Exploring the Limits of Privatization

Author(s): Ronald C. Moe

Source: Public Administration Review, Vol. 47, No. 6 (Nov. - Dec., 1987), pp. 453-460
Published by: Wiley on behalf of the American Society for Public Administration
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453
Exploring the Limits of Privatization
Ronald C. Moe, Congressional Research Service,
Library of Congress
When administrative historians some years hence
study the 1980s, they are likely to conclude that
"privatization" was the single most influential concept
of the decade. Their studies will undoubtedly portray
public administration as being profoundly altered by
several ideas that collectively have become known as
privatization. These same historians are also likely to
conclude that public administration, as an intellectual
field and profession, was in disarray and decline with
relatively little capacity to direct its own destiny in the
1980s. All in all, the story will not provide pleasurable
reading for public administrationists.
Privatization has its intellectual roots in free market
economic theory, and its promoters have a world view
that admits of few limitations. Public administration, as
a field of study not sharing the perspective of the free
market economists, first ignored, then resisted, the
privatization challenge. The resistance has tended to
take the form of defensive tactics to defeat specific pro-
posals rather than viewing the challenge of privatization
as an opportunity to develop a comprehensive theo-
retical position justifying the distinctive character of the
public sector. This essay suggests that public admin-
istrators have been relatively minor players in the
unfolding drama of privatization because they no longer
have the capacity to draw upon their own theoretical
and intellectual roots. These neglected roots of public
administration are to be found in its public law
tradition.
Public administrators know, or at least believe, that
there are limits to privatization. But they have been
unable to articulate those limits and thus have difficulty
in defining what is unique to the public sector that
makes it distinctive from the private sector. Exploring
the limits of privatization should not be construed as
tantamount to hostility toward the concept and use of
privatization. All too often the relationship between the
public and private sectors is viewed as a zero-sum game
where increased prosperity for one sector must be
achieved at the expense of the other. The reality of the
modern nation state, however, is that the prosperity of
the two sectors is inextricably linked. To understand the
potential of privatization, therefore, it is first necessary
to understand its limitations.
Privatization Movement
The Privatization Movement, once simply a group of
scholarly outsiders, has come of age. This new status is
evident from the seriousness assigned to privatization
even by its critics. Although different people define
privatization in different ways, the Movement itself is
NOVEMBER/DECEMBER 1987
* Privatization, as a concept and as a political move-
ment, is profoundly altering the shape of the public sec-
tor in the United States. Distinctions between the public
and private sectors are being blurred as the organiza-
tions for accomplishing public purposes are more and
more frequently a deliberate blend of public and private
characteristics. Throughout this transformation in the
public sector, the discipline and profession most directly
affected by privatization, public administration, has
been remarkably passive, both unwilling and unable to
raise critical questions respecting the limits, if any, to
privatization. This essay suggests that the origins of this
passivity lie in the reality that public administration has
largely forsaken its intellectual roots-roots which are
embedded in public law, not in economics or the social
sciences. Only by returning to public law, which empha-
sizes the distinctive character of the public and private
sectors, will public administrators become influential
players in the continuing debate over the future of the
public sector.
held together by a shared belief that the public sector is
too large and that many functions presently performed
by government might be better assigned to private sector
units, directly or indirectly, or left to the play of the
market place. The private sector, it is argued, will per-
form these functions more efficiently and economically
than they can be performed by the public sector.'
Implicit in the rhetoric of the Privatization Movement
is the view that the public and private sectors are alike,
both subject to the same set of economic incentives and
disincentives. Many functions are interchangeable.
Some promoters of privatization go so far as to argue
that nearly all public sector activities are potentially
amenable to being transferred to the private sector. The
basis for assigning functions between the public and
private sectors, therefore, should rest principally upon
normative economic criteria. The key question becomes
simply which sector performs the function more effi-
ciently and economically? Problems that may arise in
connection with legal status or organizational structure
are considered of secondary interest and importance.
The prevailing orthodoxy is highlighted in Barry
Bozeman's new book, All Organizations Are Public,
where he argues that "sector blurring" is not only pres-
ent and inevitable, but the desired way to plan for the
future. While allowing for a modest amount of distinc-
tiveness between government organizations and private
organizations, the overwhelming contemporary reality
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454
PUBLIC ADMINISTRATION REVIEW
is the similarities between the public and private sectors
of American life. The "publicness," to use Bozeman's
term, of organizations should be viewed on a matrix
with one objective of public policy being to provide the
right mesh of the sectors to achieve the mission of the
organization. In effect, Bozeman is asserting that the
public and private sectors are alike in the essentials, dif-
fering only in the nonessentials. He concludes by
lamenting that public administration theory equates
public organizations with government organizations
and is thereby a "puzzling and even disappointing
approach to an organizational world...."
