Reason Foundation - Policy Areas > Federal Government

Elizabeth Newell at Government Executive writes today on what figures to be an interesting new report from the Federal Acquisition Innovation and Reform Institute (FAIR Institute) concluding that federal agencies should focus on increasing the quantity and quality of competition in federal contracting:

One of the key challenges in assessing federal competition is a lack of consensus on its key goals and measurements of success, said FAIR Institute President Raj Sharma. The most common question raised to gauge competition is determining how many contracts or how many dollars were competed, according to Sharma.

But agencies instead should concentrate on ensuring they are creating a competitive, innovative marketplace for federal contracts that ensures the lowest life-cycle costs for purchases, the report concluded.

"It's the quality of competition we need to look at in combination with the quantity of competition," Sharma said. "For example, if we determine we're increasing full-and-open competition, are we attracting the best suppliers and the best capabilities?"

While the Obama administration and other stakeholders agree that competition is an important element of a healthy acquisition system, there isn't consensus on whether the government is making progress. "There is no consistent definition for competition. To be able to say whether competition is increasing or decreasing, when there's no consensus definition, is hard," Sharma said.

The FAIR Institute reported that the current competitive environment does not allow government to attract the most innovative and capable suppliers or to manage total life-cycle costs effectively. The group identified three primary issues hindering progress: limited knowledge of industry or supplier capabilities, economics and cost structures; a complex acquisition process and unique government requirements; and common acquisition strategies such as aggregating unlike requirements.

These issues create an acquisition environment Sharma likened to the federal hiring process -- "complex, lengthy and unattractive for the best candidates." Among the most detrimental consequences are a process and requirements so excessive they discourage some qualified companies from competing in the federal marketplace. Many of those that do choose to compete incur significant costs to overcome barriers to entry, costs that are eventually passed on to the government and taxpayers.

The report also criticized the government's cost management and negotiation strategies, which neither reduce cost nor improve performance, observers said. [...]

To ensure best value and productive competition, the government should adopt a more "proactive, systematic and holistic" approach to competition, the report stated. Agencies should develop a common set of definitions and metrics to measure competition, devise strategies to mitigate barriers to entry and attract the best suppliers, strengthen internal capabilities to perform industry analyses and cost modeling, and ensure acquisitions strategies enhance competition and limit risk in sole-source situations.

Privatization News Roundup, 10/11/2009

leonard.gilroy@reason.org (Leonard Gilroy) — Sun, 11 Oct 2009 13:07:00 EDT

Some privatization news highlights from the last week that haven't been covered elsewhere on the blog:

FEDERAL

"Feds ‘In-Sourcing’ Could Hurt N. Va. Economy," Burke Connection
"DHS announces immigration detention reforms," Government Executive
"Defense policy bill has major implications for contractors," Government Executive
Report: "Civilian Agencies' Development and Implementation of Insourcing Guidelines," GAO-10-58R, October 6, 2009, U.S. Government Accountability Office
Report: "Contract Management: Agencies Are Not Maximizing Opportunities for Competition or Savings under Blanket Purchase Agreements despite Significant Increase in Usage," GAO-09-792, U.S. Government Accountability Office

STATE & LOCAL:

"Private Capital Can Serve as Second Stimulus," EarthTimes.org
"New council exploring public-private alliance," NJBIZ
"Oklahoma urged to sell worker's comp agency," Forbes
"Activists Storm Leno's Office, Demand Schwarzenegger Veto Privatization Bill," Fog City Journal
"Supervisor questions savings from 'reverse privatization'," Fairfax County Times
"Protesters pan privatization plan," New Haven Register
"Bidwell Marina deal sealed Friday," Oroville Mercury-Register
"Future of BayWalk sidewalk up in the air again," Tampa Tribune
"Library faces privatization or drastic cuts, report says," The Union
"Piscataquis County decides against dispatch contract," Bangor Daily News
"Southampton Councilwoman mulls bids to privatize town animal shelter," 27east.com
"Newton firefighters seek chance to bring ambulance service in-house," Gatehouse News Service

INTERNATIONAL:

"Russia to go ahead with privatization in 2010 - deputy PM," RIA Novosti
"Brazil to privatize Rio airport to prepare for 2016 Olympics," RIA Novosti
"Private group seeks slice of $3b rail budget," Brisbane Times
"Turkey achieves privatization successes," Hurriyet Daily News
"Iran's Telecom Privatization May Prompt Reform," Forbes
"Iran to privatize its ports, management," Tehran Times
"Belarus plans to sell stake in Beltelecom by end-2009," ISI Emerging Markets
"Mumbai Port opens RFQs for privatization of 3 berths," SteelGuru

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Privatization News Roundup, 10/2/2009

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 02 Oct 2009 06:57:00 EDT

It's been a few weeks since I've done a privatization news roundup, so today I'll play catch-up. The articles below are some privatization news highlights from the last several weeks that haven't been covered elsewhere on the blog:

FEDERAL

"NASA plans new schedule for $4B procurement," Washington Technology
"IG: VA has widespread problems with management of IT projects," NextGov.com
"House panelists decry space privatization," Salt Lake Tribune
"Immigration agency to outsource disaster-recovery plans," Washington Technology

STATE & LOCAL:

"Schwarzenegger's prison plan sets stage for court battle," Sacramento Bee
"Port of Miami tunnel deadline extended," South Florida Business Journal
"State prison contract changes hands," Alaska Dispatch
"Editorial: Privatizing roads may boost infrastructure," The Detroit News
"Let's get back on the privatization train," Vancouver Sun
"Indianapolis Extends IT Services Deal With Northrop Grumman," Government Technology
"Indianapolis considers electronic parking meters," WTHR
"Daley administration floats privatization of plowing side streets," Chicago Tribune
"Mental health workers sue DC to stop privatization," Washington Business Journal
"DC Council Member Fights Privatization Of City Child Care," WAMU
"County May Privatize Ambulances," The Monticello News (GA)
"Concessionaire signs contract for Bidwell Marina," Contra Costa Times

INTERNATIONAL:

