Privatization and the Federal Government: An Introduction

Publication Date: December 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Government

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Abstract:

During the past two decades, the privatization of federal agencies and activities has been much debated. That said, privatization -- here defined as the use of the private sector in the provision of a good or service, the components of which include financing, operations (supplying, production, delivery), and quality control -- is not a recent phenomenon. Since its founding in 1789, the federal government has used private firms to provide goods and services. Hence, privatization is of perennial interest to Congress.

This report is an introduction to privatization in the federal governmental context. It discusses the emergence of privatization on the federal policy agenda in the late 1970s and early 1980s. To some, privatization appeared as an answer to the purported failures of "big government." Privatization attracted political support due to its rhetorically persuasive rationales, purported benefits, and political attractiveness. However, privatization also has been controversial. Critics have complained that privatization is a form of union busting and that privatization can have unforseen and undesirable consequences.

This report also supplies a typology of the various means through which federal agencies and activities have been privatized. The typology shows that privatization is not an either/or proposition. Rather, privatization, as this report's definition implies, is a matter of degree. Policymakers may transfer to the private sector one or more of the components of government provision of goods and services -- however many they deem appropriate.

Next, the report explains the distinction between privatization and marketization, an alternative to privatization, which is "the structuring of a government agency so that it provides goods and services in the efficient manner of a private firm." Marketization retains an activity within the governmental sector; privatization moves the components of an activity to the private sector. This distinction is significant because entities within these differing sectors tend to behave differently. Private sector firms tend to be self-directing and profit-seeking; government agencies tend to be process-oriented and pursue the multiple and sometimes conflicting goals assigned to them by Congress and the President. Hence, policymakers who wish to improve an agency's efficiency or performance, but are leery of privatization, may find marketization an attractive option.

Finally, the report notes that, whenever policymakers consider privatizing a federal agency or activity, a fundamental issue arises -- "Which activities are essential to the state and should remain directly accountable to the elected representatives of the people and which may be carried out by the private sector?" This question is complex and value-laden; no definitive answer exists. Thus, the decision to privatize is inherently controversial.

This report will not be updated.