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John A. Koskinen - June 18, 1997

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JUNE 18, 1997


Mr. Chairman, I am happy to have the opportunity to discuss with you today the proposed "Freedom from Government Competition Act of 1997 (S.314)," a bill which by its own terms would "require that the Federal Government procure from the private sector the goods and services necessary for the operations and management of certain Government agencies."

In light of our current budgetary restrictions and our move to implement the Balanced Budget Agreement, all of us are anxious to ensure that the Government operates as efficiently as possible. Our guiding principle for determining when the Government engages in commercial activities and when it considers outsourcing, privatization or competition should be to ensure that we get the best deal for the American taxpayer.


We need to bear in mind that the Federal Government has always obtained a vast array of products and services from the private sector and expects to continue that policy. In Fiscal Year 1996, for example, we spent over $114 billion on commercial support service contracts, including custodial, warehousing, buildings maintenance, transportation and computer support services. We also contract for highly technical service requirements such as depot level maintenance services, architectural design, integration, financial, scientific and research and development services.

In addition to the substantial volume of contracting out already taking place, we are currently engaged in the largest effort ever undertaken by the Federal Government to compete our in-house commercial support workload with the private sector. Over 40,000 FTE are currently under OMB Circular A-76 review in the Defense Department alone. We expect more cost comparisons in the near future.

As we work to reinvent the way Government meets its mission requirements, we are asking senior agency managers to always ask three basic questions; (1) do we need to keep doing this work at all; (2) if the work needs to be done, could another agency or a contractor do it better; and (3) is the work being performed in the most efficient manner possible or does it need to be fundamentally re-engineered? We have also asked the agencies to consider the fully allocated costs of providing services, by applying the standards adopted by the Federal Accounting Standards Advisory Board (FASAB).

Pursuant to implementation of the Government Performance and Results Act, we are holding managers more accountable for results. We are asking that managers justify their decisions to perform work by in-house, contract or interservice support agreement through full and open competitions designed to achieve the best value, lowest cost to the taxpayer. To achieve this new level of accountability, we are encouraging a broader range of competitions and we favor encouraging new organizations to enter the competitions. The Congress authorized us to develop the franchise funds pilots and to expand the competitive environment that exists for reimbursable activities Government-wide. The private sector is now being invited to participate in new markets and new levels of commercial workload that had previously been the province of simple cross-servicing agreements between agencies. At the same time, we are encouraging public offerors to compete for that same work on a level playing field. Finally, we do not believe that these competitions should be one-time events. To ensure that the taxpayer continues to get the best deal, we need to periodically re-examine our outsourcing, cross- servicing and in-house performance decisions. If the function was kept in-house, is the public sector continuing to provide the best deal? If the private sector is performing the service, is the current offeror the best one for the job, or has the Government developed a competitive approach? Competition should be used on a regular basis to review the situation and to determine who can best provide required services.

Ultimately, our goal is to restore the public's faith in Government by managing our resources more effectively and by giving citizens and taxpayers more value for their dollar. By issuing the March 1996 OMB Circular A-76 Revised Supplemental Handbook, we have established a streamlined approach to permit full and open competition - on a level playing field - to determine who should do the work. In this context, it is important to remember that when faced with competition, Federal employees have been shown to be extremely cost competitive. Approximately 50 percent of the competitions conducted to date have been won by the Government. Indeed, savings from reviewing the current organization and implementing the Government's Most Efficient Organization (MEO) have averaged an additional 20 percent savings per study. Over the years, this has translated into billions of dollars of annual savings whether the function is retained in-house or contracted out and has done so without service reductions. At the same time, the private sector has won about 50 percent of the competitions, which is a strong indication that this process works.