"Russia to relaunch privatization drive," AFP
"Polish Privatization Will Narrow Budget Gap," Wall Street Journal
"Iran to privatize oil terminals," Tehran Times
"BBC considers part-privatization of commercial arm," Boston Globe
"British Conservatives consider bank privatizations," The Associated Press
"Ukraine hopes for $1.2 bln in privatisation in 2010," Forbes
"Gaming giants vie for lottery," Melbourne Herald Sun
"NSW Lotteries Privatised by Rees Government," Razors Edge
"Gov't to sell 15% of holdings in Ashdod, Haifa ports," Jerusalem Post
"Privatizations to gain pace," Turkish Daily News
"£184m housing repairs contract out to tender in Kingston," Surrey Comet
"2009-2010 Revenues of Bulgaria’s Privatization Agency can reach 440 million euros," Radio Bulgaria
"Oman to privatize, invest in power projects," Tehran Times

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Air Force Privatizing Electricity Distribution, Transmission Assets at Wright-Patterson AFB

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 09 Sep 2009 19:00:00 EDT

Per Reuters, the U.S. Air Force has reached agreement with the Dayton Power & Light Company on a 50-year contract to own, operate and maintain the electricity distribution system infrastructure serving Wright-Patterson Air Force Base:

The Dayton Power and Light Company (DP&L) and the U.S. Air Force have announced an agreement to privatize the assets for the distribution and transmission of electricity at Wright-Patterson Air Force Base (WPAFB).

The Department of Defense has been privatizing non-core functions on military bases to streamline operations worldwide. Outsourcing its electrical distribution system allows WPAFB to outsource functions not central to its mission. The WPAFB assets included in the contract are:

* Eight substations for the transmission of electricity with 16 transformers
* Over 1,000 electrical poles with more than 21 miles of overhead electrical line
* More than 60 miles of underground electrical line

Over the life of the 50-year contract, DP&L will purchase the equipment and the base will pay DP&L to maintain and operate the system. DP&L was selected in a sealed-bid process after a public request for bid. The agreement is subject to approval by the Public Utilities Commission of Ohio (PUCO).

For more details on some of the U.S. military's other innovative, non-combat-side privatization initiatives—including the military housing privatization and Army lodging privatization initiatives—see Reason Foundation's Annual Privatization Report 2009.

» Reason Foundation's Privatization Research and Commentary

Feds on a Hiring Spree, Whistling Past the Graveyard

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 03 Sep 2009 16:50:00 EDT

I've written recently on two troubling developments:

A new Cato Institute analysis finds that federal workers averaged $119,982 in wages and benefits in 2008—over twice the private sector average of $59,909; and
President Obama is now asking Congress to "limit" cost-of-living pay raises to 2% for over one million federal employees in 2010

With that backdrop, Alex Parker at Government Executive reports on the next piece of what's shaping up to be an extremely disturbing—bordering on the absurd—puzzle.

A new study from the nonprofit Partnership for Public Service predicts a government hiring surge in critical fields during the next three years, especially in careers related to public health.

By September 2012, federal agencies will have hired 273,000 workers for mission-critical jobs, according to the report, which is set for release on Thursday. Those numbers mark a 41 percent increase, compared with the previous three fiscal years. The numbers are based on hiring projections from 35 federal agencies that employ more than 99 percent of federal workers.

Max Stier, president and chief executive officer of the Partnership, said one reason for the jump is the Obama administration's push to beef up the federal workforce.

"There's pent-up demand," he said. "A lot of agencies have been flat-lined, or have been reduced for quite a number of years, and this administration is recognizing that this is a problem, and that they need to deal with it." [...]

"This is a once-in-a-generation opportunity for the government to restock its talent," he said.

The Partnership has predicted that in Obama's first term, agencies will bring on 600,000 employees, making a third of the federal workforce newly hired.

Are there no bounds to the self-delusion driving these workforce decisions? At a time of historic deficits and debt, we can't even afford the federal employees we have today, much less contemplate adding a whopping 200,000+ new ones.

Here's a simple thought experiment. Defenders of federal largesse are screaming that Cato's pay figures are inflated (they come from official federal data, but that's beside the point). I seriously doubt this, but for the sake of argument, let's just say the pay disparity is less than half of Cato's estimate. I'll pick a ballpark $75,000 average federal pay & benefits to use a round number.

Do the math—273,000 new federal employees x $75,000 = $20.5 BILLION in new employee costs. Of course, this is a conservative, back-of-napkin calculation and is likely to be much more costly (over $30B if you use Cato's estimate).

I realize that "billion" just doesn't carry much emotional weight in an era when "trillion" is the new benchmark, but $20-30 billion is real money—and it's our money. It's neither rational nor fair for the private sector to have to absorb the employment shock of the recession while the feds go on a drunken-sailor hiring spree. Will the madness ever stop?

Obama's Underwhelming COLA Proposal

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 02 Sep 2009 22:18:00 EDT

As reported here on Monday, a new analysis by Chris Edwards at the Cato Institute finds that federal workers averaged $119,982 in wages and benefits in 2008—over twice the private sector average of $59,909. With that backdrop, this news from USA Today should leave taxpayers scratching their heads (or pulling their hair out):

President Obama urged Congress Monday to limit cost-of-living pay raises to 2% for 1.3 million federal employees in 2010, extending an income squeeze that has hit private workers and threatens Social Security recipients and even 401(k) investors.

Obama's proposal, outlined without fanfare in a letter to congressional leaders, would leave federal workers with their lowest COLA in two decades. Presidents Bill Clinton and George W. Bush proposed lesser increases three times. Congress, which must approve the plan, has not granted less than 2% since 1988.

The president's action comes when consumer prices have fallen 2.1% in the 12 months ending in July, because of a massive drop in energy prices. The recession has taken an even tougher toll on private-sector wages, which rose only 1.5% for the year ended in June — the lowest increase since the government started keeping track in 1980. Private-sector workers also have been subject to widespread layoffs and furloughs.

How this can be spun as frugality is beyond me. The administration is only asking to mildly slow the rate of growth in federal pay, and somehow it's OK for federal employees to get a 2% COLA adjustment while wage growth the recession-beleaguered private sector has totalled 1.5%. Throw in the fact that the adminstration and Congress seem bent on bringing a large chunk of contracted jobs back in-house—thereby increasing the federal workforce—and you have a recipe for fiscal disaster.

Edwards is right—a 0% COLA seems like the least Congress could do to demonstrate to taxpayers that they're actually paying attention to the federal fiscal crisis.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Public/Private Pay & Benefits Gap Continues to Widen

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 31 Aug 2009 14:09:00 EDT

Last week, Chris Edwards at the Cato Institute released his annual review of federal pay and benefits relative to the private sector and finds that the gap is large and getting larger. Federal workers averaged $119,982 in wages and benefits in 2008, over twice the private sector average of $59,909. Edwards goes on to argue for a freeze in federal wages and some scaling-back of benefits, noting that the high-level of job security in government positions already represents a major benefit.

