Terms Related to Privatization Activities and Processes

Published by the Government Accountability Office on 1997-07-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Glossary

July 1997
                 Terms Related to
                 Activities and


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Privatization and Government

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Privatization and Government

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Activity-Based   ABC is a methodology that assigns
                 costs to products or services based on
Costing (ABC)    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. ABC gives visibility to how
                 effectively resources are being used
                 and how all relevant activities
                 contribute to the cost of a product or
                 service. Such information may be key
                 to making decisions about whether to
                 restructure or privatize an activity.

Asset Sale       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. However, if
                 the asset is sold to a company in an
                 industry with monopolistic
                 characteristics, the government may
                 regulate certain aspects of the
                 business, such as utility rates.

Commercial       The term commercial activity is used in
                 the governmental context to identify
Activities       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.

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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

Contracting   Contracting out is the hiring of
              private-sector firms or nonprofit
Out           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.

Divestiture   Divestiture involves the sale of
              government-owned assets or
              commercial-type functions or
              enterprises. After divestiture, the
              government generally has no role in the
              financial support, management,
              regulation, or oversight of the divested

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Employee         Under an ESOP, employees take over,
                 or participate in, the management of
Stock            the organization that employs them by
Ownership        becoming shareholders of stock in that
Plans (ESOP)     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 of   Under the franchising of external
                 services, the government grants a
External         concession or privilege to a private
Services         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.

Franchising of   Under the franchising of internal
                 services, government agencies provide
Internal         administrative services to other
Services         government agencies on a
                 reimbursable basis. Franchising gives
                 agencies the opportunity to obtain
                 administrative services from another
                 governmental entity instead of
                 providing them for themselves. In the
                 federal government, these
                 arrangements are often called
                 interservice support agreements

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Government     Government corporations are separate
               legal entities that are created by
Corporations   Congress, generally with the intent of
               conducting revenue-producing
               commercial-type activities, and that are
               generally free from certain government
               restrictions related to personnel and

Government-    GSEs are federally established,
               privately owned corporations designed
Sponsored      to increase the flow of credit to
Enterprises    specific economic sectors. GSEs
(GSE)          typically receive their financing from
               private investment, and the credit
               markets perceive that GSEs have
               implied federal financial backing. GSEs
               issue capital stock and short- and
               long-term debt instruments, issue
               mortgage-backed securities, fund
               designated activities, and collect fees
               for guarantees and other services.
               GSEs generally do not receive
               government appropriations.

Inherently     An inherently governmental activity is
               one that is so intimately related to the
Governmental   public interest that it must be done by
Activities     federal employees. These functions
               include those activities that require
               either the exercise of discretion in
               applying government authority or the
               making of value judgments in making
               decisions for the government.
               Governmental functions normally fall
               into two categories: (1) the act of
               governing, i.e., the discretionary
               exercise of government authority, and

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                 (2) monetary transactions and

Joint Ventures   See public-private partnership.

Managed          Under managed competition, a
                 public-sector agency competes with
Competition      private-sector firms to provide
                 public-sector functions or services
                 under a controlled or managed
                 process. This process clearly defines
                 the steps to be taken by government
                 employees in preparing their own
                 approach to performing an activity.
                 The agency’s proposal for providing the
                 service, which includes a bid proposal
                 for cost-estimation purposes, is useful
                 in competing directly with
                 private-sector bids.

Most Efficient   In certain circumstances under OMB
                 Circular A-76, agencies that are
Organizations    considering contracting out an activity
(MEO)            must first conduct a cost benefit
                 exercise to identify the MEO. The MEO
                 refers to the government’s in-house
                 organization that would most
                 efficiently perform a commercial
                 activity after a managed competition
                 under A-76. It may include a mix of
                 federal employees and contract
                 support and is used as the basis for
                 measuring all government costs (direct
                 and indirect) and performance against
                 competitive contractor or interservice
                 support agreement (ISSA) offers. To
                 determine the MEO, the in-house
                 activity may reinvent, reorganize and
                 restructure itself, including making

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                capital investments, in order to arrive
                at the agency’s most efficient method
                of performing the commercial activity.

OMB Circular    OMB Circular A-76 sets forth federal
                policy for determining whether
A-76            commercial activities associated with
                conducting the government’s business
                will be performed by federal employees
                or private contractors. Recent revisions
                to the A-76 Supplemental Handbook
                were designed to enhance federal
                performance through competition and
                choice, seek the most cost-effective
                means of obtaining commercial
                products and support services, and
                provide new administrative flexibility
                in agency decisions to convert to or
                from in-house, contract, or ISSA

Outsourcing     Under outsourcing, a government
                entity remains fully responsible for the
                provision of affected services and
                maintains control over management
                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-    Under a PBO, policymaking is to be
                separated from service operation
Based           functions by moving all policymaking
Organizations   responsibilities to a presidential
(PBO)           appointee. The service operations are
                moved to an organization to be headed

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                 by a chief executive officer (CEO)
                 hired on a competitive contract for a
                 fixed term. The CEO’s contract defines
                 expected performance, and in
                 exchange for being held accountable
                 for achieving performance, the CEO is
                 granted certain flexibilities for human
                 resource management, procurement,
                 and other administrative functions. As
                 of March 1997, several PBOs had been
                 proposed, but no PBO had been
                 authorized in the federal government.

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-Private   Under a public-private partnership,
                 sometimes referred to as a joint
Partnership      venture, 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 and/or
                 facilities. In such a partnership, public
                 and private resources are pooled and
                 responsibilities divided so that the
                 partners’ efforts complement one
                 another. Typically, each partner shares
                 in income resulting from the
                 partnership in direct proportion to the
                 partner’s investment. Such a venture,
                 while a contractual arrangement,
                 differs from typical service contracting

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             in that the private-sector partner
             usually makes a substantial cash,
             at-risk, equity investment in the
             project, and the public sector gains
             access to new revenue or service
             delivery capacity without having to pay
             the private-sector partner. Leasing
             arrangements can be used to facilitate
             public-private partnerships.

Service      Divestiture through service shedding
             occurs when the government reduces
Shedding     the level of service provided or stops
             providing a service altogether.
             Private-sector businesses or nonprofit
             organizations may then step in to
             provide the service if there is a market

Subsidies    The government can encourage
             private-sector involvement in
             accomplishing public purposes through
             direct subsidies, such as the funding of
             low-income housing, or tax subsidies,
             such as research and development tax

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 revenues generated by taxes.
             The fees charged for entry into public
             parks are an example of a user fee.

Volunteer    Volunteer activities are conducted
             through either a formal agency
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           volunteer program or a private
           nonprofit service organization. An
           activity in which volunteers provide all
           or part of a service and are organized
           and directed by a government entity
           can also be considered a form of

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.
           One form of voucher is a federal grant
           given to a state or local government,
           which then may use the funds to buy
           services from the private sector.

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