Privatization and the Federal Government:: An Introduction

Privatization and the Federal Government:
An Introduction
Updated April 23, 2007
Kevin R. Kosar
Analyst in American National Government
Government and Finance Division

Privatization and the Federal Government: An
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, in all its forms,
which include contracting out, vouchers, and prize competitions, 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.

In troduction ......................................................1
Privatization: A Definition...........................................2
Background: The Recent Political Salience of Privatization.................3
The Rhetorically Potent Rationales for Privatization..................4
Purported Benefits of Privatization................................6
Political Attractiveness of Privatization.............................7
Criticisms of Privatization...........................................9
Means of Privatization.............................................12
Divestiture/Load-Shedding .................................13
Contracting for Goods.....................................14
Contracting for Services (Outsourcing)........................15
Vouchers ...............................................16
Quasi Governmental Entities/GOCO..........................17
Third-Party Financing.....................................17
Grants to Private Parties....................................18
Prize Competitions........................................19
Use of Volunteers........................................19
Privatization: Ramifications........................................20
Behavior of the Entity.........................................20
Accountability ...............................................21
Privacy .....................................................22
Marketization: An Alternative to Privatization?.........................23
Agency Franchises........................................25
User Fees...............................................25
Government Corporations..................................27
Competitive Sourcing.....................................28
To Privatize or Not — The Inevitability of Political Controversy............30
Conclusion ......................................................32

Privatization and the Federal Government:
An Introduction
Newspapers1 and journals carry reports of efforts by local, state, and national
governments to privatize government agencies or services.2 Privatization initiatives3
are being considered and carried out in nation-states around the world.
Privatization is an idea that has attracted both strong adherents and vociferous
critics. Privatization reached the federal policy agenda in the United States more
than two decades ago, and each Congress features new bills proposing to either
expand or halt the movement of federal governmental activities to the private sector.
In recent years, President George W. Bush has advocated the privatization of
military housing and the expansion of opportunities for private organizations to
provide social and community services as part of his government management4
agenda. Moreover, the President supported the provision of housing and schooling
vouchers to persons displaced by Hurricane Katrina, and the creation of a Medicare5
prescription drug benefit provided by private firms.

1 This report draws upon CRS Report 95-522, Privatization: Meanings, Rationale, and
Limits; and CRS Report 89-160, Privatization from a Public Management Perspective, by
Ronald C. Moe (both archived; available from author).
2 To cite two recent examples: Samuel G. Freedman, “The Not-So-Public Part Of the Public
Schools,” New York Times, September 13, 2006, p. 9; and Eric Peter, “Privatization Will
Bring Fresh Ideas,” Augusta Chronicle, September 26, 2006, p. A5.
3 For example, the French government is considering the privatization of a state-owned gas
firm, and the Algerian government, reportedly, is in the process of privatizing a state-owned
Algerian People’s Credit Union. “EU Energy Giants May be Broken Up,” Irish Times,
September 12, 2006; and Djalal Bouâti, “CPA to be Privatized Next February,” El-Khabar,
September 27, 2006.
4 Office of Management and Budget, The President’s Management Agenda (Washington:
OMB, 2002), pp. 35-42,available at [
5 On these policies, see, respectively, CRS Report RL33173, Hurricane Katrina: Questions
Regarding the Section 8 Housing Voucher Program, by Maggie McCarty; CRS Report
RL33236, Education-Related Hurricane Relief: Legislative Action, by Rebecca R. Skinner
et al.; and CRS Report RL33136, Medicare: Enrollment in Medicare Drug Plans, by
Jennifer O’Sullivan.

Congress, however, has been of mixed mind regarding privatization, enacting
policies that both limit and expand the private sector’s access to federal funds to
provide governmental services.
!Congress has enacted statutes (e.g., P.L. 104-193, sec. 104; P.L. 106-
554, sec. 1) that permit private groups — including not-for-profits
and religious organizations — to apply for grants to provide social
services, such as substance abuse counseling and employment
training, previously offered by government agencies.6
!During the 110th Congress, the House approved a bill that would
impose a one year “moratorium on conversion to contractor
performance of Department of Defense functions at military medical
facilities” (H.R. 1538, Section 301).
Privatization, however, is not a recent phenomenon. Since the founding of the
Republic, the federal government has hired or contracted with private firms to
provide public goods and services. For example, Congress enacted a statute in 1789
that declared that
it shall be the duty of the Secretary of the Treasury to provide by contracts,
which shall be approved by the President, for building a lighthouse near the
entrance of the Chesapeake Bay, and for rebuilding when necessary, and keeping
in good repair, the lighthouses, beacons, buoys, and public piers in the several
states....” (1 Stat. 54)
Hence, privatization has been of perennial interest to Congress and likely will
continue to be so.
Privatization: A Definition
Economists, political leaders, and government officials tend to define7
“privatization” differently. The breadth of activities covered by the term
“privatization” varies greatly. The Congressional Budget Office (CBO), for example,
has defined “privatization” narrowly to refer to activities that “involve a genuine sale
of assets and termination of a federal activity.”8 The Oxford English Dictionary,
meanwhile, defines the term more broadly to mean “the policy or process of making

6 CRS Report RL32736, Charitable Choice Rules and Faith-Based Organizations, by Joe
7 On privatization as a contested concept, see Paul Starr, “The Meaning of Privatization,”
Yale Law & Policy Review, vol. 6, issue 1, 1988, pp. 6-41.
8 Congressional Budget Office, Third Party Financing of Federal Projects, Economic and
Budget Issue Brief, June 1, 2005, p. 5.

private as opposed to public.”9 Perhaps most commonly, “privatization” is used to
refer to “any shift of activities or functions from the state to the private sector.”10
All three of these definitions have value. Arguably, though, it may be possible
to define privatization more precisely. Privatization might be 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.
This definition is useful to policymakers for three reasons. First, it enables
policymakers who wish to improve the provision of a good or service to see that
privatization is not an either/or proposition. Rather, privatization is a matter of
degrees and there are myriad means, as this report explicates, through which the
private sector may be brought into the process of the provision of a good or service.
At minimum, an agency might purchase office supplies, such as printer paper, pens,
and folders, from a private sector firm (supplying). Alternatively, a government
agency may more heavily utilize the private sector. It might also hire a not-for-profit
corporation to raise operating funds and contract with private firms to assist in the
provision of a service (supplying, financing, delivery). Taken furthest, an agency
might be abolished and private firms allowed to provide a good or service (financing,
supplying, production, delivery, and quality control).
Second, utilizing this definition also may enable policymakers to see that a
fundamental values question lies beneath the issue of privatization. Whenever
government must provide a good or service, the question arises, “Which components
of provision ought to be done by the government and which might be done by the
private sector?” Different approaches to privatization of the components of an
agency’s provision of goods and service may provoke more or less controversy. For
example, permitting an agency to hire a private firm to assess its performance
(quality control) may elicit some concern; permitting this same agency to acquire
funds by charging citizens fees (financing) may provoke widespread criticism.
On the whole, then, the definition employed in this report may highlight for
policymakers both the instrumental (e.g., “how”) and normative (e.g., “ought”)
questions involved in privatization.
Background: The Recent Political Salience of
The sources of the salience of privatization are manifold, but likely include
privatization’s rhetorically potent rationales, purported benefits, and political

9 Oxford English Dictionary, available at [].
10 Starr, “The Meaning of Privatization,” p. 14.

The Rhetorically Potent Rationales for Privatization
A host of rationales has been employed to advance privatization as a policy.
Collectively, though, these arguments amount to a criticism of the purported failures
of “big government.”11
In great part, the contemporary privatization movement has its intellectual
roots in free market economic theory and public choice theory.12 Philosophically,
free market theory is skeptical of government and is sanguine toward markets. As
one renowned exponent of markets has written,
Economic arrangements play a dual role in the promotion of a free society. On
the one hand, freedom in economic arrangements is itself a component of
freedom broadly understood, so economic freedom is an end in itself. In the
second place, economic freedom is also an indispensable means toward the
achievement of political freedom.13
From this perspective, the great danger to freedom is the concentration of power in
the hands of government. Economic freedom protects individual freedom by limiting14
the extent of political power. Free market theory, generally speaking, argues that
markets — not governments — are the most efficient means for the production of
goods and services. In arguing for markets and against government provision of
goods and services, free market advocates argue that government tends to behave as
a monopoly provider of goods and services. As such, it is inefficient, inattentive to
public wants, and slow to reform and innovate.
Public choice theory is a near relation to free market economics.15 One of public
choice theory’s criticisms of government is that public bureaucracies should not be
viewed as neutral vehicles for delivering government goods and services. Rather, it
posits, individual bureaucrats should be viewed as self-interested actors, not public-
spirited civil servants.16 As each bureaucrat strives to achieve what he desires, he

11 On the role of ideas and the movement of privatization onto the federal policy agenda, see
Jeffrey R. Henig, “Privatization in the United States: Theory and Practice,” Political Science
Quarterly, vol. 104, no. 4, 1989-90, pp. 649-670.
12 Jane Seaberry, “‘Public Choice’ Finds Allies in Top Places,” Washington Post, April 6,

1986, p. F1.

