Cost‐​effective: Myth or Fact?

April 25, 2008 • Commentary
This article appeared on United Press International on April 25, 2008

If you’ve heard it once, you’ve heard it countless times: Governments and corporations turn to private military contractors because it is more cost‐​effective than using regular military forces. But is it true?

Typical is this statement by Doug Brooks, president of the International Peace Operations 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.”

This is a popular notion once adhered to only by diehard‐​free market advocates who believe government is fundamentally inefficient and unproductive. Admittedly, the actions of the Bush administration have given it credence, but it has been conventional wisdom since the days of Ronald Reagan and Margaret Thatcher.

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 last September’s shootings in Baghdad by Blackwater contractors.

Sometimes the contracts are awarded on a “cost‐​plus” basis. This means the contractors’ profit is a percentage of the costs, which gives them an incentive to keep costs high. Contractors argue that such contracts are a necessity, given the unpredictable nature of the environment they operate in and the often short notice they are given before being asked to deploy, which is true. Still, it is hardly a recipe for efficiency or rigor.

As a New York Times article noted last year, competition intended to produce savings appears to have sharply eroded. An analysis showed that fewer than half of all “contract actions” -­ new contracts and payments against existing contracts -­ were now subject to full and open competition. Just 48 percent were competitive in 2005, down from 79 percent in 2001.

Indeed, for Blackwater, full and open competition is more an ideal than a reality.

Looking at the slightly more than $1 billion worth of contracts it had with the U.S. government from 2001 to 2007, only some $47 million of that was won in open competition with other firms. That leaves some $1 billion in contracts that Blackwater received without any competition — or without any competition that we know of — from other firms.

Blackwater itself has acknowledged that the cost‐​benefit claim is still undecided. This was seen last October in a hearing of the House Oversight and Government Reform Committee at which Erik Prince, the head of Blackwater, testified. When asked about the cost‐​benefit of using private contractors he said:

“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.”

Many academics who examine the issue of the relative cost of private versus public point to the politics behind the ways one can measure cost. What you include or exclude can be a complicated, and highly political, exercise. Economists disagree on how to answer the question at least in part because they use different variables when measuring cost.

When you measure the savings of using retired special operations forces personnel, do you factor in the hundreds of thousands of tax dollars used to train these ex‐​soldiers? This is a valid economic variable worth including, but no study yet published seems to have done so.

There is also another aspect of costs. What little cost‐​benefit analysis there has been to date has focused on narrow economic cost comparisons and generally avoided addressing equally important political factors, such as avoiding tough choices concerning military needs, reserve call‐​ups and the human consequences of war.

As Tyler Cowen, an economics professor at George Mason University, wrote, “Excessive use of private contractors erodes checks and balances, and it substitutes market transactions, controlled by the executive branch, for traditional political mechanisms of accountability. When it comes to Iraq, we’ve yet to see the evidence of a large practical gain in return; instead, use of contractors may have helped to make an ill‐​advised venture possible.”

Privatization has been touted as one way to actually allow a government the ability to see cost comparisons between, say, what the army will charge and what a private provider would charge. It is not a bad idea, but you have problems when cost reductions are assumed or when statistics measuring savings from outsourcing are based on hypothetical projections.

The way to ensure more nearly that the use of contractors produces real cost savings and greater efficiency, and to make it more likely that commitments to their use will not be counterproductive, is to adopt a much more public decision‐​making process, with a far larger active role for Congress, together with robust oversight and accounting for both expenditures and performance. This means closer regulation, mandatory audit trails, regular reporting and greater public access to non‐​sensitive records. And this will require a much more nearly coherent body of laws and regulations than we now have.

About the Author