While we are encouraging agencies to compete to provide services to other agencies, as Congress contemplated with the establishment of the GMRA franchise fund pilots, we also agree that "unfair Government competition," to the extent that it actually exists, should be identified and eliminated. A clear distinction needs to be drawn, however, between the Government's involvement in private sector or even State or local markets and the need to manage our own resources on a cost effective basis. A substantial statutory and policy framework already exists that carefully limits the Federal Government's involvement in the private economy and in State and local service markets. This framework is provided, for example, by statutes, policies and procedures authorizing our Federal Prisons Industries, the DOD Arsenal Act (10 USC 2539), Title III of the Intergovernmental Cooperation Act of 1968, OMB Circular No. A-97, "Rules and Regulations Permitting Federal Agencies to Provide Specialized or Technical Services to State and Local Units of Government," USC 2553 with respect to DOD laboratories, the Federal Acquisition Streamlining Act, OMB Circular A-76 and others.


The possibility of legislation in this area needs to be viewed against ongoing reinvention efforts. We are moving to implement strategic capital acquisition planning, ITMRA and the recommendations of Federal Accounting Standards Advisory Board (FASAB). We believe that we are moving to a better decision making process, one that will recognize the full costs of performance to the taxpayer and one that relies on full and open competition. Our concern with the legislative proposal embodied in S.314 is that it mandates a particular approach to this situation rather than letting the customer agencies themselves examine their current in-house to contract mix, including the use of reimbursable support agreements with other agencies, to make the best management decision. We also prefer to let the provider agencies determine what their mix of in-house and contract resources are, again in the best interests of the taxpayer. This is the competitive environment that now exists under the March 1996 A-76 Supplemental Handbook, which requires that agencies make their outsourcing decisions on the basis of public-private competitions.

We are concerned that the bill would limit the ability of public offerors to participate in the competitive process. The key here is that we want everyone - public and private - to compete for our work so that taxpayers can be assured of getting the most for their money. The issue is not about jobs or employee rights - we have long had the Right-of-First- Refusal in A-76 solicitations - and even Federal unions have supported full competition. It is not even about the fundamental question as to whether to outsource. That debate is now essentially over. The question here is when and where to outsource in the taxpayer's best interests.

If we have a need for legislation, it is legislation to remove existing barriers to competition. S.314, for example, does not repeal the restrictions imposed on the Department of Defense in 10 USC 2461- 2469. Finally, we are concerned that S.314 will result in a significant new level of litigation, caused by the conversion of what are essentially management implementation decisions into a statutory obligation that would be subject to judicial review.


One of the primary reasons offered to support this bill is the finding that Government competition with the private sector is detrimental to all businesses and to the American economy. We disagree. We believe that competition spurs efficiency and creates the environment needed for effective cost control and for creative and innovative change. Government competition for the provision of services to itself encourages lower cost and, therefore, is in the best interests of the taxpayer and the American economy. Unlike S.314, our approach to outsourcing, privatization and competition expands the competitive opportunities for public and private sector offerors.

S.314 states that the Government's current mix of in-house and contract resources is "unacceptably high;" that the existence of reimbursable arrangements between agencies is inappropriate; that such consolidations divert the Government's attention from its core mission; that small business is being hurt by our current mix of in-house and contract resources, and that current laws and regulations have proven ineffective in controlling the growth of Government. While individual anecdotes can be offered to support these findings, there is no quantitative data to establish or support them. In fact, the amount of outsourcing has increased moderately over the four years that the Government has downsized by 300,000 employees. One could ask what the problem is that the legislation is trying to solve.

S.314 requires that certain information be made available to the public, including the development of inventories of commercial activities performed by the agencies. The March 1996 A-76 Revised Supplemental Handbook already requires that agencies conduct annual inventories of their commercial activities performed with in-house resources. The Federal Procurement Data System provides information regarding which work is currently performed by contract. This information is available to the public upon request and private sector companies are free to make offers to perform commercial work. What Circular A-76 does not do is require agencies to schedule existing commercial activities or cross-servicing arrangements for conversion to contract performance or cost comparison, unless, in the judgement of the agency head, such action is warranted. We believe that agency managers must have the flexibility to manage their approved resources. In contrast, and of major concern to us, S.314 suggests that the private sector and the employee unions may have a legal right to review these inventories and seek judicial review of agency determinations with respect to whether the function is inherently governmental, commercial or has otherwise met the cost effectiveness standards of the statute. Having these issues subjected to legal challenge will delay, not expedite, competition and contracting out.

