In my last post I wrote about the report, Bad Business: Billions of Taxpayer Dollars Wasted on Hiring Contractors, released by the Project on Government Oversight. The bottom line of the report was that:
The current debate over pay differentials largely relies on the theory that the government pays private sector compensation rates when it outsources services. This report proves otherwise: In fact, it shows that the government actually pays service contractors at rates far exceeding the cost of employing federal employees to perform comparable functions.
As one would expect those who work in and advocate for private contractors were not pleased. All well and good; everyone is entitled to their opinion. But the way some on the pro-contractor side has responded says more about their own lack of empirically proven facts than any failings on the part of the POGO report.
But before going any further let me explain exactly what dog I have in the privatization/outsourcing fight. I started following the issue of the use of private military and security contractors (PMSC) in the early '90s. Back then, as now, advocates would assert that when it came to doing work traditionally done by the U.S. government that PMSC were the equivalent of the Bionic Man, that they could it do quicker, more efficiently and effectively and at lower cost.
It is an appealing argument and on the surface makes a lot of sense. After all, all of us can think of things that we want private sector professionals, and not the government, to do. But what I also noticed was the PMSC advocates rarely pointed to any methodologically rigorous, empirically proven studies that confirmed their view. Either they just said, over and over and over, that it is common sense, or pointed to studies in other areas of privatization that showed cost savings and claimed it would happen in the military sector also, or pointed to something like private contractors mowing the grass or building housing on military bases, as if that was the same as guarding a convoy on Route Irish in Iraq.
Don't get me wrong. I'm not saying that using PMSC isn't cost-effective, at least some of the time. I am saying that the work substantiating the blanket claim made for them has not been done. And given how much money sloshes around the PMSC industry it is rather telling, at least in my view, that people there, if only for the purpose of public relations, haven't bothered to hire a couple of economists to do a few studies on the subject.
Anyway, back to the POGO report. Shortly after it came out, the International Stability Operations Association, a PMSC trade group, whose motto, to borrow from the classic Superman TV show slogan, can be described as stability, human security, and the private sector way, sent me an email suggesting that I write about an analysis of the POGO report by the Professional Services Council. The PSC is a major trade group for private governmental services contractors. The email called it, "PSCs rather devastating response to the POGO report."
Well, call me cynical if you like but I am not devastated. The PSC two-page analysis -- wow, two pages, count 'em -- which you can find here says:
An open and honest dialogue about the costs of government operations is important but any such discussion must be based on facts. And the fact is that POGO's report draws false conclusions by comparing fully burdened contractor rates -- which include all costs charged to the government, such as salaries, benefits, overhead, supplies, equipment, materials, rent, and more -- to an estimate of just salaries and benefits paid to a similar government workforce. Their analysis ignores the full range of overhead and other non-personnel costs that drive the cost to the taxpayer for federal employee performance," said PSC President and CEO Stan Soloway. "This also helps to explain why POGO's conclusions run so contrary to those of numerous other studies by other entities, such as the Commission on Wartime Contracting.
Well, that is a rather interesting assertion to make, considering the CWC final report doesn't actually say that. What it does say is that considerable cost savings are achieved only when using local or third-country nationals. But it also says "For the balance of activities that rely on contractor support using U.S. citizens, the cost advantages of contracting versus performing the function using military or federal civilians is less clear." (Appendix F, p. 235, CWC final report).
Furthermore, it is not true that POGO's conclusions are antithetical to that of the CWC final report. As POGO subsequently noted:
POGO is not alone in finding that contractors can be more expensive than federal employees. Recently, the Commission on Wartime Contracting (CWC) and the Defense Department issued reports that largely support our findings. The CWC found (see p. 226) that money could be saved in certain high-skill positions if the work was performed by federal civilian personnel. And, despite DoD's recent flip-flopping on insourcing, last week it released a report finding that 50 percent (see p. 5; full report) of its FY 2010 insourcing was conducted because the work could be "more cost effectively delivered by civilian personnel of the Department.