This essay takes issue with the view that the public
and private sectors are alike in the essentials, differing
only in the nonessentials. Quite the contrary is true, as
Wallace Sayre is said to have observed in 1929.(3) The
public and private sectors may be alike in the non-
essentials, but it is in the essentials where they differ,
and these distinctions cannot be glossed over or taken
lightly.
While a certain fascination arises from the idea that
the current complexity and ambiguity in organizational
matters is an inevitable and desirable consequence of the
complexity and ambiguity of life in general, this fascina-
tion is misplaced. A line must separate that which is
public, or governmental (while other meanings of public
are important, these terms are used here interchange-
ably), and that which is private. The configuration of
the line may vary over time and with circumstances, but
it is a vital line nonetheless and the fundamental basis of
this line is to be found in public law, not in economic or
behavioral theories.
Promoters of privatization have been at the forefront
of current efforts to mesh the public and private sectors,
particularly at the federal level. One of the most inter-
esting of these experiments at "privatization" has been
the creation in 1985 of the Federal Assets Disposition
Association (FADA). This corporation was created by
private citizens under the laws of the State of Colorado
with capital provided by the Federal Savings and Loan
Insurance Corporation (FSLIC), an agency of the
United States. A study of the first years of FADA
follows shortly to facilitate inquiries as to the limits, if
any, of privatization and the distinctions, if any,
between the public and private sectors. Before that
study of FADA, however, some historical and theo-
retical analysis is necessary.
Lessons from McCulloch v. Maryland
Privatization is correctly described as an international
phenomenon. In nation after nation, from developed
countries like Japan, Great Britain, and France to less
developed countries like Sri Lanka and Turkey, the state
is rapidly divesting itself of commercial enterprises and
encouraging the development of competitive market
4
economies.
Among the countries of the world, the United States
presents a unique situation. From the outset of the
Republic, the government has relied on the private sec-
tor to provide commercial services and to own utilities.
Exceptions to this rule are well known, but they are
definitely exceptions. Thus, today, compared to most
other nations, developed and less developed, relatively
few candidates are available for full divestiture by the
United States government.'
In the United States, particularly with respect to the
federal government, the Constitution, statute law, and
the political culture all tend to promote and reinforce
the separate and distinct basis for the public govern-
mental and private sectors. While separation is encour-
aged, this has not discouraged cooperation between the
sectors. This cooperation, however, has rarely involved
joint ownership ventures at the national level of
government.
One important exception to this generalization
occurred early in the history of the United States. This
involved an instance of joint ownership of a corpora-
tion, and the battle that ensued led to results that still
influence the American political system. The story of
the second Bank of the United States is a case study in
privatization; or more directly, a case study of how not
to privatize a public function.
The second Bank of the United States was chartered
by Act of Congress in 1816 for a 20-year period. The
State of Maryland attempted to tax the operations of
the Baltimore branch of the Bank, a decision challenged
in the courts. The U.S. Supreme Court in the case of
McCulloch v. Maryland (1819)16] attempted to define the
status of the Bank. The ruling of the Court covered
many issues, but the case is most famous for its dictum
by Chief Justice John Marshall that the "power to tax is
the power to destroy." The lesson: A sovereign cannot
be taxed by a subordinate unit since to do so would per-
mit another body to determine the fate of the sovereign.
The McCulloch case, more by implication than direct
commentary, concerned issues beyond that of state tax-
ation of the Bank. The chartering Act required that
20% of the stock be owned by the federal government
while 800% was to be held in private hands. The Court
considered the Bank to be an instrumentality of the
sovereign, or agency of the United States, notwithstand-
ing the fact that only 200/o of the stock subscription was
held by the federal government. Thus, it was subse-
quently assumed that if the federal government owned
any portion of a corporate body, the entire body
acquired the attributes of the sovereign.
The legal questions in the McCulloch case, while
important, turned out to be secondary in U.S. history
compared to the political questions. Andrew Jackson,
reflecting the egalitarian character of American political
culture, became an implacable enemy of the Bank and
eventually succeeded in vanquishing the institution. The
utility of the Bank in economic terms was generally
recognized although some of its management practices
resulted in financial difficulties for the Bank and
alienated much of its natural constituency.
Jackson's opposition to the Bank was not based so
much on a negative opinion of its usefulness but rather
on the fact that its private owners enjoyed special privi-
NOVEMBER/DECEMBER 1987
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EXPLORING THE LIMITS OF PRIVATIZATION
455
leges resulting from the favored legal status of the Bank.
