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does privatization save money?

One of the arguments for downsizing the military after the Cold War was that private contractors could be brought in to do some jobs more efficiently and the cost would be cheaper than the expense of a larger standing army. But there is a real debate within and outside the military as to whether the use of private contractors has saved taxpayer funds or not. Here are the views of Doug Brooks, president of the International Peace Operations Association (an association of private security contractors); Paul Cerjan, vice president of worldwide military affairs for Halliburton/KBR; Peter Singer, author of Corporate Warriors: The Rise of the Privatized Military Industry; Col. Thomas X. Hammes (Ret.), U.S. Marines; and Steven Schooner, an expert on government contracting.

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Doug Brooks
President, International Peace Operations Association (an association of private security contractors)

In terms of salary to salary, if you take a look at, say, a corporal in Iraq, [he]'s probably getting $18,000 a year, which isn't much. But for the U.S., it's costing about $25,000 a month to keep that corporal in Iraq just because of all of the military services and support and so on that goes for that individual. A close protection person or a personal security person -- and you're talking about a former Special Forces person with 30 years' experience in the military, and then experience doing personal security -- they may get upwards of $750 a day to do that job.

But as soon as the job's over, you stop paying them, whereas the corporal you're still paying. To keep the corporal, you're paying for any benefits they get in terms of GI Bill, in terms of VA [Department of Veterans Affairs] -- all sorts of other things. So you're hiring a surge capacity. You need a lot of people right now to do this sort of job, and it ends up being far cheaper to go through the private sector to do that.

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paul cerjan
Vice president of worldwide military affairs, Halliburton/KBR

[The Army has] outsourced its functions that it needs in order to support or deploy force. But when you look at it in the overall context, it's cheaper that way because of what it takes to maintain a soldier on active duty. You take him to the training process and everything that goes along with it.

Let's talk about that a little bit. Why is it cheaper?

Well, when you start taking a look, the training base that supports that soldier, you take a look at the family that he or she may have. When you take a look at the deployment of that individual into a different theater -- into Germany, for example -- when you start rolling up all those costs, then you compare them to what it takes to give it to a civilian contract, it's very much cheaper. It's a very cost-effective way of doing business.

But that's not immediately evident to somebody listening to you, because they're going to see that a truck driver, for instance, who is brought over here from the States [is] paid much more than anybody who was driving a truck for the armed services in the past was getting. How is it cheaper?

Because we increased the number of soldiers who can go out on patrol. And when you look at the cost of that soldier and a life-cycle environment, the dollars just show up. It's more cost-effective to outsource some of those activities, those functions, outside of the military. I didn't do the numbers, but I'm telling you, it's cheaper.

But when we're outsourcing what used to be done by military, we're paying the new private contractors more than we paid the soldiers to do the same job.

Well, I can't stand here and give you that analysis. I didn't do it. That's a DOD analysis, and they came up with the conclusion it's cheaper to outsource. So they outsource to KBR [Halliburton subsidiary Kellogg, Brown & Root]. And we got the contract. We do what they ask us to do. So if you're asking me to do the business case and give you the puts and takes on it, I can't do that. I can just tell you its overall context. Having been in the military and seeing the military downsize and know what we were doing putting contractors on the battlefield, it's cheaper.

But you're convinced it's cheaper.

I am convinced it's cheaper.

Even though we're paying people more money.

Well, wait a minute now. You're paying some people more money. You're talking about expatriates that come over here. There's an American truck driver who gets more money, but you don't take into account the third-country nationals we hired at less wage, because they can come over here and do it cheaper.

They don't have deployment issues that they have to contend with. They don't have mobilization issues that's on their nickel. We use subcontractors from around the area so you don't have to mobilize them. They take care of their own living conditions and what have you. So when you're talking about the number of people that are on LOGCAP [Logistics Civil Augmentation Program] -- about 48,000 people -- only about 13,000 of them are Americans. So when you start adding up those costs, it's obviously cheaper. ...

But let me give you the other piece of it, the piece that is never taken into consideration. When a soldier comes inside the wire -- soldier, airman, Marine -- when they come inside the wire, we provide a building for them; we provide a safe environment, because they take care of the force protection around the base camp that they're in.

We provide dining facilities that are very attractive and give them all the nourishment they need. We give them MRW [morale, recreation and welfare] facilities so they can work out, see movies, etc. And we get their mind straight so when they go outside the wire to do their military job, they're sharp.

