The Case Against Privatizing
by Ann Markusen
Dollars and Sense magazine,
In the past 20 years, this country has
undergone a transformation in the way it prepares for, conducts,
and mops up after war. The Pentagon has overseen a large-scale
effort to outsource all aspects of its operations to private corporations.
the claims of privatization proponents,
there's scant evidence that private firms perform better or at
lower cost than public-sector agencies. More troubling, as corporations
cash in on lucrative contracts, they encroach on the political
process, driving up military spending and influencing military
and foreign policy.
THE GROWING "SHADOW PENTAGON"
National defense is one of the most heavily
outsourced activities in the U.S. federal government. From 1972
to 2000, private contractors' share of all defense-related jobs
climbed from 36% to 50%. While the country's public-sector defense
workforce remains large- about 2.2 million in 2000-its "shadow
workforce," the true number of people supported by federal
government spending and mandates, is far larger.
Of the dozens of major military contract
firms in the United States today, Lockheed Martin, Boeing, and
Northrop Grumman are the largest three-they divvied up $50 billion
of the $209 billion the Pentagon awarded in prime contracts in
2003, according to defense analyst William Hartung-but lesser-known
info-tech and engineering companies like Computer Sciences Corporation,
BDM International, and Science Applications International Corporation
are emerging as major Department of Defense (DOD) suppliers, each
with billions of dollars in defense business annually.
Despite the popular image of a defense
contract as a contract for building large weapons systems like
aircraft, missiles, or tanks, contracts for services are actually
more typical. Service workers-not production workers-accounted
for nearly three out of four contract-created jobs in 1996, up
more than 50% since 1984. A growing legion of contracted employees
install, maintain, trouble-shoot, operate, and integrate military
hardware. Similarly, research and development work is increasingly
farmed out. (Navy technical centers outsourced 50% of research,
development, test, and evaluation work by 1996, up from 30% in
1970.) And other, lower-skill, service contract firms perform
a panoply of other functions, from base maintenance and catering
and support, to security detail and military training.
According to economic theory, it's competition,
not privatization per se, that is expected to produce cost savings
and performance improvements. Competition is key because private
contractors are profit-seeking firms whose first loyalties are
to their shareholders. Without competition, and in the absence
of close monitoring, the corporations have every incentive to
raise prices and hide information about their products and services.
Defense economists suggest competition should generate efficiencies,
but only under certain conditions: four or more firms competing
for a given job, ongoing competition over time, clarity by the
government buyer about task and performance requirements, and
active, sustained government monitoring.
That's the theory. In the real world of
military contracting, these conditions are rarely met. Most contracts
that are opened to competing bids have fewer than three bidders.
Once signed, contracts last for long periods, insulating firms
from ongoing competitive pressures. The bidding process itself
may be distorted in that firms "low-ball" bids, knowing
they can negotiate add-ons later. And with the dramatic consolidation
of the industry in the mid-1990s, and the shrinking number of
large prime contractors, collusion among firms is a recurrent
Several Pentagon contracts are "cost-plus,"
meaning the companies recoup their costs, including a portion
of overhead, and are guaranteed a percentage of the costs as profit-a
recipe for cost inflation. For example, Halliburton subsidiary
Kellogg Brown & Root was given a 10-year multibillion dollar
contract to provide logistical support services to U.S. troops
overseas. The contract guarantees the firm will receive 1% of
total costs as profit. In addition, KBR is eligible for a bonus
payment of up to 2%. The firm has a long record of cost overruns
in Kosovo, and its performance to date in Iraq has been weak.
KBR admitted to overcharging the government by $61 million for
gasoline, and its own internal audit of its Iraq operations reveals
serious problems including a failure to control subcontractor
costs and widespread loss of supplies and equipment, according
to the Wall Street Journal.
THE EVIDENCE ON EXPECTED GAINS FROM PRIVATIZATION
Given the colossal sum of government dollars
doled out in defense contracts, you'd think Congress and the Pentagon
would carefully track cost and performance outcomes. But Pentagon
records are sketchy and largely hidden from public view. Even
the U.S. General Accounting Office (GAO), the investigative arm
of Congress, has had difficulty prying data from the Pentagon.
What's more, the few assessments that do exist focus on competitions
between public and private bidders (where a government agency
bids for work in competition with a private entity), and not private-private
competitions, or the 50% of DOD purchases that are sole-sourced,
simply given to a contractor with no competitive bidding process
Some have estimated that the DOD saves
20% to 30% from public-private competitions, but those approximations
are based on savings estimates at the initial bidding stage. In
other words, they look at the promise of savings, not actual savings
over time-a poor measure, since cost overruns are common and contracts
are often renegotiated or otherwise changed after they're awarded.
