possibilities and limitations of privatization

8/3/2019 Possibilities and Limitations of Privatization

1/43Electronic copy available at: http://ssrn.com/abstract=1773832Electronic copy available at: http://ssrn.com/abstract=1773832

Vanderbilt University Law School

Public Law & Legal TheoryWorking Paper Number 11-09

Law & EconomicsWorking Paper Number 11-14

The Possibilities and Limitations of Privatization

Edward Rubin

Vanderbilt University Law School

This paper can be downloaded without charge from the

Social Science Research Network Electronic Paper Collection:

http://ssrn.com/abstract_id=1773832



2009 Rubin - Possibilities and Limitations 2/28/20114:21PM

1

THE POSSIBILITIES AND LIMITATIONS

OF PRIVATIZATION

Government by Contract: Outsourcing and American Democracy, edited byJody Freeman and Martha Minow, Harvard University Press 2009

EDWARD RUBIN*

Neal Stephensons Snow Crash1 envisions a United States of thefuture where protection against foreign enemies is provided by AdmiralBobs Global Security, domestic order is the domain of the CentralIntelligence Corporation, and local safety is maintained by MetaCopsUnlimited (Dial 1-800- THE COPS: All Major Credit Cards), all of which

fits perfectly with the named-branded, commercialized environment thatdominates peoples day-to-day existence. In Los Angeles, where the Mafia,a legal corporation, will deliver pizza anywhere in twenty minutes,guaranteed, Fedland is highly guarded office complex and seem to have nofunction that anyone can discern other than to protect itself. The novelmerits science fictions much-coveted accolade of prescience for having alsoenvisioned a cyberspace world where people can create virtual charactersthat move around and interact, and having introduced the term avatar todescribe them.2Whether Stephensons vision of a totally privatized Americawill turn out to be equally prescient is at leas t one theme of Jody Freemansand Martha Minows edited volume, Government by Contract.3

This excellent collection of essays arrives when the debate about

privatization is already well advanced. Beginning largely during the 1970s,but accelerating in res ponse to the second Bush administrations unalloyedenthusiasm for this approach,4 the scholarly literature on privatization isnow voluminous. In fact, a number of the contributors to this volume havealready written books or extensive articles about the topic.5 This is an

* University Professor of Law and Political Science, Vanderbilt University. I want to thank theVanderbilt Law School faculty workshop participants for their helpful comments, Professors MargaretBlair and Kevin Stack for their insightful suggestions, and Lauren Solberg and Lauren Winter for theirvaluable research assistance.1 Neal Stephenson, Snow Crash (1992)2 In his acknowledgements, Stephenson notes that the term avatar was being used by a virtual realitysystem called Habitat at the time he wrote the book, although he became aware of it only after his bookwas published. Id. at 470. In any case, his book appears to be the origin of the terms current usage.33 Jody Freeman and Martha Minow, eds., Government by Contract: Outsourcing and AmericanDemocracy (2009)[hereinafter cited by page number only].4 See Office of Management and Budget, The Presidents Management Agenda, Fiscal Year 2002 (2001),reprinted at www.whitehouse.gov/omb/5 See, e.g., Alfred C. Aman, Jr., The Democracy Deficit: Taming Globalization through Law Reform(2004); John Donahue, The Privatization Decision: Public Ends, Private Means (1989); William J.

Novak, The Peoples Welfare: Law and Regulation in Nineteenth Century America (1996); Paul R.Verkuil, Outsourcing Sovereignty: Why Privatization of Government Functions Threatens Democracy
http://www.whitehouse.gov/omb/http://www.whitehouse.gov/omb/




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advantage. It not only means that the authors are extremely knowledgeable,but also that they have moved past the overheated enthusiasm or instinctive

horror with which the debate began

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to more modulated and informedpositions. They can therefore enter into a sustained, constructive dialoguewith each other that constitutes a further virtue of Government By Contract.In all too many edited volumes, the contributors talk past each other; thesecontributors have read each others work, taken it seriously, and respondedin ways that deepen the debate. The result is that this is a book that will beextremely useful for readers who are new to the topic and want tofamiliarize themselves with its essential facts and basic issues, and equallyuseful for those who have been following the controversy and want toremain up to date with its most recent ramifications.

In other words, if you have any interest in privatization, you shouldread this book. And as the editors Introduction argues,7if you dont have

any interest in privatization, you should develop one. Privatization is animportant issue by anyones standards, but it is arguably much more thanthat. A convincing case can be made that it is one of two issues that hasdefined regulatory policy, and in large part presidential politics, for the pastthirty years. According to Stephen Skowroneks Kuhnian model,8presidential administrations can be organized into sequences defined bydistinctive paradigms of governance: one president defines or reconstructsa new approach to government, one or more successor presidents extend orarticulate that approach, and then one or more unfortunate or inadequatepresidents continue the approach past its period of effectiveness, whichSkowronek describes as a disjunction.9 The obvious example that he givesfrom the twentieth century is Franklins Roosevelts reconstruction, Harry

Trumans articulation and Jimmy Carters disjunction.

10

Despite the dangerof interpreting recent history at this level of generality, Ronald Reagansadministration can be regarded as a reconstruction in Skowroneks sense,with the first Bush administration being an articulation and the second a

and What We Can Do About It (2007);; Sharon Dolovich, State Punishment and Private Prisons, 55Duke L.J. 441 (2005); Jody Freeman, Extending Public Law Norms Through Privatization, 116 Harv. L.Rev. 1285 (2003); Jody Freeman, The Private Role of Public Governance, 75 N.Y.U. L. Rev. 543 (2000);Gillian E. Metzger, Privacy as Delegation, 103 Colum. L. Rev. 1367 (2003); Martha Minow, Public andPrivate Partnerships: Accounting for the New Religion, 116 Harv. L. Rev. 1229 (2003)[hereinafter;Martha Minow, Outsourcing Power: How Privatizing Military Efforts Challenges Accountability,Professionalization and Democracy, 46 Boston Coll. L. Rev. 989 (2005).6 See, e.g., Daniel Guttman and Barry Willner, The Shadow Government: The Governments Multi-Billion-Dollar Giveaway of its Decision-Making Powers to Private Management Consultants, Experts,and Think Tanks (1976); E.S. Savas, Privatization: The Key to Better Government (1987)7 Jody Freeman and Martha Minow, Introduction: Reframing the Outsourcing Debates, p. 18 Stephen Skowronek, The Politics Presidents Make: Leadership from John Adams to George Bush(1993). See Thomas Kuhn, The Structure of Scientific Revolutions (2nd ed., 1970)(scientific theoriesoperate as paradigms). Skowronek, probably to his credit, does not rely explicitly on Kuhn in advancinghis theory.9 The earlier clusters that Skowronek discusses in his book are Jefferson, Monroe and Quincy Adams;Jackson, Polk and Pierce; Lincoln, Theodore Roosevelt and Hoover.10 Skowronek, supra note [ ], at 287-406.


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disjunction. With respect to regulatory policy, which Reagan moveddirectly to the forefront of political debate, the two principal pillars of his

reconstruction were probably cost-benefit analysis and privatization. Bothremained organizing principles of regulatory policy through the two Bushadministrations and, even more strikingly, through the Clintonadministration as well. They therefore can be said to constitute theparadigm of domestic policy that has prevailed for the past three decades11

It is too early to tell whether the Obama administration willrepresent a new reconstruction, but re-evaluation of the privatization part ofthe preceding paradigm is clearly underway. Office of Management andBudget (OMB) Circular A-76,12 which has served as the centerpiece ofprivatization policy for the past thirty years and as a particular vehicle forthe second Bush administrations efforts, was suspended for a year by the2009 Omnibus Appropriations Act, which Obama signed this past March.13

In that same month, he issued a Presidential Memorandum instructing thenew director of OMB to re-evaluate government outsourcing.14 TheMemorandum states that the line between inherently governmentalactivities that should not be outsourced and commercial activities that maybe subject to private sector competition has been blurred and inadequatelydefined. As a result, contractors may be performing inherentlygovernmental functions. Agencies and departments must operate under clearrules prescribing when outsourcing is and is not appropriate."15 Thus, itwould appear that we have now reached a truly historic turning point, notmerely for privatization, but for the thirty-year long paradigm of regulatorypolicy that the policy of privatization has so largely defined.16

The first section of this review will summarize Government by

Contractnot by simply by reiterating the main points in each essay but taking advantage of one of the books virtues by describing how thecontributors arguments interact with one another. The second section,continuing this theme, will attempt to identify the common ground that theytrace out as a result of their dialogue: first, that policy making shouldremain in the control of politically accountable government authorities;

11 For a general survey of cost-benefit analysis, as it has developed and flourished in the last fourpresidential administrations, see Matthew Adler and Eric Posner, New Foundations of Cost BenefitAnalysis (2006); E.J. Mishan and Euston Quah, Cost Benefit Analysis (5 th ed. 2007); Tevfik F. Nas,Cost-Benefit Analysis: Theory and Applications (1996)12 Executive Office of the President, Office of Management and Budget, Circular No. A-76 (Revised)(May 29, 2003)13, P.L. No. 111-8 (March 11, 2009)14 Barak Obama, Memorandum for the Heads of Executive Departments and Agencies, Subject:Government Contracting (March 4, 2009), reprinted at http://www.govexec.com/pdfs/030409e1.pdf15The phrase inherently governmental is quoted from Circular A-76, supra note [ ], Attachment A atA-2 to A-3. A-76 defines an inherently government activity as an activity that is so intimately related tothe public interest as to mandate performance by government personnel. Id. at A-2. While the Circulargoes on to provide criteria, it never offers a definitive test, so the categorization, as Obamas statement

suggests, is inevitably a matter of judgment.16 See Freeman and Minow, pp. 14-20.


