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Public Needs And Private Enterprise

You've heard of Japan Inc. Now meet Washington Inc. It's costing us billions of dollars a year, and hurting small business in the process.
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James T. Bennett moved from one house in Fairfax County, Va., to another. At his old house, the county collected the rubbish once a week and charged him roughly $130 a year for the service. But at the new house there was no county pickup, and Bennett had to contract with a private firm. When he did, he found that the private trash collector would charge him only half as much as he used to pay the county, and the private collector would come twice a week to the county's once.

How could that be possible, wondered Bennett, a professor of economics at George Mason University. "After all, public agencies don't operate to earn profits, don't pay taxes of and kind, and are often subsidized by tax dollars in addition to fees received for service. The public firm should, therefore, provide service at far lower costs than 'greedy' profit-seeking firms."

This apparent paradox prompted Bennett to research and write a book, Better Government at Half the Price (Caroline House Publishers Inc., 1981), in which he and co-author Manuel H. Johnson point out that collecting garbage is not the only thing governments do that can be done better and cheaper by the private sector.

Scottsdale, Ariz., has no municipal fire department. A private company, Rural/Metro Fire Department Inc., puts out Scottsdale's fires for 47% of what it would cost the city to run its own fire department. Rural/Metro's trucks lack the chrome trim found on most municipally owned fire equipment, but the company has designed and built innovative equipment that gives it greater fire-fighting capabilities suing far fewer men than its publicly operated counter-parts. The service must be good, Bennett and Johnson report, because 13 other Arizona communities and 1 in Tennessee have asked the company to serve them as well.

The National Weather Service spent $237,000 in 1978 to operate a six-man weather observation team at a Washington, D.C., airport. The following year the Weather Service let private firms bid to replace the services of four out of the six federal workers. The annual operating cost fell to $152,000 -- a saving of $85,000, the authors point out, made "merely by shifting four jobs from the public to the private sector."

Using government employees to do commercial and industrial work is expensive. Officially, the federal Office of Management and Budget estimates that 400,000 federal workers operate 11,637 commercial or industrial activities at an annual cost of nearly $19 billion. Not all federal agencies, however, own up to everything they do that might be considered commercial. If they did, an OMB official estimates, the true annual operating cost might be as high as $30 billion.

But take the lower number and assume, as OMB does, that 60% of the government's commercial and industrial activities (or 0.6 X $19 billion = $11.4 billion) could be contracted out to the private sector. Now apply the "Bureaucratic Rule of Two" used by Bennett and Johnson: Moving an activity from the public to the private sector will cut its cost in half. In other words, what it cost the government $11.4 billion to do for itself, the private sector can provide for $5.7 billion. So far, we've saved the government 30% on its total commercial and industrial expenditures.But there's more.

Assume the private sector companies earn a pre-tax margin of 20% on the business thrown their way and that they pay taxes at the 46% rate. The government's actual expenses are reduced by another $520 million in tax receipts. Altogether, we've saved the taxpayers $6.2 billion, or 33%, not even counting state and local taxes that the private sector firms would pay. And the products and services the government gets for its money are probably better than those the government was providing for itself. (The displaced government workers, by the way, could get jobs with the private firms that take over their duties. Or, if they stay with the government, maybe they'll have time to do some of the things they say they don't have time for now.)

Since 1955 the federal government has had an official policy of reliance upon the private sector for commercial and industrial goods and services. Currently, that policy is contained in OMB Circular A-76, first issued in 1966 and last revised during the Carter Administration in 1979. "The Government's business," it says, "is not to be in business. Where private sources are available, they should be looked to first to provide the commercial or industrial goods and services needed by the Government" -- the government always refers to itself with a capital G in its own documents -- "to act on the public's behalf."

If that's the policy, why does government continue to compete with taxpaying private companies in activities like laundry and dry-cleaning services, movie making, printing, laboratory work, retailing, and hundreds more? Circular A-76 contains a couple of escape clauses. One says that the government can operate a commercial or industrial activity when the activity is inherently related to national defense. The other is big enough to drive, well, 400,000 bureaucrats through. It says that the government can provide goods and services for itself when it can do so cheaper than buying them from the private sector. And guess who decides which is cheaper.

Burt Hall, an official with the General Accounting Office, takes a very dim view of the government's reliance on cost comparisons in reaching make-or-buy decisions. Cost comparisons are too narrow, he said in a recent article, because they don't consider quality, reliability, or timely delivery. They're unreliable, because government accounting systems are not designed for business activities. Cost comparisons, Hall went on, penalize the private firm for start-up costs. They don't recognize the absence in government of incentives to take risks, innovate, adapt to new technology, and cut costs. And not the least troublesome, Hall said, "Cost comparisons strain the government's already damaged credibility... How can the same agency (1) decide to conduct business activities in-house, (2) structure cost comparisons with private firms, and (3) then act as a fair judge of these 'paper' competitions?"

Sen. S. I. Hayakawa, the venerable California Republican, has taken government competition with the private sector as one of his causes this year. As chairman of the Senate Small Business Committee's Subcommittee on Advocacy and the Future of Small Business, Hayakawa will hold field hearings, first in his home state, on the effects of this competition on small business. But even before the field hearings, Hayakawa presented his solution to the problem: a congressional resolution that would give Circular A-76 the force of law.

It's too easy to suggest that politicians often engage in grandstanding for the sake of their own reelections, but in this case the appearance of grandstanding is too strong to avoid comment. Last year a task force appointed by the Small Business Administration's chief counsel for advocacy released a 200-page report of its own hearings and investigation into the same subject. It's doubtful that the results of Hayakawa's hearings could be any more thorough. Furthermore, according to Burt Hall's assessment, Circular A-76 is part of the problem. Giving it the force of law doesn't make it part of the solution.

In their book, Bennett and Johnson use examples and insight to demonstrate what is wrong with the way governments relate to the private sector and why it happens that way. But, like Hayakawa, they're short on solutions that get to the heart of the matter as they exposed it.

"People of all political and social beliefs can have renewed hope," Bennett and Johnson wrote on their last page, "that by forcing the bureaucrats to serve the public instead of themselves, a stronger and better America can be built."

Okay, but how do we get started?

Last updated: Sep 1, 1981




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