Federal Contracting: Comments on S. 1724, the Freedom From Government
Competition Act (Testimony, 09/19/96, GAO/T-GGD-96-169).

GAO discussed S. 1724, the Freedom From Government Competition Act,
which would require that the government procure from the private sector
the goods and services it needs to carry out its functions. GAO noted
that: (1) the amount of government contracting is already extensive, and
most government agencies rely heavily on contractors to provide
commercial services; (2) the proposed act would greatly increase the
proportion of government activity carried out by private contractors;
(3) the three exceptions to the act's goal of promoting private
contracting occur when the goods or services are inherently
governmental, government performance is needed to protect national
security, or commercial practices cannot fulfill unique agency
requirements; (4) the nondiscretionary nature of the proposed act would
settle most of the disagreement over private contracting; (5) a number
of other considerations need to be addressed, including the utility of
retaining some government services to use as benchmarks for evaluating
contractors, whether some government services are less costly than
contracting, whether adequate competition exists, and whether the
leasing of public facilities should be retained; (6) increasing federal
contracting may overwhelm federal workload capacities and be very
optimistic; and (7) persistent contract management problems and federal
downsizing may also adversely affect the government's ability to
increase and adequately monitor federal contracting.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD-96-169
     TITLE:  Federal Contracting: Comments on S. 1724, the Freedom From 
             Government Competition Act
      DATE:  09/19/96
   SUBJECT:  Contract administration
             Privatization
             Federal procurement
             Cost effectiveness analysis
             Contract monitoring
             Federal procurement policies
             Proposed legislation
             Competitive procurement

             
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Cover
================================================================ COVER


Before the Committee on Governmental Affairs
U.S.  Senate

For Release on Delivery
Expected at
10:00 a.m., EDT
Tuesday
September 24, 1996

FEDERAL CONTRACTING - COMMENTS ON
S.  1724, THE FREEDOM FROM
GOVERNMENT COMPETITION ACT

Statement of
L.  Nye Stevens, Director,
Federal Management and Workforce Issues
General Government Division

GAO/T-GGD-96-169

GAO/GGD-96-169T


(410070)


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  DOE - Department of Energy
  GSA - General Services Administration
  OMB - Office of Management and Budget

FEDERAL CONTRACTING:  COMMENTS ON
S.  1724, THE FREEDOM FROM
GOVERNMENT COMPETITION ACT
==================================================== Chapter STATEMENT

Mr.  Chairman and Members of the Committee: 

I am pleased to be here today to assist the Committee in its
consideration of S.  1724, the Freedom From Government Competition
Act.  The bill would require that the government procure from the
private sector the goods and services it needs to carry out its
functions, with a few specified exceptions.  We believe that our
extensive body of work on government contracting permits some
observations and suggests some questions that the Committee might
find useful. 


   CONTRACTING IS ALREADY
   EXTENSIVE
-------------------------------------------------- Chapter STATEMENT:1

For more than 40 years, it has been government policy to rely on the
private sector for commercial goods and services.  Office of
Management and Budget (OMB) Circular A-76 is the federal policy that
governs how contracting out decisions are made.  Since 1967, the
objective of the A-76 program has been to achieve efficiencies by
encouraging competition between the federal workforce and the private
sector for providing commercial services.  While we have often
commented on the cumbersome nature of the circular and its drawn-out
disruptiveness in application, we have also consistently endorsed the
concept of encouraging competition as a sensible management approach
that can lead to more efficient and effective government operations. 

OMB's rigid controls over personnel ceilings have caused government
agencies to rely increasingly on contracting out as a major tool of
government.  Agencies created in the past 2 or 3 decades, such as the
Department of Energy (DOE), the National Aeronautics and Space
Administration, the Environmental Protection Agency, and the Health
Care Financing Administration, typically have relied from the start
on contracting out most of their work rather than performing it
directly.  Contractors have almost completely replaced federal
employees in some functions, such as cleaning services, travel
management, and most recently personnel security investigations. 
Employment at the General Services Administration (GSA) has fallen
from 35,800 in 1980 to 16,200 in the fiscal year 1996 budget.  The
federal workforce today stands at slightly fewer than 2 million, and
the estimated $115 billion personnel costs for federal employees
compares to fiscal year 1995 obligations of about $65 billion for the
purchase of goods, and $116 billion for construction, R&D, and other
service contracts. 


