Privatization of the Federal Government Term Paper

Excerpt from Term Paper :

Privatization is the use of the private sector in government management and delivery of public services. Contracting out services predates the Constitution. In fact, in the early nineteenth century, some "inherently" governmental functions such as tax collection, mail delivery, and spying were performed by private contractors. Throughout the twentieth century, the government has continued to rely on contractors.

The Clinton administration, under the 1998 Federal Activities Reform Act, required federal agencies to identify jobs considered commercial in nature that could be contracted out to the private sector. As a result of the agencies findings, the white house office of management and Budget instructed all federal agencies to open identified positions to competition with the private sector. Recently, the Bush administration has identified as many as 850,000 federal jobs that could be performed by the private sector.

Does privatization affect you? Privatization is important because it helps the government achieve savings, improve efficiency and maximize effectiveness. The General Accounting Office has determined that competition for these positions could save taxpayers as much as thirty percent on each contract. The improvement will not only reduce costs, but will improve service to the Federal Government and you, the taxpayer.

I am currently employed by a government contractor that provides accounting services to governmental and not-for-profit organizations. I chose to write about privatization because my career path may be affected by the outcome of this research. We will begin with a review of related literature on the topic of privatization. Within the literature review we will explore the advantages and disadvantages of privatization. Our discussion will then focus on the methodologies that were used to acquire the research. We will also discuss the findings of our investigation and discuss the implications of the research.

Literature Review

According to research published in Foreign Policy, privatization is an economic issue as well as a political issue.

Privatization is defined as "any process aimed at shifting functions and responsibilities, in whole or in part, from the government to the private sector." ("Terms Related to Privatization Activities and Processes") The research states, "The transfer of State Owned Enterprises to the private sector reorients their basic purpose away from the political goal of providing employment and toward the economic objective of maximizing profits and wealth for shareholders." (Megginson)

The article notes, that privatization of the federal government can induce significant changes in labor policies and compensation in the private sector. In addition, privatization can often shift the power from labor to management proving to be an undermining force in the influence of labor unions in the public sector. (Megginson)

Much of the privatization that the federal government engages in involves, "contracting out" and "public-private partnering." These terms are often used to describe the relationship between the private sector and the government. While both of these strategies involve a contractual relationship between the government and the entity, the terms have varying requirements.

The United States General Accounting Office explains that "contracting out" involves "the hiring of private-sector firms or nonprofit organizations to provide goods or services for the government." ("Terms Related to Privatization Activities and Processes") When this approach is utilized, the government finances the contract and also has control over the management and quality of the goods or services that are produced. As a result, the government can terminate contractors that do not adhere to the government's standards. ("Terms Related to Privatization Activities and Processes") The fact that these contracts can be lost creates an environment of accountability between the contractor and the government.

The GAO describes public-private partnering as "a contractual arrangement formed between public- and private-sector partners that can include a variety of activities that involve the private sector in the development, financing, ownership, and operation of a public facility or service." ("Terms Related to Privatization Activities and Processes") This type of contractual relationship usually involves infrastructure facilities and projects. In public-private partnering, the resource of the private and public sector are combined and the management responsibilities are also divided. In most cases, "each partner shares in income resulting from the partnership in direct proportion to the partner's investment." ("Terms Related to Privatization Activities and Processes")

There are also other types of privatization including divesture, employee stock ownership programs, Franchising of internal or external sources, and Government sponsored enterprises. All of these programs are important facets in the privatization of the federal government. However, for the purposes of this discussion let's focus on contracting out and public-private partnership.


Many governments choose to privatize to encourage foreign investment, raise revenue for the state and introduce competition into the economic environment. (Megginson) Privatization makes foreign investment a more attractive prospect because it allows investors to place bids on governmental contracts. Raising revenue for the state is of particular interest to the federal government because it allows the state to offer the public additional services. The introduction if competition into the economic environment is important because it increases the quality of goods and services that the taxpayer receives. Competition is "when two or more parties independently attempt to secure the business of a customer by offering the most favorable terms or highest quality service or product." (Terms Related to Privatization Activities and processes")

There are three forms of competition as explained by the General Accounting Office;

Public vs. private: the public-sector organizations compete with the private sector to carryout public-sector business. (Terms Related to Privatization Activities and processes")

Public vs. public: public-sector organizations compete among themselves to conduct public-sector business. (Terms Related to Privatization Activities and processes")

Private vs. private: in which private-sector organizations compete among themselves to conduct public-sector business. ("Terms Related to Privatization Activities and Processes")

Privatization can also make companies within the private sector more efficient. In fact, "Studies document dramatic increases in output, efficiency, profitability, investment spending, and dividend payouts for firms privatized through share offerings, as well as significant reductions in their debts. And new shareholders have experienced positive returns -- over and above those earned on comparable shares of private sector firms." (Megginson)

Consumers also benefit mightily from privatization. Most consumers experience, "lower prices, wider access to higher quality services, greater competition, and increased choice -- all the result of privatization." (Megginson) The privatization of utilities such as gas, water and electricity has allowed consumers to experience tremendous savings. Consumers have also benefited from privatization in the area of telecommunications because the price of related services decreases while the quality of these services increases. "As changes in the global economy widen the gap between the world's technological haves and have-nots, the enhanced provision of telecommunication services is one of privatization's most significant contributions." (Megginson)


In spite of the fact that there are many advantages to privatization there are also some disadvantages. For instance,

The technical demands on the state may increase after privatization, since governments must move from managing individual companies to regulating entire sectors. The transition is not simple, especially when public officials themselves have grown accustomed to running SOEs for decades with only token oversight. But unless effective and independent regulators discipline the new private owners, many of the intended benefits of Privatization could go unrealized." (Megginson)

One of the major disadvantages of privatization is that it can sometime breed corruption. There are certain forms of privatization that can be easily manipulated and is therefore susceptible to corruption. Foreign Policy explains, "Insider dealings and various forms of corruption frequently bedevil countries that have privatized through vouchers or asset sales. Asset sales are often conducted in a nontransparent manner -- such as a poorly publicized sale -- giving insiders the chance to manipulate the transaction in their favor." (Megginson)

Another problem with privatization, as it relates to contracting, is that it can cost federal employees their jobs. As the government begins to "contract out" many federal employees become unnecessary and loose their jobs. This increases unemployment and can have a very negative effect on the stability of the economy. In addition, many of the federal job cuts come in sectors that are dominated by women and ethnic minorities, who have a more difficult time finding new jobs.


In preparing this report, I will utilize two sources of information: first, the existing literature on privatization and second, interviews with individuals involved in privatized services at both the federal and contractor level.

There is a great deal of information on the positive and negatives aspects of privatization. My theory is that privatization can greatly benefit the government and American public. I am concerned, however, that the results of my research will contradict my theory and my employer will not like the outcome of my research. Other problems I may encounter include a lack of cooperation on the interviewee's part, and lack of supporting privatization documentation. I also anticipate biases on the part of federal employees as well as contractors.

Privatization is a complex topic. There are many forms of privatization and I will not be able to research all the facets of this topic. I will specifically discuss contracting as it relates…

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