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Privatizing Government Services

Posted by Joseph T. Caufield on April 26, 2016 at 9:03 AM

Local governments often benefit from private and public partnerships formed around special projects and routine services. For example, public entities often work with national organizations such as the Nature Conservancy or a local conservation trust to obtain land for parks or nature preserves. Additionally, many local governments entrust the operations of wastewater treatment and refuse collection to private sector service providers. These partnerships are mutually beneficial and we expect more initiatives among public entities and both private for-profit and non-profit entities in the future.

The insurance and risk management needs that arise from these routine services or special projects are not so different from the requirements that were in place before the public/private initiatives started. After all, most local governments continue to directly purchase land, treat water and collect refuse. While not necessarily in direct competition with local governments, private individuals and companies also continue to perform similar activities and services.

There is an emerging trend to consider joint public/private operation of services traditionally viewed as exclusive governmental functions. Examples include traffic violation cameras installed and operated by a private contractor, probation services delegated to a third party, and in at least one instance so far, an initiative to assign most of the daily administration and oversight of a local government to a not-for-profit outside service provider. The former public sector employees are actually transferred to private sector employment status but continue to perform the same governmental duties. For local government agencies dedicated to providing public transit, there are also examples of joint public and private operation when an outside private sector management firm is hired to assume oversight of staffing, scheduling, and maintenance.

Unlike many of the routine services or special projects, these new hybrid public sector/private sector initiatives to jointly administer services once exclusively governmental, do prompt numerous insurance and risk management questions.

Is the local government authorized to hire an outside entity to perform traditional governmental functions? Are law enforcement duties for traffic control delegable to an outside contractor? Can the local government delegate judicial administration, remittance of fines or penalties, to a private vendor? Does a local government actually exist if its operations are delegated 100% to the private sector? Or, does that local government begin to resemble a property owners association?

The practical insurance and risk management issues that quickly surface contrast the differences between local governments and the private sector, profit or not-for-profit.  Dependent upon individual state jurisdiction, local governments enjoy specific legal immunities, unique defenses and often maximum limits of liability. None of these features typically apply to private entities performing governmental work. There are exceptions for private entities regulated as public utilities, but such entities are not joint public/private initiatives.

We expect that economic considerations will continue the trend to increased joint public/private administration. “Tread lightly due to unknown territory” is the preferred risk management approach. Service agreements with vendors should indemnify the local governments. The private sector partner should not be permitted to transfer responsibility for poorly performed services to the local government. Never accept a private sector proposal to assume a local government responsibility at no cost to the local government. Such an agreement is unlikely to require the needed protection to the local government.

So, while there are cases of local governments beginning to privatize, the trend will likely proceed slowly as cautious risk managers try to weigh the risks – those that are insurance related and beyond.


Kate Wood

April 26, 2016 at 4:21 PM

I'd be curious to hear form Public Risk Managers about "privatizing" risk management services. Many organizations already hire outside counsel, use TPAs for claims administration, purchase insurance through brokers, engage safety and loss prevention consultants and participate in not-for-profit risk pools. Should we expect to see this "outsourcing" grow, or will more organizations see value in bringing in (or keeping in) risk management services - especially in light of a growing interest in ERM?