   POLICY CHANGES FROM ENACTMENT
   OF S.  1724
-------------------------------------------------- Chapter STATEMENT:2

The Freedom From Government Competition Act would greatly increase
the proportion of government activity carried out by private
contractors.  Section 3 of S.  1724 would essentially replace
Circular A-76's policy of competition with a rule that "each agency
shall obtain all goods and services necessary for or beneficial to
the accomplishment of authorized functions by procurement from
private sources." There are only three specific exceptions to this
general rule:  (1) when the goods or services required are inherently
governmental, (2) when government performance is necessary in the
interests of national security, or (3) when commercial practices
cannot satisfy "unique requirements of the agency."

Under these exceptions, activities exempt from the contracting
requirement are likely to be substantially reduced from current
practice.  Section 7 (b) of the bill provides a definition of
inherently governmental functions that is drawn from but considerably
less qualified than the definition provided in OMB Policy Letter
92-1, which we presume it would replace.  Policy Letter 92-1 also
provides several other examples that seem to address the exemption
under S.  1724 dealing with national security.  For example, in the
letter, OMB lists as inherently governmental (1) the command of
military forces, (2) the formulation and conduct of foreign
relations, and (3) the direction and control of intelligence
operations. 

The exemption for cases where "commercial practices are not
sufficient to satisfy unique requirements of the agency for the goods
and services" could take two meanings.  First, the good or service
itself might be unique to the government and, therefore, not
available commercially.  Given the current broad use of contracting
for goods and services, such exceptions would be rare.  Even postage
stamps are today produced by contractors in competition with the
Bureau of Engraving and Printing.  Second, the characteristics of the
good or service might be unique to the government, e.g., the level of
reliability.  However, Department of Defense (DOD) procurements have
for years included such unique requirements.  Although under section
5 of the bill OMB is to issue regulations, there appears to be
little, if any, flexibility for OMB to deviate from the general rule
and its three specified exemptions. 

The issue of contracting out has given rise to a number of policy
debates over the years.  The nondiscretionary nature of the general
rule in S.  1724 would have the effect of settling these debates,
almost always in favor of contracting out.  There are several
considerations that weigh in these debates under current policy, yet
would not be cause for exemptions under S.  1724.  Some examples
follow. 


      NEGATIVE COST COMPARISONS
------------------------------------------------ Chapter STATEMENT:2.1

Current government policy requires contracting out decisions to be
made on the basis of cost comparisons, i.e., contracts are to be let
when it is less expensive to do so, but (in general) not when
contracting costs more than government performance.  The proposed
conversion could entail significant additional costs to the
government if the performance of certain functions or activities by
government employees would be less costly than contracting.  Our work
has uncovered many such cases where government performance was more
cost-effective than contractor performance and overall shows no
clear-cut cost advantage to either contractors or the government. 
There are examples of cost savings on both sides.\1 Our review of the
depot maintenance public-private competition program revealed that 67
percent of the 95 non-ship competitions were won by DOD depots--with
winning public sector offers averaging 40-percent less than their
closest private sector competitor.\2 Over the history of the A-76
program, government performance won about 50 percent of the cost
comparisons.  Early on in the program, private sector contractors won
over half of the competed activities, but as the most obvious targets
were converted, the proportion of instances where government
performance was competitive has increased. 


--------------------
\1 Government Contractors:  An Overview of the Federal
Contracting-Out Program (GAO/T-GGD-95-131, Mar.  29, 1995);
Government Contractors:  Measuring Costs of Service Contractors
Versus Federal Employees (GAO/GGD-94-95, Mar.  10, 1994);
Public-Private Mix:  Effectiveness and Performance of GSA's In-House
and Contracted Services (GAO/GGD-95-204, Sept.  29, 1995); Postage
Stamp Production:  Private Sector Can Be a Lower Cost Optional Source
(GAO/GGD-93-18, Oct.  30, 1992); and Energy Management:  Using DOE
Employees Can Reduce Costs for Some Support Services
(GAO/RCED-91-186, Aug.  16, 1991). 

\2 Defense Depot Maintenance:  Privatization and the Debate Over the
Public-Private Mix (GAO/T-NSIAD-96-148, Apr.  17, 1996). 


