Regulatory Policy

Excluding for-Profit Companies from Government Contracts Does More Harm Than Good

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In government contracting as in anything else, free-market competition improves outcomes.

Policymakers and activists often condemn government contracts with for-profit providers, arguing that the quest for profit inherently corrupts private businesses. To the extent that governments must rely on third-party service providers, such critics often see private nonprofit organizations as the morally superior option, believing them to be somehow insulated from financial motivations.

But nonprofit entities are not inherently immune to greed, and just like their for-profit counterparts, they should be held accountable by free-market competition when awarded contracts for the provision of services. As much as possible, a nonprofit should be subject to provisions that tie profit (or “net revenues” in nonprofit parlance) to performance standards set by the government agency that has awarded it a contract.

Typical of the “profit bad, nonprofit good” mentality is a recent petition from Fix Foster Care, an activist group dedicated to improving outcomes for children who have been removed from their parents’ homes. “Foster care and youth justice services should not be run by for-profit companies under dubious contracts with governments that benefit stockholders at the expense of children’s best interests,” the petition declares.

But this is a distinction without a difference. Shareholders do not directly control large corporations: Day-to-day decisions are made by management under the supervision of a board of directors, in much the same way as they are at nonprofit organizations. The presence of stockholders in a private company does not make a contract “dubious”; the provisions of the contract do.

Critics of for-profit government contractors also like to point to outrageous compensation packages earned by top executives. But nonprofit executives have ample opportunity to extract value from the organizations they oversee, too: The Economic Research Institute identified ten nonprofit executives who each received more than $8 million in compensation in 2018. And nonprofits are just as prone to corruption, greed, and other malfeasance as their profit-making counterparts: Both Nonprofit Quarterly and Charity Watch have pages that offer long lists of nonprofit scandals.

Yet the notion that nonprofits are morally superior to for-profit contractors persists, and has real consequences: Government contracts for the provision of certain types of services are being walled off from for-profit providers in some areas of the country, stifling competition to dismal effect.

In California, for instance, almost all nongovernmental homeless services are provided by nonprofits, and few knowledgeable Californians would claim that homelessness is a problem their state has under control. Similarly, California’s foster-placement agencies are required by law to be nonprofit organizations, but the over 200 501(c)(3) organizations overseeing foster placements in the Golden State are far from perfect, and government social workers sometimes fail to remedy their failures.

In 2019, Edgewood Center for Children and Families, a nonprofit contracted by San Francisco and San Mateo Counties to serve vulnerable children and teens, faced disciplinary action from the State of California after reports emerged of sexual abuse by staff members.

In 2017, foster parents, a nonprofit foster-family agency, and San Bernardino County settled a case brought by five foster children alleging abuse, paying the children $700,000. The Victorville Daily Press reported:

According to the complaint, the children were allegedly given just five minutes to shower, dress, brush their teeth and hair; not allowed to choose which clothes they wore; barred from practicing their religion of Christianity or celebrating Christmas; provided dinner at 3 p.m.; put to bed between 5 and 7 p.m.; prevented from calling family; and retaliated against through chore work when reporting negative information to social workers.

The Community Care Licensing Division of the California Department of Social Services catalogues hundreds of complaints against nonprofit foster-family agencies and lists many such agencies that have ceased operations.

The troubling state of foster care and homelessness in the Golden State suggests a need for innovation, a need that only market competition can fill. Particularly where the provision of social services is concerned, the desired outcomes tend to be clearer than the means of achieving them. The more providers are given the opportunity to compete for government contracts to provide such services, the better the chance that one of them will hit upon what works.

Canceling for-profit providers is not the magic policy elixir that will fix foster care or other social services once and for all. While private contractors should always be properly scrutinized, tested, and vetted before being trusted to provide government services, blanket bans that prevent them from even bidding for such contracts do more harm than good. At the end of the day, contracts should go to the most capable contractor, whether for-profit or nonprofit.

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