Privatization: Analyzing the Process of Privatization in Theory and Practice

Lessons and Steps for Successful Implementation: A Privatization White Paper

In examining instances of privatization, it is quite clear that programs have resulted in varied level of success. While there is no recipe or process by which success can be guaranteed, the past experiences of successful and unsuccessful programs combined with an understanding of the opportunities of and theories regarding privatization can point to certain practices which can increase the likelihood of creating a successful, beneficial and sustainable privatization initiative. Among the myriad of opinions on what steps can be taken to ensure successful privatization decisions, several experts have attempted to distill a small list of rules to address complexities of the privatization decision.

Of Auger’s recommendations, the most prescriptive, applicatory recommendation Lesson 2. In Massachusetts, the lack of a centralized support system led Governor Weld’s policies to result in fiscal and political disasters. By contrast, the experiences in Virginia saw similar programs privatized during the same time period with a high level of success. At the heart of Virginia’s program was a strong central council, expressly committed to ensuring that programs would only be privatized in a manner that clearly appeared to benefit the public sector.

In addition to Auger’s seven lessons, several other strategies have been shown to be likely to strengthen a privatization program:

Institute two-way competition for contracts – Successful privatization programs should not simply look to contract out more public services, but rather should use the option to privatize as a tool to improve service quality, increase performance and reduce costs. By addressing all aspects of state spending, not just public agency finding, privatization can be used to effectively manage service provision in addition to seeking the most beneficial fiscal policies. As stated by Senator Pacheco, any publically financed service should be the charge of the provider best suited to provide it. Private service contracts ought to be put to the same competitive tests as agencies to ensure that they are offering their services at a competitive rate and high level of performance.

Identify and agree upon specific performance expectations – A clearly understood and generally accepted definition of success is essential for privatization to even be considered, let alone evaluated. In order allow service quality and performance to be evaluated clearly and uniformly, all contracts should include a list of measureable benchmark expectations by which changes in service quality or performance can be quantifiably evaluated. These priorities should be determined by the administrators, legislators and the needs of the service recipients. Common measures could include response times, administrative cost ceilings, recipient satisfaction levels, contract compliance and any unique criteria suited for each individual service.

Desired actions must be included in contracts – In addition to specifying the outcome a contract is seeking to purchase, contracts should specify and enumerate the methods by which services are to be provided. This helps to ensure that the direct control surrendered when using private service vendors doesn’t result in unclear, unusual or small but important facets of the service from being overlooked during the provider transition. Agency directors should perform top-down review of the steps their agency’s employees take in providing their services so that they may be included in contract preparation.

Set up oversight for each contract – All contracts ought to identify an individual or office that is responsible for overseeing and evaluating the service provision over the length of the contract. Ideally, this ‘contract manager’ will have experience or be familiar with the service in question. In cases where agencies are transition services to the private sector, the previous agency director is a likely candidate for this task, provided they haven’t proven they are unable to meet expectations for service quality or performance in the past.

Begin by asking the following 5 questions:

• Do policy makers, agency directors and other key players agree on the goals of this privatization?
• Is this activity already performed in the private sector, or will a contractor need to create a system to deliver this service?
• Do circumstances and the provisions in the contract allow the government to switch vendors, if necessary, without seriously disrupting the flow of service provision?
• Have the legal, financial and technical risks to the government been considered and are they acceptable?
• If a vendor is unable to meet its contractual obligations, have alternatives and their estimated costs for the government resuming these operations been considered, and is this cost and acceptable risk?80

Finally, if these provisions are to be used successfully, it is essential that the goal of any privatization program is to develop a system for ensuring that the tax payers, service recipients and members of the workforce are getting the best deal possible. Any privatization decision must be a means to achieving these ends. By using this approach, administrations can truly attempt to offer better government at lower costs.

Acknowledgements

This paper benefitted greatly from the generous assistance, time, expertise, opinions and collaboration graciously and candidly offered by the following individuals:

Michael Dukakis, Fmr. Governor, Commonwealth of Massachusetts; Professor, Northeastern University, Boston MA,

Marc Pacheco, State Senator, Commonwealth of Massachusetts,

John Parsons, First Deputy State Auditor, Commonwealth of Massachusetts, Officer of Auditor A. Joseph DeNucci,

Steve Poftak, Research Director, Pioneer Institute; Director, Shaime Center for Better Government, Boston MA, and

David Sullivan, Chief Counsel, Office of Administration & Finance, Commonwealth of Massachusetts.

