59

later, and had city employees conduct the tree cutting again and
compared the costs.

And the result of the study—and I have the two news articles on
it-~—was that the public employees performed the service at well
over $100 less per hour than the private firm. So my question to
all of you is, have you looked at having public employees compete
with the private sector, if there is such a decision to contract out,
and let them bid as would any other private company for the abil-
ity or the chance to do that work?

Mr. LEEDS. I absolutely agree with you that there should be open
competition between the public and the private sector. I think that
one of the misconceptions is that when you contract out a service
or privatize in any way, the government walks away. And that, ob-
viously, is not appropriate in many of these cases. There has to be
monitoring and careful supervision of what is being done when the
private sector takes over.

The second thing is that the way the competitive bidding is
structured is very, very important. And it sounds that, in this case,
it probably wasn’t done very effectively. But you have to have a
competitive bidding design that encourages intense competition to
take over the service. And then you have a monitoring of the proc-
ess. And I do not believe that in every case you’re going to get a
private firm that is going to perform better.

I would like to know why the public sector, in this case, was
more efficient. And if you can demonstrate, in an open competition,
that they can underprice and overperform, by all means, I would
then say that the public sector should continue doing it. And that
was my point, that unless you can demonstrate that there is an ef-
ficiency gain, there is no point in privatizing. And this may be a
good example of that.

Mrs. MALONEY, Any other comments?

Mr. Jones. I think a couple of points. The real issue is why the
study—I presume the study was done 2 years, which indicated
outsourcing, or contracting out, was more efficient. And so I guess
one of the real questions we should be asking ourselves is, what
has happened in 2 years that has made the State more efficient
than the private sector.

And one of the reasons, I think, why—and it’s one of the thin
you need to be very careful of when looking at when you should
contract out—is the whole overhead issue of government, and
whether an individual function itself, if you isolate out overhead
that is not typically incurred by the private sector. If you isolate
that out, whether the actual operation of that particular function
is being performed more efficiently than the private sector.

By the time you add in all of the other Federal overhead, that
particular agency or that particular city or whatever it is, then the
thing becomes less efficient. And so the issue that needs to be ad-
dressed is not contracting out the actually function itself, but re-
ducing the overhead that is there. And maybe what might have
happened, and there is no fact to back this up whatsoever, but
what might have happened is that when you tock it out to the pri-
vate sector, you might have, over the 2 years, have lost a lot of
that. So then when you go back and look at it 2 years later, you
now see those savings by performing it back in-house.


25

Other benefits such as Health, severance and retirement/pension benefits and
whether employees who transfer to the private sector are able to maintain these
benefits are other issues that must be considered.

In the UK government employees involved in privatization have certain rights
under the Acquired Rights Directive implemented in the UK through the Transfer
of Undertakings (Protection of Employment) Regulations 1981 and subsequent
measures collectively known as TUPLE” This implies that:

Staff are entitled to transfer with their jobs to the new owner on the same
terms and conditions of employment including rights to compensation for redun-
dancy that they enjoyed with the agency.

Whilst TUPE does not preserve for staff an entitlement to the same pension
rights in their new employment the government, to avoid the risk that a case for
constructive dicmissal may be brought, ired bidders to offer a pension scheme
which was broadly comparable to that which the staff received at the agency.

With regard to accrued pension benefits earned by staff social security legislation
in the UK provides three options for staff; to preserve the benefits in the Principal
Civil Service Pension Scheme; to transfer them to new owner’s scheme; or to trans-
fer them to a personal pension scheme.

With regard to severance entitlements the government in the UK is under no leg-
islative requirement to guarantee severance entitlements in the event that the com-
pany goes into liquidation without the resources to meet the obligations. However,
to avoid delay and ensure a smoother process they agreed to guarantee individual
employees who transferred with the business their accrued civil service redundancy
entitlements for a period of three years from the date of sale.

In the US the Civil Service Retirement System is not as portable as its UK equiv-
alent and employces are not able to transfer their benefits into either the new own-
er’s pension scheme or a personal pension scheme. In addition the scheme is se-
verely unfunded and if legislation was passed to allow transferability, the initial
funding cost to the government would be huge. However, conversely, there is no leg-
islation in the US that requires the new owner to provide the same level of benefits
as provided by the federal government.

onsequently, there is much less protection in the US for employees transferred
into the private sector.

LESSONS LEARNED

Every privatization is unique, has a different set of parameters, external influ-
ences and financial considerations and will require a unique solution. While we can
learn from the experiences of others the one most overriding lesson is to ensure that
the decisions are not made hastily whether through impatience, political or any
other motive. Time must be taken to ensure that al] the costs have been considered
and that the decision is made on complete information.

One of the most important aspects, however, that can be learned from past experi-
ence is how to regulate, if at all, newly privatized businesses, particularly monopo-
listie government corporations. Many different types of regulation have been used
to ensure the interest of the taxpayer (customer) is maintained post privatization.
Some have been more successful than others in promoting competition, cost reduc-
tion and increased service. By reviewing the experiences of other countries a more
informed decision on the most appropriate form of legislation can be made.

CONCLUSION

One can never hope to provide a comprehensive list of issues in the few minutes
available but these are some of the major issues confronting agencies considering
privatization. For almost every case Congress will be required to pass legislation in
one form or another. By considering/understanding some of the roadblocks that pre-
Vent privatization in advance, Congress is taking large steps in the right direction
to ease this difficult process. I am grateful for the opportunity to participate in this
discussion and look forward to opportunities to work with this subcommittee as this
process evolves,

‘Thank you. I would be pleased to answer any questions.


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F. CLINGER, JR., Pennsylvania, Chairman

BENJAMIN A. GILMAN, New York

DAN BURTON, Indiana

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

STEVEN SCHIFF, New Mexico

ILEANA ROS-LEHTINEN, Florida

WILLIAM H. ZELIFF, JR., New Hampshire

JOHN M. McHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

PETER BLUTE, Massachusetts

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

JON D. FOX, Pennsylvania

RANDY TATE, Washington

DICK CHRYSLER, Michigan

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

WILLIAM J. MARTINI, New Jersey

JOE SCARBOROUGH, Florida

JOHN B. SHADEGG, Arizona

MICHAEL PATRICK FLANAGAN, Illinois

CHARLES F. BASS, New Hampshire

STEVEN C. LATOURETTE, Ohio

MARSHALL “MARK” SANFORD, South
Carolina

ROBERT L. EHRLICH, JR., Maryland

CARDISS COLLINS, Illinois

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

JOHN M. SPRATT, JR., South Carolina

LOUISE McINTOSH SLAUGHTER, New
York

PAUL EB. KANJORSKI, Pennsylvania

GARY A. CONDIT, California

COLLIN C. PETERSON, Minnesota

KAREN L. THURMAN, Florida

CAROLYN B. MALONEY, New York

THOMAS M. BARRETT, Wisconsin

GENE TAYLOR, Mississippi

BARBARA-ROSE COLLINS, Michigan

ELEANOR HOLMES NORTON, District of
Columbia

JAMES P. MORAN, Virginia

GENE GREEN, Texas

CARRIE P. MEEK, Florida

FRANK MASCARA, Pennsylvania

CHAKA FATTAH, Pennsylvania

BERNARD SANDERS, Vermont
(Independent)

JAMES L. CLARKE, Staff Director
KEVIN M. SABO, Counsel
JupITH McCoy, Chief Clerk
BuD MYERS, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman

MICHAEL PATRICK FLANAGAN, Illinois
PETER BLUTE, Massachusetts

THOMAS M. DAVIS, Virginia

JON D. FOX, Pennsylvania

RANDY TATE, Washington

JOE SCARBOROUGH, Florida
CHARLES F. BASS, New Hampshire

CAROLYN B. MALONEY, New York
MAJOR R. OWENS, New York

FRANK MASCARA, Pennsylvania
ROBERT E. WISE, JR., West Virginia
JOHN M. SPRATT, JR, South Carclina
PAUL E. KANJORSKI, Pennsylvania

Ex OFFICIO

WILLIAM F. CLINGER, JR., Pennsylvania

CARDISS COLLINS, Mlinois

J. RUSSELL GEORGE, Staff Director

MARK BRASHER, Professional Stoff Member
MARK UNCAPHER, Professional Staff Member
ANDREW G. RICHARDSON, Clerk
DAVID MCMILLEN, Minority Professional Staff

ay


68

the Bush Administration’s Department of Labor cites the hierarchical and rigid
workplace as a key factor in slowing down the American economy. As long as work-
ers are treated as costs to be controlled, not investments to be Nieveloped, we will
never reach the economy’s full potential. A high performance workplace is built on
trained workers, flattened bureaucracies and decisions moved close to the front
lines. This is especially true in the service sector of the economy whether public or
private. To return to one of the questions raised by the committee, workers in
privatized entities, and in the private sector generally, should be treated the same
way as workers in the public sector: with respect and ignity.

e observations I have offered come from my own direct experiences with New
York City government over the past 30 years, and as an officer of the National Soci-
ety of Professional Engineers, but they reflect a national pattern that has been doc-
umented by AFSCME, which they would be happy to provide for the record.

The pattern is really quite clear and I believe goes to the heart of this inquiry.
‘The principle problem in the delivery of public services is a problem of public man-
agement. Our most successful companies treat their frontline workers as assets, not
expendable parts. These companies have transformed themselves by replacing the
hierarchical workplace of old with one that respects workers’ knowledge and experi-
ence. They have defined their core mission and then trained, deployed and moti-
vated the staff needed to carry out that mission.

If we were to begin with this assumption, I believe we would be asking ourselves
a different question today. Not how do we find ways to privatize more public serv-
ices, but rather what is the mission of government and what kind of workforce is
necessary to carry out that mission, The answer would obviously indicate some de-
gree of private sector participation in the delivery of services to the public. But the
Tesulis will be very different, depending on how we ask that question. The
unexamined assumption that more privatization is necessary, for example, denies
the irrefutable evidence in the case of our own experiences with engineering and ar-
chitectural services in New York City that in fact the opposite is true: We would
save money and improve the quality of service in New York if more of this work
were done in-house.

Nobody should be surprised by this, In maintaining the huge and complex phys-
ical infrastructure of a city like New York, the public interest requires a significant
core of highly motivated and skilled professional engineers who have a Brasp and
intimate understanding of the entire system. This knowledge is sometimes referred
to as “institutional memory.”

T will conclude my remarks with a story behind a story that made headlines a
couple of years ago. It is a story about “institutional memory.”

Stanley Brezenoff Executive Director of the Port Authority of New York and New
Jersey and former deputy mayor of New York City, has offered a dramatic example
of what this can mean. speakin before an audience of municipal engineers shortly
after the bombing of the World Trade Center, which is operated by the Pork Author-
ity, Brezenoff explained the role played by the Authority's professional and technical
staff in the wake of the bombing.

“It struck me,” he related, “as we discussed the various strategies to restore the
building’s labyrinth of systems, how the en; neering staff displayed an intimate fa-
miliarity with the building complex’s life safety, utility and structural systems. This

rmitted them to answer questions and brainstorm solutions without having to
Bret study plans and specifications. ... .. What | was witnessing was instantaneous
access to the Port Authority's institutional memory. . .. This staff knowledge
proved invaluable. It made possible an efficiency that could never be matched by
contract staff, no matter how highly qualified.”

Every enterprise, public or private, has a need for this kind of personnel. It makes
no sense whatsoever to deny government, which has both a legal and moral respon-
sibility to provide the public with a wide range of vital services, this essential com-

onent in its ability to function effectively. e real question is how to provide the
Best balance between the private and publi

ic sector in the delivery of services. Unfor-
tunately, in the current privatization mania, political rhetoric and narrow economic
jnterests have too often substituted for objective criteria in determining that bal-
ance,

Such criteria would assure that public entities retain a staff of sufficient size and
skill to carry out the many routine functions of government that study after study
has demonstrated to be more effectively done by in-house staff. It would also assure
that this staff had the capability to compete with private contractors for larger and
more complex work. This serves two important functions. It provides government
with personnel capable of supervising contractors and also guards against govern-
ment Secoming totally dependent on a single or small group of contractors. While
much attention has been devoted to the need for competition in delivering public


79

My favorite was Mr. Brezenoff that you mentioned earlier. For
some reason, he decided to contract all of the oversight and the
study of city hospitals to firms in California. I couldn’t understand
why. I mean, I think you could have found some universities in
New York that would have been willing to do if for free. But we
were contracting with all of these California firms to “study” the
municipal hospital system. And we were hurt very deeply and very
badly by all of these scandals in contracting out.

And I just would like to hear your comments on it. We tried
many ways to improve oversight and monitoring, but it unfortu-
nately has been one long series of abuse of taxpayers’ funds. My
favorite was the hauling of the city sludge. We were paying 8 times
more than any surrounding county. I even went to court and sued
the mayor over it. But it was a whole series of one scandal after
another without contracting out.

And maybe you could start, Mr. Concklin.

Mr. ConckLin. Sure. I certainly have limited to no knowledge of
the details of what went on in New York City. But I can tell you
that professional technical services contracting by the Federal Gov-
ernment, as I said, is a $70 billion per year enterprise. We have
been virtually free of any scandal or major performance problems
of any type over a period of three decades plus.

This is not to say there aren’t occasional problems in Federal
contracting. There are, but by and large, it has worked very well
to the benefit of the Federal Government and ultimately the tax-

ayers. Just listening to the examples you gave, I would certainly
look very deeply and very critically at the behavior of both the
buyer and the seller. If somebody was paying 8 times the going
rate for a given unit of service, then I would gain the impression
that there must have been something mortally wrong with the
management of that contract that would have approved the con-
tract that was going to generate that kind of price or rate.

This is not to say the contractor wasn’t a charlatan as well, for
being party to that.

Mr. Horn. Thank you very much. The gentleman from Virginia,
Mr. Davis.

Mr. Davis. Thank you, Mr. Chairman.

Mr. ALBANO. I thought of—I would like to add something to that
question, if I could?

Mr. Horw. Sure. Well, let me ask you, do you have anything that
you'd like to add to that last question?

Mr. ALBANO. I appreciate that, Mr. Chairman.

Mr. Davis. Then I’ve got a question for Mr. Concklin.

Mr. ALBANO. The parking violation bureau was something that
was a horror because of the fact that they set up a separate agency
and then contracted out the work. There was not one civil servant
in that agency. It was a political agency. It was set up without any
standards or specifications. And the people involved had no dedica-
tion to civil service. They were political appointees, no examina-
tions. It was a horror.

And it goes right back to the basic statement I made at the be-
inning. You need accountability. You need people in place who can
lo the evaluation and to be sure that the public is being protected.


15

questions. You mentioned here London Heathrow, Gatwick Air-
ports, and Toronto’s imaginative venture. Have you had an oppor-
tunity to personally visit these areas?

Mr. BERNARDI. I have not, but I will be doing that with my com-
missioner of aviation in the very near future.

Mr, Horn. I think you make an excellent point where you_talk
about the current Federal law, which requires repayment by Syra-
cuse of all of the Airport Improvement Program funds, rather than
only the depreciated value that remains. As yu may know, the
chairman of the full committee and I are both on Transportation
and Infrastructure. And he is, in essence, the ranking Republican
on that committee, but he doesn’t assert that because he’s chair-
man of this committee. And he’s on the Aviation Subcommittee of
the Transportation and Infrastructure Committee. In that sub-
committee, we really need to look at that and see if we can’t change
that formula. I’ve run into the same thing in Long Beach, where
we had the situation of a very noisy airport that we were trying
to get within the noise limits. Frankly, it may be that you coul;
get more productive use out of that airport in many other ways,
with Los Angeles International 20 minutes away.

So I think that’s something that you made a good comment
about. Let me ask you, on your interest in privatization—and I
think I know the answer, but if I could hear it from you—is it
based on the need for investment in the airport or savings in the
city budget?

ir, BERNARDI. Both.

Mr. Horn. Yes.

Mr. BERNARDI. We have a tremendous amount of land space at
our airport. We’re very fortunate. But the economic development
that I would like to see there, I think, is inhibited by the restric-
tions that we have. Without getting into too much detail, now,
there’s the air side, there’s the land side. I would like to believe
that if the restriction of repayment of the Federal grants can be
lifted, we could provide an opportunity for the private sector in our
area to take a look at some opportunities on the land side that per-
haps they couldn’t do before.

There are many different ways to do it, from leases to direct sale
of assets. But right now no one will listen, no one will pay atten-
tion because of the prohibitive financial amount of money that
would have to be returned to the Federal Government.

Mr. Horn. The gentleman from Pennsylvania, Mr. Mascara.

Mr. Mascara. Thank you very much, Mr. Chairman. Nobody,
Mayor, has more respect than I do for local government leaders,
such as yourself, mayors and county commissioners. I served for 15
years as a county commissioner. I operated_an airport, which was
a reliever for the International Airport of Greater Pittsburgh. We
upgraded that facility because we thought it was vital to our eco-
nomic development plans in Washington County, PA.

We made some major investments, along with the Federal Gov-
ernment, to put in an ILS system—an Instrument Landing Sys-
tem—and upgraded our aprons. We extended our runway to 5,000
feet because we needed to get businesses into Washington County.
And it paid off. I have some concerns about privatization generally,
but in this case, specifically because of my close ties to economic


14

there was a iegislative initiative to permit DoD depots to compete directly with es-
tablished private-sector organizations who routinely perform the same service (e.g.,
overhaul af aircraft engines). This would have been a patently inequitable scheme
since the federal depot would be partially underwritten or otherwise subsidized by
the goverament.

Special Problem of Public-Private Competition—The A-76 commercial ies
program and the DOD’s depot program have both involved direct competition be-
tween the public and priyate sectors which has been a highly controversial and po-
litically volatile process. The primary defect in this process is the use of “cost com-
parisons” as the primary tool for determining whether a proposed contracting-out
action should go forward, The cost comparison methodology is seriously flawed in
the view of many federal experts, most industry practitioners, the accounting and
audit community and other informed observers. Public-private competitions should
be used only in the most unusual circumstances and cost comparisons should never
be used unless the current flaws are corrected—a process which would require a
radical transformation of the government’s financial and accounting systems.

RECOMMENDATIONS.

1. Promote Privatization—A statutory base is needed which sets forth strong, un-
equivocal direction for the executive branch to move forward with a strategically-
based privatization program. This statutory instruction would form the backbone of
a comprehensive long-term movement of commercial-type activities from the govern-
ment to the private sector.

2. Create a Self-Perpetuating Process—The new statutory base should call for one
or more privatization mechanisms which are as close as possible to self-perpetuating
through creative and judicious use of incentives, performance goals, measurement
criteria (metrics) and realistic timetables with penalties for default.

We suggest consideration of at least three mechanisms: (1) something similar to
the DoD’s Base Realignment and Closing Commission; (2) continued use of federal
personnel ceilings or target reduction goals to help catalyze pursuit of productive
privatization opportunities; and (3) a requirement for each major federal agency to
submit (within six months of passage) to the congress a list of their most promising
privatization candidates (e.., top ten) along with an implementation strategy.

3. Prohibit Public-Private ‘Competition Because of the inherent inequity arising
from pliting the government against the private sector, compounded by the deeply
flawed use of questionable cost comparisons, public-private competitions should not
be used as a privatization strategy

Mr. Chairman, and members of the subcommittee, we thank you for the privilege
of presenting our views on privatization. We respectfully commend you on your wis-
dom in undertaking an examination of this promising area of government policy.
Successful privatization will reduce the cost of government, improve performance
and enhance the average citizen’s perception of the responsiveness of the federal
government.

Mr, Horn. Let me ask the first question. I don’t quite under-
stand that last paragraph. What are the side effects of public-pri-
vate competition?

Mr. CONCKLIN. Well, No. 1, in the last decade and a half, there
have been abortive, largely unsuccessful efforts to move ahead with
a program called A76, sometimes referred to as a commercial ac-
tivities program. The nervous system, the heart of that program,
is something called a cost comparison. And I’m going to skip over
a lot of detail, but cost comparisons between doing work in-house
by Federal employee associations, and the private sector are ana-
lytically deeply flawed because the government’s accounting system
does not reflect and faithfully collect indirect costs.

So you get a substantial understatement, certainly in the range
of 10 to 20 percent, conservatively, of overhead when you compare
the government’s cost of running a motor pool, let’s say, versus the
private sector. The private sector cannot hide overhead. The IRS,
the SEC and the mandatory Federal cost principles require you to
show all your overhead. If you hide it, you're committing a criminal
act, or a civil act.


32

visunad ade UUNSinulgin UWS
Companies Act Company (Coco) immediately prior to privatisation.
However, a direct wansfer to the purchaser may be possible in cciusin
circumstances. The appropriate timing for vesting will vary from casc to
case. (See NIP(90)3, paragraphs 65-67.)

Accommodation

2.17. ConSideratiun is needed at the outset as to how best to handle the
accommodation vunscqucnces of privatisation. The main options avatlahle.
are:

+ inthe case of singly accnpied bunidings, selling the accommodation with
the business,

+ allowing the privatised business to remain temporarily within
government-owned accommodation. (This could be the case in a jointly
occupied building where the department or agency has alternative plans
for the accommodation.) Legal advice wtll he required on the terms of
the temporary letting.

+ allowing the business to remain in government accommodation on a
longer-term basis (This could apply where there are operational
advantages in ca-lacanon,)

+ allowing the purchaser of the busine3s to usc its own property.

2.18. In appraising these options, Propecty Holdings should be consulied about
issues relating to accommodation on the Common User Estate.

EC law

2.14 Furopean Linion reguianons need to be considered. There may be State Aid
Directive implicanions if there are transactions involving the provision of
Government assistance to the hnsiness on privansation, DTI's European
Community and Trade Relations Division can advise. If a proposed
privatisation will Involve procurement, EC Procurement Direcuves may
apply. Departments” Procurement Units and the Treasury's PSP Division can
advise.


39

employment are broadly comparable to the PCSPS, or that staff are
compensated (by improvements to other terms and conditions or otherwisc).
If not, there may be grounds for claims of constructive dismissal against the
department ar agency. The Government Actuary’s Department will be able
10 advise whether the pensians nghts offered are broadly comparable with
the PCSPS and must therefore he consulted at an early stage,

Redundancy entitlements

6.4.

Where TUPE applies, redundancy entitlements cannot be alicred at the point
of wansfer. However, departments and agencies will need to consider staff
concems that redundancy entitlements in respect of public service might be
changed, or not honoured, after transfer to the private sector. The strong
presumption is against giving redundancy payments guarantees or other
torms of redundancy assurance to staff but, if in doubt, departments and
agencies should cansuit the Treasury While negotiation of future
redundancy entitlements are a matter tor the future employer and staff, TUPE
regulations place a duty on the department or agency to intorm staff of any
such changes which the new employer proposes to make.

Options for staff facing privatisation

65

6 6.

Where TUPE applies, the presumption is that staff will transfer permanently
with the privatised work (and the new employer may have made his bid on
the basis of the wansfer of certain key workers). While staff have the right
to refuse to transfer where TUPE applies, if they do so there is no obligation
ta tind them altemative work or to make a redundancy payment. The refusal
can be treated as resignation

In exceptional circumstances, vendor departments and agencies might
consider the options of seconding staff to the new employer or transferring
them to other work in the department (or elsewhere,in Government). Such
arrangements can only be made with the agreement of the prospective
purchaser. Kelevanr considerations will include the need to ensure that
enough staff are transferred tn secure the viability of the future business; the
scope for finding staff alternative employment in Government; and the cost
of possible redundancies. Secondment is a difficult pprion where there is a
TUPE wansfer; and legal advice should be taken if departments and agencies
are considering this appruach.

Staff records

67.

Certain staff information should be given to potential purchasers in cases
where TUPE applies, Under the Data Protection Act, disclosure of personal
information requires the permission of the individual. At the bid stage,
therefore, wansfers of informarion about staff should be the minimum
necessary to allow potential purchasers to make firm bids and calculate


64

feel free to write us and we'll put those letters in the record so our
colleagues can read them also. Thank you very much for coming.

Mr. BUTLER. Thank you.

Mr. Horn. The next panel is primarily the services panel. Mr.
Albano and Mr. Concklin.

[Witnesses sworn.]

Mr. Horn. Please be seated. Mr. Albano is president of the Civil
Service Technical Guild. I was fascinated by your background.
You've had a lot of experiences in New York and elsewhere.

STATEMENT OF LOUIS ALBANO, PRESIDENT, CIVIL SERVICE
TECHNICAL GUILD, ACCOMPANIED BY BERT M. CONCKLIN,
PRESIDENT, PROFESSIONAL SERVICES COUNCIL

Mr. ALBAN. If I may, I like to do all the mechanics first. I am
a professional engineer, and I worked for better than 20 years in
the city of New York as an engineer, designing schools. I was in
the transportation subway unit and located the wayside equipment,
and I also provided departmental personnel examinations. So I've
been more of an engineer than I have been a union leader.

If I may, I want to thank the committee, the chair, the commit-
tee members, and a special thanks to Congresswoman Maloney, for
being able to be here today and to speak on what I consider a very
important topic. As you stated, I am a professional engineer, and
I represent engineers, architects, in the city of New York, some
7,000 members. And we are one of the oldest professional unions
in the United States. And this unit recognized privatization from
its inception.

We had our own St. Valentine’s Day massacre in 1934, on a Sat-
urday, when the Little Flower laid off 3,000 professional engineers
and architects. The beauty of it was that these people did not get
mad.

Mr. Horn. The Little Flower?

Mr. ALBANO. Mayor LaGuardia.

Mr. Horn. It’s Mayor LaGuardia, for those who don’t remember
that colorful mayor. (Laughter.]

A good independent Republican, by the way.

Mr. ALBANO. No, he was a fusion candidate, like Mr. Giuliani.

Mr. Horn. That’s the only way Republicans can win in New York
City. [Laughter.]

Mr. ALBANO. Well, there was one person, Mr. Lindsay. I happen
to be from New York, so—but I am a member of District Council
37 and the American Federation of State and County Employees.
I believe there was a lot said today, and I don’t mean to repeat
what has been stated, but I believe there has to be a balance in
government, just as our forefathers set it up to have a Congress,
an Executive, and a Supreme Court.

We need to provide accountability. Somebody has to be there in
the system who will protect the owner. We need to understand that
that accountability can only be prepared by and put in place by
people who are trained professionals; who have a dedication to the
service; who believe there is a career and a job that they care for,
and that they are treated appropriately.

As an engineer, I understand that you need a good foundation to
provide the structure of government so that the services are pro-


3.9.

3.10.

3.41.

3.12.

3.14.

35

Full draft sale documentation should also be prepared, in consnitarion with
the finasiciad and legal advisers and the reporting accountants, at an early stage
in the sale pruccss, Departments should make this documentation available
to sclected bidders at an appropriate stage. Bidders should be told that if they
wish to propose changes to the documentation itey slivuld submit fully
marked up documents with their bids.

When itis judged that all potential bidders have had adequate time to consider
the Information Mcmorandum, a standard letter should be issucd sctling a
date for the submission of indicative offers. Those potential purchasers who.
are considered by the financial adviser to have made an acceptable indicative
offer should be given the chance to examine the business in more detail undcr
the so-called "due diligence” procedure, Information made available at this
stage should normally include a long-form accountant’s report; and potential
Purchasers should be given access to all legal, business and commercial
documents relevant to the husiness. A data room may need to be made
available for this purpose.

Departments will need tq consider the nature and timing of consultation with
the trade unions about the sale documentation, {tis desirable that trade union
representatives have the opportunity to meet with shortiisted hidders so that
they can commence discussions on transferring terms and conditions under
TUPE regulations. These consultations would have to be conducted
responsibly and in suict confidence.

A date should be set. through a formal tender iemer, tor the submission of
final offers. Bids should be treated as commercial-in-contidence. Clear
criteria for the ssment of bids by the advisers should be established,
related to dhe sale vbjectives. It is important that departments should observe
all undenakings given to bidders un timetable and procedures since failure
to do so may result in legal action. Negotiations should then proceed with
the preferred purchascr on the basis of the draft sale documentation.

‘The vendor departinent ur agency must secure Treasury agreement that the
sale consideration provides acceptable value for money: and chat there is no
dilution of the financial retuin subsequently ay a result of clawback
provisions, redundancy guarantees or other asangciicints which have not
been explicitly agreed with the Treasury.

A sale contract should be cachanyed and completed as soon as possible.


67

half of our bridges rated deficient, to name only a few of the more glaring mani-
festations of the deterioration of New York City’s physical infrastructure.

A decade ago, in the midst of this rapid privatization process, the City’s Office
of Construction reviewed 6,000 capital construction projects and found $109 million
in cost overruns, or 7.2 percent of contract value, a sum that translated to $3 billion
over the life of the city’s 10-year capital program, This report identified nine “prob-
lem” projects with costs averaging 235 percent above original estimates, an alarm-
ing signal of the City’s inability to cope with its accelerating capital program. It is
relevant that eight of these nine projects were designed and carried out by private
contractors.

This report by the City’s Office of Construction was only one of several done by
a wide range of government and private entities that illuminate the relative cost-
effectiveness of in-house and private engineering services. Virtually all of these re

rts and audits have reached similar conclusions: Under most circumstances, New

ork City would be far better served by having its own staff designing and super-
vising its capital program rather than contracting-out for these services. The ques-
tion is why, in the face of these studies. has the City persisted in this policy of con-
tracting-out the work?

The answer is not simple, but I believe it can be summarized by looking at five
unexamined assumptions that seem to underlie this illogical policy.

1. CONTRACTING OUT WILL SAVE TAXPAYERS MONEY.

This assumption often fails to take account of the costs of writing contract speci-
fications, administering the bidding process, resolving legal issues, monitoring con-
tractors to guard against overbilling, insuring that structures are finished or cor-
recting work not done properly. It almost always fails to calculate the costs of unem-
ployment insurance and public assistance for laid-off public employees—and the loss
of their tax revenues, nor does it account for the tendency of nationally based con-
tractors to use their own suppliers, which cuts out local vendors and drains profits
from the community.

2. THE COMPETITIVE MARKETPLACE WILL REVITALIZE GOVERNMENT SERVICES.

Competition for government contracts exists more in theory than in practice.
When competitive bids are opened to the private sector, frequently only one or two
companies make a bid. In a typical year New York City awards more than $1 billion
in contracts to companies that were sole bidders. And even when competitive bid-
ding takes place at the time a contract is first awarded, it rarely occurs at renewal
time. The result is the opposite of competition—a virtual monopoly of taxpayers vul-
nerable to higher costs and poorer service.

3. QUALITY IMPROVES WHEN PUBLIC SERVICES ARE PRIVATIZED.

Private contractors must find a way to sustain their profit margin, and that often
comes at the expense of quality. These companies either hire low-wage, temporary
and often unqualified workers, or slash costs on the services they provide. We could
fill an encyclopedia with examples just from New York City of shoddy work done
by private contractors trying to cut corners—streets that begin to disintegrate
months after they are repaired, equipment and materials improperly tested and
schools that are freezing in winter,

4. CONTRACTING OUT IS BENEFICIAL TO THE COMMUNITY.

__ This assumption ignores the often serious and debilitating consequences of privat-
ization on workers and the local community. It is not accurate to say that public
sector jobs are being replaced by better private sector jobs. When privatization takes
place, stable public sector jobs are often replaced by low-wage, temporary private
sector jobs, many of which pay so little that the workers must seck public assistance
to feed their families, Not only does the tax base decrease, but families suffer and
the extra burden of support is placed on the community. The public employees most
harmed by privatization are minorities and women. Because discrimination contin-
ues to be prevalent in the private sector, government employment has become an
avenue for minority advancement. If these jobs are privatized, the impact is felt dis-
proportionately among women and in minority communities.

5. PRIVATE SECTOR EMPLOYEES ARE MORE EFFICIENT THAN PUBLIC EMPLOYEES.

Inefficiency has less to do with the private or public sector than with an old and
outmoded management structure prevalent in every sector of the economy. In the
1992 report of the Secretary's Commission on Achieving Necessary Skills (SCANS),


45

ANNEX C

CHECKLIST OF THE KEY STAGES IN A TRADE SALE

Define the. business to be sold.

Feasibility study.

Decision in principle and formulation of sale objectives.

Prepare business for sale, ¢g :alionalise and rescructure: consider
legislation and relevant regulations, set financial accounting arrangements
on commercial footing.

Appointment of privatisation advisers.

Prepare offer for sale document and information memorandum.

Advertise the business.

Indicative bids invited and assessed. Shortlisted candidates examine
detailed financial information.

Assess final bids from private sector (and MEBO team).

Negotiation with favoured bidder.

Establish the business as a Government-owned Companies Act Company
and transfer the staff into it. (The appropriate timing will vary from

case to case.)

Control arrangements in place between exchange of contracts and sale
completion.

