Study: Privatizing government doesn’t actually save money

The theory that the federal government should outsource its operations to private firms usually rests on a simple premise: It saves money. But why should we believe it saves money? Often the argument is made by pointing to salaries for public- and private-sector employees in comparable jobs and noting that the private-sector employees make less. So outsourcing the task to the private worker should be cheaper, right? That’s the theory, at least. But a new study from the Project on Government Oversight suggests that this theory is quite wrong. In many cases, privatizing government turns out to be far more costly.

For its study, POGO decided to do something different than the usual method of comparing public- and private-sector salaries. Instead, the group scrutinized the actual contracts that were awarded to companies for specific tasks and compared them with what it cost the government to do the same job in-house. They looked at 550 contracts — all deemed “fair and reasonable”— for 35 different jobs across government agencies, from auditors and engineers to food inspectors and groundskeepers.

As it turned out, the private contractors cost more in 33 of those 35 jobs. On average, the service contracts paid private employees 83 percent more than the government would pay a federal employee doing the same job (and that’s even taking into account health care benefits, pensions, and so on). There’s a long debate about whether workers in the private sector actually make less than their federal counterparts, but it turns out this is all beside the point. The POGO analysis found that private contractors working with the government make, on average, twice as much as a comparable private-sector worker.

In any case, this is just one study, and POGO does include caveats about the difficulties of collecting good salary data. But maybe the most stunning revelation in the report is that the federal government doesn’t have a solid system for determining how much money it saves or wastes by outsourcing various functions to private firms.

And this seems like something we’d like to know: Since 1999, the number of federal workers employed by the government has stayed roughly constant at about 2 million. But the number of private contractors has ballooned, from 4.4 million to 7.6 million in 2005 (these numbers turn out to be surprisingly difficult to pin down, since records on contractors are fairly unreliable). Last year, the government spent some $320 billion on service contracts. And yet there’s no ready way to tell whether this outsourcing boom is actually saving taxpayers money.

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Jeff Ribeira

A very intriguing study, to say the least. I first saw the results from this study over at GOOD who did a simple, yet interesting infographic using a few of the numbers. I’m not able to embed it, but you can check it out here:

My question is what’s going to happen now? Will the results of this data actually change the way the government awards contracts, or will it continue to be business as usual? Is this the government that needs to be more judicious/diverse in who they contract with, or is it the contractors that need to change their tune?

Pam Broviak

This just makes sense. A private business has to build in profit – public does not. So all things being equal, it will always cost more to privatize because of the profit. Now add on top of that poorly written contracts, and costs will go up even more.

Another issue of privatization that has amazed me is the decision made by some governments to reduce their public work force and hire private in an effort to reduce pension costs. Elected officials try to justify their decision to privatize saying the pension system is broke so the answer must be to get rid of people who will draw a pension. But what they don’t say or perhaps don’t even realize is, yes, it is broke. But they broke it by getting rid of the people who were supporting it (early outs – not replacing retirees, etc). And, they are still paying pensions costs that are now buried in consultant fees. It all seems so obvious I can’t understand why they can’t figure it out.