Time to ditch the privatization/contracting delusion (contd.)

This follows up Tuesday's post on the dawning recognition that the vogue for outsourcing government functions to commercial contractors has largely proved be a debacle in the military & national-security fields—David Petraeus & Dianne Feinstein: Time to pull back from another failed experiment in "privatization".

A new report issued by the Project on Government Oversight, a well-respected non-partisan watchdog outfit, offers a systematic assessment of this failed experiment in more comprehensive terms. (Hat tip to Andrew Sullivan.) "For decades," they note,

there have been increasing political pressures to reduce the size of the federal government. In response the government has awarded service contracts, resulting in an expanding “shadow government” that costs hundreds of billions of dollars annually.

With what result? Well, here's the gist of it:

Bad Business: Billions of Taxpayer Dollars Wasted on Hiring Contractors
September 13, 2011

Executive Summary

Based on the current public debate regarding the salary comparisons of federal and private sector employees, the Project On Government Oversight (POGO)[1] decided to take on the task of doing what others have not—comparing total annual compensation for federal and private sector employees with federal contractor billing rates in order to determine whether the current costs of federal service contracting serves the public interest.

The current debate over pay differentials largely relies on the theory that the government pays [standard or low-end] private sector compensation rates when it outsources services. This report proves otherwise: in fact, it shows that the government actually pays service contractors at rates far exceeding the cost of employing federal employees to perform comparable functions.

POGO’s study analyzed the total compensation paid to federal and private sector employees, and annual billing rates for contractor employees across 35 occupational classifications covering over 550 service activities. Our findings were shocking—POGO estimates the government pays billions more annually in taxpayer dollars to hire contractors than it would to hire federal employees to perform comparable services. Specifically, POGO’s study shows that the federal government approves service contract billing rates—deemed fair and reasonable—that pay contractors 1.83 times more than the government pays federal employees in total compensation, and more than 2 times the total compensation paid in the private sector for comparable services.

Additional key findings include:

• Federal government employees were less expensive than contractors in 33 of the 35 occupational classifications POGO reviewed.
• In one instance, contractor billing rates were nearly 5 times more than the full compensation paid to federal employees performing comparable services.
• Private sector compensation was lower than contractor billing rates in all 35 occupational classifications we reviewed.
• The federal government has failed to determine how much money it saves or wastes by outsourcing, insourcing, or retaining services, and has no system for doing so.

POGO’s investigation highlights two basic facts about outsourcing government work to contractors. First, comparing federal to private sector compensation reveals nothing about what it actually costs the government to outsource services. The only analysis that will shed light on the true costs of government is that of contractor billing rates and the full cost of employing federal employees to perform comparable work. The Commission on Wartime Contracting in Iraq and Afghanistan recently completed a fundamental study of costs, and found that, in certain contingency operations, although savings resulted from hiring local or third-country nationals, military and civilian employees cost less than hiring American contractors.

Second, the federal government is not doing a good job of obtaining genuine market prices, and therefore the savings often promised in connection with outsourcing services are not being realized. The argument for outsourcing services is that, by outsourcing services on which the government holds a monopoly, free market competition will result in efficiencies and save taxpayer dollars. But our study showed that using contractors to perform services may actually increase rather than decrease costs to the taxpayers.

POGO found several failures in government procurement, employment, and data systems that limit the government’s and the public’s abilities to assess and correct excessive costs resulting from insourcing or outsourcing federal services. Failures included the lack of standards for calculating cost estimates and justifying insourcing or outsourcing decisions; the lack of data related to negotiated service contract billing rates; not publishing government information about the number of actual contractor employees holding a specific occupational position under any given contract; and that there is no universal job classification system.

For decades there have been increasing political pressures to reduce the size of the federal government. In response the government has awarded service contracts, resulting in an expanding “shadow government” that costs hundreds of billions of dollars annually. The focus on comparing federal and private sector salaries needs to shift because they have nothing to do with what the government actually pays for services. Instead, the focus properly belongs on analyzing the full costs of paying contractors to perform federal services. Given the nation’s ongoing economic problems, this analysis has become even more relevant—approximately one-quarter of all discretionary spending now goes to service contractors. [....]

(The full report is here.)

As I noted on Tuesday, the whole craze for privatizing and subcontracting public functions has been one more exercise in what C. Wright Mills used to call "crackpot realism," pushed along by the strange mixture of pro-market ideological delirium and practical corporate welfarism that has infected so many areas of public policy over the past several decades. With rare exceptions, this approach is a bad idea for all sorts of reasons; but many people believe (largely on faith) that any possible drawbacks must invariably be compensated for by increased efficiencies and lower costs. It's a tempting idea, and it has the additional appeal of seeming "tough-minded" and "realistic," but most of the time it happens to be wrong. Time to start waking up.

Yours for the public interest,
Jeff Weintraub