Privatization and Competition: Comments on S. 314, The Freedom From
Government Competition Act (Testimony, 06/18/97, GAO/T-GGD-97-134).

Pursuant to a congressional request, GAO discussed S. 314, the Freedom
From Government Competition Act, as a potential vehicle for competitive
contracting, using the results of GAO's recent work on privatization
initiatives at the state and local government levels.

GAO noted that: (1) in the six governments GAO visited, a political
leader, or in one case several leaders working in concert, played a
crucial role in fostering privatization; (2) S. 314 does not, and
probably cannot, provide for effective political leadership; (3) S. 314
would give the force of law to general reliance on the private sector
for commercial goods and services, and thus would provide a stronger
foundation, but not a substitute, for political leadership; (4) to
implement their privatization initiatives, the governments GAO visited
reported the need to establish an organizational and analytical
structure; (5) responding to the need to such a centralized structure,
S. 314 would require the Office of Management and Budget to issue
regulations and to establish a new "Center for Commercial Activities,";
(6) the bill would amend the Government Performance and Results Act by
requiring that agencies include in the annual performance plans and
reports that they submit to Congress: (a) an inventory of functions that
are subject to the act's provisions; and (b) a schedule for converting
the functions identified in the performance plan; (7) if Congress
chooses to enact S. 314, an opportunity exists to further integrate
implementation of the bill's provisions with GPRA; (8) while providing a
statutory basis for competitively contracting out government functions,
S. 314 has implications for certain existing laws, and how it will
relate to existing laws and policies is not entirely clear; (9) a
notable feature of the draft legislation is the provision describing the
criteria that are to be used in contracting for goods and services; (10)
efforts are under way to develop the type of cost and performance data
that would be necessary to compare public versus private proposals, as
could occur under the provisions of S. 314; (11) the bill's findings
section states that it is in the public interest for the private section
to utilize government employees who are adversely affected by
conversions of functions to the private sector; (12) the essential
foundation for effective oversight is good cost and performance data,
and S. 314's analytical requirements call for the consideration of all
direct and indirect costs, qualifications, and past performance; and
(13) these requirements, along with the authority and flexibility given
to OMB in implementing the legislation, provide the necessary foundatio*

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

 REPORTNUM:  T-GGD-97-134
     TITLE:  Privatization and Competition: Comments on S. 314, The 
             Freedom From Government Competition Act
      DATE:  06/18/97
   SUBJECT:  Competitive procurement
             Federal procurement
             Contract monitoring
             Federal procurement policies
             Privatization
             Proposed legislation
             Strategic planning
IDENTIFIER:  Georgia
             Massachusetts
             Michigan
             New York
             Virginia
             Indianapolis (IN)
             
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Cover
================================================================ COVER


Before the Subcommittee on Oversight of Government
Management, Restructuring, and the District of Columbia
Committee on Governmental Affairs
United States Senate

For Release on Delivery
Expected at
9:00 a.m., EDT
Wednesday, June 18, 1997

PRIVATIZATION AND COMPETITION -
COMMENTS ON S.  314, THE FREEDOM
FROM GOVERNMENT COMPETITION ACT

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

GAO/T-GGD-97-134

GAO/GGD-97-134T


(410153)


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

  OMB - x
  GPRA - x
  GSA - x
  FASAB - x
  DOE - x
  NASA - x

PRIVATIZATION AND COMPETITION: 
COMMENTS ON S.  314, THE FREEDOM
FROM GOVERNMENT COMPETITION ACT
==================================================== Chapter STATEMENT

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today to assist the Subcommittee in its
consideration of S.  314, the Freedom From Government Competition
Act.  The bill would require that the government procure from the
private sector, with some exceptions, the goods and services it needs
to carry out its functions.  We testified in the 104th Congress on a
predecessor to S.  314.\1 The revisions incorporated in this new bill
respond to a number of our suggestions, including provisions relating
to the use of best value as a criterion for contracting decisions,
allowing for situations where private sector sources are inadequate
to meet the government's needs, and recognizing that the
identification of inherently governmental functions is somewhat
situational.  As you know, we recently had discussions with the
Subcommittee staff on S.  314 and provided some suggestions and
comments.  The Subcommittee has asked that today we discuss the new
bill as a potential vehicle for competitive contracting, using the
results of our recent work on privatization initiatives at the state
and local government levels. 