13 Milton Friedman with the assistance of Rose Friedman, Capitalism and Freedom, 40th
anniversary ed. (Chicago: University of Chicago Press, 2002), p. 8.
14 Ibid., p. 15.
15 Hugh Stretton and Lionel Orchard, Public Goods, Public Enterprise and Public Choice:
Theoretical Foundations of the Contemporary Attack on Government (New York: St.
Martin’s Press, 1994).
16 “Bureaucrats are much like other people and, in general, are more interested in their own
well-being than in the public interest. The problem is to design an apparatus that leads
bureaucrats in their own interest to serve the interests of the rest of us.” Gordon Tullock,
“Bureaucracy,” in Gordon Tullock, Arthur Seldon, and Gordon L. Brady, Government

helps produce collective organizational pathologies, often termed “government
failures.”17 For example, according to public choice theory, the head of each
administrative division of an agency should be expected to seek to obtain the
maximum possible funding for his division. In order to justify this budget request,
he will devise ways to increase projected costs. When each administrative head does
this, the collective result is a greatly enlarged agency budget with funding priorities
that are neither rational nor necessarily related to achieving the goals assigned to the
agency by statute.
Both free market economists and public choice theorists typically believe that
the nature of the goods or services to be produced determines whether the private
sector or government should produce it. If the good is “non-excludable” (meaning
that persons cannot be prevented from using it) and “non-rival” (meaning that one
person’s use of it does not diminish another person’s use of it), then it is a “public
good” and government should produce it. An example of this sort of good is national
defense. As for goods that do not meet these criteria (e.g., computers, bullets,
housing priced at below-market rates for occupancy by low-income persons), free
market economists and public choice theorists tend to hold that private firms should
be left to produce these items because they can do so most efficiently. Since public
goods tend to be few, this perspective amounts to an advocacy of minimalist
government, and one that would have the government use private firms as much as
it can to help it produce public goods.
There also have been political and philosophical arguments that have
encouraged privatization implicitly and explicitly. Primarily, these arguments have
come from conservatives and libertarians who wish to shrink the federal government.
Some of these critics have complained about the growth of a “behemoth” federal
government that accretes power at a cost to the liberty of citizens.18 Other detractors
of “big government” complain that the federal government has overstepped the
bounds set for it by the Constitution.19 In both cases, the argument is that
government is doing things that it should not be doing and that it should desist from
doing them. These activities, then, would be left to the private sector, which may or
may not perform them.
Still, other critics of big government have explicitly advanced privatization as
a means for reducing the size of government and the federal deficit:
It is the demand for public services that powers the growth of the government,
and there is a systematic political imbalance between those who desire more

16 (...continued)
Failure: A Primer in Public Choice (Washington: Cato Institute, 2002), p. 53.
17 Gordon Tullock, The Politics of Bureaucracy (Lanham, MD: University Press of America,


18 James Bovard, Lost Rights: The Destruction of American Liberty (New York: St. Martins
Press, 1995).
19 See, for example, Robert Bork, The Tempting of America: The Political Seduction of the
Law (New York: Free Press, 1990), chapter 2.

spending and those who desire less — an imbalance consistently favoring the
pro-spending lobby.... [A] powerful coalition of beneficiaries, service suppliers,
political activists, and bureaucrats tends to develop around each federal spending
program. It is in the interest of those coalitions to press [Congress] for an20
expansion of the federal role.
Privatization, according to this perspective, can diminish these political pressures by
taking an activity out of the hands of those with an interest in its expansion.
Bureaucrats would be replaced by private sector entrepreneurs, and recipients of
government goods and services would be transformed into customers. Whereas the
former persons had an interest in greater spending, it is said, the latter will favor low-
cost services.
These arguments for privatization have attracted attention, in part, because they
are rhetorically potent. Economics, history, and constitutional law all have been
employed to argue against “big government” and for the superior ability of private
firms to provide goods and services.21 Proponents of privatization also have
portrayed privatization as a policy that promotes widely-esteemed values, such as
freedom and efficiency, as a tool for fighting the bugbears of intrusive and wasteful
bureaucracy, and as a “key” to better government.
Purported Benefits of Privatization
Proponents of privatization have claimed that it provides diverse benefits. E.S.
Savas, one of the earliest and best known proponents of privatization, has stated,
[P]rivatization is the key to both limited and better government: limited in size,
scope, and power relative to society’s other institutions; and better in that
society’s needs are satisfied more efficiently, effectively, and equitably.
Privatization is both a means and an end. For pragmatists who want better
government and for populists who seek a better society, privatization is a means22
toward those ends.
Generally, promoters of privatization believe that private firms can provide
goods and services “better, faster, and cheaper” than government. Competition and
the profit-motive, they say, goad private firms to better produce products and services23
than government, which they construe as a “monopoly.” Advocates for

20 Stuart Butler, Privatizing Federal Spending (New York: Universe Books, 1985), p. 2. See
also Stephen Moore and Stuart M. Butler, Privatization: A Strategy for Taming the Federal
Budget (Washington: Heritage Foundation, 1988).
21 Some advocates have argued that the tenets of Christianity are consanguine with the
principles of free markets economics and minimalist government. See, for example, Stephen
Carson, “Christianity’s Free-Market Tradition,” website of the Ludwig van Mises Institute,
July 14, 2003, available at [].
22 E.S. Savas, Privatization: The Key to Better Government (Chatham, NJ: Chatham House,

1987), p. 288.

23 David Osborne and Ted Gaebler, Reinventing Government (Reading, MA: Addison-

privatization often point to the positive experiences that some states and localities
have experienced when they privatized municipal services such as waste removal,
fire protection, and ambulance services.24
Privatization also is desirable, some advocates contend, because it can spur
economic growth by opening new areas of activity to entrepreneurs. Privatizing
activities that the private sector can provide has also been justified as a means to
improve government performance by forcing it to focus more sharply on its “core
activities” rather than adjunct functions.25
Political Attractiveness of Privatization
Privatization holds appeal to some policymakers because of its purported utility
for addressing at least four salient political issues.
First, some persons in the United States have expressed disillusionment with the
federal government’s performance as a provider of services and regulator of the
economy. The roots of this sentiment are deep, going back at least to conservative
reactions against the expansion of the federal government during the New Deal and
the economic and national socialism in Europe and the Soviet Union.26 In more
recent decades, allegations of “waste, fraud, and abuse” by federal agencies have
encouraged a search for private sector solutions to government problems.27
Second, worldwide, a number of countries have experienced a host of problems
with state-operated industries and entities. Corruption, escalating costs, and
employee strikes inspired some central governments to consider other means to make

23 (...continued)
Wesley, 1992), chapter 3.
24 E.S. Savas, Privatizing the Public Sector: How to Shrink Government (Chatham, N.J.:
Chatham House Publishers, 1982), pp. 111-117; Keon S. Chi and Cindy Jasper, Private
Practices: A Review of Privatization in State Government (Lexington, KY: The Council of
State Governments, 1998); and Roger S. Ahlbrandt Jr., Municipal Fire Protection Service:
Comparison of Alternative Forms (Beverly Hills, CA: Sage Publications, 1973). For an
early and more critical view, see Donald Fisk, Herbert Kielsing, and Thomas Muller, Private
Provision of Public Services: An Overview (Washington: The Urban Institute, 1978), pp.


25 Edward H. Crane and David Boaz, Cato Handbook on Policy, 6th ed. (Washington: Cato
Institute, 2005), p. 326.
26 See James T. Patterson, Congressional Conservatism and the New Deal (Lexington:
University of Kentucky Press, 1967); Friedrich A. Hayek, The Road to Serfdom (Chicago:
University of Chicago Press, 1944); and Milton Friedman, Capitalism, Freedom, and
Democracy (Chicago: University of Chicago Press, 1962).
27 For example, see Donald Lambo, Fat City: How Washington Wastes Your Taxes (South
Bend, IN: Regnery Publishing, 1980). See also President’s Private Sector Survey on Cost
Control, War on Waste (New York: MacMillan Publishing Company, 1984).

these entities more cost effective and competitive.28 Foreign governments’
experiments with privatization helped fuel the United States’s own experimentations
in government reform.29
Third, the persistent budget deficits of the past three decades have encouraged
lawmakers and agency managers to develop new sources of revenue and to reduce
costs. The search for solutions has stimulated both the federal government and
private firms to examine government activities, to develop proposals to transfer
government functions to the private sector, and to make agencies operate more like
the private sector.30
Fourth, private sector firms have significant interests in the advancement of
privatization.31 These firms may reap significant financial benefits, for example, by
purchasing government assets and by winning contracts to provide products and
services to the government or the public. To cite just two instances: (1) In 1998,
Occidental Petroleum was willing to spend $3.65 billion to purchase the Elk Hills
Naval Petroleum Reserve from the U.S. government.32 Recently, the company has
said that the purchase was “an excellent investment.”33 (2) In 2005, the federal
government’s annual spending on contracts with private companies for goods and
services grew to $377.5 billion.34 Over the past two decades, newspapers and
periodicals have carried pieces by business executives that urge the government to
turn to the private sector to improve government.35

28 William P. Glade, ed., State Shrinking: A Comparative Inquiry into Privatization (Austin:
Institute of Latin American Studies, University of Austin at Texas, 1986); and Donald J.
Savoie, Thatcher, Reagan, Mulroney: In Search of a New Bureaucracy (Toronto: University
of Toronto Press, 1994).
29 Katsuro Sakoh, Privatizing State-Owned Enterprises: A Japanese Case Study
(Washington: Heritage Foundation, 1986); U.S. General Accounting Office, Privatization/
Divestiture Practices in Other Nations, GAO/AIMD-96-2 (Washington: GAO, 1995); and
U.S. General Accounting Office, Budget Issues: Privatization Practices in Argentina,
GAO/AIMD-96-55 (Washington: GAO, 1996).
30 On improving government efficiency, see, for example, the publications of IBM’s Center
for the Business of Government, available at [
31 Savas, Privatization, p. 9.
32 Platt’s Inside Energy, “Government Sells Elk Hills Reserve,” The Energy Report,
February 9, 1998.
33 Website of the Occidental Petroleum Corporation, available at [
OIL_GAS/world_ops/usa/elkhills.htm] .
34 U.S. House of Representatives, Committee on Government Reform — Minority Staff,
Dollars, Not Sense: Government Contracting Under the Bush Administration (Washington:
U.S. House of Representatives, 2006), p. 3.
35 For two recent examples, see John Torinus, “Public Sector Can Learn from Private
Successes,” Milwaukee Journal Sentinel Online, June 17, 2006, available at
[]; and Stephen L. Starling, “What
Private Industry Can Teach Government,” World Trade Magazine, April 1, 2004.