Jackson waged war against the Bank on the grounds
that it violated the American political culture. His argu-
ments ultimately proved persuasive to the majority of
Americans. For the remainder of the nineteenth cen-
tury, the federal government did not own stock in any
corporation. When it wanted a public function per-
formed, it provided for the function through a regular
government agency or by contract with another
provider.
One lesson learned from the battle over the Bank was
that there are limits, both constitutional and political, to
privatization ventures.
Assigning Functions
If nothing else, the Privatization Movement must be
given credit for forcing political and academic leaders to
reopen questions long considered settled. The assign-
ment of functions with a public character is one such
area where the settled has again become unsettled.
Insofar as there was, until recently, a consensus on
assigning functions, it was that the assignment process
should be handled on pragmatic, political grounds. It
really did not make much difference, according to this
view, if the federal government owned and operated
some facility since, by adopting tried and true business
methods, the activity would be managed equally or
more efficiently than if privately owned and operated.
Indeed, the Tennessee Valley Authority (TVA) was
touted as a "yardstick" for private power companies to
match. The privatizers came along to challenge this
comfortable assumption by arguing that in empirical,
economic terms most facilities, including power gen-
erating facilities, could be run more economically by the
private sector and, therefore, ought to be assigned to the
private sector.
This challenge by free market economists highlighted
the hidden reality that public administrators had seldom
developed sophisticated or comprehensive criteria to
assist lawmakers in deciding where best to assign a
public function. Indeed, while they saluted Woodrow
Wilson's essay, "The Study of Administration," they
never really sought to answer his central concern: "It is
the object of administrative study to discover, first,
what government can properly and successfully do, and,
secondly, how it can do these proper things with the
utmost possible efficiency and at the least possible cost
either of money or of energy."' As it stands now, the
political actors, both executive and legislative, are
assigning functions with a public character largely with-
out criteria and with consequences that are expensive to
both the public and private sectors.
Entering the Twilight Zone
Developing and applying criteria to be used in assign-
ment of functions to the public and private sectors is not
an easy task. The difficulty of the task is highlighted by
the experience of the corporation mentioned in the first
NOVEMBER/DECEMBER 1987
section of this article, the Federal Assets
Disposition
Association (FADA). A few words of background are
required to provide a context for its story.8
The Federal Home Loan Bank Board is a government
agency headed by a three member, full-time board.
Under this agency are three entities: the Federal Home
Loan Bank system, the Federal Home Loan Mortgage
Corporation ("Freddie Mac"), and the Federal Savings
and Loan Insurance Corporation (FSLIC). The latter
body is a wholly-owned government corporation oper-
ating under provisions of the Government Corporation
Control Act. It is a small agency under enormous pres-
sure as the number of defaults among financially
troubled savings and loan associations has increased.
The FSLIC, being an agency of the United States, is an
arm of the sovereign with all the privileges and immuni-
ties that inhere to this status.
All too often the relationship between the
public and private sectors is viewed as a
zero-sum game where increased prosperity
for one sector must be achieved at the
expense of the other. The reality of the
modern nation state, however, is that the
prosperity of the two sectors is inextricably
linked.
Given the great stress placed upon FSLIC by the
defaults across the country, the parent body, the
Federal Home Loan Bank Board, decided to create
another entity to act as the "agent" of the FSLIC in the
actual disposition of assets of failing savings and loans.
Citing a section of the National Housing Act of 1934, as
amended,9 the FSLIC encouraged a group of private
citizens to create the Federal Assets Disposition Associ-
ation as a "private, Federally chartered savings and
loan association" under the corporation laws of the
State of Colorado. This corporation was capitalized at
$25 million with the FSLIC owning 100%o of the stock
and with the corporation being assisted by a substantial
line of credit guaranteed by the FSLIC. The officers and
employees of this corporation were not to be considered
officers and employees of the United States, a status
making possible the payment of high salaries (the Presi-
dent of FADA receives $250,000 annually plus generous
bonuses) to both officers and employees of the
corporation.
IO
The FADA performs asset management and disposi-
tion services for the FSLIC with a staff of professionals
(approximately 200) who utilize a network of sub-
contractors to conduct the actual disposition of the
assets. Those assets total billions of dollars.
This brief description completed, the question
remains: What is FADA? Where, precisely, is its
enabling law?" Is it an agency of the United States sub-
ject to the laws applicable to such bodies? Or, is it, as
claimed by FADA's President and Chairman of the
Board, a private organization established under the laws
of the State of Colorado with its headquarters being
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456
PUBLIC ADMINISTRATION REVIEW
located in San Francisco, California? If it is the latter, is
it subject to state taxation on the operations of the cor-
poration and are the directors liable for their actions in
the same manner as other corporations in Colorado? If
the former categorization is correct, is FADA subject to
all management acts (e.g., Freedom of Information
Act, OMB legislative clearance) normally applicable to
agencies unless specifically exempted by provisions in
their enabling act? Are the expenditures of this corpora-
tion subject to review and disallowance by the U.S.
