Making Agencies Compete

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Though governments are increasingly using competition between private businesses and public employees to get the best price and highest quality service, the playing field is often tilted against the private sector, a new report contends.

In its eleventh annual report on privatization, the Reason Foundation's Public Policy Institute, a conservative think tank, calls for agencies involved in competitive bidding to account for all their costs, be charged taxes or a tax equivalency, and be granted personnel and procurement flexibility. Those changes would make public-private competition fair, the institute says.

Public-private competition, often called "managed competition," has been used in cities such as Indianapolis and Phoenix, and has been endorsed by Vice President Gore's National Performance Review.

Under managed competition, a function that is being performed by a government agency is put out for bid. Private contractors and the agency are encouraged to compete against each other.

The Reason Foundation report argues that in such competitions, private companies must account for all their costs, but agencies don't, because they often do not include personnel and infrastructure costs in the costs of activities. The report recommends bringing in third parties to account for a function's true cost.

In addition, several cities that have tried managed competition allow departments to see private companies' bids before submitting their own. This corrupts the competition process, the report says.

"If private firms believe they are only being used by politicians to obtain concessions from in-house units, they will soon decide it is not worth the trouble and expense of putting together serious contract bids," the report says.

The report also argues that agencies should be relieved from regulations that limit their productivity.

"Unless government units are given more autonomy when governments institute competition, they are being forced to operate in both worlds--the entrepreneurial and the bureaucratic," the report says.

The report also explores the idea of separating policy functions from service-providing functions. The Vice President's performance-based organization (PBO) concept is based on that idea. For example, the Patent and Trademark Office's plan to become a PBO would keep intellectual property policymaking in the Commerce Department but separate the service function of issuing patents into an organization that uses private sector business practices.

To decide if a function should be privatized, decisionmakers must consider several factors. Constituencies with vested interests, including public employee unions, will oppose privatization. Political leaders must decide if privatization is worth the fight. Decisionmakers must also look at how much money they expect to save by privatizing. Functions that are extensively integrated into other government operations are difficult to privatize. The report warns that information technology services, for example, are not attractive candidates for privatization.

"The IT function has tendrils that reach throughout the organization, and adding to the complexity, there are often scattered personnel and equipment budgets within the user departments," the report noted.

The operating principle of privatization should be: "The more competitors, the better," the report argues.

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