Is, in fact, the POGO report, bad analysis? It may not be perfect but I doubt it is as bad as PSC makes it out to be. Consider the first point it makes:
By POGO's own admission, its analysis has gaps. Despite POGO's efforts to minimize their significance, the gaps are in fact important and relevant. For example, POGO states that its assessment of contractor costs primarily relied on pre-negotiated labor rates from the General Services Administration's Multiple Award Schedules. However, those rates are the maximum a company offers and do not represent what the government actually pays. When contracts are competitively bid, GSA rates are often significantly discounted.
So POGO's study has gaps? Gasp, the horror! Oh, wait a minute. Don't all respectable, academically sound studies, start with the premise that not all relevant information on the subject being analyzed is known and that there are always gaps and uncertainties. Only those who believe in God, and similar fairy tales, believe that all information is knowable. And I'm pretty sure that neither POGO, nor PSC for that matter, is omniscient.
POGO's subsequent response makes PSC's critique look weak.
○ Industry Complaint: POGO unfairly used contractor loaded rates -- rates that include salaries, benefits, administrative costs, profits, etc.
POGO Response: We would love to see contractor cost or pricing data. If they would lay those cards on the table that would be wonderful. Unfortunately, the last seventeen years of so-called "acquisition reform" having been primarily about keeping important data away from government contract negotiators-data that would lead to better negotiation outcomes and more informed contract pricing. If rates are so much lower, as claimed by the Professional Services Council, than GSA should list both the ceiling prices and the actual prices negotiated to ensure that all government agencies are aware of current sales trends. But, what matters for the purposes of the current POGO report, is the cost to the government to contract with the company(ies) for the services studied. And that's what we analyzed.
○ Industry Complaint: POGO's analysis was flawed because it did not include all government overhead and lifecycle costs for federal employees.
POGO Response: All additional overhead was excluded, including the government's overhead rate to award, administer, and oversee contractors which would be in addition to the billing rates paid by agencies. If we added the government's overhead costs for federal employees, we would need to do the same for situations when the government used contractors to perform the work. Even assuming POGO had added the standard OMB A-76 12% "overhead" rate, this would not have changed the results of the study. Incidentally, we intentionally only used billing rates for contractors operating out of federal government facilities to more closely keep our comparison apples -- to apples.
However, the PSC, like ISOA is a trade group, not a group of dispassionate, objective academics, so it is entitled to spin the facts anyway it wants.
What was more interesting was the mention of the POGO report in ISOA's Weekly Digest. It mentions both the CWC and the POGO report. On the CWC report it says "The eye-popping $31-60B [fraud and waste] numbers are surely exaggerated," although it offers no specifics on how and why that might be.
It also said, "Thus far the breakdown of the $30 -- $60 billion figures have yet to be specifically identified. Evidently ISOA's crack analysts didn't bother to read page 90, which said "The Commission's estimate of a 5 percent to 9 percent fraud rate would indicate that between $10.2 billion and $18.5 billion of the $206 billion in funds spent for contingency contracts and grants has been lost to fraud."
More bothersome, however, is this language, "POGO's far more partisan attack on contractors focuses more on their domestic utilization but unfortunately they cherry-pick specific tasks that favor their conclusions, annualize compensation for services that are utilized for temporary requirements, and ignore the value of exploiting outside expertise to achieve governmental goals."
Cherry-pick? That is pretty funny. Last time I checked, cherry-picking was more commonly used by neo-cons and free market apostles like past vice president Dick Cheney, former head of Halliburton. Anyone remember the threat of Iraqi WMD? It's a dead give away that a case is weak when one side calls the other names, instead of disputing actual facts.
It is particularly unfortunate for ISOA to do this, as it knows what it is like to be on the receiving end of ad hominem attacks. It has frequently, and rightfully, protested in the past when people call private security contractors mercenaries. As I have noted many times in the past private security contractors may not fit nearly into the existing international law pigeonholes but they are quite clearly not mercenaries. I've agreed with ISOA in the past when they have protested such characterizations. It is sad that it weakens its credibility by using a double standard.