The next step in the privatization process is to evaluate the near-term privatization potential of each identified privatization opportunity and determine which privatization technique is best suited for the government service function or asset. In theory, all the activities identified earlier, in addition to many other state government programs, are prospects for privatization. In practice, however, numerous factors such as political feasibility and current efficiency levels of government delivery mean that some functions will have much better near-term privatization prospects than others.

The different privatization techniques that are feasible for each privatization opportunity should be determined at this stage. In most cases, several privatization techniques could be used to implement each privatization opportunity. During this stage, it is not necessary to make a concrete decision on the most appropriate form of privatization. However, the privatization options should be narrowed down.

The most significant factor in the decision to privatize is likely to be potential cost savings. Unless it can be reasonably demonstrated that privatization will lead to significant cost savings, most state officials are unlikely to privatize a state service. The first step is to conduct a very rough, preliminary cost comparison between the present costs of government delivery versus the potential costs of private delivery of all functions identified as privatization opportunities. One method of doing this is presented in the appendix.

In addition to cost savings, other factors should be considered in evaluating privatization opportunities. These are listed in Figure 5.

Figure 5

Evaluation Criteria

  • Whether the function has been successfully privatized in other state or jurisdictions.

  • Degree to which objective standards and performance measures can be described.

  • Degree to which contractor’s performance can be monitored by government after contracting out.

  • Presence of two or more private contractors able and willing to perform the service.

  • The ability to replace the private provider if service is below the standards set forth or the firm goes out of business.

  • Degree of potential political opposition to the privatization of activity.

  • The impact on current employees.

  • Legality of privatizing function or entity.

  • Time schedule required to structure and implement privatization.

Another model for evaluating privatization opportunities is the systematic approach developed by the Colorado State Auditor's office. In 1989, the office published a privatization assessment workbook to assist government agencies in making decisions about privatizing public services.

As shown in Table 3, various criteria were developed to evaluate the privatization potential of different public services. Each service is rated according to criteria such as political resistance, legal barriers, and others on a scale ranging from +3 to -3. The greater and more positive the number, the greater the service's privatization potential.

TABLE 3

PRIVATIZATION PROFILE SUMMARY FORM

 

Pro-Gov’t

Provision

Pro-Private

Provision

Market Strength

-3

-2

-1

+1

+2

+3

Political Resistance

-3

-2

-1

+1

+2

+3

Cost Efficiency

-3

-2

-1

+1

+2

+3

Quality of Service

-3

-2

-1

+1

+2

+3

Impact on

-3

-2

-1

+1

+2

+3

Legal Barriers

-3

-2

-1

+1

+2

+3

Risk

-3

-2

-1

+1

+2

+3

Resources

-3

-2

-1

+1

+2

+3

Control

-3

-2

-1

+1

+2

+3

Source: Colorado State Auditor’s Office, Privatization Assessment Workbook, 1989.

FEASIBILITY STUDY

It is impossible to determine precisely the costs and benefits of a sale or long-term lease prior to the actual implementation. However, a feasibility study should be performed in order to better gauge the desirability of privatization. In addition to estimating the approximate market value of the entity, the feasibility study should address the following issues:

  • The presence of private sources of finance;

  • Potential for improved operational efficiency and performance;

  • Required potential capital expenditures;

  • Existence of legal restrictions which may prevent or obstruct private finance, ownership and operation;

  • Financial options for lease or disposition of entity;

  • Potential impact on government revenue streams and expenditures;

  • Impact on current employees.