Most governments using privatization to generate new revenue or reduce costs typically use only one or two types of privatization. The most common types of privatization are contracting out public services to the private sector and selling government-owned enterprises. In order to fully utilize privatization, governments should expand their arsenal by using nine types of privatization and a wide variety of privatization techniques. The nine types of privatization and examples of the various privatization techniques (see Table 1) used for each type are as follows:

A Generic “Menu of Privatization Opportunities”

An example of privatization opportunities that result from applying the nine types of privatization on a city-wide basis for a relatively large U.S. city.

TYPE 1:  Transfer Facility Operations to Private-Sector Management Companies.

  • Civic Arena

  • Stadium

  • Airport(s)

  • Water Treatment Plant

  • Convention Center

  • Municipal Golf Course

TYPE 2:  Fully Utilize Government-Owned Hard and Soft Assests.

  • Disposition of Selected Properties Among the City’s Inventory of Real Estate

  • A Real Estate Asset Management Plan for the Entire Inventory

TYPE 3:  Structure and Implement the Public/Private Finance and Development of Facilities and Infrastructure

  • Highways and Bridges

  • Utility Systems

  • Major New Civic Facilities

  • Expansion or Rehabilitation of Existing Civic Facilities

TYPE 4:  Structure the Public/Private Lease or Partial Disposition of Facilities.

  • Airport(s)

  •  Stadium

  • Port

  • Selected Public Housing

  • Civic Arena

  • Public Garages

TYPE 5:  Enhance the Economic Performance of Existing Government-Owned and Operated Facilities.

  • Airport(s)

  • City Parks

  • Public Garages

  • Arena and/or Stadium

  • Convention Center

  • Higher Education System

TYPE 6:  Structure Selected Public Services to be More Competitive

  • Solid Waste Collection and/or Disposal

  • Vehicle Maintenance

  • Building and Grounds Services

  • Health and Mental Health Care

  • Correctional and related Facilities and Operations

  • Data Processing

  • Transportation Services

  • Legal and Security Services

TYPE 7:  Streamline Government Organization and Restructure Selected Administrative Groups and Departments.

  •  Housing Agencies

  • Transportation Agencies

  • Health Care Agencies

  • An Incentive Program for Operation of Agencies and Management of Assets

  •  Parks and Recreation Agencies

TYPE 8:  Enhance Cash Management and Restructure Debt.

  • Restructure Debt on Major Civic Facilities

  • Restructure Debt on Major Civic Infrastructure

  • Revenue Collection of Traffic/Parking Fines

  • Revenue Collection of License Fees

TYPE 9:  Structure the Disposition of Government-Owned Companies.

  • Utility Companies

  • Television or Radio Stations

TYPE 1: Transfer Facility Operation to a Private-Sector Management Company. Many governments operate facilities that could be operated by private management firms specializing in a particular type of facility. Example: sports and entertainment facilities. A number of highly qualified facility management companies are available to government. These firms take advantage of their economies of scale and their ability to specialize in one type of facility or, in some cases, one type of operation.

By leveraging their national network of entertainers and events, these private management firms are better able to generate new bookings. Private management firms, or operators, also introduce innovative management techniques to control operational costs. By retaining private management companies, governments are often able to reduce or even eliminate the need for operating subsidies, and share the additional net income stream.

TYPE 2: Fully Utilize Government-Owned Hard and Soft Assets. Most governments passively manage their real estate properties, which in most instances represent valuable assets. Not only are governments not monetizing selected assets, they are having to fund maintenance and insurance costs. While wholesale selling of assets is never advocated, a selected few assets could be sold and returned to the property-tax rolls to generate long-term streams of income for governments.

TYPE 3: Structure and Implement the Public/Private Finance and Development of Facilities and Infrastructure. Governments are continually studying and analyzing the feasibility of public and public/private development projects. However, many of these efforts neglect to fully consider all of the potential sources of revenue or cost sharing. Nor are innovative public/private finance and development plans explored.

There are many ways to structure public/private development projects. Three techniques increasingly employed around the world include:

  • Build-Operate-Transfer (BOT) of a new facility. Basically, a private entity structures the public/private finance of a road, airport, or other entity, and then builds and operates the facility for a specified term, typically 20 to 40 years. Title and operation are transferred to the government at little, or no cost upon expiration of the term of the agreement.

  • Build-Transfer-Operate (BTO) technique. BTO requires a private entity to finance the facility, but title to the facility is transferred to the government upon completion of construction. The private entity then operates the facility for a term of 20 to 40 years to collect all revenues and recoup its investment.