      ABSENCE OF EFFECTIVE
      COMPETITION
------------------------------------------------ Chapter STATEMENT:2.2

The private sector's capacity and willingness to provide all goods
and services is not always clear--at least at a reasonable price.  In
reviewing efforts to contract out commercial activities, we have
observed that competition for all activities in all locations can be
limited.  In 31 percent of the solicitations we looked at in a random
selection of Public Buildings Service commercial activities from 1982
to 1992, there was only one, or no, technically responsive and
financially responsible offeror for the activity.\3 Also, if one
contractor dominates the federal market for a particular function in
an area or region, this can put the government at risk in terms of
both cost and performance.  For 23 percent of the competitions we
reviewed for depot maintenance services, there were no private sector
offerors, and for another 35 percent, only one private sector
offeror.\4


--------------------
\3 Public-Private Mix:  Effectiveness and Performance of GSA's
In-House and Contracted Services (GAO/GGD-95-204, Sept.  29, 1995). 

\4 Defense Depot Maintenance:  Commission on Roles and Mission's
Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July
15, 1996). 


      QUASI-PRIVATE SOURCES
------------------------------------------------ Chapter STATEMENT:2.3

The bill does not define "private sources," and a clarification might
be needed if Congress believed agencies should be able to use the
services of federally funded research and development centers;
government corporations; mixed-ownership enterprises; and perhaps the
U.S.  Postal Service, which competes for government business in
several of its markets, such as overnight delivery and package
delivery. 


      BENCHMARK CAPACITY
------------------------------------------------ Chapter STATEMENT:2.4

In contracting out functions, some cities have found that continuing
to retain at least a small, in-house operation provides a useful
benchmark for determining whether contracted services are being
provided at a reasonable cost and level of quality.  For instance,
such in-house capacity provides some assurance that contractors do
not initially bid below cost and subsequently raise fees after the
government has become fully dependent on the contractor.  Retaining
some modicum of capacity within the federal government for various
contracted functions may be similarly desirable. 


      PUBLIC BUILDINGS
------------------------------------------------ Chapter STATEMENT:2.5

As a general matter, we note that no definition of goods is provided
in the bill.  Since the government has few operations that result in
the production of "goods," the primary application of the bill to
physical goods could involve the inventory of public buildings.  GSA
owns about 53 percent of its space and leases the rest.  Our work has
shown that leasing office space is cost-effective for short-term
space needs but that ownership of federal buildings can pay off in
the long run.  While many of these facilities may have a market in
the private sector, a massive divestiture over the short term could
raise a number of issues.  For example, since asset sales are not
scorable as budget savings, proceeds from these sales could not be
used to offset any new leasing costs. 

Other considerations that today occasionally lead to decisions not to
contract out include services below a minimum value threshold where
contracting could be cumbersome or inappropriate; a situation where
flexibility is essential to the performance of a function, making it
difficult to specify contract requirements in output form; and when
some modicum of government capability would help provide government
employees technical expertise to judge private sector performance. 


   CONVERSIONS TO CONTRACT
   PERFORMANCE COULD POSE DAUNTING
   IMPLEMENTATION CHALLENGE
-------------------------------------------------- Chapter STATEMENT:3

In our view, the practical challenge of converting nonexempt
government activities to private sector performance should not be
underestimated.  This task may impose a substantial contracting
workload on federal agencies within a relatively short time frame. 
OMB would be charged with developing a schedule to transfer all
government activities that are inconsistent with the bill's
requirements to the private sector.  The schedule is to provide for
the completion of the transfer within 5 years after OMB's report is
transmitted to Congress.  The existing contract administration
capacity of federal agencies may be overwhelmed by such a
large-scale, short-term conversion. 

Converting all government functions targeted for contracting out
within 6 years seems like a very optimistic expectation.  First,
translating a broad list of commercial functions into specific
procurement actions could prove difficult and time-consuming.  The
government's experience with the A-76 inventory of commercial
activities provides some evidence and insights into this process. 
Quite simply, it takes time to identify and review specific
activities.  For example, GSA took 11 years to finish reviewing and
soliciting the activities in its A-76 inventory, even though most
were directly converted to contracts instead of going through formal
cost-comparison studies.  There were 10 broad functions represented
in the inventory, but those functions involved almost 900 separate
activities.  In general, OMB has had difficulty getting federal
departments and agencies to meet even minimal goals for reviewing
commercial activities in their inventories. 

Second, despite recent reforms to the federal procurement process,
soliciting and awarding contracts takes time.  For large contracts it
can take over a year between the original procurement request and the
final approval of a contract and notice to proceed.  Other state,
local, and foreign governments that have initiated aggressive
contracting-out programs have experienced frustrating delays. 