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second, that the primary purpose of privatization is to achieve greaterefficiency; and third, that this efficiency gain depends on the claim that

private contractors are competitive entities in a competitive environment. Itthen identifies some of areas where which the contributors disagree, themost significant being the competitiveness of the contracting process andthe resulting level of efficiency that it achieves. The discussion thenproceeds to some of the possibilities for privatization that lie beyond therealm of contractor efficiency, and that future commentators might consider.Taken as a whole, these varied considerations suggest that privatization isnot an issue that will yield to a simple or uniform solution. Rather, whatwill be required, as we move forward into a new era of Americangovernance, is a fine-grained microanalysis of the possibilities andlimitations of privatization in the many situations where it is potentiallyapplicable.

I. THE PRIVATIZATION DEBATE

A. Historical Background of Privatization

William Novak begins the book by placing privatization inhistorical perspective.17 He points out, as have other participants in thisdebate,18 that the concept of privatization depends on a socially constructeddistinction between public and private. Over the course of Americanhistory, patterns of collaborative governance inherited from long-standingEnglish practice have produced a porous, intricate and ever-shiftingboundary between these supposedly separate spheres. Many state and city

governments originated during the Colonial era as charters to privatecompanies,19 and early American corporations were conceived asinstruments of governance.20 The dynamic interplay between the tworealms, Novak notes, continues to the present time. In the context of thesetwin concerns about the potential for public corruption in state-directedprojects and private coercion in the free market, it is not an accident that theUnited States developed a preference for balancing public direction withprivate initiative and regulating the private excesses and market failures of

17 William Novak, Public-Private Governance: A Historical Introduction, p. 23.18 E.g., Dan Guttman, Governance by Contract: Constitutional Visions: Time for Reflection and Choice,33 Pub. Cont. L.J. 321 (2004); Sheila S. Kennedy, When is Private Public Private? State Action in theEra of Privatization and Public-Private Partnerships, 11 Geo. Mason Civ. Rights L.J. 203 (2001); ChrisSagers, The Myth of Privatization, 59 Admin. L. Rev. 37 (2007).19 Pp. 27-3020 Pp. 30-31. See also Nicholas Parrillo, The De-Privatization of American Warfare: How the U.S.Government Used, Regulated, and Ultimately Abandoned Privateering in the Nineteenth Century, 19Yale J. Law & Human. 1 (2007)


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competition and monopoly power with what John Kenneth Galbraith termedcountervailing public power.21

Novaks insight can be extended on the basis of the pre-Americanexperience of the Western world. Feudalism, the dominant mode ofgovernance for many centuries after the collapse of the Roman Empire, wasessentially an extreme form of privatization.22 In theory-- and often inpractice as the result of coup or conquest -- the king owned all the land inhis realm. But the administrative capacities of royal regimes during thisperiod were so limited, and the transportation and communications systemsso degraded, that a king could not possibly control even a moderate-sizedrealm.23 Instead, he would divide his lands among his followers, givingthem property rights that were equivalent to total control and demandingonly loyalty and in-kind service in return.24 With the revival of trade andlearning, the governance capacities of European kingdoms began to expand,

and the central governments gradually re-asserted control over the areaswithin their jurisdiction, cancelling feudal rights and imposing political andeconomic obligations.25

But these governance capacities developed only slowly, and thenascent nation states found that the rapidly expanding bureaucracies thatthey needed to effectuate control were too unwieldy and expensive tosustain. The solution, once again, was privatization, but now on the basis offunction rather than geography. Major governmental offices were eitherinitially created or gradually reconceived as private property. Thus, aparticular individual would be assigned to perform some function for thestate and would be granted the right to receive the revenue derived from thatfunction.26 The system prevailed until the end of the eighteenth century,

when the administrative capacity of central governments finally caught up21 P. 32 (quoting John Kenneth Galbraith, American Capitalism: The Concept of Countervailing Power(1980)).22 For general descriptions, see Marc Bloch, Feudal Society 145-279 (L.A. Manyon, trans. 1961);Heinrich Fichtenau, Living in the Tenth Century: Mentalities and the Social Order 135-56 (PatrickGeary trans., 1991); E.L. Ganshof, Feudalism (Philip Grierson, trans., 1996)23 Charlemagne tried assiduously to administer his enormous realm, sending out agents called missi toexercise direct control, but the effort collapsed even during his lifetime and proved completelyimpossible for his successors. See Roger Collins, Early Medieval Europe 300-1000 at 298-300 (2nd ed.,1999); R. Van Caenegem, Government, Law and Society, in The Cambridge History of MedievalPolitical Thought c. 350c. 1450, at 174, 174-83 (J.H. Burns, ed., 1988).24 Most notably, of course, military service. See Georges Duby, The Chivalrous Society 158-70(Cynthia Posten, trans., 1977); Ganshof, supra note [ ], at 31-32, 86-92; Frances Gies, The Knight inHistory 29-32 (1984). Minow notes this history in her discussion of privatization in our contemporarymilitary services, see pp. 112-13.25 See, e.g., William Bouwsma, The Waning of the Renaissance 1550-1640 at 215-31 (2000); James B.Collins, The State in Early Modern France (1995); J.H. Elliott, Imperial Spain 1469-1716 (1963);Thomas Ertman, Birth of the Leviathan: Building States and Regimes in Medieval and Early ModernEurope (1997)26 See Ernest Baker, The Development of Public Services in Western Europe, 1660-1930, at 9-11 (1966);Norman Chester, The English Administrative System 1780-1870 (1981); Jonathan Dewald, AristocraticExperience and the Origins of Modern Culture: France 1570-1715 (1993); Hans Rosenberg,Bureaucracy, Aristocracy, and Autocracy: The Prussian Experience, 1660-1815 (1966); Ellery Schalk,From Valor to Pedigree: Ideas of Nobility in France in the Sixteenth and Seventeenth Centuries (1986).


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with their centralizing aspirations. They rescinded private property rights inoffices by one means or another and established functionally organized

agencies, staffed by full-time salaried employees, in their place.

27

Accordingto Weber, this process constitutes the transition to modern bureaucraticgovernance.28

As this brief history suggests, there is no particular sets of functionsor responsibilities that are inherently public. For most of Western history,private parties carried out virtually all activities we now regard asgovernmental. The last two centuries have seen a steady and dramaticincrease in the scope of direct governmental authority, although often withthe continued involvement of private parties, as Novak indicates. Thus, thecurrent spate of privatization is correctly viewed as a sort of minor epicyclein a massive trend that has been moving rather steadily in the oppositedirection. That does not reduce recent developments to insignificance,

however. Being mortal human beings, we must live on a time scale that issmaller than millennia or even centuries, and there can be no doubt that thelast few decades of our nations history have seen the privatization of manyactivities that were previously regarded as the preserve of public authority.The point is that these recent privatization efforts cannot be opposed ongrounds that they relinquishing inherently governmental functions intoprivate hands. Arguments against privatization must be framed in morepragmatic, instrumental terms.

B. Critiques of Privatization

One of the many virtues of Government by Contract is that it isprecisely these kinds of arguments that its contributors advance. The criticsof privatization, avoiding both the conceptual error and the unconstructiveconsequences of deontological declarations, focus on particular andpotentially remediable defects, thus inviting rather than foreclosing aresponse. Martha Minow offers one of the most far-reaching critiques.29Her example is the wars in Afghanistan and Iraq, where the second Bushadministrations heavy reliance on privatization overlapped with a numberof its other readily-critiqued enthusiasms. She notes that in Afghanistan

private contractors, served in paramilitary units with the CIA, maintained

27 This change was effectuated by revolution in France, see Clive Church, Revolution and Red Tape:The French Ministerial Bureaucracy 1770-1850, at 69-110 (1981) and by a benevolent despot in Austria,

see T.C.W. Blanning, Joseph II (1994); Robert Kahn, A History of the Habsburg Empire, 1526-1918, at183-207 (1974). Great Britain, lacking the benefit of either, but just as determined to de-privatize itsoffices, had to rely on attrition or buy out the office holders with annuities, see Baker, supra note [ ], at34-36, 61-64; John Mackintosh, The British Cabinet 70-73 (3rd ed. 1977).28 Max Weber, Economy and Society 217-23 (Guenther Roth and Claus Wittich, eds., 1968)

29 Martha Minow, Outsourcing Power: Privatizing Military Efforts and the Risks to Accountability,Professionalism and Democracy, p. 110.