General Accounting Office? Since FADA issues rules
and regulations, does it come under the provisions of
the Administrative Procedures Act? These questions are
hardly points of trivial interest. The public law status of
FADA is critical to determining its privileges and
immunities, if such there be.
Is FADA "private" in its legal status? Can the cor-
poration declare bankruptcy? Are the employees, their
offices and records, protected by the privacy rulings
based on the Fourth Amendment applicable to private
citizens, or are the offices and records considered
"public" and hence not protected to the same degree by
the Privacy Act and the Fourth Amendment? Are the
officers of FADA subject to federal conflict of interest
laws? Do the state laws of Colorado determine the
degree of liability of directors acting in their capacity as
directors of the corporation?
The truth is that FADA is a "crypto-quasi-pseudo"
entity living a precarious existence in the twilight zone
between the public and private sectors. Studying the
functions performed by FADA provides an insufficient
basis for determining its character as a corporation. To
an economist, FADA may look and even act for the
most part as a private corporation, but functional
analysis raises more questions than it answers. The con-
fusion caused by FADA's ambiguous status is captured
by the following statement submitted by FADA's Chair-
man of the Board, Thomas Bomar, in a 1987 letter to
Chairman Fernand St Germain of the House Banking,
Finance and Urban Affairs Committee questioning cer-
tain provisions of a bill under consideration:
I am a director of FADA, serving with a group of other savings and
loan associations' chief executive officers, after having been one of
the organizers of FADA. For this reason, as well as AmeriFirst being a
payer of substantial premium dollars to the Federal Savings and Loan
Insurance Corporation, we have a major interest in your bill. .. It
[FADA] was organized by a group of private individuals acting at the
request of the FHLBB, but all the money put into it is FSLIC funds
and Federal Home Loan Bank borrowings. This makes its status
somewhat unique. (Emphasis added)'2
The status of FADA is unique only in the extremes to
which the public and private sectors have been com-
mingled. Numerous attempts have been made in recent
years somehow to bridge in legal and organizational
terms the public and private sectors. Many, if not most,
such attempts encounter problems which weaken the
capacity of the entity to achieve its assigned mission.
Among the more spectacular recent failures to mesh the
organizational elements of the public and private sectors
was the Synthetic Fuels Corporation (SFC). This
corporation, launched with immense fanfare and little
planning, was immediately in hot water with its high
salaries, private sector executive habits, and an inability
to relate its objectives to overall Administration energy
policies. The life span of the Synthetic Fuels Corpora-
tion was predictably short.
Being 100 percent owned by an agency of the United
States, FADA has a heavy burden of proof to muster to
be convincing in its argument that it is "private."
Recalling the McCulloch case, where the Court
reasoned that when the government owned any portion
of an entity, the entire body became an instrumentality
of the government, it is difficult not to conclude that
FADA is an agency of the United States. In a purely
political sense, it appears that FADA seeks to be private
in its direction and interests but public in its rights and
privileges.
The Distinctive Sovereign
As the case history of FADA suggests, the argument
holds substance that in the American political and cul-
tural setting the public and private sectors are funda-
mentally different and ultimately distinctive in charac-
ter. Thus, the criteria for assigning functions should
take into consideration these fundamental distinctions.
The single most important characteristic that separates
the public and private sectors, particularly at the federal
level, involves the concept of sovereignty. The federal
government possesses the rights and immunities of the
sovereign; organizations functioning in the private sec-
tor do not, or at least ought not, possess such rights and
immunities.
The debate over the definition of sovereignty is hoary
with age and is not likely to be resolved any time soon.
Rather than attempt to construct a single, all-
encompassing definition, it is sufficient for the purposes
here to suggest certain attributes that inhere to a
sovereign.
The first attribute generally assigned the sovereign is
that it possesses the legitimate right to use coercion to
enforce its will. The sovereign can coerce organizations,
groups, and individuals to conform to the laws it makes.
The sovereign may, for instance, tax citizens and cor-
porations and impose penalties on those who resist pay-
ing their taxes.
Only a sovereign may legitimately go to war with
another sovereign. Wars against sovereigns by private
parties occur, of course, but they are not considered as
legitimate and are fought outside the accepted boun-
daries of warfare.
Sovereigns can do no wrong. If a sovereign is to be
preeminent over all others within a territorial jurisdic-
tion, it cannot be subject to constraint or injury except
by its permission. Thus, sovereigns are immune from
suit except by their permission.