A third factor that has been a long-standing concern for us is that
conversion to contract performance requires considerable contract
management capability.  To start, an agency must have adequate
capacity and expertise to successfully carry out the solicitation
process, from defining the scope of the contract, to soliciting the
requirement, to evaluating cost and technical proposals of interested
offerors.  Then the government must be able to effectively
administer, monitor, and audit contracts once they are awarded. 
However, OMB, agency inspector general offices, and we have
identified serious shortcomings in the contract management practices
and capacities of federal agencies.  Dramatically increasing the
existing contracting burden of federal agencies without first
addressing these weaknesses may be risky. 

A common criticism has been that agencies have not given sufficient
management attention to contract administration.  Emphasis is placed
on the award of contracts, not on ensuring that the terms of the
contract are met or that the contract is properly managed after it is
awarded.  In past products summarizing work on governmentwide
contract management, we identified major problem areas, such as
ineffective contract administration, insufficient oversight of
contract auditing, and lack of high-level management attention to and
accountability for contract management.\5 An interagency SWAT team
created by OMB to examine and assess contract administration and
auditing practices of 12 civilian agencies found serious deficiencies
in contract administration and oversight.\6 The OMB report concluded
that the problems resulted from inadequate management attention,
ambiguous regulatory guidance, ineffective procedures, inadequate
resources, and poor communication between contract administration and
audit staffs. 

DOE provides an example of an agency that is as heavily dependent on
contracting as the rest of the government would be under S.  1724. 
DOE has more than 110,000 contractor employees, overseen by a federal
workforce of about 18,675, a 6-to-1 ratio.  Historically, these
contractors have worked largely without any financial risk, had
little fear of competition, and got paid even if they performed
poorly; DOE oversaw them under a policy of least interference.\7 We
declared DOE's contract management a high-risk area because of its
high vulnerability to waste, fraud, abuse, and mismanagement.  The
recent Secretaries of Energy have declared reform of contract
management practices a major management priority. 

The effects of recent federal downsizing may exacerbate these
persistent contract management problems.  Agencies may have lost
valuable contract management and procurement personnel who have been
differentially targeted in recent downsizing efforts as excess layers
of middle management.  We have anecdotal evidence of this diminishing
capacity from a number of recent and ongoing reviews at various
agencies. 


--------------------
\5 Government Earns Low Marks on Proper Use of Consultants (GAO/FPCD
80-48, June 16, 1980); Civilian Agency Procurement:  Improvements
Needed in Contracting and Contract Administration (GAO/GGD-89-109,
Sept.  5, 1989); and Federal Contracting:  Cost-Effective Contract
Management Requires Sustained Commitment (GAO/T-RCED-93-2, Dec.  3,
1992). 

\6 Summary Report of the SWAT Team on Civilian Agency Contracting,
Office of Management and Budget (Washington, D.C.:  Dec.  3, 1992). 

\7 Department of Energy:  Observations on the Future of DOE
(GAO/T-RCED-96-224, July 23, 1996). 


------------------------------------------------ Chapter STATEMENT:3.1

In conclusion, Mr.  Chairman, striking a proper balance between the
public and private sector provision of goods and services to the
American people is an enduring and perhaps the central issue in
American politics and public policy.  The Freedom From Government
Competition Act would sharply change current policy, which does not
have the weight of legislative authority.  We believe that Congress
is the proper forum to address such fundamental questions, and we
hope that our testimony today has raised some good questions for the
Committee to consider in its deliberations on the proposed act. 

That concludes my prepared statement.  I would be pleased to answer
any questions the Committee may have. 


RELATED GAO PRODUCTS
================================================== Appendix Attachment

Defense Depot Maintenance:  Commission on Roles and Mission's
Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July
15, 1996). 

Defense Depot Maintenance:  Privatization and the Debate Over the
Public-Private Mix (GAO/T-NSIAD-96-146, Apr.  16, 1996). 

Public-Private Mix:  Effectiveness and Performance of GSA's In-House
and Contracted Services (GAO/GGD-95-204, Sept.  29, 1995). 

Privatizing OPM Investigations:  Implementation Issues
(GAO/T-GGD-95-186, June 15, 1995). 

Postal Service:  Performing Remote Barcoding In-House Costs More Than
Contracting Out (GAO/GGD-95-143, Sept.  13, 1995). 

Government Contractors:  An Overview of the Federal Contracting-Out
Program (GAO/T-GGD-95-131, Mar.  29, 1995). 

Nuclear Facility Cleanup:  Centralized Contracting of Laboratory
Analysis Would Produce Budgetary Savings (GAO/RCED-95-118, May 8,
1995). 

Government Contractors:  Contracting Out Implications of Streamlining
Agency Operations (GAO/T-GGD-95-4, Oct.  5, 1994). 