Implement disengagement procedures.

Completion of sale.


87

mated that there are approximately $227 billion of such assets eligible to be trans-
ferred.

REMOVE CURRENT BAN ON TOLLS ON INTERSTATE HIGHWAYS

A recent estimate by the federal highway administration indicated that there are
$212 billion in needed highway work and $78 billion in bridge improvements needed
on our nation’s roads. Congress has gradually relaxed the ban regarding tolls on fed-
eral aid highways in the past eight years, and in the next highway bill the current
restriction on tolls on the interstate should be removed completely. This would be

articularly helpful to repair the 280,000 bridges in the country that are unsafe.

r company is currently negotiating a franchise on the Tacoma Narrows Bri
in Seattle that would allow tolls to be installed and improvements made to that fa-
cility, including the possibility of a new bridge, under a fifty year franchise. I would
also like to announce today that our company and Brown & Root, pa*t owner and
contractor of Dulles Greenway, will shortly be submitting a proposui to the federal
ernment to design, finance, build, and operate a replacement facility for the
reodrow Wilson Bridge. A removal of the ban on tolls would greatly add to this
effort.

TAX CODE CHANGES

Finally, there are several very simple changes in the tax code which, if made,
would bring billions of additional investment into our nation’s infrastructure. The
single most significant barrier to infrastructure privatization is the rate difference
between tax-exempt bonds, which increase the federal deficit, and taxable bonds.
The first step would be the adoption of the public benefit bond also incorporated in
the DeLauro bill, which would allow the nation’s pension funds, with over $4.5 tril-
lion in assets, to invest in infrastructure.

‘A second change would be to remove the current five year limit on operating and
maintenance contracts, which has the practical effect of curtailing a private firms
willingness to a make capital investment. This restriction should be abolished, and
if it were, billions of dollars of capital improvements would be made to facilities
such as wastewater treatment plants. These improvements would be made with tax-
able revenue bonds, which would have the additional benefit of adding revenue to
the treasury.

A third change would be to eliminate the distinction between public and private
ownership when it comes to the eligibility to use tax exempt bonds.

Tax exempt status should be made for all public-purpose infrastructure, or it
should be eliminated for those facilities that are self-supporting.

CONCLUSION

‘These specific changes I have suggested can be achieved in this Congress and can
be easily implemented. The cumulative effect would be to attract dollars of private
capital to meet this nation’s infrastructure needs, more than enough to offset what-
ever reductions in outlays for federal grants are made in the budget. These sug-
gested policy changes should be included in the budget resolution as policy issues
to be reviewed by the relevant Senate committees and adopted in this Congress.

Mr. Horn. Thank you very much.

Now, Mr. Correll, president and chief executive officer, United
Water Resources.

Mr. CorRELL. Good afternoon, Mr. Chairman and members of
the subcommittee. My name is Don Correll, and I am chairman
and chief executive officer of United Water Resources, an investor-
owned water utility holding company based in northern New Jer-
sey which provides water service to 2 million Americans in 14

tates.

I'm also a member of the Board of Directors of the National Asso-
ciation of Water Companies and chairman of its government rela-
tions committee, The National Association of Water Companies is
a trade association representing the Nation’s investor-owned water
utilities. We recently celebrated our 100th anniversary as an orga-
nization, and many of our members have been in business for much


8

Mr. Kiuc. There’s conflicting testimony from experts on how
much of that money is actually recoverable. If you go back to the
Carter administration, actually one of the recommendations the
Carter administration asked Congress to do was to dramatically in-
crease the number of IRS collection agents, based on some kind of
projection of money we could then take in—that for every agent
you hired, you’d get that agent’s salary plus some other factor,
which means more money would come in the door.

Despite increases in some of those IRS employment levels, it’s
my understanding that we've never really achieved those kinds of
savings. Faced with similar frustrations, a number of States across
the country—Alabama, Maine, and New Jersey—have begun to
contract out with private collection firms to collect on their debt.
New Jersey’s experience, which is my understanding, is the longest
running and the one which we have the best data on, suggests that.
for every $1 the State of New Jersey pays out, it collects roughly

4,

Now, clearly, some of that $150 billion or $160 billion is bad debt
that nobody is ever going to collect. But I also think somewhere be-
tween where we are today and where that $160 billion is, there’s
a fair amount of money. And my recommendation to the Budget
Committee was to move forward aggressively with the privatization
of debt collection.

I don’t know that you necessarily want to do that for the whole
country. But it certainly seems to me, it’s reasonable to pick re-
gions for the IRS and try it as a pilot project and just to simply
see what the experience has been. If it is anything similar to what
the States have discovered, I think it’s likely we could recover 10,
15, 25 percent of that debt, which could mean $25 billion or $30
billion, potentially.

Mr. Mascara. Thank you, Congressman.

Mr. Horn. Just a few brief questions. No. 1, as you know, when
a lobbyist comes in to see us, some of us ask, “What’s the best case
of your opposition?” If they can’t state that pretty succinctly, we
don’t listen to them too much. Let me ask you this. In terms of pri-
vatization, what’s the downside, socially, economically, govern-
mentally, however you want to look at it, the kind of worries that
might be out there?

Mr. Kus. Well, I think you have conflicting goals. And I think,
in many ways, it’s difficult to reach a consensus in Congress on
what that goal is. Is the consensus to maximize the profit? Or is
the consensus to be some point less than that, but still perform
public goods? And let me give you a perfect example. We privatized
COMSAT—Communications Satellite Network—in the 1980's.

When we privatized COMSAT, we made a conscious decision that
we didn’t want to restrict that information to just a couple of peo-
ple, since it was a government-financed satellite, we wanted to
make the information available still to a number of parties. Well,
when you did that, obviously what you did was dilute the value of
the information that was marketable.

And so in the case of COMSAT, I think it was clear that on the
one hand, we achieved what we wanted to do, which was to cut
strings with an organization and an agency that could stand on its
own. We didn’t really pick the peak economic value of it because


THE FEDERAL ROLE IN PRIVATIZATION

TUESDAY, MARCH 14, 1995

House OF REPRESENTATIVES,
SUBCOMMITTEE ON MANAGEMENT,
INFORMATION, AND TECHNOLOGY,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room
2154, Rayburn House Office Building, the Honorable Stephen Horn
(chairman of the subcommittee) presiding.

Present: Representatives Davis, Fox, Horn, Maloney, and Mas-
cara.

Staff present: J. Russell George, staff director; Mark Brasher and
Mark Uncapher, professional staff members; Andrew G. Richard-
son, clerk; David McMillen, minority professional staff; and
Elisabeth Campbell, minority staff assistant.

Mr. Horn. The Subcommittee on Government Management, In-
formation, and Technology will come to order, a quorum being
present. And our first panel is Representative Klug of Wisconsin,
and Mayor Bernardi of Syracuse, NY. Mayor, if you would, please
come forward. We have a tradition in this committee, of swearing
all witnesses. So if you just raise your right hand.

[Witnesses sworn.]

Mr. Horn. And we will start with you, Mayor. We're delighted
to have you here. I congratulate you on your win. And I think
they've got a sign for you right there; there you are.

Mr. Fox. Sir, will you accept the opening statements as a brief?

Mr. Horn. My opening statement will be fairly brief, and I'll be
glad to recognize you after mine. I just want to get the witnesses
sworn in.

Mr. Fox. Very well. Thank you, Mr. Chairman.

Mr. Horn. And let me say to all witnesses that we will put your
full statement in the record automatically. What we’d like you to
do is summarize it. We give every witness 5 minutes for summari-
zation, and then each Member, alternating between Republicans
and Democrats, has 5 minutes per round. And let me just make a
few comments on this and I’ll explain what we're about.

In 1979, Margaret Thatcher was elected as Britain’s Prime Min-
ister. Mrs. Thatcher initiated a review of the British government
that included privatizing the State-owned enterprises, which had
been nationalized by the Labour government, following the Second
World War. The sale of British Petroleum and British Aerospace
kicked off the transformation of several British firms from largely
State-owned to largely private. Thatcher’s Conservative Party revo-

@


42

COMPETITION POLICY

Ashley Rosengarten

Competition Policy Division

Dept of Trade and Industry

Ashdown House

123 Victona St O71 215 6777
LONDON SWIE 6RB GTN 215 6777

GENERAL CONTRACT ISSUES

Barne Ashford

Central Unit on Procurement

HM Treasury

Allington Towers O71 270 1633
LONDON SWIE 5EB GTN 270 1633

ACCESS FOR NAO

Duncan Slaughter

TOA Division

HM Treasury

Parliament St 071 270 9361
LONDON SWIP3AG GTN 270 5361

PENSIONS AND REDUNDANCY

Steve Rackstraw

Civil Service Pensions Division

HM Treasury

Alencon Link

Basingstoke 0256 29222 ext 6464
Hants RG21 JR CEN 1439 6464

Andrew Johnston

Goverment Actuary’s Dept

22 Kingsway 071 242 6828 cxt 330
LONDON WC2B 6LE GTN 242 6828 ext 330

15


73

cision mechanism in the A~76 process is a cost-comparison methodology which
is seriously flawed and has geaerated a continued and unresolved controversy.
* The executive branch’s efforte to privatize have been impeded by contracting
out limitation’s imposed on major functions. A prime example is the Depert.
ment of Defense (DoD) depot (equipment maintenance and repair) function
where the congress has said that 60 percent of all depot work (a 15 billion-dol,
lar market) must be performed in-house, thus severely limiting the extent of
privatization,

GOVERNMENT-OWNED, CONTRACTOR-OPERATED FACILITIES

* GOCO privatization has been implemented primarily in the Department of
Energy and the DoD. It is most appropriate where the function requires sub-
stantial investment in development or production assets which would not nor-
mally be capitalized by the private-sector for-profit community—such as labora-
tory facilities to conduct research into advanced nuclear weapons or space-
launch vehicles and payloads. GOCOs are not necessary where private-sector
perfarmance does not require special-purpose assets such as laboratories and
test facilities.

GOVERNMENT CORPORATIONS

+ Government corporations take a number of forms, but have in common the
government providing capital and market guarantee assistance. Perhaps, the
most obvious form of this model is the U.S. Postal Service where the fcderal
government has provided hundreds of millions in subsidies annually since ils
inception in 1971—in an area where there is a highly competitive and high per-
formance private sector capable of performing the Postal Service missions Many
of the government corporations are special-purpose financial institutions dealing
with the home mortgage market, federal deposit insurance, student loans an
similar functions.

In summary, direct contracting out has béen the most frequently used method
of achieving privatization and represents a mature, low risk, economically
sound and rapid approach to successful privatization.

BROAD-BASED CAPABILITIES OF PRIVATE-SECTOR SERVICES

The private, professional and technical services sector of the U.S. economy, rep-
resents approximately 400 billion dollars in annual sales or roughly ten percent of
the gross domestic product. Its diverse capabilities cover virtually every field of ac-
tivity with major concentrations in fields such as information technology, environ-
mental technology, space, defense, health, transportation, energy, education and
international development.

The federal government spends approximately 70 billion dollars on services each
year and it is conservatively estimated that 50 percent of this amount is spent on
activities which represent privatization in the sense that these activities are ciscrete
functions which the government contracts out for on a continuing basis. This exten-
sive use of service contracts provides unique benefits through continuous access to
leading edge technologies, contemporary problem-solving capabilities and modern
management.

The services sector, owing to its size, diversity and financial stability is fully capa-
ble of responding to additional opportunities to perform for government functions
which qualify for privatization

KEY PRIVATIZATION ISSUES

Qualifying Privatization Candidates—A clear, flexible set of first principles is
needed to guide federal decisions on what functions to privatize. This is cniically
important as a device to add objectivity to a process that tends to be highly politi-
cized. Candidates for privatization should be subjected to a rigorous analysis before
they are converted to private-sector stewardship.

eating a Sclf-Perpetuating Mechanism—Cultural resistance to privatization
within the federal bureaucracy will range from passive to overt and intense. A high-
ly innovative, high-leverage mechanism will be needed to stimulate and motivate
the executive branch to move forward with diligence and commitment. A variation
on the generally successful Base Realignment and Closing Commission used by the
DoD should be considered.

Avoiding Unfair Competition Between the Public and Private Sector—A potential
exists to create unfair competition between the public and private sector, depending
on what privatization model is employed. For example, in the previous congress


82

It also has caused us to put jobs out that aren’t completely de-
signed. I’ve had arguments with city council people, the mayor,
that 10 percent more time spent in the development of the draw-
ings would eliminate, at the minimum, 10 percent of the construc-
tion costs. And that’s a multiple at least 10 to 15 times. So if you
spend $10,000, you’d save $100,000 easy on the actual site.

The major problem is the fact that we don’t have the staff. We
are not doing the real overview. And a lot of shoddy work is getting
approved because, again, if the inspector does the type of Job, he
finds that he may live in Brooklyn. He does a great job in Brook-
lyn; he’s very happy. And his boss says, you know, you’re doing
such a good job, we're going to put you up in the Bronx. And he
does a good job up in the Bronx and the next thing you know, he’s
at Staten Island. And he gets a message.

And it’s a very difficult problem for the union, because sometimes
our own people are involved. And we need to do more accountable
work. We need to provide the professional staff and we should de-
velop that staff so that you can get an honest contractor to do the
work. A lot of good contractors don’t bid for city work. And it’s a
problem. The whole procurement system needs to be revised, and
we're trying to work on that.

Mr. Horn. Thank you. Any further questions? I thank both of
you very much for coming to share these experiences and your wis-
dom with us. Thank you very much. Our last panel for the day,
panel IV, is the infrastructure panel, Mr. Stanley, Mr. Correll.
Would you please come forward?

[Witnesses sworn.]

Mr. Horn. Please be seated. We'll start with Mr. Stanley, the
senior vice president of the United Infrastructure Corp.

STATEMENT OF RALPH L. STANLEY, SENIOR VICE PRESIDENT,
UNITED INFRASTRUCTURE CO.; ACCOMPANIED BY DONALD
CORRELL, PRESIDENT AND CEO, UNITED WATER RE-
SOURCES

Mr. STANLEY. Thank you, Mr. Chairman. My name is Ralph
Stanley, and I’m currently working for United Infrastructure Co.,
a joint venture of Bechtel and Peter Kiewit, two diversified con-
struction companies with combined revenues of more than $11 bil-
lion. UIC is a newly formed developer whose purpose is the devel-
opment and ownership of infrastructure projects, such as roads,
bridges, water plants and airports.

We're a company formed to assist in addressing the shortfall in
infrastructure resources. We're also dedicated to working with this
committee and others in developing policies at the Federal, State
and local level to encourage private involvement. Prior to joinin
UIC, I served as the founder, chairman and CEO of the Toll Roa
Corp. of Virginia, the company building the private extension of the
Dulles Toll Road.

T’ve also served here in Washington for 6 years as Chief of Staff
to Secretary of Transportation and Administrator of the Federal
Transportation Administration, where I actively sought to increase
the role played by the private sector to provide transportation in-
frastructure. I’ve served on two Presidential commissions that


THE FEDERAL ROLE IN PRIVATIZATION

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

MARCH 14, 1995

Printed for the use of the Committee on Government Reform and Oversight

ee

U.S. GOVERNMENT PRINTING OFFICE
91-041 CC WASHINGTON : 1996

For sale by the U.S. Goverment Printing Office
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402

ISBN 0-16-047296-2
a





2.4.

30

However, in line with the Government's policy on selling services into wider
markets (set out in PFO/91/1), this is only appropriate where a firm
commitment to privatise has been announced.

The degree af progress towards establishing a commercial track record, and
expanding the client base. before pnvatisanon may involve difficult
judgements about where the balance of advantage lies since such preparatory
work is likely to involve significant costs, and some risks, and may delay the
timing of the sale.

Comprehensive information on the past, present and future financial position
of the activity (eg statements of profit and loss, cash flow, balance sheet
projections and capital requirements) should be prepared where practicable.
Historic accounting information should be audited. Poor financial
information on viability and prospects is likely to result in lower bids,
although a halance hac ta he struck between detail and quality, proceeds and
delay. The provision of such information may require the creation of new
planning. budgeting. accounting and management reporting systems

The impheanions of the Fair Trading Act 1973 and European competition law
will also need to be considered. The pnvatisanon must be structured in such
a way as to avoid infringement of the rules and, where necessary, appropriate
authorisations may need to be obtained from the UK and European
competition authorities. Otherwise. Government as well as the privatised
vonipaity could rivk liability. A wade sale could also create a merger that
would fall to be considered by eithe: the UK or the European competition
authorides. (Tor more information, consult DTI's Guidance on UK and EC
Competition Procedures for Tradc Sales and NIP(90)3 paragraph 14.) in
any event, DTI’s competition policy division should be consulted at an early
stage of privatisation plans. Departments are also advised to consider the
state of competition in the relevant industry and how this might impact on
future prices and relations with the supplier.

Feasibility study.

2.6.

2.7.

2.8.

A financial adviser - normally a merchant bank or firm of accountants - should
be appointed tu advise on the feasibility of a sale. The vendor department
should wake the appointinent by competitive tender co ensure faimess and
value for money.

The financial adviser should prepare an initial report on the feasibility and
financial implications of the sale, and should be given full access to
information i¢levaii ty tic commiercial viability of the business to be sold.
‘The outcome of this report may affect die timing, method and structure of
the sale.

‘The Treasury's PE3 division can advise on the procedures for appointing
advisers and ate preparing guidance: see NLP(94)1 for a directory of advisers


89

The third is the Revenue Proc. 93-19. This IRS ruling severely
limits the ability of governmental bodies to contract with private
operators for water and wastewater management services.
Amongst other things, it limits the term of the management con-
tract to periods of 3 years if tax-exempt debt the government entity
is outstanding. This time limit precludes significant investment by
private contractors to attain efficiencies or to make system im-

rovements. And this is particularly problematic for the water in-
dustry, where most of the assets have long lives going as long as
25 to 50 years and, in some cases, even longer. The NAWC is cur-
rently both working with the administration to address this con-
cern in pursuing a possible legislative remedy. Congressional atten-
tion to timely resolution of this matter would expedite privatization
activities.

The last item is Executive Order 12803, which has been dis-
cussed almost ad nauseam today already by a number of panelists.
But it was issued in 1992, and it was designed to facilitate the sale
of government facilities that receive funding through Federal
grants.

Many of the municipal water systems and almost all of the
wastewater systems were financed during the last several decades
in whole or in part with Federal grant money. Grant repayment
conditions were imposed by the OMB if the facility is sold or
leased. The presumption of this grant repayment was partially that
the asset’s use might be changed with private ownership. But un-
like housing or other general purpose structures, water and
wastewater facilities are almost never converted to some alternate
use.

Executive Order 12803 requires a local government to repay the
undepreciated portion of the grant. The local government, however,
is allowed to recover its costs before the funds are paid back. The
Executive order also places restrictions on the use of the proceeds
received by the city as a result of the sale or lease. The Executive
order directs Federal agencies to adopt rules to carry out its re-
quirements. To date, the implementation has been very disappoint-
ing and clearly has not achieved the order’s intent of streamlining
privatization efforts.

Our association would support legislation to codify an improved
version of this Executive Order 12803. Under the plan, we would
envision the city would not be obligated to repay any of the Federal
grants, and the local governments could use the proceeds it re-
ceived as a result of the transfer without the restrictions found in
the Executive order.

_ Our business is perhaps the most basic of enterprises, and that
is why it is often taken for granted. But the continued economic

‘owth or other larger, high-profile privatization ventures that

ave been presented before this subcommittee will be academic dis-
cussions if the aging government water services infrastructure con-
cerns remain unresolved. Examples of increased water supply and
operating problems, including here in Washington, DC, have been
reported in the media with increasing frequency in recent years.
Support for private sector participation in this basic service is vital.

I thank you for your opportunity provided for our association to
speak before you.


84

That legislation recommended the creation of the National Infra-
structure Corp., an entity that would provide debt, equity, credit
and risk insurance to private entities for revenue-based infrastruc-
ture projects. It would be funded with a 3-year capitalization
through the sale of common stock to the Treasury. Total startup
funds were recommended at $1 billion a year, and any further in-
vestment would be prohibited.

After a 3-year period, there would be a complete conversion to
private ownership. NIC would provide four functions. First, it
would make senior and subordinate loans, as well as investments,
to private entities for revenue-based infrastructure projects. Sec-
ond, it would provide limited financial insurance on the debt of
projects that would have difficulty obtaining credit. Third, it would
provide limited preconstruction risk insurance. And finally, it
would certify the eligibility of projects for public benefit bond sta-
tus, another commission recommendation, that would allow pen-
sion funds to invest in infrastructure in a manner competitive with
tax exempt rates.

My second recommendation, in addition to looking at that legisla-
tion, would be to codify Executive Order 12803. As was mentioned
earlier, there are a number of infrastructure facilities, such as air-
ports, highways, and wastewater systems, built with Federal
grants during the last 20 or 30 years. A common feature of these
grants, thousands of which I signed at FTA, require a repayment
of the Federal portion if the asset is transferred to the private sec-

tor.

I think the effort made in 1992 by President Bush in issuing Ex-
ecutive Order 12803 improved on the situation. There still has been
very little activity. The repayment requirement has hampered that.
I would recommend the Congress enact a measure, the McIntosh
bill, that allows State and cities to privatize their federally aided
infrastructure by sale or lease, as long as it is kept in its original
use.

At least one estimate has been that there are about $227 billion
worth of such assets eligible to be transferred. My third rec-
ommendation is to remove the current ban on tolls on interstate
highways. As I mentioned earlier, there have been numerous stud-
ies about the underfunded infrastructure in our Nation’s roads and
bridges. Congress, in the last two highway bills, has gradually re-
laxed the ban regarding tolls. And, in the next highway bill, the
current restriction on tolls on the interstate should be removed
completely.

This would be particularly helpful to repair the more than
280,000 bridges in this country that are unsafe. Our company is
currently negotiating a franchise on the Tacoma Narrows Bridge in
Seattle that would allow tolls to be installed and improvements
made to that facility, including the possibility of a new bridge. We
also are going to be shortly submitting to the Secretary of Trans-
portation, along with Brown & Root, the contractor on the Dulles
Toll Road extension, a proposal to design, finance, build and oper-
ate a replacement facility for the Woodrow Wilson Bridge here in
the Washin on area.

A removal of the ban on tolls would Preatly add to that effort.
Finally, I want to mention a couple of changes in the tax code


12
DEPARTMENT OF LABOR
The Job Corps is prohibited to contract out any Civilian Conservation Center.
DEPARTMENT OF TRANSPORTATION

The FAA is prohibited from contracting out functions of an airport control tower
at any airport.

The Department of Transportation is prohibited from funding changes in the cur-
rent federal status of the Transportation Systems Center or the Turner-Fairbank
Highway Research Center.

DEPARTMENT OF TREASURY

No appropriated funds are allowed to be used for the study of the possibility of
contracting out or the actual contracting out of positions ‘under the United States
Mint Police Force and the Bureau of Engraving and Printing Police Force.

Currently, Congress is required to be notified before the Department of Labor
and/or the Department of Treasury contract out or privatize any functions under
their jurisdiction:

No federal funds shall go to contracting out or privatizing any function or activi
ties presently performed by Federal emp loyees in the Department of Labor unless
the 4 ppropriation Committees of both Houses of Congress are notified fifteen days
in advance.

No appropriations shall be used for contracting out or privatizing any functions
activities presently performed by Federal employees in the Department of Treasury
unless the Appropriations Committees on both Houses are notified fifteen days in
advance of such reprogramming of funds.

Mr. BERNARDI. Thank you, Chairman Horn, Congressman Mas-

cara, Congressman Klug, ladies and gentlemen. It’s a pleasure to
e here.

Facing a $16 million revenue shortfall for our next fiscal year,
the city of Syracuse, like many others, is hard pressed to support
any service which cannot be best described as essential to the
health and safety of its residents.

Our budgetary position, similar to so many others throughout the
country, has forced us to analyze other methods of delivery of non-
essential services without added taxpayer expense.

Based on competitive market conditions, fiscal constraints and
decreasing levels of service, numerous State and local governments
across the United States are reviewing their approach to public sec-
tor management of infrastructure, assets and services. A primary
area of focus has been the introduction of entrepreneurial private
sector management, and even ownership, of public sector infra-
structure assets and services.

Our administration in Syracuse, like those in Atlanta, Boston
Indianapolis, Los Angeles, New York City, Philadelphia, and
Worcester, is actively pursuing the opportunities which are avail-
able through privatization. Ladies and gentlemen, I can tell you
right now, we’re looking back home on our tax-delinquent prop-
erties, as Jersey City did, we’re talking to banking experts to take
that over for us; to manage that; to pay us up front; and to collect
our tax-delinquent situation, which approaches about $25 million
in the city of Syracuse. We're also in the process of the sale and
lease-back of all of our vehicles and other equipment.

We're looking at solid waste pickup, privatization of snow re-
moval, the sale of our city golf courses, and sale of all real estate.
Basically what I want to enter into the city of Syracuse, and have
done so to this point, is the competition aspect of who can do it bet-
ter; who can do it more efficiently; who can do it at a quicker rate
of speed; and who can do it, more importantly, more economically.



04

PUBLIC-PRIVATE PARTNERSHIPS ARE EMERGING AS A SOLUTION TO LOCAL
INFRASTRUCTURE NEEDS

During this period of increased global competition and decreased Federal re-
sources for infrastructure projects, state and local officials must employ innovative
solutions to meet their communities’ infrastructure needs. A growing number of
state and local officials are now recognizing the important role the private sector
can play in these efforts.

, Mayor Bernardi, who testified earlier about his interest in the possible privatiza-
tion of Hancock Airport (the city-owned airport in Syracuse), is a national leader
considering how to make the best use of the private sector. Another leader in inno-
vative municipal public-private partnerships is Mayor Stephen Goldsmith of Indian-
apolis. Since taking office in 1992, Mayor Goldsmith has cut more than $100 million
from the municipal budget by privatizing city infrastructure assets—including the
city’s waste water treatment facility—and by permitting the private sector to bid
against the city government for municipal contracts. Mayor Goldsmith is also cur-
rently involved in an innovative airport privatization program. Additionally, several
Governors, including Pete Wilson in California, George Pataki in New York, and
Frank Keating in Oklahoma, have announced their intentions to increase the oppor-
tunities for public-private partnerships in their states.

Federal policies must not stifle these innovative approaches to infrastructure
management. To highlight this point, I would like to call your attention to one par-
ticular policy which severely impedes privatization transactions.

IMPROVING EXECUTIVE ORDER 12803 ON THE PRIVATIZATION OF STATE AND LOCAL
INFRASTRUCTURE ASSETS.

Prior to 1992, Federal policy—known as the “Common Rule”—required state and
local governments to fully reimburse the Federal government for all grants received
for a federal-aid infrastructure asset upon the transfer of that facility to the private
sector. This 100% repayment requirement was a prohibitive economic disincentive
to privatization transactions. To address this disincentive, and “promote private in-
vestment in local infrastructure,” President Bush issued Executive Order 12803,
which liberalized the 100% repayment requirement—permitting state and local gov-
ernments to repay the depreciated value of Federal grants in the event a federal-
aid facility is privatized. Notwithstanding the articulated purpose of the Executive
Order, this modified repayment requirement continues to be a disincentive to privat-
ization transactions.

eed Air Terminal strongly supports Congressional efforts to address this un-
necessary restriction on the discretion of civic leaders to consider privatization as
a solution to their infrastructure management needs. Specifically, Congressman
David McIntosh (R-IN) has proposed legislation to permit state and local govern-
ments to transfer federal-aid, facilities to the private sector, by sale or long-term
lease, without repayment of Federal grants, provided the private entity is bound by
contract or law to operate the facility for the purpose for which Federal aid was
given and abide by Federal grant assurances. Codification of this proposal will en-
sure state and local leaders the flexibility to undertake privatization programs,
while protecting the Federal government’s legitimate interests.

LOCKHEED AIR TERMINAL WOULD LIKE TO PARTICIPATE IN A CONTINUING DIALOGUE TO
ENHANCE OPPORTUNITIES FOR GREATER PRIVATIZATION OF INFRASTRUCTURE ASSETS

In conclusion, the explosion of international privatization programs demonstrates
that public-private partnerships can provide innovative solutions to domestic infra-
structure needs. However, we must work to overcome our widespread tendency to
resist change—an ironic characteristic for a country with a history of being revolu-
tionary. This reluctance to consider new infrastructure management arrangements
is slowing the potential of the country’s economy. It is time to_regroup, look at
change and manage differently. We should welcome new ways of financing projects,
and quicker methods of completing them. Lockheed Air Terminal looks forward to
participating in a continuing dialog to reach these goals. |

‘Again, I very much appreciate the opportunity to appear before you, and I will
be happy to answer any questions you may have.

Mr. Horn. Thank you very much. The gentleman from Penn-
sylvania.

Mr. Mascara. More than a question, I want to speak to the part
in this testimony that refers to the transfer of undertakings, the
protection of employment. And I see the UK is sensitive to the


96

a substitute for compensation. For the first time, federal, state and local employees
no longer have the security that was guaranteed when they entered public service.
Some cynics among us will say that we can no longer afford this—that public em-
ployees have become “America’s Protected Class.”

What we can no longer afford is the preconception that government is destined
to fail at what ever it docs. Government has the distinctive capability to meet a va-
riety of problems which are poorly handled by the market or private charity. Privat-
ization should never be confused with excellence. The issue is not public versus pri-
vate. It is one of quality of service. And, it is an issue of the quality of our lives
as citizens and as workers in our democratic society. A passage from the SCANS
report provides a fitting conclusion to my statement, as they outline the challenges

fore us.

The challenge that the public sector faces in the 1990s is to continue to create
high performance organizations at all levels of government. Current efforts in this
direction are encouraging, but much more is needed if government is expected to
experience truly systemic reform. High performance reform is not a one-time effort.
It will require consistent, on-going commitment from public managers, elected lead-
ers, unions, and front-line workers if it is to succeed. While the task is daunting,
the examples of high performance in government outlined in this report suggest that
the public sector is up to the challenge.

PREPARED STATEMENT OF JOHN N. STURDIVANT, NATIONAL PRESIDENT, AMERICAN
FEDERATION OF GOVERNMENT EMPLOYEES, AFL-CIO

On behalf of the American Federation of Government Employees, AFL-CIO,
which represents over 700,000 federal employees across the nation, let me take this
opportunity to respond to the testimony offered by various witnesses at the hearing
on contracting out/privatization held by the House Government Reform and Over-
sight Committee’s Subcommittee on Government Management, Information and
Technology, on March 14, 1995.

While not reflexively opposed to contracting-out and privatization, federal employ-
ees are also working and middle class taxpayers who are sadly familiar with both
the extraordinary growth in service contracting expenses as well as the consistent
and documented inability of service contractors to perform work in a cost-efficient
manner. As the record clearly shows, the federal government is contracting-out more
and more, but the American people are getting less and less. Since federal employ-
ees and their representatives were not invited to testify at this recent hearing, | am
using this letter to present you with their views and concerns. After all, they are
the men and women who deliver important services to the American public seven
days a week, 365 days a year. That is to say, they are the people who know best
how government works—and when it fails to work, why that is so.

E members can’t help but find this newfound determination sweeping Capitol
Hill to sell off large chunks of the federal government to politically well-conn
firms in the private sector to be highly ironic. After all, the federal workforce hasn't
been this small since the Kennedy Administration. At the same time, service con-
tracting is the costliest part of federal procurement and one of the fastest-growing
expenses in the entire federal budget. According to the Office of Management an:
Budget (OMB), federal service contracting costs the American taxpayers $105 billion
every year.! (The $70 billion estimate provided by the Professional Services Council
in its testimony is patently inaccurate.) That staggering sum is at least $25 billion
more than the combined salaries and wages of every single federal employees

Just how many service contractor employees are on the federal payroll? I wish I
could say, but such records are not kept. Considering that the federal government
now spends a whopping $105 billion per year on thousands and thousands of labor-
intensive contracts, I can conservatively estimate that the contractor workforce is
some 2,000,000 employees. As points of reference, I ask you to consider that the
2,017,197 employees who make up the entire federal workforce earn a combined
$75.3 billion in salaries and wages per year.2 We hear a lot of talk these days about
making the federal government run more like a business. But is there a single firm
in the private sector that fails to keep any records about a burgeoning subset of em-

Office of Management and Budget, “Summary Report of Agencies! Service Contracting Prac-
ticgs” (January 1994), p,v.

2Office of Bersonnel Management, “Pay Structure of the Federal Civil Service” (March 31,
1993), pages 12-13.


75

In the case of the government, the government does not flow
down—accounting terms—does not flow down the overhead from
the Pentagon such that every gallon of the Secretary’s gas spent
flying around the world gets fractionally allocated to that motor
pool. That’s the problem, in simplest terms.

