Commentary

Contractors and Cost Effectiveness

By David Isenberg
This article appeared on the Huffington Post on December 23, 2009.

It is a fact that currently private contractors are the equivalent of an American Express card. The U.S. military’s literally can’t go to war without them.

However, this does not mean that all the reasons given for the use of such contractors are credible . Consider the main selling point that all such PMCs use when bidding for contracts. They all claim that using the private sector is more cost-effective than using their public sector counterparts.

At first glance it sounds reasonable. After all, private contracting companies don’t have to maintain standing forces, pay pensions, or provide benefits, to name just a few things that the public sector must do.

Typical is this statement by Doug Brooks, founder and president of the International Peace Operations Association trade association: “Contractors are cost effective. While the popular perception is of huge salaries for cushy jobs, the reality is that contractors live alongside military personnel and generally cost the government far less in the long run.”

In the interest of full disclosure I have known Doug Brooks since he was a grad student at the University of Pittsburgh. In all those years I have repeatedly asked him to point me to a single empirical, peer reviewed, methodologically sound, academic study confirming that private military or private sector contractors are more cost effective than their public sector counterparts. He has yet to do so.

This is a popular notion once adhered to only by diehard-free market advocates who believe that government is fundamentally inefficient and unproductive.

It also reflects the cumulative effect of military force reductions and the fashionable notion of “core competency,” i.e., that one should focus only on what one does best and pay someone else to do the rest. In the Pentagon’s case, the core competency is war-fighting.

But whether it’s true that contractors are cost effective is at best an open question, the answer to which depends, in part, on what you mean by cost.

While outsourcing can be effective, doing things in-house is often easier and quicker. You avoid the expense and hassle of haggling, and retain operational reliability and control, which is especially important to the military.

Then there is the fact that outsourcing works best when there’s genuine competition among suppliers. But while there may be hundreds of private security contractors in Iraq, not all of them are created equal. For really big contracts, like the U.S. State Department’s Worldwide Personal Protective Services Contract, shared by Blackwater, DynCorp and Triple Canopy, there are not that many alternatives. That is one reason the State Department was reluctant to fire Blackwater after the September 2007 shootings in Baghdad by Blackwater contractors.

In fact, despite all the claims of its advocated the free market ideology has hardly been confirmed by the evidence.

The market for private security services is only partially competitive, and in some cases (for example in certain areas of logistics) quasi-monopolistic. The champions of the virtues of privatization and outsourcing with respect to the military generally forget one thing: the Pentagon is as far away from a free market as one can possibly get.

While the free market is undoubtedly a good thing it is no insult to Adam Smith’s invisible hand to note that the market for military services is the closest thing to collectivism since the demise of the Soviet Union.

In fact, as P.J. O’Rourke notes in his book on Adam Smith’s Wealth of Nations:

Smith understood the potential of privatization: Public services are never better
performed than when their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them. But his experience of the corporations that were contracted to perform British government services—such as the East India Company, the Halliburton of its day—left him too skeptical to suggest privatization: “These companies…have in the long-run proved, universally, either burdensome or useless.”

In general, the environment surrounding military interventions is not conducive to cost-savings and efficiency. Warfare is usually characterized by secrecy, heavy time constraints and the imperative of victory. There is hardly time for either complex bidding procedures; transparency is lacking, which makes it difficult to assess contract performance. Furthermore, military commanders prepare for worst case scenarios, thus always having a backup (or two or three) at hand. For the military commander the priority is accomplishing the mission, not saving money.

Indeed, even industry insiders acknowledge that the relative value of contracted services
is indeterminate. In testimony before the U.S. House Oversight and Government Reform
Committee Erik Prince, the founder and head of Blackwater (now Xe Services) was asked about the cost-benefit of using private contractors:

MR. PRINCE: I don’t know what those numbers are, sir, but that would be a
great fully burdened cost study that Congress could sponsor. They don’t have to
do the whole thing, just take some key nodes and really study it.

Don’t take my word for it. Here is what Prof. Allison Stanger of Middlebury College wrote in her recent book One Nation Under Contract: The Outsourcing of American Power and the Future of Foreign Policy.

We begin by probing the assertion that the U.S. government is saving money on pensions by hiring private contractors. Some have argued that since the PMCs do not pay pensions but hire on a per-job basis, they generate significant costs saving. But on closer inspection, we find that American PMC employees have all served in the in the military prior to joining the private sector. The U.S. government prefers to employ U.S.-based firms, and most U.S.-based firms prefer to hire American citizens. Since the government will eventually pay a pension to the employees who are American citizens regardless of their employment status upon retirement, the savings in pension payments are not great. To reap any savings, Washington would have to encourage the private military sector to hire foreign nationals—but the conflicts of interests that emerge when non-U.S. citizens are asked to support the American army in a combat zone render this les than prudent. The idea that we save money on pension by relying on contracted security forces is thus difficult to sustain.

Another way for the federal government to save money through privatization is by exploiting the lower labor costs of outsourcing. But is Washington actually paying less money in labor costs for military services? While it is true that contractors do not receive a set annual salary but are hied on an as-needed basis, they also make double or triple what their uniformed counterparts make doing the same job. it is difficult to argue, even with contract personnel hired and let go as needed, that the U.S. government saves money by hiring labor at a significantly higher daily rate.

A third potential saving comes from the hiring of already trained employees. If the government does not have to pay to train private sector employees, it saves money. But again, when we look at the employment patterns for U.S.-based firms, this bargain too fails to materialize. If most PMC personnel come from the U.S. military this bargain too fails to materialize. If most PMC personnel come from the U.S. military, then the government bore cost of their training. A security clearance is a marketable asset, yet the American taxpayer paid the screening bill.

Adding it all up, a rough assessment of the market for force’s underlying structure reveals that the federal government is effectively paying for the training and retirement of the contractors it hires, all appearances to the contrary, as well as paying double or triple the daily rate for their services. In addition, the government must cover the firm’s profits. It is difficult to see where cost saving exist. (pp. 96. 96-97)

The existence and widespread use of private contractors reflect important underlying questions regarding the U.S. role in the world, which the public has chosen not to face, namely the mismatch between U.S. geopolitical ambitions and the resources provided for them. Putting aside all the arguments about presumed cost-effectiveness or organizational flexibility of the private sector, it seems likely that if a nation can’t summon public support for its policies, strategies and goals, it probably should revisit its goals. People who want to argue about the use of contractors should begin their critiques by examining the inescapable disconnect between ends and means.

David Isenberg is an analyst in national and international security affairs and a US Navy veteran. He is also a member of the Coalition for a Realistic Foreign Policy, an adjunct scholar with the Cato Institute, and the author of a new book, Shadow Force: Private Security Contractors in Iraq.