References

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Auger, Deborah A., Contracting, and the States: Lessons from State Government Experience. Public Productivity & Management Review, Vol. 22, No. 4, (1999). http://www.jstor.org/stable/3380929

Behn, Robert D., “Why Measure Legislative Performance? Different Purposes Require Different Measures”, Public Administration Review, Vol. 63, No. 5, (2003), 586-606.

Christie, The Hon. Christopher, Governor of the State of New Jersey, Executive Order # 17, 2010. 

Commonwealth Competition Council, Cost Comparison Program COMPETE: Users Manual, Commonwealth of Virginia, 2001, Richmond, VA.

Commonwealth Competition Council. 2007 Report to the Governor, General Assembly and Small Business Commission. Commonwealth of Virginia, (2001).

Commonwealth Competition Council. 2007 Report to the Governor, General Assembly and Small Business Commission. Commonwealth of Virginia, (2007).

Commonwealth Competition Council. 2007 Report to the Governor, General Assembly and Small Business Commission. Commonwealth of Virginia, (2010).

Commonwealth of Massachusetts. Massachusetts General Laws: Part I: Title II: Chapter 7: § 52-55.

Commonwealth of Virginia, Code of Virginia, Title: 2.2, Chapter: 26, § 2620-2625.

Chi, Keon S., Kelly A. Arnold and Heather M. Perkins, “Privatization in State Government: Trends and Issues”. Symposium: Public-Private Cooperation. (2003).

England, Evan. Memorandum to Jay Gonzalez, Secretary, Executive Office for Administration & Finance, Massachusetts, 2010.

Feigenbaum, Harvey B., and Jeffery R. Henig. “The Political Underpinnings of Privatization: A Typology”. World Politics, Vol. 46, No. 2. (1994), 185-208.

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Yarrow, George, Mervyn King, Jacques Mairesse and Jacques Melitz. “Privatization in Theory and Practice”. Economic Policy, Vol. 1, No. 2. (1986), 323-377.

Endnotes<

1.) Parsons, John, First Deputy State Auditor, Massachusetts. Interviewed by author, December 2, 2010.

2.) Higgins, Gordy. “A Review of Privatization Definitions, Options and Capabilities”, Montana Business, Labor and Agriculture Committee. Legislative Services Committee, (2000), 3.

3.) Auger, Deborah A., Contracting, and the States: Lessons from State Government Experience. Public Productivity & Management Review, Vol. 22, No. 4, (1999), 437.

4.) Ibid.

5.) Ibid, 450.

6.) Ammons, David N., and Debra J. Hill. “The Viability of Public-Private Competition as a Long-Term Service Delivery Strategy”, Public Productivity & Management Review, Vol. 19, No. 1. 1995, 12-24.

7.) Auger, 1999, 450.

8.) Higgins, 3.

9.) Auger, 1999, 437.

10.) Ibid.

11.) Ibid.

12.) Higgins, 1999, 4.

13.) Ibid.

14.) Chi, Keon S., Kelly A. Arnold and Heather M. Perkins, “Privatization in State Government: Trends and Issues”. Symposium: Public-Private Cooperation, 2003. 15.

15.) Ibid. 

16.) Wallin, Bruce. Privatization of State Services in Massachusetts: Politics, Policy and an Experiment That Never Was, Economic Policy Institute, Washington D.C., 45. 

17.) Parsons, 2010.

18.) Ibid.

19.) Pioneer Institute, The. The Pacheco Law: A Roadblock to Competitive Contracting, Making Government Sustainable: Agenda for Leadership 2002. Boston, MA. 2002, 17.

20.) Parsons, 2010.

21.) Pioneer Institute, 2002, 17-18.

22.) Wallin,17.

23.) Ibid.

24.) Morgan, Donald. “The Two Faces of Privatization”. Pubic Administration Review, Vol. 48, No. 6. 1988, 980.

25.) Ibid, 981.

26.) Pacheco, Marc, State Senator, Massachusetts. Interviewed by author, November 30, 2010, Boston, MA.

27.) Feigenbaum, Harvey B., and Jeffery R. Henig. “The Political Underpinnings of Privatization: A Typology”. World Politics, Vol. 46, No. 2. 1994, 190.

