OF
JOHN KOSKINEN
DEPUTY DIRECTOR FOR MANAGEMENT
OFFICE OF MANAGEMENT AND BUDGET
BEFORE THE
SENATE GOVERNMENTAL AFFAIRS
SUBCOMMITTEE ON OVERSIGHT OF GOVERNMENT MANAGEMENT, RESTRUCTURING AND THE DISTRICT OF COLUMBIA
REGARDING
"THE FREEDOM FROM GOVERNMENT COMPETITION ACT" (S.314)
INTRODUCTION
Mr. Chairman, I am happy to have the opportunity to
discuss with you today the proposed "Freedom from
Government Competition Act of 1997 (S.314)," a bill which by its own
terms would "require that the Federal
Government procure from the private sector the goods and services
necessary for the operations and management
of certain Government agencies."
In light of our current budgetary restrictions and
our move to implement the Balanced Budget Agreement, all of
us are anxious to ensure that the Government operates as efficiently
as possible. Our guiding principle for
determining when the Government engages in commercial activities and
when it considers outsourcing,
privatization or competition should be to ensure that we get the best
deal for the American taxpayer.
THIS ADMINISTRATION SUPPORTS CONTRACTING
OUT
We need to bear in mind that the Federal Government
has always obtained a vast array of
products and services from the private sector and expects to continue
that policy. In Fiscal Year
1996, for example, we spent over $114 billion on commercial support
service contracts, including
custodial, warehousing, buildings maintenance, transportation and
computer support services.
We also contract for highly technical service requirements such as
depot level maintenance
services, architectural design, integration, financial, scientific and
research and development
services.
In addition to the substantial volume of
contracting out already taking place, we are currently
engaged in the largest effort ever undertaken by the Federal
Government to compete our in-house
commercial support workload with the private sector. Over 40,000 FTE
are currently under
OMB Circular A-76 review in the Defense Department alone. We expect
more cost comparisons
in the near future.
As we work to reinvent the way Government meets its
mission requirements, we are asking senior
agency managers to always ask three basic questions; (1) do we need to
keep doing this work at
all; (2) if the work needs to be done, could another agency or a
contractor do it better; and (3) is
the work being performed in the most efficient manner possible or does
it need to be
fundamentally re-engineered? We have also asked the agencies to
consider the fully allocated
costs of providing services, by applying the standards adopted by the
Federal Accounting
Standards Advisory Board (FASAB).
Pursuant to implementation of the Government
Performance and Results Act, we are holding
managers more accountable for results. We are asking that managers
justify their decisions to
perform work by in-house, contract or interservice support agreement
through full and open
competitions designed to achieve the best value, lowest cost to the
taxpayer. To achieve this new
level of accountability, we are encouraging a broader range of
competitions and we favor
encouraging new organizations to enter the competitions. The Congress
authorized us to develop
the franchise funds pilots and to expand the competitive environment
that exists for reimbursable
activities Government-wide. The private sector is now being invited
to participate in new markets
and new levels of commercial workload that had previously been the
province of simple
cross-servicing agreements between agencies. At the same time, we are
encouraging public
offerors to compete for that same work on a level playing field.
Finally, we do not believe that
these competitions should be one-time events. To ensure that the
taxpayer continues to get the
best deal, we need to periodically re-examine our outsourcing, cross-
servicing and in-house
performance decisions. If the function was kept in-house, is the
public sector continuing to
provide the best deal? If the private sector is performing the
service, is the current offeror the
best one for the job, or has the Government developed a competitive
approach? Competition
should be used on a regular basis to review the situation and to
determine who can best provide
required services.
Ultimately, our goal is to restore the public's
faith in Government by managing our resources
more effectively and by giving citizens and taxpayers more value for
their dollar. By issuing the
March 1996 OMB Circular A-76 Revised Supplemental Handbook, we have
established a
streamlined approach to permit full and open competition - on a level
playing field - to determine
who should do the work. In this context, it is important to remember
that when faced with
competition, Federal employees have been shown to be extremely cost
competitive.
Approximately 50 percent of the competitions conducted to date have
been won by the
Government. Indeed, savings from reviewing the current organization
and implementing the
Government's Most Efficient Organization (MEO) have averaged an
additional 20 percent savings
per study. Over the years, this has translated into billions of
dollars of annual savings whether the
function is retained in-house or contracted out and has done so
without service reductions. At the
same time, the private sector has won about 50 percent of the
competitions, which is a strong
indication that this process works.