We are also concerned that the statute provides very limited exemptions from the requirements to rely on the private sector, including limiting the Government's existing flexibility to convert to or from in-house or contract performance, without cost comparison. The exemptions from full reliance on the private sector are limited to: (1) the function being inherently governmental, (2) related to national security, (3) when a best value cost comparison determines that in-house performance is more cost effective, or (4) there is no private sector offeror to perform the work. Ironically, cost comparisons would be required under S.314 that are NOT required under OMB Circular A-76, including provisions for conversions of: (1) procurement preference eligibles, (2) functions involving 10 or fewer FTE, (3) functions involving 10 or more FTE with placement, (4) military positions and (5) functions covered by agency waivers.

We know that new technologies can bring new opportunities to reduce cost, including the opportunity to achieve new economies of scale. As a matter of policy, S.314, does not permit agencies to begin, continue to carry out, or consolidate any product or service that can be provided by the private sector, unless justified by a best value competition. This approach eliminates the opportunities for achieving economies of scale, restricts our ability to respond to emergencies and may result in unnecessary administrative costs.

We should not view outsourcing narrowly. For example, the Treasury, IRS, Social Security Administration and the Labor Department recently signed an agreement to collaborate on a streamlined wage and income reporting system. Agencies cooperated in responding to the Oklahoma bombing, the crash of TWA flight 800, Hurricane Hugo and other natural disasters. These joint efforts include the provision of services that are generally considered commercial in nature and, in many cases, the work is being done directly by agency employees. In other cases, it is being accomplished through reimbursable agreements, contractors or a mix of in-house and contract employees. This legislation - if passed- will put in place additional legal and other administrative obstacles to our ability to respond to these kinds of situations.

S.314 also appears to conflict with the provisions of the Federal Property and Administrative Services Act of 1949, the Economy Act of 1932 (31 USC 1535), and the Government Management Reform Act of 1994 (103 USC 356). It would prohibit the Government from using excess property and common administrative services available from other Federal departments or agencies, even if they can be obtained more economically through agency resources.

We are also concerned that S.314 may adversely affect our ability to expand contracting with small businesses. In many cases, it is only because of our current mix of technical in-house, reimbursable and contract resources that small businesses are eligible to participate as direct prime contractors to the Federal Government. S.314's requirement to convert all work to contract performance, unless otherwise justified on the basis of a best value/ past performance competition, could result in fewer and fewer opportunities for small business participation.

Finally, we are opposed to the Bill's proposed establishment of a Center for Commercial Activities within OMB. These oversight responsibilities are properly done at the agency level, as provided for in the Revised Supplemental Handbook.


Ultimately, the question is whether S.314 provides anything better than that already provided by the Circular A-76 and its Revised Supplemental Handbook. The March 1996 A-76 Revised Supplemental Handbook provides a clear preference for private sector performance of new and expanded work requirements, requires agencies to develop inventories of commercial activities, establishes prohibitions against the Government's entering into non- Federal support markets, restricts the development of new or expanded interagency support agreements to those justified by full and open competitions and provides for independent administrative oversight within the agencies. The Revision also provides that agencies may leave existing reimbursable agreements and convert directly to contract, without cost comparison, at the discretion of the customer agency. We believe that this process not only works, but is beginning to encourage real competition for Government work.

Circular A-76 and its Revised Supplemental Handbook create the incentives to improve performance and reduce cost by continuing to permit fair and open competition for commercial services. The rules also provide appropriate controls and administrative assurances that agencies are competing on a level playing field and that agencies are not unduly competing with or displacing the private sector.


In sum, it is full and open competition that has made the American economy the envy of the world. We support the provision of Government services by those best able to do so, whether in the private sector or within the Government. Rather than open up existing markets or enhance the dynamics of competition, S.314 restricts the number of competitors. Trying to put existing agencies, franchise funds and cross-servicing arrangements out of the market is likely to result in the enactment of many more agency specific prohibitions against outsourcing and competition, such as those applying to DOD. The bill will also spawn a whole new level of compliance litigation, resulting in higher costs to the taxpayer.

Mr. Chairman, that concludes my prepared statement. I would be happy to address any questions that you might have.

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