STATEMENT OF

G. EDWARD DESEVE

ACTING DEPUTY DIRECTOR FOR MANAGEMENT

OFFICE OF MANAGEMENT AND BUDGET

BEFORE THE JOINT HOUSE AND SENATE HEARING

ON

PROPOSED REVISIONS TO

S. 314/H.R. 716, "THE FREEDOM FROM GOVERNMENT COMPETITION ACT"

March 24, 1998

INTRODUCTION

Thank you Chairman Brownback and thank you Chairman Horn. I am here to discuss proposed revisions to S. 314, currently being cited as the "Fair Competition Act of 1998," and to H.R. 716, currently being cited as the "Competition in Commercial Activities Act of 1998."

We share the goal of seeking the most efficient and cost-effective source for the provision of commercial support activities required by the Federal Government. Five years ago this month, the President announced and the Vice President led an effort to fundamentally change the way Government operates.

At the time it seemed almost impossible. Red tape, poor financial and management systems, rigid hierarchies, poor performance incentives, a procurement system in desperate need of repair, systemic problems in our ability to acquire and integrate information technology, and senseless rules and procedures separated Federal employees from managers; separated managers from their missions, their responsibilities and their employees; and separated the taxpayer from their Government. Today, reinventing Government is the longest running, most dramatic and most successful government reform effort in our history. Together, we have streamlined our infrastructure, eliminated business lines, created partnerships with our employees to contribute to reform, eliminated red tape, changed business practices, eliminated duplication and, yes, opened our commercial support activities to significantly expanded levels of competition. As of the end of FY 1997, the Administration had cut the civilian Federal workforce by over 316,000 employees, creating the smallest Federal workforce in 35 years and as a share of total civilian employment, the smallest Federal workforce since 1931. Almost all of the 14 Cabinet Departments have cut their work forces; only the Justice and Commerce work force is growing. Through these and other reinvention efforts, the Administration has saved $137 billion over the last five years.

We have worked with you to improve our financial and management systems through the implementation of the Chief Financial Officers Act. We have worked with you to improve our performance standards through the Government Performance and Results Act. We have worked with you to reduce the burdens, delay and costs associated with the Federal procurement system through the Federal Acquisition Streamlining Act and the Clinger-Cohen Act. And, we worked with you to expand the opportunities for public-public and public-private competition through the March 1996 OMB Circular A-76 Revised Supplemental Handbook and the Government Management Reform Act. We recognize that continued efforts are required in each of these areas and have begun initiatives to better integrate budgeting with performance planning and reporting.

The key to this success has been our ability to overcome the rhetoric and to work together to identify needed reforms. In our view, the House and the Senate drafts contain a number of important improvements over last year's "Freedom from Government Competition Act." We appreciate that the revised bills no longer center on who may or may not be eligible to perform Federal work. Nothing is more "unfair" than to limit or otherwise arbitrarily exclude a viable offeror (public or private) from the competitive process. Each of us seeks to expand the level of competition for both in-house and contracted work in an effort to improve quality and reduce the cost of services to the taxpayer. This process works. The differences that remain are not about the goals, but rather how to best achieve them.

The process outlined by the March 1996 OMB Circular A-76 Revised Supplemental Handbook was developed through more than 40 years of give and take and currently represents the input of the agencies, employee groups, large and small businesses and congressional sources. It was also developed in conjunction with the other management, budgetary and procurement improvement initiatives noted above. In the Department of Defense, over 150,000 FTE have been scheduled for competition with the private sector over the next five years. This would be the largest number of in-house FTE ever placed under review for competition and we expect that this number will grow, both in Defense and within the civilian agencies, over the next few years.

Any legislation should contribute to this process and move it forward. We are concerned that rather than build on what we have, many of the proposed revisions try to modify and create an overly simplistic process by creating new rules for what should be inventoried, creating mandatory competition schedules, creating new prohibitions regarding agency competitions for contracted work, broadly defining new costing requirements, promulgating new rules for the operation of interservice support agreements, and imposing significant new levels of administrative, Inspector General, Government Accounting Office and even judicial oversight.

FUNDAMENTAL PRINCIPLES

Since we do not have a single bill to react to, let me discuss some of the fundamental principles that a final bill should embody, including some aspects that we would hope could be avoided.

First, the Government must be permitted to choose the alternative -- public or private -- which is the most cost effective and in the best interest of the taxpayer. In so doing, the process must be fair and equitable to all interested parties. The customer agency, the reimbursable public offeror, the employees and the private sector should all have access to a level playing field to compete for the performance of all Federal commercial support requirements. We do not care who does the work! We do care, however, that the decision process is fair, reasoned and that it results in lower costs to the taxpayer. Legislation must not restrict the opportunities for public offerors to participate in the process or distort the level playing field. Work must be able to be converted both from in-house to contract and from contract to in-house performance.