A sovereign is indivisible. A sovereign cannot assign
its attributes to a private party and remain a sovereign.
Similarly, a sovereign cannot share its powers with
another body claiming sovereignty. The American Civil
NOVEMBER/DECEMBER 1987
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EXPLORING THE LIMITS OF PRIVATIZATION
457
War was fought in large measure over
conflicting
theories of sovereignty with President Lincoln arguing
for the concept of indivisible sovereignty, and the
Southern states arguing for a system of dual sovereignty.
A sovereign may disavow debts but cannot go bank-
rupt. One of the tests applied to determine whether or
not an organizatiaon is part of the federal government is
the test of whether or not its obligations are backed by
the "full faith and credit of the Treasury." If they are,
the organization is generally deemed to be governmental
in character. The right to declare bankruptcy, that is to
be cleared by law of financial obligations, is a personal
or private right not inhering to the sovereign. Debate
over the status of the Federal National Mortgage
Association ("Fannie Mae"), a privately-owned cor-
poration whose stock is traded on the New York Stock
Exchange, revolves, in large measure, around the ques-
tion of whether or not its notes are backed by the "full
faith and credit of the Treasury."
The sovereign has the right to establish the rules for
protection and transference of property, both public
and private. Thus, the sovereign has the right to take
private property, "eminent domain," to promote a
public purpose. Sovereigns must provide the means of
contract enforcement and other safeguards for the
transaction of business.
Additional attributes may be ascribed to a sovereign,
but the above mentioned attributes are generally viewed
as fundamental. Since the idea of sovereignty is largely
an abstraction, the actual implementation of the will of
the sovereign is assigned to a government. The govern-
ment passes the laws that permit the will of the sover-
eign to become a reality.
In any serious analysis of a proposal to assign the per-
formance of a function to the public or the private sec-
tor, the first question should be: Does the performance
of this function necessarily involve the powers properly
reserved to the sovereign? Or, is the function largely
private in character requiring none of the coercive
powers of the sovereign? This question certainly
prompted the 1986 resolution of the American Bar
Association that the "privatization" of the operational
responsibilities of prisons and jails "not proceed . . .
until the complex constitutional, statutory, and con-
tractual issues are satisfactorily developed and
resolved.""3 Questions concerned with the relative
"economic costs" for providing a given service appear
to be secondary, or at least subsequent, to the resolution
of more fundamental legal issues.
Additional Factors to Consider
in Assigning Functions
Assuming for the moment that the performance of a
function does not involve the use of sovereign powers,
are there additional factors or variables that might
reasonably lead lawmakers to assign a function to the
public sector? If so, what are they, and should these
variables take precedence over or be considered at a par
with the economic factors?
NOVEMBER/DECEMBER 1987
With respect to the national level, the federal govern-
ment may decide that a particular product be produced
or service be provided by the government itself for
reasons of national security. The Central Intelligence
Agency, for instance, is not likely to choose to contract
for cryptographic services. Similarly, U.S. embassies
abroad may reject less costly local contractors in favor
of U.S. personnel for security and
accountability
reasons. The Iran-Nicaragua hearings in the one-
hundredth Congress highlighted problems associated
with delegating sensitive national security operations to
private parties. Privatization clearly has limits when
national security factors are present.
The single most important characteristic
that separates the public and
private sec-
tors, particularly at the federal
level,
involves the concept of sovereignty.
Another practical limitation on privatization may be
concern for public safety. Legislation has been intro-
duced in the one-hundredth Congress, for instance, to
prevent the Department of Defense from contracting
with a private commercial firm to guard and be respon-
sible for disposing of chemical weapons. In support of
the bill, the sponsor stated: "I dare say that Arkansas
and all Americans will sleep better knowing that
chemical weapons are being guarded by a trained
Government security force rather than by the lowest
commercial bidder.""4 Whether these concerns are well
founded is not the issue; the point is simply to indicate
that lawmakers feel obligated to consider public safety
factors in the assignment process.
In a constitutional democracy, a major societal value
is the idea that public officials should be held accounta-
ble for their actions to elected officials and through
these officials to the public. When a public function is
assigned to a private entity, usually through a contract,
there is an inevitable weakening in the lines of political
accountability. While a government agency is directly
accountable to elected officials, a private entity under
contract has only an indirect and tenuous relationship to
elected officials. What occurs, in variant forms, is the
emergence of "third-party government." In describing
this phenomenon, Lester Salamon suggests that the fed-
eral government is rapidly losing much of its decision-
making capacity to private for-profit and not-for-profit
corporations.