There's a lot to be said about bringing an individual inside the wire and providing them these amenities that don't have to be provided by soldiers. I spent my entire career watching soldiers pull KP in the kitchen. Why do we have to do that with soldiers? Why can't we outsource that mission? And so when you take that all into context, what we're trying to do is assist the war fighter and get him prepared to go do the mission with a proper attitude in a proper environment.

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paul singer
Author, Corporate Warriors: The Rise of the Privatized Military Industry

Are we saving money, as some claim?

The reality of this, and the irony of it, is that we often talk about it in terms of economic cost savings, but there are no proven economic cost savings. There is simply no comprehensive study that we can look at and say that it has proven to save us money. ...

It's really been about political cost savings. It's been about avoiding the hard choices that come with deploying military forces. And the way to look at this is the counterfactuals: What would we have done otherwise? We would have either had to expand the regular force -- it would have had to either be with regular forces, or it would have had to be with Reserves. That's also politically unpopular, because that's more families that are upset, brunt of the war, etc. Also takes place within a presidential campaign season. Or we would have had to have brought in allies. Well, that's difficult, because you would have had to make political compromises with those allies that we weren't willing to make.

Or you bring in contractors. And by the way, contractors come with the extra positive externality from the perspective of the client here that if contractors are killed, wounded or go missing, they don't go on the public rolls. And so when we talk about the cost, they don't count in the public discussion of it. …

When you have four, five, six layers of subcontracts, what's that doing to the cost to U.S. taxpayer[s]?

I think if you or I looked at these numbers -- and that's the reason why we're not allowed to look at them -- we would find so much fluff within them, because remember, you've got at the employee level someone who's making anywhere from two to 10 times more than a U.S. soldier is making. And that guy is certainly not getting what the company is being paid.

And remember, that company is often three, four, five levels of subcontractors down. And each of those layers isn't taking it at a loss or isn't taking it at no cost. They're adding their own operating margin in there. And remember, all these companies are staffing up not only those operations, but the entire organization around them, the lobbying efforts around it, the marketing, the real estate, you name it. And so there's so much fluff built into this process that there's no way to argue that it's about cost savings. ...

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Col. Thomas X. Hammes
U.S. Marines (Ret.)

Wartime is not about efficiency; it's about effectiveness. The American way of war is "We don't care what it costs. Let's get it done right and save lives." Contracting's about the most efficient way rather than the most effective way.

Efficient way for whom, for the company?

… No, for the U.S. government.

But when you have multiple layers of contracts -- for example, the Blackwater security guards that went into Fallujah [on March 31, 2004], they were escorting three trucks that were going to pick up some kitchen equipment out at Camp Ridgeway. They were on a subcontract with Regency [Hotels], and then Regency had a subcontract with ESS [Eurest Support Services]. ...

I didn't say it was efficient. I said that was the goal. It's just like we're not always effective in the military, but at least that's the goal we're working toward. And that's the problem. We're working toward efficiency rather than effectiveness. Now, the subcontracting -- I'm not a contracting officer, but it certainly seemed to me there were a lot of layers and a lot of wasted money there.

You saw that?

Yes, but I have no idea what's a legitimate price. I do know that at times it seemed like I was paying more than I ought to, but I have no idea how to price a contractor in a combat zone.

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steven schooner
Professor, The George Washington University Law School; expert on government contracting

I don't think there's any question that no one knows whether it's cheaper or not. One of the best studies we've seen on whether outsourcing saves money is the RAND study, which is now a few years old. And what the RAND study says is there's the potential for immense cost-saving in outsourcing. But it hasn't been proven yet.

There's a number of episodic studies since, but there has not been a compelling case made that government outsourcing, particularly this type of outsourcing, saves money.

Help me out. It seems to me it would cost a lot more money if you hire truck drivers, for instance, that are getting two, three, four times as much. You hire security guards and you subcontract with a security company that provides security, they're going to get a lot more than soldiers would get doing the same [job]. How can it possibly not cost a lot more money?

Well, it's easy to see a number of ways that it might end up being worth it to pay individuals a tremendous amount of money for a short period of time. Consider, for example, the government isn't going to pay pensions for anyone working for a contractor in Iraq.

In addition, the government didn't have to have these people on its payroll before we went to war in Iraq. So if you think about the old model, particularly before the end of the Cold War, the United States military had thousands and thousands of troops sitting around and training, but basically waiting in military installations all over the world.

Now, with this leaner, meaner fighting force, the military doesn't have that capacity sitting around, so the private sector can bring these people in. The government hasn't been paying in advance. They don't have to pay the pensions later. And they don't have to pay the types of buyouts that we've typically seen when there's been aggressive reductions in force in the military. …

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posted june 21, 2005

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