INTRODUCTION
In the United States over the last couple of years, there has been much discussion centered on how government can work better and cost less. Recently, this focus has led to discussion on whether or to what extent the private sector should be performing many of the activities, functions and services currently being performed by the government. With Washington debating budget deficit reduction and downsizing government agencies, the attention given to privatization, competition and efficiency has greatly increased.

Thus, the National Council for Public-Private Partnerships (NCP3) formed a task force in late 1996 to examine the reasons for the stagnation and halting evolution of federal privatization activities. The Council, in its on-going interest to remain non-partisan and find the "highest common denominator" politically, sought involvement from both federal and private sector representatives and experts across public sector management and across industry backgrounds.

Best practice models, successes and failures, and pilot projects have been presented at previous Council meetings at which federal sector managers and senior officials have participated. Even with this helpful information, little progress has been made. The realities of federal privatization may provide key indicators of this minimal progress:

• Opportunities for privatization, as defined below, are plentiful in the federal sector but the path of successful business relationships and implementation are wanting;
• Federal managers are reluctant at best, outright opposed at worse, to the partnering capabilities afforded through existing federal rules and policies;
• Yet, a number of significant rules and policies remain barriers to the privatization process, while direction and guidance on how to proceed is generally absent, giving federal managers little comfort in taking the measured risk for such relationships;
• Faced with reluctance, delays and failed competitions, the private sector, with its abundant financial and technical expertise and experience, is growing increasingly frustrated, and turning its time and resources to global marketplace instead.

It is with these realities and more importantly with a sense of national interest in improving the public-private sector interaction that the Council formed a task force on federal privatization. The overriding philosophy of the task force was not to determine if privatization was good or bad as a management decision, but to identify the hurdles, enablers and incentives to achieving greater privatization of US government assets and operations. Finally, the task force worked in stages of evolving analysis to:

• Define specific terms of privatization
• Define the barriers and absent policies
• Examine the traditional forms of privatization (asset transfer, outsourcing, enterprise development)
• Identify the key impediments and underlying concerns for the success of federal privatization

Privatization
The Task Force found that among federal managers there is a perception that privatization is limited to reaching out to private sector to obtain business acumen (e.g., performance measurements/benchmarks, management principles and concepts) and to reshaping federal operations to more closely resemble a private sector business. And while textbooks define privatization as the transfer of ownership of assets from the public to the private sector, globally and within the US privatization has come to mean much more. The Task Force adopted the more common and more practical definition of privatization as a process of wide-ranging economic change that includes public-private partnerships, joint ventures and outsourcing. The change in ownership (or control) of the assets, or the prospect of it, is just the catalyst, however, internal federal agency reorganization, absent the transfer of ownership, control or responsibility to a private party, is not.

Competition
What is the role of competition in the privatization process? Competition is the engine that creates the savings and efficiencies associated with privatization. The federal government should be able to do almost anything cheaper and better than the private sector does, since it does not need to make profit and does not pay taxes. Yet, government is usually only more efficient (or equally efficient) following a reengineering program while the private sector is generally always at a near efficient state. The key difference is that government is subject to periodic competition through the A-76 process whereas the private sector is subjected to constant competition. Creating a competitive environment in which the federal government can migrate to a straight line cost curve is the purpose and end objective of privatization and outsourcing. In fact, privatization itself does not yield annual operating savings. Privatization is simply the process of getting there. Therefore any successful privatization initiative must consider the competitive environment.

For the purposes of this study, the Task Force decided that it would focus on competition between the private sector and government. Competition between government agencies was not included in the definition of competition. While competition between government agencies may result in improved short-term performance for a given operation, over the long-term these agencies are not subject to the same competitive pressures as private businesses, and it is these constant pressures which result in break-through technologies and constant drives for efficiency.

Government Efficiency
When people talk about making government more efficient they are usually referring to making the government work better and cost less. It is generally regarded that the path to becoming more efficient is periodic OMB A-76 studies and annual customer satisfaction surveys. However, doing more with less requires more than periodic competition through OMB A-76 and a change in customer service. Government efficiency is all about effective asset utilization, where an asset is not only physical plant and equipment but also the employees and intellectual capital. For privatization to be successful, competition must be introduces. Competition will in turn force a more efficient government by focusing management on effectively utilizing all their physical assets, disposing of those no longer needed and maximizing employee productivity.

The Task Force, upon clarifying the terminology used by federal managers and private sector representatives for defining privatization activities, then concentrated its attention on cross-cutting issues and terms which would define barriers and absent policies in the federal privatization process. It became immediately apparent to all members of the Task Force that there are clearly defining legislative and policy hurdles and enablers for privatization but few, if any, incentives.

Simply, both federal and private sector representatives called a foundation on which privatization could be built: A consistent philosophy and methodology that is defensible to Congress, Agency heads and the Administration.

Our definition for these hurdles, enablers and incentives established a grid on which an analysis of required changes, amendments, new legislation, or simple education and training would alleviate any confusion and resistance.

The Task Force desired to communicate a very simple analysis which considered such elements as true cost accounting for scoring, true savings to the taxpayers, positive tax impacts from the creation of new enterprises, etc.