  • Perpetual Franchise technique. The title, financing, construction, and operation of an entity becomes the primary responsibility of a private firm. The government has oversight controls on safety, quality of construction, and day-to-day service.

TYPE 4: Structure the Public/Private Lease or Partial Disposition of Facilities and Infrastructure. Governments have made an enormous investment in public facilities and infrastructure. The management and operation of these investments is complex. Owning, and especially operating, this wide array of facilities and infrastructure, may not always be the most appropriate means for a government to meet the needs of residents. Public/private partnerships can be structured in a manner whereby the government retains ownership, or at a minimum, maintains a comfortable level of oversight control without being burdened with all of the costs, risks, and responsibilities traditionally required of an owner and operator.

Investments in stadiums, arenas, theaters, garages, and other revenue-generating facilities can be very attractive to the private sector. Governments can recognize an economic return from these valuable assets by structuring long-term lease agreements, or partial dispositions, in which the private sector is responsible for the day-to-day operation of the facility. Governments receive an up-front cash payment and a negotiated portion of the net or gross revenues. Governments also benefit from the interest income from the initial payment, plus the enhanced future revenue stream while maintaining partial ownership and quality control.

Governments should also capitalize on the privatization breakthroughs contained in passage of the Intermodel Surface Transportation Efficiency Act (ISTEA) in 1992.

TYPE 5: Enhance the Economic Performance of Existing Government-Owned and Operated Facilities. There are a number of ways to improve the economic performance of government-owned and operated facilities. Increasing or implementing user-fees, establishing or expanding concessions, or joint-development opportunities can increase revenues and/or reduce expenses.

TYPE 6: Introduce Competition into Public Services. The cost of government operations and services, as well as compensation for public employees, has grown at a faster rate than the private market. Yet the quality and scope of public services has sometimes decreased. Government officials need to remember three important points: 1) services are tax-supported; 2) delivery of services should be as effective and efficient as the competitive private market where taxpayers live and work; and 3) the services provided should be customer-driven.

Governments have considerable flexibility in structuring privatization plans for services, because at least seven privatization techniques apply to services:

  • Contracting Out. Governments structure a contract with private companies, or nonprofit organizations for the delivery of services, or government supplies.

  • Intergovernmental Agreements. One government agrees to pay another government to provide a service, or a government unit is designated to provide a service to several governments within a region.

  • Vouchers. The government pays for the service, however, the user, or consumer of the service can freely select producers in the marketplace.

  • Grants. Grants are a form of government subsidy to a private entity producing the product, or service. The primary objective is to reduce the retail price of services for participating consumers.

  • Franchise. The government structures the contract, but the user pays the private company for goods or services such as infrastructure, utilities, telephone service, and cable television.

  • Self-help. Small community organizations and charitable groups perform public services on a voluntary basis. Examples: street cleaning, neighborhood security, social services, recreational programs, and volunteer fire departments.

  • Load Shedding. Government discontinues providing a service and lets the private sector take over the function.

TYPE 7: Streamline Government Organization and Restructure Selected Administrative Groups and Agencies. Governments can benefit from establishing clear and distinct responsibilities for each of their administrative groups and agencies. Often several agencies have overlapping responsibilities that lead to inefficiencies. By restructuring the management and responsibilities of these agencies and groups, government can realize substantial cost savings and increase efficiency, as well as short- and long-term effectiveness.

TYPE 8: Enhance Cash Management and Restructure Debt. Cash management is exactly what it sounds like--governments seeking to increase their access to cash from their financial claims and maximize their income on that cash.

The objectives for cash management are: 1) to collect the cash as fast as possible; 2) to disburse the cash as slowly as possible; and 3) to maximize income from the idle cash. Privatization opportunities for cash management typically focus on collection procedures, accounts-payable systems, and investment programs.

For debt, the primary focus is to explore any opportunities for government to capitalize on restructuring debt. This could include benefits such as reducing the cost of financing, and maximizing the paydown of principal on selected investments.

TYPE 9: Structure the Disposition of Government-Owned Companies. Many government-owned enterprises, or companies, are attractive privatization candidates. If the private sector acquires a government-owned enterprise, the government usually benefits from a large cash infusion, as well as added corporate and property taxes.

In some situations a sale or disposition eliminates the government's need to support enterprises that have operating deficits. In these situations, a sale or disposition should be viewed as an expense reduction rather than a revenue source.

When selling a government-owned enterprise, it is imperative that the government's actual cost of operation be quantified. Frequently, the full costs associated with security, vehicle maintenance, and administrative support are not reflected in an enterprises' operating budget. Conversely, in many situations the revenue generated by an enterprise is understated in the operating budget.