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combat equipment, provided logistical support, and worked on surveillanceand targeting.30In Iraq, they were involved in planning, policy writing,

budgeting, intelligence gathering, nation building.31

Because monitoringthese varied, extensive and complex contractual activities was clearly adifficult task, the Department of Defense contracted out its monitoringfunction to private contractors as well.32

This extensive reliance on private contracting was not accompaniedby a concomitant commitment to the procedures that are supposed to governthe contractual process. The Department of Defense failed to follow therequired rules for competitive bidding, failed to monitor and control theperformance of the contracting parties, and failed to ensure that contractoremployees followed appropriate legal and moral norms, a failure also notedby Laura Dickinson in her contribution to this volume.33 The consequencesof these casual attitudes are well known in the case of Abu Ghraib, where

private contractors carried out many of the interrogations.

34

This was morethan an unfortunate lapse in contractual supervision of the sort can cost theU.S. government a billion dollars or so.35 Regardless of how one feels aboutsuch a massive human rights, the fact is that the images of naked, sometimesbloodied Arab men lying on the floor under the supercilious grins of maleand female Americans will be vividly present in the mind of every adult inan embattled region where we are absolutely reliant on the support andgoodwill of moderate forces for our security and supply of crucialresources.36

But the difficulties with the militarys use of private contracting, in

Minows view, run deeper than the specific failures during the Afghani andIraqi wars. First, the competitive process that supposedly renders private

enterprise more efficient than public agencies cannot be effectively30 P. 112.31 Id. (quoting Dan Guttman, Outsourcing the Pentagon: Commentary: The Shadow Pentagon: PrivateContractors Play a Huge Role in Basic Government Work --- Mostly out of Public View,http://store/publicintegrity.org/pns/report,aspx?aid+386 (Oct. 8, 2004)).32 P. 11733 As Dickinson states, the contract with CACI International to provide interrogators in Iraq wascompletely silent on whether interrogators will receive education in international and human rightslaws. P. 34134 See Mark Danner, Torture and Truth: America, Abu Ghraib and the War on Terror (2004); PhilipGourevitch and Errol Morris, The Ballad of Abu Ghraib (2009); Seymour M. Hersch, Torture at AbuGhraib, New Yorker, May 10, 2004, at 42. As these reports make clear (Danners includes a largenumber of primary sources), the primary responsibility must rest with the American military itself.Private contractors, however, played a significant role.35 In 2004, Darleen Druyun, the second highest-ranking procurement officer in the Air Force, plead guiltyto improperly awarding billions of dollars in contracts to Boeing, which had employed her daughter andson-in-law and subsequently employed her as well. She was sentenced to nine months in prison and anumber of the contracts she negotiated were cancelled. See Jeffrey Branstetter, Darleen Druyun: AnEvolving Study in Corruption, Power and Procurement, 34 Pub. Cont. L.J. 443 (2003); Leslie Wayne,Air Force Unease in the Capital, New York Times, Business at 1, Dec. 16, 2004.36 For discussions focusing specifically on the images that emerged from Abu Ghraib and their effect, seeDanner, supra note [ ], at 217-24; Barbara Eirenreich, Feminisms Assumptions Upended, in David LeviStrauss and Charles Stein, eds., The Politics of Torture 65 (2004); Stephen F. Eisenman, The Abu GhraibEffect (2007); Charles Stein, Abu Ghraib and the Magic of Images in Strauss and Stein, supra at 123.
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implemented in many cases because there is no non-governmental marketfor the product in question. An obvious example is the LOGCAP contract

through which a few private companies have provided a broad range oflogistical services to the military since the Reagan Administration.37 Inthese circumstances, there is no real competition for the initial award, andalso a serious constraint on subsequent monitoring because the governmentcannot afford to terminate the contract.38 Second, the private contractorsemployees cannot be fully monitored or controlled because they lie outsidethe hierarchical structure that is so central to military discipline, and are thusexempt from many of the rules that constrain military personnel. Third,legal and moral norms can never be fully imposed on private contractorsbecause these firms lack the democratic accountability of public agencies.

Both Sharon Dolovich and Paul Verkuil raise equally basicconcerns about privatization. According to Dolovich, deciding whether or

not to privatize a particular function distorts the way that function isconceived, regardless of the ultimate decision.39 The reason is that thedecision process necessarily focuses on the relative efficiency ofgovernment and private providers. This tends to shrink the goals of anyparticular function -- Dolovich focuses on the incarceration of convictedfelons -- to efficiency alone. At the same time, it ensconces the existinglevel of performance as a ceiling that the private party needs to reach at alower cost than the public agency. Cost-benefit analysis, the basic tool bywhich government and private performance is compared, is often viewed asa way to avoid this exclusive focus on efficiency because it can account forthe entire range of program outcomes. But cost-benefit analysis suffersfrom a well-known tendency to undervalue soft variables, that is, those

that cannot be measured in strictly economic terms, and also from its

37 LOGCAP stands for Logistics Civil Augmentation Program, a contract to provide housing, sanitation,food, recreation and burial services to soldiers, and operations, information, personnel and maintenanceservices to the Army as a whole. See Army Regulation 700-137, Dec. 16, 1985, reprinted atwww.aschq.army.mil/gc/files/AR700-137.pdf. The four successive LOGCAP contracts have beenawarded to just two contractors, KBR and DynCorp, except that Fluor Corporation received parts of themost recent contract following disclosure of extensive legal violations and business inefficiencies byKBR and criticism of the award on the basis that Vice President Cheney had been CEO of KBRs

corporate parent, Halliburton. See Pratap Chatterjee, Halliburtons Army: How a Well-Connected TexasOil Company Revolutionized the Way America Makes War (2009); Nathan Vardi, DynCorp takesAfghanistan, Forbes.com, July 30, 2009, www.forbes.com/2009/07/30/dyncorp-kbr-afghanistan-business-logistics-dyncorp.html38 Federal regulations, specifically the Federal Acquisition Regulation (FAR) authorize the use of clausesallowing the government to terminate a contract for either default or convenience. FAR, 52.249-2(termination for convenience); id. 52.249-8 (termination for default of fixed-price supply and servicecontracts); id. 52.249-10 (termination for default of fixed-price construction contracts). Default isbroadly defined, and includes termination for failure to make progress in carrying out the contract. SeeDanzig v. AEC Corp., 224 F.3d 1333 (Fed. Cir. 2000); Brad Fagg, Default Termination for Failure toMake Progress, 25 Pub. Cont. L.J. 113 (1995). The contracting officer has wide discretion in exercisingthe termination right, see Fairfield Scientific Corp. v. U.S., 222 Ct. Cl. 167 (1979). As Minow points out,however, these powers will be of little use if the government agency has become dependent on aparticular contractor to carry out an essential function.39 Sharon Dolovich, How Privatization Thinks: The Case of Prisons, p. 128.
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dependence on previously-established goals.40 The result is to reinstate theefficiency analysis around a principle that Dolovich identifies as cost

minimization,

41

thereby undermining democratic accountability.

42

Paul Verkuil reaches a similar conclusion to Dolovich on the basisof a constitutionally based analysis.43 The Constitutions AppointmentsClause, he points out, provides that the President appoints Officers of theUnited States with the advice and consent of the Senate.44 When the rolesthese Officers have been appointed to fulfill are transferred to privateparties, Congress is denied its constitutionally established opportunity toapprove or reject the appointment, and similarly denied its power toimpeach for high crimes and misdemeanors.45 The crucial question iswhether these private parties, by virtue of the authority they have beengranted, qualify as Officers in the constitutional sense. In Buckley v.Valeo,

46 the Supreme Court established three criteria for making this

determination: the scope of authority, the duration of employment, and thepermanence of the task assigned. It did not indicate, however, whetherthese criteria were conjunctive, disjunctive or something in between. TheOffice of Legal Counsel (OLC) for the Bush I administration, adopting theunitary executive theory, concluded that they were disjunctive, namely, thatmeeting any one of the three criteria made one an officer. The Clintonadministrations OLC repudiated this conclusion and held that the privateparty must meet all three criteria.47 Under the Bush I interpretation,privatization would be largely unconstitutional without explicitCongressional consent. Under the Clinton interpretation, the effect of theAppointment Clause would not be so extreme, but it would nonethelessextend to many private contracts, such as LOGCAP. This constitutional

concern, and several others that Verkuil discusses, is not mere formalism inhis view. Rather, it relates to functional concerns about the executivesfailure to adequately supervise contracting parties, and about both the