Air Traffic Control:  Status of FAA's Plans to Close and Contract Out
Low-Activity Towers (GAO/RCED-94-265, Sept.  12, 1994). 

Contractor Overhead Costs:  Money Saving Reviews Are Not Being Done
As Directed (GAO/NSIAD-94-205, Aug.  3, 1994). 

Navy Maintenance:  Assessment of the Public and Private Shipyard
Competition Program (GAO/NSIAD-94-184, May 25, 1994). 

Public-Private Mix:  Extent of Contracting Out for Real Property
Management Services in GSA (GAO/GGD-94-126BR, May 16, 1994). 

Department of Energy:  Challenges to Implementing Contract Reform
(GAO/RCED-94-150, Mar.  21, 1994). 

Government Contractors:  Measuring Costs of Service Contractors
Versus Federal Employees (GAO/GGD-94-95, Mar.  10, 1994). 

Federal Contracting:  Weaknesses Exist in NSF's Process for Awarding
Contracts (GAO/RCED-94-31, Jan.  31, 1994). 

Energy Management:  Improving Cost-Effectiveness in DOE's Support
Services Will Be Difficult (GAO/RCED-93-88, Mar.  5, 1993). 

Goddard Space Flight Center:  Decision to Contract for Plant
Operations and Maintenance (GAO/NSIAD-93-92, Jan.  12, 1993). 

Federal Contracting:  Cost-effective Contract Management Requires
Sustained Commitment (GAO/T-RCED-93-2, Dec.  3, 1992). 

Postage Stamp Production:  Private Sector Can Be a Lower Cost
Optional Source (GAO/GGD-93-18, Oct.  30, 1992). 

Tennessee Valley Authority:  Issues Surrounding Decision to Contract
Out Construction Activities (GAO/RCED-92-105, Jan.  31, 1992). 

Government Contractors:  Are Service Contractors Performing
Inherently Governmental Functions?  (GAO/GGD-92-11, Nov.  18, 1991). 

Energy Management:  Using DOE Employees Can Reduce Costs for Some
Support Services (GAO/RCED-91-186, Aug.  16, 1991). 

OMB Circular A-76:  Legislation Has Curbed Many Cost Studies in the
Military Services (GAO/GGD-91-100, July 30, 1991). 

U.S.  Mint:  Procurement of Clad Metal for Coins (GAO/GGD-91-78BR,
May 17, 1991). 

OMB Circular A-76:  Expected Savings Are Not Being Realized in Ft. 
Sill's Logistics Contract (GAO/GGD-91-33, Feb.  11, 1991). 

Achieving Cost Efficiencies in Commercial Activities
(GAO/T-GGD-90-35, Apr.  25, 1990). 

OMB Circular A-76:  DOD's Reported Savings Figures Are Incomplete and
Inaccurate (GAO/GGD-90-58, Mar.  15, 1990). 

A-76 Program Issues (GAO/T-GGD-90-12, Dec.  5, 1989). 

Civilian Agency Procurement:  Improvements Needed in Contracting and
Contract Administration (GAO/GGD-89-109, Sept.  5, 1989). 

Army Procurement:  Fort Benjamin Harrison's Commercial Activity Study
Should Be Redone or Updated (GAO/NSIAD-89-90, Feb.  24, 1989). 

Federal Productivity:  DOD's Experience in Contracting Out
Commercially Available Activities (GAO/GGD-89-6, Nov.  28, 1988). 

Federal Productivity:  DOD Functions With Savings Potential From
Private Sector Cost Comparisons (GAO/GGD-88-63FS, Apr.  8, 1988). 

Contracting Out for Commercial Activities and Services Under OMB
Circular A-76 (GAO/T-GGD-88-7, Jan.  7, 1988). 

Federal Workforce Provisions for Comparing Government and Contractor
Retirement Costs Should Be Changed (GAO/GGD-88-25, Dec.  17, 1987). 

Federal Productivity:  Potential Savings From Private Sector Cost
Comparisons (GAO/GGD-87-30, Dec.  31, 1986). 

Synopsis Of GAO Reports Involving Contracting Out Under OMB Circular
A-76 (GAO/PLRD-83-74, May 24, 1983). 

GSA's Cleaning Costs Are Needlessly Higher Than In The Private Sector
(GAO/AFMD-81-78, Aug.  24, 1981). 

Civil Servants and Contract Employees:  Who Should Do What for the
Federal Government?  (GAO/FPCD-81-43, June 19, 1981). 


*** End of document. ***