive
rates.
Removes potential for political
interference in the ratemaking
process.
The private Accident Fund Company
has introduced new products for
participants, such as group dividend
programs which offer the potential for
rebates on insurance premiums if the
overall loss ratio
for the group remains low.
Physical Cost savings. Outsourcing Estimated savings of approximately
security at $1.2 million over fiscal year 1996
military costs from contracting security
facilities programs at Camp Grayling, Alpena
Combat Center,
and Battle Creek Air National Guard
Base.
Estimated cost savings represent a
savings of 70
percent over fiscal year 1996 costs.
Allows the state's Department of
Military Affairs to meet federal
security requirements at all three
sites within
the limitations of available federal
funding.
Camp Grayling increased level of
security with enhanced monitoring
coverage.
Sales of Excess, unused Asset sale State gained $407,900 from the sale
armories armories that of the St. Joseph and Benton Harbor
resulted from armories.
national defense Sale proceeds from armory asset
downsizing were no sales deposited in Michigan National
longer needed. Guard Armory Construction Fund to be
used for acquisition and construction
of facilities and other purposes,
thereby offsetting future1 general
fund expenditures.
State no longer responsible for
oversight of vacant facilities.
New York Governor established an advisory Reduce size and scope of Vista Hotel Owning/operating Asset sale Hotel was sold in 1995 by the New
commission on privatization and a government. hotel York-New Jersey Port Authority for
research council on privatization in was not $141.5 million.
1995. Reduce cost and improve the considered
quality of government to be a
services. governmental
function.
Tax form To enhance cost Outsourcing Estimated annual savings of $7.5
processing savings and the million.
efficiency and
effectiveness of
processing tax
returns.
Economic Reduce costs and Outsourcing Approximately $3 million estimated
development improve services. annual cost savings.
and housing
loan portfolio
servicing
Virginia Key legislators and governor created a Improve service and Delinquent tax Increase Outsourcing Estimated $6.8 million in
competition council in 1995. productivity of government collection collections. collections in first year.
services. Improved collection of previously
uncollectable accounts.
Reduce cost of operations.
Education Not considered to Asset sale State gained $62 million from sale
loan be a government of loan portfolio and building
authority function. facilities that housed loan authority
staff operations.
Child support Need to respond to Outsourcing Administrative cost of private
enforcement increased caseload office to collect $1 dollar
and take advantage support was 60 percent lower than
of private sector public office
technology. during an 18-month period.
Improved customer service
satisfaction.
Increased number of clients served.
Indianapolis Mayor created a private-sector Reduce size and scope of Wastewater Cost savings. Outsourcing Estimated $65 million cost savings
advisory group in 1992. government. treatment between 1994 and 1998.
Estimated cost savings represent a
Increase the quality and 42 percent savings over government
decrease the cost of provision of service.
services. Increased capacity to treat effluent
with fewer staff.
Improved effluent quality.
Better maintenance program resulted
in improved equipment reliability.
Combined sewer overflows reduced by
50 percent.
Airport Promote economic Outsourcing Estimated $105 million in cost
management development. savings or new revenues between 1995
and 2004.
Estimated cost savings represent a
28-percent savings over government
provision of service.
16.5 percent reduction in the cost
per enplaned passenger from 1994 to
1995.
22 percent reduction in airline
landing fees from 1994 to 1995.
Increased retail selection and
quality for passengers.
Street Cost savings. Outsourcing/ Estimated $700,000 in cost savings
maintenance managed between 1992 and 1996.
competition Estimated cost savings represented a
30-percent savings over previous
costs.
Increased chuckhole crew daily
productivity by 68 percent.
A 200-percent annual average
increase in lane miles repaired
(cracks sealed) between 1993 and 1996
compared to 1993 baseline.
Audio-visual/ Cost savings. Outsourcing Estimated $1.5 million in cost
microfilm savings between 1992 and 1995.
services Estimated cost savings represented a
54-percent
savings over government provision of
service.
Eliminated prior 3-year backlog of
service requests.
Consistent achievement of turnaround
requirements.
Improved service to citizens using
microfilm archives.
Indianapolis Maintenance of Cost savings. Managed Estimated $4.2 million in cost
(continued) city vehicles competition savings between 1995 and 1997.
Estimated cost savings represent a
21-percent savings over government
provision of service.
Fewer labor grievances in first year
of contract compared to prior 1-year
period.
Cost of workers compensation claims
decreased by two-thirds since 1994.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The six governments selected the projects to illustrate the
range of activities that they have undertaken in their recent
privatization efforts.