Not surprisingly, then, the past four presidents all have promoted privatization
to some degree. President Ronald W. Reagan was a vigorous exponent of
privatization, favored the privatization of Conrail, and appointed a Commission on
Privatization in 1987.36 Though less ardent than his predecessor, President George
H.W. Bush spoke in favor of privatization and issued an executive order to encourage
it.37 President William J. Clinton, with the help of Vice President Albert A. Gore Jr.,
promoted the reinvention of government based upon ideas drawn from the private
sector, and supported the privatization of the Elk Hills Naval Petroleum Reserve in
1998.38 President George W. Bush, as noted above, has voiced support for
privatization initiatives.
Criticisms of Privatization
Unlike “reinventing government,” “performance-based organizations,” or other
recent government reform ideas, privatization remains much discussed in federal
policy networks.39 That said, proponents’ acclamation of privatization as a tool for
improving the performance of government has not gone without rebuttal. Observers
and opponents have raised numerous questions and issued assorted criticisms of
privatization. Views include the following:
!The shifting of government work from government employees to
private sector contractors has been criticized as a union-busting
strategy intended to weaken the political left by decreasing the
number of unionized government employees.40

36 U.S. President’s Commission on Privatization, Privatization: Toward More Effective
Government (Washington: GPO, 1988).
37 George H.W. Bush, Executive Order 12803, April 30, 1992. (57 FR 19063) Bush later
remarked of this executive order, “Facilities now run by government that could be owned
and operated by competitive enterprises can thus serve the public more fairly and more
efficiently.” As quoted in John E. Yang, “Bush Moves to Ease Sale of Federally Financed
Facilities” Washington Post, May 1, 1992, p. A10.
38 U.S. Executive Office of the President, National Performance Review, From Red Tape
to Results: Creating a Government That Works Better and Costs Less (Washington: U.S.
GPO, 1993).
39 A CRS Nexis search of Washington Post articles revealed 36 mentions of the phrase
“reinventing government” and two mentions of “performance based organizations” over the
past five years. Meanwhile, a CRS Nexis search for Washington Post articles carrying the
terms “privatization” and “federal government” produced over 350 articles in the past five
years. On reinventing government and performance-based organizations, see U.S. General
Accounting Office, Reinventing Government: The Status of NPR Recommendations at 10
Agencies, GAO/GGD-00-145 (Washington: GAO, 2000); and CRS Report 97-72GOV,
Performance-Based Organizations in the Federal Government: A Reinvention Innovation,
by Harold C. Relyea (archived; available from author.)
40 Craig Becker, “With Whose Hands: Privatization, Public Employment, Democracy,” Yale
Law and Policy Review, vol. 6, issue 1, 1988, pp. 88-108, quotes at pp. 88, 89.

!Contracting out may adversely affect women and minorities
collectively, as they have “tended to find jobs in the civil service
more readily than in the private sector.”41
!Under the American theory of governance, political power
originated with the people, who erected government and entrusted
it to use this power in accordance with the law. Thus, the
responsibility of those employed by government is to act in
accordance with this fiduciary relationship. Accordingly, both the
Constitution and federal law include oaths to be taken by elected
officials and civil servants.42 Bureaucracies are not merely passive
entities that execute the law as enacted. Bureaucracies interpret the
law and sculpt policies. Thus, any effort to shift bureaucratic
functions to the private sector may risk transferring away some
governing discretion into the hands of private parties who are not
accountable to the public and may not have its interests at heart.43
!One of the objectives of creating a civil service was to provide
government with a stable corps of committed employees. Federal
workers were to be chosen on a rational basis, as opposed to the
favor of an appointee, and provided with protections and good
compensation and benefits that would encourage long tenures. It
was hoped that this arrangement would develop in employees the
often peculiar expertise required to carry out governmental activities
and instill in them a commitment to the law.44 Privatization may
“hollow out” agencies’ expertise, replacing them with short-term

41 Ibid., p. 95.
42 Art. II, sec. 8 requires the President to take an oath. “Before he enter on the Execution of
his Office, he shall take the following Oath or Affirmation: — ‘I do solemnly swear (or
affirm) that I will faithfully execute the Office of President of the United States, and will to
the best of my Ability, preserve, protect and defend the Constitution of the United States.’”
Art. IV, Cl. 3 requires an oath of Members of Congress and government officers: “The
Senators and Representatives ... and all executive and judicial Officers, both of the United
States and of the several States, shall be bound by Oath or Affirmation, to support this
Constitution.” 5 U.S.C. 3331 requires: “An individual, except the President, elected or
appointed to an office of honor or profit in the civil service or uniformed services, shall take
the following oath: ‘I [insert your name] do solemnly swear (or affirm) that I will support
and defend the Constitution of the United States against all enemies, foreign and domestic;
that I will bear true faith and allegiance to the same; that I take this obligation freely,
without any mental reservation or purpose of evasion; and that I will well and faithfully
discharge the duties of the office on which I am about to enter. So help me God.’”
43 David H. Rosenbloom and Suzanne J. Piotrowski, “Outsourcing the Constitution and
Administrative Law Norms,” American Review of Public Administration, vol. 35, no. 2, June

2005, pp. 103-121.

44 See, generally, Paul P. Van Riper, History of the United States Civil Service (Evanston,
Il: Row, Peterson, 1958).

contract workers with little commitment to the public mission of the
agency. 45
!Contracting out can promote iron triangles and other corrupt
relationships between the federal government and the private sector.
For example, Boeing Company reached a $615 million settlement
with the Department of Justice in May 2006. The company was
investigated for its role in a contracting scandal. The company fired
its chief financial officer — who attempted to persuade an Air Force
official, who was overseeing a large federal contract that Boeing was
bidding on — to take a job with the company. This same official
was jailed after she admitted that she had used the Boeing executive
to get a job for her daughter and future son-in-law with Boeing and
improperly favored the company in awarding the contract.46
!The premise of privatization is that the government will benefit
when firms in a competitive market compete to provide it with
products and services. Competitive markets, however, require a
number of conditions to be met for them to function properly. To
cite just two of them, (1) firms must not face barriers to entry in this
market and (2) the buyer of the goods and services must possess
sufficient information to empower it to make a rational purchase. If
any of the conditions for competition are not met, the buyer — i.e.,
an agency — may be exploited. In short, markets can fail,47
especially if there are too few firms to compete for government
cont ract s.48
!Hiring private firms to carry out government work creates great
management challenges for government administrators. Should an
agency fail to have well-trained personnel and effective oversight
procedures in place, its utilization of private providers can result in
waste, fraud, and abuse.49

45 For example, see Mark L. Goldstein, America’s Hollow Government: How Washington
Has Failed the People (Homewood, IL: Richard D. Irwin, Inc., 1992), chapter 6.
46 Renae Merle, “Boeing Agrees to pay $615 Million Settlement,” Washington Post, May

16, 2006, p. A10; and U.S. Government Accountability Office, Air Force Procurement:

Protests Challenging Role of Biased Official Sustained, GAO-05-436T (Washington: GAO,


47 See CRS Report RL32162, The Size and Role of Government: Economic Issues, by Marc
48 Reportedly, one company, US Investigations Services (USIS), performs 70% of the
background investigations for federal employees, job applicants, and contract workers. Tim
Kaufmann, “Pace of Background Investigations Challenges OPM Offshoot,” Federal Times,
July 17, 2006, p. 22. Similarly, see Renae Merle, “Rocket Monopoly Approved: Boeing-
Lockheed Alliance Likely to Increase Costs,” Washington Post, October 4, 2006, p. D1.
49 U.S. Government Accountability Office, Contract Management: DOD Vulnerabilities to

!Government may benefit when private firms compete to provide a
good or service; however, should the firm providing the service go
out of business there may be a time lag before it can be replaced.
The costs of this time lag can be formidable. For example, when a
company operating charter schools in California became defunct in
August 2004, the parents of 10,000 children had but a few weeks to
locate new schools for their children.50
!Privatization does not always lead to cost savings or better service.51
In some instances, private firms have had significantly higher cost
overruns than government agencies in the performance of services.52
In other instances, private firms have performed work that has been
criticized as being grossly inadequate.53
Privatization, then, has been criticized as ill-intentioned and inherently inimical to
good government, and it has been faulted both in principle and in practice.
Means of Privatization
Many means of privatization have been devised, and the classification and
nomenclature used for these activities varies from study to study.54 Nevertheless,
privatization, generally, is understood to include the following activities:
divestiture/load-shedding, contracting for goods, contracting for services
(outsourcing), vouchers, quasi governmental entities (including government-owned-
contractor-operated facilities (GOCO)), third-party financing, grants to private

49 (...continued)
Contracting Fraud, Waste, and Abuse, GAO-06-838R (Washington: GAO, 2006).
50 Erika Hayasaki, “Charter Academy Shuts 60 Schools,” Los Angeles Times, August 16,

2004, p. B1.

51 U.S. General Accounting Office, Private and Public Prisons: Studies Comparing
Operational Costs and/or Quality of Service, GAO/GGD- 96-158 (Washington: GAO,


52 U.S. General Accounting Office, Navy Maintenance: Cost Growth and Schedule Overrun
Problems Continue at the Shipyards, GAO/NSIAD-90-144 (Washington: GAO, 1990).
53 Amit R. Paley, “Heralded Iraq Police Academy a ‘Disaster,’” Washington Post, September

28, p. A1.

