April 28, 1999
                                           DO-99-020

MEMORANDUM

TO:       Designated Agency Ethics Officials

FROM:     Stephen D. Potts
          Director

SUBJECT:  Ethical Challenges of Privatization and Partnering


     The Clinton Administration's efforts to "reinvent" Government
have led to a surge in the privatization of Federal functions over
the past six years.  Variously termed partnering, out-sourcing,
contracting out, downsizing, devolution, cooperative agreements,
integrated process teams or other similar descriptions, the common
characteristic entails transfer of a Government function to the
private sector.  Both the privatization process itself and any
resulting arrangements which involve interactive partnering between
Government employees and the private sector work force raise
challenging ethical considerations for executive branch employees
and ethics officials.  

     The purpose of this memorandum is to remind ethics officials,
who in turn should counsel employees, about our legal obligations
under those existing ethics principles, which still remain a
viable, controlling framework for official involvement in
transferring Government functions to the private sector and in any
resulting Government-private interactive work performance.

THE PRIVATIZATION PROCESS

     The Office of Government Ethics (OGE) has previously addressed
the types of legal issues that typically arise during the process
of privatizing.  See OGE informal advisory memorandum 95 x 10,
originally printed as an article in the Government Ethics Newsgram
(Summer 1995, vol. 12, no. 2, pp. 1-3), entitled "Privatization
Issues Affect Federal Employees."  The issues examined therein
concerned the potential for conflict under 18 U.S.C. § 208 when
employees involved in the devolution process have a financial
interest because their jobs might be eliminated and transferred to
the private sector, or because they are part of an Employee Stock
Ownership Plan (ESOP) that seeks to perform the privatized
function, or because they are negotiating or have an arrangement
with an outside entity to perform the privatized function. 
Additionally, that opinion addressed restrictions under 18 U.S.C.
§ 203 and § 205 on representational activities to the Government on
behalf of private entities, procurement integrity considerations,
and post-employment restrictions under 18 U.S.C. § 207.

     Subsequent to the publication of advisory memorandum 95 x 10,
OGE issued a regulatory provision at 5 C.F.R. § 2640.203(d), which
had the effect of modifying the analysis in footnote 1 of that
opinion regarding 18 U.S.C. § 208, though the result may be the
same, in most cases.  Footnote 1 had concluded that participation
in a particular matter affecting only an employee's Federal salary
was not encompassed by the statutory bar.  Discussion at 60 Fed.
Reg. 44707 (August 28, 1995) in the preamble to the new regulation
(as first published on an interim basis) modified that position. 
As indicated therein, because of somewhat conflicting
interpretations over the years, and after further consultation
with, and concurrence of, the Department of Justice, it was decided
to treat financial interests that arise from Government salary and
employment as disqualifying under § 208, but to exempt most of
those financial interests by the accompanying regulation, as
permitted by 18 U.S.C. § 208(b)(2).  

     With that caveat, OGE's informal advisory memorandum 95 x 10
remains a seminal guide concerning ethics matters that arise in
connection with the process of privatization.  Of course, as that
opinion suggests, the issues must necessarily be examined on a
case-by-case basis, because the particular underlying facts will
vary.

     The regulatory exemption at 5 C.F.R. § 2640.203(d) itself adds
considerably to the body of OGE guidance concerning privatization. 
It permits an employee to fully participate in particular matters
affecting his Government position, salary and benefits, so long as
those matters do not affect him individually or specially, and so
long as they do not affect his interests beyond those arising from
Government employment (such as the creation of a private employment
position through an ESOP, contract or other arrangement).  These
principles are well enunciated by Examples 7 and 8 in
§ 2640.203(d), as further explained in the preamble to the final
rule at 61 Fed. Reg. 66838 (December 18, 1996).  Even with regard
to matters individually or specially affecting an employee's own
Government position, salary and benefits, she may make requests and
recommendations, but not determinations, as illustrated by
Example 10.
                                                  
WORK PERFORMANCE INTERACTION WITH THE PRIVATE SECTOR

     It has become increasingly apparent that the ethics issues
facing Government employees go well beyond the concerns associated
with the process of privatization, extending to the partnering
arrangements that may result from privatization whereby Government
employees work side-by-side with private company employees or
interact with them in performing a function that was previously the
primary province of the Government.  Some Government employees have
assumed, because of the political direction toward privatization
and partnering, that the established ethical rules and conflict of
interest statutes may have been overridden or are subject to
special exceptions in those circumstances.  Employees need to be
reminded, however, that the existing ethics statutes and
regulations continue to apply in both the privatization process and
any resulting arrangements that involve partnering, and that these
rules help ensure the integrity of Government operations and
prevent employee ethical violations.

     Agencies are encouraged to integrate relevant examples into
their ongoing employee training programs, based on their particular
experiences, so as to strengthen awareness that privatization does
not alter the governing ethical restrictions on employee behavior
during privatization and subsequent interaction with private
entities that perform Government-related functions.  In addition to
the conflict of interest statutes cited above, the standards of
ethical conduct at 5 C.F.R. part 2635 should be emphasized,
especially in these areas:

                   Gifts from outside sources, such as
          entertainment, meals, awards, transportation,
          and parties or receptions celebrating employee
          achievements;

                   Outside financial interests that conflict with
          the performance of official duties, such as
          employment of a spouse or children,
          investments, and seeking future employment
          (based largely on 18 U.S.C. § 208); 

                   Adverse appearances arising from participation
          in official matters where the employee has a
          covered relationship under § 2635.502 that
          would cause a reasonable person with knowledge
          of the facts to question his impartiality;

                   Misuse of Government resources, including
          travel funds, transportation, equipment, and
          information; and

                   Endorsements and preferential treatment of
          private entities.

     As specific fact patterns arise, OGE will continue to provide
guidance through oral and written advice.  See, for example, OGE
informal advisory letter 98 x 8 (June 25, 1998) on the use of
contractor-provided transportation.

     The key point is that the statutes and regulations
collectively referred to as Government ethics rules remain
unchanged by privatization.  We anticipate that the ethics issues
surrounding privatization will generate an ongoing dialogue, in
which this memorandum represents only an overview and first step. 
We welcome your comments, as that dialogue develops over the coming
months.  Additionally, OGE is currently exploring the feasibility
of sponsoring a panel discussion or other appropriate forum to
share expert commentary and resources on ethical concerns in
privatization and partnering.