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Shadow Elite: Selling Out Uncle Sam & Outsourcing American Power

07/22/2010 08:15 am ET | Updated May 25, 2011

This is the first of a Shadow Elite series, investigating the game-changing effects of government contracting on the most vital government functions.

It's one of those ideas that might seem sensible at first-glance: retired military officers hired to serve as "senior mentors" to the armed forces. Only on closer inspection are the potential conflicts of interest revealed: the retired officers were paid by contractors, advising on military services even as they were consulting for companies seeking to sell military products, as reported by USA Today. When news of the program came to light, Defense Secretary Robert Gates ordered changes, but the paper reported Tuesday that "senior mentors will not have to disclose their business ties or finances to the public, under a [July 8 Defense] directive...That falls below what [Defense Secretary Gates] initially called for...."

This Pentagon program is not simply an isolated conflict of interest story, or "coincidence of interest"--where players craft roles across organizations to serve their own agendas, instead of those of the organizations for which they supposedly work. It illustrates the perils of a governing landscape that has transformed in recent years: where once federal employees executed most government work, today more than 75 percent of that work, measured in terms of jobs, is contracted out and many of these jobs involve government functions. Many contractors are integrally involved in formulating and influencing policy on issues ranging from defense (as seen in the mentoring program), to the economy and energy to homeland security and intelligence. Even when many, if not most, of these contractors perform admirably, whether contractors always have the public interest at heart, or whether, beholden to shareholders, they might have their own, is a crucial question.

The Washington Post reported this week on the influence of contractors and the unmanageable growth of the intelligence community since 9/11. I also studied this development (in the area of intelligence and beyond) as part of my research for my book Shadow Elite and in a follow-on study (supported by the Ford Foundation), Selling Out Uncle Sam: How the Myth of Small Government Undermines National Security, soon to be released. In addition to interviews with government and contractor officials, I poured through piles of Government Accountability Office (GAO) reports, inspectors general audits,and congressional testimony evaluating the role of contractors in federal agencies. And a key finding that emerges is that information that once was or should be in official hands is being privatized, ceded to government contractors, at a time when government oversight is increasingly overwhelmed and undercut.

When information that is supposedly of and for government is in private hands, it is not just that government often isn't kept in the loop. The information, and the power that goes with it, can be used to serve private agendas with the risk of corporate and private players influencing policy to suit those agendas. This is far more insidious than simply hiring a contractor to provide food service or even contracting security assistance in a war-zone like Iraq. Contractors are now routinely carrying out what's known as "inherently governmental functions," the work so fundamental to the public interest that only federal workers should conduct. The privatization of information is especially dangerous when these core functions are outsourced.

Take the case of the Pentagon senior mentors. Under that program, the selection of mentors, the identity of their defense clients, and the mentors' pay levels were locked in a black box beyond government and public scrutiny. The latest news suggests that mentors won't have to disclose financial interests, but even if that changes, and the officers eventually adhere to new ethics regulations, or are hired directly by the Pentagon as part-timers, this will only chip away at the margins of the information deficit. The fact is that, while contributing their invaluable experience, these officers also glean invaluable inside information. It is hard to imagine that they erase what they learn as mentors when they conduct their work as defense industry executives or consultants, and vice-versa. In the area of the economy, contractors manage - and more - taxpayer stimulus and bailout money, giving them access to should-be government information. With regard to the $700 billion so-called TARP money, the Treasury Department hired several contractors to set up a process to disburse the bailout funds. The government also enlisted money manager BlackRock to help advise and manage the Bear Stearns and AIG rescues. BlackRock also won a bid to help the Federal Reserve evaluate hard-to-price assets of Freddie Mac and Morgan Stanley. The Wall Street Journal said:

BlackRock's multiple hats put it in the enviable position of having influence on setting the prices of both the assets it is buying and selling.

Another big area of concern is in the outsourcing of information technologies. An estimated upwards of three-quarters of governmental IT was outsourced even before the major Iraq war-related push to contract out. While outsourcing certain IT functions, such as computer network services, may be unproblematic or even desirable, IT often can't be separated from other mission-critical operations. Contractors often control crucial databases. For instance, in a 2004 Homeland Security mega-contract, Accenture LLP was granted up to $10 billion to supervise and enlarge a mammoth government project to track foreign citizens entering and exiting the U.S.

How did private and corporate interests seize the upper hand from government? A key reason for the information deficit is the sharp decline in the number of government oversight officials, relative to contractors. In theory, contracts and contractors are overseen by government employees. But the number of civil servants who could potentially oversee contractors fell during the Clinton administration and continued to drop during the Bush years. The contracting business boomed under Bush, while what is commonly called the "acquisition work force"--government workers charged with the conceptualization, design, awarding, use, or quality control of contracts and contractors--has remained virtually constant.

The paucity of oversight is the reason large procurement operations are identified by the GAO as "high risk" due to "their greater susceptibility to fraud, waste, abuse, and mismanagement." It also leaves government officials dangerously in the dark about what's going on, since contractors frequently control the information. Government officials are often reliant on what the contractors report and recommend, especially when a sole contractor carries out a given program or project (as is often the case).

As a top GAO official, Katherine Schinasi reported that, in many cases, government deciders scarcely supervise the companies on their payrolls. (And routinely, contractors are also hiring and overseeing other contractors.) Nearly a year before the 2003 Iraq combat began, the army reported to Congress that its best guess was that it directly or indirectly employed between 124,000 and 605,000 service contract workers--a discrepancy of half a million workers. And, as the GAO's director of acquisition and sourcing management reported,

At this point, DOD [the Defense Department] does not know how well its services acquisition processes are working, which part of its mission can best be met through buying services, and whether it is obtaining the services it needs while protecting DOD's and the taxpayers' interests.

When contractors have superior information, they have the edge over their government overseers. Disincentives for contractors to share unbiased information are many, ranging from extra work required to the possibility that the information could become available to potential competitors or that it could lead to discovery of contractor activities that might be disapproved. And when officials receive incomplete or skewed information, the public interest easily can be compromised. Even when government officials approve projects and decisions, they sometimes may be merely rubber stamping the work of contractors.

With regard to many arenas of government, government investigators have raised questions about who drives policy--government or contractors?--and whether government has the information, expertise, institutional memory, and personnel to manage contractors. Or is it the other way around?

A few years ago, the Wall Street Journal asked in a headline whether the U.S. government was "outsourcing its brain." With contractors able to hoard public information, influence policy, and put blinders on government supervision, the unavoidable answer to that question appears to be "yes'. Government that literally doesn't know what it is doing can scarcely be operating effectively. Moreover, it is vulnerable on all fronts.

Linda Keenan edits the Shadow Elite column.