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Economic and Institutional Constraints on the Privatization of Government Information Technology Services

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Advances in information technology give public officials unprecedented opportunities to reshape government. Governments can employ this new technology to improve their own internal efficiency and to deliver new transactional services, such as electronic registration renewal or online voting.

As both consumers and providers of information services, governments often contract with private entities for information technology. Rather than building their own computers or running their own local telephone systems, governments contract with third parties for these infrastructure goods and services. Governments also hire private companies to provide information services such as operating data centers. A growing number of governments also privatize informationintensive functions by hiring contractors to perform work that was previously conducted by the state. For example, Massachusetts pays a private company to administer its motor vehicle registry and California uses the same company to manage student aid and welfare cases. Almost universally, governments expect to save money by privatizing such services.

Some governments have become even more aggressive in their privatization plans. These plans involve more than merely contracting for individual services, such as hiring a company to provide computers or a vendor to provide voice mail to state employees. Instead, state and local governments are investing more managerial control in the private sector by entering into “whole-of-government” projects, which privatize their entire information technology infrastructure.

This Note argues that privatizing public information technology will likely not generate the cost savings that governments expect, especially under a “whole-of-government” approach. Part II explains how state and local governments use both information technology and privatization to increase the productivity of government.

Part III applies existing privatization concepts to show that privatizing information services would likely not produce significant cost savings. The first two sections identify structural and institutional constraints to privatizing complex government services. These constraints include large transaction costs associated with the principleagent relationship and core government functions not easily delegated. The next section applies a framework for evaluating the effects of privatizing government information services. This evaluation shows that since government information services are complex, with rapidly changing goals, they are difficult to privatize. A survey of privatization trends and examples of privatization failures corroborates this result.

The Note concludes that privatizing government information services would likely fail to achieve any anticipated cost savings, especially under a “whole-of-government” approach