According to the government Accounting Office, privatization is commonly defined as “any process aimed at shifting functions and responsibilities, in whole or in part, from the government to the private sector.” The most common form of privatization (though there is argument about the label) is contracting out, which typically entails a competition among private bidders. With such contracting, the government remains the financier and has management and policy control over the type and quality of services to be provided.
The purest form of privatization is when a government transfers ownership of assets, commercial-type enterprises, or responsibilities to the private sector. Generally, in this case, the government would have no role in the financial support, management, or oversight of a sold asset. Such is the case with Employers Insurance company of Nevada, formerly the State Industrial Insurance System. Governor Kenny Guinn recently signed a law making Employers Insurance a private company, and consequently removing the state of Nevada from the now-competitive worker’s compensation insurance market.
Managed competition, a more recent variation of privatization, is when a contracting process permits a government agency to prepare a work proposal and submit a bid to compete with private bidders. The government may award the contract to the bidding agency or to a private bidder.
Public-private partnerships, such as voucher systems, may also be considered a form of privatization, though there is debate as to this definition as well. In general, the most expansive definition of privatization covers virtually any action that involves exposing the operations of government to the pressures of the commercial marketplace. But the argument over labels is only a small part of the quagmire of opinions and beliefs the issue of privatization engenders.
Judy Cresanta is president of the Nevada Policy Research Institute (NPRI) — a free-market think tank in search of private solutions to public problems. She sees privatization as “a possible solution to offsetting state and local government budgets that are burgeoning these days.” She sees a basic difference between public and private incentives. “The private sector is going to compete by looking at costs, efficiency, production, profit and service,” she says. “Those five things are absent in the public sector. Government agencies focus on a process, because process is the essence of what bureaucracy is. The private sector focuses on product, because product is the essence of the private sector.” This is inherent in a system where a government agency measures its level of success by increases in budgets — there are no material incentives to cut costs.
Scott Scherer, chief of staff for Nevada Governor Kenny Guinn, sees privatization as a great option for some areas of government. “With more temporary or seasonal positions,” he says, “we don’t have to worry about hiring and laying off again and again. We don’t have to worry if we have enough for them to do.” It also makes sense in cases where large outlays of money are necessary for specialized equipment or personnel that are already working in the private sector.
Though privatization is often entered into for financial reasons, Sydney Wickliffe, director of the Nevada Department of Business and Industry, says competition can help with customization. “You’re going to compare and pick the best deal for you,” she says.
When Clark County needed a women’s correctional facility a few years back, privatization was chosen simply for speed. “It allowed us to bring a facility online when and where we needed it,” says Glen Whorton, chief of classification and planning and public information officer for the state Department of Prisons. Bob Gagnier, executive director of the State of Nevada’s Employees Association (SNEA), agrees speed is an advantage to privatization, but points out that the time differential is not from government inefficiencies, but rather from governmental requirements for ensuring value for the public. “There are a great many checks and balances that private industry doesn’t have.”
The key to making privatization work, says Cresanta, is in the bid process, which needs to be open to public scrutiny and careful planning. Her five steps to an effective process are as follows. 1) Identify the costs for services, being careful to compare the exact services with each other. 2) Determine the availability of potential competing contractors. “Sole source contracting,” she says, “is an open invitation to cheat the taxpayers.” 3) Assess current quality, set quality goals and assess the quality of competing contractors. 4) Communicate with employees in the public sector and the community about the plan. 5) Prepare a request for proposal inviting bids or proposals of service. These contracts need to be carefully designed with specific expectations laid out. Cresanta recommends contracts be for short time periods, such as three years, rather than decades.
Gagnier is not necessarily against the concept of privatization, but he feels it should be an all-or-nothing deal. “Our position,” he says of SNEA, “is it is a proper function of government to determine what services it will offer to the public. And if there are services we should not provide, then they should be in the private sector. But if a function is properly decided to be handled by government, then it should be handled by government workers.” Where SNEA gets involved is when “they try to displace government workers with private contractors based on doing it for less, which is rarely true.” He points to the fact that, unlike governmental agencies, private companies can choose who they will serve. When a company can deny services to their most expensive clients, it is not a fair comparison. Gagnier is also frustrated by private companies coming in and doing a job haphazardly or incorrectly (as may be the case with some computer systems) and then leaving the government workers to handle the fallout.