What is involved here ... is not simply the contracting out of well-
defined functions or the purchase of goods and services from outside
suppliers. The characteristic feature of many of these new, or newly
expanded tools of action is that they involve the sharing of a far more
basic government function: the exercise of discretion over the spend
ing of federal funds and the use of federal authority. They thus con-
tinually place federal officials in the uncomfortable position of being
responsible for the programs they do not really control.... Instead of
a hierarchical relationship between the federal government and its
agents, therefore, what exists in practice is a far more complex bar-
gaining relationship in which the federal agency often has the weaker
hand.'15
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458 PUBLIC ADMINISTRATION REVIEW
Third-party government is not only dangerous to the
political order, critics contend, it is corrosive of man-
agement supervision and personnel. Evidence of the
risks involved with third-party management of govern-
ment programs is provided by the tangled web of deci-
sion making between NASA and the Morton Thiokol
Company in the wake of the Challenger disaster.
The assignment of functions must take into con-
sideration the need for government to attract and retain
officers and employees with sufficient knowledge and
training to properly contract for, monitor, evaluate,
and use highly technical products from the private sec-
tor. Government, in order to avoid being "captured"
by contractors, must have a skilled cadre of technicians
and managers. Much of the continuing controversy over
Defense Department procurement practices involves the
issue of whether the mission of the Department has been
distorted to the extent that it sees its role as more to keep
its private sector contractors financially healthy than to
achieve some national policy objective set by Congress.
Congress.
Possibly the most potent of the factors limiting the
spread of privatization in the American context is the
spectre of corruption. Historically, the federal govern-
ment has been relatively free of the most blatant forms
of financial corruption, although enough instances have
arisen so as to indicate its potential for mischief. At the
state and local levels, however, particularly the latter,
history is very mixed, with some cities experiencing long
periods of corrupt "machine rule." Corruption, when
exposed, tends to result in "reform movements" and
reform, more often than not, has meant assignment of
services to units directly accountable to public officials,
i.e., both provided and produced by government agen-
cies and employees.
A high percentage of instances of corruption that
have occurred over the two centuries of American
administrative history has involved contracts with
private providers to perform a public service. This is
understandable because the letting of contracts general-
ly involves substantial sums of money accompanied by
considerable discretion on the part of contracting
officers. The stakes for private parties are often high,
and they may be willing to go to the edge of the law.
Thus, the potential for corruption during the contract
stage of the delivery process is considerable.
Case studies of many federalized services (e.g.,
prisons) suggest that often the shift from private to full
public sector performance of a function (the first
federal prison did not open until the 1890s) has been
preceded by the exposure of some pattern of corruption.
The cumulative effect of these several limiting factors
on the assignment of functions with a public character is
considerable although difficult to pinpoint in any given
case. Clearly, one factor may serve to constrain a pro-
posal for privatizing under certain circumstances, yet
not be influential under other circumstances. What is
important to recognize, however, is that ultimately
activities of a purely public and governmental character
exist that may not be assigned or delegated to private
parties. The nature of such activities may be in dispute
from time to time, but that a distinction exists between
the public and private sectors appears beyond dispute.
The debate today, whether it is recognized or not, is
largely over the "right" configuration for the line
between the public and private sectors.
Back to the Basics
The present twilight existence of FADA and similarly
structured instrumentalities presents a challenge not
merely to public administrators and attorneys but to the
advocates of increased privatization as well. If the
Privatization Movement continues to encourage the
creation of more entities combining elements of the
public and private sectors, it may find, to its discom-
fort, that the critical arena for major policy and
managerial decisions will shift (some argue that it
already has shifted) from the political to the judicial
arena. Thus, the inability of the Privatization Move-
ment to come to grips with the need to integrate its
economic theory with the complementary theories of
public law and, by extension, public administration
appears to be the Achilles Heel of privatization.
Supporters of the Privatization Movement view their
role as advocacy of a cause and thus feel little need to
consider the possible limitations to their arguments. The
role of finding limitations to privatization is left to its
opponents. This view, however, is shortsighted and car-
ries risk. As long as the premises of privatization do not
extend beyond the relatively narrow confines of the
public choice and free market paradigm and are not
challenged or modified by significant issues of public
law, then its advocates admit to few recognizable limits
to the efficacy of privatization. But the real world is not
limited to economic premises.
The larger issue facing the American political econ-
omy as it enters the twenty-first century is the macro
issue of functional placement and organizational man-
agement. Distinctive characteristics of the public and
private sectors need to be recognized as a prerequisite to
developing criteria for assigning functions between the
sectors. If a set of working criteria currently existed for
use by the executive branch and Congress, it is highly
unlikely that a hybrid such as FADA would have been
created. The principal winners in the FADA situation
are likely to be the lawyers who will have to try to sort
out the ambiguities in the courts when the litigation that
will surely arise reaches them.