\a See the end of this report for our glossary of privatization
terms.
\b All results are as reported by the governments. We did not verify
these results.
Sources: Georgia, Massachusetts, Michigan, New York, Virginia, and
city of Indianapolis government officials.
ANALYTICAL FRAMEWORKS USED BY
INDIANAPOLIS, MICHIGAN, AND
VIRGINIA
========================================================== Appendix IV
Most of the state and local government officials and experts we
surveyed said that having a framework or process was key to
implementing privatization because it provided a consistent approach
for analyzing government activities. All six governments used some
form of analytical framework to guide their decisionmaking. Some
said that the repeated use of such a framework shortened the learning
time in analyzing government functions.
These analytical frameworks typically included a step-by-step
decisionmaking process. Many of the frameworks established by the
six governments shared common elements, such as providing criteria
for selecting activities to privatize, an inventory of privatization
candidates, cost comparison and evaluation methods, and procedures
for monitoring the performance of privatized activities.
Indianapolis, Michigan, and Virginia had the most formalized
frameworks and they are described below.
THE INDIANAPOLIS COSTING AND
COMPETITIVENESS MODEL
------------------------------------------------------ Appendix IV:0.1
After introducing competition into government in 1992, Indianapolis
included city employees through their union in the process for
competitive bidding for contracts to deliver city services. Once a
number of activities had been identified as candidates for
competition, city officials developed a three-phase approach to
implementing a managed competition process. The three phases were
(1) determining the costs of government services using activity-based
costing, (2) openly and competitively bidding for functions or
services and contracting with either a city agency or private-sector
firm to provide those functions or services, and (3) evaluating the
level of performance of functions and services delivered using a
system of citizen and customer satisfaction surveys and measures of
cost and performance. The costing and competitiveness model is shown
in figure IV.1 and worked as follows.
First, city officials, after a discussion with the affected unions,
decided whether or not to open competitive bidding for an activity.
If the decision was to compete, the city then issued a request for
proposals. City officials provided a bid package to the union at the
same time as other potential bidders.
Second, to ensure that city employees were equipped to participate in
the process, the city provided managers and union members with the
analytical training they needed to spot inefficiencies, and with the
knowledge needed to analyze and reduce costs. The city also provided
consultants to help city employees prepare their proposals.
Third, a union-management bid team reviewed the bid document and
determined (1) the number of employees and hours needed to perform
the function as well as the amount of equipment and materials needed
and (2) the necessary financial and performance information, which
was provided by management. The team then worked to streamline the
work processes and rewrite the workplan. Often with the help of
consultants provided by the city, the team then prepared the bid
package which was submitted along with private bids.
Fourth, at a public forum, all public and private-sector bids were
opened together and the winning bid was announced.
Finally, if the public sector won a competition and the
union-management team performed the activity at the desired level of
performance for less than it bid, the team received a share of the
savings at the end of the year. The city, after it tracked
performance over a period of years, could place a moratorium on
bidding for areas for which city employees had demonstrated
performance excellence and in which they consistently outbid private
competitors.
Figure IV.1: The Indianapolis
Approach: Costing and
Competitiveness in the Delivery
of Public Services
(See figure in printed
edition.)
Source: City of Indianapolis.
(See figure in printed
edition.)
MICHIGAN'S PERM PROCESS
------------------------------------------------------ Appendix IV:0.2
Michigan established its framework in 1992. The framework provided a
set of procedures for analyzing government activities to determine if
they should be privatized, eliminated, retained in current form, or
modified (PERM). To accomplish these objectives, the PERM process
included the steps described below. Michigan's operating agencies,
Privatization Division, and private contractors have performed PERM
studies of state activities and functions. Figure IV.2 illustrates
this process.
Initially, agency directors used the Public-Private Partnership
Commission's list of suggested activities\1 to choose functions and
services to be analyzed. The analyses were to be done using a
three-part analytical model developed by the Privatization Division
in Michigan's Department of Management and Budget (DMB). First, an
historical analysis of the activity was done to identify factors that
caused the state government to become involved in the activity and
whether those factors have changed. This analysis also tracked the
state's level of responsibility throughout its involvement.
Second, the agency prepared a report which recommended whether the
function should be privatized, eliminated, retained in current form,
or modified. This included evaluating the potential effects on
customers and other state activities of changing a function or
service. It also included a quantitative assessment of activity
operations, as well as results to be achieved and in what time
frames. Issues involved in resolving potential or pending issues
(legal, liability, confidentiality, etc.) were also assessed.
