Government For Sale

By Tom Shoop

June 1, 1995

When Vice President Gore launched the second phase of the Clinton Administration's reinventing government initiative last December, he dusted off a term that hadn't been heard much since the Reagan Administration, and which Democrats have almost never dared speak; privatization.

REGO I, said Gore at a press conference, had set out to make government work better and cost less. Now, he said, "we are going to make government work better and do less."

Cabinet departments like Transportation and Energy, said Gore, would at least partially privatize huge functions like air traffic control and electric power marketing. Every agency, large or small, would comb its budget looking for other programs to sell off. For example, Gore told reporters, Office of Personnel Management director Jim King "will tell you how we are phasing out old-fashioned, centralized management of the government, turning commercial functions like training . . . to the private sector where they belong."

King stepped up to the microphone and did exactly that. Then he went back to OPM and set up a task force to examine how to privatize OPM's 14 training programs, which range from an "emerging leaders" program for lower-graded employees to management seminars for senior executives. After developing a series of options, the task force called in financial experts to put a dollar figure on what the whole operation was worth.

That's when they got the bad news. It turns out that on the open market, the value of OPM's training programs, for which agencies pay some $ 40 million a year, is approximately zero. Zip. Nothing.

The problem is that OPM's programs capture only about 10 percent of the government market for training services. The rest is already controlled by private firms. And if any of them want access to OPM's training curricula, they don't have to buy it: They can simply file a Freedom of Information Act request asking for it.

"Why would you pay for this operation when you could get all of the information for the price of a 32-cent stamp?" says OPM's Judy Jaffe, who heads the training division. "The sad truth in our case is that there is really nothing to buy."

OPM is still looking to get out of the training business, perhaps by transferring its programs to the USDA Graduate School. The self-funding school might be able to continue the programs, as it would have the advantage over private sector firms provided by interagency agreements that allow agencies to contract for its services without competitive bidding. Such a merger, though, would not be a privatization, and private training firms oppose it.

Most likely, Jaffe says, OPM will be forced to lay off the more than 200 employees in the training division and try to find work for them at private firms. Because private firms would likely pick up the work the government stops doing, this would be a form of privatization -- but not the kind the agency had wanted.

Experiences like OPM's may show that selling off federal operations is more difficult than it looks, but they haven't slowed the privatization juggernaut that got rolling after last fall's Republican takeover of Congress. In fact, with the new Congress and a Clinton Administration eager to push the envelope of reinvention, the prospects for widespread privatization of federal services are stronger than ever.

President Clinton's fiscal 1996 budget included a series of proposed privatizations. Rep. Scott Klug, R-Wis., head of a new House task force on privatization, is working on a plan to strategically slash agencies' budgets to force them to turn over key functions to the private sector. Senate Republicans have already held hearings on a wide variety of privatization proposals.

Ever since the election of Ronald Reagan in 1980, conservatives have held out privatization as the cure for many of the federal government's ills, from management inefficiency to the budget deficit. But privatization has always been a political minefield. Members of Congress -- Republicans as well as Democrats -- have long been leery of turning over programs that benefit their constituents to the vagaries of the private market. Congress has barred many agencies from even studying how to privatize their operations. "It isn't hard to find privatization ideas," says Klug. "It's hard to convince folks who have been whipped and beaten to take one more run at it."

What is It?

Merely defining "privatization" is difficult. In its purest form, the term refers to the shifting of the production of a good or the provision of a service from the government to the private sector, often by selling government-owned assets. Clinton Administration officials take this rather narrow view. "When we talk about privatization, we don't mean contracting out," says Elaine Kamarck, who heads Gore's National Performance Review. "We mean purely divesting the government function."

Most definitions of privatization, though, are more expansive, covering virtually any action that involves exposing the operations of government to the pressures of the commercial marketplace. (See "The Privatization Pyramid," below.) That would include everything from contracting out janitorial services at a federal building to selling off the Naval Petroleum Reserve.

The broader definition of privatization also includes a wide range of public-private partnerships, such as voucher systems. Even the creation of federal corporations, quasi government organizations and government-sponsored enterprises is often filed under the general category of privatization. In such organizations, though, it is often difficult to tell where government ends and the private sector begins. (See "Government Inc.," February.)

Any way you define it, the gradual process of turning government functions over to private entities has been occurring throughout the world for the last 15 years or so. The Reason Foundation, a California think tank that tracks privatization efforts, estimates that more than 100 countries have privatized some $ 445 billion worth of state-owned assets and enterprises in the last decade. A serious privatization agenda in the United States, argues Reason president Robert W. Poole, could produce $ 382 billion in one-time proceeds from the sale of federal assets.

"The United States is the last country on earth to adopt privatization as an important component of its management and budget strategy," says Ronald D. Utt, a visiting fellow at the Heritage Foundation who was associate director of the Office of Management and Budget for privatization in the Reagan Administration.

"Why that has been the case in a country that is probably more commercial than any other is a mystery to me."