Mr. Horn. As a former dean of research, I can understand the
problem of indirect costs. 1 must say, some government agencies
have tried it and they've dumped everything they can think of. For
example, naval shipyards, of which I’m becoming a junior grade ex-
pert, and you've got competition there, and a standard, that the
public yards provide. Frankly, if there were no public yards, there
would be a scalping of the Department of Defense every day. I be-
lieve in private enterprise, but not gouging the Defense Depart-
ment on a defense contract.

So I worry about that. I think you're right on that.

Mr. CoNCKLWN. It is.

Mr. Horn. But indirect cost isn’t that much of a concept. But
now they’re dumping that type of cost on their own cost, which is
ballooning the cost beyond reason.

Mr. CONCKLIN. Yes, sir.

Mr. Horn. And some of them aren’t necessary.

Mr. CONCKLIN. May I make an additional very quick statement
about the financial structure, which I failed to make?

Mr. Horn. Sure.

Mr. CONCKLIN. There was a comment, I guess, referring to the
UK experience, of ballooning profits, or profits out of control. When
the U.S. Federal Government contracts, using services contracts,
for things like running a test range or running a computer center,
there is zero point zero probability or possibility that profits will
balloon out of control, because the Federal system controls profits.

Profits, for example, gross profits are in the 4 to 8 percent range.
Net profits are 2 to 4 percent for most of our members. There is
no mystification whatsoever about that. Profits are controlled if you
obey the Federal cost principles, which are part of the regulatory
architecture when you do business with the Federal Government.

Mr. Horn. The gentleman from Pennsylvania.

Mr. Mascara. Is there anything in the Federal Government
that’s off limits to privatizing, or how far do we go?

Mr. CONCKLIN. Yes, sir, 1 would start with—not to be too theo-
retical—but there is an OMB, Office of Management and Budget,
directive that defines, with respectable precision, what are inher-
ently governmental functions. And they are such things as design-
ing programs; making all policy decisions; formulating budgets and
managing budgets; making all regulatory decisions; all the war
power or war fighting aspects.

Although, that’s not adhered to because service contractors get
deeply involved in battlefield advanced front line support in many
instances. But those are fairly well spelled out. And again, I want
to associate myself with the previous speakers. I think it’s impor-
tant to go slow and take the low risk, feasible targets first. For ex-
ample, computer centers are widely contracted out. I see no reason
why virtually all Federal computer centers couldn’t be contracted

out.
That would fit the —


41

4.2

43

36

DISENGAGEMENT AND POST-SALE
INVOLVEMENT

‘The ininal teasihitity studies conducted by the professional advisers should
have identified areas where the business to be disposed of is reliant on other
public sector bodies. A programme of disengagement will need to be
developed to cover issucy such as:

+ accounting systems;
+ payroll;

+ staffing;

*  felecommunicauions,
+ insurance;

+ property nghts;

+ official records: and

+ VAT registration.

Management canrrot of the business between the exchange of contracts with
the pnrchaser and the date of legal completion of the sale also may need to
be considered.

Trade sale consideration is frequently related to the value of the net assets of
the business. Conscquently, the sale agreement should provide for the
preparation by the vendor department of a completion balance sheet based
‘on the policies, principles and practices used in preparing the business’ most
recent set of accounts. This information should be audited by the reporting
accountants and agreed with the purchaser. Arbitration procedures will need
to be specified if there is disagreement.

The Government generally prefers to make aclean break at privatisation, with
no post sale involvement in the financial affairs or management of the
business. This is consistent with the central principle of privansatian, namely
that exposure to market pressures and the removal of Ciavernment support is
the best way to promote etticiency to the benefit of the consumer. It is
therefore Government policy not to grant sale warranties except in respect of
its ownership of the shares heing sald.


48

But I would add a word of caution here, that the calculation of
efficiency is not always as straightforward as it appears. And it
must be comprehensive, taking into consideration such factors as
regulation, which also is costly, especially when there is going to
be an absence of competition as a result of privatization. Public
safety considerations and environmental concerns also have to be
taken into consideration, and also may be costly. And of course, as
was mentioned earlier, the transaction costs, ‘which sometimes are
substantial and have to be netted out from the cost-benefit calcula-
tion. So I think that all of these factors have to be taken into con-
sideration when determining whether or not efficiency really is
gained, whether there are cost savings and so forth.

Second, we have to be very clear about the meaning of this rath-
er inelegant and somewhat ambiguous term we call “privatization.”
Privatization occurs, in my judgment, when the operational and/or
the financial control of a service or a productive asset passes from
the State to the private sector. And this can happen in many dif-
ferent ways. Less likely in this country, but very frequent in other
countries around the world, the purest type of privatization is
when there is an outright sale of an asset. This was the case in
1987 with Conrail, as someone mentioned earlier this afternoon.
We're considering it now with the U.S. Enrichment Corp. And
there are a few other examples, but not very many.

A more common technique in this country is likely to be contract-
ing out, or as it has been called, “outsourcing” of a service to the
private sector—everything from roads and public park maintenance
to administering the Federal prisons. In this case, of course, unlike
the first example, there’s no ownership change, just a change of
operational control to the private sector. And then of course, there
is the so-called build-operate-transfer—BOT—schemes, whereby
the financing, the operation, and sometimes, for a period of time,
the ownership of a particular asset is transferred from the public
to the private sector. This is very common with Physical infrastruc-
ture projects—roads, airports and so forth. A good example in Vir-
ginia right now is the Dulles Toll Road; over $300 million project
which has been contracted out to the private sector through build-
operate-transfer scheme.

What all these techniques have in common and what we should
keep in mind is that private sector responsibility replaces the gov-
ernment with a clear view that the facility will operate more effi-
ciently, or the service will be performed more efficiently. And the
operative term in privatization is control—the complete absence of

fovernment intervention in the operation of a service or productive
facility, And if government is not willing to forfeit that control, pri-
vatization really should not occur.

Finally, a word of caution about implementing privatization pro-
grams what we have learned from other countries, very briefly.

ivatization, first and foremost, in my judgment, is a political
process. Its success depends ultimately on public support for the

‘oals of the process. And I think that political leaders from around
the world have lost public support for privatization by
overpromising and underperforming.

Policymakers and government leaders should keep this in mind.
I recall Mrs. Aquino standing before 100,000 people in Manila and


53

PREPARED STATEMENT OF VIGGO BUTLER, PRESIDENT, LOCKHEED AIR TERMINAL

‘Thank you Chairman Horn, and members of the Subcommittee, for the oppor-
tunity to testify today on the privatization of infrastructure assets, My name is
Viggo Butler, and I am the President of Lockheed Air Terminal, Inc. Lockheed Air
Terminal has been managing, developing and operating airports for over 65 years,
contributing to the economic growth of many communities across the country. To
note just one example, Lockheed Air Terminal has privately operated Burbank-
Glendale-Pasadena Airport since 1929.

THE PRIVATE SECTOR PROVIDES TRANSPORTATION SOLUTIONS AROUND THE WORLD

Today, private firms develop and implement innovative approaches to infrastruc-
ture management throughout the world. Examples of foreign governments oa 8-
sively pursuing privatization programs abound. In Mexico alone, thousands of kilo-
meters of toll roads are being privately built; significant port projects are being sold
to private concerns; and telecommunications facilities have private operators. In
Britain, most of the major airports—including Heathrow and Gatwick—are now pri-
vately operated.

Unfortunately, Federal policies have prevented a parallel rise in domestic oppor-
tunities for public-private partnerships. This has forced American companies, such
as Lockheed Air Terminal, to rely, almost exclusively, on privatization projects
abroad—driving U.S. capital out of the country. Today we have 20 operations
around the world—from Guam to Turkmenistan, and governments from Australia
to Eastern Europe are at various stages of development of airport privatization
projects. Thus, most of our opportunities in the foreseeable future will be abroad,
unless Federal policies change.

The development of our largest facility, the Trillium 3 terminal in Toronto, dem-
onstrates both the aggressiveness of foreign governments secking public-private
partnerships, and the incentives motivating their efforts. In this instance, the gov-
ernment came to us with a plan to build a new terminal that would meet the rising
traffic demands at Pearson International Airport, but would not further burden the
taxpayers, In addition to being part owners of the terminal, we now operate the ter-
minal under a 40 year lease with the government. The Trillium facility, which cost
over half a billion dollars and is the largest independent airport privatization pro-
gram in the world, stands as a clear example of the innovation and ingenuity pri-
vate entrepreneurs can bring to bear on even the most complex projects. It is a long-
term public-private partnership that draws from the strengths of both to create a
truly unique passenger processing facility, constructed entirely with private funds.

THE PRIVATE SECTOR HAS A ROLE TO PLAY IN DOMESTIC FACILITIES

At Lockheed Air Terminal, we believe that any government enterprise that re-
sponds to market forces is a candidate to be owned and/or operated by the private
sector. Some government p1 such as social services, police and fire, are driv-
en by community need, and, therefore, should be supported by the government, em:

loying its tax powers. However, many transportation assets, such as airports, clear-
ly respond to the marketplace—consumers choose to fly, and then choose to use a
particular airport, based on economic decisions. Increased privatization of such mar-

et oriented infrastructure assets would achieve significant benefits for the users of
the facility—and by users I mean both airlines and their passengers—and for the
community at-large.

First, a private sector investor in an infrastructure asset replaces government.
debt or equity with private capital, at no expense to the government itself. Privat-
ization, therefore, provides a public ‘owner the means to continue existing operations

develop new ones, regardless of the availability of Federal, state and local funds
for infrastructure projects.

Second, the private sector, responding to market forces, best allocates infrastruc-
ture resources For example, most public airport authorities do not respond to the
market; they respond to civic desires. An airport may, therefore, be located in the
wrong place altogether—where there is little demand—while another more logical
location has no facility. Or, one airport may be overbuilt, while another is
underbuilt. The private sector would respond quickly to such inefficiencies.

Third, passengers and airlines will benefit from the increased efficiency and cost
savings created by the private sector. Private firms, with their own money on the
line, are going to find the best deal and get it done quicker, both to save financing
time and to secure the revenue the project is intended to produce. This market in-
centive clearly benefits the users of the infrastructure facility.


ay

saying that she was going to privatize Philippine Airlines in 90
days, and 5 years later, she was still at it. She had underestimated
the complexity of the process. More recently, one of the so-called
experts in this country projected that the U.S. Government reve-
nues from privatization could approach $300 billion. I’m skeptical
of this figure, even though, theoretically, it may be possible. So I
would caution that we should not overpromise and underperform.

Second, what we have learned from other countries is that pri-
vatization is far more complex, time consuming, and expensive to
execute than most people realize. The preparation, the pricing, the
identifying prospective investors or contractors, the competitive
bidding process—all of this takes time. It’s highly complex, and we
should not underestimate how important this preparatory process
is. So we must have clear planning and a clear strategy for doing
the work.

Third, suggests a rule of thumb that has become axiomatic the
world over. Regardless of who is privatizing or what the strategy
is, 1 would advise that the government begin with so-called “win-
ners”—services or other assets that are relatively simple to pri-
vatize, noncontroversial, and where the benefits are clear and un-
ambiguous.

By these criteria, avoiding controversy until the program has
gained momentum and credibility with the public is highly advis-
able. As one minister of privatization from another country said, “if
we make a mistake privatizing a bicycle factory, it is not as tragic
as if we err in the sale of a national airline.” So I would advise that
we be very, very careful in choosing what we're going to privatize
and when.

In closing, let me quote one of my favorite——

Mr. Horn. If you're on the close, fine. You're a little over time.

Mr. LEEDs. Thank you. I'll stop there and wait for questions.

[The prepared statement of Mr. Leeds follows:]

PREPARED STATEMENT OF ROGER LEEDS, MANAGING DiRECTOR, BARENTS PLC

Good afternoon Mr. Chairman and Members of the Committee. It is a pleasure
to comment briefly on privatization in the United States.

I would like to address three very basic issues that are relevant to the increas-
ingly public debate about whether and how to privatize in this country:

« First, under what circumstances does privatization make sound economic and
financial sense?

* Second, what do we mean by the term “privatization” in an operational sense?
* And third, very briefly, what can policy makers in this country learn from the
large amount of experience gained by other countries that already have de-
signed and implemented privatization programs?

First, when does it make sense to privatize?

As the Members of this Committee know well, there are a broad range of U.S.
Government services and physical assets that are eligible candidates for privatiza-
tion—from the post office, the prisons and the FAA to every conceivable component
of the nation’s physical infrastructure, including ports, airports, roads, water sys-
tems and the like.

In my view, Government decision makers should establish a clear, objective and
fully transparent set of criteria for determining which of these services and assets
should be transferred to private control, and which should remain in the public do-
main.

At a moment in history when the dominant global trend is to reduce state inter-
vention in favor of free markets and open competition on virtually every front, we
must be particularly careful not to initiate indiscriminately a wave of privatization
without explicitly understanding when the public is likely to benefit, and when the
odds clearly suggest otherwise. Although there are many important criteria that de-



78

Mr. CoNCKLW. All right, I'll respond briefly. My answer to your
question is, the problem could be solved if the Federal Government
systematically, across the board, put in place a finance and ac-
counting system which required the full collection and full rep-
resentation of overhead. It’s not a state-of-the-art problem. It’s just
that public administration, at least at the Federal level, has been
not concerned with collecting all the costs associated with doing a
thing such as having a military battalion deployed to the Middle

ast.

It tends to budget in terms of manpower or peoplepower, train-

ing, operating costs. But it doesn’t associate costs with functions as
I know some State and local governments do a better job of. And
in the private sector, that’s the way it’s aligned. It’s aligned by the
function, production function or service function.
” Mrs. LONEY. I’d like to ask both panelists, the panel before
you discussed employee stock ownership, which has been very suc-
cessful in growing private firms. How do you think that would
work with public employees if we changed the law so that certain
services could be bought by either the private sector or by the pub-
lic employees? I’d like to ask both panelists how they feel about
that concept.

And first, the public employee. Mr. Albano, would you support
that concept or not?

Mr. ALBANO. It would really have to be studied, because basically
there is a question of setting an equal playing field and whether
we could really be able to get the cohesiveness. I think that might
be a problem. It’s a new concept. I have never been ashamed or
afraid of new concepts. We have been very flexible in the city. We
have set up new agencies. We're ready to sit down. We'd have to
take a very careful look at it.

I think it’s something that, like everything else, with moderniza-
tion and efficiency and changes that are being made, we have to
take a serious look.

Mrs. MALoney. Thank you. Mr. Concklin.

Mr. CONCKLIN. It is a very complex question. Our preference, as
professional and technical service purveyors is for the most direct,
straightforward way, which, we would submit, is contracting out,
to the extent that you’re going to do privatization. There are other
models. The notion of Federal employee buyouts, I think, is a fairly
fanciful notion. We do not favor it, as a general proposition.

It presupposes almost an instant ability to take on the behavior
patterns and the cultural architecture of a high-performance pri-
vate sector organization. And there are cultural differences be-
tween public employees and private sector employees that are not
easily erased or replaced.

Mrs. MALONEY. In your testimony earlier, Mr. Albano, you stated
that contracting out has become the new patronage system, And as
both of us know from our service in New York City, we’ve been
plagued by a long series of scandals not with city employees, but
with private contractors. The city source scandal; the parking me-
ters, when we contracted out; the collection services; the waste
management; the sanitation department—just a whole series of pri-
vate contracts that, when they were contracted out, ended up in
court in some scandalous situation.


88

longer periods. Our 381 members in 41 States provide safe, reliable
drinking water to over 22 million Americans every day.

By contrast, approximately 80 percent of the population in the
United States receives its water services from various govern-
mental agencies and authorities. And for wastewater services, the
percentage of governmental ownership is greater than 95 percent.
Many of these municipal water and wastewater systems have aging
infrastructure and are now facing the daunting task of trying to
comply with the Safe Drinking Water Act and the Clean Water het.
All of these factors are placing enormous strains on the funding
and technical capabilities of many of these systems. The EPA’s
1992 needs survey estimates that the Clean Water Act will cost
Federal, State, and local governments $137 billion over the next 20
years. This is $57 billion more than the 1990 estimate. Further, an
estimated $49 billion will be required to meet the requirements of
the Safe Drinking Water Act just through the end of this century.
To address these growing financial responsibilities, government
systems across the country are exploring various privatization al-
ternatives, often with our NAWC companies. However, while we
explore these privatizations, localities regularly encounter legisla-
tive and administrative obstacles. My company and the other mem-
bers of the NAWC have the experience and the resources to profes-
sionally operate first-class water and wastewater facilities. The pri-
vate sector has proven that it’s capable of providing safe, reliable
drinking water to the public in an efficient manner.

For these reasons, on behalf of the members of the NAWC, I ap-
plaud this subcommittee’s efforts to investigate the issues that are
affecting privatization.

The NAWC members have encountered many privatization im-
pediments, some of which have existed for many years. Under-
standably, resolutions of these problems may fall under the juris-
diction of many different committees, However, I will briefly de-
scribe the significant issues for your information and elaborate on
those that we believe may be within the purview of this sub-
committee.

The first is the publicly owned treatment works, known as
POTW. The regulatory requirements for municipally owned
wastewater treatment "Pacilitves is less stringent than industrial
dischargers. Due to how facilities are defined, this has resulted in
confusion when a private company has attempted to assume owner-
ship of a municipal facility or a POTW. This confusion has existed
since the enactment of the Clean Water Act in 1972. The NAWC
would support a uniform definition of POTW based on purpose
rather than ownership within the Clean Water Act reauthorization
to facilitate private sector investment in wastewater treatment fa-
cilities.

The second issue is contributions in aid of construction, known
as CIAC. Investor-owned water utilities are taxed on capital con-
tributions from developers for system expansion. This tax creates
competitive advantages for government systems and indirectly dis-
courages privatization efforts.

The NAWC has sought relief of this provision since 1986 and
supports H.R. 957, sponsored by Congresswoman Nancy Johnson,
which would both repeal and pay for this tax.



43

ANNEX B
BIBLIOGRAPHY

NIP(90)3 TRADE SALES INCLUDING MANAGEMENT AND
EMPLOYEE BUY OUTS

Guidance on handling of wade sales. In particular this document offers advice on
value for money matters and propriety especially where a MEBO is contemplated.
(A revised version - provisionally NIP(94)3__ will issuc in the near future.)

N#P(94)] DIRECTORY OF ADVISERS APPOINTED IN THE
PRIVATISATION PROGRAMME

Lists the firms which have acted in key advisory roles in the privatisation programme
or which have sought appointment.

NIP(94)2 SPECIAL RIGHTS SHARES

Guidance on (limited) circumstances in which Government may seek to retain a
Special or “Golden” Share in a privaused company to secure the national interest or
to avoid carly wikeover.

NIP(92)3 PRIVATISATION: VOTE, PES AND OTHER COST ISSUES
General guidance on cosi and budgetary issues, including the Vote treatment of
privatisation costs and thei: ucaunent under the New Control Total.

NIP papers are available from PE3 division, HM Treasury (071 270 4778).

PFO/91/i SELLING GOVERNMENT SERVICES INTO WIDER
MARKETS

Guidance on when Government bodies should be prepaic io sell services outside
Government in competition with the private sector. Available frou: SMC division,
HM Treasury (071 270 6213).

THE GOVERNMENT'S GUIDE TO MARKET TESTING
Detailed guidance on how to deal with cach stage of the market testing process.
HMSO, 1993. ISBN 0 11 130078 X

JOINT VENTURES, GUIDANCE FOR DEPARTMENTS
Advice on establishing partnerships with the private sector. issued on 16 March 1993.
Available from Private Finance Unit, HM Treasury (071 270 $531).

TRANSFER OF UNDERTAKINGS (PROTECTION OF EMPLOYMENT)
REGULATIONS. SI 1981 No 1794


CONTENTS

Hearing held on March 14, 1995 ..
Statement of:
Albano, Louis, president, Civil Service Technical Guild, accompanied by
Bert M-Concklin, president, Professionat Sere:ces Counell
Jones, Aniiew, wordwide privatization coordinator, Arthur Andersen:
Roger Leeds, managing director, Barents PLC; and Viggo Butler, presi
dent, Lockheed Air Terminal
Klug, Hon. Scott, a Representative in Congress from the State of Wiscon-
sin; and Roy Bernardi, mayor, Syracuse,
Stanley, Ralph L, senior vice president, Uni
companied by Donald Correll, president and ceo, United Water Re-

Albano, Tui, president, Civil Service Technieal Guild, prepared state-
ment of

Bilik, Al, president,
statement of

Butler, Viggo, president, ir Terminal, prep:
ncklin, ‘Bert M., president, Professional Scrvices Couneil, prepared
statement of ..

Horn, Hon. Stephen, a Representative in Congress from the State of

California, Executive Order 12803 ..

Jones, Andrew, worldwide privatization coordinator, Arthur Andersen,
prepared statement of .

Klug, Hon. Scott, a Representative in Congress from the State of Wiscon-
sin, prepared statement of

Leeds, Roger, managing director, Barents PLC, prepared statement of

National Council for Public-Private Partnership, prepared statement of

Savas, E.S., director, Privatization Research Organization, School of Pub-
lic Attain, Baruch College/City University of New York, prepared state-

ment
Stanley, Ralph L., senior vice president, United Infrastructure Co.
pared statement of
Sturdivant, John N., national president, American Federation of Govern-
ment Employees, AFL-CIO, prepared statement of

aly

Page
1


66

Mr. ALBANO, Stan Brezenoff, who was the deputy mayor under
Mayor Ed Koch, expressed a great desire to privatize and contract
out work. He then left city service and became the head of the
World Trade Center. And as you well know, there was a slight ex-

losion. And he found that he was able to sit down with the in-

ouse staff and, in 24 hours, have light back on, because they had
the institutional memory. They had the ability to recall the way
the building was put together and what were the problems, what
was out and how best to fix it.

There has to be a balance. There has to be accountability. I’m not
afraid of competition. I’m afraid that in many instances, we in city
government are not given the opportunity to compete.

[The prepared statement of Mr. Albano follows:]

PREPARED STATEMENT OF Louis ALBANO; PRESIDENT, CIVIL SERVICE TECHNICAL
ILD

My name is Louis G. Albano. I am a licensed professional engineer and President
of the New York City Civil Service Technical Guild, which represents over 7,000
professional and technical employees of the City of New York. union is an affili-
ate of District Council 37, of the American Federation of State, County and Munici-
pal Employees, AFL-CIO, which represents 1.3 million public employees throughout
the United States.

I appreciate the opportunity to address several of the questions the committee has
raised for this hearing, both from the perspective of our own experiences in New
York City and those of our national union throughout the United States.

The questions that I will address are:

1, What are some of the pitfalls of privatization of which Congress should be
aware?
2, How should workers at the privatized entities be treated in the privatization
process?

3. On what basis does one decide when to privatize an asset or function?

Let me say at the outset that we welcome this inquiry. There is no constituency,
no group of Americans, who have more ta gain from making government more effi-
cient, honest and responsive than public employees. That is our job and the reason
we have chosen public service. We share with you and all the other men and women
who work in government a common purpose and mission, aptly summed up more
than 200 years ago: “to form a more perfect union, establish justice, insure domestic
tranquility, provide for the common defense, promote the general welfare and secure
the blessings of liberty to ourselves and our posterity.”

believe this is a useful point of departure. For while there is much talk these
days about “entrepreneurial” government and of course privatization, it is essential
to remember that the business of government is not just another business. We are
in the business of preserving and constantly renewing the greatest democracy in the
world. We measure our effectiveness by the vitality of certain values, most of which
we all agree upon, rather than by the accountant’s ledger. Having said that, let me
quickly add that the American people have every right to expect that their taxes
are being wisely spent—and that they are getting what they believe they are paying
for.

Our experiences in New York City provide a unique and I believe extremely valu-
able perspective on the question of privatization. In my own field of engineering and
architectural services, New York City now has nearly 40 years of experience with
the contracting-out of these services.

During the 1950s the city’s need for filling the void in capital plant left during
World War I was met by supplementing city technical staff with private consult-
ants. In later years the city’s announced goal for more contracting-out was greater
flexibility. In the 1980s we first heard the term “privatization,” which became the
rationale for accelerating the pace of shifting the delivery of these services to the
private sector. Forty years ago about 80 percent of this work was done by in-house
staff and 20 percent by contractors. Today the ratio has been reversed. So I would
suggest to you that we have here a unique opportunity to evaluate over a long pe-
riod of time the effectiveness of this experiment in privatization.

The results are clearly visible to the people of our city: schools in a disgraceful
state of disrepair, sewers replaced at a rate equivalent to once every 250 years, de-
fective street construction and interminable delays in modernizing subway stations,


52

it in other countries. Projects currently in the pipeline around the
world are in the billions and billions of dollars. From Australia to
New Zealand to Germany to Hungary to Turkey to China, all of
these countries are looking at or actively putting together privat-
ization of their airports.

And we are taking our capital and taking it there to help them
build their infrastructure. And we cannot do that here—that
strikes me as an anomaly that should be fixed. One other point
that is discussed here today is what happens to the people? The
people are not part of the problem on airports. It is the process.
The difference between a public airport and a privately operated
one is the process of running it and the discipline involved in that.

I come from the public sector. All of my senior staff and all my
airport managers come from the public sector. The employees we
hire when we take over airports are from the public sector. We do
not replace workers at airports, never have. It is just the training;
the mechanism by which they are measured; what are the require-
ments at the end of the day; and when is the end of the day, is
the difference.

And that difference makes a difference in how the enterprise is
run. And what the results are is what we're looking for—can it be
run more efficiently and cheaper, more innovatively and quick
ideas and implemented quickly? It’s that type of discipline that
comes with privatization. Part of this debate—as I said we work
around the world, and I visit many countries, read many news-
papers, deal with a lot of political leaders. And it is interesting that
the debate is the same around the world.

The subject is different. It is a resistance to change issue. In
France, water has always been provided by private companies, but
the airline is publicly owned, and there’s great debate about
privatizing it. And the airline is not well-run. In Germany, there’s
great debate about privatizing the phone company. We don’t think
about it here, it’s private and we’ve always accepted that. But
there, they’re talking about privatizing Berlin airports, and that’s
not an issue.

And in Britain, they have privatized many things, and appar-
ently to no great travail to the public wherever they have
privatized. So the debates that occur in these countries is over
whether we should change it. But what they’re changing is a dif-
ferent subject in each country. Here, we’re talking about airports
and infrastructure, and that is where the debate is. But the subject
has always got the same messages in it—what happens to the peo-
ple; what happens to controls; what about monopoly power?

All of these issues are the subjects. It’s just a different topic of
enterprise. So to summarize, I’m here to begin a dialog on how the
private sector can help this country with its infrastructure; how
can we invest our money here; how can we provide facilities for the
transportation user and do it with a quick and efficient method?

And I will close by saying that in our entire history, we have al-
ways underpromised and overperformed. Thank you.

[The prepared statement of Mr. Butler follows:)


26

PRIVATISATION
OF CENTRAL
GOVERNMENT
ACTIVITIES

Guidance for departments

HM Treasury
January 1995


22

privatization. Not only will this provide a track record for that par-
ticular function as to how it performs both on a revenue basis and
a cost basis, but it will also enable that entity to focus on getting
those cost savings down and maximizing the proceeds that the gov-
ernment receives for the sale.

Finally, on the lessons learned front, I think the idea of privat-
ization needs to include a detailed analysis of what the costs are
that you will incur in the process of privatization. It is fine to look
at a particular function on a purely financial basis and say, well,
yes, it could be performed more efficiently by the private sector.
That is not the end of the story. You need to consider in detail how
much it’s going to cost you to take this privatization and enact it.

There are many costs, many of which relate to the need to look
after your employees in an appropriate way. And by the time
you’ve taken in all these costs, and that includes the cost of advi-
sors, it is necessary to look at the long-term position and see
whether you actually end up with long-term savings. Some of the
major barriers that exist in the United States to privatization, in
my view, focus on the way in which you have to deal with employ-
ment law and conflict of interest laws.

The issue over pension funds in this country for State and Fed-
eral employees is such that, for those Federal employees who are
members of CSRS, they have no ability to transfer that pension
fund if they move out into the private sector. This in itself is a dis-
incentive to those employees to transfer, particularly senior em-
ployees who have been with the Federal Government or with that
function for a long term, and whose experience might be critical to
any private sector company seeking to perform those functions that
are being transferred.

In addition to that, there are the conflict of interest laws which
seem, in my understanding, to prohibit existing employees of a
function from bidding to take over or perform that function in the
private sector, should they be able to put a bid together, which
would be cheaper than any existing private sector company. It is
very easy to separate out the sale process from the continuing per-
formance of that function within an agency within the Federal Gov-
ernment. .

And the conflict of interest laws, in my view, prohibit that ability
to separate those two out and allow the employees to bid. In the
United Kingdom, there are various guidelines which are published
by the government. And one of the things they encourage agencies
to look at in detail is the need to allow the management or employ-
ees to but out a particular function, should the need arise.

I have in front of me a detailed list of the guidelines to people
in various agencies in the United Kingdom. And they say the re-
sponsibility for running the activity to be privatized should be sep-
arated from that of selling it. Departments should consider estab-
lishing privatization unit with responsibility for conducting the sale
and dealing with potential purchasers, including any management
employee group.

The department may provide the management employee team
with financial support to pay advisors where necessary. A similar
approach within the United States——


34

perceive such a company as retaining its independence and impartiality
which may help to retain some customers. On the other hand, with no
shareholder pressure, the incentive to maximise use of assets is limited
and with no access to equity capital, the company is vulnerable to any
downturn in business. The transfer may therefore entail a dowry. For
more informanon on this mechamsm consult the Treasury's SMC
division.

+ establishing a partnership with the private sector. This brings private
sector capital and expertise into the business with both the public and
private sectors sharing risks and rewards. However control should rest
with the private sector and the allocrion of risk (and reward) between the
contracting parties should be clearly defined. The Ireasury’s “Joint
Ventures, Guidance for Departments” gives further details.

Trade sales

3.4,

3.6.

3.7.

38

NIP(90)3 gives detailed information on the principles and procedures for
handling trade sales, including management and employee buy-outs. A
checklist of the usual pattern of main stages involved in a trade sale is at
Annex C.

Clawback arrangements may be needed to allow the Government to capture
part of the future value of assets, within a reasonable period after sale, where
it has not been possible to reflect this value in the sale price, and where the
vendor department judges that clawback would not have a disproportionately
neganve effect an sale cansideration. One example where clawback may
apply is the alternative use of surpius land (or other assets) which may later
be sold on by the purchaser of the business for commercial development.

Parliament should formally be informed of any impending sale through a
written Parliamentary Question or other means, giving detailsexplaining why
privatisation ts desirable, Additional intarmarian on the facts and analysis
underlying the decision to pnvatise may need to be made publicly available.

The business to be privatised should normally be advertised in the national
and trade press and, where appropriate, internationally. (It is Government
policy to consider overseas hidders ) ‘The number and identity of the hidders
should normally be regarded as commercial in confidence. Only general
information about the business should be disseminated at this stage so as to
encourage a wide response whilst ensuring commercial confidentiality.

An “Information Memorandum” should be prepared giving potential
purchasers commercial, financial and management information about the
business. Although there are no statutory disclosure requirements. the
information must be accurate to avoid potential future litigation. Potential
bidders sign a confidentiality agreement, pay an administration fee and are
then allowed to examine the Information Memorandum.


58

Mr. Jones. I think two things—carrying on on the ESOP idea,
it is a very important way of getting buy-in from your existing Fed-
eral employees. And the question is, even if you have an outright
trade sale, or even, heaven forbid, a public offering, will the em-
ployees even be allowed to buy shares as it stands at the moment;
would that be, again, affecting their employment as it stands at the
moment?

And second, I think, the other key is that it has to be an honest
process. If you look at outsourcing whatever it is, you need to con-
vince your employees that the process you are undertaking is an
honest process. And the only way to do that is to demonstrate
through the process that you have integrity and honesty in doing
it. And if something turns out that, gee, we’re actually really out-
performing this far more efficiently than anybody out there is going
to, whether it be simply a function of the Taet that you happen to
be the governmeat and people are prepared to give you better deals
because of credic rating, risk rating, government loyalty or what-
ever, than they are the private sector, then don’t privatize it for
privatization’s sake.

There’s going to be plenty of things out there that can be
privatized and should be privatized. But there is no need to pri-
vatize things, which, when you do the analysis, says we shouldn't
privatize it. And if you keep the process honest, then the employees
will understand and will do their best to help, I think.

Mr. Horn. Good. Mr. Butler.

Mr. BUTLER. I can’t speak to Federal workers, per se. But our
own experience has been very positive in transferring local govern-
ment workers to our payroll. One aspect of our business is that we
are in the service business. We have no product, other than provid-
ing people to do work for the contract we’re providing. So we’re
very conscious of how those people are managed and how they
serve us, because that is the product.

