TESTIMONY
OF
JOHN A. KOSKINEN
DEPUTY DIRECTOR FOR MANAGEMENT
OFFICE OF MANAGEMENT AND BUDGET
BEFORE THE
SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS
REGARDING
"THE FREEDOM FROM GOVERNMENT COMPETITION ACT" (S.1724)
SEPTEMBER 24, 1996
INTRODUCTION
Mr. Chairman, I appreciate the opportunity
to testify before you today after my schedule made
it impossible for me to appear at your earlier hearing on the subject
of how the Federal
Government should obtain commercial services. My testimony today will
address two legislative
proposals to increase the Government's reliance on the private sector
and their relationship to the
recently issued OMB Circular A-76 Revised Supplemental Handbook.
"The Freedom from Government Competition
Act of 1996 (S.1724)," would replace a 40-year
administrative policy of relying on competition, in the provision of
commercial goods and
services, with a statutory requirement to convert all
such work directly to the private sector.
S.1724 requires the Office of Management and Budget (OMB) to develop a
Government-wide
inventory of all commercial support functions performed by Federal
employees and a five-year
schedule for the conversion of such work to contract performance. The
Act prohibits the
Government from conducting cost comparisons or other financial
analyses to determine who can
perform a function at the least cost to the taxpayer and makes no
provision to alleviate the
adverse impacts on the large number of existing Federal employees
affected by this legislation.
In a similar vein, the Senate recently passed Senator Thomas' amendment to the Senate's Fiscal Year 1997 "Treasury, Postal and General Government Appropriations Act" (Amendment 5224/Section 646). This amendment, passed without any hearings or opportunity for public comment, requires agencies to conduct cost comparisons between the provision of services by one agency to another and the provision of services through the private sector. While the Administration has supported and actively encouraged competition in the performance of commercial work, the amendment prohibits OMB or any other agency from issuing any regulation, policy or other authorization that would permit an agency to perform any reimbursable work for another agency, unless that work was related to a National emergency, until those cost comparisons are completed.
We are opposed to both of these approaches to
the question of who should perform
commercial services. In the short term, both S.1724 and the Thomas
Amendment would severely
impair the Government's ability to perform its responsibilities. Tens
or even hundreds of
thousands of civilian and military employees would be adversely
affected, without any assurance
that work will be performed with the same quality or at lower cost.
The costs of these disruptions
to ongoing service requirements, our efforts to build flexibility and
accountability in the
performance of work, our ability to train individuals to administer
new contracts, our position as a
good employer and the related employee severance costs that would be
placed upon current
agency budgets, should not be underestimated.
EXISTING RELIANCE ON THE PRIVATE SECTOR
While we oppose these bills, let me make it
clear that this Administration supports using the
private sector to provide commercial services when that is cost
effective. The Federal
Government has always outsourced a vast array of products and services
to the private sector and
expects to continue that policy. In 1995, the Federal Government
spent over $114 billion on
service contracts, including common administrative support services
such as custodial,
warehousing, buildings maintenance, transportation and computer
support services. We also
contract for highly technical service requirements such as
architectural design, financial, scientific
and research and development services. Outsourcing is expected to
continue to grow as agencies
redesign their approaches to mission accomplishment, incorporate new
technologies and as we
move to a balanced budget. Indeed, every Administration since 1955
has endorsed the principle
of a general reliance on the private sector for the provision of
commercial goods and services,
when that is the cost effective way to proceed. The
question here is not whether the private
sector should provide additional levels of support, but rather, what
additional opportunities exist
for justifiably converting work to or from in house or contract
performance to save taxpayers'
money. Current budget restrictions and the other influences of
downsizing are forcing agencies to
reconsider their business lines and whether or not their existing mix
of in house and contract
resources is appropriate. This policy is sound and this
Administration has acted to improve its
implementation.