Governor Guinn is willing to look at privatization if it’s the best way to provide service to the public at a lower cost to taxpayers. But, according to Cresanta, he is not one to be taken in by buzzwords or jump on a bandwagon. Guinn chief of staff, Scherer, says the administration has to be careful. “If we don’t have well drafted contracts and don’t manage them well, some companies may attempt to take advantage of the state, viewing it as having deep pockets, and they may feel they can charge more than they would for normal customers.” Another area to watch for is conflicts of interest. If legal services for the state are contracted out, it would be a conflict to have a law firm who also represents people suing the state.
Gagnier says privatization is nothing new. Many of the functions being handled by government today are being done that way because the private industries were corrupt. “Keep in mind that what is corrupt for government may not be so in private business,” he says, such as hiring one’s relatives. But many industries were taken out of the private sector because of downright abuse (as in many of the prisons) or neglectful management.
If it ain’t broke
Not everything should be considered for privatization. And some of those categories are even agreed upon across the board. No one thinks law enforcement should be privatized. “Law enforcement is the epitome of a government function,” says Scherer. “It’s important that the state maintain control over that function and the ability to limit abuses and assume responsibility when we don’t limit abuses.”
Scherer says areas of high liability should remain under governmental control — the Department of Transportation, which carries a certain amount of immunity when it comes to lawsuits, keeps insurance rates lower than a company without that immunity might manage. “It’s the same with insurance,” he says, pointing out that a long-term interest must be taken in insurance rates to be sure privatized prisons are cost-effective. To take that further, Gagnier says “anything where government is suppressing a person’s personal rights” needs to be public — such as law enforcement, fire fighting and prison guards.
Cresanta says privatizing police enforcement would be a stretch, but some of the things the police do might be better handled by private companies. Those functions include traffic control, dispatching, computer system management and jail management. NPRI believes that if it is in the Yellow Pages, it shouldn’t be handled by government.
Wickliffe says regulatory responsibilities need to remain in public control. “Any area in which the public needs a recourse,” such as licensing, she says, “a whole host of businesses need to be responsible to an entity larger than themselves.” Gagnier points out that industry has not been particularly good at regulating itself.
Ripe for a change
Scherer says there are two primary services that have been suggested for consideration of privatization — the motor pool and the printing office. Though the decisions won’t be made until the 2001 Legislature, the two entities lend themselves well to privatization. Both are areas where others have expertise, and both could be handled by companies with other clients as well. “A company who has us for its only client,” he says, “they aren’t going to be any more cost effective than us.”
Privatization may mean business for Nevada companies. “I’m sure there are opportunities we haven’t thought of and won’t think of without someone bringing it to our attention,” said Scherer. To the extent that a business has experience with a diversified client base and can show expertise and the ability to focus and take the burden from the state with better service and lower costs, the governor’s office is open to suggestions. But keep in mind, there may be Constitutional and statutory restrictions on what can be privatized and what can’t.
Two basic belief systems are at the heart of the privatization debate. The first says government is corrupt and cannot be trusted. Political officials are happy to trade services for votes. This camp can’t likely envision a state employee doing a good job only out of a sense of pride or public welfare. They see profit as a primary motivating force in the universe.
The second camp believes businesses are corrupt and will do anything for profit. Companies are happy to sell out the public welfare for cash. They are unlikely to believe in business people doing a good job out of a sense of pride or citizenship. They see laziness and job security as a primary motivating force in the universe.
While most people fall somewhere between these two camps, when the debates get heated, the arguments tend to boil down to a lack of trust. Though it may not sound like it, that fact alone means there is room for compromise. Trust can be garnered through regulation, oversight and/or careful planning. Any decisions made about public services will be scrutinized, discussed, and monitored carefully. And vigilance always favors the taxpayer.