And we have been very effective in getting transfers, matching
up retirement plans. About 50 percent of our locations are union-
ized. We have no union issues, whether the union workers are
unionized is not an issue. We are very accommodating in how we
transfer the people. Over time, there is a change in the number of
people working for us as we change how the structure is made.
That is a factor of life, public or private.

But we try to create an environment where there are more jobs
created in the enterprise, and new jobs are created that people can
move into, and to create growth in the enterprise that we’re man-
aging. And that growth then takes care of any dislocation.

Mr. Horn. Very good. The ranking member, Representative
Maloney from New York, has arrived.

Mrs. MALONEY. Thank you, Mr. Chairman.

Mr. Horn. Any questions?

Mrs. MALONEY. Yes, thank you very much, and thank you all for
your testimony. Mr. Leeds, you mentioned that two ingredients
that are very important for success in privatization is ownership
and competition. In New York City, we’ve been experimenting wit!
privatization. And one area that we experimented with recently
was tree cutting from the parks department. And we contracted out
our tree-cutting services, and then we went back a year or 2 years


76

Mr. Mascara. And the last question, Mr. Concklin, is in ref-
erence to your final statement about going head to head with pub-
lic and private sector. I didn’t quite understand that, other than
there was some kind of an accounting function that you had a prob-
lem with as it relates to indirect cost.

Mr. CoNCKLIN. The history, both in the so-called A76 program,
as well as the Department of Defense’s depot program, the history
is one of great contention, great unresolved problem, great order of
unresolved problems with respect of the so-called comparison of the
Federal cost to the contractor cost because the overhead is usually
not accurately or totally reflected on the Federal side, so the costs
look smaller.

And then academicians, people from accounting firms, most gov-
ernment employees will readily admit that that so-called cost com-
parison methodology is mortally flawed. We’ve had debates
throughout government. We’ve had debates with the General Ac-
counting Office where they have made that concession. It’s not fair.
It doesn’t provide a level playing field when you use that methodol-
ogy.

Mr. Mascara. But we have two groups here. We have the private
sector and we have a group of public employees who are bidding
on a certain job. How does the fact that we weren't taking into con-
sideration indirect costs affect the size of that bid or the amount
of that bid?

Mr. CONCKLIN. Because—and I apologize if I sound theoretical—
but the contractor cost—if I’m a contractor, I must when I bid to
run the government’s motor pool, I must incorporate into my costs
all of the allocated overhead that is associated with running a
motor pool as a private sector contractor. Even if I had malign in-
tent, the IRS, SEC and Federal regulations absolutely require me
to do that.

The government is not engaging in necessarily subterfuge, but
the point is, the government doesn’t have the accounting structure
to identify and aggregate its overhead, other than what is often
called the marginal or very local overhead, or the marginal cost as-
sociated with that motor pool. This is no theory, they are real dol-
lars. The government’s cost of running the Pentagon is——

Mr. Mascara. But isn’t all that reflected in the bid of the people
bidding? I mean, it costs so much—

Mr. CONCKLIN. The methodology—you obviously have to take
this on faith, and I realize it’s arguable—but the methodology that
the government uses does not capture, other than local and there-
fore a limited amount, of overhead, rather than the total overhead.

Mr. Mascara. When the employees bought Hertz—not Hertz,
Avis, I mean, didn’t they have to take everything into consideration
when they bought that company out—what it was going to cost to
run it and what kind of a profit they hoped to generate? And if you
have a public sector and a private sector here, and they’re bidding
on a job, what makes the difference whether one is or isn’t? I
mean, they would both have to consider what the cost would be
and how much profit they hoped to realize, regardless of all these
other nuances, accounting nuances.

Mr. CoNCKLIN. Congressman, I don’t mean to be argumentative,
but it’s straightforward accounting. There is a way for accounting


1.2.

INTRODUCTION

This guidance summarises the main issues that Government departments and
executive agencies need to consider during tie process of privatising
-hurmnally tlirvugh a uade sale- a Civil Service business or activity. Itapplies
equally to executive NDPBs who should follow the same procedures. It is
not intended that it should apply to the privatisation of nationaliscd industrics.

‘The document is intended ay a xeneral guide which cross refers 10 a nunber
of existing guidance notes. A list of contact points, mainly in the Treasury,
as at Annex A; and a bibliography is at Annex B. Deparments arc advised
to consult the relevant Treasury expenditure division at an early stage if they
asc contemplating making a privatisation, They should give staff and
recognised tade unions the opportunity to comment at an early stage where
privatisation looks probable.

The NAO have a right of aecess to papers relating to a privatisation to enable
it to carry out a financial and value for money audit. Such access is limited
to documents in the possession of the department. In the case of a major sale,
the Comptroller and Auditor Cieneral 15 likely to examine the extent to which
the vendor has achieved the sale objectives, including maximising value for
money. A report may be presented to Parliament under Section 9 of the
National Audit Act 1983.

Identifying possible privatisation candidates

Ld.

An activity will normally be identified as a possible candidate for
privatisation either in the department's annual Efficiency Plan, or following
a “prior options” review to establish whether it should be abolished,
privatised, strategically contracted out, market tested or given agency status
The Treasury and OPSS should be consulted ahant the autcome of such
reviews. Activities which may be surtahle candidates for privatisation
include those already established on a customer/supplier relationship with
departmental or agency headquarters: those that do not contribute directly to
the department's or agency's central objectives; and thusc already performed
under contract by the private sector.

Speed of the process,

1.5.

In some cases, it may be possible to privatise an activity quickly. However,
where there is no trading record, it may be desirable for the activity to be
established on a commercial footing with an appropriate accounting
framework before sale.


94

FEDERAL BARRIERS

Many Federal Government barriers inhibit privatization at the state and local lev-
els.

1. With respect to mass transit, Section 13(c) of the Urban Mass Transportation
Act places an enormous obstacle that inhibits localities from contracting competi-
tively for bus services. That provision effectively thwarts privatization if any jobs
might be lost. This restriction should be eliminated.

2. The express mail statutes are confusing but are nevertheless used by the US
Postal Service from time to time to attack private delivery services such as Federal
Express. These statutes should be eliminated.

. One of the greatest barriers to more cost-effective medical care is the tax treat-
ment of health insurance premiums, At present, employers pay for their employees’
health insurance and this is treated as a tax-deductible business expense. Instead,
this should be treated as remuneration to the employee, who should be allowed to
purchase medical insurance and to treat it as a tax-deductible expense.

4. The evidence indicates that user charges lead to more cost-effective government
services. Such charges, however, are treated as normal household expenditures and
are not tax deductible, whereas when local taxes are used to pay for the same serv-
ice provided by a government agency, the taxes are deductible on Federal income
tax returns. (Example: In a small town the residents may subscribe to a private
waste collection service and pay a user fee to the firm. If the town provides the serv-
ice with its own work force, paid for by taxes, the local tax is deductible for the
homeowner but the fee is not.) An effort should be made to eliminate this inequi-
table situation, which acts as a barrier to greater use of the private sector.

5. FAA rules limit the flexibility of local governments in privatizing municipal air-
ports, because they require that any savings be reserved for airport use rather than
applied for general municipal purposes. This mandate should be eliminated.

6. Many contracts for social service programs discriminate in favor of not-for-prof-
it organizations and against for-profit firms engaged in the same activity. This is
unfair and unnecessary. Localities should be allowed to make their judgements
based on-cost and quality, regardless of the tax situation of the service provider. If
a non-profit provider can produce the same quality and level of service at a lower
cost, this wil be manifested in the bidding. Any such discriminatory language
should be expunged, in order to level the playing field and thereby to give localities
more options and more competitors from which to choose.

7. Vouchers are arguably a better tool than contracts for many social services,
such as day care for children, home care for adults, job training, and services for
drug addicts, alcoholics, and AIDS patients. Organizations that provide these serv-
ices under contract, however, vigorously oppose vouchers, just as homebuilders op-
posed housing vouchers and preferred to continue getting HUD grants instead. Leg:
islation involving such services should make it clear that vouchers are an acceptable
form of service delivery and are not to be eliminated from consideration.

CLOSING

‘The Subcommittee is to be congratulated for holding this hearing and thereby be-
ginning the process of pruning unnecessary constraints to prudent privatization.

PREPARED STATEMENT OF AL BILIK, PRESIDENT, PUBLIC EMPLOYEE DEPARTMENT,
AFL-CIO

In recent years, our nation has focused on the question of how to make govern:
ment work better. Many have suggested privatization as a wholesale remedy that
will solve all the complexities of our civic Ete. They would have us believe that gov-
ernment usually fails and that the answer is not to try to correct its failings, but
to turn to the private sector.

The time has come to look beyond simplistic solutions. Citizens are demanding
improved and more efficient service from all government institutions, not lesa gov-
ernment. But, when looking for ways to improve government, we cannot afford to
forget our history. We must remember the countless scandals and stories of fraud,

litical corruption, and unreliable services that flooded newspapers in the early
Secades of this century, inspiring the public to insist that government hire workers
directly to collect garbage, maintain roads and infrastructure, police our neighbor-
hoods, treat the ill, and teach our children. We must remember how private sector
romoters reaped hundreds of millions of dollars at the taxpayers’ expense from
gam Pierce’s ill-advised privatization schemes at the U.S. Department of Housing


9

we could have more closely held that information, I think part of
the same debate, frankly, is going on right now in the Science Com-
mittee on the National Weather Service.

Even the administration, for example, has said, we need to get
the National Weather Service out of some of the functions it does
today. It does private crop forecasting for the cranberry industry;
for the corn industry; for the maritime industry; for the aviation in-
dustry. Do we really need to do that, or should we restrict the Na-
tional Weather Services’ job to the core function—worrying about
tornadoes and hurricanes and whether it’s going to be 70 and
sunny or 70 and rainy tomorrow in Washington, DC? .

There again, I think you have to ask yourself that question, how
do you get the most money for what you want to do, or how do you
get the public good, or how do you split the difference? And I had
suggested in the past, we've tried to split the difference and we've
not always been very successful.

Mr. Horn. On that point, I would guess that when you fly to
Wisconsin and I fly to California, we’d just as soon know we're not.
flying into a hurricane or a tornado.

Mr. Kuuc. Absolutely. And the National Weather Service makes
a good case that it wants to keep all of those emergency functions
in place. But when you see the increased ability of the National
Weather Service to consolidate offices, I mean, I don’t have to have
somebody in Madison, WI, or San Francisco, to give an aviation
forecast. They can shrink some of that back dramatically.

And I would suggest that when you fly on a commercial airliner,
they’ve got their own forecasting team, because they don’t want to
take the chance that the government forecast might be incorrect.
So I think we can still maintain the public safety, but dramatically
roll back—frankly, the Eisenhower administration suggested in the
1950’s to get out of businesses where there’s already private serv-
ices being provided by the private sector, and where the govern-
ment no longer needs to be involved.

Mr. Horn. Let me mention the Government Printing Office. One
of the reasons that they do what they do and how they do it, in
terms of timing, is the fact that they publish that amazing docu-
ment known as the Congressional Record. And it’s few publishers
in the world that can have a 700-page book on your desk the next
day, giving a blow-by-blow account, now that we've got fairly au-
thentic transcripts, and you can’t edit them like we used to, before
the 104th Congress.

How do you solve that problem? Are we going to drop the Con-
gressional Record in the process to be efficient and farm all this
stuff out to private publishers?

Mr. Ktue. First I think, Congressman, that it’s clear anybody in
the private sector would understand the parameters that said, we
need the Congressional Record tomorrow morning, and get it. If the
Wall Street Journal can be assembled and edited in New York and
then sent by satellite to a publisher in Wisconsin, and end up at
my doorstep at 5 in the morning, I think the private sector can fig-
ure out how to turn the Congressional Record overnight.

But there’s a real bizarre labyrinth of how the Congressional
Record is produced. We have stenographers on the floor who take
notes. Then they go upstairs and transcribe it electronically. Then


77

for overhead that is pervasive and required by law in the private
sector. The Federal Government—and this is not a criticism, it’s
the government is different than the private sector—the Federal
Government—I’ve spent half my career in the Federal Govern-
ment—is not, other than in a few rare instances like some naval
repair facilities and air repair facilities, the other 90 percent of the
Federal Government does not account systematically for overhead.

Mr. Mascara. I understand that. But it still costs x number of
dollars to perform the service. And regardless of whether it’s the
former public sector, and these people are now going to be private
sector people, bidding on a government job, they still have to take
into consideration what it costs to perform that duty, and then they
put their mark-up in it. And regardless of who’s bidding on it, they
both have—they’re heading in the same direction.

Mr. CoNCKLIN. No, the mark-up that the government assigns in
its paper study, in its paper analysis is artificially low. And, there-
fore, they have a lower—when you add direct costs, mark-up and
profit to each side, the government ends up with an implicit 10 to
20 percent handicap. That’s not my theory, that’s the result of a
lot of analytical and audit work that’s been applied to it.

Mr. Mascara. Well, I don’t want to continue this debate. I’m just
saying that regardless of whether it’s the private or public, the
public now becomes private and they'll be bidding on a job to make
a profit. So regardless of what these former public indirect costs
were that were not being added in, it doesn’t make any difference,
is what I’m saying. I’m finished, Mr. Chairman, thank you.

Mr. Horn. Does the gentlewoman from New York have any ques-
tions?

Mrs, MALONEY. I would like Mr. Albano to comment on Mr. Mas-
cara’s question if there’s some inequity, why can’t we just level the
playing field? It seems. to be unfair, if we’re going to aggressively
pursue privatization, to cut out the private sector. Who knows—
maybe they can save us some money by doing the job better and
cheaper and faster.

Mr. ALBANO. I can’t speak for the Federal Government. And it’s
just sad to hear that they have an inability to cost out an item.
Prior to my coming here, we have sat down with the city of New
York. We’ve spoken to the issue of managed competition. We have
put together the papers and the cost analysis to actually compare
the costs between doing the work. So there is an even playing field.

I don’t see this as some mystery. I don’t think it’s something that
is so innate that somebody couldn't sit down who has the experi-
ence and say, well, this is the cost of government, this is what the
cost is, and set some equation. I’m astounded if it’s true what he’s
saying. I, quite frankly, don’t see that in the city. We’ve been, how
should I say, doing managed competition for many years.

The Office of Management and Budget, in my estimation, I have
somebody who was a former employee who now comes on as a con-
sultant to my union as a volunteer, who believes in the practice.
And he provides us the cost analysis, and we make very sure of the
fact that all costs are taken in. And invariably, as my testimony
states, we can, in most instances, compete and save money.

Mr. CONCKLIN. May I respond?

Mrs. MALONEY. Yes, Mr. Concklin.


83

looked at privatization of services, as well as a new means to in-
volve private capital in infrastructure projects.

I mention my background to demonstrate that I’ve been on both
sides, attempting to implement public-private partnerships, and am
very well aware of changes in Federal policy needed to increase pri-
vate investment in infrastructure. As you know, it is well docu-
mented, and has been for years, that this country needs to make
substantial new investment in its basic infrastructure.

The public sector is spending approximately $140 billion annu-
ally, and the projected shortfall cach year is from $40 billion to $80
billion a year. EPA alone indicates the need for $200 billion in new
finance over the next decade to bring communities into compliance
with the Clean Air and Clean Water Act. Our highway administra-
tion estimates that $29 billion a year is needed to merely maintain
the conditions of the Nation’s roads and bridges.

It’s clear that these needs cannot be met by government alone,
whether at the Federal, State or local level. The use of the private
sector to develop, own and operate infrastructure projects is trul
a global phenomenon. It is occurring in both developing and devel-
oped countries. According to a recent survey, there are more than
900 projects in 72 countries with a total requirement of $680 billion
that are in development or have been put under construction by
private sponsors since the 1980's.

The trend is everywhere from Eastern Europe to the Asia Pacific,
where former Treasury Secretary Lloyd Bentsen estimated a need
of $1 billion a week to meet that country’s infrastructure needs. In
the past 2 years, a number of funds have been created to meet that
need, and many include American institutional investors. As men-
tioned earlier, as the competition for capital increases globally, we
as a Nation find ourselves in the position of providing resources
from U.S. insurance and pension funds to finance infrastructure
overseas,

As those capital resources are utilized to improve the infrastruc-
ture of other countries and their economies that compete with us,
surely now is the time to remove the barriers that prohibit private
investment and ownership of infrastructure in the United States.
Id like to take the balance of my testimony to just mention specific
steps that I think this Congress in this session can take that would
have a profound effect on freeing up private sources of capital to
invest in our infrastructure.

As I mentioned earlier, I served on the Infrastructure Investment
Commission in 1993. That panel also included Neil Goldschmidt, a
former Transportation Secretary, Governor and mayor; Kay Bailey
Hutchison, who’s now in the U.S. Senate, and former Treasurer of
the State of Texas; and Frank Hanley, who was the general presi-
dent of the Union of Operating Engineers.

The commission was bipartisan, unanimous in its recommenda-
tions, and recognized two fundamental truths. One, there would be
a decrease in Federal funding for infrastructure; and two, new
ways were needed to leverage existing funds. It resulted in the in-
troduction, last Congress, of the Infrastructure Development Act of
1993. I'd encourage this committee and the Transportation Com-
mittee to take a look at that legislation, a copy of which I will pro-
vide.


5

eral Government—and, for example, the central theme that will
dominate the welfare debate next week—is the discussion of which
level of government should perform a service. Can the State, the
local government, or the Federal Government do welfare reform
best? And if you think of a giant flow chart, much of the discussion
is really focused on the State versus national debate, in terms of
what sector of government can do it most efficiently and more in-
telligently.

at I think, in many ways, has been overlooked is the second
half of that equation, which says, should the government still be
in the business? And if the answer is no, then I think the question
is, how do we get out of the business? In privatization, it seems to
me, it’s important for a number of reasons: to balance the budget;
to downsize the Federal Government; to make sure that taxpayers
receive a fair return on their investments; and, in many ways, to
get the government out of the way where it interferes with the free
market.

There are really three categories of privatization that are very
distinct. First of all, the idea of selling off government assets, or
releasing off government assets, primarily in the natural resources
area. Second, contracting services out now done by Federal Govern-
ment employees. And I think if you look across the country, there
are a number of States and municipal governments which have had
terrific success with this,

Finally, functional conversion, which means, essentially, taking
what is today a government entity and spinning it off and letting
the private sector do it instead. In the issue of asset sales or leases,
I think we have to examine a number of properties owned by the
Federal Government today, and really ask why it is, in 1995, we’re
still in the business of running hydroelectric dams across the coun-
try and selling off the power from them.

I think we have to ask why, in 1995, we continue to hold onto
a series of oil reserves and natural gas reserves established in the
Roosevelt administration—Teddy, not Franklin—to guarantee we'd
have an adequate supply of oil to allow the U.S. Navy fleet to make
the conversion from coal and wood to oil. I think we have to ask
why, in 1995, we still manage to hang on to a strategic helium re-
serve, first established by the Federal Government in 1920, really,
then, focused on dirigible research; not a very hot commodity these
days, anywhere in the world.

And I think it’s time we get out of these. And quite frankly, not
only do we downsize the government —for example, the Power Mar-
keting Administration today employs nearly a third of all the em-
Pployees at the Department of Energy—but second, most economic
analyses that have been done suggest you can maximize your re-
turn to the government by selling off and liquidating assets, rather
than holding them and attempting to milk them.

The bottom line, Mr. Chairman, quite frankly, is given the choice
between taking $1 million in the lottery today, or $100,000 over the
next 10 years, you always want the cash up front. The second area
involves the privatization of functions now done by government em-
ployees. And just several blocks away from here, from the Capitol,
I think, is the perfect example—the Government Printing Office.


81

out is the fact that private firms do not pay equal standards in the
salaries and benefits. It’s a major problem. What happens is, you're
just downgrading the economy, in my opinion.

Mr. CONCKLIN. If I could respond briefly to that?

Mr. Davis. Sure.

Mr. CONCKLIN. And I don’t mean to sound rand about it, but cer-
tainly in professional and technical services as we know them, em-
ployees are our assets. And we depend 100 percent on the morale
motivation and meeting of obligations by employees for our success,
for repeat business, for our reputation building. And you cannot
take the risk of a disenchanted, alienated employee by wage
gouging or withholding or provision of minimal fringe benefits.

The market determines that. The market determines what you
pay a Ph.D. physicist or a technician who is doing environmental
tests in a laboratory that you may run for the Federal Government.
And it is virtually devoid of that kind of syndrome. And I don’t
challenge that that happened in New York City.

Mr. ALBANO. I just wish you were bidding for city contracts.

Mr. Davis. I yield back. Thank you, Mr. Chairman.

Mr. Horn. Thank you very much, Mr. Davis. I think you raise
a very interesting point on the proper financial records. We should
get a balance sheet as a condition of consideration for privatization.
This committee and the full committee, for 3 years at least, have
been trying to get these two administrations to get the Chief Fi-
nancial Officer Act implemented.

There have been some successes; there have been some failures;
and there’s been a lot of dragging of feet in a few agencies. We're
going to get back to that this summer and fall. But your point, I
think, is well taken, Mr. Concklin, on the indirect cost situation.
I suspect we'd have to define it a little differently here and not give
one-millionth of 1 percent to Secretary Perry’s car in the Depart-
ment of Defense, as you do at a university, where you throw in the
library, the percent of time the central administration spends on
the research project, et cetera.

So those things ought to be clarified so you are able to compare
apples and apples. Td just like to ask one question of Mr. Albano.
On page 2 you note—and I agree with your institutional memory
statement. I thought that was very well put. But I note on page
2 in that third paragraph, you say,

The results are clearly visible to the people of our city. Schools in a disgraceful
state of repair; sewers replaced at a rate equivalent to once every 250 years; effec-
tive street construction, interminable delays in modernizing subway stations; half
of our bridges rated deficient, to name only a few of the more glaring manifestations
of the deterioration of New York City’s physical infrastructure.

I guess my query is, is that really the result of privatization, the
so-called consultants, technical staff, or is it a lack of capital out-
lays and lack of political will of the city of New York?

Mr. ALBANO. It’s a combination. Basically, as Carol said before,
the question of accountability. In the 1950’s and 1960’s, you had a
full staff. You provided inspectors in the field. Every job was mon-
itored. With the downsizing and the cutting back, there are less
people available, and we do not have the same level of inspection
and literally watching the contractor do the installation.


92

you mentioned, the interstate highway system was built in the
1950’s. The good news is, it’s about to be finished. The bad news
is, most of it has to be repaired and replaced.

As I mentioned earlier, we have at our company on a computer
all of the Nation’s bridges, including Pennsylvania. And, as you’re
well aware, Pennsylvania has a number of aging bridges that need
to be repaired or replaced, and we would propose to put a user fee
on for a fixed period of time with a regulated rate of return. We
could find private capital to do that, and I think that freedom
ought to be allowed.

Mr. Mascara. I agree wholeheartedly that we need to lift the re-
strictions regarding tolling. And studies have shown that people
will pay a toll if you give them a good highway to ride on. And I’m
very supportive of that.

In fact, privatization is working in southwestern Pennsylvania,
where we built an interchange on somebody’s land that would be
enhanced, the value of it would be enhanced because we located an
interchange there. We have a program where we have worked with
the Federal Government, State government, and the private sector
to build interchanges.

And local governments benefited because, as the value of the
land went up, then, of course, taxes were increased for local and
county governments. So it’s working well. And I think the Federal
Government needs to work more closely in enhancing all of those
programs for the private sector to work with the public sector.

Thank you, Mr. Chairman.

Mr. Horn. We have no more questions. I hear we're about to go
into an hour of votes on the floor. I want to thank you both. Did
you have an additional comment, Mr. Stanley?

Mr. STANLEY. If I could just add one point that came up earlier.
I would just like to clarify for the committee and the record, with
regard to ESOPs, there was a 15 percent ESOP provision in the
sale of Conrail for the employees.

And they have done remarkably well with that investment and
that ESOP. But I know that question has been asked by Congress-
woman Maloney, and that has been very successful.

Mr. Horn. Very good. Anything you would like to add?

Mr. CorrELL. No.

Mr. Horn. Well, we thank you both. I would like to thank the
minority for excellent questions and thank the staff that set up this
hearing and will be setting up the others in privatization, Mark
Brasher, professional staff member, specializing in this area; the
subcommittee counsel, Mark Uncapher; Andrew Richardson, clerk;
Wallace Hsueh, staff member; and our legislative fellow, Tony
Polzak, on leave from the Department of the Army; and our faithful
official reporter, Donna Ferguson. We thank you all.

So without objection, we'll adjourn this hearing and go vote.
Thank you very much.

(Whereupon, at 5 p.m., the subcommittee was adjourned, subject
to the call of the Chair.]

[Additional material submitted for the record follows:]


60

Mrs. MALONEY. In England, did you allow public employees to
compete in the contracting out?

Mr. JONES. Yes. It’s one of the things that is specifically men-
tioned, and I think I touched on it during my testimony, about it
is part of the government’s regulations issued by Her Majesty’s
treasury, which says that any agency or department thinking of
privatizing its service must allow the management employee group
to bid. But they can’t do that in this country under the government
ethics, as I understand it.

Mrs. MALONEY. I'd like to refer to another news article. This was
from California, Los Angeles, where special audit shows, “district
lost millions.” And here was an example where a local government
hired private contractors to perform functions and then found itself
forced to cover the debts incurred by the contractor. And what ad-
vice would you give to an agency to avoid this situation?

And again, this was a case where they contracted out food serv-
ices to Marriott, who, by the way, is doing our food services now.
(Laughter.]

And they overran the budget dramatically, millions. And then
the school agency had to cover the loss of the mismanagement of
the corporation that privatizes delivery of the service. And how
would we avoid this happening?

Mr. LEEDS. I would refer, again, back to what I said in my testi-
mony, which is that we underestimate how complex privatization
is in the preparation and execution of privatization. And this is a
case, quite clearly, where it was poorly planned and executed. It
probably was not a good competitive bid; there was not good con-
trol; there was not good monitoring of the process; and maybe there
was not good accounting of what appraisal of the company. Because
if they were taking over debts, that’s clearly a mistake.

And I think that these types of errors are made very frequently.
We underestimate how difficult it is to execute privatization effec-
tively in a cost sense and in a political sense. And I do not conclude
from the example that you just gave that this should not have been
done, that this food service should not have been contracted out.
But I certainly conclude that it was poorly executed.

Mrs. MALONEY. Your testimony interested me. My time is run-
ning out, I see from the light—but one of the things that you said
that I found very interesting is that it was successful, particularly
with ownership. That meant there was a stake in it; the business
grew, and this type of thing. I have seen ESOPs very successfully
executed in this country in the private sector.

I have never seen a public sector ESOP. I’m not aware of one,
are you, Mr. Chairman, or anyone, where we've contracted out an
ESOP type of situation in the United States? Are you aware of any
with public service?

Mr. LEEDS. No, I’m not.

Mr. JONES. It doesn’t mean it couldn’t work. And can I briefly
just touch on something in your last question?

Mrs. MALONEY. Sure.

Mr. JONES. Mr. Leeds already mentioned, one of the critical
things is, you don’t walk away from it when you outsource. And I
think that is fundamental. You have to monitor the contracts with
the private sector. You have to have people remain in Federal em-


56

I'l close by saying that I resist the temptation to deal in
oversimplifications, ut you apparently have some expertise in
at.

What happens—who manages disasters, when the public sector
is gone and we have a firm who builds highways or bridges or who
maintains them? Who do we call? I mean, if we’re going to disman-
tle the public sector, who deals with that in the UK?

Mr. JoNEs. Who deals with it?

Mr. Mascara. In California we have disasters and mudslides and
fires. And if we're going to start farming out and privatizing this
work, who deals with that. Maybe I'll even get more simple. I live
in Chaleroi, PA, and I call the mayor and say, “Mayor, I’ve got a
problem. We had a huge snowfall and they’re cleaning some other
street off, or I can’t get out, or I have an emergency.”

Who do I call if some private organization moves my snow?

Mr. JONES. You could call the fire brigade.

Mr. Mascara. OK. That’s all, Mr. Chairman, thank you.

Mr. Horn. Go ahead, if you’d like to respond to that.

Mr. JonEs. The only point I would like to make on that is, there
was a big article in “The Economist” this week on British privatiza-
tion and whether it’s been a disaster or not, and how now, if you
actually ask people what they think of privatization, only about 20
percent of the British public think that it’s been a good thing. The
real answer to that is that most of the people just don’t know a
good thing when they see it. [Laughter.]

But it really boils down to the actual costs themselves have come
down and that’s because of the regulation that’s used. And I guess
one thing that I didn’t touch on is that you have used rate of re-
turn regulation typically in this country. Britain took a completely
new approach to that by looking at price capping, effectively. And
that had a major impact on helping it be successful.

Mr. Mascara. If my arithmetic is correct, then the 80 percent
that really care about the service they're not getting or the change
in service, it doesn’t matter, as long as the cost is better, more effi-
cient, it’s more cost effective.

Mr. JONES. It is more cost effective now than it was before. But
what people complain about is, prices keep going up and the profits
of the privatized entities and making it get huger and huger every
year.

Mr. Mascara. How do you control those, unless you want to get
into the business of regulating what people can charge? How do
you regulate the cost of the private sector? You’ve done away with
your public sector, now the private sector handles that obligation,
that duty. And all of a sudden, he starts increasing the prices. The
public has to pay that.

Mr. JONES. The most effective way to do it is to do it through
competition. I notice from the adverts over here, you can still by
long distance at 10 cents a minute from Sprint over weekends. But
in the UK, in a lot of the things that are privatized, they are, some
people would argue, natural monopolies. And there is no way that
you can create competition. It’s not strictly true, but if you do that,
you have to regulate them.

And if you do regulate them, you have to regulate them in such
a way that you focus their attention on reducing costs. And it


18

ments” common rule, or other relevant rules or regulations, for infrastructure as-
sets; provided that the transfer price shall be distributed, as paid, in the followin,

manner: () State and local governments shall first recoup ia full the unadjusted dol.
lar amount of their portion of total project costs (including any transaction and fix-
up costs they incur) associated with the infrastructure asset involved; (ii) if proceeds
remain, then the Federal Goverament shall recoup in full the amount of Federal
grant awards associated with the infrastructure asset, less the applicable share of
accumulated depreciation on such asset (calculated using the Internal Revenue
Service accelerated depreciation schedule for the categories of assets in question);
and (iii) finally, the State and local governments shall keep any remaining proceeds.

Sec. 4. Criteria. To the extent permitted by law, the head of an executive depart-
ment or agency shall approve a request in accordance with section 3(c) of this order
only if the grantee: (a) Agrees to use the proceeds described in section X(cXiii) of
this order only for investment in additional infrastructure assets (after public notice
of the proposed investment), or for debt or tax reduction; an

(b) Demonstrates that a market mechanism, legally enforceable agreement, or reg-
ulatory mechanism will ensure that: (i) the infrastructure asset or assets will con-
tinue to be used for their originally authorized purposes, as long as needed for those
purposes, even if the purchaser becomes insolvent or is otherwise hindered from ful-
filling the originally authorized purposes; and (ii) user charges will be consistent
with any current Federal conditions that protect users and the public by limiting
the charges.

Sec. 5. Government-wide Coordination and Review. In implementing Executive
Order Nos. 12291 and 12498 and OMB Circular No. A-19, the Office of Manage-
ment and Budget, to the extent permitted by law and consistent with the provisions
of those authorities, shall take action to ensure that the policies of the executive
departments and agencies are consistent with the principles, criteria, and require-
ments of this order, The Office of Management and Budget shall review the results
of implementing this order and report thereon to the President 1 year after the date
of this order.

Sec. 6. Preservation of Existing Authority. Nothing in this order is in any way in-
tended to limit any existing authority of the heads of executive departments and
agencies to approve privatization proposals that are otherwise consistent with law.

See. 7. Judicial Review. This order is intended only to improve the internal manage-
ment of the executive branch, and is not intended to create any right or benefit, sub-
stantive or procedural, enforceable by a party against the United States, its agencies
or instrumentalities, its officers or employees, or any other person.

GEORGE BUSH
THE WHITE HOUSE,
April 30, 1992.

Mr. Horn. Yes, the gentleman from Pennsylvania, please.

Mr. Mascara. Mr. Chairman, my point was that the private sec-
tor will be taking advantage of the Federal grants and loans, what-
ever they might be. In this case, they’re all grants. But the private
sector, then, by assuming the airport and purchasing that airport,
they will not reimburse, dollar for dollar, for the improvements
that went into that.

Mr. BERNARDI. Well, the assessed value of that airport would be
determined, and obviously, no one would be salient or leasing an
asset that would not be based on what that particular piece of real
estate is worth at this time.