The few existing studies of longer-term
outcomes-conducted mainly by the center for Naval Analysis (CNA),
a federally funded research and development center, and the GAO-offer
A CNA study of surface ships found that
readiness was about the same whether the work was done in a public
Navy yard or a private yard; a study of Navy maintenance work
over time found that for a period of around two years, the contractors'
performance was worse than that of the Navy in-house team, but
that overall, the contractors performed better than the Navy team.
CNA insists that public-private competitions
do generate bids and plans which would, if implemented, save the
Pentagon money. But CNA analyses are emphatic that "competition
produces the savings and not outsourcing per se." Its simulations
suggest that 65% of total savings should in theory be achieved
simply by the exercise of competing, even if no private firm receives
GAO is less sanguine about the potential
for cost savings. The agency investigated some of the Pentagon's
savings estimates and concluded that they were overstated because
"DOD has not fully calculated either the investment costs
associated with undertaking these competitions or the personnel
separation costs likely to be associated with implementing them."
DOD had assumed it would cost just $2,000 per position to conduct
a competition, but in actuality the costs run from $7,000 to $9,000.
In a later review of the Pentagon's claim that it had saved $290
million through public-private competition in 1999, the GAO concluded
that it was difficult to determine how much had actually been
saved. A large part of the problem, again, is that the DOD does
not systematically track or update its savings estimates once
contracts are underway.
GAO also cautions that savings from outsourcing
come chiefly from cuts in personnel costs. We cannot know whether
these cuts normally take the form of wage and benefit reductions,
the use of temporary workers, cuts to the full-time workforce,
or some combination, because private sector firms refuse to share
personnel information, calling it proprietary.
The large role of labor-cost savings in
Pentagon outsourcing should give policymakers pause. It's troubling
that the Pentagon does not monitor the pay and working conditions
of its "shadow employees." If private prison administrators
are required to share employment data with evaluators, why shouldn't
Pentagon contractors face the same requirement?
In sum, the jury's still out on whether
outsourcing military work produces efficiencies, and little is
known about how savings that are achieved may result from cutting
wages. Furthermore, no study has included the cost of competent
oversight in the outsourcing calculus, or looked systematically
at performance outcomes.
CORRUPTION AND POLICY INFLUENCE
Beyond efficiency and performance concerns,
the increasing reliance on for-profit firms for national defense
creates deeper political and institutional problems-namely, the
capture of public decision-making by private military interests.
Through lobbying, advertising, and heavy
campaign contributions, the private defense sector calls for weapons
systems and defense initiatives that generate lucrative contracts.
Since the end of the Cold War, private military contractors have
formed a powerful lobby to protect obsolete Cold War weapons systems.
For example, during the Reagan years, strenuous lobbying overcame
even the highly mobilized and scientifically well-informed opposition
to the B-1 bomber and the Star Wars program, two of the most costly
weapons programs in the postwar period. In the 1990s, lobbyists
undermined important initiatives to control the export of conventional
arms, and recently the aerospace industry-led by Lockheed Martin-pushed
hard to bring Poland, Hungary, and the Czech Republic into NATO
in the expectation that these countries would then upgrade their
militaries with costly new hardware. In general, the defense industry's
leverage in Congress makes it difficult for the nation to shift
resources toward peacekeeping missions, negotiated settlements,
and the use of economic development in place of regional warfare.
As John Donahue summarizes in The Privatization
In any contractual relationship between government and private
business, a key question becomes who is representing the broader
public interests. Unless there are sturdy provisions to prevent
it-and even if all parties are immune to corruption-the natural
outcome is an alliance between private-sector suppliers and government
officials at the taxpayers' expense.
Less visible than the congressional lobbyists
and trade groups, but just as significant, contractors employ
their superior technical expertise to sell Pentagon procurement
managers and top military leaders on pricey and risky new projects.
Sitting on Pentagon advisory committees helps, as does the firms'
insulation from public scrutiny. The quickening pace of privatization
in research and development has left the government without the
expertise to assess and monitor contractors' proposals.
WHAT'S DRIVING DEFENSE PRIVATIZATION?
The political, intellectual, and financial
impetus for government privatization began in the 1970s and received
its major political boost from the Reagan administration, which
shrank government even as it increased defense expenditures by
50% in real terms. The Clinton administration's reversal of the
Carter-Reagan military buildup had the unintended consequence
of unleashing a hungry pro-privatization lobby onto the political
scene-the mid-1990s reduction of the defense budget sent private
contractors scrambling for new markets. At the same time, a raft
of mergers consolidated the industry into a powerful handful of
giant firms, all focused on developing new streams of government
revenue. Their efforts on Capitol Hill dovetailed with and drew
life from the 20-year ideological assault on public-sector provision
of goods and services. During the Clinton years, insiders also
adopted and capitalized on the "reinventing government"
agenda spearheaded by Vice President Al Gore at the federal level.