Critics like Gregg Carlstrom at the Federal Times have taken Edwards to task for his methods, writing that Edwards' comparison is not apples-to-apples since it compares a federal sector where two-thirds of employees are in professional/management positions to a private sector where nearly two-thirds of employees are in low-wage jobs.

In response, Edwards defended his analysis here:

First, people accuse me of producing distorted data somehow. Actually, it’s essentially just raw Bureau of Economic Analysis data, but the data is usually overlooked by the media because I don’t think the BEA puts out a press release on it. Anyway, the average wage data is from BEA Table 6.6D. The average compensation data is simply total compensation (Table 6.2D) divided by the number of workers (Table 6.5D).

Second, people argue that reporting overall averages for wages and compensation is somehow illegitimate. People email me comments like “my federal salary is only $50,000, yet you claim that federal workers make $79,000.” All I can say to folks like this is that there must be a federal worker out there making $108,000 who balances you off.

Third, people argue that a better analysis would be to compare similar jobs in the private and public sectors, rather than looking at overall averages. I agree that that would be very useful. Unfortunately, the BEA data is not broken down that way. At the same time, the BEA data provides the most comprehensive accounting for the value of employee benefits of any data source. Benefits are a very important part of federal compensation, and so that’s why I look to the BEA data.

Fourth, many people argue that the federal government has an elite workforce with many highly educated people. Certainly, that’s an important factor to consider. However, that is the reason why I focused on the pay trend over the last eight years. The federal worker compensation advantage rose from 66 percent in 2000 to 100 percent in 2008. Has the composition of the federal workforce really changed that much in just eight years to justify such a big relative gain? I doubt it.

Read the whole thing. Even if the available data don't support the "ideal" analytic approach, IMO Edwards is doing a huge service by hammering this issue. Not only does the federal fiscal crisis demand scrutiny of such a massive portion of the budget, but it also highlights a major—and undiscussed—problem with the Obama administration's push to arbitrarily bring contracted jobs back in-house (see discussion in Reason's Annual Privatization Report 2009), without any prior analysis of cost effectiveness.

Presumably, the adminstration believes that it can get a better price in-house for this contracted work, but with the public/private sector pay gap already so high and continuing to rise, it seems fair to argue that any potential cost savings might be quickly evaporated by rising pay and benefit costs. And yet again, taxpayers would pay more and get less, all in the interest of appeasing public employee unions.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Europe's Getting Out of the National Mail Business, Why Not the U.S.?

leonard.gilroy@reason.org (Leonard Gilroy) — Sat, 29 Aug 2009 21:53:00 EDT

Noting that national postal services throughout the entire European Union are set to be opened to competition within the next two years, Small Business & Entrepreneurship Council chief economist Raymond Keating writes that it's time to privatize the beleaguered U.S. Postal Service:

You know the U.S. Postal Service is inefficient when President Barack Obama takes a jab. [...]

At an Aug. 11 town hall meeting in New Hampshire, Obama was trying to defend his health care plan against the charge that a government-run plan would have an unfair advantage over private insurers. The president reportedly said: "I mean, if you think about it, UPS and Fedex are doing just fine, right? No, they are. It's the post office that’s always having problems."

Acknowledging that the government cannot run a mail delivery system well does not seem to be the best strategy for justifying a government-run health care system, but that’s a topic for another column. [...]

A government-run post office might have been justified during the early days of the country. But especially given the dramatic changes in the marketplace in recent times – including the Internet, UPS and Fedex, not to mention mobile communications devices – no reason exists for government to be in the mail business.

Postal service privatization, for example, is spreading across Europe, with mail service throughout the European Union scheduled to be open to competition starting in 2011.

Indeed, it's time to privatize. Float a stock offering, and submit the U.S. Postal Service to the rigors of the free market, including prices, profits, losses, competition and ultimately, the preferences of consumers.

» Reason Foundation's Privatization Research and Commentary

Privatization News Roundup, 8/28/2009

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 28 Aug 2009 14:04:00 EDT

The articles below are some privatization news highlights from the last week that haven't been covered elsewhere on the blog:

FEDERAL

"House Panel Begins Broader Review of Procurement System," Washington Post
"Eye Opener: Kennedy's Impact on Federal Workers," Washington Post
"Locking Up Profits in Private Prisons," Motley Fool

STATE & LOCAL:

"Three suitors compete to run the Port of Virginia," Virginia Business Magazine
"HGEA wants Hawaii state layoffs blocked until union is 'consulted'," Honolulu Advertiser
"Colorado: Lawmakers to examine state WC insurer, consider privatization," Risk & Insurance
"RTD to hold hearing on FasTracks partnership," Denver Business Journal
"Mass Pike service plazas, air rights concessions flop," TollRoadsNews.com
"Denver parking-meter change suggested," Denver Post
"South Fulton politicos making a bad situation worse," Atlanta Journal-Constitution
"Monroe County may privatize public safety, security systems," Rochester Democrat and Chronicle

INTERNATIONAL:

"Norway Opposition Plans $12 Billion Privatization Move-Report," CNNMoney.com
"Vinci to secure Slovak motorway financing," Reuters
"Oman plans privatization of power plants," Middle East North Africa Financial Network
"Rwanda, Burundi demand TRL privatization deal be scrapped," ThisDay
"Mounting CEE budget gaps may speed up government selloffs," Reuters
"Real properties top state assets for sale in 2010," BusinessWorld Online
"Authorities extend tender for port operator Marina Bar," ISI
"Serbia may seek at least 200 mln eur for drugmaker-report," Reuters
"Government to spend EUR 240mn from privatization on investments," ISI
"How Privatizing Hydro-Québec Can Make Quebecers Richer," Nickle's Energy Group
"Obstacle removed to Leumi privatization via stock exchange," Globes

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

USPS Nets $40 Million in Chicago Post Office Sale

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 27 Aug 2009 21:01:00 EDT

After sitting vacant since 1997, the U.S. Postal Service netted $40 million today in an auction for Chicago's old central post office building. Better late than never, since USPS has been paying roughly $2 million annually (presumably since 1997) just to maintain an empty building. Per Reuters:

Chicago's old main post office, originally built in the 1920s and vacant for more than a decade, was sold at auction on Thursday for $40 million.