Donald F. Kettl, a privatization expert at the University of Wisconsin at Madison, says the reason is that other countries have in fact been trying to create systems more like ours, in which the government owns very few enterprises. in testimony before the Senate Budget Committee in March, Kettl argued that almost every major policy initiative launched by the federal government since World War II -- such as the creation of the interstate highway system, the space exploration effort, the Medicare and Medicaid programs, and environmental cleanup efforts -- has been managed through public-private partnerships.

"Beyond the privatization debates," says Kettl, "lurks a little recognized truth: The federal government has already privatized many goods and services."

On the List

Nevertheless, a consensus has emerged that Uncle Sam is still involved in a series of commercial activities that ought to be turned over to the private sector in one form or another. The list hasn't changed much from the Reagan days: Amtrak, federal prisons, the Government Printing Office, various federal loan programs, even the U.S. Postal Service. But now specific proposals are being developed to privatize these and a host of other operations, and they're being taken seriously in the Administration and on Capitol Hill.

In its fiscal 1996 budget, the Administration proposed to:

The Administration also said it would privatize the government's helium reserves and portions of NASA and the National Weather Service, and would consider proposing legislation to fully privatize the Student Loan Marketing Association and the College Construction Loan Insurance Association.

Klug and other House leaders have already endorsed all of the Administration's proposals -- and added some of their own. Klug has recommended fully privatizing the Weather Service, all federal loan programs, the Postal Service, the Tennessee Valley Authority and a series of government-sponsored enterprises.

Rep. Joel Hefley, R-Colo., has submitted a bill to end federal support for Amtrak that he says would save the government $ 10 billion over five years. Rep. Jennifer Dunn, R-Wash., has introduced a measure to get the Government Printing Office out of the printing business, turning GPO into a contracting agency. She says her proposal would save at least $ 1 billion over five years.

Contract It Out

Agencies, too, are weighing new privatization ideas. An independent panel headed by Christopher C. Kraft, former director of NASA's Johnson Space Center, has recommended that the space agency hand over the operation of the space shuttle to a single prime contractor, a move that both NASA Administrator Daniel Goldin and House Speaker Newt Gingrich have endorsed.

The Defense Department, which already contracts out many of its functions, may be in for a dramatic new wave of privatization. The Commission on Roles and Missions, set up by Congress in 1993 to propose ways to streamline military operations, was on the verge this spring of recommending not only that DoD sort out overlapping combat tasks among the armed services but also that it engage in large-scale privatization of support functions such as payroll, accounting, information management and equipment maintenance.

In late March, House Budget Committee Chairman John Kasich, R-Ohio, and Senate Governmental Affairs Committee chairman William Roth, R-Del., introduced legislation that would repeal a statute requiring that 60 percent of all DoD maintenance and repair work be done by DoD-run depots. Under Kasich and Roth's legislation, DoD would be given only work that private industry is unwilling to perform.

In fact, with continued cutbacks in federal personnel and budgets, reliance on private contractors to provide government services is likely to increase. The government contracted out for $ 108 billion worth of services in 1994, according to OMB. (By contrast, the federal payroll last year was about $ 84 billion.)

Key members of Congress say agencies should rely even more heavily on the private sector. "In the next four years, it should be possible to contract out more than 50 percent of the services and activities of the federal government," said Rep. John L. Mica, R-Fla., chairman of the House Government Reform and Oversight Subcommittee on the Civil Service, at a March hearing.

Drawing on the work of the Heritage Foundation, Mica, Klug and others have suggested that as many as one million federal employees are still doing "commercial" work. Contracting out such work, Heritage officials argue, could save the government as much as $ 9 billion a year.

Such talk raises the hackles of federal union leaders. They cite a 1994 General Accounting Office review of nine agency studies of service contracts, which concluded that in many cases having federal workers perform the services would have been cheaper than contracting out. The real problem, union leaders say, is performance problems and cost overruns on federal contracts.

But even the unions aren't looking for a monopoly on government work. In the current climate, they're willing to settle for the chance to compete against private firms. "Better contracting will come about only if there is real and genuine competition between contractors and federal employees for the federal government's service assignments," said John Sturdivant, president of the American Federation of Government Employees, in testimony submitted to Mica's subcommittee in April.

Privatizing Power

Increasing the amount of work the government contracts out is a fairly simple process. Fully privatizing federal functions, though, is another matter. Take the case of the Energy Department's power marketing administrations (PMAs).

The five PMAs -- Alaska, Bonneville, Southeastern, Southwestern and Western -- operate as federally subsidized power wholesalers, supplying energy to more than 1,000 electric power systems in 34 states. Earlier this year, the Clinton Administration decided to accept the conservative argument that the federal government shouldn't be in the business of selling power, especially if it means some taxpayers subsidize the electric bills of others.

So President Clinton set an ambitious agenda for privatizing the PMAs: the sale of the Alaska PMA, which has been in the works for some 10 years, is to be completed by the end of fiscal 1996: Southeastern is to be privatized in 1997; and Southwestern and Western in 1998. Bonneville would be turned into a federal corporation next year.

Interest groups blasted the Administration's proposal as soon as it came out. The National Rural Electric Cooperative Association claimed in a press release that 17 million Americans would see their electric bills go up a total of $ 400 million a year if the PMAs were privatized. Larry Hobart, executive director of the American Public Power Association, said it would be "a foolish economic mistake . . . to sell revenue-producing national assets belonging to the people."

