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Outsourcing Government – A Strategic Approach to Partnered Privatization (Part 4)

Public-Private Partnership

There are situations where the government wishes to get an initiative underway but does not want to take the financial, technical and operational risk associated with it. Neither does the government wish to involve the public in assuming the risk for the venture. The results may only come after considerable research or investment of time and money. This type of Public–Private Partnership (PPP, P3 or P3) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies.

In return for assuming this risk, the government may offer some existing asset such as land, building(s) or tax breaks and may further guarantee purchase of resulting products and services for some period of time, thereby assuring the private companies of guaranteed annual revenues for some fixed period of time.

A typical example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medical services while the hospital itself provides medical services. Since the financial crisis of 2009, the relatively short-term investment by the government in banks and automotive firms could be considered a form of PPP where the government received a return on its investment for providing a one-time infusion of funds. However, in these cases, public funds were clearly at risk. However, the failure of some of these firms would have adversely affected the public as well so perhaps there was a saw-off in terms of risk.


Candidates for Privatization

Why should the government parcel out an operation for privatization? It depends on what one considers the core business of government to be. What is the mission of the government? When would we consider a government to be successful and how would we measure that? Does it have customers? Does it have markets that it services? Does it produce products and provide services needed by its constituents?

These are all good questions that we as shareholders of a corporation would ask of its management or board of directors? Why do we not treat the government in a similar manner? Why do we have unnatural, unreasonable and irrational expectations of it? The individuals serving on a government are people just like us. Would we consider it fair if others had the same expectations of us as we do of elected officials?

A government is an entity that is similar to a private sector organization, but with a conscience. While that sounds harsh, the intent is not to be disparaging of the private sector organizations or their management. It is simply a matter of responsibility and expectations. A private sector organization exists to make a profit, increase business and satisfy its shareholders – over the long term. It must necessarily make decisions that may not be in the best interests of its employees when it has to reduce benefits, lay off staff or divest itself of obsolete and non-profit making operations.

The government does not get off that easily. It also has customers – its citizens, and has stakeholders. However, by statute and policy, it may have to allocate funds for functions and operations for the public good and benefit. In some instances it may be able to achieve a measure of cost recovery. For the most part, all it can reasonably achieve is to maximize services in a cost effective and efficient manner.

In order to do so, government looks at delivery channels that have historically worked well. It uses internal staff and operations and various forms of contracting and public-private partnerships as have been described in earlier sections. The question is: What does the government do which can be done more effectively by the private sector? This presupposes the fact that government can and should be a participant in the process to “bid” for work in the same manner as the private sector does. Government and unions must be obliged to work with each other so that one is not an impediment or deterrent to the other in getting business done.

There are many government operations that may be candidates for various forms of privatization:

  • Supplies
  • Armaments
  • Aviation
  • Construction
  • Infrastructure Management
  • Delivery channels
  • Information technology
  • Administrative functions
  • Publishing
  • Event Management
  • Insurance

Government is not in the business of manufacturing paper, pencils, desks, chairs, guns, airplanes, computers, etc. It needs to purchase them so it gets the “best” deal. It is the definition of “best” where a level of partiality, incompetence, corruption, waste and other such negative factors creep in. At the end of the day, government needs to govern. That includes the enactment of laws, development of policy, establishment of criteria that represent operational success and delivery channels which it may perform itself or contract out.


Privatization at Work

The government has contracted out about two-thirds of its work to the private sector. While that sounds positive and forward-thinking, government in the minds of its citizens is bloated and continues to grow.

Why is that so? There are three reasons: First, both the Republicans and the Democrats have increased the size of government since the days of President Bush (41). While that is philosophically not in keeping with conservative values, the views of Bush 41 and 43 have been that their government, be it larger, is an effective and efficient government.

Secondly, with the faltering economy and lack of private sector investment, and with government bailouts, the current Obama administration has taken it upon itself to manage and run businesses that one would expect to stay in private sector hands. President Obama has used the reasons of fiscal stimulus to create or bring in functions into government that have traditionally been in the private sector. In his defense, permitting these organizations to fail may have been the only other alternative. There is a great fear from the public, fuelled by the Republicans and media, that this is the beginning of a set of socialist policies and moves to push the country towards a familiar European and Soviet socialist model.

Thirdly, and most importantly, when the public sector contracts out work to the private sector, it does not reduce its own operations and staff, nor does it reengineer its own operations. Instead, the result is an internal and an external organization partnering in the same job. Cost and staff have been added, no meaningful savings are achieved.


Click to view the first, second or third article in this limited series.


Shami Dugal is a member of ASPA and on the SHHSA Board. He has Bachelor’s degree in Operations Research from University of Waterloo (Canada) and an MPA from Drake University (Des Moines, Iowa). He can be reached at [email protected].



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3 Responses to Outsourcing Government – A Strategic Approach to Partnered Privatization (Part 4)

  1. kesiasa Reply

    December 19, 2012 at 2:47 am

    This article is thought provoking. Outsourcing of some of the government function is possible.But the biggest challenge is that many of the governments in the world operate like a secret organisations.

    For instance in Africa,It will take time for such measures to be implemented.

  2. Shami Dugal Reply

    December 17, 2012 at 1:45 pm

    Good to know someone is reading and thinking about the articles. Completely agree with efficient operations. My thought is if the metrics that need to be achieved by the “winning” bidder are well thought out, then either the vendor meets them or is tossed out. And I would check on progress at established milestones, not at the end of the contract when all the funds have been paid out and there is no leverage. It IS a process and a history of holding firms to their bids and promises must exist so there is belief in the method.

  3. Robert L. Morrison Reply

    December 15, 2012 at 9:05 am

    You bring up some interesting concepts. Perhaps you may want to also discuss efficiency. Just because a function is privatized does not mean you are getting more efficiency for your money. Some governments like some businesses are not efficient and cost conscious. They become bloated over time.

    I think it is good to talk about privatization and possibly go through with it, but it is also very critical to see what is being gained and will efficiency or a better cost structure derive from it.

    I think your quote of “A government is an entity that is similar to a private sector organization, but with a conscience” is very true and needs to be known by many citizens.

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