by Daniel Hinšt
While Croatia has declined to outsource non-core government activities due to labor-union pressure, the U.S. and U.K. governments contract-out even the provision of security services, including military and intelligence functions. This latest trends in the scope of outsourcing should serve as a brake on the Croatian government’s decision to discard its planned limited scope of outsourcing, to create a spin-off government monopoly instead, and to put other market reforms in question. Outsourcing is important for introducing choice, competition, quality, innovation, and economy to “new public management.”
Outsourcing, or contracting-out, of government functions to competitive private enterprise is beneficial because it is more efficient than monopoly government provision. But it requires strong market oriented leadership to face down the special rent-seeking interests that profit from the traditional (statist) system and remnants of still active socialist legacy.
Croatia is learning this the hard way
The Croatian government planned to outsource some non-core public services, mostly in the education and health systems: cleaning and building maintenance, washing and ironing, preparing and serving food and drinks, transport, protection, etc. About 26,500 government employees currently provide these services. The main reason for outsourcing was to save about 700 million Croatian kunas annually, and therefore contribute to the deficit reduction that European Union authorities require. The annual cost of these services is estimated at 3.4 billion kunas (about 1 percent of GDP).
As expected, labor unions organized public campaigns against the plan and gathered signatures for a referendum. As always, the unions said they wanted to preserve public-sector jobs.
This is not the first time the unions discouraged the government from enacting market-driven policies, however modest.
No referendum was necessary, however. When the unions had enough signatures, the government reversed itself. There would be no outsourcing. Only the liberal (market oriented) minister of the economy opposed this decision. Instead of outsourcing, a large spin-off government “enterprise” with an exclusive contract would employ around 24,000 workers to provide several non-core services. The government believes that the spin-off will save money (about 300 million Croatian kunas or 0.1 percent of GDP), which is less than half the savings of the outsourcing option (about 700 million Croatian kunas). Private employers oppose the new plan, emhasizing that the decision is not responsible towards taxpayers.
Reasons Behind Outsourcing
Private companies are increasingly using outside business services for management, legal, and accounting services, research and development, information communication technologies, design, marketing, etc. in order to focus on core activities and reduce operational costs. This rising trend holds lessons even for governments. For example, regulatory impact assessments, policy design and provision of public services could all be outsourced to ensure effective implementation of market-based reforms.
A sort of outsourcing is also vital in apprenticeship programs, in which students can acquire practical, market-relevant skills working part-time for private firms and therefore increasing their employment prospects. For evidence of success we need only look at Germany’s and Austria’s so called dual education system, which has resulted in relatively low youth unemployment.
Moreover, outsourcing can also be a transition to full privatization, which is important in the context of market reforms. Outsourcing is a good way to demonopolize government and reduce its functions to the minimum.
The British Example
In Great Britain outsourcing and large-scale privatization of the public sector started in 1980s, when Margaret Thatcher’s government contracted-out some public services. Thatcher believed the public sector was too extensive, and contracting-out was one market reform during her era. The outsourcing agenda contributed to the increase of business service providers, which has made Britain the global hub for knowledge-intensive business services.
This in turn started the global privatization wave, a revolution that has provided legitimacy even for the growth of a privatized military sector (Singer, 2008). This market revolution has freed up space for new entrepreneurial initiatives. Businesses that provide management consulting, information communication technologies, and detective and security services have extended their offerings to intelligence, police, and defense.
The British army is a good example of the trend, one that could spread to the entire European continent. Private enterprises already manage essential parts of the Royal Navy and Royal Air Force transport units. Similarly, Australia has outsourced military recruiting, while Canada did the same with military logistics (Singer, 2008).
Outsourcing in Britain continued in 1990s. However, since 2010, David Cameron’s conservative-liberal government has gone even further and released control over public services entirely to the market and other nongovernmental sectors.
U.S. Intelligence and Military Contractors
After the Cold War, reductions in the U.S. military budget and the number of personnel opened up large opportunities for outsourcing to private contractors. This trend has been driven especially by rapid development of information technology (IT) and market innovations. Government monopoly, even in national security, is not what it used to be.
The CIA has become a “farm system” for contractors (Shorrock, 2008) because many private companies, prompted by opportunities to win outsourcing contracts, go even to Langley (CIA headquarters) to recruit spies to work for them. Booz Allen Hamilton, Stratfor, and many other companies offer much better market-based intelligence services.
The same has happened with the National Security Agency (NSA), as well as other parts of the U.S. Intelligence community. Private intelligence contractors provide various services, such as data gathering and analysis, policy analysis, political risk management, physical security, satellite management, special operations, reconnaissance, electronic surveillance, and signal interception. Private contractors even work in the offices of U.S. intelligence agencies. Their language, IT, multicultural, and management skills are much better than those available from government sources. Shorock (2008) points out that 60 percent of the CIA’s service providers are private contractors.
The number of NSA contractors has increased from 144 in 2001 to 5,400 in 2006. Eighty-three percent of the NSA signals-intelligence budget goes to “spies for hire” (Shorrock, 2008). NRO, the National Reconnaissance Office, outsources 95 percent of its reconnaissance operations, especially with IT enterprises, when dealing with spy satellites. Private contractors dominate the CIA’s National Clandestine Service’s special operations.
The heart of the U.S. Intelligence community is the National Counterterrorism Center (NCTS), the agency for gathering information and managing national security threats. Shorrock (2008) emphasizes that more than half the individuals working at NCTS are private contractors from companies such as Booz Allen Hamilton, Science Applications International Corporation, BAE Systems, and Lockheed Martin. In 2006, 70 percent of the Office of the Director of National Intelligence (ODNI) budget was allocated for private contractors. The portion was 35 percent for the Defense Intelligence Agency (DIA).
The estimated annual value of the U.S. security-intelligence market is around $50 billion (Shorrock, 2008). This is a rapidly growing sector, which includes hundreds and even thousands of firms, such as: Stratfor, Booz Allen Hamilton, Science Application International Corporation, Consolidated Analysis Centers International, ManTech, Military Professional Resources Incorporated, Kellogg Brown & Root, Lockheed Martin, DynCorp, Essex Corporation, General Dynamics, Titan, Verizon, Hewlett-Packard, Nortel Networks, Dell, Raytheon, SEDC, Essex Corporation, AirScan, Wackenhut, Abraxas, Scitor, AKE Group, Kroll, K2, GK Sierra, Quintel Intelligence, Strategic Insight Group (SIG), Crown Intelligence, Watchguard International, ArmourGroup, Northrop Grumman Corporation, L-3 Communications, BAE Systems Information Technology, and Global Strategies Group.
Croatia versus America and Britain
The distance between Croatia and the Anglo-Saxon countries in the outsourcing of government functions is vast. While even modest market-oriented reforms in Croatia, including outsourcing, are now in doubt, some countries, as we’ve seen, even contract-out parts of their national-security services. To operate efficiently, the public sector needs to outsource its functions. Examples from the United States and Great Britain show that even basic functions can be left to entrepreneurs. Outsourcing is the way to reduce the size of government, which should focus on creating the legal framework for free-market competition.
Mikac, R. 2013. Contemporary Security and Private Security Companies: Privatization of Security and Consequences. Jesenski i Turk.
Shorrock, T. 2008. Spies for Hire: The Secret World of Intelligence Outsourcing. Simon & Schuster Paperbacks.
Singer, P. 2008. Corporate Warriors: The Rise of the Privatized Military Industry. Cornell University Press.