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Government Causes Harm When Excluding For-Profit Companies from Contracts

Marc Joffe writes for National Review Online about one misguided approach to public policy involving for-profit companies.

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. …

Mitch Kokai / Senior Political Analyst

Mitch Kokai is senior political analyst for the John Locke Foundation. He joined JLF in December 2005 as director of communications. That followed more than four years as chie...