Since the 1990s, private business groups,
DOD advisory boards and key managers, and both the Clinton and
Bush administrations have heightened calls to privatize national-security
activity. For Pentagon managers, privatization offers a means
of coping with a "go it alone" defense doctrine that
deploys U.S. armed forces around the world with little international
Advocacy groups heavily populated by large
defense contractors issue a stream of pronouncements and publications
urging privatization. They recommend outsourcing functions outright
rather than relying on public-private competitions (which give
public agencies a chance to bid for projects), and back the wholesale
privatization of complex business areas that currently involve
large numbers of government employees.
One such task force, the Defense Science
Board Task Force on Outsourcing and Privatization, issued studies
in 1996 claiming that $10 billion to $30 billion could be saved
through privatizing DOD's support and maintenance services.
Needless to say, they offered inadequate
evidence to support these multibillion-dollar savings estimates.
The panel that released the first study was headed by the CEO
of military contractor BDM International.
At about the same time, Business Executives
for National Security (BENS), a group founded in 1982 as a watchdog
organization to monitor the Pentagon on weapons costs and nuclear,
chemical, and biological warfare, transformed itself into an outspoken
advocate of outsourcing. In 1996, BENS launched a high-profile
commission to "promote outsourcing and privatization, closing
unneeded military bases and implementing acquisition reform"
with a self-described membership of "business leaders, former
government officials and retired military officers." The
commission published op-eds and position papers claiming the Pentagon
civilian workforce is bloated. It decried what it misleadingly
described as the bleeding away of private-sector defense jobs.
(BENS used 1988 as its baseline; the year was an anomaly that
included a spike in Reagan-era defense contracts.) It also claimed
the Pentagon lags behind private corporations in outsourcing,
and that the United States lags behind Europeans in privatization.
Neither assertion is borne out by the evidence.
Under Clinton, Secretary of Defense William
Cohen and other top DOD officials echoed BENS' calls for a "Revolution
in Military Business Affairs." Dr. Jacques Gansler, President
Clinton's undersecretary of defense for acquisition and technology,
frequently spoke out in favor of outsourcing and a business approach:
To meet the challenge of modernization,
the Department of Defense ... must do business more like private
business.... My top priority, as Under Secretary of Defense, is
to make the Pentagon look much more like a dynamic, restructured,
reengineered, world-class commercial sector business.
In February 2001, just after George W.
Bush took office, a defense reform conference organized by the
Aerospace Industries Association of America and Boeing, Lockheed
Martin, Northrop Grumman, Raytheon, TRW, Inc., and BAE Systems
met to set the agenda for the new administration. It attracted
500 participants and drew up a "Blueprint for Action"
to slash bureaucracies, reduce "cycle times" and restore
operational and financial strength to the defense industrial base.
Also in February 2001, a BENS initiative, "Improving the
Business End of the Military," identified activities the
DOD can discontinue and "replace with world class business
models," turning entire functions (housing, communications,
power utilities, logistics systems) over to the private sector.
Since George W. Bush took office, the
military budget has grown from $300 billion to $400 billion, not
counting the $200 billion in supplemental expenditures for Iraq
and Afghanistan. The spending hike has set off a feeding frenzy
among contractors, some of which have seen double-digit growth
The Bush administration is intensifying
efforts to transfer work from inside the Pentagon to private contractors.
The DOD is expected to put 225,000 jobs up for competition between
public employee groups and private companies by the end of Bush's
first term. Many more jobs have been displaced through direct
outsourcing. The Bush push appears to be driven by a combination
of ideology and political calculation, reinforced by defense-sector
campaign contributions and the accelerating revolving door between
the Pentagon and private contractors.
But this strategy poses serious risks
and may threaten the possibility of society exercising democratic
control over the evolution and use of military force. George Washington
University political scientist Deborah Avant stresses that privatizing
security "almost inevitably redistributes power over the
control of violence both within governments and between states
and non-state actors." In the United States, the private
delivery of services has strengthened the executive branch, diminished
the control of Congress, and reduced transparency. And, she warns,
the process is cumulative-as private security companies are integrated
into military efforts, the companies gain greater influence over
foreign and military policy-making.
This article was adapted from a longer
article published in the journal Governance, Vol. 16, No. 4 (October,
Ann Markusen is a former Senior Fe/low
at the Council on Foreign Relations and Professor of Public Policy
and Planning at the Humphrey Institute of Public Affairs, University