The Privatization Movement worldwide deserves
much credit for altering the basic issues under debate in
nation after nation. The strength of free market con-
cepts, even in communist countries, is undeniable.
Presently no evident reason exists to believe that the
spread of privatization is likely to stop or that a rash of
nationalizations is likely to return.
This political and intellectual success notwithstand-
ing, it is time to move to a more sophisticated level.
Simply being "anti-government" is not enough. What is
needed now is a theory, or at least a set of criteria, to
assist in assignment of functions to the appropriate sec-
tor. The best thing that could happen to the private sec-
NOVEMBER/DECEMBER 1987
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EXPLORING THE LIMITS OF PRIVATIZATION
459
tor is to have a first-class public sector, appropriately
limited in size and functions, but fully capable of pro-
viding the legal, economic, and public goods infrastruc-
ture that will permit the private sector to reach its full
potential. This new challenge is surely worthy of the
same spirit and dedication that brought forth the first
stage of the new free market era in world politics.
Ronald C. Moe is a Specialist in American National
Government with the Congressional Research Service of
the Library of Congress. His writings include The
Hoover Commissions Revisited (1982) and articles in
such journals as PAR, Political Science Quarterly, and
Presidential Studies Quarterly. He is a member of the
National Academy of Public Administration and is cur-
rently working on a book on the President's veto power.
Notes
1. The literature promoting privatization is extensive and increasing
at a seemingly geometric rate. Although the economic theory
underlying much of the current interest in privatization may be
traced to Adam Smith's Wealth of Nations (1776), it is only
recently that free market economic theory has been "repack-
aged" and adapted to the language of contemporary political
discourse. With respect to the United States, three readings are
particularly helpful in understanding the arguments put forth by
promoters of privatization: Emanuel S. Savas, Privatizing the
Public Sector: How to Shrink Government (Chatham, NJ:
Chatham House, 1985); Stuart Butler, Privatizing Federal
Spending: A Strategy to Eliminate the Budget Deficit (New
York: Universe Books, 1985); and Steve H. Hanke, "Privatiza-
tion: Theory, Evidence, and Implementation," Proceedings of
the Academy of Political Science, vol. 35, no. 4 (1985), pp.
101-113.
Thus far, most criticism of privatization as a concept has been
oriented toward protecting the role and functions of the civil
service or disputing the claims for or results of privatization in a
particular policy field. See, for instance: American Federation of
State, County, and Municipal Employees, When Public Services
Go Private: Not Always Better, Not Always Honest, There May
Be a Better Way (Washington: AFSCME, 1987). Christopher K.
Leman, "The Revolution of the Saints: The Ideology of Privat-
ization and Its Consequences for the Public Lands," from Sell-
ing the Federal Forests, Adrien E. Gamache, ed. (Seattle: Uni-
versity of Washington, 1984). Robert Kuttner, "Going Private:
The Dubious Case for Selling Off the State," The New Republic
(May 29, 1983), pp. 29-33.
The fundamental premises underlying privatization have occa-
sionally been discussed in public administration literature. See:
Ted Kolderie, "The Two Different Concepts of Privatization,"
Public Administration Review, vol. 46 (July/August 1986), pp.
285-291. Paul Starr, "The Limits of Privatization," Proceedings
of. the Academy of Political Science, vol. 36, no. 3 (1987), pp.
124-137. Ronald C. Moe, Privatization: An Overview From the
Perspective of Public Administration, Congressional Research
Service Report No. 86-134 (Washington: CRS, June 1986).
A number of "think tanks" are promoting privatization
through books, periodicals, essays, and conferences. Preeminent
in this effort is the work of the Heritage Foundation, CATO
Institute, National Center for Policy Analysis, and the Citizens
for a Sound Economy.
The National Academy of Public Administration is presently
(1987) engaged in a study of new management principles and
techniques required to administer a state with a high degree of
service provision by nongovernmental bodies.
NOVEMBER/DECEMBER 1987
2. Barry Bozeman, All Organizations Are Public: Bridging Public
and Private Organizational Theories (San Francisco: Jossey-Bass
Publishers, 1987), pp. xi-xii.
3. The "law" attributed to Wallace Sayre is noted in Graham T.
Allison, "Public and Private Management: Are They Funda-
mentally Alike in All Unimportant Respects?" Proceedings for
the Public Management Research Conference, November 19-20,
1979 (Washington: U.S. Office of Personnel Management, Feb-
ruary 1980), pp. 27-38.
4. Madsen Pirie, Dismantling the State: The Theory and Practice of
Privatization (Dallas: National Center for Policy Analysis,
1985). "Privatisation: Everybody's Doing It Differently," The
Economist (December 21, 1985), pp. 71-86.