The suggested minimum bid was just $300,000 and bidders had to have a certified check for $250,000 to express good faith. The identity of the winning bidder was not immediately disclosed.

The 2.5-million square foot building (232,000 sq meters), which straddles an expressway and sits above railroad tracks, was deemed a must-sell because the U.S. Postal Service did not want to keep paying the $2 million annual cost of upkeep, auctioneer Rick Levin & Associates said.

The postal service moved its main office across the street from the old facility in 1997. The old nine-story building, flanked by two towers, was once the U.S. Postal Service's largest facility. Its soaring marble-floored lobby was featured in a scene in "The Dark Knight," the latest entry in the Batman movie franchise.

Among past failed proposals for the structure, which sits adjacent to the Chicago River and near the downtown Loop, were converting it into condominiums, a hotel, an auto dealership, an indoor parking facility, a casino and water park.

Unfortunately, $40 million is just a drop in the bucket relative to the red ink the USPS is bleeding these days, but still, this is a solid start to what I'd expect will become a large-scale asset divestiture program over time. Given their financial crisis, it's not a question of if, but how much and when.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Public Options Are Ill-Conceived

info@reason.org (John Palatiello) leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 26 Aug 2009 23:45:00 EDT

Bacon's Rebellion

The CONNECTION newspaper ran an editorial, "Public Options" in its August 19-25 edition. John Palatiello and Leonard Gilroy wrote the following rebuttal:

Imagine for a moment the Fairfax County government deciding to get into the weekly newspaper business. The Board of Supervisors determines that the advertising rates of The CONNECTION are out of reach for many and jumps in to offer the opportunity for businesses and individuals to advertise at greatly reduced prices, making it available to almost everyone.

After all, the county already has plenty of staff members in public affairs positions who are prolific writers. Through the magisterial offices, police department, tax assessments and other agencies it has a built-in infrastructure for news gathering and reporting, already paid for in staff salaries, so the new county newspaper won't cost the taxpayers any money. There are already printing presses used for a variety of county publications, so that will keep costs low. There is no charge for office space, electricity, water, heat and other utilities, because they are already being paid for by taxpayers.

Since it is the county government, it doesn’t have to pay taxes. And since the staff already has offices, there is no rent or other overhead costs. And, since it is government, it doesn’t have to build a profit into its cost structure.

So the new Fairfax CORRECTION weekly county newspaper begins publication, offering advertising space at a 90 percent reduction below the rates charged by The CONNECTION.

How would the editors, staff and investors of The CONNECTION like such unfair government competition?

But that is exactly what The CONNECTION's editor, Mary Kimm, endorsed in her editorial "Public Options," published in the August 19-25 edition of The CONNECTION.

Every time the federal government has convened a White House Conference on Small Business, combating unfair government competition is always one of the top issues cited by America's entrepreneurs. One agenda of small business concerns said, "Government at all levels has failed to protect small business from damaging levels of unfair competition. At the federal, state and local levels, therefore, laws, regulations and policies should … prohibit direct, government created competition in which government organizations perform commercial services."

Surprisingly, in many states and local governments, those commercial services extend to taxpayer-subsidized golf courses, what Governing magazine once called "perhaps the most non-essential of the non-essential public services."

And what's even more disturbing than the notion that there's an inherent public interest in low green fees is the fact that governments aren't very good at running golf courses. Many municipal golf courses are running huge deficits, are in poor condition, and face competition from better-maintained privately owned public courses. For example, the Freedom Foundation of Minnesota published a report earlier this year estimating that municipal golf enterprise funds throughout Minnesota combined for approximately $2 million in operating losses in 2007, and earlier this year South Carolina state legislature rejected a budget proposal to privatize two state-run golf courses currently operating at an estimated $500,000 annual deficit.

In fact, government-run courses rarely turn a profit, thus requiring a subsidy from taxpayers at large. In other words, non-golfers subsidize those who play the public links. Advocates like Kim see no problem with such inequity, arguing that government golf will "hold down prices" and offer links "at a cost well below private options."

But this is a false illusion and ignores the myriad of hidden costs. When a fully allocated cost is applied to public golf courses—including land acquisition, interest on bonds, operation and maintenance, labor costs, liability, retiree benefits and tax revenue foregone—it becomes clear that the "public option" is a bad deal for taxpayers.

Luckily some policymakers are paying attention, and over 25 percent of all municipal golf courses have been privatized over the last several decades. Governments from New York City to El Paso to Los Angeles County have either sold or contracted out the management of their golf courses to private operators, who have a natural incentive to focus on reinvesting in the quality of the golf course to attract more players, host more tournaments, sell more merchandise, and generally increase golf revenues. By getting out of the way, these governments turned these liabilities into revenue generating assets.

There's a lesson here. Whether it is golf courses, miniature golf, water parks—or newspapers or health insurance—government should leave commercial activities to the private sector. Governments at all levels are running deficits and lack the funds needed to carrying out inherently governmental functions. It should forsake the "government competition option." It is not in the public interest.

John Palatiello is President of the Business Coalition for Fair Competition (www.governmentcompetition.org) and a former Fairfax County Planning Commissioner. Leonard Gilroy is Director of Government Reform at Reason Foundation and Senior Fellow for Government Reform at the Thomas Jefferson Institute for Public Policy.

Privatization News Roundup, 8/21/2009

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 21 Aug 2009 15:53:00 EDT

The articles below are some privatization news highlights from the last week that haven't been covered elsewhere on the blog:

FEDERAL

"Dear USPS: Consider privatizing," CNNMoney.com
"Two Army hotels in Hawaii in privatization program," TMCnet
"Lend Lease sets sights on public private projects," Architecture and Design

STATE & LOCAL:

"Would Privatization Help Public Universities Excel?," U.S. News & World Report
"Education Security Provider Wren Helps Texas Schools Streamline Procurement Process Through TCPN Partnership," PR Newswire
"Oklahoma Public Employees Association seeks court action against privatizing Griffin Memorial Hospital," The Oklahoman
"Privatization of group homes protested," Connecticut Post
"Chicago's parking-meter lease draws lawsuit," Chicago Tribune
"100 Addiction Workers Face Layoff, Union Says," Washington Post
"County Commissioners Seek Proposals To Privatize Ascarate Golf Course," KFOXtv.com
"Town May Privatize Animal Shelter," The Sag Harbor Express

INTERNATIONAL:

"Bulgaria State Goes after Telecom for Unpaid Privatization Dues," Novinite.com
"Air France Withdraws From Czech Airlines Bidding," Wall Street Journal
"East Africa Seeks Private Investment for Energy Projects," GlobalAtlanta
"Govt. to pay for 20% cost of mega development projects under PPP model," Thaindian.com
"Govt forms Joint Hydropower Public Private Partnership Committee," Regional Times
"TOKİ cancels Ataköy land privatization tenders," Today's Zaman
"Kuwait launches first public-private partnership power scheme," MEED
"Romanian President Says Privatization Auth Was Wrong To Shut Down Tractor Maker," Mediafax
"China Steelmakers Block Privatization," Wall Street Journal
"OECD to Israel:Privatize farmland, cut water subsidies," Ha'aretz
"BCWD privatization: Creating equity to Butuanons access to cheaper water rates, better service," Philippine Information Agency
"Port workers vow to stop privatization of North Harbor," Business Mirror

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Want a Real Stimulus? Privatize.