Mr. Mascara. I see.

Mr. Horn. The gentleman from Virginia, Mr. Davis.

Mr. Davis. Thank you, Mr. Chairman. Mayor Bernardi, it’s been
a pleasure to have you here. I’ve worked close with Jim Walsh on
a number of District of Columbia related issues and——

Mr. BERNARDI. You're having fun, then.

Mr. Davis. Yes, we're having a great time. But that’s a subject
for another day. I was the head of —


AT

Mr. Horn. We appreciate that. We're going to call on your other
two colleagues, and then we'll have you all in a dialog with ques-
tioning by members of the panel. Our next guest is Roger Leeds,
the managing director of the Barents Groups, a wholly owned sub-
sidiary ‘of KPMG. He’s had extensive experience in Russia,
Kazakhstan, Ukraine, Czech-Slovak Federal Republic, Poland,
Hungary, Bulgaria, Slovenia, and Lithuania. So welcome.

Mr. LEEDS. Thank you, Mr. Chairman. It’s a pleasure to be here
with you and members of the committee. With the limited amount
of time today, I would like to address three very basic issues that
I think are relevant to the increasingly public debate that is going
on about whether to privatize. First, under what circumstances
does privatization make sound economic and financial sense?
Which is to say, when should government privatize and when
would it be advisable to refrain?

Second, the term privatization has been, in my judgment, some-
what abused. I'd like to just briefly talk about what we mean by
privatization in an operational sense, so that we are clear on the
definition. And third, very, very briefly, what can policymakers in
this country learn from the large amount of experience gained by
other countries and other political leaders that have already trav-
eled down the same or a similar privatization path?

First, when does privatization make sense? I think all of you are
aware that there are a broad range of government services and as-
sets that are eligible privatization candidates, from the post office
and FAA to every conceivable component of the Nation’s physical
infrastructure, such as roads, ports, airports, and so forth, and
then of course, a wide variety of services.

I think that the first thing, in my view, is that the government,
whether it is local or Federal, should have a very clear and objec-
tive and fully transparent set of criteria for "determining what
should be passed to private control and what assets and services
would better be kept in the public domain. I think this is very im-
portant at a moment in history where the overwhelming global
trend is to reduce State intervention on virtually every front, and
increase the role of market forces and competition.

But we must be very, very careful, it seems to me, not to indis-
criminately initiate a wave of privatization without a clear under-
standing of when the public is likely to benefit and when the odds
are stacked against it. There are many criteria for determining
when it makes sense to privatize. But in my judgment, one over-
rides all the rest, and it’s been mentioned here this afternoon.
Namely, will the transfer of control from the State to the private
sector clearly enhance the efficiency of how the service is delivered
or the product is produced? This, of course, is the economic jus-
tification for privatization, a rationale that is based on the prob-
ability that State intervention and control is reducing the efficiency
and therefore, is costly to the public, relative to the private sector
alternative.

We now have from all around the globe overwhelming evidence
that ownership matters and that competition matters. And, that
those two factors together, in many cases, will affect the efficiency
of the underlying asset or service.


oL

with implementation, such as preparation, pricing, investor screening, designing
and executing competitive bids, regulatory reform and negotiations—all take time,
special skill and resources, There is a need, therefore, for careful planing, realistic
budgets and a skilled implementation team.

‘And finally, a rule of thumb that has become axiomatic to privatization strategists
the world over: Begin the program with “winners”—services or other assets that are
relatively simple to privatize, are non-controversial, and offer benefits to the public
that are unambiguous. By applying these criteria, the government will avoid con-
troversy, at least until the program has gained momentum and public credibility.
As one Privatization Minister commented,

If we make a mistake with a bicycle factory it is not as tragic as if we
err in the sale of an airline, or the railroad.

In conclusion, permit me to recall the wise words of Yogi Berra, who once advised,
“when you come to a fork in the road, take it!” Decisiveness, as Mr. Berra believed,
is an attribute all of ug should strive for. With privatization however, the go/no-go
decision should be made cautiously and analytically, not on political or ideological

junds. The benefits to be derived from transferring control of a government serv-
ice or enterprise to the private sector can be significant, ag countries the world over
have realized. But the pitfalls also must be carefully considered in order to ensure
that the public will be benefit from the decision.

Thank you.

Mr. Horn. Thank you very much for that most helpful state-
ment. I now want to introduce Mr. Viggo Butler, who is the presi-
dent of Lockheed Air Terminal. That’s a firm that’s had extensive
experience in privatization and operating what are generally once
public air terminals. So, Mr. Butler.

Mr. BUTLER. I’m here today just to express an interest in the pri-
vate sector being a part of the equation of solving problems in the
country, and specifically in transportation and on airports. We be-
lieve that the private sector does have a role in providing services
to transportation, and are Jooking for a place at the table to do
that. We have a history of providing private services to airports
that is now 65 years. ‘Our company was formed in 1929 to build
a private airport in Burbank, CA, when privatization was en vogue,
and has remained a private operator all these years.

The private sector rules in the transportation business, every-
thing a consumer does in the transportation area buying tickets
from a travel agent, renting a car, staying in a hotel, lying on an
airline—is provided by the private sector, and provided in surplus.
The airports are the only part of the equation that are not pri-
vately operated nor owned. And they are generally in short supply.
Even the areas within the airport—the concession stands, all of the
factors where you deal with another human being—you’re dealing
with the private sector.

The facility is the only area where the public sector is involved.
And in other methods of transportation—railroads, buses, trucks—
their facilities and transportation centers and depots and all are
privately provided. So why is one particular element publicly pro-
vided is an area that we feel needs to be brought into question.

As you've heard earlier, London is now served by privately owned
airports. And to all indications, both the public and. the airline in-
dustry, they are both better served by that private enterprise. And
the average consumer flying into Britain has no realization that
anything has changed, as far as who owns it. He does not know
who owns it when he comes in.

We are currently investing a great deal of money overseas in pri-
vatization of airports. We’re taking American capital and investing


80

The owner has to be protected, and you need to have the people
there to do it.

Mr. Horn. Mr. Davis.

Mr. Davis. I'll ask each of you, if we can start with Mr. Concklin,
who I’ve known for many years and, I think, represents an out-
standing organization, the Professional Services Council. In local
government, we found many times that before we would make a

lecision to go private, we would allow our public employees to com-
pete as well. This is in a new area. We would allow our public em-
ployees to work up their own strategy for trying to deal with the
RFP, and allow the private sector at the same time.

And we found many times that the public sector could win out,
but they would streamline the strategies that we had been using
over time, it would lower the cost to the taxpayer, which is ulti-
mately what you're after. You're not after privatizing, simply for
the sake of privatizing. You're trying to deliver the best service
that you can at the lowest price to the taxpayer.

Has the Federal Government done this? Is it workable? I'll ask
each of you all, starting with Mr. Concklin.

Mr. CONCKLIN. Yes, I’ve responded to part of that before, and I'll
keep this brief. We have a serious problem with public-private com-
petition at the Federal level, again, because of the fact that the
Federal Government does not have a competent system for accumu-
lating its costs, especially are indirect or overhead costs. So
can’t get a valid factual or analytical comparison on paper before
you make at least a tentative decision to attempt a competition.

So we have opposed that. And my impression is that State and
local governments have more rigorous and thorough accounting
systems so that it’s more possible to do a side-by-side, level playing
field cost comparison than it is at the Federal level.

Mr. Davis. Let me follow up. One of the problems we found is
to get the private sector to participate, sometimes they didn’t want
to go on a wild goose chase.

Mr. CoNCKLIN. Right.

Mr. Davis. They would be expending a large amount of money
and maybe end up with something that wouldn’t go. But there ma:
be an abbreviated process here where you can start to ballpar!
some of those. It may depend on the agency.

Mr. ALBANO. Well, with the city of New York, basically, we, in
negotiations, set up what we call a section 11 to provide some sort
of an equal playing field. In the majority of cases where workers
contracted out, they do not provide the employees the benefits or
the same salary levels. And so the cost comparison there makes it
very difficult for city employees to compete.

Section 11 of our contract was one aspect of that, and then we
were able to get the city council to pass a new law 35, again, stat-
ing that there has to be, built into the contract cost, benefits, basic
salary levels. Because all too often what happens is that the em-
ployees of these contracted out jobs fall back on the city dole, so
to speak, because they don’t have the basic protections. They don’t
have hospitalization insurance. If they get sick, they don’t have
time off. And they go back on welfare in many cases.

The problem is that there’s not an equal playing field, all too
often, And the only way, in many cases, the city employees are beat


13

Specifically, the potential to privatize and instill a level of com-
petition, what I want to talk about here today is the Syracuse-Han-
cock International Airport. Our goal is simple: it’s to better the
service available to the traveling public, while lessening the burden
placed on our municipality to own and operate this airport. Cur-
rently, the full economic and financial capabilities of our airport
are not being realized.

In order to capitalize on the potential untapped benefits at the
airport, a more aggressive management approach must be taken.
That’s why, just 2 weeks ago, I established the Mayor’s Advisory
Committee on Airport Privatization to assist and analyze the en-
hancement of services at the airport to a public-private partner-
ship. The introduction of private sector expertise could enhance the
capabilities and efforts of the city and the airport’s existing man-
agement through development efforts.

Through a properly incentivized business structure, introduction
of entrepreneurial management and ideas of Hancock Airport could
yield significant economic and financial benefits, cost savings, and
service quality improvements, while increasing the attractiveness
of Syracuse as a place to do business. These benefits could accrue
directly the city of Syracuse and the users of the airport, including
the traveling public, the airlines, and other tenants.

In order to implement a public-private partnership through a
managed competition process, our airport advisory committee must
address the financial opportunities, the legal issues, and competi-
tive structure related to an initiative of this nature. But most im-
portantly, especially to this committee, are the constraining effects
of Federal oversight and regulation. My committee is currently re-
viewing various alternatives, ranging from public authority owner-
ship to a consortium of public-private partnerships, to total private
ownership.

Specifically, ladies and gentlemen, we have identified one obsta-
cle, which, if removed by the Federal Government, would accelerate
our efforts to improve airport service delivery and enhance our eco-
nomic opportunities. As I’m sure you’re aware, under the Federal
Aviation Act of 1958, the Airport and Airways Improvement Act of
1982, and subsequent amendments, the Federal Aviation Adminis-
tration provides grants through the Airport Improvement Program.

We in the city have participated in the AIP program over the
years to keep pace with needed improvements at our facility. Cur-
rent Federal law requires the repayment by the city of all past AIP
grants that we've received. This repayment inhibits our ability to
enact the private sector disciplines needed to better service the
traveling public. Repayment of all past Airport Improvement
grants, if required, would not allow the end result to be accom-
plished, but would rather shift the burden from the city of Syra-
cuse and its taxpayers to a private operator.

If the Federal Government is truly interested in promoting and
assisting local government in bettering service and lowering tax-
payer exposure, then this barrier required repayment must be re-
moved. I wrote to Representative McIntosh regarding my support
of his amendment to H.R. 5 to remove the required repayment of
Federal grants when privatization opportunities involved public as-
sets.


55

needs of the individuals involved in the transfer of this public to
a private sector operation. And I wonder if you just want to com-
ment a little more on that, to share with us how that all works.

Mr. Jones. OK. The TUPE itself arose from a European Commis-
sion directive. I guess you have a little more faith in the conserv-
ative government in the UK than maybe I do, in the sense that
they were forced to implement this by the Europeans. Whether
they would have done, had that not been the case, I don’t know.
Now, in the UK government, employees involved in privatization
have certain rights under what was called, I think, the acquired
rights directive, which is, as you point out, TUPE.

'UPE itself basically says we have certain legislation in the UK
about constructive dismissal, which effectively says that you cannot
fire somebody—or using your terminology, push somebody out of
employment—by effectively making the terms and conditions of
their employment so unbearable that they’re left with no choice but
to leave. Putting that across over here, if you, again, were to say
to somebody, you either will have to transfer into the private sector
or we can’t position you somewhere else in the Federal Govern-
ment, then, because of the way CSRS, for example, works, they
would lose a lot of their entitlements under the pension scheme.

And effectively what you're doing is, you’re saying—in the UK,
that would be deconstructive dismissal. So there are lots of things
that people have to consider within agencies in the UK that may
be not considered or have to be considered here. Attached in the
same document which you asked to be submitted for the record is
a list of all the staff issues under TUPE and what exactly it means
for pensions.

The government, in some cases in the UK, has actually insisted
that the private sector provides a pension of equivalent stature and
compensation as they would receive if they had remained in the
private sector. Now, if you were to do that here, because of the
problems of reportability, and in the UK, the civil service pension
is pretty much transferable. So it doesn’t create some of the same
problems that implementing that type of thing here would create.

If you were to do that here, then you'd be putting a huge burden
on the private sector, because the money that they take out of
CSRS is what they put in. There’s no major—it’s not transferable.
So the private sector would be forced to put all the money in to cre-
ate that pension. And that’s a sort of cost that the private sector
is going to take into account when either putting a bid in, or work-
ing out what they’re prepared to pay for a particular company.

And that, again, effects the cost of privatization. Now, you may
say, well, given, we don’t have TUPE, why do we need to do that?
And the question is whether you—how you propose to treat your
employees in this process. ‘And 1 guess one of the reasons why the
UK was so keen to do it right was because if you have buy-in from

our employees, the process works that much better, and, to be
onest, is far more likely to be politically successful.

Mr. Mascara. So the human element is important. And the other
thing that I wanted to note is, there’s a section in here that says,
take time to make the right decision. That somehow, if we do this
in haste, that we could end up costing more than what it costs
under the public sector. And I thought that was noteworthy. And


2

lution even transformed the opposition British Labor Party from a
party committed to public ownership of “the commanding heights
of the economy,” to one that accepts privatization and does not in-
tend to undo the achievements of the preceding two decades.

That really was a shot heard around the world. Privatization has
been widely copied in Latin America, Africa, Asia, Europe, even in
countries which were part of the former Soviet Union, and China,
which is still ruled by the Communist Party of China.

Conspicuously lacking among the ranks of the privatizers is the
United States. The United States has limited experiences with na-
tionalization of Federal ownership of corporations, except in the
First World War with the railroads. The lack of State-owned enter-
prises has limited the scope of privatization in the United States.
However, there are billions of dollars of Federal assets that are
available for sale.

Congressional committees should closely examine the opportuni-
ties available to us to achieve savings, and improve the effective-
ness and efficiency of various government-run programs. We should
have specific goals when privatizing. There should be a solid ra-
tionale and clear criteria in order to move areas of activity away
from government ownership to private ownership and management.
which meets a public purpose.

A demonstration of the cost savings and economic opportunities
for economic benefits for society’s consumers and workers are es-
sential. These are some of the questions we hope each of the wit-
nesses will deal with, based on your experience, so we can get a
feel for where are those solid rationale and the clear criteria. Con-
gress needs to decide whether to privatize; what form privatization
should take; how Federal workers should be treated; and finally,
how we can remove barriers to State and local governments for
their own privatization program.

With that, I look forward to hearing the testimony of the wit-
nesses. And to answer some of these questions, we’ve assembled an
impressive array of talent. And, as appropriate, other hearings will
follow this one over the next 2 years. I’d like to yield now to the
acting ranking minority member on the committee, Mr. Mascara,
the gentleman from Pennsylvania, for any opening statement he
might have.

Mr. Mascara. Thank you very much, Mr. Chairman. Let me first
indicate that I’m sitting in for our ranking member, Congress-
woman Carolyn Maloney. She is suffering from the flu, and I guess
that’s going around, and she couldn’t be here today. But we all
wish her a speedy recovery. Thank you for holding this hearing. We
are going to seriously consider privatizing Federal Government
functions and selling government assets. :

This is a useful beginning, but it is only a beginning. We will
touch on a number of topics in today’s hearing which are highly
controversial: cost accounting, contract control, and job placement
for displaced workers, just to name a few. We will not resolve these
issues today. At a hearing of this breadth, we can do little more
than identify the issues which are to be debated. I look forward to
working with you to make sure that each of these issues is fully
explored before we begin divesting Federal functions and assets.


72

THE CHALLENGE OF BALANCING PUBLIC AND PRIVATE RESOURCES

The federal government has been engaged in successful privatization for over
three decades, with a sharp increase pattern emerging in the 1980-1995 period.
Most of this “contracting out” activity has been performed by for-profit service con-
tractors through competitive procurement procedures. Today, services contractors do
approximately 70 billion dollars of business with the federal government per year.
A substantial percentage of this work qualifies as defacto privatization in the sense
that the government has engaged service contractors to perform clearly defined
functions over a long period of time.

The PSC has consistently taken the position that public policy should be clear as
to what functions of government are inherently governmental—must be retained in-
house as the exclusive responsibility of government employees—and what functions
are eligible to be contracted out without infringing on these inherently govern-
mental functions.

Public policy should recognize three distinct levels when balancing public versus
private roles in support of federal missions.

Inherently Governmental Functions—The first and most critical level consists of
those functions of governance which are clearly the exclusive province of the govern-
ment employees. Fortunately, a solid working definition of inherently governmental
functions is available in the form of an OMB policy letter developed in 1992. This
policy document? sets out very clear boundaries on functions which must be re-
tained in-house—such as policy and budget decisions, regulatory strategy, waginj
war, revenue raising and many others. lt also enumerates functions which should
be contracted out—such as operation and maintenance of facilities, studies and
analysis, technical support to development of systems, management assistance to
complex programs and others.

Government Core Capability—The second major level is equally important but
somewhat less distinct. This level contains the core capabilities that the government
must possess in order to oversee and direct activities carried out by nongovernment
parties. The governing prin le should be the retention in government of the tech-
nical, management and administrative skills to competently plan, program, direct,
review and validate the results of efforts performed by the private sector, but not
perform the work unless the functions are deemed to be inherently governmental
In nature.

Private-Sector Role—The third and last level to be considered in balancing public
and private-sector roles is the private sector. Here the central question is, can the

rivate sector perform a given function and is there sufficient competition to assure

igh-quality results at reasonable, market-determined prices? Typical examples of
successful private-sector performance include operating federal computer centers,
maintaining and operating missile test ranges and launch facilities, and training
federal employees in the operation of complex equipment.

GOVERNMENT'S PRIVATIZATION LEGACY 1980-1995,

Over the past 15 years, there has been a growing trend in the federal government
in implementing privatization through contracting out.

The primary scenarios for privatization have been, in order of magnitude, direct
contracting out, the creation of GOCO’s (government-owned, contractor-operated fa-
cilities) such as the Sandia National Laboratory, and the so-called government cor-
porations such as the Student Loan Marketing Association.

CONTRACTING OUT

« The dominant contracting-out category is typically driven by an agency's jude.
ment that a given function (operating and maintaining a computer facility) can
be more effectively and economically performed by a service contractor acquired
through competitive procurement. .

This form of privatization has been especially successful because it affords the
government customer complete flexibility to vary the level and content of the
contractor's support activity in response to real demand (e.g., mission changes).
« During this same time period, OMB has sponsored a little used policy (re-
ferred to as “A—76”) which calls for contracting out commercial type activities.
The A-76 decision to contract out is based primarily on an attempt to compare
the costs of retaining the work in-house with contracting out. The A-76 pro-
gram has had limited impact because agencies have resisted the policy and the
congress has effectively stalled the program. More importantly, the principle de-

10MB Policy Letter 92-1, Inherently Governmental Functions, September 23, 1992.


CONTENTS

1. Inoduction
Identifying possible privansation candidates:
Speed of the process
2. Preparing the business for sale
Initial steps
Feasibility study
Preparation tor pnvatisation if ris decided to sett
Accommodation
EC law
3. The sale process
Appointment of privatisation advisers
The method ot pnvarisation
Trade sales
4. Disengagemem and pust-sale uivolvement
5. Costs and budgetary issues
6. Stoff issues
Consultation

Verms and conditions of employment and
redundancy payments

Pensions
Redundancy entitlements
Options for staff facing privatisation
Staff records
Annex A: fast of contacts
Annex B: Bibliography
Annex C. Checklist of the key stages ina wade sale

Anncx D: Extract from TUPE regulations.
as amended by the Turer Act 1993


70

and Building of the space launch complex at Kennedy Center in
lorida.

There is no single entity in western civilization that combines as
many high-technology, critical functions as that space launch com-
plex. And of course, human lives are involved every time a button
is pressed and there’s a launch. We want to commend you, Mr.
Chairman, and your colleagues, for stepping up to a thoughtful con-
sideration of this very complex and very critical subject.

We think that properly pursued, with all the caveats and more
that have been offered here today in terms of infrastructure, rigor,
counting 10, great care before embarking, that the benefits of pri-
vatization are profound. And, in the most fundamental sense, they
involve right sizing, or properly sizing, the Federal Government;
substantial improvements in the economic efficiency of what the
government does or brokers outside sources to do; and finally, im-
proving Federal performance through a release of so many Federal
employees who are ostensibly in charge to do what one author has
called, “steer, rather than row.”

And that’s a bumper sticker slogan, but in many respects, it’s a
metaphor for what privatization should be about—policy functions,
regulatory decisions, budget functions, war powers, and those high
level, inherently governmental functions certainly need to reside
with full time, dedicated, confident government employees. A great
preponderance of what is now done by the Federal Government can
be contracted out.

Now, I want to simply echo what previous witnesses have said
in terms of the cultural transformation that is an absolute impera-
tive if privatization is to be done successfully over time. And it is
not rocket science, but it’s a matter of extremely careful attention
to training, to education, to organizational structures, to analytical
tools and protocols to do it right, and also to the existence of a
structure to measure what youre doing with a fast, serious, direc-
tive action, as appropriate.

I see the yellow light, so I will move ahead smartly. I did men-
tion that there are innumerable functions that have been con-
tracted out by the Federal Government that range from very eso-
teric R & D labs; include computer centers; include every-day func-
tions, such as guard service, firefighting, security service; include
prominently, in the Department of Defense, a $10 billion to $20 bil-
lion market in the maintenance and repair of weapons, such as air-
planes, ships and other military assets.

We, as a collective voice for professional and technical services,
believe that it’s vitally important that you focus seriously on con-
tracting out not to the exclusion of other models, but we think
there are significant risks and orders of complexity when you get
into government corporations and like models. And we can talk
more about that at your convenience.

Let me just quickly summarize our recommendations. They may
seem a little bit premature, given that this is the kick-off of this
examination. But in order to be able to look back 5 or 10 years
from now and believe we’ve had a successful privatization legacy,
we think several things need to happen. One is a clear, resounding
legislative mandate to move ahead with a Federal Government
strategy for privatization,


63

Mr. BUTLER. All new terminal. It’s an existing airport with old
terminals, and this is the add-on terminal. And so it stands next
to the government-owned terminals.

Mr. Horn. Do you own the runway, for example?

Mr. BUTLER. No, we do not.

Mr. Horn. They did maintain control of that.

Mr. BUTLER. Right.

Mr. Horn. It’s strictly the terminal.

Mr. Bur er. Right.

Mr. Horn. And do you have some of the taxiing on the ground?

Mr. BUTLER. All the taxiway is ours out to the runway.

Mr. Horn. Did you find that experience any different from what
you might do in the United States with a municipality?

Mr. BurLer. As far as implementing it, it would be not much dif-
ferent than how you could do it here. Here you cannot do that in
the context of Federal law and regulation. In how to achieve profit-
ability of a private project on an airport, the law here is very re-
strictive in that regard.

Mr. Horn. Well, as I suggested, we're going to try and change
that. Mr. Mascara.

Mr. Mascara. I just wonder what happens if the private sector
becomes unable to, because of insolvency, to continue to offer these
services. What happens then?

Mr. BUTLER. In the case of Canada, and in most of the cases
we're looking at, it’s the best thing that ever happens to the gov-
ernment—they get everything back for free. If we fail in Toronto,
we've got to return the building to the public owner.

Mr. Mascara. But if tonight, somehow, they go into bankruptcy,
chapter 7, and everything is closed down. We're trying to run an
airport here. They control the runways and you control the
taxiways and whatever. I mean, couldn’t that become a real major
dilemma for the operation of an airport in this instance?

Mr. BUTLER. Well, my view is that you can structure it in a way
that that would not occur. And it appears, in this country, that it
is just as likely to occur to a government agency. So I don’t know
if there’s a differentiation here.

Mr. Mascara. That’s chapter 9.

Mr. BUTLER. OK. [Laughter.]

Different chapter, but a similar result could occur. The lenders—
if you want to get into a complex answer, maybe this should be
done in writing—the lenders putting the package together would
want the place to remain open for the revenues. Who would take
over the facility and operate it would be a structural issue in con-
tracts. I see nothing that would prevent a revenue generating, op-
erating airport from continuing in business.

And putting the right paragraphs in an agreement to allow that
to occur is something that can be done and has been done.

Mr. Mascara. Thank you, Mr. Butler.

Mr. Horn. Any further questions? OK. If not, thank you very
much, each of you. We appreciate your contribution. As I said, the
staff will follow up on both sides with some questions. And if you
think of some things you think would be helpful to this commiitee
as we sort out the pluses and minuses and criteria and rationale,


20

Mr. BERNARDI. Whenever I get together with the mayors
throughout New York State—the Big Six—we have a lot to talk
about.

Mr. Davis. You've got the toughest job in the country, running
a local government. But probably the most important in a lot of
ways. Thank you.

Mr. BERNARDI. Thank you.

_ Mr. Horn. The gentleman from Pennsylvania has the last ques-
tion.

Mr. Mascara. Mayor, are the employees who would be effected—
I’m not sure you're far along in the process of privatizing—given
an opportunity to bid on purchasing these services or being able to
provide those services for Syracuse? You have a group of 100 em-
ployees who do this now. Two questions, and I don’t know whether
you're unionized or not, and whether your union contract has a suc-
cessor clause, where a company who would be absorbing this func-
tion would give these individuals the right of first refusal to do the
work or to work for the company.

Mr. BERNARDI. Well, Congressman——

Mr. Mascara. This is the human aspect.

Mr. BERNARDI. We have 114 employees who are very close out at
our airport. And in the conversations that l’ve had to this point,
both publicly and privately, we would do all that we could to make
sure that if a company were to take over those services, that our
employees would have the first opportunity to be part of that orga-
nization.

Mr. Mascara. Thank you, Mayor.

Mr. BERNARDI. Absolutely.

Mr. Mascara. Thank you.

Mr. Horn. We thank you very much, Mayor Bernardi. We appre-
ciate you coming down here to share some of your ideas with us.
And [hope they'll stimulate a lot of congressional discussion.

Mr. BERNARDI. Thank you. As difficult as our job is as mayors
of cities throughout this country, this 104th Congress—you have
your work cut out for you also. Thank you.

Mr. Horn. Thank you. I’d now like to call forward panel _II,
which will have three members in it: Mr. Jones; Mr. Leeds; Mr.
Butler. And we will swear you in.

[Witnesses sworn.]

Mr, Horn. We'll start with Mr. Jones, Worldwide Privatization
Coordinator for Arthur Andersen. Mr. Jones.

STATEMENT OF ANDREW JONES, WORLDWIDE PRIVATIZATION
COORDINATOR, ARTHUR ANDERSEN; ROGER LEEDS, MAN-
AGING DIRECTOR, BARENTS PLC; AND VIGGO BUTLER,
PRESIDENT, LOCKHEED AIR TERMINAL

Mr. Jones, Thank you, Mr. Chairman. One of the issues that I
guess is fundamental to the whole process of whether you privatize
or don’t privatize is the issue of whether privatization actually real-
ly creates efficiencies or whether it is merely a stimulus for change.
‘Transferring something from the State sector into the private sec-
tor, you don’t automatically create a miracle cure overnight for the
functions that are being performed by government.


5.1.

37

COSTS AND BUDGETARY ISSUES

Financial provision for the sale, and the necessary Vote accounting
arrangements, shuld be agreed with the relevant ‘Treasury expenditure
division well in advance of the sale. (General guidance on procedures for
handling thesc issucs, and the ueaunent of sale costs and proceeds arising on
privatisation, is given in NIF(92)3.)

As well as ensuring that tie NAO has access to documents, provision of
access to sale documentation fur departments” own intemal auditing purposes
is important.


57

comes down to what I was saying earlier in that privatization itself
does not create savings. It is the way in which you provide incen-
tives to those people to reduce costs. And the private sector is in-
centive by profit and competition to cut costs. And that’s the key
to privatization, in my view.

ir, HorN. Thank you. Let me ask a question of all of you. An:
of you feel free to chime in on it. According to a 1992 World Ban
study on privatization, workers did not suffer under the
privatizations which were studied largely because, first, firms
whose employees were strongly opposed to privatization are gen-
erally not sold. So that exempts one group. And the employees, or-
ganized or unorganized, could be satiehied | by being offered a share
of the games.

In other words, in the case of our own civil service and the Presi-
dent’s program, Federal work force reductions would have been im-
possible, some feel, without buyouts. And having administered
three of those as a university president, it seemed to break you for
a while. But when people went out at the top step, and their re-
placements came in at the lower step, you recouped your costs of
the buyout, or added retirement years, within a matter of 3 years.

How can we gain the support of Federal workers in our country
to really buy in to help the Congress privatize? And what has been
your experience you've seen in other countries where they also had

arge, groups of organized employees? Mr. Leeds, do you want to
start?

Mr. LEEDS. Sure. I’m familiar with that study, which was done
in four different countries, and I believe 12 enterprises. The first
caveat, of course, is that those were outright sales of assets. They
were not contracting out of services, or build-operate-transfer
schemes. They were the sale of public sector assets. And I think
that’s a major distinction between what happens there and what
most likely is going to happen here.

There are two factors, I think, if you are going to have the out-
right sale. One is, as was said by Mr. Jones, or alluded to, is the
possibility of employee share ownership in one form or another,
which is an inducement to participate. And in most of those cases
that were cited in the World Bank study, they were discounted
shares. So that you are providing some kind of financial incentive
to the possibility of discounted shares for the employee to partici-
pate and thereby support the process.

The other is that, in 11 of the 12 enterprises that were studied
under that analysis, post-privatization performance improved con-
siderably as a result of the privatization. Which is to say that pro-
ductivity went up, earnings went up, in the actual enterprise
group. So that rather than having lay-offs, you had a situation
where employment actually increased and the salaries went up as
a result of the increased productivity that came out of the privat-
ization.

That is the ideal that you are seeking. But I’m not sure that that
analogy transfers very well to a lot of what is going to happen in
the United States. Because as we said earlier, a tee of what is goin
to happen here is not going to be outright asset sales. But it sti
is something worth considering.

Mr. Horn. Mr. Jones.


23

Mr. Horn. I wonder if this is confidential material, or can we in-
clude it as an exhibit in the record?

Mr. Jones. I would imagine that there is no confidentiality as-
pect over it, otherwise they wouldn’t have faxed it to me. [Laugh-
ter.]

Mr. Horn. Well, at least it wasn’t on the Internet. Without objec-
tion, then, it will be put in the record such as you would see
deemed fit. .

Mr. JONES. By encouraging the employees to participate, you en-
courage them to focus on the process. You give them some incentive
to participate in the process. Employee participation in the privat-
ization process is a key element of its success. I think those are the
major areas that I wanted to concentrate in covering in testimony
that I prepared for the written statement.

I would like to thank the committee for the opportunity to speak,
and hope that I will be able to assist you as the process evolves.
Thank you.

(The prepared statement of Mr. Jones and the guidelines referred
to follow:]

PREPARED STATEMENT OF ANDREW JONES, WORLDWIDE PRIVATIZATION
CoorDINATOR, ARTHUR ANDERSEN

INTRODUCTION

Good afternoon. My name is Andrew Jones. I am a senior manager at Arthur An-
dersen responsible for coordinating our world-wide privatization activities.

1 am here today as someone who has witnessed the privatization program in the
Uk, its impact on government agencies, some of the problems encountered and soln-
tions proposed, and as someone who is currently involved in the efforts of the Unit-
ed States General Services Administration to seek out the way to deliver quality
services in the most cost effective way to the taxpayer.

Over the last two years there has been much discussion centered on how govern-
ment can work better and cost less. Recently this focus has led to discussions on
whether or to what extent, the private sector should be performing many af the ac-
tivities, functions and services currently being performed by the government.

WHY AND WHEN TO PRIVATIZE

Privatization has become a world-wide phenomenon largely due to privatization’s
ability to improve performance and reduce the cost of government. However, it is
important to understand the exact make up of these costs that can be saved. Gen-
erally excess cost can be split into two components, procurement related and oper-
ation related.

‘The cost savings that will be realized through privatization are those that result
from the ability of the private sector to carry out the tasks of the agency in a more
cost effective manner.