54 For example, see General Accounting Office, Terms Related to Privatization Activities
and Processes, GAO/GGD-97-121 (Washington: GAO, 1997), Appendix V; and E.S. Savas,
“A Taxonomy of Privatization Strategies,” Policy Studies Journal, Winter 1989/90, pp. 343-


parties, prize competitions, and the use of volunteers.55 Each of these activities is
described below.
Divestiture/Load-Shedding. The sale, or divestiture, by a government of
an agency, corporation, or service to private ownership is the most clear-cut method
of privatization. An example of the divestiture of a federally owned corporation was
the March 1987 sale of Conrail to the public through a stock offering. An example
of the divestiture of a governmental activity is the Office of Personnel Management’s
(OPM’s) creation of US Investigations Service (USIS). OPM created this private
sector entity and transferred the employees of OPM’s Federal Investigations Division56
to it.
Another simpler form of divestiture is to sell some asset, such as real property,
to a private firm or individual. Recent large-scale examples57 include the
privatization of the Alaska Power Administration (1996) and U.S. Enrichment
Corporation, Inc. (1998),58 and the previously mentioned sale of the Elk Hills Naval59
Petroleum Reserve (1998).
The government may simply give some asset away as it did when transferring
land to homesteaders in the 19th century.60 Finally, government may decide to stop

55 Some who have examined this issue have classified deregulation, loan guarantees, and
government insurance programs as forms of privatization. See, for example, President’s
Private Sector Survey on Cost Control, Report on Privatization (Washington: GPO, 1983,
p. i; and Harold Seidman, “Privatization in the United States,” International Review of
Administrative Sciences, vol. 56, no. 1, March 1990, pp. 15-28. These policies, though they
facilitate and subsidize private sector activities, fall outside the definition of privatization
employed here.
56 On USIS, see CRS Report RL30533, The Quasi Government: Hybrid Organizations with
Both Government and Private Sector Legal Characteristics, by Ronald C. Moe and Kevin
R. Kosar.
57 Small-scale divestitures of government assets occur frequently. The General Services
Administration (GSA), for example, uses auctions and other means to dispose of
government assets, such as furniture, computers, and “real property,” including the air rights
of land behind Union Station in Washington, DC. GSA website, available at
[ h t t p : / / a . go v/ Por t a l / gs a / e p / c h a n n e l V i e w .do?page T ypeId=10430&channelId=-13

241]; and Dana Hedgpeth, “New Life Above Union Station Tracks,” Washington Post,

October 2, 2006, p. D3.
58 Congress authorized the privatization of the U.S. Enrichment Corporation, a government
entity, in a 1996 appropriations law (P.L. 104-134, Title IV, Subchapter D). Privatization
of this entity into USEC Inc. was completed in 1998.
59 Occidental Petroleum, a division of Occidental Oil and Gas Company, paid $3.65 billion
for the 47,000-acre Elk Hills site. Platt’s Inside Energy, “Government Sells Elk Hills
Reserve,” The Energy Report, February 9, 1998. See also Department of Energy, “Largest
Federal Divestiture Completed, Elk Hills Transferred To Private Owner,” February 5, 1998,
available at [].
60 A related activity might be termed “temporary divestiture” wherein the federal
government may auction off an asset, such as the radio spectrum, to the highest bidder for

providing a good or service (“load shedding”) and allow private providers to meet
any public demand for the good or service. This situation occurred when the Coast
Guard stopped assisting stranded boats in the Miami area except when they are in
clear and imminent danger.61
Whether the immediate objective is to provide revenue to the U.S. Treasury,
increase the output from a particular resource, or assist some worthy public cause, the
divestiture of a government asset fundamentally alters the legal status of the asset,
moving it from the governmental to the private sector.
Contracting for Goods. The Federal Acquisition Regulation (FAR) sets the
“uniform policies and procedures for acquisition by all executive agencies.” (48
C.F.R. 1.101) The FAR governs government “acquisitions,” which it defines as the
“acquiring by contract with appropriated funds of supplies or services (including
construction) by and for the use of the Federal Government.” (48 C.F.R.


The federal government has contracted for goods since its founding. In great
part, contracting for goods is a matter of necessity. Like private firms, government
agencies face a “make or buy” decision and have limited funds available. Few would
argue that it would be efficient or even practicable for an agency to supply itself with
all the materials it needs, such as staplers and paper clips, when the agency can
readily acquire them from private producers. However, it is also the case that the
federal government long has had a policy that forbids competition with the private
sector. A Bureau of the Budget (BOB) Bulletin of 1955 stated that the “[f]ederal
government will not start or carry on any commercial activity to provide a service or
product for its own use if such a product can be procured from private enterprise
through ordinary business channels.”62
While the idea of government contracting for goods is rarely questioned, the
actual practice of contracting has been criticized frequently. In many of these
instances, private firms are alleged to have failed to produce and provide the goods
as agreed. Federal agencies also have experienced difficulties in overseeing the work
of goods contractors and coordinating agency activities with those of contractors.
For example, recently, a government audit identified significant problems in a private
firm’s delivery of equipment to be installed in medical facilities in Iraq. Crates
carrying the equipment were damaged and showed “unmistakable signs” that

60 (...continued)
a period of time. See CRS Report RL31764, Spectrum Management: Auctions, by Linda
K. Moore.
61 Hugh Victory, “‘Tough Business:’ Private Firms Handle Sea Rescues,” Washington
Times, February 27, 1986, p. 9.
62 U.S. Bureau of the Budget, “Commercial-Industrial Activities of the Government
Providing Products or Services for Government Use,” Bulletin 55-04, January 15, 1955.

equipment was missing. The audit also cited a government agency for failure to
inspect the equipment upon receipt.63
Contracting for Services (Outsourcing). Sometimes called contracting
out, “outsourcing” refers to an agency engaging a private firm to perform an agency
function or provide a service. The term often is conflated with competitive sourcing,
a marketization activity considered later in this report.
Federal outsourcing policy is governed by the FAR and the Federal Activities
Inventory Reform (FAIR) Act of 1998 (P.L. 105-270). FAIR requires agencies to
produce inventories of “commercial activities” — those that are not “inherently
governmental” and able to be acquired from the private sector — that may be put up64
for competitive sourcing. OMB’s Circular A-76 provides agencies with specific
directions for undertaking competitive sourcing.65
As with the procurement of goods, the federal government long has hired private
firms to help it perform services. For example, in 1819, Congress empowered the
Postmaster General to “contract for the transportation of the mail in steamboats,
between New Orleans, in the state of Louisiana, and Louisville, in the state of
Kentucky.” (3 Stat 496)
FAIR and A-76 encourage agencies to outsource. Agencies also are attracted
to outsourcing because it can provide cost-savings and flexibility. Additionally,
outsourcing is a means for agencies to handle large, infrequent demands for
government services. For example, the General Services Administration (GSA) uses
private call-center contractors when it expects agencies it supports, such as the
Federal Emergency Management Agency, to receive large numbers of telephone calls
from individuals affected by episodic tumults, such as hurricanes.66 Additionally,
when an agency uses a contractor, instead of hiring a new federal employee, it need
not expend resources training the contractor; nor need it provide medical benefits or
pensions to the contractor.

63 Office of the Special Inspector General for Iraq, Review of the Medical Equipment
Purchased for the Primary Healthcare Centers Associated with Parsons Global Services,
Inc., Contract Number W914NS — 04 — D — 0006, SIGIR-06-025 (SIGIR: July 28, 2006)
available at [], pp. 10-18; quote at p. 14.
64 The law also defines a process through which outside parties may challenge the inclusion
or omission of an activity on an agency’s inventory. CRS Report RL31024, The Federal
Activities Inventory Reform Act and Circular A-76, by L. Elaine Halchin.
65 Office of Management and Budget, Circular A-76 (revised) (Washington: OMB, May 29,

2003), available at [].

Circular A-76 was first issued in 1966 and has been revised six times since then. CRS
Report RS21489, OMB Circular A-76: Explanation and Discussion of Recently Revised
Federal Outsourcing Policy, by John R. Luckey.
66 Christopher Lee, “Private Operators Take Calls in a Pinch,” Washington Post, September

26, 2006, p. A19.

For these reasons, in recent years, the number of federal contractors has
increased, topping seven million.67 There may also be a trend of increasing the scope
of contract services to include areas not previously considered appropriate for
assignment to the private sector (e.g., the operation of prisons, the performance of
personnel background checks, and the protection of government officials).
Reportedly, federal agencies issued $388 billion in contracts in FY2005.68
Vouchers. There are situations where a government may want a particular
service to be funded publicly, but not delivered directly by a governmental entity.
The government may choose to give the recipient of this service a “voucher” to
purchase the service from private or other public sources. A voucher is “a subsidy
that grants limited purchasing power to an individual to choose among a restricted
set of goods and services.” As such, it can be designed in a variety of ways, such as
a tax credit or a grant.69
The objectives for using vouchers vary. Vouchers may be used to contain the
government’s costs of providing a good or service. Vouchers can do this because
they can be designed to have a limited per capita cost (e.g., $5,000 per annum per
person to spend on a particular good, such as housing). This contrasts with the
possibly escalating costs that can occur when government attempts to produce and
provide a good (e.g., the cost of an item needed in production, such as concrete, may
spike due to some unforeseen factor.) Vouchers may also be employed to increase
the competition and availability of a service or function and to improve the
responsiveness of service providers to consumers. Finally, vouchers may be utilized
for the purpose of improving equity. Advocates of school vouchers, for example,
have argued that government should provide children from poor families with
vouchers that would enable them to do the same as children from more affluent
families — attend the schools of their choice.70
The overt simplicity and actual flexibility of vouchers have helped make them71
an often-used option for policymakers at all levels of government. An early
example of a voucher program was the “GI Bill”(P.L. 78-346; 58 Stat. 284-301),
which provided World War II veterans vouchers to attend any accredited school that
would admit them.72 More recently, the federal government has enacted a number

67 Paul C. Light, The New True Size of Government (New York: New York University,
August 2006), p. 11, available at [].
68 Tom Shoop, “Raking It In,” Government Executive, August 15, 2006, p. 41.
69 C. Eugene Steuerle, “Common Issues for Voucher Programs,” in C. Eugene Steuerle et
al., Vouchers and the Provision of Public Services (Washington: Brookings Institution Press,

2000), pp. 4 and 3.

