Lee Drutman is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
In the weeks following Hurricane Katrina, there was much hue and cry about the massive no-bid “cost-plus” cleanup and rebuilding contracts going to politically-connected firms like Bechtel, Fluor and CH2M Hill.
And sure enough, eight months later, the first audits are in and it is that same old depressing reel of fraud and waste and mismanagement. According to a recently released memo by Rep. Henry Waxman, D.-Calif.:
The documents disclose widespread mismanagement, waste and fraud in contracts worth billions of dollars. The documents reveal a host of major problems that occurred in numerous locations under multiple contracts over a period of many months.
We’re talking about double-billing for hauling the same debris, hauling extra debris to boost reimbursements, overstating mileage—the same old tricks. As a neat touch, inspectors found that Army Corps of Engineers officials had an “informal agreement” not to challenge bills that exceeded estimates by 50 percent.
So why is this storyline so achingly familiar? Politically well-connected company gets massive no-bid contract to do re-construction work in New Orleans, Iraq, Afghanistan—wherever. Without any real accountability, said contractor runs up excessive costs for taxpayers. Sometimes the public gets upset; sometimes a wrist gets slapped. But in the end nothing changes.
It is certainly tempting to blame it on cronyism. Dick Cheney rewarding Halliburton. George W. Bush, the ultimate CEO president, doing all this to help his corporate friends.
Sure, our leaders may have certain personal sympathies. But to think they are doing this all to help out a few friends gives them too much credit. More importantly, it ignores the structural reasons why all this contracting out is bound to fail, no matter who is in charge and what their sympathies are. After all, let’s not forget that back in 2000 (under Clinton), a GAO study of Kellogg, Brown and Root’s $2.2 billion contract in the Balkans concluded that U.S. Army officials “frequently have simply accepted the level of services the contractor provided without questioning whether they could be provided more efficiently or less frequently at lower cost."
To understand why contractor fraud keeps happening over and over again, it’s worth thinking about why some folks thought contracting out for services was such a good idea in the first place. Think back to the 1990s, when Bill Clinton and Al Gore talked proudly about “reinventing government”—tapping into the supposed efficiencies of the private sector, cutting out the supposed inefficiencies of the public bureaucracy (Clinton and Gore eliminated 426,200 federal civilian workforce jobs).
The argument then and today is that turning to the private sector harnesses the power of competitive markets. Since companies must compete for contracts, this competition should discipline them into using taxpayer money more efficiently, especially compared to the dreaded government bureaucracy.
So why hasn’t this worked?
The first reason is that contracting out requires monitoring—and monitoring requires actual people. Over and over again, reports of contractor fraud find at best minimal oversight. The ideological turn that “reinvented” the public sector to favor private contracting has severely limited government’s oversight capacity. No wonder New Orleans is the land of contractors gone wild—FEMA lacks the resources to keep contractors in line.
The second, and related, reason for the failure of private contracting is that when it comes to certain services and products (say, building military bases), there is no real competition. There are only a few firms capable of doing this work, and there is only one buyer—the U.S. government (in economic terms, having only one buyer is a monopsony).
Imagine for a second that you owned a company that specialized in building military bases. Would you put your energy into providing the best service at the best price? Or would you put your energy into securing friends in the government—your one and only customer? There is a simple reason that all of the major contractors are politically well-connected—they have to be to stay in business. It’s the same reason that Mitchell J. Wade handed Randy “Duke” Cunningham $2.4 million in bribes. Without Cunningham’s help in securing defense contracts, Mitchell’s MZM Inc. wouldn’t have much of a business model.
Add up the two, and you have an explanation for why contractor fraud is rampant. Government agencies, made lean by a turn towards privatization and promises of “reinventing government,” don’t have the capacity to effectively monitor contractors. And the market forces that are supposed to discipline private contractors don’t work. Any contractor with any sense is going to develop political connections to get around these market forces. In most cases there is only one buyer and only a few sellers.
Perhaps its time to stop blaming cronyism and instead take a good hard look at the underlying policies that make it possible for such cronyism and profiteering to run rampant in the first place.
One approach might be to establish an independent commission to study the overall effects of contracting out. Were we to seriously re-assess the whole policy of private contracting, we would probably learn that in many cases, it actually costs more to contract out. It’s hard to imagine that an expanded U.S. military force would have done a worse job in Iraq than Halliburton. In other cases, such as unexpected disasters that call for sudden expanded capacity, it may still make sense to contract out, but agencies that do contract out should be properly equipped to monitor the contractors and be empowered to hold them accountable.
But until we thoroughly study the issue, we won’t know. Instead we’ll keep wasting taxpayer money on a policy that has demonstrated a remarkable capacity to generate waste, fraud and abuse.