Almost any function performed by government today can be privatized. The key
to this decision relies on two elements:

First, where the safety of the taxpayer is dependent upon that function, e.g.
Army, Navy, Air Force, Police, Fire and Ambulance etc., most people agree that
these functions should remain within the control of government.

The question of whether to privatize other functions is more complex. Should the
decision be a matter of principle or a financial matter? If the government can dem-
onstrate that it can perform a function at the same quality level but at a lower cost
to the taxpayer than the private sector is it reasonable for that function to remain
government owned?

,_ The answer to this question depends upon whether it is believed that government
is inherently inefficient and that if a function is efficient now then it won't be long
before it becomes inefficient. If this argument is believed then any function cur-
rently performed by both government and the private sector should be privatized.

If, however, you believe as I do that there are certain functions that for one rea-
son'or another can be performed more efficiently by government, then they should
remain so.


yu

Mr. Horn. We thank you very much. Let me ask a couple of
questions here, Mr. Correll. According to the Environmental Pro-
tection Agency, we have a large number of communities across the
country—and that has certainly been the finding of the Committee
on Transportation and Infrastructure—where substantial capital
investments are required.

Most of these communities have no way to get the millions they
need to build these facilities, which would Be under the Clean
Water Act or any number of other acts we're talking about. And
the estimzite of EPA is that we need about $137 billion in capital
investments to bring municipal water systems up to the Clean
Water Act standards.

Would privatization increase access to capital for these projects?
What's your feeling?

Mr. CorRELL. I think the increased opportunity for management
services, as well as investment capital, I think it would be in-
creased substantially if the private sector were to be involved in
this process.

Many o/’ the municipalities—I can speak firsthand about many
we have spoken to surrounding our rimary service areas in north-
ern New Jersey and in New York State—they literally cannot do
any additional financings. They are at their limits.

They are already having their bonds downgraded to below invest-
ment. g-ade, and their ability to attract any additional capital is se-
verely jim:ted. So I think the introduction of private sector partici-
paticn would increase substantially the opportunity for many of the
municiyalities to get the necessary financing to meet the require-
ments.

Mr. Horn. Have these municipalities pledged as collateral their
current water system?

Mr, CoERELL. Many of the systems have already issued revenue
bonds where they have supported the cash-flow from their oper-
ations, and they are at the limits of how much they can finance,
even having pledged the cash-flow.

What will happen in many cases is that the municipalities also
will have to increase the rates that are charged to the customers.
It becomes one of will, as well, to increase the rates to the cus-
tomers.

And to ineet the current requirements, it’s not unusual to see es-
timates of water or wastewater charges not only increasing in dou-
ble digits but sometimes actually doubling.

Mr. Horn. So the political damage is done by the council that
votes for privatization, and then the prices go up. But at least they
wouldn’t throw them out each time the rates went up, because it’s
no longer their problem and responsibility; is that the political
analysis of it?

Mr. Corre. I think that’s one way one can look at it. I think
that was some of the background and the privatization that oc-
curred in Great Britain that you alluded to in your opening re-
marks.

The type of regulatory environment and oversight that they im-
plemented when they privatized the entire country’s water system
recognized that they had severe infrastructure problems and the
equivalent of our Clean Water Act requirements to face, as well.



44

CONTRACTING FOR THE PROVISION OF SERVICES. CENTRAL
UNIT ON PROCUREMENT GUIDANCE NOTE NO. 42 - SEPTEMBER
1993

Advice on the use of contract terms and conditions for the provision of services.

GOVERNMENT ACCOUNTING CHAPTER 32: DISPOSAL OF ASSETS
Procedures to follow in sclling off surplus assets.

GUIDANCE NOTE ON UK AND EC COMPETITION PROCEDURES
FOR TRADE SALES
Available from CP3 division, Department of Trade and Industry (071 215 6777)

DEO LETTER OF 28 MAY 1986. TRANSFERRING WORK OUT OF
GOVERNMENT DEPARTMENTS-CONSULTATION WITH THE
UNIONS

Information on consulting staft and trade unions. Availahie tram Cabinet Office,
Efficiency Unit (071 270 0426).

TUPE TRANSFERS: CONFIDENTIALITY OF STAFF RECORDS
Note by the Efficiency Uni, 18 August 1993.

1G LETTER OF 27 SEPTEMBER 1993. TUPE: MODEL
INFORMATION ON TERMS AND CONDITIONS

Information that might be sent to tenderer at the Did stage. Available from Cabinet
Office, Efficiency Unit (071 270 0426).

GUIDANCE ON THE RELEVANCE OF THE TUPE REGULATIONS TO
MARKET TESTING OF PUBLIC SERVICES - 11 MARCI 1993
Guidance available from OPSS Press Office. Tel: GTN 270 6355


85

which I think would go a long way toward increasing investment
in our infrastructure. The first would be to remove the current 5-
year limit on operating and maintenance contracts. It has the prac-
tical effect of curtailing a private entity’s willingness to make cap-
ital investment. .

If this restriction were abolished, billions of dollars of capital im-
provements would be made to facilities, such as wastewater treat-
ment plants. In addition, I would like to see the distinction be-
tween public and private ownership eliminated when it comes to
the eligibility for tax exempt bonds. Tax exempt status should be
made for all public purpose infrastructure, or should be eliminated
for those facilities that are self supporting.

In conclusion, I’d like to thank you for the opportunity to testify
today. And what I’ve tried to do is suggest some changes that I
think can be easily implemented and whose cumulative effect
would be to attract billions of dollars of capital to meet this Na-
tion’s infrastructure needs. Thank you very much.

[The prepared statement of Mr. Stanley follows:]

PREPARED STATEMENT OF RaLPH L. STANLEY, SENIOR VICE PRESIDENT, UNITED
INFRASTRUCTURE Co.

Good morning. My name is Ralph Stanley, and I am currently a senior vice presi-
dent of United Tafractructure Company, a joint venture of Bechtel and Peter Kiewit,
two diversified construction companies with international operations and combine:
revenues of more than $11 billion. United infrastructure is a newly formed devel-
oper whose purpose is the development, and ownership of infrastructure projects
such as roads, bridges, wastewater and water plants, and airports. We are a com-
pany that was formed to assist in addressing the shortfall in infrastructure re-
sources. We are also dedicated to werking with your committee and others in devel-
oping policies at the federal, state, and local level to encourage private involvement
in infrastructure.

Prior to joining UIC, I served as the founder, chairman, and chief executive officer
of the Toll Road Corporation of Virginia, the company now building the private ex-
tension of the Dulles toll road the country’s first effort at infrastructure privatiza-
tion. I have also served here in Washington for six years as chief of staff to the Sec-
retary of Transportation and Administrator of the Federal Transportation Adminis-
tration, where I actively sought to increase the role played by the private sector in
providing needed transportation infrastructure. [ have also served on two Presi-
dential commissions which examined both the potential for general privatization of
government services as well as new means to involve Private capital in the delivery
of infrastructure projects. I speak of my background to demonstrate that I have
been on both sides attempting to implement public/private partnerships, and am
very well aware of what changes in federal policy are needed to Increase private in-
vestment in infrastructure.

It has been well documented that this country needs substantial increased invest-
ment in its basic infrastructure to remain competitive in a global econamy. The pub-
lie sector currently is spending $140 billion annually on infrastructure investments,
Projections of the shortfall range from $40-$80 billion a year to meet our critical
infrastructure needs. The United States Environmental tection Agency alone
projects the need for $200 billion in new finance over the next decade to bring com-
munities into compliance with existing federal mandates for clean water and clean
air. The Federal Highway Administration has estimated that $29 billion dollars a

rear is needed to merely maintain the conditions of this nation’s roads and bridges.
It is quite clear that these needs cannot be met by government alone, whether at
the federal, state, or local level.

The use of the private sector to develop, own, and operate infrastructure projects
in partnershi with the public sector has become a global trend in both developin
and developed countries. According to a recent survey by the authoritative publica-
tion, public works financing, more than 900 projects in 72 countries with a total re-
quirement of almost $680 billion dollars are in development or have been put under
construction by ‘private sponsors since the 1980's. This trend is evident from Eastera
Europe to the Asia-Pacilic, where former Treasury Secretary Lloyd Bensten esti-
mated a need of $1 billion dollars a week in China alone to meet that country’s in-



62

so low for most of the population that they can’t afford to pay huge
prices for goods.

And so you need to take care, in terms of what you do, to ensure
the survival of these things, post-privatization. That is not really
as much of an issue over here. In the Middle East, the problem is
the fact that there is no private sector—95 percent of employees of
the Kuwait population is employed in the State sector. How do you
go about privatizing and creating competition when there is no pri-
vate sector out there to start off with?

And there is no private sector for employees to transfer out of the
State sector into when there is a reduction in the levels of staffing.
And so those are issues there which don’t necessarily apply here.
But I think the real issue over agency privatization, I think, that’s
where we'll see most of the focus, probably, in this country, and the
issues that can be learned over the ability of the private sector to
regulate itself.

For example, with the Federal Aviation Authority and air traffic
control, I guess, one of the debates is, if you transfer that into the
private sector, how do we ensure that safety is maintained? Is it
safe to transfer it into private hands? Well, the answer should be
yes, as long as the regulation is right. And so the issue over how
you regulate bodies that have been privatized is something I think
we can learn from. And if you like, I can go into it in more depth
in a written statement afterwards.

Mr. Horn. We'd appreciate that. Mr. Leeds, do you have any
thoughts on that?

Mr. LEEDs. On the surface, privatizing in this country should be
immeasurably easier than in the countries you mentioned. First of
all, these are mainly services as opposed to asset sales. But the in-
frastructure to get privatization done is so much better. As was
said, the enterprises themselves or the services are in far better
condition and, therefore, should be easier to sell.

The capital markets are more efficient; accounting is more reli-
able; banks intermediate more effectively; the legal framework is in
much better shape. So for all these reasons, all of which are rel-
evant to the privatization process, it should be a lot easier in this
country. The only question is execution, which we talked about in
various forms this afternoon. And I think that we cannot pay too
much attention to execution.

Mr. Horn. Mr. Butler, does Lockheed Air Terminal have any op-
erations overseas where you've had privatization?

Mr. BUTLER. Yes.

Mr. Horn. Can you tell me about that?

Mr. BUTLER. The biggest airport privatization project where inde-
pendent financing was used is in Toronto, which is not overseas,
but it’s across the border, which is a $600 million terminal build-
ing, roadway complex, freeway interchange and ramps and
taxiways. The whole complex was privately financed, and where we
pay a lease payment to the government for the use of the land.

d we operate that as a stand-alone business. Whatever reve-
nues we can collect from the terminal building is all we have to op-
erate with.

Mr. Horn. Was that a new project, or one that was existing?


86

frastructure needs, In the past two yours, a number of funds have been created to
meet this need, and many include American institutional investors such as insur-
ance companies, banks, and pension funds. Thus, as the competition for capital in-
creases, we as a nation find ourselves in the position of providing resources from
USS. insurance and pension funds to finance improved infrastructure overseas. As
our capital resources are utilized to improve the infrastructure of other nations, and
their economies that compete with us, surely now is the time to remove the barriers
that prohibit private investment and ownership of infrastructure in the United
ates.

T would like to focus the balance of my testimony on specific steps that the Con-
gress can take in this session that will have a profound effect on freeing up private
sources of capital to invest in America’s infrastructure. This committee is charged
with the task of making difficult choices on spending priorities, and the steps that
are suggested here today will more than offset those reductions by leveraging the
capital available and allowing for private capital to be invested.

ADOPT THE NATIONAL INFRASTRUCTURE DEVELOPMENT ACT

tit infrastructure investment commission upon which I served in 1993 also in-
cluded:
© Neil Goldschmidt, a former mayor of Portland, Governor of Oregon and Sec-
retary of Transportation;
« Kay Bailey Hutchison, now a U.S. Senator and formerly a treasurer of the
State of Texas; and,
» Frank Hanley, general president of the union of operating engineers.

The commission was bipartisan, unanimous in its reeommendations, and it recog-
nized two fundamental truths: there would be a decrease in federal funding and new
ways would be needed to leverage funds that were available. This committee is now
confronting the former and needs the recommendations from that commission that
were very ably incorporated into legislation written and introduced last Congress by
Congresswoman Rosa DeLauro with the assistance of Robert Spring of Milbank,
Tweed, and David Seltzer of Lehman Brothers. That legislation would establish a
government corporation, the national infrastructure corporation (NIC) that would
provide debt, equity, credit and risk insurance to private entities for revenue-based
infrastructure projects. NIC would be funded with a 3 year capitalization through
the sale of common stock to the Treasury. Total startup funds would be $1 billion
a year for 3 years only, and any further investment would be prohibited. After a
period, there would be a complete conversion to private ownership, at which point
the federal government would be repaid.

NIC would provide four functions. First, it would make senior and subordinate
loans as well as investments to private entities for revenue-based infrastructure
projects. Second, it would provide limited financial insurance on the debt of projects
that would have difficulty obtaining credit. Third, it would provide limited

reconstruction risk insurance, and finally, it would certify the eligibility of projects
for public-benefit bond status. Public benefit bonds, another commission rec-
ommendation, would allow pension funds to invest in infrastructure projects in a
manner competitive with tax-exempt rates.

The establishment of NIC could be achieved quickly, and the funds for its capital-
ization could come from existing grant authorizations. Indeed, its function could be
performed by a simple amendment to the charter of an existing government spon
sored entity, such as Connie Lee. The result of the creation of an entity to perform
the functions of NIC would be $30 billion worth of new infrastructure investment
and three quarters of a million jobs.

CODIFY EXECUTIVE ORDER 12803

There are a number of infrastructure facilities such as airports, highways, and
wastewater systems that have becn built with federal grants during the past 30
years. A common feature of such grants, thousands of which I signed at FTA, re-

juires a repayment of the federal portion of the grant if the asset is transferred to
the private sector. This restriction has prevented many such transactions, such as
Albany, New York’s attempt to sell and then lease its’ airport in 1989. In 1992, to
increase private involvement in infrastructure, President Bush issued Executive
Order 12803, which, while better still, requires the city or state to repay the
undepreciated portion of the grant. Nevertheless the repayment requirement has
hampered any real activit; Fhis Congress should enact a measure that allows
states and cities to privatize their federally aided infrastructure, by sale or lease,
so long as they are kept in their original use. Bob Poole’s reason foundation has esti-


31

appointed in the privatisation programme; and paragraphs 19-23 ot NIP(9Q)3
on financial advisers and feasibility studies.

Depending on the relative importance of the business to their own activities,
Customers within government should be vunsulted prior to making a decision
to privatise (and kept in touch subsequendy).

Preparation for privatisation if it is decided to sell

2.10.

2u

214.

2.15.

Deparonental lawyers should be consulted as early as possible about whether
fresh legislation is needed to pnvatise a business.

A judgement needs to be made on a case by case basis as to whether a
management and employee buy-out (MEBO) should be facilitated, merely
entertained or ruled out at an early stage. Paragraphs 10 and 11 of NIP(90)3
discusses the advantages and disadvantages of a MEBO.

Where there is a MEBO proposal, procedures need to be established tocnsurt
that officials involved in purchasing the business do not act in a way that
could result in their private interest contlicting with their continuing public
responsibilities. Responsibility for minning the activity to be privatised
should be separated frum that of selling it. Departments should consider
establishing a privatisation unit with responsibility for conducting the sale
and dealing with potential purchases, uicluding any MEBO. (See NIP(90)3,
paragraphs 30-35, for further advice.) The department may provide the
MEBO team with financial support to pay advisers (which Is repaid if the
MEBO bid is successful).

Departments may find it helpful to establish a steering group to coordinate
the concerns of the various interested parties. Such a group should comprise
representatives of the vendor department ur agency, the business (unless a
MEBO had been launched), the professional advisers and the Treasury.

The business may have to be streamlined or restructured in the run up to the
sale. For example, decisions may be required on site closures, asset sales,
changing the management structure, staff wansfers and the handling of
redundancies. Such decisions must take account of the department's or
agency’s equal opportunities policics. The normal deparmental and agency
arrangements for consultation concerning wansfers, relocations or
redundancies should apply. (NIP(90)3, paragraph 46, gives guidance on the
preparatory work that might be needed wher the activity 1 be suld provides
goods and services to public sector customers.)

Provision may need to be made for special shares in certain nariowly-uefined
circumstances, principally where the business being sold has had associations:
with national security or detence, or is of strategic importance. (See
NIP(94)2 on special rights shares.)


7

Mr. Horn. Now, I’m very conscious of members’ time, and I won-
der, can you join with us while we hear Mayor Bernardi? Or would
you prefer to take any questions now from the committee?

Mr. Kuuc. I have a date with the Rules Committee, so if I could
answer questions for 3 or 4 minutes, to give the Mayor plenty of
time, that would work the easiest for me.

Mr. Horn. Fine. We'd be delighted to accommodate you. The gen-
tleman from Pennsylvania, do you have some questions?

Mr. Mascara. A couple brief questions. In your statements, you
refer to the requirements to have the Department of Labor and
Transportation notify Congress of any reprogramming of funds. Are
there any other departments that are under the reporting require-
ments?

Mr. Kiuc. Well, what we did—and we can give you, again, a de-
tailed analysis—is ask the Congressional Research Service to
search bills and laws and statutes to try to pin down as many spe-
cific prohibitions as possible, or other advisory referendums. And,
for example, let me just give you a couple of more on here. The
Farmers Home Administration and the Conservation and Soil Serv-
ice are required to keep minimum employment levels.

The Department of Defense is prohibited from contracting out se-
curity and fire-fighting services. The Department of Transpor-
tation, as you said, is required to notify Congress of any specific
changes. No Federal funds can be used to contract out or privatize
any functions or activities presently performed by Federal employ-
ees in the Department of Labor, which just, I think, amplifies what
you asked about earlier.

And in both cases, there are 15-day notice requirements for both
Treasury and Labor. So those are the only specific requirements we
know that require notification to Congress. But there are also ac-
tual bans in other departments which forbid it from even being dis-
cussed.

Mr. Mascara. Congressman, don’t you think it’s Congress’ re-
sponsibility to oversee this privatization? We have some respon-
sibility, rather than being notified of some activities that are taking
place?

Mr. K1uc. I think you're right, that we do have an obligation and
a responsibility to be notified when departments are considering
privatization ideas. But what I'd suggest is, in the past, those time-
frames and notifications have been used as an excuse to delay any
active discussions of privatization. So if it’s simply a notification
process, J don’t have any concerns whatsoever.

If it, however, is a delaying tactic and a barrier to privatizing or
downsizing in either of those agencies, then I have a post.

Mr. Mascara. I have just one other question that relates to some
testimony given before the Budget Committee. You talked about
contracting out to the Internal .evenue Service some collection
work.

Mr. Ktue. Right.

Mr. Mascara. Which included about $150 billion worth of out-
standing debts. Could you talk about that a little bit and tell me,
how much do you think we can recover and would that be a good
move on our part, and how much of that do you think is collectible?


46
ANNEX D

EXTRACT FROM TUPE REGULATIONS, AS AMENDED BY THE
TURER ACT 1993

Duty to inform and consult trade union representatives

10-(1) In this Regulation and Regulation 11 below "an affected employee means, in relation to
arelevant transfer, any employee al the wansteror or the transteree (Whether of not employed in
die uuidertaking ot part of Uxe undertaking to be transferred) who may be affected by the transfer
ox may be affected by measures taken in connection with it; and references to the employer shall
bbe construed accordingly.

(2) Long enough before a rclevant wansfer to enable consultauions to take place between the
employer of any affected employees af a description in respect of which an independent trade
union is recognised by him and that union's representatives, tue cipluyer sal! iufunw Utose
representatives of

(a) the fact that the relevant transfer is to take place. when. approximately, itis to take place
and the reasons for it; and

(b) the legal, economic and social implications of the transfer for the affected cmployces:;
and

(c) the measures which he envisages he will. in connection with the Cansfer, take in relation
to those employees or. fhe envisages that no measurcs will be $0 taken, that fact; and

(@) if the employer is the transferor, the measures which the transferee envisages he will, in
connection with tne wansfer, take in relation to such of those employees as, by virtue of
Regulation $ above, become employes of the wansferec after the transfer or, if he envisages
that no measures will be so taken. that fact .

Gy Ihe wansteree shail give the Wfansferor such information at such a Lime as will enable the
ansfeio1 to perform the duty imposed by him by virrue of parsgraph (2(d)) above

(4)The information which is to be given to the representatives of a ade union under this
Regulation shail be delivered to them. or sent by post to an address notified by them 10 the
cinployes, o1 sent by post to the union at the address of its head or main office

{5)Where an employer of any affected employees envisages that he will, in connection with the
iwanster. be taking measures un relation to any such employees of a descripuon in respect of which
‘an independent wade union is recognised by him, he shall enter into consultations with the
representatives of that union with a view to secking their agreement to the measures taken.

(6) In the course ot those consultauions the employer shali-
(a) consider any representations made by Ue wade uniun tepieseutatives, aund

(b) reply to those representations and, if he rejects any of those representations. state his
reasons.

(/) itan any case there are special circumstances which render it not reasonably practicable for
an employer to perform a duty imposed upon hum by any of the foregoing paragraphs, he shall
take all such steps towards performing that dnty as are reasonably pracucable in the
circumsiances.


6

Today we still have 4,000 employees in the Washington, DC,
area involved in printing documents for the Federal Government.
The General Accounting Office, several times, at the request of this
very committee, has done long, detailed analyses on the General
Accounting Office. And the bottom line is, everything that the Gov-
ernment Printing Office prints today could be printed at a third to
half the price in the private sector.

Td suggest what we do is shrink the Government Printing Office
and make it a procurement office to use the 100,000 private print-
ers in the United States, and to get the Federal Government out
of running printing presses for a living. And frankly, anybody who
knows the changes in printing—and I'm sure it’s the kind of chal-
lenge you faced when you were a university president—is it’s much
cheaper, in this day and age of desktop publishing, to do things
quietly, cheaply, in-house and farm the rest of it of. than it is to
still have a university system have a large printing plant on the
campus itself.

I also think, quite frankly, there’s a number of other privatiza-
tion areas within this building itself. Why we spend $100,000 rent-
ing beauty shops and barber shops and keeping folks on the payroll
and then having those entities—for example, the barber shop—lose
money is an absolute mystery to me. Where I think if you’d open
up the building for competition and say, here’s a place where you
can put a barber shop in; what are you willing to pay us to have
that privilege? I think you could turn many of those operations
from losing money into for-profit operations.

The final area I want to talk about is the idea of functional con-
version. In the Commerce Committee, which I sit on, we’re about
to complete the final steps of taking the U.S. Enrichment Corp. to
a private corporation. For years the Federal Government actually
took all the uranium; we processed it; processed some of it for
weapons-grade plutonium; and then processed some of the rest and
sold it to private utilities for nuclear power plants.

We managed to do such a wonderful job of it when it was a gov-
ernment entity, we used to have 100 percent of the market share
in the world and we now have 40 percent of the market share. So
we're about to cut the tethers, set up a private corporation, and
have the government get out of the business of marketing and sell-
ing and processing uranium, period.

The final thing you will see, and there’s a rather detailed expla-
nation for you, which we'll insert in the record, is the number of
laws which currently exist which make it very difficult for some of
these privatization issues. For example, on the Power Marketing
Administration in 1986, the last time these ideas were discussed,
in the appropriations bill itsvif, there is now actually a barrier in
place which forbids employees of the Department of Energy to talk
or discuss or analyze the sale of the Power Marketing Administra-
tion; as there is a ban at this point on the executive branch, which
prohibits it from procuring from commercial sources any printing-
related production of government publications.

There are a number of outdated laws. And it’s my hope that this
committee can take the lead in repealing those to allow privatiza-
tion efforts to go forward. Thank you.


40

pension entitlements and should he provided in an anonymous, global torm
to ensure that confidentiality is not undermined. It is not always possible to
conceal details of the most senior staff. but disclosure has to be made with
thelr permission. Showing the rade union side the anonymised format in
which persunnel information is tw be presented should reasseue hen. Any
personal information should not generally be released until the new employer
has taken over. (See also the Efficiency Unit's guidance of 18 August 1993
“TUPE Transfcrs: Confidentiality of Staff Records”.)


19

Mr. Horn. I'd say we have some other mayors, then, in this
hearing and other hearings.

Mr. Davis. Exactly. I was the chairman of our county board, but
functioned as the mayor, out in Fairfax County, where we operated
a city government—it's a county under Virginia law, but the same
kind of issues. It’s a county of 900,000 people. And we also went
to privatization. Trying to bring competition to government, was
our goal.

The goal wasn’t to privatize, it was to bring some competitive-
ness to your costs and test whether you were charging the right
amounts or not for some of the ways we were doing business. I
wanted to ask if there are any other areas you're looking at for pri-
vatization opportunities in the city.

Mr. BERNARDI. Yes. Earlier, I mentioned that we're looking at
our tax-delinquent properties, privatizing those. We're looking to
the sale and Tease back. of vehicles and other equipment. We're
going to be selling a couple of our golf courses, all of our real es-
tate. The possibility of the competition aspect with sold waste re-
moval—we’re going to take one of the quadrants of our city and-——

Mr. Davis. Let me ask you about solid waste removal. In my ju-
risdiction, part of it was done by the municipality and part of it
was privatized. And it was a nice balance to keep everybody
straight, keep the prices down, keep the city honest, too.

Mr. BERNARDI. We want our public employees, or laborers in the
Department of Public Works, to be competitive. And we’re looking
very closely at privatizing one of our five quadrants.

Mr. Davis. Yes. That was how we started. We ended up, now, it’s
maybe 60-40. But we have both, and different quadrants can
switch from time to time if they don’t feel they’re getting their
money’s worth. What I wanted to ask, though, is, since private
waste collection fees are not tax deductible, but city property taxes
are, is that a disincentive in the Federal tax system to privatiza-
tion? Have you thought that through?

Mr. BERNARDI. Not really, no.

Mr. Davis. OK. You can do trash collection, for example, in a
couple different ways. If you call it a trash collection fee, it’s not
deductible. But if you make it part of the property tax——

Mr. BERNARDI. It’s part of our property tax.

Mr. Davis, Then it’s deductible.

Mr. BERNARDI. It is deductible.

Mr. Davis. But you let the private sector come in, all of a sud-
den, you take that deductible ayment out and it’s a nondeductible
payment. And I just wondered 4 you have any reflections on it ei-
ther now or later. That’s something we can address at the Federal
evel.

Mr. BERNARDI. Well, with our shortfall that we’re experiencing in
the city of Syracuse, I don’t believe the tax rate would be going
down if we privatized part of our solid waste collection.

Mr. Davis. Right, OK. I think that was my question, as we look
at it. I appreciate the job you're doing. I just note that when I took
over our county, we had a $200 million deficit. My only advice is,
get it over right away. The longer it lingers, the tougher it gets.

Mr. BERNARDI. It’s quite a challenge.

Mr. Davis. Yes, good luck.


14

_This proposal would return to State and local officials the deci-
sionmaking power they need to effectively administer their govern-
ments in the difficult years that lie ahead. It is my belief that the
removal of barriers such as the requirement of repayment of Fed-
eral grant awards will allow incentives to flow to our community
in the following manner: provide superior performance and effi-
ciencies for the airline and other airport users; would enhance the
city of Syracuse’s business environment and economic development;
would position Central New York for growth into the 21st century;
and would realize the full economic and financial benefit of Han-
cock International Airport.

In closing, I'll leave you with a message that you've all heard be-
fore. It’s a message that has been embraced by Speaker Gingrich,
Senate Majority Dole and even President Clinton, who, in his 1993
State of the Union address, said, “the real engine of economic
growth is, indeed, the private sector.” If we adhere to this simple
message, then I think we can all win.

The traveling public wins because they’re offered a broad range
of new services at a fair price. The airlines win as their costs go
down and passenger satisfaction raises. The community at large
wins as the airport becomes and even more significant engine of
economic development for the region. After looking at the successes
of privatization of major airports such as London Heathrow and
Gatwick Airports, as well as Toronto’s imaginative public-private
venture, I look forward to the day when Syracuse can mirror and
compete with these accomplished transportation hubs in the new
world economy.

Again, I'll thank the committee and its members for their inter-
est, your time and attention. And hopefully your efforts here today
and into the future will assist cities like the city of Syracuse and
cities and States throughout the country. Ladies and gentlemen, I
firmly believe that, as Congressman Klug quite aptly put it, we
have to rethink everything that we do.

I think, Mr. Mascara, you asked the question, or Chairman Horn,
what’s the downside? Well, the downside is if there’s no control.
But I expect full well that my State Governor Pataki and myself
as the mayor of the city of Syracuse, or Mayor Giuliani, as we em-
bark on privatization of any aspect of government, that we would
do it not only with the checks and balances of our offices, but also
with the legislative bodies that are involved.

What we're trying to do here is to manage a business more effi-
ciently and at a less cost. With the cuts that are coming from
Washington and in Albany, and filtering down to our municipali-
ties, we're in a position where we must do things differently. And
if that means that I can have the snow removed from our streets
by outside vendors at a cheaper rate than I can do with my own
Department of Public Works, then I have no alternative.

bviously, there’s many difficulties. There are many mine fields
in the way. There are employee unions. There are airlines in this
particular situation. But all of that can be overcome. You give us
the mandated relief, which you’ve done; change some of the rules
and regulations at Hancock; and we’ll do the rest at the local level.

Mr. Horn. Well, we thank you, Mayor, because you’ve obviously
done a very commendable job in Syracuse. Let me ask you a few


3

Privatization is not a cure-all for government problems, We
should remember that it is just one of the tools at our disposal. The
President’s National Performance Review has found that in many
situations, empowering the workers, not privatization, is the most.
effective way to improve services. We see the same decision being
made each day in corporations and we hope the government wil
emulate these decisions. Xerox and Corning have prospered be-
cause they have invested in their workers.

They treat their front-line employees as assets—an employee and
organizational style that respects workers’ knowledge and experi-
ence. Often, the solution to inefficiency in government just means
changing the way we do things. We saw this last year as we looked
at procurement reform. Many of the problems could be solved by
giving the workers the authority to act as responsible agents. In
some cases, that was as simple as giving them a credit card and
telling them to go to a store and buy software off the shelf.

Similarly, when we discovered the $400 hammers and $600 toilet
seats at the Defense Department, we didn’t rush out and hire a
contractor to do military procurement. Instead, we made sure that.
the managers resronsible understood their fiscal responsibi’ities.
We must be cautious that privatizing a function doesn’t wind wy
costing us more in the long run. Private trash-hauling in New Yor!
City costs 5 times what it costs in San Francisco.

But once a function is given over to the private sector, it is dif-
ficult for the government to regain control. A similar story is told
by the Los Angeles school district, which wound up with a $3 mil-
lion bill for deficits run up by a contractor hired to run the school
food services. On the other hand, New York City gave park seryices
workers greater control over their jobs, and found that they could
be more efficient than private contractors. The 1992 experiment,
the cost of tree removal in Queens and Bronx by city workers was
thousands of dollars less than a contractor would have charged.

The sale of government assets must also be carefully scrutinized.
In the 1980's, we set up the Resolution Trust Corporation, a gov-
ernment-sponsored enterprise to handle the assets of the failed
savings banks. In the end, most assets were sold well below market
value, and the bail-out cost the taxpayers more.

The history of management of the national forests is replete with
timber being sold below market value. On top of that, we build the
roads for the companies doing the logging. The least we can do
when we sell assets is to get a fair price for it. Determining when
to sell an asset is as important as deciding whether or not to sell.
We could sell the national helium reserves today, but the results
would be to depress the price of helium and decrease the savings
to the taxpayers.

We cannot let privatization become another trough of corporate
welfare. But to avoid that, we must scrutinize the process very
carefully. First, we must have sound information on what is to be
privatized and why. That information should include an estimate
of what savings could be realized by improving the management of
the service within the government.

Second, we must insist on sound contracts that incorporate in-
centives for cost savings as well as severe penalties for failure to
perform. Finally, in those situations where we do privatize govern-


69

services, the truth is that the artificially limited debate around privatization has
rarely allowed for realistic competition to take place.

It is my hope that this hearing will begin to correct that deficiency.

Mr. Horn. I thought you had a beautiful sentence in here, where
you said, “As long as workers are treated as costs to be controlled,
not investments to be developed, we will never reach the economy’s
full potential.”

Mr. ALBANO. That’s true.

Mr. Horn. That's something with which I agreed. Mr. Concklin,
welcome. Mr. Concklin is the president of the Professional Services
Council.

Mr. CoNCKLIN. Thank you very much. Is this on?

Mr. Horn. It should be, pull it a little closer to you. That’s usu-
ally the problem.

Mr. CONCKLIN. All right, how’s that?

Mr. Horn. And I wish you'd explain, as you do in your opening
paragraph, the Professional Services Council and its role.