Meanwhile, on Capitol Hill, House privatizers welcomed the PMA proposal, but key Senators -- Republican and Democratic - whose constituents benefit from subsidized power were quick to denounce it. "You're not going to sell the PMAs," Sen. Dale Bumpers, D-Ark., flatly told DOE officials at a Senate Energy and Natural Resources Committee hearing in early February. "I'd bet on it." Senate Appropriations Committee chairman Mark Hatfield, R-Ore, called the idea a leftover "smoke and mirrors policy of the Reagan Administration." And at a February budget hearing, Sen. Larry Craig, R-Ohio, pledged to "work awfully hard to make it not happen." Craig berated Energy Secretary Hazel O'Leary for merely discussing the idea of privatization, since a Reagan-era law prevents DOE from using appropriated funds to even study selling the PMAs.

That law notwithstanding, DOE officials argue that Congress can't deny the executive branch the right to make policy proposals about its operations. So this spring DOE officials worked feverishly to figure out what type of privatization legislation to send to Capitol Hill.

On May 3, O'Leary sent a bill to Congress that would authorize DOE to prepare separate plans to sell or transfer the Southeastern, Southwestern and Western PMAs out of federal ownership, management or control over the next three years. Such plans, promised O'Leary, "would make it possible to increase the efficiency and responsiveness of the power administrations to local concerns without resulting in any rate increase."

Moving all of the power marketing administrations into the private sector by 1998, though, may be too ambitious an agenda. "It all depends on whether you are driven by the budget or by reality," says Joel Bladow, who serves as the PMAs' liaison to DOE headquarters in Washington. The Western PMA alone, he notes, includes 17,000 miles of transmission line, 300 substations and hundreds of communications sites. "Just to do an environmental impact statement -- which I would think you'd have to do to transfer all that into private ownership -- you're looking at years," says Bladow.

Will it Happen?

The power marketing administrations aren't the only part of the federal government that will be difficult to privatize. Virtually every other privatization proposal has also drawn fire from prominent Members of Congress.

"We're not corporatizing or privatizing air traffic control," said House Transportation and Infrastructure Committee chairman Bud Shuster, R-Pa., earlier this year. In March, 94 Democrats and 28 Republicans sent a letter to the House and Senate Budget Committees recommending continued federal support for Amtrak.

In April, the Clinton Administration dropped a proposal to privatize part of the Social Security disability claims process in the face of opposition from the American Federation of State, County and Municipal Employees.

For political reasons, huge parts of the government that clearly duplicate private-sector services, such as the VA hospital system, aren't even considered candidates for privatization. The Tennessee Valley Authority, long a target of privatizers, has been largely excluded from the current debate, Klug notes, perhaps because it is located in the home state of the Vice President and two Republican Senators.

Klug has prepared a long list of agencies that, like DOE, are prevented from even considering privatization. Overturning such barriers -- not to mention writing bills to allow agencies to actually sell assets -- will take a lot of legislative grunt work. Agencies aren't convinced it will happen.

Before they found out their training operation wasn't worth anything, OPM officials had considered writing legislation asking for the authority to sell it. But they decided Congress would be unlikely to take up the proposal while it was busy dealing with all the big-ticket items in the GOP's Contract with America. "We thought Congress would be so tied up with its own agenda that it would be difficult, if not impossible, to get their attention," says Kirke Harper, an OPM executive who headed the training privatization effort.

Nevertheless, Klug is convinced that the House can lead an effort to force a series of large-scale privatizations through the budget process. This spring, he worked with the House Budget Committee on a proposal to cut DOE's budget by an amount equal to the estimated value of the power marketing administrations. "If [the PMAs' defenders] have to come up with billions of dollars somewhere else to save them," he says, "I don't think they'll have any real choice but to do what we want them to do."

Klug insists he has no illusions about how difficult the privatization process will be. "Programs tend to survive," he says, "because along the way they have developed new protectors." The key, Klug argues, is not trying to do too much too fast.

"I want to use a rifle rather than a shotgun," he says. "We need to pick off four or five big targets first." But, he concedes, "No matter where you look, somebody's going to be mad."

THE PRIVATIZATION PYRAMID
Selling Out

Sales of federal assets. Example: Naval Petroleum Reserves.
Service Shutdown

The government simply discontinues or gives up responsibility for a service. Example: OPM's training operation.
Quasi-Government

The netherworld of federal corporations, government-sponsored enterprises, and quasi-government organizations. Often an intermediate step on the road to full privatization. Examples: Amtrak, Postal Service.
Public-Private Partnerships

Any effort in which government and private organizations share ownerships of assets and operational responsibilities. Includes voucher systems, franchise arrangements -- even volunteer programs. Examples: food stamps, Medicare, job-training programs.
Contracting Out

The most common form of privatization: shifting the provision of a good or service to the private sector by putting it out for competitive bid. Examples: everything from construction of aircraft carriers and management of nuclear weapons facilities to provision of landscaping services.

By Tom Shoop

June 1, 1995

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