T H E   W H I T E   H O U S E

John A. Koskinen - September 24, 1996

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SEPTEMBER 24, 1996


    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.


    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.


    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.


    Let us now look at each of the proposals before us this morning in greater detail.

    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 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.


    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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