Private vs. public? In contracting, the details are the deal

Certain core functions are the sole province of government. No one expects to see
foreign policy handled by a contractor, although the government is often willing to pay
for advice. Recently, however, more and more jobs are mentioned as outsourcing candidates.
Vendors are running public schools and doing other novel things.


The innovative spirit also works the other way. Government agencies are
bidding--against companies--on contracts for work at other agencies. Recently, the Federal
Aviation Administration awarded the Agriculture Department a contract, the Integrated
Computing Environment-Mainframe and Networking contract. Some industry bidders, however,
complained that the ICE-MAN competition was unfair.


Competition can be a powerful tool for maximizing the value of tax dollars. But
comparing proposals from the public and private sectors brings forth its own set of issues
and problems. In reviewing them, agencies should separate the differences that must be
weighted against one another from those that are the unique strengths of each type of
bidder.


Some government advantages are the result of hidden costs. For instance, some personnel
functions are performed for federal agencies by the Office of Personnel Management. A
bidding vendor has to shoulder these functions, too.


Agencies do not reimburse OPM for these services and so they are not factored into a
price quote. But the services are not free because OPM receives appropriations to fund its
activities. There is an expense associated with these and similar functions. An agency's
bid on a government contract should be adjusted to bear an allocable share of the costs.


Another difference with monetary consequences is tax liability. Contractors must pay
various taxes, including federal income tax on their profits. Of course, federal agencies
pay no tax; they are on the other side of the transaction. Because the payment of income
tax amounts to a refund of the price paid, contractors should receive a credit in the
evaluation process.


Some differences, however, do not necessarily create an unfair economic impact or are
counterbalanced by other considerations. For instance, vendors must pay for their capital
by providing a return to their lenders and investors. Government agencies funded by
appropriations have no such problem. But is this a difference that needs to be taken into
account?


I would argue not, as long as the federal government is constrained by the civil
service laws in its personnel practices. Companies have much broader latitude and so can
achieve higher degrees of productivity--at least in theory. This private sector advantage
should more than compensate for the disadvantage posed by the need to raise capital. When
agencies can hire and fire as freely as their private-sector counterparts, then the cost
of capital becomes an unfair discriminator.


Even so, there are many gray areas. For instance, the Supreme Court recently declined
to extend qualified immunity from suit to private-sector prison guards in a 5-4 opinion,
Richardson et al. vs. McKnight. Prison guards who are government employees enjoy qualified
immunity. Therefore, some suits that cannot be brought regarding a state-run prison are
fair game when prison management is contracted out. This will impose costs on contractors,
costs that their public sector counterparts need not consider.


Should there be an adjustment to equalize this factor when a vendor competes with a
government agency to operate a prison? On one hand, the different liability of a
contractor seems unfair. The private and public guards are doing the same job, but one can
be sued and the other cannot. On the other hand, the dollars are real ones. Private
operation will cost more in this one respect.


The fate of public vs. private competition is hidden in details such as this. Only an
informed and level-headed analysis will lead to a process that promotes both fair and
realistic competition. And only then will taxpayers enjoy the benefits of the competition.


Joseph J. Petrillo is an attorney with the Washington law firm of Petrillo &
Associates.


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