Mr. CONCKLIN. Thank you, Mr. Chairman, and members of the
panel. We appreciate very much the opportunity to be here today
to express our views on privatization. The Professional Services
Council is a trade association, a creature in the Washington milieu
that numbers along with three or four other thousand similar orga-
nizations. We are basically a policy voice and an advocate on behalf
of the high technology, knowledge based services sector of the Unit-
ed States.

We have approximately 140 members, representing somewhere
in the vicinity of 350,000 employees, and do an estimated $25 bil-
lion worth of business. A substantial part of that business, histori-
cally and through the moment, is with the public sector, the Fed-
eral Government. An increasing share is represented by inter-
national business, both with public and private sector international
sources, as well as commercial business.

The products, if you will, that we supply as a services purveyor
are problem solving techniques which literally span the spectrum
of government. We do health research. We do education program
development. We are heavily involved, and have been historically,
in defense, space, environment, energy and virtually any area of
government. I might say at this point, and this is a somewhat sub-
tle underlying phenomenon.

The Federal Government buys about $70 billion worth of services
each year. And conservatively, 25 to perhaps 35 percent of that $70
billion is privatization or what you might call de facto privatiza-
tion; meaning the U.S. Government, over the last 30 years, has
contracted out functions on a continuous basis, such as the oper-
ation of computer facilities, the operation of test ranges for missiles
and space equipment and other high-tech type systems, and many
other examples, which we’d be happy to submit for the record.

Td just like to make a sidebar comment that I hadn’t planned to
make. But there’s been some suggestion in some of the statements
by previous witnesses having to do with quality or functions that
are critical to human life or critical in the case of fast response to
disasters. The company that I worked for for 11 years, a well-
known services company, designed and supervised’ the assembly


24

The decision as to what to privatize then becomes a financial one of comparing
the annual savings in cost that could be made against the initial costs of privatiza-
tion. Any fonction with a postive net present value should be privatized.

One of the problems with this analysis isthe ability to gather meaningful internal
cost data with which to compare performance with the private sector. Most agencies
account for expenses on an obligation rather than a direct cost basis.

In a time when agencies’ budgets are decreasing the revenue or cost data will
typically be higher than obligation data, In order to make a meaningful benchmark
against the private sector cost data must be used. When such data is not available
difficulties occur with the analysis and assumptions have to be made to crosswalk
between the two sets of data

TAKE TIME TO MAKE THE RIGHT DECISION

One of the most significant pitfalls that legislators can fall into is trying to drive
the process too fast. The failure to take sufficient time to ensure that the nght deci-
sion is made, can have disastrous results on performance and quality leading in the
Jong run to increases in cost.

‘or agencies looking to contract out or sell functions to private sector, the need
to ensure the right decision is made and that privatization is not enacted for privat-
ization sake is equally important.

Equally important is the need to ensure that all the costs of privatization have
been considered and accounted for in the decision making process, In addition to the
usual financial costs there are significant costs that can be incurred with regard to
personnel.

HUMAN RESOURCES

The impact of privatization on human resources and how it is treated is a major
factor behind the success of privatizations in the past. The benefits of privatization
will be lost if government or management fail to make some of the difficult decisions
concerning (Full Time Equivalents).

If the employees believe that management is at least considering their interests,
then they will “buy in” to the process to a greater extent which in turn ensures that
the privatization has a greater chance for success.

The other important consideration is the need to identify the true costs of privat-
ization.

Under current legislation any plan to outsource or privatize a fuaction of a gov-
ernment agency will result in the need for a Reduction In Force (“RIF”). This proc-
ess can only be avoided if legislation is passed amending the statute or if the condi-
tions that lead to a RIF are not met.

Unless employees can be given incentives to transfer to the private sector and
those who do not can be relocated within government a RIF cannot be avoided with-
out a change in legislation.

A key element of the RIF process in relation to the categories is the determination
of competitive areas. A competitive area defines the geographic boundaries of the
RIF. In many agencies, competitive areas are currently based on services and are
invariably different to the components of a privatization program.

In some cases the privatization analysis will be dependent upon the ability of the
business line to select those employees within the business line who will be required
as part of the continuing oversight operation. Under current law, the option selected
may require a RIF. Such a RIF may frustrate agency management's ability to as-
sure that critical employees experienced in a business line remain to perform the
function. The potential savings may then be lost, unless a RIF can be avoided.

In the case of USEC, the combination of sufficient vacancies in the government
corporation, voluntary employee movement, and an option to detail employees from
(and return them to) the parent agency (DoE) removed the need to have a RIF.

Employces, particularly those with a high seniority, those close to retirement and
long serving employees will receive a significant benefit package, and will be reluc-
tant to transfer due to the loss of these benefits and the lack of portability of the
Federal pension scheme CSRS (Civil Service Retirement System). The private sector
is unlikely to be willing to provide make up packages and so the government must
make the payments necessary to ensure sufficient numbers transfer.

If an insufficient number transfer then the agency will be left with large numbers
of staff who will require relocation within the agency which reduces the savings
from privatization. Since the cost of the contract remains the same the net effect
is that the privatization decision may not create real savings to government.


10

they make a printed copy of the document they just put in the elec-
tronic section—you're nodding your head yes over here—at which
point, then, the hard copy goes over to the Government Printing
Office, where they then Pave to retype it and enter it again elec-
tronically into a system.

I think we can, obviously, and we'll have to streamline that, so
that when this young woman or any clerk goes upstairs and tran-
scribes it, that immediately that document is sent electronically, as
the Wall Street Journal would do. We’re part of the Government
Printing Office’s problem, Congress itself is. The second part of
that equation is, all of the incentives are wrong in the system right
now.

If you look at the Government Printing Office, one reason it’s so
extraordinarily expensive is, so many documents are printed in the
evenings and printed on weekends, when it’s a crisis. With all due
respect to our current profession, I find it hard to believe that
much the government needs to do is done at a crisis period. And
if we could figure out a way to really make agencies understand
what it costs them to have it printed on weekends and on overtime,
and made them do it in the private sector, and actually made them
account for the budgeting costs, I would suspect many more docu-
ments would not be a crisis, would not be an emergency, and in-
stead, could be done at 10 o’clock on a Wednesday morning at a
private printing plant, which is much more cost effective.

Mr. Horn. I thank you. As usual, your testimony is succinct and
filled with a lot of wisdom. And I am hopeful this committee—we'll
probably need 15 references to other committees—can get. rid of
those bans and prohibitions on studying these issues.

Mr. Kuuc. Thank you very much.

Mr. Horn. We should be beyond that stage. Thank you. We ap-
preciate your testimony. Mayor Bernardi, you're on.

[The prepared statement of Hon. Scott Klug follows:}

PREPARED STATEMENT OF Hon. Scott KLUG, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF WISCONSIN

The federal government has many opportunities for privatization today. Many of
the assets and functions performed by the government. duplicate what is already
provided by the private sector. I don’t think the federal government should be com-
peting with private businesses. We can’t afford it, It is generally estimated that the
ernment would save approximately 20% by privatizing many of its functions.
Fhrough privatization, the iederal government has the opportunity:
to balance the budget
to downsize the government
to make sure the taxpayers receive the full return for their investments
to help competition in the free market.
Privatization can be implemented through three categories:
Asset Sales or Leases
Contracting Out
Functional Conversion .
I strongly believe, however, that in order to use the above options, various barriers
to privatization must be lifted first.

PRIVATIZATION: ASSETS SALES OR LEASES

Since my appointment as “Privatization Point-Man” by the Speaker, my office has
been ‘approached by a number of people from the private sector who have an inter-
est in investing in federal government assets ranging from the hydroelectric facili-
ties under the U.S. Army Corps of Engineers and the Department of Interior Bu-
reau of Reclamation to the Naval Petroleum Reserves under the Department of En-

ergy.


2.

29

PREPARING THE BUSINESS FOR SALE

Initial steps

21.

rey
v

The scope and nature of the function to be privatised needs to be clearly
identified. In some cases, Ministers may decide that pans of an activity
should remain in Goverment control for operational, statutory or market
reasons. In such circumstances it may be necessary to restructure the activity.
Departments and agencies should consult staff and recognised trade unions
about the implications of any decision to retain in part, or restructure,
government activines

It may be desirable to sell the business as a single entity; or it may be split
up and parts sold individually. The decision will be determined by factors
such as the size and character of the business; the way it is structured; its
lukely commercial attractiveness; th. need to ensure or create a competitive
market post-sale; and which route is likely to maximise potential sale
proceeds.

Retore an activity can he privatised, itis desirable for it to be given as much
commercial exposure as is practicable and to develop a commercial rack
record. Accounting and commercial deficiencies may need to be remedied.
In particular:

«commercial skills and expertise might be injected inta the hnsiness, eg
by empinying accounting. marketing and contract specialists:

+ munning costs status might be changed from gross to net control, possibly
as a stepping stone to cading fund status or the business being run as a
Government owned Companies Act company (GOCO). It might
alternatively be converted directly to a trading fund or aGOCO. Various
conditions have to be met, including complying with the 1942 PAC:
Concordat which constrains depanmenis” abilities in own and run
companies other than for bnef periods. Any change in status has to be
approved by the Treasury:

» intra-Government trading relationships should be established on an
arms-length basis, with documentation that can easily be converted into
acontractual form which becomes legally binding at the point of sale (see
CUP Guidance Note 42, “Contracting tor the Provisian of Services”, for
information about the standard terms and conditions that might apply in
contracts for the provision of services);

* financial and other performance targets should be established;
+ accruals based accounts should be introduced;

+ the business” elicut base might be capanded iv inerease its chance of
sucess in the private sector and its valuc as a going concern.


98

used this federal government property to perform commercial work unrelated to the
contract: In addition, according to the report, some of that property had even been
sold back to the government. Last year, GAO reported that almost $75 million of
government property had been lost by a single contractor at just one Department
of Energy (DoE) facility. Even worse, that $75 million figure is only the proverbial
tip of the iceberg. As GAO reports, “this amount represents only what the contractor
reported to DoE as missing. We believe that figure probably understates the actual
amount of missing property, particularly in light of our detailed review of property
management at the (facility).”1 Where are Rush Limbaugh and the rest of the
radio shock show hosts when you really need them?

There were several references during the hearing to “barriers” to contracting-out/
privatization. As the evidence reviewed earlier in this letter suggests, it might be
more accurate to refer to the provisions in question as “safeguards.” Unfortunately,
none of the hearing’s participants mentioned the costliest “barrier” of all to cost-effi-
cient service delivery: agency personnel ceilings,

‘As OMB reported, several agencies—including the Departments of Agriculture,
Health & Human Services, Housing & Urban Development, State, Education, and
‘Treasury, as well as the Environmental Protection Agency—said that they each
could have saved several million dollars by performing functions directly rather
than having them performed by contractors but did not do so because either their
requests to OMB to take on the necessary full-time employees (FTEs) were refused
or the agencies were so sure such requests would be turned down that they were
not even submitted.!® In other words, even when it’s been shown that it would save
money for the taxpayers by keeping services in-house, the arbitrary personnel ceil-
ings force agencies to waste money on inefficient service contractors.

Incidentally, federal employees do not fear competition with service contractors.
What federal employees fear is rules that are increasingly crafted in such a way
that fair competition js impossible—a pernicious phenomenon exemplified to chilling
perfection by the FTE ceilings. Our hearty embrace of competition distinguishes fed-
eral employees from service contractors. You'll notice that the Professional Services
Council, in its testimony, pleaded with Members of the Subcommittee, time and
time again, to spare service contractors from the rigors of competition with the pub-
Tic sector.17)

If Members of the Subcommittee really want to eliminate barriers to the delivery
of cost-efficient services to the American people, then it should work to lift agencies’
in-house personnel ceilings. Congress can continue to cut the jobs of federal employ-
ees, and make it necessary for agencies to contract out in order for the work to
done. However, as the OMB report indicates, this sort of “down-sizing” is actually
leading to significant increases in federal spending.

In light of the foregoing evidence, it appears that the Subcommittee should broad-
en the scope of its inquiry to include several important issues:

Considering the Tong trail of damning ‘audit, broken premises, and busted
budgets, how is it possible that a mania is sweeping Capitol Hill that causes Mem-
bers of Congress to consider substantial increases in contracting-out and privatiza-
tion? In other words, shouldn’t Congress, instead of looking for new ways to con-
tract-out and privatize, be concentrating more of its attention on bringing work that
had been given away to private sector operators back in-house where it can be per-
formed by reliable, experienced, and cost-efficient federal employees?

—Shouldn’t the Subcommittee take a long, hard look at how service contractors
have performed—or, more accurately, how they have failed to perform—before
spending even more money on service contracting, already the biggest part of fed-

General Accounting Office, “Managing DOB: Government Property Worth Millions of Dol-
Jang Te Missing” (GAO/E-RCED-94-308) (September 1994).
id., p. 2.
asOnice of Management and Budget, Ibid. “Agencies often assume that additional personnel

will not be authorized and, therefore, there is no alternative but to contract for needed services.
Several agencies requested that they be given more flexibility with respect to determining
whether work should be performed by agency or contractor staff. Examples were reported where
the government (based on the agencies’ projections) could save several millions of dollars by per-
forming functions directly rather than having them performed by contract.” In the report's Ap-
pendix 2, p. 30, OMB reported that it was the consensus of agencies it surveyed that “OMB
Reeds to’ review the cost-effectivencsa of bringing contracted work in-house when there uren’t
sufficient Full-Time Equivalents (FTEs) to perform the work. More flexibility with the budget
limitation on FTEs is necessary when it can be demonstrated through studies that it would be
less expensive to perform the work in-house but governmental personnel ceilings prevent that

decision.”
17Some examples: “Avoidi Competition Between the Public and Private Sector”
Private Competition” (page 6), “Prohibit Public-Private

U:
(page 6), “Special Problem of’ Publi
Competition” (page 7).


91

And it was easier to do it and to set up a new regulatory frame-
work in that case to allow for the charges for water to increase over
time.

Mr. Horn. With reference to the Executive order that you men-
tioned, suppose a municipality built with a Federal grant a very at-
tractive, up-to-date wastewater treatment plant for $10 million,
and then it sold it the next year.

Should Congress adopt some sort of prohibition against this type
of churning or the immediate reselling of a federally funded infra-
structure project? What’s your feeling on that?

Mr. CorRELL. The question regarding whether or not they should
allow an immediate sale?

Mr. Horn. Permit an immediate sale. Some people say, “Hey,
why don’t you depreciate that and not stick them for the entire $10
bil ion? But after 15, 20 years, maybe it’s worth about 3 or 4 mil-

ion.”

Mr. Corre. I think in the—I can’t speak for airports or some
of the other broader-scale privatizations. I think in the case of
water or wastewater, particularly, if there were a plant that were
built within the last 2 to 3 years, the motivation for privatization
would probably be far less than it is today.

Chances are that if they have built a plant in the last several
years, it’s up to the current requirements of the Clean Water Act,
and there is not the same motivation to sell an asset, if you will.

Mr. Horn. The gentleman from Pennsylvania.

Mr. Mascara. Thank you, Mr. Chairman.

Mr. Stanley, I missed a little bit of your testimony, but I do have
a copy of it in front of me, and there’s some interesting comments
there that you and I would have mutual agreement on.

As a former chairman of the Southwestern Pennsylvania Re-

ional Planning Commission and its chairman for the Plan Policy

‘ommittee, which implemented the 1991 ISTEA and the 1990
Clean Air Act amendments, which were companion bills, there’s
supposed to be as a result of the gasoline taxes—and I understand
a penny generates somewhere around $1 billion—that somehow
over the life of the current ISTEA, that we would generate some-
where in the neighborhood of $157 billion, and specifically, Penn-
sylvania should recover about $9 billion of those dollars.

I was just wondering whether you had given some thought in ad-
dition to—and I agree about the tolling. I think under the Eisen-
hower administration, which founded the Federal Highway Act and
built some 40,000 miles of highways across this country, that some-
how, ISTEA is different now because of the Clean Air Act amend-
ments?

But couldn’t some of this money be used for programs as regards
to new highways and infrastructure development, coupled with the
bridge program in this country?

Mr. STANLEY. I agree totally. And one thing I want to emphasize,
there is a lot of capital. Our companies and these funds, the-s's a
lot of capital to be invested in infrastructure. But the introduction
of private capital isn’t a substitute for the funds that are being gen-
erated under ISTEA.

I would say, though, that the flexibility to allow user fees or user
charges to repair, rehabilitate, or build new facilities is critical. As


11

Privatization through assets sales or leases would allow the government to not
only save money by eliminating these assets from the budget, but also be a source
of revenue to reduce the deficit. Asset sales or leasing has generally been done
through a bidding process. By working with the private sector, the federal govern-
ment can ensure that the taxpayers will receive the maximum amount for their in-
vestment.

PRIVATIZATION: CONTRACTING OUT.

The federal government provides many services which can be easily contracted
out. From haircuts on Capitol Hill to debt collection, to government printing, we all
know that these services exist in the private industry. Many of these private busi-
nesses would like the opportunity to work with the federal government in a partner-
ship. There is no reason to continue to have a barber on the federal payroll or to
expand an already bloated staffs to perform these services. It simply makes no sense
when private businesses provide these services at a cheaper costs and with more
efficiency. By contracting out, the federal government would save taxpayer money
and encourage competition in the private sector.

PRIVATIZATION: FUNCTIONAL CONVERSIONS,

Agencies and functions which fall under the category of functional conversion be-
cause they would neither sell asscts or contracted out. These functions are identical
to what private industries offer and should be eliminated from the federal budget
by turning them over to the private sector. Functional conversions would include
certain functions within the National Weather Service, federal loan programs and
government sponsored enterprises.

For example, government sponsored enterprises are privately owned and oper-
ated, but are exempt from most, but not all, laws and regulations applicable to fed-
eral agencies and to similar private enterprises. As for federal loan programs, the
government should sell these loans to private markets and purchase private reinsur-
ance for loan guarantees. Federal agencies administering these loans have inad-
equate collection efforts, poorly managed loan programs, and improper accounting
procedures.

PRIVATIZATION: BARRIERS

Many of the obstacles Congress faces in privatization initiatives are not only from
those who oppose privatizing various government entities. These obstacles were
placed by the federal government. Lifting these barriers is a key first step to carry-
ing out and, in some cases, simply looking into the possibilities for privatization.

DEPARTMENT OF AGRICULTURE

The Farmers Home Administration, Agricultural Stabilization and Conservation
Service, and the Soil Conservation Service are required to keep minimum employ-
ment levels.

The Farmers Home Administration is prohibited from contracting out with private
debt collection firms to collect delinquent payments.

DEPARTMENT OF DEFENSE

Army depots have a minimum civilian employment level requirement.
The Department of Defense is prohibited from contracting out security and fire-
fighting services.

DEPARTMENT OF ENERGY

The Department of Energy is prohibited from studying the sale the Power Mar-
keting Administration, except Alaska. [The prohibition applies to the Tennessee Val-
ley Authority (TVA) which is not under the Department of Energy]

GOVERNMENT PRINTING OFFICE

No appropriated funds are allowed to be used by the Executive Branch for the
procurement from commercial sources of any printing related production of Govern-
ment publications.

DEPARTMENT OF HOUSE AND URBAN DEVELOPMENT
The Public and Indian House Program hax minimum employment levels.


97

loyees that makes up anywhere from one-third to one-half of its entire workforce?
i very much doubt it.

Are the taxpayers well-seryed by this explosive growth in service contracting? A
mountain of evidence stacked up in one damning General Accounting Office (GAO)
report after another indicates that the answer is “No!” Only last year, GAO sur-
veyed nine studies on service contracting and found that in each case savings, often
substantial, could have been realized if the work had been done in-house.

Why has service contracting been consistently found to be so inefficient? Limita-
tions of space make it impossible to spotlight each and every reason, but permit me
to list a few:

1. Statements of Work, the forms used to describe specifically the services to be
contractually procured, are so poorly-written that competition is limited and per-
formance cannot be measured.*

2. Cost comparison requirements are often ignored. As OMB has reported, cost
analyses and independent government estimates are not performed by many agen-
cies prior to renewal, extension, or recompetition of existing contracts.® And in far
too many instances, OMB must admit, cost estimates are not even prepared prior
to entering into new contracts.

3. Contract administration is almost non-existent. As OMB reported, agencies be-
lieve that they are contracting for mission-essential services; as a result, most of
their contract administration efforts focus on ensuring that they ehase the re-
quired services with costs often becoming a peripheral concern. Th addition, most
contract administration is not done by contracting officers who are skilled in deter-
mining whether the service was actually rendered for the price specified in the con-
tract, but rather by program officers, who are merely determined to have the service
rendered, regardless of cost.

4. Contractors have no incentives to provide quality service for the lowest cost
under the current payment system. As GAO reported, widely-used cost-reimbursable
contracts, which reimburse contractors for all allowable costs incurred, “provide con-
tractors with little incentive to control expenses and place a considerable adminis-
trative burden on the federal government to oversee, control, and identify inappro-
priate costs.”® Further, agencies do not always review the effectiveness and effi-
ciency of the services performed by contractors prior to the issuance of payments.1°
If you had a $105 billion bill, I think you'd check to see if the work was done cor-
rectly. So why doesn’t the federal government?

5. Agencies fail to properly audit the work of their contractors. As GAO reports,
“(independent audits show millions of dollars in unallowable costs and questionable
costs have been charged that do not contribute directly to the agency’s intended mis-
sion.!! During just a six-month period in FY 93, defense contractors returned to the
government $751 million, and in FY 94, they returned $957 million, most of which
appears to have been overpayments that were detected by service contractors.12 If
those gigantic sums are being returned, would it be too cynical to ask just how much
is being kept?

6. Contractors are allowed to steal from the American taxpayers. I know “steal”
sounds harsh, but, unfortunately, it’s the right word to use. Several years ago, the
House Committce on Government Operations reported that more than $40 billion
worth of materials and equipment purchased by the federal government for use by
contractors in the performance of their services was still in the possession of those
contractors.!9 The report noted that, in many cases, contractors had improperly

3General Accounting Office, “Government Contractors: Measuring Costs of Service Contrac-
tors Versus Federal Employees” (GAO/GGD-94-95) (March 1994).

*Office of Management and Budget, Ibid. The report noted that “(the statements-of-work
used to describe the specific tasks or services to be procured by contract are frequently eo broad
and imprecise that vendors are unable to determine the agency's requirements. As a result, com-
petition is limited and performance cannot be assessed.”

id.

8 Ibid.
faribid- “Contracting personnel concentrate on the award of contracts and the obligation of
funds.

Ibid. “Contract administration, particularly in most civilian agencies, is conducted by agency
program staff and not by contracts personnel. “he program staffs are’often ill-trained in con-
tract administration.”

®General Accounting Office, “Federal Contracting: Cost Effective Contract Management Re-
quires Sustained Commitment” (GAO/T-RCED-93-2) (December 1992), p. 3.

29 Office of Management. and Budget, Ibid.

11General Accounting Office, Ibid, p. 11.

22 General Accounting Office, “Defense Contract Management” (February 1995), p. 6.

23 House Report 99-139 (May 21, 1985).



65

vided. And that can’t be done unless workers are properly man-
aged. And what has saved Japan—and what I really foster with a

eat deal of enthusiasm in every opportunity that I have when I
deal with management—is to put forward the Dr. Deming’s prin-
ciples.

Go to the people who are doing the job. They will provide you
with the most efficient ability and. the ways of delivering the serv-
ice. But there is also, I believe, a requirement on the part of gov-
ernment that they are provided with the training, with career ad-
vancement. And that dedication pays off. They need to have jobs
which are challenging. They have to have fair salaries and benefits.

And when you have a dedicated employee, that to me is the most
substantial product in this country, and the most successful re-
source that we have to call on. Now, I am not against privatization,
per se. It’s the manner in which it is put forward, and was stressed

well by several of the gentlemen before. It has to be very care-
fully studied. But the method of awarding it, unfortunately, in New
York City, usually is done on the basis of patronage.

And what occurs there is you do not get the best consultant, the
design, and the engineering or architectural work. They do not put
on their best people. The work is not as good, and the attention to
the city is not as devoted as the in-house staff. And invariably, as
stated in my testimony, the work performed in-house is superior in
a number of ways.

First, since the work is repetitive in a sense—I came from one
of those agencies, the Board of Education, we designed schools. So
after the first school, I designed another school. And I can honestly
say, because of the repetition, I was able to say that second school
was better, the third school was better. The consultant who comes
in to do the design work doesn’t necessarily have the chance to do
repeat work, nor has a staff that might practically stay on and con-
tinue in that area of expertise. They're required to do a greater va-
riety of work.

So I’m speaking to the area in which I have the most under-
standing. You have, within any job, a process. And you need that
accountability, that even if the job is contracted out, if the in-house
staff doesn’t have the understanding or the ability to know what
they are reviewing, then that job fails, because the best product is
not being put forward.

It has to be that the owner being represented provides the speci-
fications and the job estimates and preliminary drawings in such
a good fashion so that if you are to transfer that work over to the
private consultant, there is a good guide. And the only way that
can be done also, is that sufficient work is maintained in-house, so
that that training is there and that accountability is maintained.

So you have to have the professionals, as I represent, work that’s
interesting, that provides them a background so that when work is
privatized, they know what to look for, they know how to guide.

id in many areas, in jobs that have been done, the consultants
really look to the city personnel to help them, because they under-
stand they have expertise that the private firms don’t have.

Mr. Horn. Pursue that, our time is limited.

Mr. ALBANO. I'd just like to make one last statement, if I may.

Mr. Horn. Fine.


71

A second is an implementing mechanism that would have to be
a high order, compelling and forceful mechanism. We do not have
an answer for you today in design terms. Certainly, what has been
done in the DOD sphere with the Base Realignment and Closing
Commission provides a model that has worked fairly well—not per-
fectly, but well. And finally, we think a judicious use of further tar-

ets and ceilings on the civil service population, carefully ramped

lown over time, with a requirement on the part of all Federal
agencies to set forth viable, sensible, early targets for privatization
will be in everybody’s best interest.

And last—and this is somewhat in contradiction to some of the
previous witnesses—we would respectively suggest that. you go very
slow in terms of head-to-head public private competition. That can
have many side effects and inequitable; uneven playing field rami-
fications, in our view.

[The prepared statement of Mr. Concklin follows:]

PREPARED STATEMENT OF Bert M. CoNcKLIN, PRESIDENT, PROFESSIONAL SERVICES,
UNCIL

Good afternoon Mr. Chairman. On behalf of the Professional Services Council
(PSC), I want to thank you for the opportunity to present the PSC’s views on privat-
ization.

PSC is a national trade association representing the fastest. growing sector of our
nation’s economy—the professional and technical services industry. One of PSC’s
primary objectives is to improve the process by which the professional and technical
services firms contract with the federal government. Our sector’s products are ideas
and problem-solving techniques—primarily the applications of professional, expert
and specialized knowledge to assist government and private-sector clients in solving
operational, technical and management problems. PSC members include firms pro-
viding services to the government in the areas of defense, space, environment, en-
ergy, education, health, international development and others. Members use re-
search and development, information technology, program design, analysis and eval-
uation, and social sciences tools in assisting the government to carry out its pro-
grams.

The PSC views the current privatization debate and the leadership, which you
have assumed, as a watershed event for all parties who believe that the federal gov-
ernment can be profoundly more effective and responsive through innovative strate-
gies such as privatization. At the most fundamental level, privatization offers dis-
tinctive benefits to the American citizens and the federal government:

(1) Rightsizing the Federal Workforce. The size of the permanent government
workforce can be reduced with improvements in the delivery of service:

(2) Achieving Economic Efficiency. Significant economic benefits will accrue
through intelligent use of competitive procurement procedures to engage private-sec-
tor organizations in place of in-house government organizations; and

(3) Improving Federal Management Reform. Federal policy and operational activi-
ties will become more focused and effective as the federal government shifts more
to the “steering” role and assigns more of the “rowing” to the private sector.

In moving to embrace privatization, we believe that it is very important to keep
foremost in our minds certain qualifications. First, privatization is not a stand-alone
solution. It will require alterations in culture, infrastructure and tools to be success-
ful. Second, contracting out is the most immediate high payoff option for implement-
ing an effective privatization strategy. Other more exotic schemes such as public
corporations, “franchising,” and civil-service employee buyouts all entail signifi-
cantly higher riska and degrees of continued government underwriting or subsidiza-
tion of markets and operating budgets (e.g., Postal Service, Amtrak).

We will address the following related topics in our remarks today:

« Balancing the Use of Public and Private Resources

. ization Legacy 1980-1995,

+ Broad-Based Capabilities of Private Sector-Services
* Key Issues

» Recommendations

Government's Privat



16

development in Washington County, and the importance of safety
a our airport and other matters, as I’m sure you're concerned
about.

My question is concerning the McIntosh bill and relieving the re-
payment of Federal grants when selling and leasing these facilities.
Isn’t that some kind of form of corporate subsidy to the private sec-
tor? I would have a serious problem with that. I mean, Pinow your
plight as a city mayor, but isn’t it sort of an oxymoron to, on the
one hand, talk about the problems associated with the Federal defi-
cit, and then to come back and say, well, we want the Federal Gov-
ernment to forgive these grants?

And that’s not only for Syracuse, it’s for the entire country. Does
anybody have any numbers—in your case, do you have any num-
bers in your city, what it would cost the Federal Government if we
were to forgive these grants? Because I'll tell you right now, my
county commissioners back in Washington County would be cele-
brating at the thought of perhaps they would not have to repay if
they sold that to a private group.

Mr. BERNARDI. I believe it’s in the $60 million range. And you're
right. However, as I understand it, with the cuts that are coming,
there’s going to be less funding available for airport improvement
projects in the future; at least, I would assume so. And we will not.
be able to continue to make the necessary improvements and de-
velop the economic climate that we’d like, based on the fact that
the Federal Government, I believe, is going to provide less and less

lollars.

So as an incentive, if you will, for the municipality, the city of
Syracuse, other cities, to involve the private sector, I think that
kind of an incentive, if you will, is a—money has been spent by the
Federal Government in so many different ways, not repaying a
grant, I think, is a—obviously you'd like to have all the money back
that you’ve put into a particular project.

But in this case, in these cases, I feel very strongly that that
would provide us with the necessary incentive to attract the private
sector to do many varied other things at an airport that we pres-
ently can’t do because of that restriction.

ir. Horn. If I can follow up on that for a second, it is a grant,
not a loan, from the Federal Government. So in any case, it does
not get repaid to the Federal Government. It is given to the mu-
nicipality or the county or the special district, whatever, to improve
the airport as sort of the beneficence of the Department of Trans-
portation and the Federal Government.

So there’s no money coming back now, and if you provided that
the depreciated amount would have to come back, you'd be ahead
of where we are now. Am I wrong on that?

Mr. BERNARDI. No, you're correct. The Executive order by Presi-
dent Bush in 1992, it first stated that State and local governments
receive their full, unadjusted portion of the project’s cost, and then
second, the Federal Government is repaid the amount of Federal
grant awards, less accumulated depreciations. So indeed, they are

‘ants.
our. Mascara. Mr. Chairman, my——

Mr. Horn. If you'll excuse me a minute, without objection, at this
point in the hearing, we will put in Executive Order 12803, Infra-


99

eral procurement and one of the fastest-growing expenses in the entire federal budg-
et?

—Shouldn’t Congress reform service contracting practices that have been proven
to result in unconscionable amounts of waste, fraud, and abuse by private sector op-
erators?

—let’s take a closer look at DoE where service contracting has been allowed to
run amok—partly as a result of the FTE ceiling which the agency admits has in-
spired much wasteful service contracting. In 93, almost four-fifths of Dok’s $24
billion budget went towards paying off service contractors.1® Almost $11 billion was
used to provide compensation br the service contracting workforce.19 DoE’s federal
employees received slightly more than $1 billion in salaries and wages.?° As one
Dok official said, “Basically, we've concluded that our analysis shows that the only
way of making a significant dent in DoE’s budget will be to require substantial re-
ductions in contract personnel.”#! To the agency's credit Secretary Hazel O'Leary
and her staff are seriously attempting contracting reform. And they've found that
no elaborate schemes or sttategics are necessary. They merely hinted to Do's serv.
ice contractors that their contracts would no longer be reflexively renewed. The re-
sults? Service contractors offered to reduce their billion dollar bills by 15% to 20%.22
If taking the first step towards real service contracting reform is that easy, why is
Congress sitting by idly while service contractors “working” for other departments
continue to conduct business as usual, taking the taxpayers to the cleaners time and
time again?

If Members of the Subcommittee are genuinely interested in saving money for the
taxpayers and improving services, I urge them to support a 10% reduction in the
federal government's service contracting expenses. Such an initiative will save the
American people $50 billion over five years, but without adversely affecting the per-
formance of service contractors.

