Privatization tips and traps: illustrations from the DC Village Nursing Home Initiative.

• Author: Watt, Patricia C.
• Position: Washington, DC

Analysis of a failed attempt at a modified divestiture highlights the importance of an open and inclusive process that keeps all parties informed at every step of the way.

Much has been written about successful privatization initiatives but very little about those that failed - let alone the reasons for, and risks associated with, failure. Government officials planning to privatize service delivery should consider, during their planning process, their chances for success - and what might happen to service delivery if they fail. This article is based on the authors' experience during their collaboration on an unsuccessful attempt to privatize a 500-bed nursing home in the District of Columbia. During that process, it became evident that some key factors are likely to influence whether a privatization initiative will succeed or fail.

Why Privatize?

Privatization is the term broadly used to describe the process of transferring to a nongovernment entity the responsibility for delivering services that were previously delivered by a government. In their quest to restructure, reengineer, and reinvent themselves, governments have engaged the private sector using many models, including the use of vouchers, franchises, asset sales, joint public/private equity developments, and contracting out services to private firms.

The underlying thesis behind most of these actions is: Because government is not moved by profit it must be inherently less efficient than the private sector. This argument leads to the conclusion that if cost is the main consideration, then privatization is the answer - an oversimplification that presents the decision to privatize as one-dimensional. It is far from so.

As the District of Columbia and many other jurisdictions have found, efficiency is only one objective. Other social or economic objectives of government - improvement in the quality or reliability of services, for example - surely compete, and a full range of organizational and environmental constraints may make efficiency unattainable. Instead of inefficient government in search of a private-sector fix, the problem can be seen as one of government monopoly.

The privatization process is one way to introduce competition to government monopolies. Building a culture of continuous improvement, in part through the introduction of competition, may offer a richer array of solutions.

Privatization Techniques

Privatization activities typically fall into three broad categories, as follows:

* divestiture of the responsibility for delivering services, where the government gets out of the business of delivering a service and divests itself of both management responsibilities and the assets previously used for providing services; the private market must be sufficiently robust to support divestiture;

* contracting out (also known as outsourcing), in which the government uses a competitive process to procure the services of a private vendor to perform a function on behalf of the government, which retains ultimate responsibility for the quantity, quality, and reliability of services; periodic rebidding for private service delivery helps ensure continuous competition; and

* franchising, in which the government uses a competitive process to confer upon a private entity the right to provide a service and run it as its own business; the government continues to regulate service quality and prices to ensure adequate consumer protection.

Most governments follow roughly the same steps toward privatizing a government service. Experience has demonstrated that all stages are intertwined in sometimes complex ways. Generally, each of the following must be successful for the entire process to succeed:

* planning the process,

* solicitation of competitive bids,

* selection of the service provider,

* transition, and

* monitoring and evaluation.

DCV: A Case of Creative Divestiture

The model used with the DC Village nursing home (DCV) was a modified divestiture in which a lease was selected to [TABULAR DATA FOR EXHIBIT 1 OMITTED] serve as the transfer instrument. Ownership of the facility would be retained by the government, but responsibility for service delivery would be divested.

The example of the DCV provides context and illustration for a discussion of the steps most governments take through the privatization process. DCV is a large, 500-bed nursing home, providing skilled and intermediate care. Under government operation, DCV employed more than 700 individuals, who were represented by five different bargaining units. Its annual budget exceeding $30 million is derived entirely from Medicaid and District of Columbia (the District) funds. The District, a unique governmental unit with state, county, and municipal responsibilities, is structured with a chief executive mayor to whom the city administrator and chief financial officer report. The city administrator is responsible for oversight of the major operating agencies. The 11-member District of Columbia Council acts on a full-time basis year-round.

Exhibit 1 highlights the sequence of major events during the DCV initiative.

Planning

Planning, requiring careful attention to the process itself as well as to the policy issues, is perhaps the most important of all five steps to privatization. The District found that an inclusionary process worked well. Yet, the ultimate undoing of a very promising privatization proved to be a strategic oversight that might have been avoided with even better planning.

As early as mid-1992, the District's department of human services (DHS) - the largest agency of the government - recognized the potential...