70 For example, see Joseph P. Viteritti, Choosing Equality: School Choice, the Constitution,
and Civil Society (Washington: Brookings Institution Press, 1999).
71 For a list of voucher programs, see Paul Posner et al., “A Survey of Voucher Use:
Variations and Common Elements,” in Steuerle et al., Vouchers and the Provision of Public
Services, pp. 522-538.
72 David O’Neill, “Voucher Funding of Training: Evidence From the GI Bill,” Journal of

of voucher policies, including Section 8 public housing and “school choice”
programs. 73
Quasi Governmental Entities/GOCO. Quasi governmental entities are74
those entities that possess both private sector and governmental legal attributes.
For example, the American National Red Cross (ANRC) was chartered by Congress,
some of its board members are appointed by the President, and it has statutorially-
prescribed duties; yet, ANRC is a private corporation.75 Quasi governmental entities
come in many types, such as government-sponsored enterprises (e.g., Freddie Mac),
congressionally chartered not-for-profit corporations (American Legion), and
government venture capital firms (e.g., In-Q-Tel), and are involved in diverse policy
areas, from housing, to veterans affairs, and intelligence.
Quasi governmental entities may be viewed as a form of privatization because
they are substitutes for fully governmental agencies. They are private vehicles for
achieving a governmentally declared good.76 Policymakers have been attracted to
quasi governmental entities for a number of reasons, including the popular perception
that the private sector is more efficient than government and budgetary constraints
(i.e., quasi governmental entities usually are off-budget).
The GOCO facility is a well-known species of quasi governmental entity. A
difference, though, is that GOCO facilities are established to produce goods for
governmental, not private, consumption (e.g., military technologies). Sandia
National Laboratories, one of the federally funded research and development
facilities, is operated by Lockheed Martin for the Department of Energy’s National
Nuclear Security Administration.77
Third-Party Financing. Third-party financing is perhaps the least known
means of privatization. In part, this likely is due to its complicated nature. Third-

72 (...continued)
Human Resources, Fall 1977, pp. 245-55. Henry M. Levin, “The Economics of Educational
Choice,” Economics of Education Review, Spring 1991, pp. 137-58.
73 See CRS Report RL33270, The Section 8 Housing Voucher Program: Reform Proposals,
by Maggie McCarty; and CRS Report RL33506, School Choice Under the ESEA: Programs
and Requirements, by David P. Smole.
74 See CRS Report RL30533, The Quasi Government.
75 See CRS Report RL33314, The Congressional Charter of the American National Red
Cross: Overview, History, and Analysis, by Kevin R. Kosar.
76 Thus, for example, the Federal National Mortgage Association (Fannie Mae) was
established initially as a government agency in 1938 to confront a national problem —
geographic barriers to credit for housing purchases and construction. Over the next three
decades, Congress altered and privatized its operations. Though private, Fannie Mae retains
government-prescribed objectives.
77 On federally funded research and development centers, see CRS Report RL30533, The
Quasi Government: Hybrid Organizations with Both Government and Private Sector Legal
Characteristics, by Ronald C. Moe and Kevin R. Kosar. On Sandia National Laboratories,
see its website at [].

party removes the federal government from the direct financing of a government
project or service and replaces it with the private sector.
So, for example, a government agency might decide that it wants to build a new
facility. To do this, the agency might sign an agreement with a private company to
incorporate jointly a special purpose entity or vehicle (SPE or SPV) that would own
the new facility.78 This SPE could borrow money in private capital markets to build
housing because the agency has agreed to rent the facility under a long-term contract
(thereby guaranteeing a flow of revenue for many years.) Third-party financing has
been used “to fund various infrastructure projects, such as housing on military bases,
government office buildings, and electric power facilities.”79
Agencies see this as advantageous because they can then record the investment
costs of the project in the federal budget over the life of the project instead of in full
when the investment is made. The Congressional Budget Office has criticized this
practice, arguing, among other things, that third-party financing is more costly to the
federal government and understates the size of the federal government and its
Grants to Private Parties. The federal government long has utilized grants
of funds and property to private parties for the sake of achieving public purposes.
For example, in 1819, Congress enacted a private law to provide a tract of land to the
privately founded Connecticut Asylum for the Education and Instruction of Deaf and
Dumb Persons (6 Stat. 229). The logic behind grants as policy is straightforward —
if a private party is undertaking work that provides a public benefit, then the federal
government may wish to support that work. The least expensive means to this end
may be to provide funds or property directly to this party.
Today, the federal government provides grants for enormous numbers of diverse
purposes. Grants are provided to support students pursuing higher education, to
scientists undertaking research, to religious groups working with persons addicted to
drugs and alcohol, to artists producing public performances, and to persons operating81
small businesses. According to a recent estimate, between 2.4 and 2.8 million
persons received grant monies per annum between 1990 and 2004.82

78 This SPE or SPV might be a limited liability corporation or some other legal entity.
79 Congressional Budget Office, Third Party Financing of Federal Projects, p. 1.
80 Ibid, pp. 1-5.
81 An appreciation for the breadth and diversity of federal grants programs may be gained
by perusing the forms of aid available to private parties at []. This
account of grants does not include mention of the grants provided to states and localities,
which, then, direct the monies to private companies to construct and repair roads, build
waste treatment plants, fund community renewal efforts, and so forth. On recent efforts to
expand “faith-based” organizations’ access to federal grant funds, see CRS Report
RL32736, Charitable Choice Rules and Faith-Based Organizations, by Joe Richardson.
82 Light, The New True Size of Government, p. 11.

Prize Competitions. In recent years, federal agencies have held prize
competitions. The aim of such competitions is to draw upon the creativity of private
individuals and firms to produce technologies desired by the federal government.
Perhaps the most well known of these is the “Grand Challenge” held by the Defense
Advanced Research Projects Agency (DARPA), held annually since 2004.
DARPA’s goal is to develop autonomous — meaning, unmanned — vehicles that83
can be used in a combat theater. Rather than attempt to develop this technology in-
house, DARPA offered large cash prizes to the competitor whose vehicle most84
quickly completes the race course. The federal government, meanwhile, acquires
privileges to utilize the technology developed.85
The DARPA example may be encouraging further experimentation with prizeth
competitions. At least two prize competition bills were introduced in the 109
Congress. H.R. 5143 would have provided $11 million per year for hydrogen energy
prize competitions; and H.R. 1021 would have permitted the National Aeronautics
and Space Administration to award prizes to inventors of useful technologies.
Use of Volunteers. The federal government has relied upon volunteers to
perform public services for over a century. Perhaps the most high-profile example
is the American National Red Cross (ANRC). Congress first chartered ANRC in
1900, charging this private voluntary organization to “continue and carry on a system
of national and international relief in time of peace and apply the same in mitigating
the sufferings caused by pestilence, famine, fire, floods, and other great national
calamities.” (31 Stat. 278) Though staffed in part by salaried, professional staff,
ANRC and its local chapters have large numbers of volunteers. ANRC reports,
175,000 volunteers worked to prevent, prepare for and respond to nearly 64,000
disaster incidents last year [2005]. Over 15 million Americans turn to us to learn
first aid, CPR, swimming, and other health and safety skills. Last year, more than
230,000 people volunteered to teach those courses. Half the nation’s blood
supply — six million pints annually — is collected by more than 190,000 Red86
Cross volunteers.
More recently, Congress has enacted the National and Community Service Act of

1990 (42 U.S.C. 12501 et seq.) and the Domestic Volunteer Service Act of 1973 (42

83 DARPA has said it is holding these challenges because it views them as a means to
achieve a goal set by the National Defense Authorization Act for Fiscal Year 2001 (P.L.
106-398; 114 Stat. 1654). Sec. 220 of this law stated, “It shall be a goal of the Armed
Forces to achieve the fielding of unmanned remotely controlled technology such that ... by
2015, one-third of the operational ground combat vehicles are unmanned.” DARPA, Model
agreement for competitors.
84 For further details, see DARPA’s website at [
gr andchallenge/index.asp].
85 See DARPA, Model Agreement, pp. 11-14.
86 American National Red Cross, “Volunteer Services,” website of ARNC, available at
[ ht t p: / / www.r e dcr oss.or g/ ser vi ces/ vol unt eer / 0,1082,0_325_, ml ] .

U.S.C. 4950 et seq.)87 These acts provide funding for a number of federal, state, and
local programs, such as Americorps, which encourage citizens to undertake public
servi ce. 88
Privatization: Ramifications
Behavior of the Entity
The difference between having a governmental entity and a private firm perform
an activity is significant. Privatization moves components of the provision of goods
and services out of the governmental sector and into the private sector. These two
sectors are not identical. As the National Academy of Public Administration noted,
In point of fact, there are some fundamental differences between the
[governmental and private sectors].... Most basic, perhaps, is the [government’s]
distinctive claim to exercise sovereignty, to enact and enforce binding laws, and
to act on behalf of the nation or the community in certain constitutionally
prescribed ways.89
Furthermore, the movement of an activity from the governmental sector to the
private sector, or vice versa, has significant ramifications. Most obviously, the
behavior of the entity carrying out the task will differ because each sector has
different incentives and constraints. One public administration scholar has suggested
that the incentives amount to this: a government entity may do only what the law
permits and prescribes; a private entity may do whatever the law does not forbid.90
Speaking to the differing constraints, a political scientist has observed the following:
To a much greater extent than is true of private bureaucracies, government
agencies (1) cannot lawfully retain and devote to the private benefit of their
members the earnings of the organization, (2) cannot allocate the factors of
production in accordance with the preferences of the organization’s
administrators, and (3) must serve goals not of the organization’s own choosing.
Control over revenues, productive factors, and agency goals is all vested to an
important degree in entities external to the organization — legislatures, courts,
politicians, and interest groups. Given this, agency managers must attend to the

87 CRS Report RL30186, Community Service: A Description of Americorps, Foster
Grandparents, and Other Federally Funded Programs, by Ann Lordeman and Alice D.
Butler. On funding for major federal voluntary programs, see CRS Report RS20420,
AmeriCorps and Other Service Programs: Program Overview and FY2005 and FY2006
Funding, by Ann Lordeman.
88 In some instances, these programs are not purely voluntary. For example, Americorps
participants receive living allowances.
89 National Academy of Public Administration, Privatization: The Challenges to Public
Management (Washington: NAPA, 1989), p. 9.
90 Ronald C. Moe, “The Importance of Public Law: New and Old Paradigms of Government
Management,” in Phillip J. Cooper and Chester A. Newland, eds., Handbook of Public Law
and Administration (San Francisco: Jossey-Bass Publishers, 1997), pp. 41-57.