The Congress and this Administration have also strongly supported the development of entrepreneurial businesses enterprises - within the Government - to meet internal administrative support requirements. The Government Management Reform Act recently authorized the development of Franchise Fund pilots. The Director of OMB has designated Franchise Fund pilots in five agencies, and we expect the sixth pilot to be designated shortly for final approval by the Congress. In addition, appropriators have expanded the use of intragovernmental support revolving funds or are providing additional authority for such funds. Indeed, Senate Report 104-330 directs OMB and Treasury to review certain revolving fund transactions. None of these efforts would be authorized, however, under S.1724, which would effectively supersede the provisions of the Government Management Reform Act.
Though there have been suggestions that
agencies are selling their services, in competition with
the private sector to State and local governments, these actions are
severely restricted by the
provisions of the Revised Supplemental Handbook for OMB Circular A-76
and OMB Circular
A-97, entitled "Rules and Regulations Permitting Federal Agencies to
Provide Specialized or
Technical Services to State and Local Units of Government Under Title
III of the
Intergovernmental Cooperation Act of 1986." Part I, Chapter 2 of the
March 1996 A-76 Revised
Supplemental Handbook states explicitly that no agency shall provide
any service to a State or
local agency or to the private sector except as provided by the
Supplement or as specifically
authorized by statute. We have worked with agencies and concerned
private sector interests to
prevent any violations of these policies. If you or the private
sector know of any serious problems
in this regard, we would be pleased to work with you to resolve them.
OMB CIRCULAR A-76
For the last 40 years, the Federal
Government's support for the competitive provision of
commercial services has been expressed and implemented through a
series of bulletins and
circulars. On January 15, 1955, the Bureau of the Budget issued
Bulletin No. 55-4. Since that
time, it has been the general policy of the Federal Government to rely
on the free enterprise
system to provide the commercial support services it needs. However,
it should also be noted
that this reliance on the private sector is and always has been
tempered by concern for the best
interests of the taxpayer. That is why, in February of 1957, Bulletin
No. 57-7 was issued, adding
the first in a series of cost comparison concepts to the policy
statement. Circular A-76, itself, was
first issued on March 3, 1966; stating that the "cost comparison
guidelines of this Circular are in
furtherance of the Government's general policy of relying on the
private enterprise system to
supply its needs. Revised on March 29, 1979 and, again, on August 4,
1983, the Circular seeks to
balance the equity interests of Federal managers, employees and the
private sector with those of
the Federal taxpayer.
A-76 is designed to identify the most cost
effective method of satisfying a recurring service
requirement. Work of a non-recurring nature, as a matter of existing
policy, is to be performed by
the private sector. In establishing common ground rules for
competitions between agencies and in
public-private competitions, the A-76 process improves cost
visibility, provides flexibility in the
design of services, encourages innovation and technology transfers and
results in better overall
business practices. In addition, we believe that the A-76 process
protects the procurement
process, establishes a common baseline for cost and quality
assessments, creates certain "good
employer" relationships for affected Federal and contract employees
and determines,
competitively, who is best prepared to do the work.
Circular A-76 protects the procurement
process in two ways. First, it ensures that an in house
option exists, thereby preventing the Government from becoming
dependent on a single offeror.
Work can be converted to or from in house or contract performance, as
appropriate. Second, it
ensures that all relevant competitive costs, including the cost of
contract administration, the cost
of employee severance and other conversion costs are recognized in the
decision process. It does
this by establishing a common baseline and a minimum level of analytic
rigor in the conduct of the
cost comparison. It minimizes any predisposition or other influences
that may be exerted upon
an agency manager, regarding contracting out or contracting in
decisions, without fully
understanding the costs and other impacts of those decisions.
Finally, the Circular permits all
interested parties to participate on a level and well understood
playing field. It permits and even
encourages agency employees to participate in the process and make
recommendations to
improve the agency's in house bid. It provides for administrative
appeals and, generally, allows all
parties a full and open chance to perform the work.
Historically, savings from reviewing the
current organization and implementing the
Government's Most Efficient Organization (MEO) have averaged over 20
percent per study.