We recently reported on the major lessons learned by, and the related
experiences of, state and city governments in implementing
privatization efforts.\2 Our report, done at the request of
Representative Scott Klug, examined the privatization experiences and
lessons learned by the states of Georgia, Massachusetts, Michigan,
New York, and Virginia, as well as the city of Indianapolis.  Each of
these governments made extensive use of privatization--primarily
contracting out governmental functions--over the last several years,
tailoring their approaches to their particular political, economic,
and labor environments.  On the basis of our literature review, the
views of a panel of privatization experts, and our work in the six
governments, we identified six lessons that were generally common to
all six governments.  In general, the governments found they needed
to

  -- have committed political leaders to champion the privatization
     initiative;

  -- establish an organizational and analytical structure to
     implement the initiative;

  -- enact legislative changes and/or reduce resources available to
     government agencies in order to encourage greater use of
     privatization;

  -- develop reliable and complete cost data on government activities
     to assess their performance, to support informed privatization
     decisions, and to make these decisions easier to implement and
     justify to potential critics;

  -- develop strategies to help their workforces make the transition
     to a private-sector environment; and lastly,

  -- enhance monitoring and oversight to evaluate compliance with the
     terms of the privatization agreement and evaluate performance in
     delivering services to ensure that the government's interests
     are fully protected. 

   Figure 1:  Lessons Learned From
   Our Review of State and Local
   Privatization Efforts

   (See figure in printed
   edition.)


--------------------
\1 Federal Contracting:  Comments on S.  1724, The Freedom From
Government Competition Act (GAO/T-GGD-96-169, Sept.  24, 1996). 

\2 Privatization:  Lessons Learned by State and Local Governments
(GAO/GGD-97-48, Mar.  14, 1997). 


   S.  314 PROVIDES A TOOL, BUT
   NOT A SUBSTITUTE FOR A
   POLITICAL CHAMPION
-------------------------------------------------- Chapter STATEMENT:1

The history of government reform has demonstrated that new policies,
whether based in law or in administrative directives, are not
self-implementing.  In our work on state and local privatization
initiatives, we reported that reforms such as privatization are most
likely to be sustained when there is a committed political leader to
champion the initiative.  In the six governments we visited, a
political leader (the governor or mayor), or in one case several
leaders working in concert (state legislators and the governor),
played a crucial role in fostering privatization.  These leaders
built internal and external support for privatization, sustained
momentum for their privatization initiatives, and adjusted
implementation strategies when barriers to privatization arose. 

S.  314 does not, and probably cannot, provide for effective
political leadership.  It has been executive branch policy for more
than 30 years to encourage competition between the federal workforce
and the private sector for providing commercial goods and services. 
However, this policy has been embodied only in an administrative
directive, Office of Management and Budget (OMB) Circular A-76. 
While we have consistently endorsed the concept of encouraging such
competition, its effectiveness in practice has been questioned both
in the executive branch and in dozens of congressional hearings. 

S.  314 would give the force of law to general reliance on the
private sector for commercial goods and services, and thus would
provide a stronger foundation, but not a substitute, for political
leadership. 


   S.  314 WOULD ESTABLISH A
   FLEXIBLE IMPLEMENTATION
   STRUCTURE
-------------------------------------------------- Chapter STATEMENT:2

To implement their privatization initiatives, the governments we
visited reported the need to establish an organizational and
analytical structure.  A key aspect of this structure is an office to
guide and support the privatization initiative and provide the
analytical framework to evaluate the costs, benefits, and risks of
privatizing a particular activity.  Many of the frameworks
established by the six governments shared common elements, such as
criteria for selecting activities to privatize, methods for cost
comparisons, and procedures for monitoring the performance of
privatized activities. 

Responding to the need for such a centralized structure, S.  314
requires OMB to issue regulations and to establish a new "Center for
Commercial Activities," which is given responsibility for

  -- implementing the requirements of the legislation;

  -- ensuring compliance by agencies; and

  -- providing guidance, information, and assistance to both private
     and public sectors. 

OMB is given wide latitude as to what regulations it will issue and
what they will contain.  This grant of broad authority affords OMB
flexibility in implementing the legislation.  However, given the wide
latitude that OMB is afforded by the bill, issues will inevitably
arise during implementation that will have to be dealt with by OMB. 
These issues could include such questions as: 

  -- Whether or not government corporations, federally funded
     research and development centers, state governments, or even the
     U.S.  Postal Service should be included within the definition of
     "private sector sources" and thus eligible to compete for the
     government's contracts. 

  -- Whether public buildings would need to be sold to the private
     sector in order to house federal employees. 

  -- How OMB will incorporate congressional views when significant or
     highly sensitive conversions are proposed. 

