The Case Against Privatizing National Security

by Ann Markusen

Dollars and Sense magazine, May/June 2004

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. But despite

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.

ECONOMIC EXPECTATIONS

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 problem.

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 at all.

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 mixed results.

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 a contract.

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 Decision:

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 support.

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 in profits.

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, 2003).

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 of Minnesota.

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