3. Framework for
Privatization Decisions

Privatization initiatives have three distinct phases: analysis (whether or not to proceed), planning (how), and implementation (getting it done). Because privatization is a management tool and not a substitute for management, all three phases require sustained attention and appropriate stakeholder participation.

Analysis

Privatization analysis seeks to answer three fundamental questions: (1) Is the activity or asset a viable candidate for privatization? (2) What are the costs and benefits expected from a privatization option? and (3) Is privatization sensible to pursue—do the tangible and intangible benefits outweigh the costs? The privatization decision will be reached differently with each asset or service determined to be a candidate and may require a complex set of analyses that could be unique to programs, sites, or the assets themselves. The ultimate decision rests with the program managers. They are best equipped to evaluate the intricacies related to each potential privatization candidate.

Candidate Screening

Screening candidate activities or assets for privatization requires managerial, legal, market, and cost/benefit analysis. The managerial analysis focuses on whether the activity or asset is required to fulfill recognized missions or contribute to the Department’s business lines. Legal analysis determines whether the statutes and regulations governing an activity or asset permit consideration of private-sector involvement. Legal or regulatory barriers can pose substantial obstacles that may require new directives or congressional action to overcome. Market analysis determines whether or not the private sector is likely to respond to the privatization proposal. Finally, a cost/benefit analysis determines if privatization is cost-effective.

The initial function of screening analysis is to determine whether an asset or an activity continues to be required by the Government and, if so, whether or not it serves an inherently governmental function¹ or involves a core capability that must be maintained by the Federal Government. Services and assets that no longer have value to the Department’s mission should be eliminated, either through privatization, discontinuation, or disposal. If found to be an inherently governmental function or a DOE core mission responsibility, the activity is not a candidate for privatization, and DOE managers should consider alternative strategies to improve management. The Contract Reform Team Report and the National Performance Review provide guidance on alternative government management strategies in these cases.

If screening analysis determines that a service or asset is critical to one of the Department’s business lines but is not an inherently governmental function, the service or asset may still be a candidate for some types of privatization. However, it is important to determine the legal or regulatory basis under which the serviceis performed or the asset is retained. At this point, the screening analysis must examine commercial markets providing similar services or utilizing similar assets. Managers should look to the private sector (which for purposes of this report includes nonprofit entities) and State or local governments that may be capable of delivering the same service or maintaining an asset at the same or greater level of quality at a lower cost. When it is apparent that the Department is required to or otherwise best suited for the job of performing a service or maintaining an asset, the Department should continue in its role.

Cost/Benefit Analysis

Once candidate activities or actions are determined to be potential privatization candidates, managers should conduct an economic cost/benefit analysis to determine if privatization is cost-effective. A rough analysis of potential benefit is part of the initial screening exercise, but a more comprehensive and formal analysis is needed as a basis to structure a privatization initiative. Also, intangible costs and benefits need to be considered. Different types of cost/benefit analyses are needed for different types of privatization. For asset transfers, managers must compare the economic costs and benefits of keeping, selling, or disposing of tangible assets. Divesting entire functions requires analysis similar to business valuation exercises. Contracting out services previously performed by government workers or management and operating contractors requires managers to perform a “make or buy” analysis, according to Federal Acquisition Regulation (FAR) Subpart 15.D (see Chapter 5).

To adhere to the Department’s seven privatization principles (see page 1–7), the cost/benefit analysis should be augmented along several dimensions. For example, the need to continue environmental, safety, and health protections should be reflected in the analysis in ways that a straightforward business-based approach may tend to ignore. Federal budget scoring rules or contract regulations may require specialized accounting and analysis techniques. When candidate activities could potentially result in the displacement of current contractor jobs, the affected workers and their representatives should be involved early and given the opportunity to provide input on ways to reduce the cost of retaining the work.

Planning

Candidate screening analysis and cost/benefit calculations are useful tools to help decide whether or not to proceed with a privatization project. The second stage of privatization is for the responsible DOE manager to develop a plan to realize the full potential of benefits revealed in the analysis phase. The planning exercise should be conducted at both the strategic and project levels and follow the precepts of performance-based management, including identifying results and the criteria for success.

The proposed privatization project must be integrated into the overall strategic management plan of the Department or sub-unit. While the screening and cost/benefit analysis focuses narrowly on the specific candidate project, managers must also step back and examine the “big picture” implications of pursuing any single initiative. Planning ensures that unintended consequences do not ultimately impair the management of remaining governmental functions and that the newly privatized entity or asset fits into an overall management scheme.

As part of project planning, the DOE manager must identify the legal requirements, establish timelines and milestones, and account for the resources needed to complete the privatization initiative. The planning process also requires a clear delineation of performance objectives and defined measures for determining success.

In addition, planning for privatization initiatives requires a careful and thorough analysis of how budgeting will be done. Each privatization requires a budget approach tailored to meet the objectives of the privatization. For example, asset sales typically seek to maximize net revenues to the Government. For environmental management, the goal is to reduce the costs of cleanup. In some cases, new legislation can facilitate privatization, and DOE is currently exploring legislation permitting the Department to retain certain receipts from asset sales to support future privatization activities. Thus, there is no “cookie cutter” approach for budgeting for privatization.

In general, budgeting for privatization can pose challenges that must be overcome in creative ways. This may involve, for example, classification by the Office of Management and Budget (OMB) of a large-scale waste-treatment project as a capital lease project. Under this approach, at the time a privatization contract is signed by DOE, an obligation of appropriated funds will be made for the estimated capital cost for the private contractor’s facilities to treat the waste. However, no current outlays will be counted until the contractor actually begins treating the waste. This approach encourages greater cleanup while reducing the impact on the Federal budget.

Implementation

Implementing a privatization effort requires effective and sustained managerial control, not only to execute the project plan but also to respond to changing circumstances, new information, or additional resource requirements. Successful implementation efforts should result from the establishment of crosscutting management teams and the assignment of clear roles. Although each privatization project will have unique problems, it is especially important in the current stage of departmental privatization efforts to systematically collect and synthesize information in the form of case studies and lessons learned. Such information can be invaluable as inputs for the analysis and planning phases of subsequent projects.

¹An “inherently governmental function” is a function so intimately related to the public interest as to mandate performance by government employees. Such a function cannot be contracted out. Federal Acquisition Regulation (FAR) Subpart 7.5 prescribes policies and procedures to ensure that inherently governmental functions are only performed by government employees. FAR Subpart 7.503(c) provides a nonexclusive list of examples of functions considered to be inherently governmental. The attachment to Office of Management and Budget Circular No. A–76 also contains a comprehensive list of commercial activities. These two documents provide guidance on determination of the status of a particular function.