28.) Kravchuk, Robert S., and Ronald W. Shack. “Designing Effective Performance-Measurement Systems under the Government Performance and Results Act of 1993”. Public Administration and Review, Vol. 56, No. 4. 1996, 349

29.) Kravchuk and Shack, 1996, 350.

30.) Behn, Robert D., “Why Measure Performance? Different Purposes Require Different Measures”, Public Administration Review Vol. 63, No. 5. 2003, 589.

31.) Behn, 2003, 594.

32.) Feigenbaum, 1994, 186.

33.) Feigenbaum, 1994, 188-189.

34.) Wallin, 2001, 8.

35.) Wallin, 2001, 4.

36.) See Morgan, Donald. “The Two Faces of Privatization”. Pubic Administration Review, Vol. 48, No. 6. 1988, 980

37.) Yarrow, George, Mervyn King, Jacques Mairesse and Jacques Melitz. “Privatization in Theory and Practice”. Economic Policy, Vol. 1, No. 2. 1986, 355.

38.) Yarrow et al., 1986, 356.

39.) Pacheco, 2010.

40.) Ammons and Hill, 1995, 12.

41.) Ibid.

42.) Auger, 1999, 443.

43.) Ibid, 444.

44.) Ibid.

45.) Pacheco, 2010.

46.) Ibid.

47.) Poftak, Steve, Director, Shaime Center for Better Government, Pioneer Institute. Interviewed by author November 23, 2010, Boston MA.

48.) Wallin, 9.

49.) See Wallin,11.; Internal memo from Department of Administration and Finance, Commonwealth of Massachusetts, 2.

50.) Wallin,12.

51.) Massachusetts House Committee on Post Audit Oversight, “Privatization Savings: Where’s the Beef?” Commonwealth of Massachusetts. 1993.

52.) Wallin,13.

53.) Wallin, 14.

54.) Montenko, A.K., et al., “Privatization and Cutbacks: Social Work and Client Impressions of Service Delivery in Massachusetts” Social Work, Vol. 40, No. 4. (1995). 456-63.

55.) Auger, 1999, 450.

56.) Wallin,17.

57.) Massachusetts House Committee on Post Audit Oversight, 1993.

58.) The Commonwealth of Massachusetts. Massachusetts General Laws: Part I: Title II: Chapter

7: § 52-55.

59.) Parsons, 2010.

60.) Pioneer Institute, 2002, 17-18.

61.) Poftak, 2010.

62.) The Commonwealth of Virginia, Code of Virginia, Title: 2.2, Chapter: 26, § 2.2-2622, §§ A, 1.

63.) Auger, 1999, 444.

64.) The Commonwealth of Virginia, Code of Virginia, Title: 2.2, Chapter: 26, § 2.2-2621.

65.) The Commonwealth of Virginia, Code of Virginia, Title: 2.2, Chapter: 26, § 2.2-2622, §§ A, 1.

66.) Auger, 1999, 444.

67.) Auger, 1999, 444.

68.) Commonwealth Competition Council, Cost Comparison Program COMPETE: Users Manual, Commonwealth of Virginia, 2001, Richmond, VA.

69.) Commonwealth Competition Council. 2007 Report to the Governor, General Assembly and Small Business Commission. Commonwealth of Virginia, 2007. 4-5.

70.) The New Jersey Privatization Taskforce, 2010. Report to Governor Chris Christie. 5.

71.) Commonwealth Competition Council, 2007, 5.

72.) NJ Privatization Taskforce, 2010. 5.

73.) Commonwealth Competition Council, 2007, 5.

74.) NJ Privatization Taskforce, 2010, 5.

75.) Commonwealth Competition Council, 2005 Report to the Governor, General Assembly and Small Business Commission. Commonwealth of Virginia, 2005.

76.) Commonwealth Competition Council, 2010 Report to the Governor, General Assembly and Small Business Commission. Commonwealth of Virginia, 2010. 6-7.

77.) Helderman, Rosalind S., “Virginia Ponders Losing ABC Stores; Studies Conflict On Privatizing Liquor Stores”. The Washington Post. August 9, 2010.

78.) WSET-TV, “No Privatization for Virginia ABC Stores This Year”. ABC News Ch. 13 Lynchburg Danville Roanoke. February 9, 2011.

79.) Auger, 1999, 438-450.

80.) England, Evan. Memorandum to Jay Gonzalez, Secretary, Executive Office for Administration & Finance, Massachusetts, 2010.