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Reason Foundation

American Legislative Exchange Council

Making Privatization Work for State Government

Outsourcing can cut costs, avoid tax increases

Adrian Moore
August 1, 2002

Privatization—the transfer of responsibility for services or assets from the government to private firms—in the United States is changing. Long thought of as strictly a conservative idea, privatization has gone bipartisan as key state and local democratic leaders have embraced it as a means of cutting costs and improving services.

Privatization as we know it began in the late 1960s and was mainly practiced by local governments. In the 1980s, Ronald Reagan brought the idea of privatization to the federal government at the same time Margaret Thatcher was revolutionizing Britain via privatization. Here in the United States we have traditionally privatized services for the money; tight fiscal times often convince governments to cut costs to avoid raising taxes, and privatization is one way to accomplish this.

And times have been tight for over a year now—almost half of the states and more than half of cities are facing revenue shortfalls. A good example of privatization driven by fiscal concerns can be seen in Florida, where for the past two years Gov. Jeb Bush has been pushing for state agencies to use privatization to reduce their budgets by at least 5 percent.

It's not just Florida. Reason Foundation just released its 16th annual report on trends and practices in privatization in the United States.1 From new highways to welfare-to-work programs, state agencies have ramped up their use of privatization over the past year as a means of balancing tighter budgets and increasing service demands.

Shifting Motivations for Privatization

Cost savings is still very important, but recent years have also seen the start of dramatic shifts in why and how governments are privatizing. More and more often, privatization is driven by a desire for cost savings linked to other factors such as:

All of these motives can be rolled together simply as "performance." Privatizing to achieve a combination of cost savings, quality, innovation, speed, expertise and innovation is privatizing to achieve higher performance.

This is most obvious in cases like the controversial privatization by Pennsylvania this spring of Philadelphia's worst-performing schools. After years, if not decades, of trying to turn the schools around themselves, the city is privatizing to improve performance, including all the kinds of changes discussed above.

Where the Action Is:
Some Oft-privatized State Services
  • Highway Design
  • Highway Maintenance
  • Engineering Services
  • Information Technology
  • Custodial Services
  • Mental Health Services
  • Welfare-to-work Programs
  • Child Care
  • Adoption Programs
  • Juvenile Rehabilitation
  • Correctional Medical Services
  • Prison Operations
  • Building Repair and Maintenance
  • Environmental Lab Analysis
  • Marina Management
  • Golf Courses

Source: Council of State Governments and Reason Foundation.

Less widely known, is Pres. George W. Bush's ambitious goal to have both federal agencies and private firms compete over the next few years to perform work currently being done by more than 400,000 federal workers. This goal is part of the President's Management Agenda and is rooted in the recognition that improved performance is more a result of competition itself than it is of who—private firms or government—ultimately does the work.2 In the Bush plan, competition will induce various units within government agencies to find ways to improve their performance, and will lead to contracts for the private firms only if they can deliver better performance than the government can.

Strategies for Success

A common failing of privatization efforts is that state agencies have little incentive to pursue privatization and they have little experience and real knowledge of it. Hence agency privatization efforts are often piecemeal and haphazard, and fail to learn from other state agencies� relevant good and bad experiences. Even the most ardent fans of privatization will admit that sometimes it goes bad or fails to deliver on its promises. It's no silver bullet, but when done right, privatization is overwhelmingly successful and is rarely reversed.

The first key to avoiding those pitfalls is for the legislature and/or administration to take a decisive leadership role and form a coherent and consistent approach to privatization.3 One strategy in particular that can be effective is creating a competition or privatization commission. Ideally a privatization commission brings together a group of stakeholders or others to examine privatization opportunities, create strategies for implementation, and advise the legislature and executive agencies on privatization best practices. Virginia’s Commonwealth Competition Council has been the nation’s leading model for some years. It produces top-notch research and assistance to state agencies, and analysis to the legislature, and its legacy is cost savings in the hundreds of millions of dollars.4

The success of commissions also depends on proper implementation. Poorly designed commissions can be hogtied by unrealistic mandates or lack of authority, and poorly led commissions can bog down in interest group squabbling. A more common failing is lack of follow-through by legislative or administrative leaders. In 1997 Colorado created a privatization commission that did an excellent job of research, identifying opportunities for privatization statewide. More importantly, it developed a set of processes that agencies could adopt, compiled a useful guide to best practices, and drafted model legislation to address a few key issues and barriers it uncovered.5 Unfortunately the legislature never picked up the ball. There was no serious consideration of the legislation the commission recommended, nor any incentive for agencies to follow through.

Though free-market conservatives and libertarians are generally no fans of creating new government bodies or bureaucracies, some evidence suggests that a well-designed, well-run privatization commission can be a valuable asset to state government and taxpayers, and is one of the more politically viable foundations for broader privatization efforts. Successful privatization efforts require political capital, knowledge, analysis, incentives, and follow-through—disparate elements that a privatization commission can help bring together.

The real secret to privatization commissions is building constituencies for reform, setting obtainable objectives, and hiring commission staff with a specialized understanding of the activities the state would like to privatize or competitively outsource.

The Bottom Line

Even if budget pressure and cost savings are what puts privatization on the legislative table, state leaders with foresight will look for privatization and competition to also improve the quality of services. That requires leadership, and understanding of strategies with a track record of success, and a willingness to create the institutions that will provide the right incentives, accountability, and transparency for privatization efforts.

Adrian Moore is Vice President of Reason Foundation.

Endnotes

1. Geoff Segal, editor, Privatization 2002 (Los Angeles: Reason Foundation, 2002).

2. Executive Office of the President, The President�s Management Agenda (Washington, D.C.: Office of Management and Budget, 2001).

3. William D. Eggers, Designing a Comprehensive State-level Privatization Program, Reason Foundation How-to Guide No.1, (Los Angeles: Reason Foundation, 1993).

4. Visit the Commonwealth Competition Council at www.vipnet.org/ccc/home.htm.

5. You can see their report at www.state.co.us/gov_dir/gss/edo/priv/privtext.htm.


Adrian Moore is Vice President, Policy


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