While we are encouraging agencies to compete to
provide services to other agencies, as Congress
contemplated with the establishment of the GMRA franchise fund pilots,
we also agree that
"unfair Government competition," to the extent that it actually
exists, should be identified and
eliminated. A clear distinction needs to be drawn, however, between
the Government's
involvement in private sector or even State or local markets and the
need to manage our own
resources on a cost effective basis. A substantial statutory and
policy framework already exists
that carefully limits the Federal Government's involvement in the
private economy and in State
and local service markets. This framework is provided, for example,
by statutes, policies and
procedures authorizing our Federal Prisons Industries, the DOD
Arsenal Act (10 USC 2539),
Title III of the Intergovernmental Cooperation Act of 1968, OMB
Circular No. A-97, "Rules and
Regulations Permitting Federal Agencies to Provide Specialized or
Technical Services to State
and Local Units of Government," USC 2553 with respect to DOD
laboratories, the Federal
Acquisition Streamlining Act, OMB Circular A-76 and others.
LEGISLATION IS NOT NEEDED AND MAY IMPEDE
CONTRACTING
OUT
The possibility of legislation in this area needs
to be viewed against ongoing reinvention efforts.
We are moving to implement strategic capital acquisition planning,
ITMRA and the
recommendations of Federal Accounting Standards Advisory Board
(FASAB). We believe that
we are moving to a better decision making process, one that will
recognize the full costs of
performance to the taxpayer and one that relies on full and open
competition. Our concern with
the legislative proposal embodied in S.314 is that it mandates a
particular approach to this
situation rather than letting the customer agencies themselves examine
their current in-house to
contract mix, including the use of reimbursable support agreements
with other agencies, to make
the best management decision. We also prefer to let the provider
agencies determine what their
mix of in-house and contract resources are, again in the best
interests of the taxpayer. This is the
competitive environment that now exists under the March 1996 A-76
Supplemental Handbook,
which requires that agencies make their outsourcing decisions on the
basis of public-private
competitions.
We are concerned that the bill would limit the
ability of public offerors to participate in the
competitive process. The key here is that we want everyone - public
and private - to compete for
our work so that taxpayers can be assured of getting the most for
their money. The issue is not
about jobs or employee rights - we have long had the Right-of-First-
Refusal in A-76 solicitations
- and even Federal unions have supported full competition. It is not
even about the fundamental
question as to whether to outsource. That debate is now essentially
over. The question here is
when and where to outsource in the taxpayer's best interests.
If we have a need for legislation, it is
legislation to remove existing barriers to competition.
S.314, for example, does not repeal the restrictions imposed on the
Department of Defense in 10
USC 2461- 2469. Finally, we are concerned that S.314 will result in a
significant new level of
litigation, caused by the conversion of what are essentially
management implementation decisions
into a statutory obligation that would be subject to judicial review.
SPECIFIC CONCERNS WITH THE LEGISLATION
One of the primary reasons offered to support this
bill is the finding that Government competition
with the private sector is detrimental to all businesses and to the
American economy. We
disagree. We believe that competition spurs efficiency and creates
the environment needed for
effective cost control and for creative and innovative change.
Government competition for the
provision of services to itself encourages lower cost and, therefore,
is in the best interests of the
taxpayer and the American economy. Unlike S.314, our approach to
outsourcing, privatization
and competition expands the competitive opportunities for public and
private sector offerors.
S.314 states that the Government's current mix of
in-house and contract resources is
"unacceptably high;" that the existence of reimbursable arrangements
between agencies is
inappropriate; that such consolidations divert the Government's
attention from its core mission;
that small business is being hurt by our current mix of in-house and
contract resources, and that
current laws and regulations have proven ineffective in controlling
the growth of Government.
While individual anecdotes can be offered to support these findings,
there is no quantitative data
to establish or support them. In fact, the amount of outsourcing has
increased moderately over
the four years that the Government has downsized by 300,000 employees.
One could ask what
the problem is that the legislation is trying to solve.
S.314 requires that certain information be made
available to the public, including the development
of inventories of commercial activities performed by the agencies.
The March 1996 A-76 Revised
Supplemental Handbook already requires that agencies conduct annual
inventories of their
commercial activities performed with in-house resources. The Federal
Procurement Data System
provides information regarding which work is currently performed by
contract. This information
is available to the public upon request and private sector companies
are free to make offers to
perform commercial work. What Circular A-76 does not do is require
agencies to schedule
existing commercial activities or cross-servicing arrangements for
conversion to contract
performance or cost comparison, unless, in the judgement of the agency
head, such action is
warranted. We believe that agency managers must have the flexibility
to manage their approved
resources. In contrast, and of major concern to us, S.314 suggests
that the private sector and the
employee unions may have a legal right to review these inventories and
seek judicial review of
agency determinations with respect to whether the function is
inherently governmental,
commercial or has otherwise met the cost effectiveness standards of
the statute. Having these
issues subjected to legal challenge will delay, not expedite,
competition and contracting out.