40 See, e.g., Frank Ackerman and Lisa Heinzerling, Pricing the Priceless: Cost-Benefit Analysis ofEnvironmental Protection, 150 U. Pa. L. Rev. 1553, 1566, 1578-80 (2002); Martha Nussbaum, The Costsof Tragedy: Some Moral Limits on Cost-Benefit Analysis, 29 J. Legal Stud. 1005, 1028-36 (2000).41 Pp. 139-4342Dolovichs example is well chosen because accountability is a particular problem in the prisoncontext. See Malcolm Feeley and Edward Rubin, Judicial Policy Making and the Modern State: How theCourts Reformed Americas Prisons 150-71 (1998).43 Paul Verkuil, Outsourcing and the Duty to Govern, p. 310.44 U.S. Const., Art. II, Sec. 2, cl. 2.45 Id., Sec. 4. See also Id., Art I, Sec. 2, cl. 5 (House power to impeach); Sec. 3, cl. 6 (Senate power totry impeachments), cl. 7 (consequences of impeachment)46 424 U.S. 1 (1976).47 Pp. 318-21. The two administrations reached these conclusions in connection with the issue of privatelaw enforcement, or qui tam actions. When these actions are the issue, rather than contracts with privateparties, the political polarity is reversed. Liberals tend to favor qui tam actions and conservatives opposethem, whereas they privatization tends to be endorsed by conservatives and criticized by liberals. It is avirtue of Verkuils essay that he connects the two issues, and puts us all to the test of articulating a single,

consistent position that applies to both or can explain the difference between them.


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executives and legislatures ability to hold these parties accountable fortheir actions.48

C. Proposed Reforms of the Privatization Process

At least four of the other essays in Government by Contractthoseby Gillian Metzger, Alfred Aman, Laura Dickinson and Nina Mendelson --generally agree with these critiques and propose legal reforms to remedy theproblems that have been identified. Metzger grounds her proposal onconstitutional law.49 In light of Minows critique that the executive branchhas failed to monitor private contractors and Verkuils critique that thelegislative branch has been precluded from doing so, she proposes anexpanded monitoring role for the judiciary. The major impediment tojudicial monitoring, Metzger notes, is the current interpretation of the state

action doctrine. Private contractors, like administrative agencies, possessdelegated power,50 but the constitutional constraints that discipline publicagencies, most notably due process, can only be applied to privatecontractors if they are deemed to be state actors.51 While current state actiondoctrine recognizes the basic reality of delegated power, it imposes twolimitations that are nearly fatal to judicial monitoring. First, the doctrinelimits the finding that a private contractor is performing a public function tofunctions traditionally and exclusively made by the sovereign for and onbehalf of the public;52 second, it requires that the government must bespecifically involved in the contractors performance of its tasks. 53 Metzgerdemonstrates that both these limitations are conceptually flawed. Withrespect to the first, she points out, in agreement with Novak, that there is no

fixed category of intrinsically governmental tasks, particularly given thedramatic expansion of governmental roles in the administrative state. Withrespect to the second, she argues that a lack of government involvement ofthe sort that Minow documents is exactly the situation where judicialmonitoring is most needed: the less the government is involved, the more

discretion and power private entities have.54 By eliminating theselimitations to the state action doctrine, the federal judiciary could requirethat contractors who exercise delegated power over private parties conform

48 In his book, Verkuil voices many of the same policy-based concerns about privatization of that Minowdoes, also with a particular focus on the military. He emphasizes the absence of supervision andattributes it to both legal and policy factors. Verkuil, supra note [ ], at 103-09, 158-73.49 Gillian E. Metzger, Private Delegations, Due Process, and the Duty to Supervise, p. 291.50 Metzger has previously explored the relationship between contracting out and delegation with greatinsight. See Metzger, supra note [ ].51 See, e.g., Brentwood Academy v. Tennessee Secondary School Athletic Assoc., 531 U.S. 288 (2001)(state-wide high school athletics association is a state actor); Flagg Bros. v. Brooks (private party takingaction authorized by codified common law is not a state actor); Marsh v. Alabama, 326 U.S. 501 (1946)(company town is a state actor).52 Blum v. Yaretsky, 457 U.S. 991, 1011-12 (1982). See Metzger, p. 293.53 P. 29554 Id.


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to the same standards of regularity, accuracy and impartiality that it hasalready imposed on government agencies.

The volume moves from constitutional to statutory law with AlfredAmans effort to deploy the resources of administrative doctrine to addressthe lack of accountability that concerns Minow, Dolovich, and Verkuil.55He agrees with Novak that the publicprivate dichotomy is artificial, andwith Metzger that similar constraints should apply to private contractors asapply to government agencies. The Administrative Procedure Act (APA),56he notes, requires that administrative agencies announce their intention toenact a regulation in advance, open their decision process to publicparticipation, and publicly explain their reasons for the decision that theyultimately reach. The Freedom of Information Act57 requires that agenciesdisclose information about their decision process to the public. Applyingthese statutory provisions to privatization would mean that government

would need to announce its intent to contract out in advance, accept publiccommentary on the decision, and explain the reasons for whatever contractit ultimately entered into. The contracting party would be required to makeinformation about its performance of the contract open to the public. Thus,whether the function was performed publicly or privately, the mechanismsthat ensure accountability to the public would be essentially the same.

Two other contributions extend the consideration of legal reforms tocommon law. Laura Dickinson argues that contractual terms can be used toimport public values such as fairness, transparency and accountability intothe realm of private contracting.58 The government can require privatecontractors to follow a public law norm, establish clear benchmarks for theirperformance, subject the private party to specific monitoring processes by a

public agency, require that it engage in self evaluation, require that it beaccredited by an independent trade or standard-setting organization, andestablish specific criteria for termination or partial takeover of the contract.Dickinson notes that many of these devices appear in contracts for domesticgoods and services, but have been strikingly absent in the internationalsetting. Based on her survey of all the publicly available contracts thegovernment has entered into to support its military and foreign aid efforts inIraq, she concurs with Minow that this has been a situation where contractsthemselves were slovenly designed, monitoring was weak or non-existent,corruption was rampant and performance was inadequate. .

Nina Mendelson also proposes reform of common law, in her casetort law, as a means of increasing contractor accountability.59 Her moregeneral theme is that existing legal provisions can be incrementally adjustedto increase the accountability of private contractors, thus avoiding the need

55 Alfred C. Aman, Jr., Privatization and Democracy: Resources in Administrative Law, p. 261.56 5 U.S.C. 551-706 (2007)57 5 U.S.C. 552 (2007) (codified as an amendment to the Administrative Procedure Act).58 Laura A. Dickinson, Public Values/Private Contract, p. 335.59 Nina A. Mendelson, Six Simple Steps to Increase Contractor Accountability, p. 241.


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for new and necessarily controversial legislation. Thus, she secondsMetzgers view that the state action doctrine should be reformulated so that

private contractors are subject to constitutional claims, and Amans viewthat administrative law standards, such as those embodied in the APA andthe Freedom of Information Act, should be applied to private contractors.She devotes particular attention, however, to tort law and proposes that theexcessively generous defenses to liability that have been granted privatecontractors should be rescinded. Courts quite reasonably allow a contractorto assert a defense against tort liability when it is acting in accordance withgovernment specifications. But they have expanded this governmentcontractor defense to any situation where the specifications are reasonably

precise, even if the action at issue in the lawsuit is not encompassed bythose specifications.60 In the best scenario for contractor accountability,Metzger writes, a court could conceivably decline to apply the government

contractor defense in a tort case unless the government had specificallyrequired particular actions (or nonactions) on the part of the contractor.61

D. Defenses of Privatization and Responses to the Critiques

The remaining five contributions to Government by Contractrespond to these calls for legal reform. Three of the fivethose written bySteven Kelman, Stan Soloway and Alan Chvotkin, and Mathew Blum argue that existing controls on government contracting are adequate and thatadditional restrictions of the sort proposed by other contributors would becounter-productive. Kelman employs transaction cost economics, as

developed by Coase and Williamson,62

to articulate a conceptual frameworkfor privatization.63 A firm must always decide whether to make or buy aparticular product or service; for functions outside the core competency ofthe firm (that is, the thing the firm does better than anyone else), contractingfor the good or service will tend to be the efficient solution unless thecontracting process is beset by unusual uncertainties, or a lack ofcompetition will develop because the contract will generate specific assetsthat cannot be used for other purposes, or because the firm will havedifficulty determining whether the contractor has performed in a satisfactorymanner. Government must make this same determination, Kelman argues.

60 P. 24761 P. 247 (citation omitted).62 See Ronald Coase, The Nature of the Firm, 4 Economica 386 (1937); Oliver Williamson, TheEconomic Institutions of Capitalism (1996) [hereinafter Williamson, Economic Institutions]; OliverWilliamson, The Mechanisms of Governance 54-92 (1996) [hereinafter Williamson, Mechanisms];Oliver Williamson, Markets and Hierarchies: Analysis and Antitrust Implications: A Study in theEconomics of Internal Organization (1975) [hereinafter Williamson, Markets]63 Steven Kelman, Achieving Contracting Goals and Recognizing Public Law Concerns: A ContractingManagement Perspective, p. 153.