Hurdles
Federal managers and decision-makers have stated that others are a number of hurdles, which exist in determining when and how to respond to private sector involvement. From CBO scoring to perceived fear of failure, managers expressed a concern that no matter how much encouragement or congressional demand for privatization, changes must take place in rules and senior management perception of striking a balanced business relationship. A critical hurdle cited by both sectors, by way of example, is how a clear valuation of the asset or investment is handled in the budget process.

Enablers
This is not identification of the carrot and stick dynamic, rather federal managers and private sector representatives noted that congressional and Administration leadership is required to enable both sectors to work more closely together. Enabling the process of privatization includes the signaling to the federal culture that such relationships are not only necessary but also encouraged through the removal or barriers. For instance, the Task Force recognized that during times of crisis or emergency, swift response and urgency often was enabled through the temporary removal or cumbersome paperwork - why not make this an on-going process?

Incentives
No matter how much congressional intent exist for privatization, changing the federal culture will be difficult. Instead, federal and private sector representatives called for a series of incentives that fostered collaboration and cooperation between the sectors to the benefit of the taxpayer and the long-term needs of the nation. No manager will be committed to reducing the size and cost of government if, by doing so, such action means the end of their career. Whether anachronistic or better provided by the private sector, federal managers see no incentive to move forward. From the ability to maintain some of the proceeds from a privatization to continue further efficiency initiatives to pension portability, representatives of both sectors acknowledged that a specific set of incentives needs to be formalized and accepted by congressional and Administration leadership.

Once the Task Force became comfortable with the terminology and definitions of the privatization process, it settled down to analyzing the three traditional forms of federal privatization. While an inordinate amount of time was spent on these definitions, it was vital to have all participants agreeing to the same viewpoint before the in-depth examination of specific case studies and current decision-making.

Asset Transfers
Asset transfers include:

• The transfer from the public to the private sector of non-operating assets such as physical property (land, buildings, equipment, machinery, etc.); and
• The transfer from the public to the private sector so asset based (typically infrastructure) operations such as water, wastewater, ports, airports, roads, railways and similar assets.
  

Outsourcing
Outsourcing occurs when the government contracts from the private sector for services or products that are being or have traditionally been performed or provided by government employees. Responsibility for service or product delivery is delegated to the supplier/contractor while the government retains oversight authority.

Enterprise Transfers
An enterprise transfer is the transfer of ownership from the public to the private sector of an operation or function (a going concern), which is producing a marketable good or service. The transfer may include people, intellectual property, facilities and other assets.

Our analysis reviewed the experience and obstacles faced by government in successfully transferring assets and enterprises or in undertaking an outsourcing. Cases we reviewed include:

• Department of Energy Precious Metals Sales
• Department of Energy Sale of Oxnard, California Facilities
• Redevelopment of US Postal Service, City Post Office Transaction
• Miami Conservancy District - Franklin Area Wastewater Treatment Plant
• DC's Correctional Treatment Facility
• Foothill/Eastern Toll Corridor
• US Investigation Services Inc.
• Naval Air Warfare Center, Indianapolis
• United States Enrichment Corporation
• Conrail
• Military Housing
• Coast Guard
• Department of Energy, Richland Operations - Hanford Laundry
• Defense Mapping
• Weather Services
• Research, Development, Test & Evaluation
• Vessel Trafficking Services (VTS)

The several months spent examining these case studies and on learning the commonalities of the process - regardless if the privatization was an asset, a program, or the creation of a new enterprise - fostered much debate and discussion on a set of critical issues. These issues, it was determined, were common threads throughout the process and if remained unanswered would continue to plague the process and continue the stagnation in the public-private relationship.

Valuation of the Asset or Program
From two different perspectives, valuation of the possible privatization target appears to be a significant hurdle. First, federal managers expressed concern that once a valuation was defined, immediate questions arose as to how the offsetting impact would occur for CBO scoring and internal budgeting. And federal managers repeatedly cited the question from senior leadership and/or congressional oversight: was this the best valuation, the best return on the investment?

For the private sector, the issue of valuation remains a hurdle as long as the rules for establishing such valuations are based on perceived highest maximum returns versus realistic market conditions and competitive pricing. In turn, valuation discussions among private sector representatives recalled previous case studies and examples in which valuation was required to consider both productive assets as well as non-productive, burdensome assets which could drain the cashflow from putting a business together.

Incentivization of the Process
Private sector representatives noted throughout the Task Force meetings that federal managers, while in most cases sincere about responding to inquiries about privatization, often remained luke warm to moving forward. The necessity to incentivize the process is based on the current posture of the public sector partner in any potential business relationship. As found in the base closure and in a number of difficult privatization initiatives, federal managers are reluctant to end their careers or diminish their responsibility without some clear and warranted knowledge of an alternative future professional and personal agenda.

Federal managers expressed reservation about finalizing the privatization process unless answers were provided to concerns about pensions, reality of ESOP and stock ownership, training for other government positions, etc. In turn, federal managers states outright that if the process led to a reduction in workforce and asset management budgets, could some of the savings be utilized to either incentivize further efficiencies of to enhance relevant on-going work in other venues. In a move for deficit reduction, the process was not taking into account the need for creating a culture of competition and/or efficiency as long as federal managers felt penalized in the short-run.

