Step 3: Creating Market Dynamics

Not all public activities should be subject to competition, as noted above. In the private sector, we call these utilities and regulate them to protect the consumer. They are run in a businesslike fashion, and they respond to the market. (For instance, they have stockholders and boards, and they can borrow on the capital markets.) They simply don't face competition.

Many governments, including our federal government, do something very similar. They create government-owned corporations to undertake specific tasks. The Postal Service and Tennessee Valley Authority are two examples. Such corporations are free from many restrictions and much of the red tape facing public agencies, but most of them remain monopolies--or, as with the Postal Service, partial monopolies.

At other times governments subject public organizations to market dynamics, stimulate the creation of private enterprises, or spin off public enterprises to the private sector. To get the best value for the taxpayer's dollar, the federal government needs to use these options more often.

Consider the National Technical Information Service (NTIS), a once-failing agency in the Commerce Department that turned itself around in a brief year's time. Established to disseminate federally funded scientific and technical information, NTIS was, until recently, not meeting its mission. The agency, which receives no congressional appropriations, was suffering serious financial problems, selling fewer documents each year to its mostly private sector customers, and charging higher and higher prices on those it did sell.

Commerce--not surprisingly--considered abolishing the agency. A year earlier, the department's inspector general had concluded that NTIS's reported earnings of $3.7 million were vastly overstated, that it suffered $674,000 in additional operating losses in 1989, and that its procedures in handling such losses and cash shortfalls violated government accounting principles and standards.

Commerce instead decided to turn the agency around. The effort worked. NTIS's revenues and sales are both up. Why? Because the agency was forced to respond to its customers' unhappiness. NTIS reduced the turnaround time on its orders, cut complaints about incorrect orders, and dramatically slashed the percentage of unanswered phone calls. Consequently, most business customers who turned away in the 1980s have returned. NTIS's turnaround shows what can happen when public organizations face the pressure of customer demands. See Note 32

Other agencies may require a structural change to enhance their customer service. Because it's run as a public agency, for instance, the Federal Aviation Administration's air traffic control (ATC) system is constantly hamstrung by budget, personnel, and procurement restrictions. To ensure the safety of those who fly, the FAA must frequently modernize air traffic control technology. But this has been virtually impossible, because the FAA's money comes in annual appropriations. How can the FAA maintain a massive, state-of-the-art, nationwide computer system when it doesn't know what its appropriation for next year or the years beyond will be?

As a result, the 10-year National Airspace Plan, begun in 1981, is now 10 years behind schedule and 32 percent over budget. Federal personnel rules aggravate the problems: The FAA has trouble attracting experienced controllers to high-cost cities. With no recent expansion, the system lacks the capacity to handle all air travel demands. Consequently, airlines lose about $2 billion annually in costs for additional personnel, equipment, and excess fuel. Passengers lose an estimated $1 billion annually in delays.

America needs one seamless air traffic control system from coast to coast. It should be run in a businesslike fashion--able to borrow on the capital markets, to do long-term financial planning, to buy equipment it needs when it needs it, and to hire and fire in reasonable fashion. The solution is a government-owned corporation.

Action: Restructure the nation's air traffic control system into a corporation.

See Note 33

"There is an overwhelming consensus in the aviation community that the ATC system requires fundamental change if aviation's positive contribution to trade and tourism is to be sustained," one study concluded earlier this year. See Note 34

The ATC's problems can't be fixed without a major reorganization. Under its current structure, the system is subject to federal budget, procurement, and personnel rules designed to prevent mismanagement and the misuse of funds. The rules, however, prevent the system from reacting quickly to events, such as buying the most up-to-date technology. In its recent report, Change, Challenge, and Competition, the National Commission to Ensure a Strong Competitive Airline Industry, (chaired by former Virginia Governor Gerald Baliles), recommended the creation of an independent federal corporate entity within the Transportation Department. We agree.

We should restructure the ATC into a government-owned corporation, supported by user fees and governed by a board of directors that represents the system's customers. As customer use rises, so will revenues, providing the funds needed to answer rising customer demands and finance new technologies to improve safety. Relieved of its operational role, the FAA would focus on regulating safety. With better, safer service, we all would benefit. This approach has already worked in Great Britain, New Zealand, and other countries.

Action: The General Services Administration will create a Real Property Asset Management Enterprise, separating GSA's responsibility for setting policy on federally owned real estate from that of providing and managing office space.

See Note 35

In asset management, too, government could take a few lessons from business. We must begin to manage assets based on their rates of return. A good place to start is in the General Services Administration.

The federal government owns assets--land, buildings, equipment--that are enormous in number and value. But it manages them poorly. Like several other agencies, GSA wears two hats: with one, it must provide office space to federal agencies. With the other, it serves as manager and trustee of huge real estate holdings for American taxpayers. It cannot do both--at least not well. Should it maximize returns for taxpayers by selling a valuable asset? Or, as the office space provider, should it require an agency to occupy one of its own buildings when less expensive leased space is available?

GSA will create a Real Property Asset Management Enterprise, solely responsible for managing federally owned real estate to optimize the highest rate of return for taxpayers, while competing with the private sector and better serving tenants' needs.

Action: The Department of Housing and Urban Development will turn over management of its

See Note 36

The Department of Housing and Urban Development has a growing workload of problem multi-family loans and foreclosed properties. In addition, restrictive rules and outdated practices hamper its management of these assets. Rather than more staff, HUD needs a new approach.

HUD, which oversees the Federal Housing Administration, owns many loans and properties it acquired from the FHA when owners defaulted on their loans. These "market-rate" assets--which were never set aside for low-income people--have fewer restrictions on disposal than most HUD-subsidized properties. But in trying to sell the assets, HUD still faces a variety of legal and political pressures. If the department entered into limited partnerships with real estate firms, it could retain most profits from any sales and let a private business entity perform the sales in the most economically beneficial way.