The Heritage Foundation

News Releases on Taxes

June 25, 2001

June 25, 2001 | News Releases on Taxes

Taxpayers Save When Government Uses Competitive Contracting, Analyst Says

WASHINGTON, June 25, 2001-Taxpayers could save billions of dollars annually-with no reduction in the level or availability of government services-if the federal government relied more on competitive contracting, a new Heritage Foundation paper says.

In competitive contracting, the government solicits bids from private businesses to perform a particular service. The business with the lowest bid-provided the amount is less than what government spends to perform that service-then takes over from the agency involved.

That agency also can bid to perform the service. If its bid comes in lower-which happens about half the time, as agencies make an effort to compete-the agency continues to perform the service. Taxpayers save about 38 percent when private firms win contracts and about 20 percent when a restructured in-house operation prevails, Heritage Senior Research Fellow Ronald Utt says.

And those savings add up, says Utt, who served as privatization "czar" in the Reagan administration. Based on the Defense Department's experiences with competitive contracting, Utt estimates the government could save $1 billion to $1.4 billion in 2002 and $10 billion to $14 billion annually within five years.

Office of Management and Budget Director Mitchell Daniels has ordered agencies to create a list of activities that could be handled by private firms and to subject at least 5 percent of those activities to a competitive bid process this year. Within five years, Daniels wants 50 percent of those activities awarded to the low bid.

In the past, Utt says, a variety of players with an interest in maintaining the status quo have opposed such efforts. Government workers, agency heads, public employee unions and others have painted competitive contracting and other privatization initiatives as risky and unable to deliver promised savings. Rep. Albert Wynn, D-Md., whose district includes thousands of federal workers, has introduced legislation that would suspend all federal "outsourcing."

In response, Utt says, President Bush should highlight the fact that local and state governments have privatized numerous services with no loss of quality and substantial savings. These services include wastewater treatment, school bus fleet management, airport management, welfare case oversight and even prison management.

The president can make the case to Congress by stressing the advantages of offering the same or better services for less cost, Utt adds. And he should make the case to federal employees by letting them share in the savings they generate through bonuses or other awards, as is already permitted by law.

"President Bush must understand that the opposition will intensify as entrenched interests work to defend the status quo and the benefits it provides them," Utt says. "But by making a positive public case for reform, and by ensuring that existing workers and managers are treated fairly and encouraged to participate in the competition, the effort will succeed."

About the Author

Related Issues: Taxes