demands of these external entities. As a result, government management tends
to be driven by the constraints on the organization, not the tasks of the91
The private sector firm, then, has one essential goal: to pursue profits; all other goals
are subordinate.92 Thus, it faces strong incentives to undertake activities that promote
this essential goal. This can prove beneficial to the government, should the private
firm devise more efficient means of production and develop new products and
services.93 This might also negatively affect the government, should the private firm
lower its costs of production by reducing the quality or quantity of the product or
service. The private firm, in large part, is rewarded for achieving results pleasing to
its owners and shareholders. How it achieves this may or may not prove beneficial
to the government.
Government agencies, unlike private firms, usually operate under complex
accountability hierarchies that include multiple and even conflicting goals. Federal
agencies, for example, are subject to the corpus of federal management laws. These
laws serve as means for keeping executive branch agencies accountable to Congress,
the President, and the public.94 They also embody principles of democratic justice,
such as the allowance for public participation and government transparency. To
name just a few, the general management laws include the following:
!the Freedom of Information Act (5 U.S.C. 552), which provides
persons the right to request information about government
!the Administrative Procedure Act (5 U.S.C. 551 et seq.), which
prescribes the process for agency rulemaking (i.e., interpretation and
operationalization of law), public participation in this process, and
judicial review of rules; and
!the Government in Sunshine Act (5 U.S.C. 552(b)), which requires
agencies to hold open meetings and provide public notice thereof.

91 James Q. Wilson, Bureaucracy: What Government Agencies Do and Why They Do It
(New York: Basic Books, 1989) , p. 115.
92 Tullock, “Bureaucracy,” in Government Failure: A Primer in Public Choice, p. 56.
93 For example, GAO found that the Department of Defense achieved savings when it
contracted out some activities, such as custodial and laundry services. U.S. General
Accounting Office, Federal Productivity: DOD’s Experience in Contracting Out
Commercially Available Activities, GAO/GGD-89-6 (Washington, GAO: 1988), p. 15.
94 See CRS Report RL30795, General Management Laws: A Compendium, by Clinton T.
Brass, Coordinator.

Thus, in shifting an activity from the governmental to the private sector, the
nature of government oversight is transformed.95 As the components of government
provision of goods and services are privatized, the jurisdiction of federal
management laws, Congress, the President, and the courts is reduced.
Moreover, privatization shifts government administrative management from
implementation to oversight as hierarchical oversight may be replaced by contractual
relationships. Government oversight of privatized government activities, or “third-
party government,” on a large scale is a recent phenomenon and one that many
federal administrators and public administration scholars have found vexatious.96
Finally, the entire question — “What constitutes governmental action and what
constitutes private action?” — becomes ambiguous when activities once carried out
by officers of the federal government are replaced by private persons. The
Constitution requires “all executive and judicial Officers, both of the United States
and of the several States, [to] be bound by Oath or Affirmation, to support [the]
Constitution.” (Article IV, Cl. 3) Contractor and subcontractors, though, need not
take such an oath. The legal distinction between officers of the federal government
and all other persons is significant as an officer of the federal government has rights,
duties, powers, and liabilities different from non-officers.97 Thus, for example, under
the Federal Tort Claims Act (28 U.S.C. 1346(b)), the government may be held liable
for injuries caused by the negligent or wrongful act or omission of a federal
employee. But what if that person is the employee of a private contractor or
subcontractor? If this individual should, say, injure somebody, who would be liable
for damages — the employee? the contractor? the subcontractor? the federal
government? The answer is not immediately obvious, which may prove a matter of
concern to (1) persons who believe themselves adversely affected by the individual’s
actions; and (2) the agency which issued the contract and legislators, who may be
viewed by the public as responsible for the oversight of the government projects.
The potential blurring of the difference between a governmental action and a
private action may also have ramifications for personal privacy. For example, an
individual who is in a dispute with the Internal Revenue Service (IRS) over unpaid
taxes may find himself receiving a telephone call from a private debt collection
company. Under an arrangement with the IRS, this private firm will possess the
individual’s name, contact information, and Social Security number. The citizen may

95 Barbara H. Craig and Robert S. Gilmour, “The Constitution and Accountability for Public
Functions,” Governance, January 1992, pp. 46-67.
96 See U.S. House of Representatives, Committee on Government Reform, Waste, Abuse and
Mismanagement in Department of Homeland Security Contracts (Washington: Committee
on Government Reform, July 2006); U.S. Government Accountability Office, Contract
Management: DOD Vulnerabilities to Contracting Fraud, Waste, and Abuse; and National
Academy of Public Administration, Privatization.
97 See CRS Report 95-717, Federal Tort Claims Act: Current Legislative and Judicial
Issues, by Henry Cohen.

be troubled that, in his dispute with the government, one which he might find
embarrassing, there is a private sector intermediary.98
Similarly, the person applying for a federal job must provide a great deal of
information about himself to the government. This citizen might be troubled to learn
that the federal government uses private firms — who, in turn, sometimes
subcontract to other private firms — to check the backgrounds of job applicants.99
Marketization: An Alternative to Privatization?
Privatization, as already discussed, involves removing the federal government
from one or more of the steps in the government provision of a good or service.100
Marketization, which is sometimes called “commercialization,” is a management
strategy that attempts to make a government agency perform better rather than
replacing it with a private firm.
Marketization, like privatization, is a term that has been used to mean different
things in different contexts. In former communist nations, for example, the sale of
state-owned manufacturing enterprises to private parties has been called
“marketization.”101 Commentators also have used “marketization” to refer to the
practice of requiring government agencies to compete with the private sector for
government work contracts.102 (This report calls this practice “competitive

98 The use of contractors can lead to further complexities. There have been incidents where
scam artists have posed as private debt collectors for the IRS in attempt to get individuals
to reveal personal financial information, which the scam artist may then use for criminal
purposes. Mary Dalrymple, “IRS Warns Taxpayers on Fake Debt Collectors,” Washington
Post, August 24, 2006, p. D2.
99 “Investigative Services Agencies, Inc. ... a Chicago-based security- and
investigations-oriented firm, has announced it was selected by U.S. Investigations Service
... one of the nation’s largest background check companies, to assist in providing personnel
clearances for U.S. government agencies and approved government contractors.” Business
Wire, “Investigative Services Agencies, Inc. Awarded Major Contract to Conduct Personnel
Background Checks,” Business Wire, October 2, 2006, retrieved via [].
100 U.S. General Accounting Office, Management Reforms: Examples of Public and Private
Innovations to Improve Service Delivery, GAO/GGD-94-90-BR (Washington: GAO, 1994),
p. 30.
101 Marcus J. Kurtz and Andrew Barnes, “The Political Foundations of Post Communist
Regimes: Marketization, Agrarian Legacies, or International Influences,” Comparative
Political Studies, vol. 35, no. 5, June 2002, pp. 524-553.
102 Mark H. Moore, “Privatizing Public Management,” in John D. Donahue and Joseph S.
Nye Jr., eds., Market-Based Governance: Supply Side, Demand Side, Upside, and Downside
(Washington, DC: Brookings Institution Press, 2002), p. 318.

Generally speaking, marketization denotes the adoption of the methods and
values of the market to guide its operations and activities.103 Hence, this report uses
the term “marketization” to refer to the redesign of a government agency in order to
make it provide goods and services in the manner of a private firm. Typically,
marketization involves altering the incentive structures facing a government agency
in order to make it operate more efficiently.
An example may prove illustrative. For much of its history, the U.S.
government had a department that provided postal services. The U.S. Post Office
received large annual appropriations from Congress, whose members were deeply
involved with its operations, including the selection of management and the pricing
of postal services. Under this configuration, the U.S. Post Office ran into operational
difficulties and developed a reputation for incompetence and corruption.104 In the
1960s, some critics called for the abolition of the Post Office and privatization of
postal services. In 1970, Congress chose a less dramatic means for reform. It
enacted a statute that marketized the U.S. Post Office (P.L. 91-375; 84 Stat 725 et
seq.) The new U.S. Postal Service (USPS) became an independent entity of the
executive branch with greater freedom to run its operations. Critically, USPS was
statutorily required to earn sufficient revenue to cover its costs of operation; it could
no longer rely on annual appropriations.105 Since its marketization, USPS has
reported considerable productivity growth and is generally acknowledged to be better
There are many ways in that an agency may be marketized. For example,
Congress might require an agency meet its costs of operations and deny it annual
appropriations. Congress might also permit an agency to set up bonus programs,
under which employees may be rewarded for reaching productivity targets. In short,
any reform that aims to alter an agency’s incentives so that they are more like those
facing private firms might be called marketization.