We are also concerned that the statute provides
very limited exemptions from the requirements to
rely on the private sector, including limiting the Government's
existing flexibility to convert to or
from in-house or contract performance, without cost comparison. The
exemptions from full
reliance on the private sector are limited to: (1) the function being
inherently governmental, (2)
related to national security, (3) when a best value cost comparison
determines that in-house
performance is more cost effective, or (4) there is no private sector
offeror to perform the work.
Ironically, cost comparisons would be required under S.314 that are
NOT required under OMB
Circular A-76, including provisions for conversions of: (1)
procurement preference eligibles, (2)
functions involving 10 or fewer FTE, (3) functions involving 10 or
more FTE with placement, (4)
military positions and (5) functions covered by agency waivers.
We know that new technologies can bring new
opportunities to reduce cost, including the
opportunity to achieve new economies of scale. As a matter of policy,
S.314, does not permit
agencies to begin, continue to carry out, or consolidate any product
or service that can be
provided by the private sector, unless justified by a best value
competition. This approach
eliminates the opportunities for achieving economies of scale,
restricts our ability to respond to
emergencies and may result in unnecessary administrative costs.
We should not view outsourcing narrowly. For
example, the Treasury, IRS, Social Security
Administration and the Labor Department recently signed an agreement
to collaborate on a
streamlined wage and income reporting system. Agencies cooperated in
responding to the
Oklahoma bombing, the crash of TWA flight 800, Hurricane Hugo and
other natural disasters.
These joint efforts include the provision of services that are
generally considered commercial in
nature and, in many cases, the work is being done directly by agency
employees. In other cases, it
is being accomplished through reimbursable agreements, contractors or
a mix of in-house and
contract employees. This legislation - if passed- will put in place
additional legal and other
administrative obstacles to our ability to respond to these kinds of
situations.
S.314 also appears to conflict with the provisions of the Federal Property and Administrative Services Act of 1949, the Economy Act of 1932 (31 USC 1535), and the Government Management Reform Act of 1994 (103 USC 356). It would prohibit the Government from using excess property and common administrative services available from other Federal departments or agencies, even if they can be obtained more economically through agency resources.
We are also concerned that S.314 may adversely affect our ability to expand contracting with small businesses. In many cases, it is only because of our current mix of technical in-house, reimbursable and contract resources that small businesses are eligible to participate as direct prime contractors to the Federal Government. S.314's requirement to convert all work to contract performance, unless otherwise justified on the basis of a best value/ past performance competition, could result in fewer and fewer opportunities for small business participation.
Finally, we are opposed to the Bill's proposed
establishment of a Center for Commercial
Activities within OMB. These oversight responsibilities are properly
done at the agency level, as
provided for in the Revised Supplemental Handbook.
OUR PRESENT SYSTEM IS WORKING
Ultimately, the question is whether S.314 provides
anything better than that already provided by
the Circular A-76 and its Revised Supplemental Handbook. The March
1996 A-76 Revised
Supplemental Handbook provides a clear preference for private sector
performance of new and
expanded work requirements, requires agencies to develop inventories
of commercial activities,
establishes prohibitions against the Government's entering into non-
Federal support markets,
restricts the development of new or expanded interagency support
agreements to those justified
by full and open competitions and provides for independent
administrative oversight within the
agencies. The Revision also provides that agencies may leave
existing reimbursable agreements
and convert directly to contract, without cost comparison, at the
discretion of the customer
agency. We believe that this process not only works, but is beginning
to encourage real
competition for Government work.
Circular A-76 and its Revised Supplemental Handbook
create the incentives to improve
performance and reduce cost by continuing to permit fair and open
competition for commercial
services. The rules also provide appropriate controls and
administrative assurances that agencies
are competing on a level playing field and that agencies are not
unduly competing with or
displacing the private sector.
CONCLUSION
In sum, it is full and open competition that has
made the American economy the envy of the
world. We support the provision of Government services by those best
able to do so, whether in
the private sector or within the Government. Rather than open up
existing markets or enhance
the dynamics of competition, S.314 restricts the number of
competitors. Trying to put existing
agencies, franchise funds and cross-servicing arrangements out of the
market is likely to result in
the enactment of many more agency specific prohibitions against
outsourcing and competition,
such as those applying to DOD. The bill will also spawn a whole new
level of compliance
litigation, resulting in higher costs to the taxpayer.
Mr. Chairman, that concludes my prepared statement. I would be happy to address any questions that you might have.