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 20 Aug 2009 16:24:00 EDT

My earlier post discussed the new Rockefeller Institute report showing that government employment has been on a slow uptick thus far in the recession, even as private sector employment has dropped by 6.9 million. Beyond the economic implications I discussed earlier, there's another salient issue here that merits discussion.

As if the employment trend imbalance wasn't troubling enough on its own, what makes it worse is that a significant percentage of government employees are engaged in commercial activities that are widely provided in the public sector—things like accounting, payroll, IT, human resources, mail, printing, vehicle maintenance, landscaping, and the like. The tendency in government is just to hire someone to do those things in-house, apparently unaware that every single state employee imposes short- and long-term costs on taxpayers. Employee pensions are one of those very significant costs, and even there governments across the country are struggling to fund them. Throw in long-term health benefits and you've got a massive obligation.

Overall, government is in many ways like a obsessive DIY addict who doesn't know when to stop for his/her own good and hire out for a specialist to get the job done right.

Here's the deal: perpetually rising government employment—which with some temporary exceptions have been the norm over the last 50 years—is inherently unsustainable. And since the private sector can perform many of the same tasks as government employees at a much lower cost, it should behoove policymakers to become smarter shoppers for services and tap good privatization opportunities when they make sense.

This isn't a small problem. At the federal level, roughly a quarter of employees—over 800,000— are engaged in activities that could be provided by the private sector. In another example, Virginia conducted a survey of state agencies in 1999 to determine what commercial activities were being conducted by state personnel and found that there were 205 commercial activities that were being performed by nearly 38,000 state employees. This accounted for between a quarter to half of the state's workforce.

This should concern anyone who believes that government should be focused on performing its core functions well and should not be in competition with its own citizens to perform non-core functions. Today, the opposite is happening. Not satisfied with just managing education, roads, police and the other core duties that traditionally define the scope of government, public officials are operating and creating agencies and departments that compete directly with the private sector. State and local governments are literally cutting into the business of business.

Want a real, sustainable stimulus? Start getting government out of the business of business. Start applying the "Yellow Pages Test" and privatize those activities that aren't inherently governmental. Start right-sizing government by letting the private sector do those things it does most efficiently and focusing government squarely back on core priorities. Start recognizing that just because government decides that it wants to see a service provided, it doesn't mean that government employees need to be the ones delivering it. Start recognizing that modern public management is increasingly cognizant of the fact that service delivery need not be top-down, but rather implemented via sophisticated networks of public, private for-profit and private non-profit providers.

States and local governments seem to be recognizing this, according to Reason Foundation's new Annual Privatization Report 2009, but unfortunately the federal government is not. In fact, the Obama administration and Congress are trying to cut private sector contracts and bring more work in-house, which will have the effect of significantly increasing the federal bureaucracy at a time when we can ill-afford it. The feds can certainly stand to get better at contracting, but you'd think that they'd be trying to expand their capacity to do so in order to do more of it, not less, given the federal fiscal situation.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

U.S. Army, Contractor Reach Commercial Close on 1st Lodging Privatization Contract

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 17 Aug 2009 16:00:00 EDT

Following up on this June blog post, the U.S. Army and its private sector partner Actus Lend Lease have reached financial close on the first contract for its new lodging privatization program. As The Wall Street Journal reports:

Australian property developer Lend Lease Corp. (LLC.AU) said Monday that its Actus unit and the U.S. Army have reached financial close on the first phase of the US$125 million (A$151 million) privatization of their Lodging Group A program. [...]

Group A involves the refurbishment and management of 62 facilities across 10 installations and 3,200 rooms, and upon completion the portfolio will operate branded hotels under select IHG brand flags, the company said.

Actus Lend Lease will perform planning, development and asset management services related to the redevelopment of these properties, at which point lodging operations will be assumed by Intercontinental Hotels Group, the parent company of Holiday Inn and several other hotel brands.

For more on this initiative, and the successful military housing privatization initiative that spawned it, see Reason Foundation's Annual Privatization Report 2009.

» Reason Foundation's Privatization Research and Commentary

Privatization News Roundup, 8/14/2009

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 14 Aug 2009 14:52:00 EDT

The articles below are some privatization news highlights from the last week that haven't been covered elsewhere on the blog:

FEDERAL

"Let's Outsource the Post Office," New York Times
"US Postal Service's Sticky Situation," The Epoch Times

STATE & LOCAL:

"Puerto Rico Public-Private Partnerships Authority Launches Its Website," BusinessWire.com
"Glitches Mar Indiana's Effort to Outsource Social Services," Wall Street Journal
"OUR ABCs: Rationales for Liquor Monopoly Don't Hold Up," Richmond Times-Dispatch
"Oklahoma lawmakers tour private prison in Lawton," Forbes.com
"State workers group seeks injunction for state agency's privatization plan," KFSM.com (Oklahoma)
"Bing: Privatizing can save city cash," Detroit Free Press
"Kansas City will explore options to improve bulky item pickup," Kansas City Star
"Gwinnett to bid out property appraisals," Atlanta Journal-Constitution

INTERNATIONAL:

"New Zealand Fin Min: Potential To Use Private-Public Partnerships More," NASDAQ.com
"Polish Government Approves Asset Sales to Cover Swollen Deficit," Bloomberg.com
"Poland's Asset Sales May Be Best Option to Finance 2010 Deficit," Bloomberg.com
"Borovo takes first step towards privatization," ISI
"Belgrade Fair won't be privatized," B92.net
"Chile's privatized pension system gets high marks, but many don't participate," Sun Journal

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Hey! This is Saving a Lot of Money. Quick, Kill It.

adrian.moore@reason.org (Adrian Moore) — Thu, 13 Aug 2009 10:27:00 EDT

I was saddened but not surprised when Congress moved quickly after the election to kill competitive sourcing--in which commercial services performed by federal agencies were subject to competition with the private sector. The federal employees usually won the competitions, but only by reducing costs, cutting staff and improving efficiency. Obviously some of the "change" we need is getting rid of cost cutting programs that inconvenience federal workers.