Second, any legislation should avoid judicial involvement in the management decision regarding whether or not to outsource. This includes avoiding giving jurisdiction to the United States Court of Federal Claims to render judgement on omissions from the list of commercial activities. In addition to raising a number of questions regarding the authority to determine what is inherently governmental, we believe that the proposal will result in a large number of legal filings and delays to the development of inventories, schedules, and existing and prospective competitions. While we do not think it appropriate to provide for judicial review of omissions from, or inclusion on, commercial inventories, it certainly would be inappropriate to allow contractors to challenge omissions while not allowing employees to challenge the inclusion of their work on the list. No legislation should allow the courts to enter into a review of the managerial, cost accounting and procedural aspects of an agency's implementation procedures.

Third, the management documentation, employee participation, costing and source selection rules for the competition must be well understood so as to be enforceable and impartial. Generalities in these areas are not helpful. In addition, the cost comparison process itself should be efficient.

For example, public-private competitions should not require the inclusion of all "direct and indirect costs" in the public offer. There are many overhead costs that will not change regardless of whether the work is performed by in-house or contract employees. Where various costs would not be affected by a conversion to or from in-house or contract performance, they should be excluded from the cost comparison. Detailed, consistent and balanced managerial and costing guidance is already provided by Circular A-76. In our view, the inclusion of "all direct and indirect" costs biases the decision to result in a conversion to contract, without any savings to the taxpayer and may result in higher overall costs. Competitions should be based on the inclusion of all "comparable direct and indirect costs." Cost is not the only issue here. Nevertheless, leaving the detailed management restructuring, costing and administrative review procedures up to each individual agency or to the courts is not recommended.

Fourth, source selection processes must permit efficient and effective competitions between public and private offerors for work presently being performed by the Government or by a private contractor. We will continue to make available to agencies techniques -- including best value competitions -- that are impartial and build on the important acquisition reforms which your Committees have helped to bring about. We would have concerns about including internal management issues in the Federal Acquisition Regulation, such as documentation requirements, internal employee participation, and the development of the Government's most efficient organization. In addition, employees must be assured that they can fully compete to keep their jobs. We would have concerns with any legislation that excludes Federal offers.

Fifth, when an activity currently being performed in-house is converted to performance by contract (including contracts awarded by another Federal agency) the in-house employees must be afforded the opportunity to compete to retain the work. Permitting conversion without competition reduces the number of viable competitors, may adversely affect small business, creates new and inappropriate incentives on reimbursable activities to outsource, and restricts an agency's ability to select the most effective source.

Finally, we must acknowledge the other reinvention and management improvement initiatives that are ongoing and not must delay or cause unnecessary administrative burdens upon the agencies. For example, the exemptions from the competition requirements should be comparable to those currently provided in Circular A-76. Exemptions do not exist in the drafts to permit the conversion of work to preference eligibles without a competition, nor do grant agreements or other non-profits appear to be excluded, as a matter of law.

We would also have concerns with legislation that required the head of each agency to undertake competitions in accordance with a schedule mandated in law. We are concerned that such schedules could be unduly burdensome and may preclude agencies from considering a mix of reinvention, re-engineering, consolidation, privatization, and cost comparison efforts. For those agencies which may have large inventories of commercial activities performed by Federal employees, such as DOD, VA, USDA, and Interior, compliance with the schedule requirements of the House and Senate bills will require additional staffing and contract resources. As agencies seek lower costs and best value support service offerors, they will test and improve their in-house, contract, and franchise (cross-servicing) support mix. Rather than mandating cost comparison schedules, we recommend that we allow the forces of declining budgets and the market to require that these competitions are conducted. This approach too is reflected in the current Circular A-76.

CONCLUSION

In conclusion, I have tried to point to some of the principles that we would all want to draw on. We do not believe that the proposed revisions to S. 314 and H.R. 716 will achieve the quality improvement or cost reduction goals that I know you are seeking. In our view, we should not treat competition as a variable independent from our other reinvention and management improvement efforts. Any legislation addressing the provision of commercial support activities through public-private competitions must build on our accomplishments to date (including the important acquisition reforms that we have achieved with your help) and help us to develop long-term incentives to keep the agencies reinventing themselves and searching for more effective service providers. Proposed legislation that would establish a new model of Federal management, must not be so general as to be meaningless to Federal managers or so specific as to be inflexible and result in additional administrative burdens and delays. That will be a very difficult thing for legislation to achieve in this area.

Federal employees are some of our nation's most highly trained and dedicated employees. They operate within a complex system of rules, regulations and laws. They respond to a vast array of missions, public concerns and operational requirements. They deserve, as does the private sector, the opportunity to compete for their jobs on a fair and level playing field. This means that the managerial complexities of a public-public and a public-private competition be recognized. We do not believe that this legislation meets that requirement and we are concerned that the proposed revisions could result in higher costs for the taxpayer.