Privatization: What Works

The chairman of a congressional panel that is targeting government programs for privatization launched the panel's review this month with a study of privatization in state and local governments.

Rep. Scott Klug, R-Wis., head of the House Republican Task Force on Privatization, asked the General Accounting Office to look at lessons learned by state and local governments in their privatization efforts.

Klug is still recruiting members for the task force. A Klug spokeswoman said the panel is expected to begin meeting during this session of Congress.

GAO identified six lessons learned in a review of privatization in Georgia, Massachusetts, Michigan, New York, Virginia and the city of Indianapolis. The most important component of successful privatization is a political leader who champions it, GAO found.

"Political leaders should anticipate a need to develop and communicate a privatization philosophy and to garner public, business and political support," the report said.

In Indianapolis, the mayor was the political champion. He found that leaders have to be flexible to address the concerns of employees and affected citizens. When employee unions initially opposed the mayor's privatization initiatives, he involved them in the planning process. Working together, city and union officials moved from pure privatization to managed competition, allowing city employees the opportunity to compete for contracts with private firms.

"Competition in the marketplace rather than privatization per se produced the most value for taxpayers," Indianapolis officials told GAO. Allowing government agencies to compete with private companies reduced costs, improved service and improved employee morale, officials reported.

The other five lessons GAO identified were:

  • Establish an organizational and analytical structure to ensure effective implementation. Governmentwide commissions were the most often-used method to identify privatization opportunities and set privatization policy.
  • Enact legislative changes and/or reduce governmental resources to encourage greater use of privatization. Such changes include eliminating civil service protections and cutting budgets.
  • Use reliable cost data on government activities to support informed privatization decisions and to assess overall performance. Indianapolis used activity-based costing to figure out how much it cost the government to provide services.
  • Develop strategies to manage workforce transition. Involving employees in the planning process, retraining displaced workers and offering buyouts and job placement assistance helped alleviate employee worries about their futures.
  • Develop more sophisiticated methods of monitoring and oversight, to protect government's interests when its role in the delivery of services is reduced. Because contracting out was the most commonly-used method of privatization, contract audits and performance monitoring helped governments maintain control over the services contractors assumed.
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