Privatization and Its Costs

by Ellen Dannin, Fannie Weiss Distinguished Faculty Scholar and Professor of Law at Penn State Dickinson School of Law, University Park, Pennsylvania

When the cherry blossoms bloom each spring, the Office of Management and Budget (OMB), which assists the President in preparing the federal budget and oversees and coordinates the Administration's procurement policies, releases a sunny report on the large amounts of money taxpayers have saved as a result of the government’s privatization initiatives. Only a careful reader would notice that all the purported savings are not fact; they are projections. And those projections stretch credibility while ignoring costs associated with privatization.

For example, OMB’s press release for Fiscal Year 2006, cleverly entitled “Competitive Sourcing Saves Billions of Dollars for the Federal Government,” said “public-private competitions completed in FY 2006 are expected to yield $1.3 billion in savings over the next five to ten years.” And OMB’s press release for FY 2007 touted “competitive sourcing” as “producing significant savings for federal agencies” and claimed a slightly more modest nearly “$400 million in savings over the next five years.”

But the big — and much less modest — claim appears in the FY2007 report:  “Competitions completed between FYs 2003 – 2007 will save taxpayers $7.2 billion, with the majority of savings to be realized over the next five years.” Furthermore, the “average net savings per [full-time equivalent job] competed over the last five fiscal years is approximately $25,000, a 27 percent return for each position competed.” Only someone familiar with privatization would know that jobs placed on the auction block are usually low-level and so poorly paid that the $25,000 of saving per job must be fantasy.

OMB silently acknowledged the validity of criticism of its cost and benefit accounting in its FY2007 report: “OMB recently asked agencies to establish validation plans on a reasonable sampling of competitions to ensure that cost savings and performance improvements are being realized as promised.” This pressure may explain why billions in savings claimed for FY2006 became mere millions claimed for FY 2007.

OMB’s numbers consistently fail to include the costs of privatization in the equation. To fill in the gaps, I performed a case study of the privatization of the Internal Revenue Service’s mailrooms. I found that OMB procedures actually forbid including some quite substantial costs in the estimate, while overlooking others.

For example, OMB forbids agencies from including costs they incurred in preparation for privatizing jobs. Yet, preparing to privatize work can take years and require agencies to move employees from work connected with the agency’s mission to working to identify “inventory” — that is, jobs — to privatize. In fact, the competition preparation process is so complex that it has spawned a new breed of consultants to guide agencies through the process. Staff and consultant salaries could easily be quantified and included if OMB did not forbid it.

A much greater cost to the agency, however, is the loss of productivity and institutional memory. The privatization process can demoralize staff, leading to a mass exodus before their jobs are auctioned off. These real costs in agency expertise and recruitment are not easily quantified.

Or consider the massive federal privatization infrastructure that includes entities to facilitate privatization, such as Results.gov. Its website contains complex and frequently changing regulations on privatization, advice to agencies on how to promote privatization and other morale-boosting messages, and quarterly report cards that grade departments and agencies on how they perform on “competitive sourcing,” among other things.  It is ironic that the move to downsize government has increased the least helpful aspects of the regulatory apparatus.

Also among costs not included in the assessment of savings from privatization is the cost of adjudication and litigation. In the case of the IRS mailroom, the employees’ union contested the legality of failing to hold a competition before contracting their work out. After its legal victory, the union settled and was reimbursed $45,000 in legal fees. No accounting was made of the agency’s costs for defending the lawsuit and the distraction from its very important duties, let alone the costs borne by the taxpayers to pay for the legal system to hear the claims.

The privatization process also laid waste to jobs that, while low paid, provided good benefits, civil service protection, union representation, and self-respect. Those lost jobs represent costs, personal and public, tangible and intangible.

All of these costs, plus others I discuss in my analysis and more, are normal and substantial costs of privatization borne by the public, but not included in assessing privatization. OMB’s publicists may put a happy face on privatization, but the numbers and consequences tell a different tale.

The results of my study may be found in “Counting What Matters: Privatization, People with Disabilities, and the Cost of Low-Wage Work.” 92 Minn. L. Rev. 1348 (2008).