Over the years, this has translated into billions of dollars of annual
savings whether or not the
function is retained in house or contracted out and has done so
without service reductions. It is
also important to note that the Government has been competitive and
able to retain functions in
house, in direct competition with the private sector, in approximately
50 percent of the
competitions conducted to date. This means that the Government can
prove itself to be cost
effective with the private sector in a competitive award and, thereby,
save taxpayer funds. In
order for a function to be converted to or from in house or contract
performance, a minimum
savings differential of the lesser of 10 percent of total labor costs
or $10 million must be realized.
This works both ways. While an in house function will not be
converted to contract unless the
savings to the taxpayer exceed the minimum differential, contract
employees are also protected by
the same minimum differential, when agencies consider converting work
to in house performance.
The minimum differential also accommodates unknown or other difficult
to estimate costs, such
as the short-term effects of a conversion on employee moral.
In March of this year, OMB issued the OMB
Circular A-76 Revised Supplemental Handbook.
The Revised Supplemental Handbook responds to many of the underlying
concerns that S.1724
and the Thomas Amendment were initially developed to address. The
Revised Supplement -
which reflects the comments of the agencies, the private sector,
Federal employee unions, and
other interested parties, including Senate and House staff, increases
the level of competition
required in the performance of recurring commercial activities and,
generally, improves the
Government's make or buy decision process. For example, the Revised
Supplement clarifies the
definition of inherently governmental activities, expands the number
of activities that may be
converted to or from in house or contract without cost comparison for
reasons other than cost,
reduces the administrative costs of compliance, expands employee
participation in the
decision-making process, provides for improved oversight of the
decision process and, ensures
that a level playing field is maintained in which all interested
service providers can compete.
Rather than mandate conversions to private-sector performance, the
Revision is designed to
encourage a greater reliance on competition in determining whether in
house, interservice support
agreements (ISSAs) between agencies or private-sector performance is
more cost effective to the taxpayer.
In encouraging competition, the Revision
relies on market and budgetary forces rather than on
a top-down management requirement. This approach places the customer
agency in charge. In
the area of interservice support agreements (ISSAs), for example, a
customer agency may
terminate an existing ISSA relationship between it and another
service-providing agency and
simply convert that work to contract performance. In our view, the
decision to permit another
agency to perform work suggests that the customer agency's management
has already made a
decision to outsource those requirements. Thus, in terminating an
ISSA relationship, the
customer agency is free to seek private sector performance without
cost comparison. We hope
that by providing customer agencies this new freedom of choice, we
will also encourage existing
ISSA service providers to respond to customer demands for service
quality at lower costs by
submitting their own resources to competition with the private sector.
In order to retain existing
customers and to acquire new service contracts, existing ISSA
providers are expected to compete
work with the private sector to test their current in house and
contract mix and to reduce costs.
In addition, the Revision requires that
prior to accepting new or expanded work from new
customers, either the ISSA service provider will have had to have
competed its work with the
private sector or the work of each individual new ISSA customer will
have to be competed with
the private sector. Again, the Revision puts the customer in charge.
While the cost comparison
requirements of the Revision do not apply directly to existing ISSAs,
to the consolidation of
services within a Department or agency, or to inherently governmental
work, they do apply to all
new starts and expansions, including all new customer relationships.
The Revision specifically
requires that any proposals to obtain new or expanded products or
services from another
Government agency or from a private sector offeror will be published
in the Commerce Business
Daily. We expect that this provision will open up markets,
facilitate oversight and expand the
level of competition.
