Rolling Stone Magazine has an good story on the conviction of a number of banks and brokers on charges of bid-rigging, specifically on contracts for short-to-medium term management of municipal bond cash accounts. Apparently brokers were paid by certain banks to be given a look at all the other bids before they made their final bid. The article focuses mainly on the ability of winning bidders not to bid any higher than necessary, though I would suppose there were also times when, given this peek, the winning bidder actually raised its bid higher than it might have to ace out other bidders.
This is classic government contracting fraud and it's great to see this being rooted out. I am not wildly confident it is going to go away, but any prosecutorial attention is welcome.
But I am left with a few questions:
- It seems that government contracting is more susceptible to this kind of manipulation. Similar stories have existed for years in state highway contracting, and the municipal bond world has had accusations of kick-backs for years. Is this a correct perception, or is the rate of fraud between public and private contracting the same but we just notice more with the government because the numbers are larger, the press coverage is greater, and the prosecutorial resources are more robust?
- If government contracting of this sort is more susceptible to fraud, why, and how do we fix it?
The latter is not an academic question for me. I run a company that privately operates public recreation areas. I bid on and manage government contracts. Frequently, a major argument used against the expansion of such privatization initiatives is that past government outsourcing and contracting efforts have been characterized by fraud and mismanagement. The argument boils down to "the government has so many management problems that it can't be trusted with contracting for certain services so it needs to operate those services itself."
The only way to reconcile this view is to assume that private actors are more likely to act fraudulently and be dishonest than public employees. If this were true, then the public would be safer if a public management process of questionable ability were applied towards public employees rather than outside private contractors, because those who were being managed would be less likely to take advantage. And certainly there are plenty of folks with deep skepticism of private enterprise that believe this.
However, I would offer that only by adopting an asymmetric view of what constitutes fraud would we get to this conclusion. Clearly, banks colluding to shave a few basis points off municipal asset returns is fraud. As the author of the Rolling Stone piece puts it several times, the crime here is that the public did not get the best market rate. So why is, say, elected officials colluding with public employees unions to artificially raise wages, benefits, and staffing levels above market rates not fraud as well? In both cases insiders are manipulating the government's procurement and political processes to pay more than the market rates for certain services.
This is Bastiat's "seen and unseen" of the privatization debate. Yes, the world is unfortunately littered with examples of government procurement fraud. This is often cited as a reason for maintaining the status quo of continued government management of a diverse range of services. But what we miss, what is unseen, is that these government services are often run with staffing levels, work rules, productivity expectations, and pay rates that would constitute a scandal if uncovered in a division of a corporation, particularly if the workers were spending a lot of money to make sure the manager handing them this largess was able to keep his job.
Yes, the public lost several basis points on its investments when it did not get the market rate of return from cheating bankers. But it loses as much as 50% of every tax dollar sent to many state agencies because it does not get market rates (and practices) for state labor.