103 Angela M. Eikenberry, Jodie D. Kluver, “The Marketization of the Nonprofit Sector:
Civil Society at Risk?” Public Administration Review, vol. 64, issue 2, March/April 2004,
p. 13.
104 The view of the U.S. Post Office as an agency riddled with patronage and scandal began
long ago. Joseph L. Bristow, who served as an assistant postmaster general from 1897 to
1905, provides accounts in his book, Fraud and Politics at the Turn of the Century (New
York: Exposition Press, 1952).
105 USPS does continue to receive appropriations, but these are minute and serve only to
compensate USPS for costs incurred in carrying out assorted governmental mandates, such
as subsidized mail services for the blind. See CRS Report RS21025, The Postal Revenue
Forgone Appropriation: Overview and Current Issues, by Nye Stevens.
106 USPS, 2005 Comprehensive Statement on Postal Operations (Washington: USPS, 2006),
pp. 63-64. Although USPS has not increased its productivity as quickly as the private
sector, even critics of USPS do not dispute that it is more productive than it was. For
example, economist Michael Schuyler in his generally critical study, The Postal Service’s
Productivity Problem (Washington: IRET, 2002), reports that USPS increased its labor
productivity 40% between 1970 and 2000 (p. 1). Available at [

Four often-employed means for marketization are franchising, user fees,
government corporations, and competitive sourcing. Though quite different, all four
approaches share a similar characteristic — they require an agency to compete for
Agency Franchises. In the private sector, a franchise is a firm that is
authorized to sell or distribute another company’s goods or services. In the federal
governmental sector, though, franchising means something quite different. Here,
franchising refers to the fee-basis provision of a government agency administrative
service by another agency.107 As such, franchising might be viewed as a form of
outsourcing — an agency hires an outside provider, in this case another agency, to
perform a function. In a sense, though, franchising also is the inverse of contracting
out. Outsourcing tasks an agency to become more efficient by hiring an outside
provider to provide a service or good; franchising invites an agency to attempt to
market one or more of its administrative services to other agencies. The former, then,
aims at reducing the production of goods and services in-house; the latter would
expand in-house production of a particular good or service.
Thus, for example, the National Finance Center (NFC) in the Department of
Agriculture (USDA) provides payroll services to many other agencies, including the108
Library of Congress. In 1994, Congress encouraged further federal
experimentation with franchising through the Government Management Reform Act
(108 Stat. 3410). This law authorized OMB to approve the establishment of six pilot
franchise funds (31 U.S.C. 501 note). The Departments of Commerce, Homeland
Security, the Interior, the Treasury, and Veterans’ Affairs and the Environmental
Protection Agency have established franchises.109 In 2004, OMB announced its
“lines of business” initiative. Its objective is to reduce the federal government’s
administrative expenses by encouraging franchising activities (“lines of business”)
common to agencies, such as financial, grants, and human resources management;
federal health architecture; and information technology security.110
User Fees. Governments have a choice when providing a service; they may
decide to provide the service “free” to all who choose to use it, or they may charge

107 See Joseph N. Coffee, “Creating Entrepreneurial Government: The Franchising
Movement,” Public Administration Quarterly, vol. 20, no. 1, 1996, pp. 71-88.
108 For an introduction to the activities of the NFC, see the NFC’s website at
109 On franchise funds and their near-relation, intragovernmental revolving funds, see U.S.
Government Accountability Office, Budget Issues: Franchise Fund Pilot Review, GAO-03-

1069 (Washington: GAO, 2003).

110 Office of Management and Budget, Lines of Business, OMB website
[]. Staff, “OMB Opens Eye to
Consolidating Budget, Records, and Other Functions,” Government Computer News, April

4, 2005.

a user fee that is sufficient to cover all or part of the cost for providing the service.
In FY2005, the federal government booked $185.2 billion in user fees.111
User fees may be employed as a means for an agency to raise revenues to help
cover costs attributable to a particular activity. The USDA charges quarantine
inspection fees, the Department of State assesses fees for passports, and the U.S.
Postal Service requires customers to pay for mail services. In other instances, an
agency may cover all its costs through fees; such is the case with the U.S. Patent and
Trade Office.112
Promoters of user fees argue that it is more fair to have those who draw upon
a government resource pay for it than to tax both users and non-users.113 They also
argue that user fees make agencies more like private firms. Agencies relying on user
fees must undertake activities to attract users; they must, in short, strive to discern
and provide for customers.
Furthermore, proponents of user fees have argued that fees may discourage the
indiscriminate use of a service or resource. The rationing of a service or resource
through user fees imposed by a public sector authority may achieve a balance
between use and resource renewal.114 This rationale has been cited by the National
Park Service in charging fees to enter and use the national parks.115 Similarly, the
Office of Management and Budget has stated that user fees are means to “promote
efficient allocation of the Nation’s resources” and “allow the private sector to
compete with the Government without disadvantage in supplying comparable
services, resources, or goods where appropriate.”116
Detractors of user fees have argued that government services should, as a matter
of principle, be available to the public free of charge. They also have claimed that
the imposition of fees may inhibit the access of lower-income individuals.

111 On user charges and “other collections” of the federal government, see Office of
Management and Budget, Budget of the United States Government: Analytical Perspectives,
Fiscal Year 2007 (Washington, GPO: 2006), p. 272.
112 See CRS Report RS20906, U.S. Patent and Trademark Office Appropriations Process:
A Brief Explanation, by Wendy H. Schacht.
113 Adam B. Summers, Funding the National Park System: Improving Services and
Accountability with User Fees (Los Angeles, CA: Reason Foundation, 2005), p. 7.
114 The “tragedy of the commons” refers to an instance when a individuals seeking their
own good so heavily utilize a common good that they deplete it. User fees, some argue, can
lower usage to sustainable levels. On this phenomena, see Garrett Hardin, “The Tragedy
of the Commons,” Science, December 1968, pp. 1243-1248.
115 For a general discussion of fees and their potential impact on recreational and timber
activities, consult Terry L. Anderson, “To Fee or Not to Fee: the Economics of Below-Cost
Recreation,” Multiple Conflict Over Multiple Uses, ed. Terry L. Anderson (Bozeman,
Montana: Political Economy Research Center, 1994), pp. 11-16.
116 Office of Management and Budget, Circular A-25, User Fees (July 8, 1993), sec. 5. The
notion that the private sector should be permitted to compete with the federal government
for the production of goods and services may also be found in OMB’s Circular A-76 (p. 1).

Government Corporations. The distinguishing characteristics of a
government corporation are that it is an agency of government, established by
Congress to provide a market-oriented public service, and intended to produce
revenues that meet or approximate its expenditures.117 At present, there are 18
government corporations that cover a spectrum from large, well-known corporations
such as the U.S. Postal Service and the Federal Deposit Insurance Corporation, to
small, low-visibility corporate bodies such as the Federal Financing Bank and the
Valles Caldera Trust.
Each government corporation is unique; each has been granted different
exemptions from particular management laws for the sake of providing it with
flexibilities similar to those possessed by private firms. For example, Congress has
partially exempted the Export-Import Bank (12 U.S.C. 635, Amendments) from
federal-employee classification and pay-rate restrictions (5 U.S.C.5101-5115 and
5331-5338 and 5341-5349). This waiver may help the bank to offer salaries to attract
highly skilled persons who might otherwise work for private financial-services
In some discussions of privatization, proposals to establish a government
corporation (e.g., reorganizing the U.S. Patent and Trademark Office into a118
government corporation) are equated with privatization because the term
“corporation” is seen as making it similar to a private corporation. This similarity
in titles, however, is misleading because a government corporation is an agency of
the U.S. government, not unlike the Internal Revenue Service, performing a mission119
established by Congress, and is managed by officers of the United States. These
characteristics are not present in private corporations.
Congress has established government corporations for a variety of purposes.
Government corporations have had mixed success. The Saint Lawrence Seaway
Development Corporation (SLSDC, 33 U.S.C. 981), which manages the waterway
between Lake Erie and Montreal, Canada, is generally regarded as a well-run
entity.120 Other government corporations have been less successful. For example,

117 CRS Report RL30365, Federal Government Corporations: An Overview, by Ronald C.
Moe and Kevin R. Kosar. See also U.S. General Accounting Office, Principles of Federal
Appropriations Laws, GAO-01-179SP (Washington: GAO, 2001), vol. iv, pp. 17-119 - 17-
216; and U.S. General Accounting Office, Government Corporations: Profiles of Existing
Corporations, GAO/GGD-96-14 (Washington: GAO, 1995).
118 National Academy of Public Administration, U.S. Patent and Trademark Office:
Transforming to Meet the Challenges of the 21st Century (Washington: NAPA, 2005).
119 In recent years, Congress has created agencies titled “corporations” which do not
perform commercial-type activities and are almost totally reliant on regular appropriations.
Corporate bodies in this category include the Millennium Challenge Corporation, the
Corporation for Public Broadcasting, the Legal Services Corporation, and the Corporation
for National and Community Services.
120 For example, according to the OMB’s Program Assessment and Rating Tool, SLSDC’s
“operations and maintenance” program was deemed an “effective”in 2005. This is the
highest PART score; programs so rated “set ambitious goals, achieve results, are

AMTRAK, which was established to provide intercity passenger railroad service, has
run deficits for more than three decades and been criticized for service and
operational shortcomings.121
Competitive Sourcing. Competitive sourcing, as described above, refers to
the process of an agency putting up the performance of one of its functions for
competition between the agency and outside parties. Thus, one possible result of
competitive sourcing is outsourcing, a form of privatization. However, competitive
sourcing is a form of marketization because it requires agencies to do as private firms
do — compete to provide a service.
As described above, FAIR and Circular A-76 require federal agencies to
compete their commercially available activities. The Office of Management and
Budget under President George W. Bush has advocated the expansion of competitive
sourcing. For example, in April 2006, OMB announced that activities performed by

26,000 government employees would be opened up to competitions, “a five-fold122

increase over the number competed last year.”
This move to expand competitions has sparked controversies. Government
employees, not surprisingly, may feel their jobs are threatened. Meanwhile, private
firms, coveting more business opportunities, have challenged agencies’ exclusion of
activities from competitions.123
Marketization, clearly, is a more incremental reform than privatization.
Marketization alters some of the incentives and constraints faced by an agency in
hopes that it will behave more like a private sector firm.124 However, since
marketization does not move an activity from the governmental to the private sector,
it may not produce an entity as likely to achieve as many efficiencies and innovations
as a private firm. This is because the marketized government agency, unlike the
private firm, cannot retain profits or compete against other firms.125