—Considering that agencies are having to resort to service contracting that has
been proven to be cost-inefficient because of in-house staff shortages, shouldn't the
Subcommittee support a revisiting of the whole issue of using arbitrary FTE ceilings
to down-size the federal workforce?

—In the pitched, partisan battles taking place these days in our Nation’s Capitol,
there are few public policy objectives that unite Americans on the right, middle, an
left segments of the political spectrum. One such objective that is gathering increa
ing bipartisan support is the need to abolish corporate welfare. Last week, the lil
ertarian Cato Institute, the moderate Democratic Leadership Council, and Secretary
of Labor Robert Reich held an extraordinary joint media conference to press Con-
gressional lawmakers like yourself to take a long, hard look at costly taxpayer sub-
sidies to politically well-connected businesses.

Corporate welfare—estimated by the Cato Institute to be more than $86 billion
per year and by the Democratic Leadership Council to be almost $265 billion annu-
ally—includes a wide variety of ingenious but completely taxpayer-subsidized give-
aways, everything from income tax exemptions worth more than $18 billion over
five years for firms doing business outside of the U.S. to subsidies for ski resorts
and casinos in some of America’s toniest towns. But, as “The New York Times”
pointed out, “little is being done to curb (corporate welfare) practices.” Why, one
might ask. “Many of them are popular with politically influential businesses and
other groups that are heavy contributors to ‘both Republicans and Democrats.”

’s members draw two lessons from this corporate welfare scandal. First, the
taxpayers, whose backs are already straining from having to support “politically in-
fluential businesses and other groups that are heavy (campaign) contributors”
should not now be required to take on the additional burden of propping up an army
of service contractors that possesses connections and influence, but, as the record
shows, offers little in the way of effectiveness and efficiency, Second, the Sub-
committee—which, in holding its recent hearing on contracting-out/privatization,

wlaside Energy/with Federal Lands (March 6, 1995), p. 2.

jd.

2 Ibid.

2 Mbid., p. 3.

2The mere prospect of competition at the Department of Energy has “already led some con-
tractors (o reduce costs by 15 percent to 20 percent.” (Imagine the savings that could be gen:
erated for the taxpayers if the federal government insisted that service contractors cut that
much waste, fraud, and abuse out of all their contracts!) “The success of the department's strat-
egy probably will not be known for some months . . . But Thomas P. Grumbly, the assistant
secretary for environmental restoration and waste management, said the ‘specter of competition’
has already led some contractors . . . to offer to reduce costa by 15 percent to 20 percent. ‘If
implied competition will do that, imagine what real competition will do, Grumbly gpipped." he
Washington Post, “Energy Dept. Plans Competition for Big Contracts” (July 7, 1994). p. A24.)



21

Privatization itself is merely the first step in the need to try to
create efficiencies within government. It is the way in which you
privatize companies which creates the efficiencies and the cost sav-
ings. A privatized company which is not forced to focus upon com-
petitive aims or is not forced, for one reason or another, to function
or to concentrate on trying to make its operations more efficient,
will not achieve the savings that government would like to see from
the privatization process.

The experience in the UK has been that privatized monopolies
only achieve savings in the long run when the regulation is set in
such a way that the privatized entities focus on trying to cut their
own costs internally. Many people will argue that given that, why
do we need to privatize any ings why can’t we focus on the
reinvention of government? One of the simple solutions to that is
that reinvention itself is merely a process which the private sector
is undertaking at the same time. And any private sector company
will seek to make itself more efficient and more cost effective every
year in order to keep pace with the competitive environment.

So at any one particular point in time, if the private sector is ca-
pable of doing something more efficiently than the government is,
then the reinvention process will not necessarily get you any fur-
ther forward because the private sector itself is undergoing the
same process, and in 12 months time, when you still compare the
situation, you could easily find that although the cost to govern-
ment has gone down, there is still a differential between the wa
in which government performs the functional service and the pri-
vate sector.

Some of the lessons learned, coming back to that, is that it’s very
important to take time to work out whether privatization is the
right option. Privatization for privatization’s sake does not nec-
essarily result in cost savings to government. Doing a clear analy-
sis and working out which method of operation, whether it be
reinvention or whether it be contracting out or whether it be a
straightforward sale in some form or other to the private sector,
will result in the best savings not only in the short term but also,
more importantly, in the long term.

The analysis was put earlier this afternoon about winning the
lottery. And I think one of the important considerations is whilst
receiving large sums of money when you sell a function to the pri-
vate sector is important in terms of seeking to reduce deficits, one
has to consider when one looks at whether it’s a monopoly or a
competitive environment the new company will face, is the actual
way in which the cost savings will be achieved versus the cost that
you actually sold that company for.

Regulation is fundamental to ensuring that where there isn’t ef-
fective competition in the private sector for the entity being trans-
ferred, that the cost savings are achieved. Another issue is whether
entities or functions of government services should be restructured
and given an opportunity to perform along the lines of the private
sector, prior to any privatization taking place.

To take an entity which is not focused upon cost, is not focused
upon revenues, and merely transferring it into the private sector
will not necessarily see the savings that the government is looking
for. In many cases it is necessary to restructure the entity prior to


50

cision makers must consider, in my judgment the response to one fundamental issue
overrides all the rest: f
Namely, is the transfer of control from the state to the private sector hi;
likely'to'énhance the efiieney of how the service ts dolifered or the product
is produced?

This is, of course, the economic justification for privatization; a rationale that is
based on the probability that state intervention and control reduces efficiency and
therefore is costly to the Public, relative to the private sector alternative. There is
now an overwhelming body of highly convincing empirical evidence from countries
around the world that:

- private ownership matters!
= competitive markets matter!

In most cases, we have learned from global experience—efficiency is enhanced
when at least one, and preferably both of these conditions are met. These are the
driving forces that propel interest in the privatization alternative to government
ownership and operations,

I would only add that the calculation of likely efficiency gains to be derived from
privatization is not always as straightforward as it may appear. It must be com-
prehensive, taking into consideration such factors as regulation (especially when
there is an absence of competition), public safety and other variables that are dif-
ficult to measure but vitally important to the ultimate cost/benefit calculation that
must be undertaken. There also is the cost of preparing and implementing the pri-
vatization transaction, which often can be substantial.

My second observation is that we should be clear about the meaning of this rather
ambiguous term, “privatization”. Privatization occurs when the operational and/or
the financial control of a service or productive asset passes from the state to the
private sector. In a pure sense, the outright sale of an asset to private investors,
as was the case in 1987 with Conrail and what currently is being considered for
the U.S. Enrichment Corporation, is the most clear-cut form of privatization. The
government completely divests itself of any future financial or operational control.

in the U.S. there are very few enterprises that lend themselves to this “pure” type
of privatization.

second type is the “contracting out” (“outsourcing”) of a service to the private
sector—everything from printing government documents, to road and public park
maintenance to administering federal prisons. Note, that with this method, there is
no ownership change. Only operational control is transferred from the state to pri-
vate contractors.

Finally there are the so-called BOTs—Build-Operate-Transfer schemes are used
increasingly around the world to transfer to the private sector the responsibility for
financing, building and operating Physical infrastructure projects, such as roads,
airports, electric generation plants and water treatment fe

e feature that each of these techniques has in common is private sector respon-
sibility replacing government as the operator and/or the owner of an asset, with an
explicit view that the facility will operate more efficiently. The operative term in all
cases is control—the complete absence of government intervention in the operation
of the service or production. Conversely, if government is not willing to forfeit con-
trol, privatization does not occur.

Finally, a few observations directed to policy makers about implementing privat-
ization programs, based on a decade of experience working with government leaders
in dozens of countries.

Privatization is first and foremost a political process—success depends ultimately
on public support for the goals and the process. If the public does not fully under-
stand the government’s objectives, they are likely to become skeptical quickly.

Political leaders from around the world have lost public support for privatization
by over promising and under performing, thereby eroding public support for the BON
ernment’s program. Mrs. Corizon Aquino, when she was. President of the Phil-
ippines, made a much publicized speech shortly after taking office promising to pri-
vatize Philippine Airlines, the nation’s flagship courier, in 90 days. The process took
more than five years.

And, more recently one so-called expert in this country projected revenues of $300
billion would be generated from privatization transactions in the U.S. Although the
figure may be correct in a theoretical sense, the likelihood that this sum will be gen-
erated in the foreseeable future, under the best of circumstances, is low to non-exist-
ent.

A second lesson learned from other country experiences, that is closely related to
the first, is that privatization is considerably more complex, time consuming and ex-
pensive to execute than most policy makers realize, and this complexity must be
taken into account when developing a privatization strategy. The tasks associated



95

and Urban Development just five years ago.! We must remember that it is U.S. tax-
payers who are paying the tab for the Savings and Loan fiasco. We must remember
these things so that when the claim is made that the private sector is inherently
more efficient than government and that it is in the nation’s best interest to pri-
vatize or contract out, we know “it ain't necessarily 80.”

It is true that public services are not always delivered by public employees and
public managers in the best or most efficient manner, but the notion that disman-
tling government is the necessary first step in correcting that problem is unaccept-
able, {f we are to reach our common goal of a government that works better at rea.
sonable cost less, the answer will lie not in abdicating our responsibilities through
privatization, but in meeting government's unique challenges head-on through new
partnerships between government agencies, employees and their unions. A new era
of labor-management relations is emerging as we draw closer to the 2ist century.
Based on innovative programs in both the private and public sector, many man-
agers, workers and their unions are engaging in cooperative efforts to solve a wide
range of problems and improve the workplace, services and products.

CREATING HIGH PERFORMANCE WORKPLACES,

At the federal level, The National Partnership Council is making recommenda-
tions to promote the conversion of government from a top-down bureaucracy to a
high-performance, customer-driven organization. At the state and local levels, Sec-
retary of Labor Robert Reich has created the Task Force on Excellence in State and
Local Government Through Labor Management Cooperation for the same purpose.
The premise of a high formance workplace is a simple one—that employees know
more about their jobs than anyone else. Given the encouragement, opportunity, rec-
ognition and security, public employees are willing and eager to contribute ideas for
making their jobs more productive. However, in both the public and private sector,
when employees are not empowered, when they do not have the security of a collec:
tive bargaining agreement, when they are under constant threat that their jobs
could be given away at any point to the lowest bidder, when employers do not invest
in training or skills development, you will find little commitment to excellence. A
high skill, high performance workplace is not built on contingent, part time workers
earning poverty-level wages. Excellence depends on committed, career public em-
ployees.

is theme was taken up in 1992 by the Secretary’s Commission on Achieving
Necessary Skills (SCANS), headed by the Secretary of Labor Lynn Martin. In its
report, Government As A’ High Performance Employer, the commission reported
that “by moving to a high performance model of organization, government will be
better able to attract and keep quality workers.”2

SCANS found that “Employee involvement, empowerment, teamwork, and labor-
management cooperation are the engines that drive the entire system of high per-
formance. Improving work processes ‘and procedures will not be fully successful un-
less all employees are involved in making it happen. When the intelligence and en-
ergies of the entire work force are engaged in the pursuit of high performance goals,
the potential for successful and quality results is virtually limitless. It makes
sense—the workers that have to deal the problems every day usually have the
best solutions, and they have a vested interest in solving those problems to make
their work easier.”

The number one recommendation of SCANS for achievement of a high perform-
ance work place is the involvement of public employee unions in reform efforts. The
commission found, “With support, cooperation, and participation of employee unions
from the § start, an organization greatly increases the likelihood of success in its qual-
ity efforts.’

SCANS also found that governments at all level must make investment in the
training and development of their workforce a top priority, largely immune to budg-
etary cutbacks. The commission reported that “an pngoing: commitment must be
made to training the government workforce, especially the frontlines. Training and
development must be viewed as an investment in higher productivity and quality,
not as a cost to be controlled.”

In too many cases, savings from privatization have come from reducing worker
pay and benefits or the use of part time and temporary workers. Public employment
‘was once considered by many as a secure life time job where often that security was

_ 1 Schifrin, Matthew, “Come and Get It: In the Name of Privatization, The Government Depu-
tized over 60 Firms fo Issue Mortgages on Multi-family Rental Projects. le Another S&L-type
Mess in the Making?” Forbes, May 15, 1989

2U.S. Department of Labor, The Secretary's commission on Achieving Necessary Skills, Gov-
ernment As A High Performance Employer.


3.

33

THE SALE PROCESS

Appointment of privatisation advisers

3.1.

A range of advisers should be appointed by the department w assist with the
privatisation:

+ for public flotations, a city instiwution (eg a merchant Dank) needs to
sponsor the issuc. Legal and uiler specialist advice will also be needed;

+ for trade sales. a financial adviser will need to he appointed (this may be
the sume merchant bank or accountancy firm thar conducted the
feasibility study provided the department can achieve best value tor
money by such an appointment). Reporting accountants, property
valuers and legal adviseis arc also usually necessary. (See NIP(90)3
paragraphs 56-59 for further derails: the Treasury's PE3 division can
advise on the procedurcs for appointing advisers.)

The method of privatisation

3.2

3.3.

There are two main alternatives - public flotation or trade sale. Public
florations are very costly and are only appropnate tor large businesses, where
there is expected to be a wide range of institutional or public demand for
shares. The Treasury's PE3 division should be consulted for fuller guidance
on what is involved in a public flotation. Most departmental and agency
Privatisations are likely iv be wade sales. Trade sales usually involve a single
commercial purchase: 01 consui lium (where there are no competition policy
objections) but, in some cases, it may be appropriate w split the business into
components (eg regions} and scll cach one separately.

There are occasional examples where the particular circumstances of a
business means an alternative wcthud of cansfer to the private sector may be
appropriate. Possibilities include.

* transferring ownership to a university or other independent
organisation shrough a private sale. This would achieve less than a
standad wade sale in terms of introducting commercial disciplines and
freedoms and it way cutail a dowry. However it would secure a clean
break from Government and could enhance the output and quality of the
new organisation and improve staffs career opportunities.

+ privatisation as a company Slmited by guarantee. This involves
transferring the business 10 a company limited by guarantee which will
often be a non profit making budy. Ultimate contol is left with the
existing management tcam or with an independent body in the private
sector. There is no equity cupital. As with a trade sale, he company has
to provide what customers want to survive; butif it is not, and cannot be,
controlled by an organisation with a vested interest, customers may


Ay

structure Privatization, dated April 30, 1992, signed by the then-
President of the United States, George Bush.
[The material referred to follows:]

EXECUTIVE ORDER 12803 OF APRIL 30, 1992
INFRASTRUCTURE PRIVATIZATION

By the authority vested in me as President by the Constitution and the laws of the
ited States of America, and in order to ensure that the United States achieves
the most beneficial economic use of its resources, it is hereby ordered as follows:

Section 1. Definitions. For purposes of this order:
(a) “Privatization” means the disposition or transfer of an infrastructure asset,
such as by sale or by long-term lease, from a State or local government to a private

arty.
PY) “Infrastructure asset” meang any asset financed in whole or in part by the
Federal Government and needed for the functioning of the economy. Examples of
such assets include, but are not limited to: roads, tunnels, bridges, electricity supply
facilities, mass transit, rail transportation, airports, ports, waterways, water supply
facilities, recycling and wastewater treatment facilities, solid waste disposal facili-
ties, housing, schools, prisons, and hospitals.

(c) “Originally authorized purposes” means the general objectives of the original
grant program; however, the term is not intended to include every condition re-
quired for a grantee to have obtained the original grant.

(d) “Transfer price” means: (i) the amount paid or to be paid by a private part;
for an infrastructure asset, if the asset is transferred as a result of competitive bid-
ding; or (ii) the appraised value of an infrastructure asset, as determined by the
head of the executive department or agency and the Director of the Office of Man-
agement and Budget, if the asset is not transferred as a result of competitive bid-

ing.

(e) “State and local governments” means the government of any State of the Unit-
ed States, the District of Columbia, any commonwealth, territory, or possession of
the United States, and any county, municipality, city, town, township, local public
authority, school district, special district, intrastate district, regional or interstate
governmental entity, council of governments, and any agency or instrumentality of
a local government, and any federally recognized Indian Tribe.

Sec. 2, Fundamental Principles. Executive departments and agencies shall be guided
by the following objectives and principles: (a) Adequate and well-maintained infra-
structure is critical to economic growth. Consistent with the principles of federalism
enumerated in Executive Order No. 12612, and in order to allow the private sector
to provide for infrastructure modernization and expansion, State and local govern-
ments should have greater freedom to privatize infrastructure assets.

(b) Private enterprise and competitively driven improvements are the foundation
of our Nation’s economy and economic growth. Federal financing of infrastructure
assets should not act as a barrier to the achievement of economic efficiencies
through additional private market financing or competitive practices, or both.

(c} State and local governments are in the best position to assess and respond to
local needs. State and local governments should, subject to assuring continued com-
pliance with Federal requirements that public use be on reasonable and nondiscrim-
inatory terms, have maximum possible freedom to make decisions concerning the
maintenance and disposition of their federally financed infrastructure assets.

(a) User fees are generally more efficient than general taxes as a means to sup-
port infrastructure assets, Privatization transactions should be structured so as not
to result in unreasonable increases in charges ta users.

Sec. 3. Privatization Initiative. To the extent permitted by law, the head of each ex-
ecutive department and agency shail undertake the following actions:

(a) Review those procedures affecting the management and disposition of federally
financed infrastructure assets owned by State and local governments and modify
those procedures to encourage appropriate privatization of such asscts consistent
with this order;

(b) Assist State and local governments in their efforts to advance the objectives
of this order; and

(c) Approve State and local governments’ requests to privatize infrastructure as-
sets, consistent with the criteria in section 4 of this order and, where necessary,
grant exceptions to the disposition requirements of the “Uniform Administrative Re-
quirements for Grants and Cooperative Agreements to State and Local Govern-



61

ployment to monitor the contracts. And the other thing is, if you
force people, for political reasons or for cost reasons, to privatize
things now and do it without taking into the time, as I mentioned
earlier, to get it right, it goes horribly wrong.

But it doesn’t mean that privatization doesn’t work. It’s just a
case of getting it right.

Mrs. MALONEY. Well, one area where local government has his-
torically fallen down is in monitoring. They’re so strapped that they
don’t have the resources to monitor situations. So I see that as a
problem. Thank you.

Mr. Horn. I’m told by staff that on the ESOP situation, there’s
apparently a provision in Federal law that the problem is a conflict
of interest, and that the Civil Service Subcommittee of the full com-
mittee, of which we're all a part, will be holding a hearing on that
matter. Let me ask a last question. The staff will follow up with
some other questions, and we’d appreciate your answers in writing,
as appropriate.

Both Mr. Jones and Mr. Leeds have had extensive foreign experi-
ence. Have you had some experience in the United States, with
various privatization efforts? I’d like to know how you would com-
pare those experiences with what you've found in Eastern Europe.
Mr. Jones.

Mr. Jones. As in my written testimony, I’m currently working to
help assist the General Services Administration in their efforts to
seek out ways in which they can perform quality services in the
most cost effective way to the taxpayer. As you point out, I’ve also
worked in Central and Eastern Europe, in the Middle East and
many parts of the world.

And I think one of the things I would say is that every privatiza-
tion is unique. And you can’t just take a package—you can’t like
pe into the shop and buy an off-the-shelf package and say, this is

iow we're going to privatize. It’s almost impossible to do that.
Many people look to the UK and say, there is the beacon of how
to do privatization successfully.

A lot of Eastern European countries say, we want to do that, or
a lot of people in the Far East say, we want to do that. And the
real issue is that the conditions in the UK were such that they're
not applicable in many other countries. Our telecommunications
company was capable of making huge profits. And we have a huge
international stock market on our doorstep, and these things are
not open to everybody else, necessarily.

Those things are available here. But then when you look at the
major utilities in this country, most of them are already in private
hands. What you're really looking at is agency privatization. And
so I guess the closest parallel I can really come to is looking at the
agencies that are being privatized in the UK now as being the most
applicable thing, from foreign experience, that I can see that re-
lates to the United States.

And that is why I brought along this thing from the treasury,
which is a guideline to those people on how to go about privatiza-
tion. So many of the issues of whether—in Central and Eastern
Europe, virtually nothing is profitable because the prices are so low
that it’s very difficult to—and the level of the standard of living is


4

ment functions, we must put in place a strong and effective job
placement program for the workers who are being displaced.

Again, thank you, Mr. Chairman, for beginning a dialog on this
most complicated topic. I look forward to working with you to solve
some of these problems. Thank you, sir.

Mr. Horn. Thank you very much. I now yield to the other gen-
tleman from Pennsylvania, Mr. Fox, for a brief opening statement.

Mr. Fox. Thank you, Mr. Chairman. The United States is on a
path of seeking better methods in meeting the needs of the Amer-
ican people, for both public and private institutions deserve and re-
ceive people’s confidence. The American people have often com-
plained of the intrusiveness of Federal programs, of inadequate
performance and excessive expenditures.

In light of these public concerns, the government has begun to
turn to the creative talents and ingenuity of the private sector to
provide, whenever possible and appropriate, better answers to
present and future challenges. In response to renewed interest in
privatization, we must continue to address alternative approaches
that can best provide the social good, and we must continue the
discussion about the proper limits of government in society.

Therefore, it is important that we consider first, and most criti-
cally, the needs of the American consumer and how these needs
can best be satisfied. This hearing is in progress that we may ex-
plore alternative approaches for administering many government
programs and services to determine whether they can better be
managed at less cost by involving the private sector and/or provid-
ing for individual consumers’ choice.

look forward to hearing from the witnesses this afternoon, espe-
cially our colleague, Scott Klug, the czar of privatization. And I fur-
ther look forward to working with Chairman Clinger and Chairman
Horn in examining the Federal role in privatization. Thank you
very much.

Mr. Horn. I thank the gentleman. Now I’m delighted to recog-
nize our distinguished colleague from Wisconsin, who has just been
described as the czar of privatization, and is heading the Speaker’s
task force in that area. And we welcome you and look forward to
some of your insights throughout this Congress, where we hope you
will feel free to guide this committee as we hold various hearings
and try to get more specific from rather grand principles and cri-
teria and hopes.

STATEMENT OF HON. SCOTT KLUG, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WISCONSIN; AND ROY
BERNARDI, MAYOR, SYRACUSE, NY

Mr. Ktuc. Thank you, Mr. Chairman. And I will submit a longer
statement for the record, but let me, if I can, just summarize what
I think need to be some of the key, overarching themes in this en-
tire debate about privatization. I was asked, as my colleague from
Pennsylvania correctly characterized, some months ago by the
Speaker, to try to really reenergize a number of efforts toward pri-
vatization that began in the late 1970’s and the early 1980's and
then, frankly, ran out of gas.

And I think we need to examine this for a number of reasons.
To this point, much of the discussion that has gone on in the Fed-


93

PREPARED STATEMENT OF E.S. Savas, DIRECTOR, PRIVATIZATION RESEARCH ORGANT-
ZATION, SCHOOL OF FUBLIC AFFAIRS, BARUCH CoLLEGE/Crty UNIVERSITY OF NEW
York

Thank you for the opportunity to offer testimony at your important hearing. For
brevity, I will confine my remarks closely to the questions suggested by the Sub-
committee.

IMPLEMENTATION
BE AWARE OF PITFALLS

1. The most important requirement for successful privatization is political will at
the highest level of the jurisdiction or agency. Privatization is not basically an eco-
nomic or fiscal act; it has economic consequences—usually for the better—but ulti-
mately it is a political act, in the sense that it alters the relative power of different
actors in the public policy arena. :

2, Many privatization tools are available. One must select the right one for the
particular application, for example, divestment, contracting out, franchise, voucher
system, or deregulation to allow the private sector to enter a field and start provid-
ing services on a market basis. Each of these can be illustrated: divestment of Am-
trak, contracting out maintenance of government buildings, franchising a private
bus line, using vouchers for home care or education, and repealing the express mail
statutes in order to permit private firms to deliver messages without harassment
by the US Postal Service.

3. Privatization should not mean abdication. Too often agencies contract out a
service but fail to monitor the performance of the contractor. (But often they also
fail to monitor the performance of their own, in-house work force.)

TREATMENT OF WORKERS

The most comprehensive study of the matter shows that only about six percent
of workers are laid off as a result of privatization. Typical programs to mitigate the
effect of contracting out on employees are: (1) Contracting out a service gradually,
at the rate of normal attrition (usually about six to nine percent a year) so no layofls
are required; (2) effecting a hiring freeze in other agencies in the jurisdiction so that
affected employees can be placed in those openings; (3) requiring the winning con-
tractor to offer the right of first refusal to affected employees (without requiring that
he hire all the workers and without dictating the terms of their employment); (4)
offering severance pay; (5) offering early retirement; (6) allowing the employees to
start their own company and giving them a negotiated contract for a limited period,
after which they would be subject to normal competition in the marketplace.

HOW TO DECIDE WHEN TO PRIVATIZE

Bearing in mind the different forms of privatization identified above, the criteria
for selecting a candidate service or function for privatization are the following:

1. Are substantial savings possible without a loss of service quality or decline in
the level of service? Remarkably, few governments know how much anything costs!
Government officials tend to look at budgets as the authoritative source of spending
data. But budget documents are not intended to be cost-accounting documents and
are totally misleading if used for that purpose. A deliberate study is needed to de-
termine the cost of a service that is a candidate for privatization, and all costs, di-
rect and indirect, should be included. At the same time, a contractor should be given
credit for the taxes he pays that a government agency does not, as this is a rebate
to the public.

2. Is there an existing competitive market of su pliers of the service, or can a
market be created, maintained, and institutionalized?

3. If divestment is the privatization tool of choice, are there buyers?

40 contracting is the tool of choice, can contract performance be monitored effec-
tively?

5. If the service under consideration does not lend itself to dear, unambiguous
specifications (many social services are in this category), can an effective voucher
system be designed and implemented?

6. If a franchise is awarded competitively but the effect is to create a monopoly,
can the monopoly be effectively regulated?

7, All things considered, is it worth the political effort to privatize?



38

6. STAFF ISSUES
Consultation
6.1. Staff and recognised trade unions should be kept fully informed, and be

consulted by management a the appiupriaic stages in the privatisation
process. TUPE (Transfer of Undertakings Protection of Employment)
regulations arc likcly toapply where staff are transferred into companies prior
to privatisation; and these regulations impose a legal duty on cmployers to
consult and provide information with a view to reaching agreement. (Sce the
DEO letter of 28 May 1986 on “Transferring Work out of
Departments-Consultation with the Unions”. On the consultation
requirements under TUPE, see paragraphs 10-11 of the Transfer of
Undertakings Regulations 19X1 S11794. The relevant TUPE regulations on
consuitation, as amended by the Irade Limon and kmployment Rights
(TURER) Act 1993, are set out in Annex D.)

Terms and conditions of employment and redundancy payments

6.2.

Legal advice should be taken a3 early a3 possible on whether TUPE applies
to the sale. Under the TUPE regulations, employees’ existing terms and
conditions of employment (except occupational pension rights) pass
unchanged when the activity is sold to a new employer. The transfer of staff
under TUPE does not in itself occasion redundancy so no redundancy
payments are made Where TUPE does not apply, staff will be ennitled to
redundancy payments unless redeployed elsewhere (However, where a
rranster of an undertaking would require staff to move house, mobile staff
transfer under TUPE while non-mobile ones have a choice of whether to
transfer or not.) See Section 5 of the Government's “Guide to Market
Testing” for detailed informatiun on TUPE, and the Efficicncy Unit's note
of 27 Sepictnber 1993 fur a mode! of the information which might be sent to
potential purchasers setting out Civil Servants” principal rerms and conditions
of employment.

Pensions

6.3.

Pensions in the new employment are a matter for the new employer. The
position on the options available to staff in respect ot their accrued pension
mghts under the PCSPS: arrangements for transfer value payments ta the new
employer's pension scheme: and the considerations relating to pension rights
with the new employer are described in paragraphs $.15-5.19 of the
Government's “Guide to Market Testing”. Model forms. produced by and
available from the Treasury's Civil Service Pensions Division, should be used.
by departments to inform staff about die options available for thei: accrued
PCSPS pension rights and to enable them to make the appropriate choices.
The deparment or agency must ensure that pension rights, overall, in the new


100

has shown an interest in determining the extent to which the federal government
should be involved in the private sector and the extent to which the private sector
should be involved in the federal government—should give serious consideration to
expanding its mandate from the narrow perspective of contracting-out/privatization
to include the growing problem of corporate welfare.

Thank you for allowing AFGE the opportunity to respond to the various witnesses
heard at the Subcommittce’s recent hearing on contracting-out/privatization. Please
contact Reth Moten or John Threlkeld, of AFGE’s Legislative Department, at (202)
639-64 13, if you have any questions about this letter.

PREPARED STATEMENT OF THE NATIONAL COUNCIL FOR PUBLIC-PRIVATE
PARTNERSHIPS

This letter of testimony is submitted on behalf of the National Council for Public-
Private Partnerships. The Council is a non-profit, non-partisan educational organi-
zation dedicated to increasing the availability and effectiveness of public services
through co-operation of government and private enterprise. The Council's members
constitute a cross section of public officials, business leaders, and non-profit organi-
zations. Its active divisions include task forces on environment, transportation, real
estate/public facilities and health. Public-private partnerships combine the strengths
of the public and private sectors, fostering market competition under the watchful
eye of representative government.

The Council applauds your efforts on behalf of greater private sector participation
to improve governmental efficiency and productivity. We offer the following com-
ments for the record.

In 1992 President Bush issued Executive Order 12803, which permits the sale of
a publicly owned infrastructure facility that was financed with the assistance of fed-
eral grants or tax-exempt funds. In 1993, President Clinton reaffirmed the intent
of E.0, 12803 issuing a subsequent Executive Order dealing with public-private
partnerships for major federal investments, and reiterating the opportunity to sell
or lease infrastructure facilities constructed with the aid of federal monies. How-
ever, both Executive Orders require that any undepreciated portion of the federal
share be repaid. This repayment requirement and difficulties with resolving issues
related to valuing such facilities have virtually precluded use of the capabilities_per-
mitted under the Executive Orders. The National Council for Publi ate Part-
nerships suggests that the power to sell or enter long term lease arrangements be
codified in legislation. However, we urge a modification, believing that the repay-
ment requirement should simply be eliminated in the legislation to facilitate forma-
tion of public-private partnerships.

The Council also supports legislation to eliminate the five year maximum term
placed on private maintenance and operation contracts for publicly owned water and
wastewater systems and other forms of infrastructure. The existing limit is based
on the fact that in most cases, tax exempt bonds financed construction and a need
was felt to ensure continued public ownership. Under a contract arrangement, lim-
ited to five years, any capital investments a private manager might make to intro-
duce new, cost-effective technology or to upgrade the facility to modernize its oper-
ations are uneconomical. Recognizing this, the Treasury Department has issued a
proposed regulatory change to extend the contract limitation, but a final revision
does not appear to be imminent and the issue remains unresolved. The Council
urges that legislation be enacted to affirm the Congress’s interest in permitting ‘con-
tracts of twenty to twenty-five years with private entities. This longer time frame
would permit the private operator to make investments that would both lower oper-
ating costs and increase the facility’s useful life.

Several other technical issues beyond the scope of this testimony on which the
Council is prepared to provide comments, include:

- limits on private contractor's use of tax exempt debt to finance public-use en-
vironmental facilities.

- revival of accelerated depreciation and the investment tax credit to stimulate
private participation in the market,

= alternative minimum tax treatment to include public or privately owned treat-
ment works that are operated for general public use.

The Council appreciates the opportunity to provide comments and would be happy
to respond to any questions which you or your staff may have.

e)



41

ANNEX A
LIST OF CONTACTS

POLICY AND PROCEDURES FOR CENTRAL GOVERNMENT
PRIVATISATIONS

Heather Morley

SMC Division

HM Treasury

Parliament St 071 270 5145

LONDON SW1P 3AG GTN 270 5145

GENERAL PRIVATISATION POLICY AND PROCEOURES

Jane Swift

PE3 Division

HM Treasury

Parliament St 071 270.4777
LONDON SWIP 3AG GTN 270 4777

FINANCIAL ADVICE ON PRIVATISATION

Stephen Smith

Accountancy Policy Division

HM Treasury

Allington Towers

19 Allington St 071 270 1764
LONDON SWIE SEB GTN 270 1764
EC STATE AID DIRECTIVE

Mike Porteous

European Community and Trade Relations Division
Dept of Trade and Industry

Ashdown House

123 Victoria St 71 215 4712
LONDON SWIE 6RB GTN 219 4712

EC SERVICES DIRECTIVE) PUBLIC PROCUREMENT POLICY
Dick Meadows

Public Sector Procurement Division

HM Treasury

Allington Jawers 071 270 1650

LONDON SWIE 5EB GTN 270 1650