The latest outrage though is federal agencies considering canceling the agreements under which those winning groups of federal workers operate. In other words, tearing up the contract they have to operate more efficiently. Yeah, lets go back to doing this at higher costs! Yipee!

Privatization News Roundup, 8/7/2009

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 07 Aug 2009 14:02:00 EDT

Reason Foundation's new Annual Privatization Report 2009 wasn't the only news in the privatization world this week. The articles below are some privatization news highlights from the last week that haven't been covered elsewhere on the blog:

FEDERAL

"Energy weighs freeing feds from competitive sourcing agreements," Government Executive
"More problems reported with Defense Contract Audit Agency," Government Executive

STATE & LOCAL:

"Tennessee appeals court rules that CCA is subject to open records law," WREG
"Chicago-area bidder for Virginia port operation adds a partner," The Virginian-Pilot
"Put first things first in proposals to operate Va. ports," The Virginian-Pilot
"State Senate candidates spar over Houma hospital," Daily Comet
"City Council seems ready to let Dallas Zoological Society run zoo," Dallas Morning News
"St. Pete moves forward with plans to privatize BayWalk sidewalk," Tampa Tribune
"In Pomona, outsourcing takes in-house indecision," Inland Valley Daily Bulletin

INTERNATIONAL:

"10 companies reported contending for Odessa Port-Side Plant," Ukrainian Journal
"Aviation Workers Protest Concession of Nation's Airports (Nigeria)," ThisDay
"Land reform to privatize parts of Jewish state," Jewish Telegraphic Agency
"Government will not privatize Zampost – Mubita," Lusaka Times
"South Korea to Privatize 9 Firms by Year's End," New York Times Blogs
"Privatization: No fire sale, please," Business Mirror (Phillipines)
"About 280 state-owned enterprises and small facilities privatized," APA
"Cabinet to privatize 50 percent plus 1 shares in Kharkivmetrobud," Kyiv Post

» Reason Foundation's Privatization Research and Commentary

The Bleeding Continues: USPS Loses $2.4 Billion Last Quarter

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 06 Aug 2009 19:31:00 EDT

Following up on earlier posts here and here, the Washington Post reports today that the U.S. Postal Service—the beleaguered federal enterprise and proverbial "government option" in the world of mail delivery—continues to bleed red ink (the chart illustrates this vividly):

The U.S. Postal Service lost $2.4 billion in the quarter that ended June 30 and forecasts a $7 billion loss for the fiscal year, according to figures released Wednesday. Mail volume dropped 12.6 percent over a nine-month period, continuing a sharp decline fueled by the economic recession that began in 2007 and by wider use of the Internet.

Though attention in recent months has focused on the potential closure of hundreds of post offices or the elimination of Saturday mail delivery to narrow the budget gap, most of the Postal Service's financial woes are tied to labor costs, especially billions of dollars in required payments to prefund future retiree health benefits. The cost of funding current and future retirees is likely to top $7 billion this fiscal year. [...]

"The Postal Service does not want to do anything that would disrupt this economy," he said. "Over a trillion dollars moves through the mail in any given year, and we are a hub of an industry that employs some 8 million Americans. We have no intention of doing anything that would disrupt the flow of mail."

That flow has slowed in recent years, to an average of 4.1 pieces of mail a day delivered to each address, down from 5.9 pieces in 2000, according to Postal Service figures. The decline has contributed to losses in 11 of the past 12 fiscal quarters.

In response, the Postal Service has implemented hiring and salary freezes and has dramatically cut its workforce -- by 37,000 employees in the past year, to a total of 630,000, down from a peak of 802,000 in 1999. It recently renegotiated more than 300 service contracts, saving $200 million.

The financial numbers follow last week's classification of the Postal Service as a "high risk" government agency and come just days after it released a list of almost 700 post offices it will consider closing. The list once included as many as 3,000 facilities, and some postal officials privately acknowledge that no more than 200 locations, most of them in downtown urban areas, are likely to close. The varying figures have raised the ire of lawmakers concerned that mail service will be trimmed in their districts with little notice.

For context, the USPS lost a total of $2.8 billion for all of last year, so this year's losses are projected to more than double. The business model is clearly failing—abysmally.

And even though the sensible thing to do immediately would probably be to close thousands of outlets, instead they're talking a few hundred. And each one of those closure proposals may prompt a hard fought political battle, if the early, parochial reaction by several pols in the WaPo piece offers any indication. We will see numerous politicians effectively grovelling not to rearrange deck chairs on the Titanic as it quickly sinks.

Why would any politician in D.C. think that the federal government could get healthcare right when it can't even run a postal business? The sooner pols realize that the federal government generally has a "black thumb" with enterprises like this—a reverse Midas effect, if you will—the better.

» Reason Foundation's Federal Privatization Research and Commentary

Policymakers Turn to Privatization Amid Prolonged Government Fiscal Crises

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 06 Aug 2009 00:00:00 EDT

Governments at all levels are facing severe budget deficits and prolonged fiscal crises amid the national economic recession. With the federal government facing a record $1 trillion deficit and at least 44 states facing a cumulative $281 billion in budget deficits through 2011, privatization and public-private partnerships have become increasingly prominent in fiscal policy debates and will remain so over the coming year as policymakers attempt to reduce the price of government in response to ongoing budget woes.

Now in its 23rd year of publication, Reason Foundation's Annual Privatization Report is the world's longest-running and most comprehensive examination of privatization news, developments and trends. The 2009 report finds politicians looking for solutions to growing deficits. Even seemingly privatization-resistant states like California, New York, Massachusetts and New Jersey are now turning to the private sector to help solve major fiscal and capital investment challenges.

The report's federal government section forecasts a bleak outlook for privatization and competitive sourcing under the Obama administration because the current Congress, controlled by Democrats, has been openly hostile to many competition-based initiatives. There are some highlights at the federal level, such as NASA's planned partial privatization of the manned space program, which will use private companies to design, build, and launch manned spacecraft while NASA finishes its own fleet to replace the Space Shuttle. Also, the highly successful military housing privatization initiative—which is modernizing and improving the quality of hundreds of thousands of military housing units nationwide—has spawned a new initiative to privatize on-post lodging for soldiers at Army installations.