5. Given the historic policy of assigning commercial functions to
the private sector, promoters of privatization have not been able
to suggest many agencies or programs of the federal government
that are appropriate candidates for privatization. After con-
siderable effort, the Reagan Administration was able to include
in its 1988 Budget to Congress only a fairly lean list of privatiza-
tion initiatives. U.S. Executive Office of the President, Budget
of the United States Government, Fiscal Year 1988 (Washington:
U.S. Government Printing Office, 1987), pp. 2-44 to 2-51. For a
discussion of federal government corporations with commercial
type functions, and many without commercial functions, con-
sult: Ronald C. Moe, Administering Public Functions at the
Margin of Government: The Case of Federal Government Cor-
porations, Congressional Research Service Report 83-236
(Washington: Congressional Research Service, 1983).
6. McCulloch v. Maryland, 17 U.S. (4 Whet.) 315 (1819).
7. Woodrow Wilson, "The Study of Administration," Political
Science Quarterly, vol. 2 (June 1887), p. 197.
8. The Federal Assets Disposition Association (FADA), while of
recent (1985) origin, is already a highly controversial entity. In
1987, its activities are under investigation by a congressional
committee and the General Accounting Office, and it is under
attack by its parent agency and elements of the constituency it
was created to serve. See: Nina Easton and Robert Luke,
"FSLIC in Turf War with Asset-Disposal Agency: Federal Asset
Disposition Association Faces Wall of Resistance, Sources Say,"
American Banker (April 6, 1987), p. 1. Kathleen Day, "FADA
Out of Favor With Many Realtors: Congress Asked to Review
Policies of Federal Land Broker Agency Owned by FSLIC,"
Washington Post (July 12, 1987), p. H-i.
9. Section 406 of the National Housing Act (12 U.S.C. 1729(a)).
FADA is often referred to as a "406 corporation."
10. The salary of the Chief Executive Officer of the Federal Assets
Disposition Association is discussed in: U.S. General Account-
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460
PUBLIC ADMINISTRATION REVIEW
ing Office, Federal Pay: Executive Salaries in Government-
Related Banking Organizations, GAO/GGD-87-68FS (Washing-
ton: GAO, April 1987).
11. Arguably, the Federal Assets Disposition Association, a wholly-
owned subsidiary of the Federal Savings and Loan Association,
was established in contravention of provisions of the Govern-
ment Corporation Control Act (31 U.S.C. 9102) which provide,
in part: "An agency may establish or acquire a corporation to
act as an agency only by or under a law of the United States
specifically authorizing the action."
12. Letter of Thomas Bomar, Chairman of the Board of the Federal
Assets Disposition Association, to Fernand J. St Germain,
Chairman of the House Banking, Finance and Urban Affairs
Committee. Attachment to Statement of Roslyn B. Payne, Presi-
dent of FADA, before the Subcommittee on Financial Institu-
tions Supervision, Regulation and Insurance, on H.R. 27. March
3, 1987. Statement distributed at hearings.
For a discussion of the liability of directors of government cor-
porations, see: Dianne Hobbs, "Personal Liability of Directors
of Federal Government Corporations," Case Western Reserve
Law Review, vol. 30 (Summer 1980), pp. 733-779.
13. No element of the privatization program has generated more
debate and heat than the efforts to privatize prisons and correc-
tions. The legal profession, as demonstrated by the 1986 Resolu-
tion of the American Bar Association (United States Law Week
[February
18, 19861, p. 2416), is largely opposed to privatizing
prisons and corrections on constitutional and statutory grounds.
The premise underlying most legal criticisms of privatization
of corrections is that a fundamental difference exists between
"state action" and "private action" and this difference is to be
found in law, not economic functions. "The Fifth and Four-
teenth Amendments, which prohibit the government from deny-
ing federal constitutional rights and which guarantee due process
of law, apply to the acts of the state and federal governments,
and not to the acts of private parties or entities." Ira Robbins,
"Privatization of Corrections: Defining the Issues," Federal Bar
News and Journal, vol. 33 (May/June 1986), p. 196. See Shelley
v. Kraemer, 334 U.S. 1, 13 (1948); Civil Rights Cases, 109 U.S.
3, 11 (1883).
14. Statement of Senator David Pryor in support of S. 736. Congres-
sional Record, daily edition (April 10, 1987), p. S5197.
15. Lester Salamon, "Rethinking Public Management: Third-Party
Government and the Changing Forms of Government Action,"
Public Policy, vol. 29 (Summer 1981), p. 260.
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THE CONTRIBUTORS: John A. Rohr, Camilla M. Stivers,
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