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But political sensitivity to corruption and a legally-suffused environmenthave led public policy makers to focus on constraining the contracting

process, rather than on achieving efficient results. The result was aconstellation of counter-productive rules; negotiations about matters otherthan price were prohibited, the contractors past performance could not beconsidered, discounts and sale prices could not be offered, andspecifications were required to purchase standard, off-the-shelf items.Overarching all these and other specific prohibitions was the sheermagnitude and complexity of the requirements, a tangle of red tape thatgenerated ritualized processes and redundant verbiage instead of efficientimplementation.

The Clinton Administrations effort to re-focus agencies on results,rather than constraints, was called Reinventing Government.64 Agencyofficials were issued credit cards to make small purchases, government-wide

acquisition contracts were developed to simplify large purchases, best valuereplaced lowest price as the standard for awarding contracts, and rulesagainst negotiation of non-price terms were eliminated.65 These changeshave had salutary effects and should not be reversed, Kelman argues.Imposing APA requirements on the contracting process, or subjectingcontractors to constitutional, statutory or common law liability suits wouldonly revive the unwieldy complexity that recent reforms have succeeded ineliminating. Most government contracts involve technical matters, suchstandardized goods or ministerial services, that do not raise public lawissues. Those relatively rare situations where public law issues are involvedare usually motivated by the governments need for a temporary increase incapacity (a natural disaster, for example), or its need for highly specialized

expertise that would be excessively expensive to maintain on staff or ironically -- the greater control that agency officials can often exert overcontractual employees.66 There are already many safeguards in place under

64 For the underlying idea, see David Osborne and Ted Gaebler, Reinventing Government: How theEntrepreneurial Spirit is Transforming the Public Section (1993) (stating the views of advisors to theNational Performance Review). Privatization per se is addressed at id., 76-107. The basic contours ofthe initiative itself are stated in Albert Gore, et al. The Gore Report on Reinventing Government:Creating a Government That Works Better and Costs Less (1993).65 Kelman cites, FAR 1.102, 60 Fed. 34,732 (July 3, 1995), see p 428, n.1, but legal structure is a bitmore complex than this single citation suggests. Since World War II, separate statutes have governedmilitary and civilian contracting: the Armed Services Procurement Act, codified at 10 U.S. C. 2301ff(2007), and the Federal Property and Administrative Services Act, codified at 41 U.S.C. 251ff (2007).Regulations implementing both statutes are promulgated jointly by the Department of DefenseRegulatory Council (DAR) and the Civilian Agency Acquisition Council (CAA), the first under theauthority of the Secretary of Defense and the second under the authority of the Administrator of GeneralServices. It is this system that is known as Federal Acquisition Regulation (FAR). The ClintonAdministration reforms were codified in FAR 13.301 to .307 (Simplified Acquisition Methods), and

supported by the Federal Acquisition Streamlining Act of 1994, Pub. L. No. 103-355, 108 Stat. 3243,codified in scattered sections of 41 U.S.C. (2007) (declaring various federal contracting laws inapplicableto small purchases).66 Pp. 177-89. The argument that private contractors are easier to control than public employees is alsoadvanced in James Q. Wilson, Bureaucracy: What Government Agencies Do and Why They Do It 359(1989). It is a striking claim, but one that Wilson supports only with anecdotes. Demonstrating it would


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current law to control the contracting process in these situations. What isreally needed, in Kelmans view, is for government to focus its attention

more fully on the monitoring process and to hire talented, experienced andcommitted staff to carry out that process. It is the lack of adequate staff, notthe scope of contracting or the level of legal constraints on it, thatconstitutes the major problem in the current federal contracting system.

Stan Soloway and Alan Chvotkin, officers of the ProfessionalServices Council, a trade association for government contractors, adopt asimilar position.67 The real motivation for outsourcing, they argue, is not anyspecific desire to dismantle the government but rather the decline in thegovernments research capacity and the vastly superior resources in this area

so crucial in our modern, technological society that the private sectoroffers. This disparity results from the rigidity of the civil service system,which disables the government from attracting highly trained and skilled

employees. Outsourcings primary role has been to expand governmentalcapacities in these rapidly growing high-tech fields and has only rarely beenused to replace existing federal workers. As such, it is just as frequently aresponse to strategic and human capital demands as it is an intentionallyplanned make or buy decision. Soloway and Chvotkin concur strongly withKelman that this process is already subject to fully adequate set ofsafeguards. All potential contracts worth over $25,000 must be publiclyposted to allow competing bids, all awards over $25,000 must be posted aswell,68 all bidders must be registered in a centralized database,69 eachcontract is managed by a specially assigned federal officer, and thegovernment must affirmatively approve all payments. Like Kelman, theyconclude that additional procedures or constraints would unnecessarily

encumber a process that is already quite complex, and recommend insteadthat the federal government expand its contract monitoring capacities.Another similar, but even stronger stand against imposing additional

constraints on outsourcing is advanced by Matthew Blum, AssociateAdministrator of Federal Procurement Policy in OMB during the Bush IIAdministration, who argues that the Administrations outsourcing policyachieved substantial savings and increased the efficiency of government.70Under the 2001 Presidents Management Agenda (PMA), every federal

agency was required to perform an analysis to determine which activities

require careful analysis based on clear definitions of control. Beyond that, it would be necessary todecide whether the control being exercised is desirable. In some cases, for example, civil servants mayresist orders from political appointees because those orders contravene the applicable statute.67 Stan Soloway and Alan Chvotkin, Federal Contracting in Context: What Drives It, How to Improve It,p. 192.68These and other requirements were established by the Competition in Contracting Act of 1984(CICA), 41 U.S. C. 253 {2007), and implemented in FAR 6.201 to .502.69 The CCR, or Central Contractor Registration. This requires the contractor to provide information thatattests to its legitimacy, availability for suit and so forth. See 48 C.F.R. 52.204-7 (2008)70 Matthew Blum, The Federal Framework for Competing Commercial Work between the Public andPrivate Sectors, p. 63.


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were eligible for public-private competition. The Administrations positionwas that this was properly described as a policy of competitive sourcing, not

privatization or outsourcing, because it made no presumption as whichsector is the better provider of a commercial service.71 As Blum describesthe process, [a]gencies are required to annually prepare two inventories ofthe activity performed by their employees: one inventory must identifycommercial activities, the other must identify inherently governmentalactivities.72 Through OMB Circular A-76, as revised in 2003, everyagency was required to designate a Competitive Sourcing Official (CSO)whose role was to justify in writing any designation of governmental

personnel performing inherently governmental activities73 OMB reviewedthese justifications, and they were made available to the public, which, ofcourse, meant lobbyists for companies that wanted to obtain contracts fromthe federal government. Once those activities that were eligible for public-

private competition had been identified, the agency was required to followstep-by-step procedures that involved a comparison between private bids forthe activity involved and the agencys offer, or tender, to continuingperforming that activity itself. This tender was prepared by anotherdesignated staff member, the Agency Tender Official (ATO), and had toinclude a staffing plan that reflects the agencys most efficientorganization (MEO) for performing the work with federal employees.74The agencys decision could be challenged by a private offeror, either to theagency itself or the Government Accountability Office (GAO).

In other words, the PMA required agencies to open everything theydid to competition unless their CSO could justify to OMB that the activity inquestion was inherently governmental; if not, the PMA required that the

ATO demonstrate to the agency or to the GAO that the agencys MEO wasmore efficient than the offers submitted by private companies. This certainlyseems to create a presumption in favor of outsourcing, whatever the BushAdministration claimed; agencies that previously carried out their assignedfunctions as a matter of course were required to demonstrate that they couldperform these functions more efficiently than private firms that were beinginvited to make countervailing, often unsubstantiated offers. Moreimportantly, it casts the entire process of government in the efficiency-based, private market framework that Dolovich critiques for systematicallyignoring or minimizing public values. Soloway and Chvotkins observation,echoed by Blum,75 that relatively little work was actually outsourced underthis program makes the situation worse not better; it means that the entiregovernment was cast into this market framework for relatively little gain inefficiency. It is perhaps for this reason that competitive sourcing under

71 P. 64 (emphasis in original)72 P. 65-6673 P. 6774 P. 7275 Blum, pp. 80-85; Soloway and Chvotkin, pp. 204-07, 214-15.


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Circular A-76 has been suspended by the Omnibus Appropriations Act of2009 and subjected to re-evaluation by Obamas Presidential

Memorandum.

