Indianapolis Mayor Steven Goldsmith’s privatization efforts will improve services and save the city nearly $200 million by 2002. One reason for Goldsmith’s success is the “Yellow Pages Test,” a rule of thumb for identifying privatization opportunities. If the city provides a service that is also provided by private firms found in the local Yellow Pages, the city may take bids on that service.

Editor’s Note: The following is a compilation of definitions that are frequently used when discussing privatization. The General Accounting Office has allowed MPR to adapt its brochure Terms Related to Privatization Activities and Processes for this feature.

Activity Based Costing (ABC) ABC is a methodology that assigns costs to products or services based on the resources they consume. It assigns functional costs, direct and indirect, to the activities of an organization and then traces activities to the product or service that caused the activity to be performed.

Asset Sale (sometimes called "shedding") An asset sale is the transfer of ownership of government assets, commercial-type enterprises, or functions to the private sector. In general, the government has no role in the financial support, management, or oversight of a sold asset. Government may maintain a regulatory role, however, such as rate setting with utilities.

Civil Service System A system established by the Michigan constitution to provide for the proper hiring, compensation, and termination of government employees. In Michigan, the civil service duties are outlined in the state constitution.


The city of Traverse City no longer collects or contracts for the collection of rubbish.


Commercial Activities The term commercial activity is used in the governmental context to identify those activities that the government performs with its employees or resources, but could obtain from private-sector sources. Commercial activities are in contrast to "inherently governmental" activities.

Commercialization The wholesale removal of government operation in a particular industry. For instance, the city of Traverse City no longer collects or contracts for the collection of rubbish. Citizens must contract directly for the service with private providers for rubbish removal.

Competition Competition occurs when two or more parties independently attempt to secure the business of a customer by offering the most favorable terms or highest quality service or product. Competition in relation to government activities is usually categorized in three ways: (1) public versus private, in which public-sector organizations compete with the private sector to conduct public-sector business; (2) public versus public, in which public-sector organizations compete among themselves to conduct public-sector business, and (3) private versus private, in which private-sector organizations compete among themselves to conduct public-sector business.

Contracting Out Contracting out is the hiring of private-sector firms or nonprofit organizations to provide goods or services for the government. Under this approach, the government remains the financier and has management and policy control over the type and quality of goods or services to be provided. Thus, the government can replace contractors that do not perform well.

Employee Stock Ownership Program Under an ESOP, employees take over, or participate in, the management of the organization that employs them by becoming shareholders of stock in that organization. In the public sector, an ESOP can be used in privatizing a service or function. For example, in 1996, the Office of Personnel Management established an ESOP for its former employees who perform personnel background investigations.

Franchising With franchising, the government grants a concession or privilege to a private sector entity to conduct business in a particular market or geographical area—for example, operating concession stands, hotels, and other services provided in certain national parks. The government may regulate the service level or price, but users of the service pay the provider directly.

Outsourcing Under outsourcing, a government entity remains fully responsible for the provision of affected services and maintains control over some decisions, while another entity operates the function or performs the service. This approach includes contracting out, the granting of franchises to private firms, and the use of volunteers to deliver public services.

Performance-Based Contracting Performance-Based Contracting involves contracting arrangements whereby expectations of contracting parties are clearly spelled out.

Privatize, Eliminate, Retain or Modify (PERM) A method developed by the Engler administration for analyzing functions of state government to determine how they should be performed or changed. PERM analysis has resulted in privatization of various state functions.

Privatization The term privatization has generally been defined as any process aimed at shifting functions and responsibilities, in whole or in part, from the government to the private sector.

Public Act 112 A law passed in 1994 that made noninstructional outsourcing by school districts an illegal subject of bargaining.

Public-Private Partnership Under a public-private partnership, a contractual arrangement is formed between public- and private-sector partners that can include a variety of activities that involve the private sector in the development, financing, ownership, and operation of a public facility or service. It typically includes infrastructure projects such as management of a water treatment plant. In such a partnership, public and private resources are pooled and responsibilities divided so that the partners’ efforts complement one another.


Contracting out is the hiring of private-sector firms or nonprofit organizations to provide goods or services for the government.


Regulatory Privatization The reduction or elimination of government-mandated directives in favor of market or industry regulation. A good example of private regulation is the certification that is provided by organizations such as Underwriters Laboratories or the National Electric Code.

User Fees User fees require those who use a government service to pay some or all of the cost of the service, rather than having the government pay for it through tax revenues. The fees charged for entry into public parks are an example of a user fee.

Vouchers Vouchers are government financial subsidies given to individuals for the purchase of specific goods or services from the private or public sector. The government gives individuals redeemable certificates or vouchers to purchase the service in the open market. Under this approach, the government relies on market competition for cost control and on individual citizens to seek out quality goods or services. The government’s financial obligation to the recipient is limited to the amount of the voucher.

Yellow Pages Test A rule of thumb used by Indianapolis Mayor Steven Goldsmith. Mayor Goldsmith looks to contract for all public services that are already being performed by private, for-profit companies and are listed in the local Yellow Pages.