We believe that this is the appropriate
approach to ensuring that commercial work is provided
cost effectively. We are consciously trying to let the market drive
agencies toward a performance
decision that is in their own and the taxpayer's best interests. For
example, an agency that is
currently obtaining a commercial support service from another
Department or agency may, with
proper notification, terminate that relationship and convert directly
to contract performance
without cost comparison. If, however, the agency wishes to perform
that work directly with in
house resources, it will need to justify that decision through a cost
comparison for a "new
requirement." If the agency wishes to outsource its workload to
another agency, a cost
comparison is required at the individual workload level or - again to
create appropriate incentives
- the providing agency may submit its workload to competition with the
private sector and,
thereby, accept the new work without further cost comparison. We
believe that by using these
incentives and market forces agencies will be encouraged to review
their own in house and
contract mix. By providing customer agencies a clear right of choice
and exit from the
relationship, service providers will also be on a constant alert to
ensure that their in house and
contract mix is also cost effective.
We are currently implementing the March
1996 Revised Supplemental Handbook. As a part of
this process, agencies are reviewing their budgets and identifying
those areas subject to the
provisions of the Circular. We have called for an updated inventory
of commercial activities
performed by Federal employees. On June 24th, 1996, OMB followed up
on this requirement
with a summary data call. We are now reviewing the data. We believe
that this information will
assist agencies in their review of their organizations and in the
search for areas to reduce cost
without service or mission reductions. This inventory complies with
the inventory requirements
of Section 6 of S.1724 and will be made available to the public upon
request. In conjunction
with this effort, agencies are also reviewing the implementation of
the Chief Financial Officers
Act, the Government Performance and Results Act and the Government
Management Reform
Act. Each of these efforts will contribute to improved management,
performance and cost
information and will reduce the administrative burdens of conducting
the cost comparisons often
required by Circular A-76.
ANALYSIS OF THE PROPOSALS
Let us now look at each of the proposals
before us this morning in greater detail.
S.1724
S.1724 limits the Government's flexibility
to seek the most efficient and cost effective method
of performance of its work. S.1724 would abandon the public-public
and public- private
competitions required under OMB Circular A-76 and the principle that
we should care more
about the cost and quality of services than who provides them. S.1724
relies on the presumption
that private sector performance - in all cases, for all types
of commercial work and in all
locations and conditions - is necessarily the most efficient
and cost effective method of
performance to the taxpayer. While acknowledging the need to retain
some activities as
inherently governmental or for the national defense, S.1724 requires
that all other commercial
services be performed by the private sector. DOD, for example, has
testified before the Senate
Armed Services Committee, that approximately 300,000 civilian
employees are performing
commercial work within the Department. DOD has also testified that an
additional 300,000
military positions - not including inherently governmental positions -
are committed to the
provision of commercial support activities. The direct conversion of
this work to the private
sector does not, necessarily, translate into direct savings to the
taxpayer. Contracts will need to
be written, workload history and inspection criteria developed,
limited management and
procurement resources will need to be diverted and there will be no
competitive Government bid,
no effort to establish the Government's most efficient and cost
effective alternative.
We believe that agencies should have three
options when considering the performance of
commercial work. A manager should be able to consider in house
performance, performance
through another Federal agency and performance by contract with the
private sector. S.1724
precludes all but the last option and, thereby, substantially reduces
the level of competition over
that which is currently available. While S.1724 provides for a five-
year conversion schedule, in
the absence of any chance to compete to retain their jobs, the best
employees could be expected
to leave without regard to continuing service requirements. The
potential disruption costs to
ongoing operations within the agencies, caused by the proposed S.1724
conversions must not be underestimated.
THE THOMAS AMENDMENT
The goal of Senator Thomas' amendment to
the Senate's Fiscal Year 1997 "Treasury, Postal
and General Government Appropriations Act" (Amendment 5224/Section
646) is to require
agencies to conduct cost comparisons with the private sector, prior to
having commercial work
performed by one agency for another, through an interservice support
agreement (ISSA). While
we support and have actively encouraged competition in the performance
of commercial ISSA
work, the amendment prohibits OMB, or any other agency, from issuing
any regulation, policy
or other authorization that would permit an agency to perform any work
for another agency,
unless it was a contingency operation associated with a National
emergency, until the required
cost comparisons are completed. In effect, the amendment requires
that all such services - even
existing services such as the issuance of payroll checks, the
performance of health services,
buildings operations and maintenance services, critical research and
development activities,
security services and other commercial support activities - be
terminated until the completion of
the required cost comparisons. Though the amendment specifically
addresses concerns related to
services provided during a National emergency, clarification will be
required as to whether the
amendment applies to interservice support agreements for inherently
governmental work and
non-National emergency situations. We must, therefore, oppose the
provision.