Given concerns such as these, Congress may want a mechanism to hold
OMB accountable for carrying out its responsibilities.  Such a
mechanism could require that OMB prepare a multiyear strategic plan
for implementing the bill's requirements.  The plan could be
developed in consultation with Congress and could describe major
goals and priorities, as well as specific strategies and milestones
for achieving the goals.  In addition, the plan could provide an
assessment of changes to current policies and systems that would be
necessary to accomplish the bill's purposes.  A strategic plan thus
would provide greater direction for agencies as they go through the
process of identifying potential activities to be included in their
annual performance plans.  It could also provide a tool for
congressional oversight of OMB and agency activities as they relate
to the bill's requirements. 

To effectively carry out the role envisioned for it under the bill,
OMB will require additional resources or will need to reallocate
existing resources from other mandated responsibilities.  We reported
in 1995 that we were concerned about OMB's capacity to carry out its
already numerous management responsibilities, which have been
expanded significantly in recent years.\3 Such a plan might be an
appropriate vehicle for addressing such resource issues. 


--------------------
\3 Office of Management and Budget:  Changes Resulting From the OMB
2000 Reorganization (GAO/GGD/AIMD-96-50, Dec.  29, 1995). 


      IMPLEMENTATION OF S.  314
      WOULD BE HELPED BY
      INTEGRATING IT WITH
      AGENCIES' STRATEGIC AND
      PERFORMANCE PLANNING
      ACTIVITIES
------------------------------------------------ Chapter STATEMENT:2.1

The experiences of other governments as well as of major private
firms indicate that, when the outsourcing of functions is
contemplated, answers to fundamental questions about the purpose and
mission of an organization should precede any major outsourcing
activities.  The bill has significant implications for the ongoing
implementation of the Government Performance and Results Act, often
referred to as "GPRA" or "the Results Act," since it cuts to the very
heart of questions on what activities the government should and
should not be performing.  Under the provisions of GPRA, agencies are
required to set their strategic direction through multiyear strategic
plans, develop annual goals, and report on performance against those
goals.  Agency strategic plans and performance measures are intended
to provide Congress with a vehicle for asking fundamental questions
about federal functions and their performance.  In our recent report
on initial implementation of the act, we found that many agencies are
not yet well positioned to specify their plans and strategies in
terms of tangible results.\4

If enacted, the bill's implementation will occur as agencies are
going through their first cycle of planning, measuring, and reporting
on program performance, as called for under the Results Act.  The
bill would amend the Results Act by requiring, among other things,
that agencies include in the annual performance plans and reports
that they submit to Congress (1) an inventory of functions that are
subject to the Act's provisions, and (2) a schedule for converting
the functions identified in the performance plan.  Requiring agencies
to specify the activities they would perform directly, and those they
would convert to private sector performance, is consistent with the
Act's strategic planning requirements. 

If Congress chooses to enact S.  314, an opportunity exists to
further integrate implementation of the bill's provisions with the
Results Act.  A key provision of S.  314 requires OMB to create a
methodology for making determinations as to what activities should
and should not remain in government.  This provision, if integrated
with the strategic planning and performance reporting requirements of
the Results Act, could avoid the potential situation of agencies
inadvertently replacing unneeded federal functions with unneeded
private sector contractors--a concern we have expressed with regard
to Department of Defense depots.\5 By making clear that, as part of
their strategic planning and performance measurement activities,
agencies should review potential outsourcing candidates in light of
their contribution to mission accomplishment, the bill could reduce
the possibility of such an outcome. 


--------------------
\4 The Government Performance and Results Act:  1997 Governmentwide
Implementation Will Be Uneven (GAO/GGD-97-109, Jun.  2, 1997). 

\5 Defense Depot Maintenance:  Privatization and the Debate Over the
Public-Private Mix (GAO/NSIAD-96-148, Apr.  17, 1996). 


   THE RELATIONSHIP OF S.  314 TO
   OTHER RELEVANT LAWS IS UNCLEAR
-------------------------------------------------- Chapter STATEMENT:3

In our state and local work, we found that all five states and the
city of Indianapolis used some combination of legislative changes and
resource cuts as part of their privatization initiatives.  These
actions were taken to encourage greater use of privatization. 
Georgia, for example, enacted legislation to reform the state's civil
service and to reduce the operating funds of state agencies. 
Virginia reduced the size of the state's workforce and enacted
legislation to establish an independent state council to foster
privatization efforts.  These actions, officials told us, reduced
obstacles to privatization and sent a signal to managers and
employees that political leaders were serious about implementing it. 