120 (...continued)
well-managed and improve efficiency.”
121 See CRS Report RL31473, Amtrak Profitability: An Analysis of Congressional
Expectations at Amtrak’s Creation, by D. Randall Peterman; and Joseph Vranich, End of
the Line: The Failure of Amtrak Reform and the Future of America’s Passenger Trains
(Washington: AEI Press, 2004).
122 Chris Gosier, “26,000 Jobs Will Open to Competition,” Federal Times, April 24, 2006,
p. 3.
123 Government Accountability Office, Competitive Contracting: Agencies Upheld Few
Challenges and Appeals Under the FAIR Act, GAO/GGD/NSIAD-00-244 (Washington:
GAO: 2000).
124 On two apparently successful examples of marketization via franchising, see John J.
Callahan, Franchise Funds in the Federal Government: Ending the Government Service
Monopoly (Washington: The PricewaterhouseCoopers Endowment for Business of
Government, 2002).
125 For example, by law, only the U.S. Patent and Trademark Office may issue patents,

On the other hand, government overseers may find that a marketized agency is
less vexatious to oversee and hold accountable. This is because the marketized firm
remains within the governmental sector; though given some operational flexibilities,
it remains a governmental entity with a statutorily prescribed mission and subject to
all government management laws except those from which it has been specifically
The marketized agency also may be less prone to the pathologies that afflict
some private firms. The contrast between two entities, the Government National
Mortgage Association (Ginnie Mae, 12 U.S.C. 1716-1723) and the Federal National
Mortgage Association (Fannie Mae, 12 U.S.C. 11A), is illustrative. Both of these
entities were created by Congress to provide liquidity to the secondary home-
mortgage market. Ginnie Mae is a government corporation; generally, it has been
viewed as competently operated.126
Fannie Mae, on the other hand, is a private entity charged with governmental
responsibilities. While its successes are manifold, it has been reproached frequently
in recent years. Critics have said that Fannie Mae’s pursuit of profits has led it to
undertake a number of undesirable behaviors. In order to protect its profits, the firm
has been accused of aggressively lobbying Congress, perhaps through questionable
means.127 It has been criticized for excessively compensating its top executives.128
Fannie Mae’s efforts to grow its business also have been criticized for threatening to
create “spill-over” effects that might negatively affect world financial markets.129
Recently, the company also has found itself accused of manipulating its financial
reporting for the purposes of producing earnings pleasing to investors and enabling
its top management to collect large annual bonuses.130

125 (...continued)
making it a monopoly provider of this service (35 U.S.C. 2). Similarly, the “Private Express
Statutes,” a collections of laws and federal regulations, convey a near monopoly to USPS
in the carriage of letters over postal routes (18 U.S.C. 1693-1699, 39 U.S.C. 601-606, and
39 C.F.R. 310, 320). U.S. Postal Service, Understanding the Private Express Statutes
(Washington: USPS, 1998), available at [].
126 U.S. Government Accountability Office, Ginnie Mae Is Meeting Its Mission But Faces
Challenges in the Changing Marketplace, GAO-06-9 (Washington: GAO, 2005).
127 See Ross Guberman, “Balancing Act: Fannie Mae Projects a Happy Image. But as Its
Debt Grows Bigger and Its Executives Get Richer, Should Taxpayers Start to Worry?”
Washingtonian, August 2002.
128 Terence O’Hara, “Exit Packages in Dispute at Fannie Mae,” Washington Post, December

28, 2004, p. E1.

129 International Monetary Fund, Global Financial Stability Report, September 2003,
available at []. See also CRS
Report RS22307, Limiting Fannie Mae’s and Freddie Mac’s Portfolio Size, by N. Eric
130 CRS Report RS21949, Accounting Problems at Fannie Mae, by Mark Jickling.

To Privatize or Not — The Inevitability of Political
Ultimately, in considering whether to pursue privatization as a strategy to
improve the provision of goods and services, the question arises, “What is the proper
role of government?” Few would dispute that some broad functions should be
handled by government and its employees, while others should be left to the private
sector. But which ones?
Definitive guidance is unavailable. The Constitution enumerates many of the
broad functions that are to be carried out by the federal government.131 However, the
Constitution does not enumerate which of the tasks required to carry out these broad
functions must be performed by governmental employees and which may be
performed by private persons. For example, the Constitution states that “The
Congress shall have Power ... To establish Post Offices and post roads.” (Article I,
Sec. 8, Cl. 7) However, it does not declare whether the federal government must use
government employees to build these roads or whether it may hire private
contractors. Furthermore, the Constitution is of limited utility because the federal
government’s activities extend far beyond those listed in the Constitution.132
Federal statutory law provides some guidance. FAIR requires “government
personnel” to perform “inherently governmental activities.” FAIR defines “inherently
governmental activities” as those “so intimately related to the public interest as to
mandate performance by government personnel.” It further defines the term to
activities that require either the exercise of discretion in applying Federal
Government authority or the making of value judgments in making decisions for
the Federal Government, including judgments relating to monetary transactions
and entitlements. An inherently governmental function involves, among other
things, the interpretation and execution of the laws of the United States so as —
(i) to bind the United States to take or not to take some action by contract, policy,
regulation, authorization, order, or otherwise;
(ii) to determine, protect, and advance United States economic, political,
territorial, property, or other interests by military or diplomatic action, civil or
criminal judicial proceedings, contract management, or otherwise;
(iii) to significantly affect the life, liberty, or property of private persons;
(iv) to commission, appoint, direct, or control officers or employees of the
United States; or
(v) to exert ultimate control over the acquisition, use, or disposition of the
property, real or personal, tangible or intangible, of the United States, including
the collection, control, or disbursement of appropriated and other Federal funds.
(112 Stat. 2382(b))

131 For example, see Article 1, sec. 8.
132 For example, the Constitution contains no explicit authorization for federal education
policies. Thus, it would be of little use to turn to the Constitution in hopes of determining,
say, whether private contractors could be used to grade federally administered academic
achievement tests, such as the National Assessment of Educational Progress.

Additionally, FAIR explicitly excludes some activities from this category.
The term does not normally include —
(i) gathering information for or providing advice, opinions, recommendations, or
ideas to Federal Government officials; or
(ii) any function that is primarily ministerial and internal in nature (such as
building security, mail operations, operation of cafeterias, housekeeping,
facilities operations and maintenance, warehouse operations, motor vehicle fleet
management operations, or other routine electrical or mechanical services).
(112 Stat. 2382(c))
Yet, this statutory guidance leaves much unclear.133 Debates have and will erupt over
the application of these terms to specific activities. For example, currently, the
federal government’s National Response Plan for mass disasters charges a private
organization, the American National Red Cross, with responsibility to lead and
coordinate efforts to provide mass care, housing, and human services after disasters
that require federal assistance.134 Under FAIR, do such activities constitute “the
interpretation and execution of the laws of the United States so as ... to significantly
affect the life, liberty, or property of private persons”? If so, then ought these
activities be carried out by the Department of Homeland Security? Or, to take a
second example — does the aforementioned portion of FAIR permit the federal
government to outsource the housing of federal prisoners?
Moreover, this statutory guidance is of limited utility in considering a
fundamental question beneath the privatization debate. FAIR provides guidance on
the permissible extent of private sector participation in current federal activities. It
does not, nor was it intended to, provide answers as to which broad activities the
federal government should be involved in and which should be left to the private
!Should the federal government be involved in commuter rail service,
as it is with AMTRAK?
!Should the federal government operate energy-generating facilities,
like the Bonneville Power Authority and those of the Tennessee
Valley Authority?
!Should federally established entities provide liquidity to the
secondary housing loan market?
!Should the federal government provide comprehensive long-term
health insurance to the aged?
!Should the federal government use private contractors to provide
security in Iraq?

133 OMB’s Circular A-76 does offer some elaboration of what sorts of activities that it
interprets the phrase “inherently governmental” to include.
134 CRS Report RL33314, The Congressional Charter of the American National Red Cross:
Overview, History, and Analysis, by Kevin R. Kosar.

These questions and others have been debated at length in recent years without easy
resolution.135 “What ought government do?” is a question that is inherently value-
laden and intimately bound up with individuals’ varying perspectives on the role of
government, the proper extent of its power vis-a-vis state and local governments, the
fairness of free markets, and other political-philosophical issues.
In the past two decades, privatization emerged on the federal policy agenda.
Surveying this policy movement, one social scientist has written,
Private and market-style mechanisms are increasingly employed to provide what
government had taken as duties. Religious groups join secular nonprofit and for-
profit providers of services paid for or sought by government. Decision makers
in education, health care, social services, and law constantly cross the boundaries136
between public and private, religious and secular, profit and nonprofit.
The very newness of privatization as a policy idea likely helped cause some of the
confusion over its definition.
This report defines privatization 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. This definition, though
imperfect, is useful insofar as it enables one to view privatization activities upon a
spectrum; that is, an agency may more or less privatize its provision of goods and
services, depending on how many of the components of the provision process have
been moved to private sector providers.
This report also differentiates privatization from marketization. As described
above, the ramifications of this difference are significant. Entities couched within
the governmental and private sectors do not behave identically; each has its strengths
and weaknesses. Those uncomfortable with privatization may find marketization a
more attractive option. Meanwhile, those favoring privatization may view
marketization as a half measure that cannot be expected to produce goods and
services as efficiently as privatization.

135 See, respectively, CRS Report RL32709, Amtrak: Historical Background to the Political
and Social Aspects of Federal Intercity Passenger Rail Policy, by John Fritelli and Robert
S. Kirk; CRS Report RL32798, Power Marketing Administrations: Proposals for Market-
Based Rates, by Kyna Powers; Peter J. Wallison, Bert Ely, and Thomas H. Stanton,
Privatizing Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (Washington:
AEI, 2004); CRS Report RS20784, Long-Term Care: What Direction for Public Policy? by
Carol O’Shaughnessy and Bob Lyke; and CRS Report RL32419, Private Security
Contractors in Iraq: Background, Legal Status, and Other Issues, by Jennifer Elsea, Nina
M. Serafino.
136 Martha Minow. Partners Not Rivals: Privatization and the Public Good (Boston: Beacon
Press, 2002).

It can be expected that privatization will remain a controversial idea. Any
attempt to improve the federal government’s provision of goods and services through
privatization likely may elicit concerns over the intentions and possible consequences
of the proposal. Meanwhile, implicit in the debate about privatization lurks the old
and nettlesome question — “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?”