Bargaining Unit Relations
Both federal and private sector representatives acknowledged the positive or negative impact bargaining units could have on the future of privatization. All politics aside - for which this issue has and could continued to be seriously debated - bargaining units will be part of the initial examination of a privatization activity and therefore require address sooner rather than later. Case studies and examples of previous privatizations include positive bargaining unit roles - from negotiating the stock valuation and ownership in a future ESOP to directly investing in the new enterprise as a joint venture partner. However, bargaining units in many cases have become critical hurdles because of the failure to recognize their role, lack of communications between the sectors, or inability to understand the business model of a privatization.

In addition to the three critical issues outlined above, there are four fundamental areas of underlying issues that must also be addressed, not only from a regulatory and legislative perspective but also from the private sector, if privatization is to proceed effectively and with maximum benefits to the stakeholders.

Financial Management Issues
Remaining "inside the box", focusing on short term versus long term financial benefits of the transaction when creating privatizations can have an adverse impact on the decision. Managers should be allowed flexibility to create innovative financial transactions without the undue concern over whether the transaction will be approved due to short-term financial concerns. In this regard, longer financial planning horizons and the broader application of lifecycle costing analyses would enable the privatization process. Federal clawback legislation requiring repayment of all outstanding federal grants in full prior to the privatizing agency or department receiving any of the financial benefits of the privatization transaction should be addressed. In addition managers should be free to adopt creative tax incentives to encourage the best ongoing financial savings to the government's operating budgets.

Non revenue generating assets and negative value assets represent a significant problem to managers looking to privatization as a solution. In many cases, these assets can only be disposed off by combining them with more attractive assets. This requires managers to have the ability to sell other assets at below market value in order to persuade the purchaser to take on the non-performing assets. This results in the elimination of operating costs to sustain non performing assets which reduces the budgetary need on an ongoing basis, and should not be prevented by a need to gather one off reductions in the budget from sale proceeds.

Liabilities
In many cases federal assets are not subject to the same legislation as private sector assets. Environmental liabilities associated with such federal assets can, at the time of privatization, be significant and unknown. The ability to indemnify any private sector company purchasing the assets is an important part of the privatization process, especially in any type of joint venture or public-private partnering initiative where legal liability may be uncertain.

In addition, lack of knowledge on part of local and federal officials regarding the degree of environmental contamination of properties poses a significant obstacle to successful asset transactions. Code regulation in the private sector e.g. OSHA does not apply to federally owned assets. Consequently, when assets are transferred to the private sector there is usually a significant investment required to bring assets up to code compliant status. Such costs adversely impact the value of the asset or business the asset is a part of. As a result there is frequently a gap between the value of an asset for continuing government use and the value of that asset for the same use in the private sector.

Legislation should allow for such transactions to take place as it allows the government to achieve the desired operating cost reductions that step from the competitive private sector environment. If the transaction is blocked due to valuation principles these benefits will be lost.

National Security
Much of the privatization opportunities exist in and around Department of Defense and Energy facilities, laboratories and programs. In turn, many of these opportunities are impacted by national security issues such as access to intellectual property, equipment and expertise which - if placed in the wrong hands - could lead to a potential threat from domestic or international sources. While private sector representatives acknowledged that no CEO or President wished to be blamed for a breach in national security, review of security impacting business relationship needs revamping and expediting. And as noted a long tradition of partnering with the private sector in large acquisitions and program development. Thus, as privatization, outsourcing and partnering reaches into new territory, those traditional processes should be enhanced so as to address expeditiously the business opportunity.

Even among private sector representatives, debate occurred about the tact and posture to take both the political and bargaining unit arenas. While some members urged stronger responses, all members concurred that the interest in the long run was to have technically - and financially solid business opportunities, which were defensible before congressional inquiry and Administration review.

Therefore, the Task Force proposes the following for consideration by members of the Congressional Privatization Task Force:

• Members of the National Council for Public-Private Partnerships' (NCP3) six month-long task force have done the work of analysis and data gathering. While not as exhaustive as some congressional members may desire, the findings and draft final report provide the basis or foundation for the Congressional Task Force;
• Through the work of the NCP3 task force, identification of a set of hurdles, enablers, and incentives has been drafted thus allowing busy congressional members to focus on action and results than analysis and study;
• In turn, three significant issues have been identified which - if given congressional attention - could result in critical movement in the privatization process, thus leap-frogging the current stagnation and minimal outcomes. Focused debate and discussion by congressional members on the valuation, incentivization and bargaining unit issues could provide the public forum for serious consideration of mutually beneficial resolutions;
• Members of the NCP3 Task Force and the entire NCP3 membership are prepared to serve as facilitators and advisors to the Congressional Privatization Task Force so as to enhance the knowledge and skills required for a positive and successful mission. NCP3 has shown its interest and intent in the privatization arena through its annual meetings, training sessions and the support of its own task force comprised of federal and private sector representatives. This grassroots level activity spans both parties and all geographies.