While providing a statutory basis for competitively contracting out
government functions, S.  314 has implications for certain existing
laws.  As currently drafted, the bill is broad in its application,
and how it will relate to existing laws and policies is not entirely
clear.  For example, S.  314 prohibits agencies from beginning or
carrying out any activity to provide any products or services that
can be provided by the private sector, and it prohibits agencies from
providing any goods or services to any other governmental entity. 
This could conflict with the "Economy Act of 1932" (31 U.S. 
1535-1536), which authorizes interagency orders for goods and
services, as well as with the General Services Administration's (GSA)
authority to provide agencies with goods and services.  GSA was
created, and still exists, to provide services to agencies, such as
office space, consolidated purchasing, air fare contracts, and excess
property disposal.  Its role under S.  314 is unclear. 

In addition, the bill does not contain language limiting judicial
review of management actions taken under its provisions.  The
possibly unintended effect of subjecting management decisions to
judicial review could slow implementation and increase costs due to
litigation. 


   RELIABLE AND COMPLETE COST
   INFORMATION NEEDED FOR
   PRIVATIZATION DECISIONS
-------------------------------------------------- Chapter STATEMENT:4

In the governments we visited, reliable and complete cost data on
government activities were deemed essential in assessing the overall
performance of activities targeted for privatization, in supporting
informed privatization decisions, and in making these decisions
easier to implement and justify to potential critics.  Most of the
governments we surveyed used estimated cost data because obtaining
complete cost and performance data, by activity, from their
accounting systems was difficult.  However, Indianapolis, and more
recently Virginia have used new techniques to obtain more precise and
complete data on the cost of each separate program activity. 


      S.  314 REQUIRES COST AND
      PAST PERFORMANCE INFORMATION
      IN MAKING PRIVATIZATION
      DECISIONS
------------------------------------------------ Chapter STATEMENT:4.1

A notable feature of the draft legislation is the provision
describing the criteria that are to be used in contracting for goods
and services.  It requires OMB to prescribe standards and procedures
that are to include the analyses of all direct and indirect costs, to
be performed in a manner consistent with generally accepted cost
accounting principles as well as with past performance of sources. 
We have found in the past that the widespread absence of this type of
information has compromised effective public-private comparisons. 
This provision of the bill is consistent with current efforts aimed
at improving federal financial management. 

When competitive contracting has been done at the federal level under
the provisions of Circular A-76, the absence of workload data and
adequate cost accounting systems has made the task all the more
difficult.  Given that most agencies do not have cost accounting
systems in place at this point, the bill's requirement to use past
performance and cost data will be difficult for many federal
activities to meet. 

Efforts are under way to develop the type of cost and performance
data that would be necessary to compare public versus private
proposals, as could occur under the provisions of S.  314.  The
Federal Accounting Standards Advisory Board (FASAB) has developed
standards that are designed to provide information on the costs,
management, and effectiveness of federal agencies.  These standards
require agencies to develop measures of the full costs of carrying
out a mission or of producing products and services.  Such
information, when available, would allow for comparing the costs of
various programs and activities with their performance outputs and
results.  To help agencies meet these standards, guidance has been
issued to facilitate the acquisition and development of managerial
cost accounting systems needed to accumulate and assign cost data
consistent with governmentwide data. 


   S.  314 RECOGNIZES FEDERAL
   WORKFORCE TRANSITION NEEDS
-------------------------------------------------- Chapter STATEMENT:5

We found that governments we visited needed to develop strategies to
help their workforces make the transition to a private-sector
environment.  Such strategies, for example, might seek to involve
employees in the privatization process, provide training to help
prepare them for privatization, and create a safety net for displaced
employees.  Among the six governments we visited, four permitted at
least some employee groups to submit bids along with private-sector
bidders to provide public services.  All six governments developed
programs or policies to address employee concerns with privatization,
such as the possibility of job loss and the need for retraining. 

The bill's findings section states that it is in the public interest
for the private sector to utilize government employees who are
adversely affected by conversions of functions to the private sector. 
The legislation does not create any new benefit or competitive job
right that does not already exist.  It does, however, assign to the
Director of OMB the function of providing information on available
benefits and assistance directly to federal employees.  This would be
a new and possibly burdensome function for OMB--a function that
probably could be better handled by the Office of Personnel
Management, which already has responsibility and experience in this
area. 


