Privatization Pushed

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Though governments are increasingly using competition between private businesses and public employees to get the best price and 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 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 allowed personnel and procurement flexibility. Those changes would make public-private competition fair, the institute says.

Public-private competition, publicized by its use in Indianapolis and Phoenix, is frequently referred to as "managed competition."

Under managed competition, a function that is being performed by the government is bidded out. Private contractors are encouraged to make bids, and the agency that is performing the function can also compete to keep doing the function.

The report argues that private sector companies must account for all their costs when they bid a contract, but agencies don't because they often do not account for 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. Allowing that 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.

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 can use 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 warned that information technology service is not an attractive candidate 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 says.

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