Third, the agency prepared an analysis of the function or service's
current costs, as well as a basis for determining the cost of
operations if they would be changed. For example, if the initial
decision were to privatize an existing state activity, the third part
of the analysis would include both the cost of the current program as
well as an estimate of what the privatized activity would cost. The
latter would include estimates of the costs associated with the
transition from government operation to privatized status. Agency
management then reviewed the PERM analysis and decided what action
was to be taken. This decision was forwarded to the DMB's
Privatization Division for review. Each recommendation was either
agreed to or, if not, it was renegotiated or studied further.
Since 1995, the focus has shifted from agency-initiated PERM studies
to Privatization Division-initiated PERM studies, particularly on
functions and services that cross agency lines. Thus, the process
changed in that DMB's Privatization Division would conduct studies,
using the three-part analytical model described above, after
obtaining approval from DMB and the Governor's office. Privatization
Division staff would then submit their PERM analysis to the affected
agency for review and comment. After DMB and the affected agency
negotiated the recommendation made in DMB's PERM study, both parties
agreed on a decision to implement.
Michigan has also contracted out to have PERM studies conducted. The
state's Office of Information Technology maintains a list of
preapproved PERM contractors, which agencies can contract with to
perform PERM studies. These are usually done in consultation with
the Privatization Division staff and the affected department and
address issues outlined in the three-part analysis model outlined
above.
According to Michigan officials, most decisions calling for
privatization, elimination, retention, or modification could be
implemented by executive branch administrative actions. When
privatization was recommended, Michigan's Civil Service Department
reviewed agency proposals to contract for personal services.\2 A
proposed privatization also could be subject to legislative approval
if authorizing legislation needs to be created, changed, or repealed.
Figure IV.2: Michigan's PERM
Process for Analyzing Functions
and Services
(See figure in printed
edition.)
\a Submit decision information to appropriate entities as required
(e.g., Attorney General, Civil Service, Contract Management,
Facilities, Purchasing).
Source: Michigan's Department of Management and Budget,
Privatization Division.
--------------------
\1 Final Report-PERM: Privatize, Eliminate, Retain or Modify,
Michigan's Public-Private Partnership Commission, December 1992.
\2 As defined by Michigan's Civil Service Commission Rules, personal
services are services that the state contracts for with persons who
are not classified as employees of the state.
VIRGINIA COMMONWEALTH
COMPETITION COUNCIL PROCESS
------------------------------------------------------ Appendix IV:0.3
Virginia's framework, known as the Commonwealth Competition Council
(CCC) Process, was used to implement governmentwide privatization
efforts for the first time in 1996 (see figure IV.3). State
officials told us that most of the previous privatization efforts
used a similar approach. This process is dynamic as state government
organizations may be at different steps depending on their respective
agency performance requirements.
In step 1, the Council held hearings to solicit input from citizens,
business interests, and government employees. Using this input and
information from functional departmental reviews, the CCC developed
an inventory of functions or services that could be opened to
competition with the private sector. The inventory for future years
is published in the Council's annual report.
In step 2, agencies conducted a public-private performance analysis
of selected activities to determine whether they should be opened to
competition with the private sector. The performance analysis
consisted of five parts. The first part evaluated an activity's
potential for competition, assessing such aspects as the private
sector's capacity and the state's ability to measure performance for
evaluation purposes. The second part assessed the full cost of
operating the current activity as well as the estimated cost of the
contract for the function or activity considered for privatization.
The third part focused on public policy issues related to public
safety and welfare. The fourth considered issues involved in
planning the competition, such as personnel and transition
considerations, as well as contract administration. The fifth
component considered implementation issues such as procurement
requirements and quality assurance evaluation procedures.
In step 3, the agency requested proposals from private-sector firms
and, in certain instances, state agencies. The Council staff oversaw
the cost comparison evaluation process. An interagency team did an
independent review of in-house costs to ensure the government costs
were complete, accurate, and reasonable. The team was selected by
and reported to the Council and included officials from the offices
of the Attorney General, Planning and Budget, Purchases and Supplies,
State Internal Auditor, Joint Legislative Audit and Review
Commission, the Virginia Institute of Government, Auditor of Public
Accounts, and Council of Higher Education.
In step 4, the agency received sealed proposals from the private
firms, and if a managed competition was used, from public employees,
and announced a tentative decision to continue in-house performance
or to award the contract to a particular bidder. Contracts were
awarded for a period not to exceed 5 years.
Step 5 required that the agency establish an ongoing quality
assurance program to ensure that quality and cost standards
established in the contract were met. The agency was required to
conduct a postperformance review at the end of the contract period.