      COMPETITIVE CONTRACTING
      HELPED ATTAIN EMPLOYEE
      COOPERATION
------------------------------------------------ Chapter STATEMENT:5.1

Involving employees in the privatization process by letting them
compete for the right to provide the service was a strategy used by
state and local governments to gain employee cooperation during the
privatization process.  S.  314 neither encourages nor prohibits
public-private competitions.  However, it does give implicit
authority to OMB to implement such a program, by requiring that the
implementing regulations include standards and procedures for
determining whether it is a private sector source or an agency that
provides certain goods or services for the best value.  While the
question of how such determinations would be made is left up to OMB,
competitive contracting has been the traditional method for making
such determinations both at the federal level and the state and local
level.\6


--------------------
\6 Under competitive contracting, also referred to as managed
competition, a public-sector agency competes with private-sector
firms to provide public-sector functions or services under a
controlled or managed process.  This process clearly defines the
steps to be taken by government employees in preparing their own
approach to performing an activity.  The agency's proposal, which
includes a bid proposal for cost-estimation purposes, is useful in
competing directly with private-sector bids. 


   EFFECTIVE MONITORING AND
   OVERSIGHT OF CONTRACTOR
   PERFORMANCE ARE ESSENTIAL
-------------------------------------------------- Chapter STATEMENT:6

When a government's direct role in the delivery of services is
reduced through privatization, we found that at least among the state
and local governments we visited, the need for aggressive monitoring
and oversight grew.  Oversight was needed not only to evaluate
compliance with the terms of the privatization agreement, but also to
evaluate performance in delivering services in order to ensure that
the government's interests were fully protected.  Indianapolis
officials said their efforts to develop performance measures for
activities enhanced their monitoring efforts.  However, officials
from most governments said that monitoring contractors' performance
was the weakest link in their privatization processes. 

The essential foundation for effective oversight is good cost and
performance data S.  314's analytical requirements call for the
consideration of all direct and indirect costs, qualifications, and
past performance, as well as other technical considerations.  These
requirements, along with the authority and flexibility given to OMB
in implementing the legislation, provide the necessary foundation for
effective performance monitoring and oversight, but they do not
resolve capacity problems. 

Converting government activities to private-sector performance will
increase the contracting workload on federal agencies.  Conversion to
contract performance requires considerable contract management
capability.  An agency must have adequate capacity and expertise to
successfully carry out the solicitation process and effectively
administer, monitor, and audit contracts once they are awarded.  In
past reports 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.\7
Some federal agencies have recognized the problem and have taken
actions intended to improve their contract management capacity.  The
Department of Energy (DOE) and The National Aeronautics and Space
Administration (NASA) provide examples of the challenges agencies
face in overseeing contractors. 

DOE --the largest civilian contracting agency in the federal
government--contracted out about 91 percent of its $19.2 billion in
fiscal year 1995 obligations.  We designated DOE contracting in 1990
as a high-risk area, vulnerable to waste, fraud, abuse, and
mismanagement, because DOE's missions rely heavily on contractors and
DOE has a history of weak contractor oversight.  DOE has been working
to improve its contract management practices.  As we recently
reported in our high-risk report on DOE,\8 changing the way DOE does
business has not come easily or quickly.  DOE has taken various
actions in the past to improve its contracting, and a recent contract
reform effort that has received high priority and visibility appears
promising; however, much remains to be done to ensure effective
oversight of contractors. 

NASA's contracting reforms demonstrate what can be accomplished when
an agency places high priority on contractor oversight.  NASA spends
about 90 percent of its budget on contracts with businesses and other
organizations.  NASA's procurement budget is one of the largest among
federal civilian agencies, totaling about $13 billion annually in
recent years.  NASA first identified its contract management as
vulnerable to waste and mismanagement in the late 1980s.  Since then,
it has grappled with a variety of contract management problems.  NASA
has made considerable progress in developing ways to better influence
contractors' performance and to improve oversight of field centers'
procurement activities.  It has, for example, established a process
for collecting cost, schedule, and technical information for all
major NASA contracts to assist management in the tracking of
contractor performance, and it also has restructured its policy on
award fees to emphasize contract cost control and the performance of
contractors' end products. 


--------------------
\7 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). 

\8 Department of Energy Contract Management (GAO/HR-97-13 February
1997). 


------------------------------------------------ Chapter STATEMENT:6.1

In conclusion, Mr.  Chairman, striking a proper balance between the
public- and private-sector provision of goods and services to the
American people is among the most enduring issues in American
politics and public policy.  The Freedom From Government Competition
Act would redirect current policy, which does not now have the weight
of legislative authority, and significantly affect the operation and
management of the federal government.  We believe that Congress is
the proper forum to address such fundamental questions, and we hope
that our testimony today has been helpful by raising some issues for
the subcommittee to consider in its deliberations on the proposed
act. 

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


*** End of document. ***