The next step is to identify state laws that act as barriers to privatization. Legislative and bureaucratic restrictions to privatization should be eliminated or revised early in the privatization process. Though privatization often requires changes in existing laws, it is unrealistic to attempt to change every law that poses an obstacle to privatization all at once. More important is to draw up and pass enabling legislation that gives broad sanctions for permitting privatization. A majority of states have now passed enabling legislation on privatization.

Once enabling legislation is passed, individual laws that act as barriers to privatization can be examined and revised or revoked. Identifying these laws and regulations is no simple task. They are often buried in omnibus laws or government procurement codes. Figure 4 presents some common legal barriers.

Figure 4

Common Legal and Regulatory Barriers to Privatization

Type of Barrier



Tax laws
Grant repayment terms
Other requirements/restrictions


Lack of clarity/consistency with regard to statutory provisions of privatized public works and utilities

Procurement Guidelines

Issuing standard procedures conducting cost comparisons that fail to compute all costs of government services delivery.

Civil Service Regulations

Prohibitions against contracting out civil service positions, prevailing wage rules.

Contracting restrictions on local governments

Usually with regard to specific services: ie, public safety, education.

Labor Law Issues

Collective bargaining.  Duty to bargain.

A number of guidelines in the California procurement code, for example, impede privatization. One standard allows contracting out only if the contractor's wages are at the industry's level and do not significantly undercut state pay rates.[11] This serves largely to restrict competition and protect state workers at the expense of the taxpayer, impeding efforts to use whatever provider can most cost effectively perform the service.

Another article in the California code asserts that the state's indirect overhead costs shall not be used when conducting cost comparisons between the public and private service.[12] This rule prevents the accurate use of cost accounting and encourages state agencies to underestimate the cost of government-provided service.

Similar restrictions and obstacles are present in many states. For example, the Michigan Department of Education has placed numerous restrictions on the ability of local governments to contract out school lunch programs. These restrictions have nearly ended the use of privatization for this service in Michigan, thus resulting in higher costs for local school districts. In the state of Washington, civil service law disallows contracting for services that have been "customarily and historically provided by civil servants."[13]