In the state government section of the Annual Privatization Report, we profile the increasingly dire fiscal conditions in the states and offer a comprehensive review of the latest state privatization action. Due to deficits and falling tax revenues, policymakers’ interest in state privatization and government efficiency boards is demonstrably on the rise, and advisory commissions on privately-financed infrastructure have been established in California and other states. In Louisiana, the new Commission on Streamlining Government (CSG) is exploring ways to reduce the cost of state government through downsizing, streamlining and privatization to address a looming budget crisis. In other highlights, New Jersey enacted a law with overwhelming bipartisan support that privatizes the cleanup of nearly 20,000 contaminated properties in the state, while Illinois policymakers passed a partial privatization of the Illinois Lottery to help fund a massive public works bill.

At the local level, we profile Chicago's groundbreaking—but controversial—$1.15 billion parking meter system lease. Los Angeles, Pittsburgh and other cities are closely monitoring Chicago's situation as they contemplate similar parking meter initiatives to generate municipal revenues in the economic downturn. We also review Georgia's fifth new contract city, Dunwoody, which followed the lead of neighboring Sandy Springs by incorporating under a privatized city government model in which contractors provide nearly all non-safety-related services. There are also a number of privatization initiatives proposed or announced in Los Angeles, Indianapolis and numerous other cities.

The Annual Privatization Report also provides a comprehensive overview of domestic and international developments in air and surface transportation, including a wide-ranging overview of the current state of the infrastructure finance market, a review of the latest in highway and airport privatization, and a review of the latest in air traffic control reform and aviation security.

The report also examines four emerging issues attracting significant attention in policy circles. First, we offer a summary of the federal bailouts and stimulus spending to date, which currently totals a staggering $12.9 trillion spent since early 2008. We also review efforts that expand and modernize port infrastructure through public-private partnerships.

The report also reviews the latest developments in the fields of private corrections and mental health services. We review Arizona's groundbreaking prison lease proposals, a new Vanderbilt University study finding private prisons reduce state corrections costs, the looming battle to protect private prison operators' proprietary rights, and numerous other privatization developments in domestic and international corrections.

This week, the Associated Press reported: "Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion."

The federal deficit is astronomical. But states are also swimming in red ink and local governments are out of cash. Taxpayers have been hit hard by the recession and cannot be expected to bail out big spending politicians. To deal with today's economic realities, political leaders need to seek out innovative public-private partnerships and tap the efficiencies in the private sector. The Annual Privatization Report details hundreds of ways to move towards better, cheaper government.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Annual Privatization Report 2009

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 06 Aug 2009 00:00:00 EDT

With governments at all levels facing severe budget deficits and prolonged fiscal crises amid the national economic recession, privatization and public-private partnerships have become increasingly prominent in fiscal policy debates, according to Reason Foundation's Annual Privatization Report 2009.

"Governments are swimming in red ink and realizing the effects of the recession will be felt long after the economy recovers," said Leonard Gilroy, editor of the report and director of government reform at Reason Foundation. "Interest in privatization is sky-high and rightly so. Now more than ever, policymakers need to study their priorities, re-examine what are really core government functions, and then tap the private sector's expertise in all of the areas where they can save taxpayer money and improve the delivery of services."

The Annual Privatization Report details the latest trends and examples of how public officials at the federal, state and local level are reducing costs and improving service delivery through public-private partnerships, outsourcing and performance-based government. It also examines privatization's progress in transportation, education, corrections, water and wastewater services and telecommunications.

California's Fiscal Death Spiral: Is D.C. Watching?

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 05 Aug 2009 20:41:00 EDT

In a Washington Post op-ed on Monday, Robert Samuelson offers a must-read, prescient warning that every American taxpayer should read—stop growing the federal government, or risk a California-style fiscal death spiral (emphasis mine):

California's budget debacle holds a lesson for America, but one we will probably ignore. [...]

California has reached a tipping point. Its government made more promises than its economy can easily support. For years, state leaders papered over the contradiction with loans and modest changes. By overwhelming these expedients, the recession triggered an inevitable reckoning.

Here's the national lesson. There's a collision between high and rising demands for government services and the capacity of the economy to produce the income and tax revenue to pay for those demands. That's true of California, where poor immigrants and their children have increased pressures for more government services. It's also true of the nation, where an aging population raises Social Security and Medicare spending. California is leading the transformation of politics into a form of collective torture: pay more (higher taxes), get less (lower services).

Make no mistake: The spending cuts and tax increases the state enacted to bridge its budget deficits are not cosmetic. In February, the Legislature agreed to a penny increase in the state sales tax, bringing the total -- including local sales taxes -- to about nine cents or more. Top income tax rates, already among the highest in the country, were raised. So were motor vehicle registration fees. Spending cuts approved in February and July are deep. Together, the cuts equal almost 30 percent of the general revenue fund and will affect schools, prisons, colleges and welfare. [...]

National parallels again seem apparent. Federal budget deficits -- reflecting the urge to spend and not tax -- predate the recession and, as baby boomers retire, will survive any recovery. Amazingly, the Obama administration would worsen the long-term outlook by expanding federal health insurance coverage. There's much mushy thinking about how we'll muddle through.

California has pioneered this sort of delusion. The presumption was that a dynamic economy would pay for expansive government. But California's relative economic performance has actually deteriorated. In the 1980s, the state's economy grew much faster than the national economy; annual growth averaged 5.1 percent vs. 3.1 percent nationally. In the present decade, the gap is smaller -- 2.9 percent versus 2.3 percent -- and much of the state's advantage reflects the unsustainable housing boom, of which California was the epicenter.

On paper, the state could solve its budget problems by raising taxes further. But in practice, that might backfire by weakening the economy and tax base. California scores poorly in state ratings of business climate. In a CNBC survey, it ranked 32nd overall but last in "cost of business" and 49th in "business friendliness." Information technology (Intel, Google, Hewlett Packard) and biotechnology remain strengths, but some traditional industries are struggling. High costs, as well as tax breaks from other states, have caused movie studios to shift production from Southern California. In 1996, feature films involved 14,500 production days in the Los Angeles area, says FilmL.A.; in 2008, the figure was half that.

