May 28, 2009

May 28, 2009 | Executive Summary on National Security and Defense

Executive Summary: Contracting Out in Defense: Lessons from the British Experience for the U.S. and Great Britain

Contracting out in defense is an important public and political issue in the United States. When based on the proper principles, contracting out allows the government to draw on the skills and resources of the private sector to deliver services more efficiently. Although the British and U.S. programs are financed differently, Britain's experience offers important lessons that both countries need to learn as they continue, where appropriate, to contract out in defense.

Contracting Out in Britain. The Labour government that was first elected in 1997 has won an undeserved reputation as a friend of the private sector. The reality is different. Within a decade, Britain went from being a country that followed the Anglosphere's model of a limited state and flexible economy to one that looked more like a continental economy.

The U.S. should recognize the failure of these state-led economic policies, but opposing the growth of the state is not enough. It is important to examine, sector by sector, how this growth was funded and the effects and efficiency of the funding model. Britain's Private Finance Initiative (PFI) is an important part of that story.

Under PFI, the government makes a long-term contract with private investors to provide goods or services. If Britain's liabilities under PFI were acknowledged as claims on the national income, its balance sheet would look substantially worse. The Ministry of Defence (MoD) is one of the largest users of PFI, and its experiences of contracting out in defense through PFI offer important lessons for both nations.

PFI's proclaimed goal is to improve efficiency. The House of Commons should investigate the MoD's use of PFI to determine whether it has delivered value for money, produced perverse incentives, become a way to manufacture private-sector jobs that in reality are paid for by the public sector, supported ineffective procurement practices, or been used to conceal inappropriate levels of debt. It should also examine the successes and failures of the U.S. program of military family housing privatization.

Learning from the British Experience. The U.S. can benefit by applying the following principles and lessons from Great Britain's successes and failures:

  • If the government is involved, risks cannot be wholly transferred to the private sector. The justification for placing most PFI projects off the balance sheet is that they transfer risk from the public sector to the private sector. In strictly financial terms and in normal times, this is correct, but political pressures will ultimately force the government to intervene if its private-sector partner fails. Congress and the executive branch, while supporting contracting out where it is suitable, need to resist introducing it where victory, not profit or loss, is at stake. The risk of defeat should never be transferred to the private sector.
  • The U.S. should take the lead in establishing best practices for contracting out. The U.S. should create an office under the Assistant Secretary of Defense for International Security Affairs that, in consultation with allies, would produce a best-practices guide to contracting out in defense and, with due regard to national circumstances, standardize government policies. The intent would not be to enforce uniformity, but to create a menu of recognized options from which states could select and that would encourage competition in bidding and transparency in government.
  • Contracts with the private sector require effective government contractors. Contracting out does not reduce the government's responsibilities: It increases them. Like any other buyer, the government must decide what it wants to buy, negotiate the contract, and then ensure that the other party fulfills its side of the bargain. The U.S. Commission on Wartime Contracting should study the U.S. and British experiences with care. As Britain expands its use of PFI to improve its service accommodations, it should examine the U.S. Military housing Privatization Initiative (MHPI), which has won praise from civilian and military authorities for its successes.
  • Both the U.S. and British militaries need better contracting forces. They should have the power and ability to decide when contracting out would be appropriate, and the skills and training of contracting officers should be improved. The contracting forces need to emphasize continuity of practical experience and not allow officers to rotate so rapidly that knowledge is lost and responsibility is blurred. They also need to be subject to improved auditing and increased accountability for failure, both internally and to appropriate legislative bodies.
  • Contracting out should promote efficiency and improved quality, not hide spending. The British experience with PFI offers a broader lesson for the U.S.: The only reason for government to contract out is that it has good reason to believe that the private sector will reliably deliver a better service. Contracting out should never be used to justify spending that increases the size of the state while simultaneously concealing this growth. Nor should the state resort to contracting out simply to obtain use of a defense asset without budgeting fully for it. To cut budgets and simultaneously demand the acquisition of assets poses unacceptable risks to national security and financial honesty.

Conclusion. Contracting out is an important instrument, both for the U.S. and for Great Britain, but it needs to be employed effectively. The British method of financing it has encouraged the continuing growth of the state and has created a series of risks and perverse incentives. Each country should learn from the other's experience about when to employ contracting out appropriately, how to fund it, how to design suitable programs, and how to improve its efficiency.

Ted R. Bromund, Ph.D., is Senior Research Fellow in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.

About the Author

Theodore R. Bromund, Ph.D. Senior Research Fellow in Anglo-American Relations
The Margaret Thatcher Center for Freedom