76

The two final contributions also respond to the calls for reform, butagree with them in part. John Donahue begins, as Kelman does, by relyingon transaction cost economics to establish the parameters for privatization.77He identifies three factors that argue in favor of outsourcing a particulargovernmental taskthe ability to specify the task, the ease of evaluating thequality of the contractors performance, and the presence of the competitivemarket, which imposes the discipline of efficiency on the contractor. Basedon these considerations, he argues that straightforward functions, whichhe describes as commodity tasks, are appropriate for outsourcing, whereasmore complex, sophisticated functions, which he calls custom tasks, aremore problematic.78 Throughout the federal government, however, the

pattern has often been exactly the reverse, with custom tasks beingoutsourced and commodity tasks being retained in house. One reason,Donahue suggests, is the lobbying efforts of civil service workers. Thosewho are performing commodity tasks fear outsourcing because it willexpose them to the remorseless rigors of the private, competitive market,whereas those who perform custom tasks, and are generally more highlyskilled, welcome the greater rewards and perquisites that the private marketcan provide. This political dynamic, Donahue predicts, will hobble anyeffort to develop a rational approach to government outsourcing.

Miriam Seifters contribution is the volumes one case study, andwould appear at first to be a tale of privatization run riot. 79 The State ofMassachusetts contracts out the cleanup of hazardous waste sites to private

firmsnot just the acquisition of necessary materials, not just the provisionof cleanup services, but the entire process of hiring, cleanup and approval.Under the Massachusetts Contingency Plan,80 landowners are required tohire a licensed firm, called a Licensed Site Professional (LSP), and pay thatfirm to certify that the site in question meets the legal standards forhazardous waste removal. Very often, the LSP performs the work itselfbefore providing the approval to the landowner. The States role inimplementing the program is limited to auditing 20% of the cleanups audits that regularly reveal that the site has not been clean up in asatisfactory manner.81

76 See note [ ], supra (citing sources).77 John Donahue, The Transformation of Government Work: Causes, Consequences, and Distortions, p.41.78 P. 45-46.79 Miriam Seifter, Rent-a-Regulator: Design and Innovation in Environmental Decision Making, p. 9380 Mass. Regs. Code 310, 40.0000 (2006)81 As Seifter reports, the percentage of audited cleanups that were deemed complete upon inspectionbetween 1994 and 2005 varied between 13% and 29%. At another 5% to 21% of the sites inspectedduring this period, the cleanup was deemed completely unsatisfactory. Of the remainder, where theauditors decided that follow-up was required before the cleanup could be approved, only 6.5% succeeded


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Although the privatization of Massachusetts hazardous wasteremoval program is so extensive that Seifter regards the LCP as akin to an

agent of the landowner, rather than an independent regulator,

82

she does notrecommend that the scope of privatization be restricted. Apparently, theState simply lacks the administrative capacity to take charge of anysignificant component of the cleanup process. Instead, she recommends thatthe program be re-designed to eliminate conflicts of interest; the LCP thatcertifies the cleanup should not be the same one that performs it, and thecontractual relationship between the landowner and the LCP, if permitted tocontinue, should be regulated. Second, along the lines suggested by Kelmanand by Soloway and Chvotkin, she recommends that the State expand itscapacity to monitor the program and impose disciplinary measures on LCPsthat under-enforce or violate the applicable rules.83

II. COMMON GROUND AND OPEN QUESTIONS

Considering the contributions to Government by Contract as awhole, it appears that they actually agree on a number of the basic principlesthat should govern the privatization process. Nonetheless, they disagreeabout the scope and application of these principles, and thus about theconclusions that should be drawn from them. This section will identity andre-characterize the agreed-upon principles. It will then attempt todetermine, on the basis of that re-characterization, what we can learn fromthe fact of disagreement among such thoughtful, well-informed authors, andwhere future discussions of privatization might profitably be directed.

A. Policy Should Continue to be Set by Government Authorities

Virtually every one of the contributors supports the proposition thatpolicy making should remain in the control of politically accountablegovernment authorities.84 Policy making is generally regarded as at leastone of the inherently governmental activities that Circular A-76 excludesfrom its competitive sourcing procedure. But the definition in the documentis muddy and, as Kelman points out85 and the Iraqi experience confirms, theboundary between policy making and other activities is frequently unclear.

in eliminating all contamination. About half achieved a risk-based result where some contaminationremained, and a significant number were required to accept use restrictions on the site because ofcontinuing contamination. Pp. 99-100.82 P. 102. Her specific analogy is that hiring an LCP is like hiring an attorney.83 Pp. 103-08.84 Aman, pp. 283-88; Blum, pp. 66- 67, 86-87; Dolovich, pp. 134-39, 144; Donahue, pp. 43-44, 56;Kelman, pp. 173-75, 182; Mendelson, p. 260; Metzger, pp. 306-09; Minow, pp. 122-23, 126-27; Novak,pp. 36-39; Seifter, p. 108; Soloway and Chvotkin, 197-99, 219-25; Verkuil, pp. 311-17.85 P. 182


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This line-drawing difficulty would seem to demand to somewhat moreprecise definition of policy than is characteristically offered in the

privatization literature. But an even more insistent demand for clarificationemerges from the need to use this broadly agreed-upon principle as a sourceof guidance for those areas where privatization is appropriate. The politicalrationale for insisting that policymaking must remain within governmentcontrol is fairly obvious, at least in a democracy. But we must also knowthe theoretical rationale for the principle its relationship to modernadministrative government in general if we want to fully understand itsimplications.

While we often associate policy making with the process of lawmaking, and describe the legislature, our primary policy maker, as enactinglaws, the concept of law will be of little value in this inquiry. As I havenoted elsewhere,86 we have inherited the term law from our pre-modern, pre-

administrative past, where it referred to a system of rules that was perceivedas possessing an inherent order or logic, and was thus homologous with,though not equivalent to, natural law.87 Common law could be plausiblyviewed from this perspective, with the occasional statutes that the legislatureor the king enacted being explained as either clarifications or intrusions. Ina modern administrative state, however, statutes are seen as expressions ofpolitical will and are not expected to possess any logical or conceptualrelationship to existing legal rules. Recognizing this fact enables us todisentangle policy making from our inherited concept of law and perceive itas an independent function that determines the direction of our regulatoryapparatus. The purpose of this apparatus then becomes apparent -- it is toimplement the policy that some authorized government authority, whether

legislative or executive, has articulated. Thus, in place of the essentiallypre- modern concept of law, we now have a modern process of policyformation and implementation.

Viewed in this manner, the modern state is organized in accordancewith the principle of Weberian rationality88not surprisingly, since Weberarticulated that principle as a description of the modern mode of thought.89Policy formation represents a choice of goals or values; implementation canthen be understood as a form of instrumental rationality designed to achievethe defined goal in an effective manner. The goals are deontological, that is,they are chosen for their own sake, independent of their prospects forsuccess, but they define success for implementation programs. This does not

86 Edward Rubin, Beyond Camelot: Rethinking Politics and Law for the Modern State 191-226 (2005).87 E.g., St. Thomas Aquinas, Summa Theologica at 995-97 (Fathers of the English Dominican Province,trans., 1981) (I-II Q. 90-91). See Otto Gierke, Political Theories of the Middle Ages 75-76 (1938);Kenneth Pennington, Law Legislative Authority and Theories of Government, in Burns, supra note [ ],at 424, 424-30.88 See Weber, supra note [ ] at 24-26.89 Max Weber, The Protestant Ethics and the Spirit of Capitalism (Talcott Parsons, trans., 1958). In hisbasic definitional passage, Weber explicitly contrasts instrumentally rational and value rational modes ofsocial action with traditional social action. Weber, supra note [ ], at 26.


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imply, however, that the choice of goals is a matter of pure power orpolitical will and beyond the boundaries of rational debate. Weber identifies

a separate form of rationality, which he calls values rationality, that governsthe debate about goals in a modern, or post-traditional society,90 andHabermas makes this debate, which he describes as communicative action,the repository of the modern worlds emancipatory possibilities. 91 Thepoint, rather, as Habermas emphasizes, is that the debate about goals orvalues should occur at that level and focus on that choice; once the choice ismade, rational behavior is instrumentally designed and consists of achievingthe established goal in the most effective manner.