Figure IV.3: Virginia's
Commonwealth Competition
Council Process
(See figure in printed
edition.)
Source: Virginia's
Commonwealth Competition
Council.
(See figure in printed
edition.)
MAJOR CONTRIBUTORS AND
ACKNOWLEDGMENTS
=========================================================== Appendix V
MAJOR CONTRIBUTORS
GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.
------------------------------------------------------- Appendix V:0.1
John K. Needham, Assistant Director, (202) 512-5274
Donald L. Bumgardner, Project Manager, (202) 512-7034
Debra L. McKinney, Senior Evaluator
Hugh J. Ripper, Jr., Senior Evaluator
Anthony J. Wysocki, Evaluator
ACKNOWLEDGMENTS
STAFF ACKNOWLEDGMENTS
------------------------------------------------------- Appendix V:0.2
Anthony Assia, General Government Division, provided assistance in
reviewing report drafts and in communicating this report's message.
STATE AND CITY GOVERNMENT
ACKNOWLEDGMENTS
------------------------------------------------------- Appendix V:0.3
The following officials in the six governments provided us with
assistance to learn about their governments' privatization efforts
and provided comments on this report:
Charles D. Baker, Secretary, Executive Office of Administration and
Finance, Commonwealth of Massachusetts.
Phil Bomerscheim, Director, Virginia Commonwealth Competition
Council, Commonwealth of Virginia.
John E. Buttarazzi, Senior Vice President, Privatization Group,
Empire State Development Corporation, New York State.
Chere Calloway, Director, Privatization Division, Department of
Management and Budget, State of Michigan.
Skip Stitt, Deputy Mayor, and David Lips, Special Assistant for
Policy Development, City of Indianapolis.
Joe D. Tanner, Executive Director, Commission on Privatization of
Government Services, State of Georgia.
GLOSSARY OF PRIVATIZATION-RELATED
TERMS
=========================================================== Appendix 0
ASSET SALE
------------------------------------------------------- Appendix 0:0.1
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
------------------------------------------------------- Appendix 0:0.2
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
------------------------------------------------------- Appendix 0:0.3
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
------------------------------------------------------- Appendix 0:0.4
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
------------------------------------------------------- Appendix 0:0.5
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
------------------------------------------------------- Appendix 0:0.6
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
------------------------------------------------------- Appendix 0:0.7
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
------------------------------------------------------- Appendix 0:0.8
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
------------------------------------------------------- Appendix 0:0.9
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 GSE's 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
------------------------------------------------------ Appendix 0:0.10
See public-private partnership.
LEASING ARRANGEMENTS
------------------------------------------------------ Appendix 0:0.11
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
------------------------------------------------------ Appendix 0:0.12
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 agency's proposal, which
includes a bid proposal for cost-estimate, is useful to compete
directly with private-sector bids.
OUTSOURCING
------------------------------------------------------ Appendix 0:0.13
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
------------------------------------------------------ Appendix 0:0.14
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
CEO's 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
------------------------------------------------------ Appendix 0:0.15
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
------------------------------------------------------ Appendix 0:0.16
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 partner's efforts complement
one another. Typically, each partner shares in income resulting from
the partnership in direct proportion to the partner's 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
------------------------------------------------------ Appendix 0:0.17
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
------------------------------------------------------ Appendix 0:0.18
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
------------------------------------------------------ Appendix 0:0.19
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
------------------------------------------------------ Appendix 0:0.20
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
------------------------------------------------------ Appendix 0:0.21
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 government's 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.
GAO PRIVATIZATION PRODUCTS RELATED TO STATE AND LOCAL GOVERNMENTS
Child Support Enforcement: Early Results on Comparability of
Privatized and Public Offices (GAO/HEHS-97-4, Dec. 16, 1996).
Airport Privatization: Issues Related to the Sale or Lease of U.S.
Commercial Airports (GAO/RCED-97-3, Nov. 7, 1996).
Child Support Enforcement: States' Experience With Private Agencies'
Collection of Support Payments (GAO/HEHS-97-11, Oct. 23, 1996).
Private and Public Prisons: Studies Comparing Operational Costs
and/or Quality of Service (GAO/GGD-96-158, Aug. 16, 1996).
Child Support Enforcement: States and Localities Move to Privatized
Services (GAO/HEHS-96-43FS, Nov. 20, 1995).
District of Columbia: City and State Privatization Initiatives and
Impediments (GAO/T-GGD-95-194, June 28, 1995).
District of Columbia: Actions Taken in Five Cities to Improve Their
Financial Health (GAO/T-GGD-95-110, Mar. 2, 1995).
*** End of document. ***