The amendment gives OMB 120 days to
prescribe regulations that reflect this cost comparison
requirement. In the short-term, we simply cannot comply with the
provision. The cost
comparisons required are too numerous and too complex. In most cases,
the historical workload,
performance and relevant costs information is not readily available.
Contract solicitations would
have to be written, evaluated and compared, in addition to the
development of competitive
cross-servicing offers. In the long-term, we believe that the
provision is unnecessary, burdensome
and not in the interests of the taxpayer.
While we applaud the goals of the
amendment, i.e., to increase the level of competition that has
existed for commercial work provided under a cross-servicing
agreement, we are concerned that
the amendment creates uncertainties with regard to the provisions of
the Economy Act and the
implementation of the Government Management Reform Act, as it relates
to the implementation
of the Franchise Fund pilots. The development of these
entrepreneurial pilots is a painstaking,
un-glamorous task; a long- term project that amounts to continuous
reinvention so that
Government can cope with the new challenges of reinvention and
downsizing. Nevertheless, this
legislative initiative was the product of bipartisan cooperation and
we want to forge ahead in that
spirit.
The amendment also conflicts with the
implementation of Circular A-76, with respect to
whether A-76's existing exemptions from cost comparison and other
incentives would apply.
Finally, we are very concerned that the amendment may open up what
were essentially
administrative decisions to a whole new spectrum of potential judicial
reviews, challenges and
related litigation costs.
We believe that the goals of the Thomas
Amendment can and will be met through the
implementation of the A-76 Revised Supplemental Handbook, in a manner
that is cost effective
and does not result in unnecessary and burdensome service disruptions.
Granted, the Revision
does not directly require existing cross-servicing agreements to be
competed with the private
sector for work already provided under existing agreements, nor does
it require any ISSA
competitions until October 1, 1997, unless there is a conversion to or
from in house or contract
performance. We took this approach, however, to encourage agencies to
reinvent themselves,
encourage service consolidations where cost effective and to permit
agencies to exit certain
business lines without incurring the delays or costs associated with
the conduct of formal
competitions. It should be noted too that many of these services are
already performed by the
private sector and would also be subject to the amendment, as written.
The term ISSA does not
equate, necessarily, to in house performance. It refers only to the
funding mechanism used to
facilitate service delivery. Over the long term, we believe that the
cost comparison requirements
of the Revised Supplement, combined with the dynamics of the new
market place that we are
actively creating, will encourage existing ISSA service providers and
their customers to conduct
more and better cost comparisons with the private sector.
CONCLUSION
Mr. Chairman, the Federal Government
overwhelmingly relies on the private sector for the
provision of goods and services. The question here is not whether the
private sector should
provide additional levels of support; we all agree that additional
opportunities exist for
converting work to contract performance. Instead, the question here
is whether the current
system should be replaced by one that limits competition, will result
in unnecessary disruptions
and service delays and may result in higher prices to the taxpayer.
We believe that Circular A-76
and its Revised Supplemental Handbook create the appropriate market
incentives to improve
performance and reduce cost by continuing to permit fair competitions
between the agencies and
the private sector. We also believe that it provides the 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. Taken in combination
with increasingly severe
budgetary restrictions, managers are under increasing pressure to find
better, faster and cheaper
ways of accomplishing work. Decreasing the number of opportunities
for full, open and fair
competition, as S.1724 would have us do, is a step in the wrong
direction.
Mr. Chairman, that
concludes my prepared statement. I would be happy to address any
questions that you might have.
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