So California is stretched between a precarious economy and a strong popular desire for government. The state's wrenching experience suggests that, as a nation, we should begin to pare back government's future commitments to avoid a similar fate. But California's experience also suggests we'll remain in denial, prisoners of wishful thinking, until the fateful reckoning arrives in the unimagined future.

Samuelson could not have offered a more timely warning. If you want to preview where the federal government is headed, just look west to a California mired in political gridlock, aversion to seemingly any sensible reform, labor-centric politics that encourage government sprawl and, of course, a seemingly perpetual fiscal crisis that has tanked its credit rating and left it reliant on accounting gimmicks, tax hikes and poaching local government funds to balance $20 billion-plus deficits every few months. California is heading south, and fast.

Is D.C. really that different? We're staring at a $1 trillion federal deficit this year, folks. We've issued mounds of stimulus and bailout-related debt that will be an economic albatross on future generations. We're facing trillions in long-term, unfunded Social Security and Medicare obligations that no one in D.C. seems serious about touching. They're too busy developing yet another massive, long-term obligation in what could become a new government health care system we cannot pay for.

Self-delusion inevitably reveals itself over time as crippling. From the federal level on down, what we need are policymakers that aren't deluding themselves about the inherent fiscal unsustainability of government. More importantly, they need to also have the gumption to do something about it (see Louisiana Gov. Bobby Jindal and Queensland (Australia) Premier Anna Bligh).

» Reason Foundation's Privatization Research and Commentary

Scalpel or Hatchet? OMB Orders 7% Cut to Contract Spending

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 04 Aug 2009 16:02:00 EDT

Recall a debate last fall where then-Senator Barack Obama differentiated between his "scalpel" approach to spending cuts and the more crude, "hatchet" spending freeze proposed by challenger, Senator John McCain. Obama's underlying premise was that spending reductions should be achieved through a strategic prioritization process to separate out the lowest-hanging fruit, rather than just a crude, across-the-board freeze (or presumably its popular close cousin, the percentage-based spending cut).

And there's certainly a logic to this. As my colleague Adrian Moore wrote here, we don't do crude percentage-based spending cuts at home when times get tight, so why would we do so in government?

However, despite the sentiment expressed in that debate, it appears that President Obama's approach to federal contracting is shaping up to be part-hatchet/part-scalpel. Per the Federal Times:

In a memo last week, Office of Management and Budget Director Peter Orszag directed agencies to cut their contract spending by 7 percent over the next two years: 3.5 percent in 2010 and 3.5 percent in 2011. That was one of three OMB memos issued last week that aim to flesh out President Barack Obama’s goal of cutting $40 billion a year from contract spending. The memos direct agencies to:

• Accelerate insourcing of inherently governmental work.
• Restore a proper balance between federal and contractor employees at government programs that rely heavily on contractors.
• Share contractor performance reviews with other agencies.

On the positive side, there is some flexibility built in to the policy directive regarding how agencies can achieve the contract spending reductions:

Jeff Liebman, OMB’s executive associate director, said agencies can achieve savings by fixing well-known problems that make their acquisition operations costly. Agencies need to hire more acquisition professionals to manage contracts better, improve upfront planning for large procurements, conduct market research and leverage the government’s buying power better, Liebman said.

Neal Couture, executive director of the National Contract Management Association, agreed. “It’s a reinforcement of some fundamentally good business practices that government may have gotten away from in the last half of the Bush years,” Couture said.

The Orszag memo may force budget and program managers to make reasoned and clear buying decisions before asking contracting officers to take action, he said.

Further, things today generally appear to be shaping up better on the contracting front than they appeared in the spring:

Stan Soloway, president of the Professional Services Council, said the memo puts the emphasis of cost-cutting where it needs to be: on the front end of the procurement process, and not on increased auditing and oversight on the tail end of the process. “It recognizes the key to improving performance is in planning requirements, the award and contract administration,” Soloway said. [...]

PSC’s Soloway called Orszag’s memos “a reasoned structure” to guide agencies’ sourcing decisions. “What it tells us is that beyond inherently governmental functions or absolutely mission-critical functions ... the insourcing decision is like an outsourcing decision — it’s a decision that should be impartial, analytically rigorous and looks at complete and not just partial costs,” Soloway said.

However, Soloway pointed out in an article last week that agencies may already be working at cross-purposes to the Adminstration on this front, which I discussed in this Friday post.

In all, the Administration's approach to cutting contract spending seems like a mixed bag. The arbitrary seven percent target runs counter to the notion of the "scalpel." Rather, that element seems more of a political gesture to curry favor with labor. That said, if you're going to do a crude percentage based bundle of cuts, then you should at least offer administrators the flexibility to achieve those cuts in a manner that preserves discretion on contracting decisions, which the Administration seems to have done here.

The more troubling—and still somewhat mysterious—elements of the Administration's emerging contracting policy relate to the thorny issue of "insourcing" previously contracted-out work (or de-privatizing, if you will). The Administration appears to be trying to craft a structured set of policy guidance on when and how to insource and outsource, which seems like a sensible approach from a management perspective. Policymakers should lay out the service delivery options, evaluate each one of them on a rigorous, apples-to-apples basis, and then select the one that makes the most sense after evaluating the decision parameters. No biases or predispositions toward public or private provision—just like the private sector routinely does in making insourcing/outsourcing decisions.

But the devil is always in the details, and next month the OMB will issue guidelines to define "inherently governmental" work, to outline appropriate instances to outsource work and to outline appropriate structures for different sorts of contracts. This guidance will give much more clarification on the Administration's approach, and the true test will come in the ability to withstand political pressure to expand the definition of "inherently governmental" far beyond the bounds of the common-sense "Yellow Pages test." For example, in the Federal Times piece, American Federation of Government Employees president John Gage previewed what his union will push for—having the new policy encourage agencies to use federal employees instead of private sector contractors. The Administration should expect much more similar pressure and should push back forcefully.

The other complicating factor sits on Capitol Hill, of course, and a Democrat majority that is seemingly bent on undermining competitive contracting and driving insourcing. However balanced and substantive the Administration's contracting guidelines are, they will undoubtedly crash into the reality that Congress stands poised to thwart privatization. Thus, the Administration will need to push hard to rein in the anti-privatization tendencies of its colleagues on the Hill for there to be any really hope of implementing a true policy of "competitive neutrality" vis-a-vis the public and private provision of federal services.

» Reason Foundation's Privatization Research and Commentary