Competitive Contracting for More Effective & Efficient

Competitive Contracting for More
Effective & Efficient Government
25 March 1996 . Number 5
Congresssional Testimony by Wendell Cox
before the
Subcommittee on Civil Service, Committee on Government Reform and Oversight
United States House of Representatives
April 5, 1995
Background on Competition
In recent decades there has been increasing concern about the cost of government, and at every
level of government, there have been serious budget difficulties. The problem is not fundamentally
a revenue problem — it is a cost problem. Government revenues have risen substantially — and so
have the unit costs of government
In the private sector, people and commercial enterprises succeed by paying no more than necessary
for what they buy. Businesses pay the market rate — it pays no more than necessary — for labor,
supplies and capital. The competitive market works to minimize factor costs. In government,
however, the situation is different. While government uses the competitive market to obtain various
goods and services, the competitive market is not applied to the factors of public service
production. The result is higher than necessary costs. And government costs that are higher than
necessary is government waste.
The problem is lack of competition. Government costs are determined in a non-competitive
environment. As Nobel Laureate economist Frederik Hayek put it,
The market price cannot be known until there is competition.
And government has a special obligation to exercise stewardship over the resources it compels from
people. This is not so in other sectors of the economy. People are not forced to purchase specific
goods and services in the market. They are able to exercise personal choice. No such choice exists
with respect to taxation. Government’s financial obligation to the people, is
…to spend each (dollar) to the best effect. Individuals do that, day after day. So do companies. They
succeed, more or less, because they face choices as consumers and competition as producers. The
minimum duty of a state should be to replicate such choice and competition in its own affairs, so
that the billions it raises in taxes achieve the high-sounding aims it sets for itself.
The public purpose (or objective), then, of government spending is to provide for government
services at a cost that is no higher than necessary. The imperative to spend no more than necessary
is intensified by the federal budget deficit, which threatens the living standards of future
generations.
Around the world, governments are using competitive contracting to apply market forces to
government services, and with overwhelmingly positive results.
The Excess Cost of Government Employment
However, before providing an overview of competitive contracting, it is appropriate to review an
important root cause of higher than necessary government services costs — excessive public
employee compensation. Government employee compensation is the largest component of state and
local government budgets — representing 60 percent of operating costs.
ALEC’s America’s Protected Class series shows that, while private employee compensation has
stagnated, government employee compensation has risen steadily.
Average state and local government compensation increased 16.0 percent from 1980 to 1991
(inflation adjusted) — $4.78 for each $1.00 received by the average private sector workers. State
and local government employees are now paid, on average, 10.3 percent more than private
employees.
The average federal civilian workers has received $4.56 for each $1.00 in compensation increase
for the average private sector worker between 1980 and 1991. Federal civilian employees are now
paid, on average, 45 percent more than private employees.
Federal workers are compensated, on average, at least 30 percent more than above state and local
government workers. If federal employees were compensated at the same average rate as state
government employees nearly $25 billion would be saved annually.
Inside the beltway, there is the perception that federal workers are less well paid than private sector
employees doing similar work. This is based upon federal surveys that are frankly incomplete,
misleading and outrageous in their results. The federal surveys are limited to wages — as if the
more expensive federal fringe benefits has no value — as if the extra paid time off has no value —
as if superior federal security has not value.
American Legislative Exchange Council research indicates that, where federal government and
private employee wages start out equal, inherent federal employment advantages create 50 percent
greater value over a career for government employees. This amounts to a nearly $600,000
advantage for government workers who start at the same rate of pay as private workers.
And then there is productivity. The lack of competitive incentives allows government staffs to
become larger than necessary. ALEC has identified substantial variation in productivity among state
governments.
ALEC estimates that, when all advantages of government employment are considered, including
sub-market productivity, it is possible that government employment costs exceed market rates by
nearly 75 percent.
In the competitive market, customers determine employee compensation: Private companies do not
have the freedom to artificially raise employee compensation. In the private sector, the prices that
customers are willing to pay for goods and services constrain how much will be available for
employee compensation, investment and distribution of earnings to stockholders (including
employee pension plans). A company that raises employee compensation above levels that
customers are willing to pay will lose market share and eventually close, taking with it the jobs of
employees and the investment of owners.
Competitive Contracting
The realization that government employee compensation often exceeds market rates has lead to an
increasing use of competitive contracting.
Competitive contracting is the provision of a public service through a competitively awarded
contract. It has been used for decades by private and public organizations to ensure that goods and
services of a defined quantity and quality are produced for the lowest possible cost.
The public agency seeks competitive bids to provide a particular public service. The public agency
establishes quality and quantity specifications. The competitive market responds to the invitation of
the public agency, and one or more producer is selected to provide a specific service for a period of
time. The public sector retains policy control over the service, while the competitive market
produces the service under public scrutiny.
There are five basic steps in the process:
1. The public agency seeks competitive proposals to deliver a specific quality and quantity of
service for a defined period of time.
2. The public agency may submit its own cost proposal, capturing all attributable costs, and subject
to the same terms and conditions that apply to private proposals.
3. A contract is awarded to the lowest responsible and responsive public or private proposer who
demonstrates an ability to provide the same quality and quantity of public service at a cost lower
than that of the public agency.
4. Contractors, public or private, that fail to provide the service as specified are financially
penalized or replaced.
5. New competitive proposals are sought in sufficient time to award a new contract for service
commencing at the expiration of the contract. New competitive proposals are sought regardless of
whether the incumbent contractor is a private company or the public agency itself.
Competitive contracting does not necessarily result in private operation of public services. It merely
requires that the public service be provided according to the specifications of the public agency for
the lowest possible cost. Competitive contracting removes the present bias toward in-house public
service provision and replaces it with a results oriented approach in which the lowest cost
qualifying proposer, public or private, operates the service.
Competitive contracting reduces public costs in three ways:
1. Lower costs through provision of service at no more than the competitive rate (the “going” rate).
Cost savings of 15 to 50 percent are frequent, with occasional savings of up to 75 percent. Touche
Ross reports cost savings in 98 percent of cases.
2. Lower direct public service costs as public agencies improve their cost performance in response
to the competitive environment. Competitive contracting not only results in lower costs for the
public services competitively contracted, it also induces improved internal public cost performance.
This “ripple effect” has been identified in various public services, including solid waste collection,
public transit, fire protection, and other services. Public employee unions have negotiated
competitive wage and benefit packages in response to competitive contracting.
3. Lower net costs as a result of tax revenues paid by private contractors on the public services they
operate.
There are two fundamental principles of competitive contracting of public services:
1. The public agency should retain full policy control, determining which services are purchased,
establishing quality and safety standards, administering contracts, and monitoring service
performance.
2. The public agency should foster a competitive market. The maintenance of a competitive market
is crucial to the success of competitive contracting. Private monopoly should not be tolerated any
more than public monopoly. Fostering a competitive market requires:
a. Wide participation and full disclosure of information, so that all potential interested proposers
have sufficient information to submit a proposal if they desire.


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