The generally accepted principle that the government should notprivatize policy decisions can be understood, from this perspective, asinherent to the concept of government itself. What it means to assign aparticular task or subject area to the government is that the government, that

is, public officials of one sort or another, must define the goals to beachieved in that area. If, for example, punishment of criminals is agovernmental function, then some government authority must decide whatthose who implement the actual punishment are expected to achieve. Goalsetting thus delineates the boundaries of government, dividing the functionsthat the government declares as its responsibility from those assigned toother institutions in society. Of course, as Novak points out and Westernhistory confirms, there is no general theory that will tell us which tasks orsubject areas are inherently governmental. Relinquishing the policy-makingrole with respect a specific subject area renders that area non-governmental,but that is not, by itself, an argument against doing so. In fact, the oldermeaning of the term privatization,92 is precisely that: the government

withdraws entirely from a field it once occupied, such as operation ofpassenger railways or electricity production, typically by selling its assets inthe area to private firms.93 Whether such withdrawal is good idea is certainlya valid topic for public debate. 94 But if a decision has been reached that the

90 Weber, supra note [Economy and Society], at 24-26. This was an important insight, because reason orrationality, in the Western tradition, had been treated as a unitary quality or concept.91 Jurgen Habermas, The Theory of Communicative Action, vol. 1: The Reason and the Rationalizationof Society 243-337 (Thomas McCarthy, trans., 1984) [hereinafter Habermas, Communicative Action].For a detailed discussion of how this process can occur through the modality of law, see JurgenHabermas, Beyond Facts and Norms: Contributions to a Discourse Theory of Law and Democracy(William Rehg, trans., 1996).92 See Donahue, supra note [ ] at 5-11.93See, e.g., Roman Frydman and Andrzej Rapaczynski, Privatization in Eastern Europe: Is the StateWithering Away (1994); Roman Frydman, Andrzej Rapaczynski, Johm S. Earle et al., The PrivatizationProcess in Central Europe (1993).94 As Donahue points out, this is not a particularly useful definition of the term in the American contextbecause the public has been so averse to government-run enterprises in the first place that there is notvery much to sell. Supra note [ ], at 6, 215. While this insight seems generally correct, the sociallyconstructed nature of the public-private distinction must be kept in mind. It is possible to sell off all sortsof things that we think of as inherently public. The notable example is Chiles sale of virtually all controlof water supply to private parties. See Carl Bauer, Siren Song: Chilean Water Law as a Model for


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government should take responsibility for a particular area, the governmentmust, at the very least, set policy define goals in that area.95 For a

government agency to privatize policy making in an area that has beenassigned to it is to be derelict in its duty, to abandon a task that it isobligated to perform.

Once a particular area has been assigned to government, bywhatever process such decisions are made, privatization in the morecommonly used sense of the term becomes a relevant concern. Soloway andChvotkin propose that we should avoid confusion by describing this secondform of privatization as outsourcing, and reserve the term privatization forthe governments withdrawal from a given field.96 It is probably too late inthe day for such verbal housecleaning, but the more important point is thatthe terms privatization and outsourcing are both confusing for a differentreason, namely, they suggest that action is occurring in a particular

direction.

97

The implicit image is that the government once carried outsome particular action itself, in more virtuous or benighted times dependingon ones point of view, and has now seen the light or embraced the darknessby transferring control to a private party. The real question, however, iswhether a task should be performed by public or private agents. This is amatter of instrumental rationality: which mode of action will be mosteffective in achieving the applicable policy goal. In other words,privatization in the second, more commonly used sense, is a means to anend, a strategy that readily fits within the policy and implementationframework that serves as a more accurate description than the term law forour dominant mode of governmental action.

The socially constructed character of the public private distinction

means that either method of implementation will be possible in almost anycircumstance; private companies can fight wars (and have throughout thecourse of Western history) or punish criminals (and have throughout thecourse of Western history); conversely, public agencies can run factoriesand retail stores or nurture young children. Occasionally, the range ofmeans available for implementing a particular policy will affect the choice

International Reform (2004); Peter Glieck et al., The New Economy of Water: The Risks and Benefits ofGlobalization and Privatization of Fresh Water (2002).95 This is not to suggest that government authorities should be precluded from consulting with privateparties in formulating goals. One of the themes of New Public Governance literature is that suchconsultation can lead to more realistic goals and higher levels of compliance. See Eugene Bardach andRobert Kagan, Going by the Book: The Problem of Regulatory Unreasonableness (1982); JohnBraithwaite and Ian Ayres, Responsive Regulation: Transcending the Deregulation Debate (1992);Michael Dorf, Legal Indeterminacy and Institutional Design, 78 N.Y.U. L. Rev. 875 (2003); JodyFreeman, Collaborative Governance in the Administrative State 45 UCLA L. Rev. 1 (1997); SusanSturm, Second Generation Employment Discrimination: A Structural Approach 101 Colum. L. Rev 458(2001).96 Pp. 195-97.97 See, e.g., Defense Science Board, Report of the Defense Science Board Task Force on Outsourcingand Privatization 7A (Aug. 28, 1966) (defining outsourcing as the transfer of a support function

traditionally performed by an in-house organization to an outside service provider.)


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of the policy itself, but this will usually occur because of an extremesituation the realization, for example that a particular policy cannot be

implemented by any means without unacceptable costs, not merely becauseof relative differences in effectiveness between public and privateimplementation. A more common but less defensible effect of means onends occurs as a matter of rhetorical strategy. Commentators who favorextensive regulation of the market at the policy level often argue againstprivatization at the implementation level, while those who oppose marketregulation tend to welcome privatized implementation. 98 The motivation,presumably, is that privatization sounds like a more technical, politicallyneutral topic. But these positions are not logically related; favoringprivatization as a means of decreasing regulation or opposing it as a meansof increasing regulation is simply an effort to achieve a policy positionthrough the backdoor of implementation techniques. It is more coherent, as

a matter of academic analysis, and more productive, as a matter of socialdiscourse, to fight out policy questions at the policy level. The willingnessto do so, rather than smuggling policy position into arguments aboutinstrumentalities, is the basis of the emancipatory process that Habermasprescribes.99

B. Privatization is Presumptively Superior when the Goal is

Efficiency

A second subject of agreement among the contributors toGovernment by Contract is that the primary purpose of privatization is to

achieve greater efficiency. They are somewhat less explicit about this thanthey are about the need for government to retain its policy making role, butthe linkage between privatization and efficiency clearly underlies virtuallyall the essays in the volume. The proponents of privatization, such as Blum,Donahue, Kelman, and Soloway and Chvotkin, present efficiency as itsprimary virtue, while the critics argue that privatization achieves efficiencyat the expense of other values (Aman, Dolovich, Verkuil), or that it fails todo so because the contractors are inadequately monitored (Dickinson,Mendelson, Minow).

The model of modern governmental action as policy andimplementation establishes and clarifies the relationship between these twoagreed-upon principles. If a particular subject matter is assigned to

government, then governmental institutions must articulate policy withinthat area. The policy must then be implemented, and that process should be

98Habermas refers to arguments of this nature as strategic as opposed to communicative action, that is,the argument is intended to manipulate the other persons views, rather than achieve mutualunderstanding. Habermas, supra note [ ], at 281-95.99 Id. at 254-71.


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governed by instrumental rationality. Efficiency is an element ofinstrumental rationality; it determines how the goal can be achieved at the

lowest possible cost.

100

Sometimes the policy maker specifies efficiency asan independent goal, the Simplified Acquisition Procedures adopted by theClinton administration being an obvious example.101 More often, someother goal is specified providing welfare benefits to the indigent,incarcerating convicted felons, conquering Iraq and efficiency, or costminimization, serves as a guiding principle in determining the means bywhich the goal can be achieved.

While efficiency is not the primary goal of most statutory orregulatory enactments, it is almost always a relevant consideration. Agovernment authority may commission a steel sculpture for its headquartersfor purely aesthetic reasons, having chosen the artist who designed it onpurely aesthetic grounds, but it will still want to get the best possible price

on the steel. This creates a certain complexity in defining the task to beperformed. A task that is not defined in terms of efficiency may havecomponents that can be so defined, and we might well regard the failure toseparate these components and resolve them in terms of efficiency as a poorimplementation strategy, that is a failure of instrumental rationality. 102 Touse Dolovichs example, the policy maker may decide that the main purposeof incarcerating felons is to rehabilitate them, not to simply incapacitatethem at the lowest cost. Although we could say that we want to implementthis policy in the most efficient manner, we might not be able to articulatesufficiently clear metrics to use efficiency as our principle for designing theprison.103 But specific components of the prison might be defined asseparate tasks, such as food services or health services, and these might be

relatively easy to define in cost-minimization terms. Precisely how ageneral program defined by the policy maker should be segmented by theimplementing agency is a subject that requires further exploration.104 Itwould appear that as an agency separates a task into discrete components, a

100 There are, of course, various definitions of efficiency, including Pareto Optimality and Kaldor-Hicksefficiency. For present purposes, it is not necessary to enter into the complexities of welfare economics.When used in the context of implementing previously established goal, efficiency can be defined asachieving that goal at the lowest cost, subject to all applicable constraints. 101 FAR 13.301 to 307. See note [ ] supra.102 See Donahue, pp. 42-44103As Donahue points out, You can only delegate what you can define. P. 44. Bengt Holmstrom andPaul Milgrom, in their study of outsourcing in industrial sales, conclude that a firm will outsource, orarrange employment relationships similar to outsourcing (strong outputbased incentives, ownership ofcustomer by the sales agent, and freedom to sell products of other manufacturers) when performance isrelatively easy to measure, but will opt for employment or employment type relationships when the costof measuring sales performance is high or when non-selling activities that are hard to measure areimportant. Bengt Holmstrom and Paul Milgrom, The Firm as an Incentive System, 84 Am. Econ. Rev.972 (1994).104 For private, for-profit firms, the analogous issue is an important topic in transaction cost economics.See Coase, supra note [ ]; Sanford Grossman and Oliver Hart, The Costs and Benefits of Ownership: ATheory of Vertical and Lateral Integration, 94 J. Pol. Econ. 691 (1986); Williamson, supra note [ ], at206-39.


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greater proportion of that task can be defined in efficiency-based terms. Atsome point, however, the transaction costs involved in balkanizing a single

function in this manner may overwhelm the savings gained by placing moreparts of the task on a cost-minimization basis.As an implementation strategy, privatization depends upon the

claim that, for a given program or program component, private contractorscan achieve the stated goal efficiently. No real-world institution or strategyis likely to be perfectly efficient, of course; the more precise claim thatproponents of privatization advance is that private contractors will be able toperform a particular task more efficiently than government agents.105 If thisclaim is true for any program or program component for which efficiency isthe primary goal, privatization is a presumptively advantageousimplementation strategy. While the government should always set policyinternally, and often implement that policy when the goal is something other

than efficiency, it should, according to this view, assign any task whose goalis efficiency to private contractors unless it can be specifically demonstratedthat government agents can implement it more efficiently. This is therationale of revised Circular A-76, the culmination of the paradigm ofgovernance that Reagan initiated.

There seem to be two similar but distinct explanations for thesuperior efficiency of private firms. Both rely upon the phenomenon ofcompetition. The first, which can be described as a transaction-basedaccount, is that private contractors must compete for government work,whereas government agents can simply take their assignments for grantedand do not need to minimize costs in order to retain their positions. 106 Thesecond account, which can be described as institution-based, is that private

contractors are more efficient because they exist in a competitiveenvironment, in other words, that the lash of competition has made theminherently different from public agencies.

C. The Presumptive Efficiency of Privatization Depends on the

Existence of a Competitive Market

105 Kelman, pp. 177-89; Soloway and Chvotkin, pp. 219-27. See Donahue, supra note [ ], at 57-78;Savas, supra note [ ]; Andrei Shleifer, State Versus Private Ownership, 12 J. Econ. Persp. 133 (1998);Michael J. Trebilcock and Edward M. Iacobucci, Privatization and Accountability, 116 Harv. L. Rev.1422, 1424-31 (2003)106 The Civil Service is often held responsible for creating or exacerbating this situation. See Donahue,pp. 49-55; Kelman, pp. 181-82, 190; Soloway and Chvotkin, 212-13. See Stephen Goldsmith andWilliam Eggers, Governing by Network: The New Shape of the Public Sector 174-76 (2004); Savas,supra note [ ], at 159-60. See generally Ronald N. Johnson and Gary D. Libecap, The Federal CivilService System and the Problem of Bureaucracy: The Economics and Politics of Institutional Change(1994) (discussing political distortions caused by civil service system).


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The contributors third area of agreement is that the presumptionthat favors privatization when efficiency is the dominant consideration for

implementing a program or program component depends on the claim thatprivate contractors are in a competitive situation. Clearly then, the accuracyof this claim is a crucial issue in the debate . It follows that ones attitudetoward the market, its competitive conditions, and the level of economicefficiency that it thereby achieves will strongly affect ones views aboutprivatization. There are many grounds for questioning the claim thatmarkets are competitive or achieve efficiency. A general analysis of marketfailure may be beyond the ambit the privatization debate in its entirety, andis certainly beyond the bounds of this review. Two criticisms of marketefficiency are directly relevant to the privatization debate, however. Thefirst, at the macro level, involves the nature of the firm in a modern masstechnological society and the second, at the micro level, involves the

specific way in which contracts between government and private firms areformed.Proponents of privatization regularly depict government agencies as

inefficient because they are massive bureaucracies whose scale, hierarchicalorganization and internal politics create a potpourri of perverse incentives.But the firms that take over the operations of these government agencies areunlikely to be mom-and-pop operations. Rather, the size of the typicalgovernment contract and the demand for experience and expertise thatshapes the critieria for its award means that most successful bidders will belarge, complex institutions, perhaps as large or larger than the agency whoserole they are replacing. Berle and Means observed that ownership andcontrol are generally separate in such firms,114 and modern theories of firm

structure are built upon this insight.

115

The consequence is that themarvelous alignment of strong, self-interested motivations with optimalcollective outcomes that was celebrated even earlier than Adam Smith maynot be operative.116 Even more basically, as Oliver Williamson pointsout,117 large private firms are bureaucracies, and suffer from many of thesame afflictions that encumber government agencies. In one of the moreenthusiastic endorsements of privatization, Michael Trebilcock and EdwardIacobucci respond to this argument by asserting that most of these incentive

114 Adolph Berle and Gardiner Means, The Modern Corporation and Private Property (1932). SeeJames Hawley and Andrew Williams, The Rise of Fiduciary Capitalism 42-68 (2000).115 See, e.g., Eugene Fama, Agency Problems and the Theory of the Firm, 88 J. Pol. Econ. 288 (1980);Eugene Fama and Michael Jensen, Separation of Ownership and Control, 26 J. Law & Econ. 301 (1980);Michael Jensen and William Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, andCapital Structure, 3 J. Financial Economics 305 (1976); Benjamin Klein, R.A. Crawford and ArmenAlchian, Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J. Law &Econ. 297 (1978).116 See Bernard Mandeville, The Fable of the Bees, or Private Vices, Publick Benefits (1988)(republication of 1924 edition, originally published 1714, 1729); Adam Smith, The Wealth of Nations(1776)117 Oliver Williamson, The Mechanisms of Governance 17-18, 219-49 (1996).


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problems will be resolved by market competition.118 It is easy enough toassert this as a matter of faith or ideology, of course, but demonstrating it

empirically is a more difficult matter, particularly given the wide range ofcircumstances to which it would need to be applied.The potential inefficiency of large-scale private firms is related to a

concern voiced by most of the contributors to this volume who criticizeprivatization, including Aman, Dickinson, Mendelson, Metzger, Minow andVerkuil.119 This is the concern that private firms, unlike governmentagencies, are not accountable to the public. The proponents of privatizationtake this concern quite seriously, and it serves as the basis for many of theirmore delimited recommendations for reform.120 Of course, the termaccountability must be used with caution, as it can refer to a wide variety ofinter-institutional relationships, some of which are largely fanciful.121 In thiscontext, it appears to have two distinguishable meanings. One is that private

firms are not accountable to the public, that is, that they are not supervisedby, or answerable to, elected officials. This may or may not be a goodthing; one of the reasons for granting authority to administrative agencies isthat they are supposed to be expert bodies insulated from the vicissitudes ofpolitics.122

A second meaning of the accountability concern is that private firmsare not accountable to the agency, that is, that the agency cannot controlthem and ensure that they achieve the purposes for which they have beenretained. 123 The result is cost overruns, non-functional equipment, poorservice and corruption. This would appear to be an undeniably bad thing,and may be sufficiently bad to create a presumption against privatization, as

118

Trebilcock and Iacobucci, supra note [ ], at 1424-31. For general versions of the assertion that acompetitive market will eliminate irrational behavior through a Darwinian process, see Richard Nelsonand Sidney Winter, An Evolutionary Theory of Economic Change (1992); Armen Alchian, Uncertainty,Evolution and Economic Theory, 58 J. Pol. Econ. 211 (1950);119 Minow gives equal emphasis to problems of corruption and inefficiency, see pp 123-24. Seifterfocuses on program design, but points to accountability as at least a secondary concern, see pp. 105-06.For other criticisms based on this concern, see Ellen Dannin, Red Tape or Accountability: Privatization,Public-ization, and Public Values, 15 Cornell J.L. Pub Poly 111 (2005); Goldsmith and Eggers 121 -56;Paul Light, The True Size of Government 184-88 (1999); Jon D. Michaels, Beyond Accountability: TheConstitutional, Democratic and Strategic Problems with Privatizing War, 82 Wash. U.L.Q 1001 (2004).120 See Blum, pp. 71-74; Soloway and Chvotkin, pp. 227-38;121 See Jerry Mashaw, Accountability and Institutional Design: Some Thoughts on the Grammar ofGovernance, in Michael Dowdle, Public Accountability: Designs, Dilemmas and Experiences 115, 115-18 (2006); Edward Rubin, The Myth of Accountability and the Anti-administrative Impulse, 103 Mich.L. Rev. 2073 (2005).122 See generally Robert Rabin, Federal Regulation in Historical Perspecive, 38 Stan. L. Rev. 1189(1986). The Administrative Procedure Act, 5 U.S.C. 551-559 (2007) can be viewed as primarilydesigned to insulate agency decision making from politics. This is certainly the thrust of many of themajor cases interpreting the Act, e.g., Motor Vehicle Manufacturers Assoc. v. State Farm Mut. Auto Ins.Co., 463 U.S. 29 (1983) (requiring that the agency offer reasoned arguments for rescinding a regulation,despite clear evidence that the President wanted the regulation rescinded); Citizens to Preserve OvertonPark, Inc. v. Volpe, 401 U.S. 402 (1971) (required reasoned basis for a highly discret

possibilities and limitations of privatization

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