Privatization and Competition: Comments on S. 314, the Freedom From Government Competition Act

Published by the Government Accountability Office on 1997-06-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                           United States General Accounting Office

GAO                        Testimony
                           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
                           PRIVATIZATION AND
Wednesday, June 18, 1997

                           Comments on S. 314, the
                           Freedom From Government
                           Competition Act
                           Statement of L. Nye Stevens, Director
                           Federal Management and Workforce Issues
                           General Government Division


Privatization and Competition: Comments
on S. 314, the Freedom From Government
Competition Act
                 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
             •   enact legislative changes and/or reduce resources available to government
                 agencies in order to encourage greater use of privatization;

                  Federal Contracting: Comments on S. 1724, The Freedom From Government Competition Act
                 (GAO/T-GGD-96-169, Sept. 24, 1996).
                  Privatization: Lessons Learned by State and Local Governments (GAO/GGD-97-48, Mar. 14, 1997).

                 Page 1                                                                        GAO/T-GGD-97-134
                                           Privatization and Competition: Comments
                                           on S. 314, the Freedom From Government
                                           Competition Act

                                       •   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

                                                     Political champion
                                                     Privatization can best be introduced
                                                     and sustained when a political
                                                     leader champions it.

                                                     Implementation structure
                                                     Government leaders need to
                                                     establish an organizational
                                                     and analytical structure to ensure
                                                     effective implementation.

      Legislative and                  Reliable cost data                     Strategies for         Monitoring and oversight
      resource changes                                                        workforce transition
      Governments may need to         Reliable cost data on                  Governments need        More sophisticated
      enact legislative changes       government activities                  strategies to manage    monitoring and oversight
      and/or reduce governmental      are needed to support                  workforce transition.   are needed to protect the
      resources to encourage          informed privatization                                         government's interests
      greater use of privatization.   decisions and to assess                                        when its role in the delivery
                                      overall performance.                                           of services is reduced
                                                                                                     through privatization.

              Implementation                                                                                Source: GAO analysis.

                                           Page 2                                                             GAO/T-GGD-97-134
                              Privatization and Competition: Comments
                              on S. 314, the Freedom From Government
                              Competition Act

                              The history of government reform has demonstrated that new policies,
S. 314 Provides a Tool,       whether based in law or in administrative directives, are not
but Not a Substitute          self-implementing. In our work on state and local privatization initiatives,
for a Political               we reported that reforms such as privatization are most likely to be
                              sustained when there is a committed political leader to champion the
Champion                      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.

                              To implement their privatization initiatives, the governments we visited
S. 314 Would                  reported the need to establish an organizational and analytical structure. A
Establish a Flexible          key aspect of this structure is an office to guide and support the
Implementation                privatization initiative and provide the analytical framework to evaluate
                              the costs, benefits, and risks of privatizing a particular activity. Many of
Structure                     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;

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    Privatization and Competition: Comments
    on S. 314, the Freedom From Government
    Competition Act

•   ensuring compliance by agencies; and
•   providing guidance, information, and assistance to both private and public

    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.

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

    Page 4                                                                     GAO/T-GGD-97-134
                           Privatization and Competition: Comments
                           on S. 314, the Freedom From Government
                           Competition Act

Implementation of S. 314   The experiences of other governments as well as of major private firms
Would Be Helped by         indicate that, when the outsourcing of functions is contemplated, answers
Integrating It With        to fundamental questions about the purpose and mission of an
                           organization should precede any major outsourcing activities. The bill has
Agencies’ Strategic and    significant implications for the ongoing implementation of the
Performance Planning       Government Performance and Results Act, often referred to as “GPRA” or
Activities                 “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

                           The Government Performance and Results Act: 1997 Governmentwide Implementation Will Be
                           Uneven (GAO/GGD-97-109, Jun. 2, 1997).
                            Defense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix
                           (GAO/NSIAD-96-148, Apr. 17, 1996).

                           Page 5                                                                        GAO/T-GGD-97-134
                         Privatization and Competition: Comments
                         on S. 314, the Freedom From Government
                         Competition Act

                         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.

                         In our state and local work, we found that all five states and the city of
The Relationship of S.   Indianapolis used some combination of legislative changes and resource
314 to Other Relevant    cuts as part of their privatization initiatives. These actions were taken to
Laws Is Unclear          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.

                         Page 6                                                         GAO/T-GGD-97-134
                           Privatization and Competition: Comments
                           on S. 314, the Freedom From Government
                           Competition Act

                           In the governments we visited, reliable and complete cost data on
Reliable and               government activities were deemed essential in assessing the overall
Complete Cost              performance of activities targeted for privatization, in supporting informed
Information Needed         privatization decisions, and in making these decisions easier to implement
                           and justify to potential critics. Most of the governments we surveyed used
for Privatization          estimated cost data because obtaining complete cost and performance
Decisions                  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   A notable feature of the draft legislation is the provision describing the
Past Performance           criteria that are to be used in contracting for goods and services. It
Information in Making      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
Privatization Decisions    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.

                           Page 7                                                      GAO/T-GGD-97-134
                          Privatization and Competition: Comments
                          on S. 314, the Freedom From Government
                          Competition Act

                          We found that governments we visited needed to develop strategies to
S. 314 Recognizes         help their workforces make the transition to a private-sector environment.
Federal Workforce         Such strategies, for example, might seek to involve employees in the
Transition Needs          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   Involving employees in the privatization process by letting them compete
Helped Attain Employee    for the right to provide the service was a strategy used by state and local
Cooperation               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

                           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.

                          Page 8                                                                           GAO/T-GGD-97-134
                       Privatization and Competition: Comments
                       on S. 314, the Freedom From Government
                       Competition Act

                       When a government’s direct role in the delivery of services is reduced
Effective Monitoring   through privatization, we found that at least among the state and local
and Oversight of       governments we visited, the need for aggressive monitoring and oversight
Contractor             grew. Oversight was needed not only to evaluate compliance with the
                       terms of the privatization agreement, but also to evaluate performance in
Performance Are        delivering services in order to ensure that the government’s interests were
Essential              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

                       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

                         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).

                       Page 9                                                                       GAO/T-GGD-97-134
           Privatization and Competition: Comments
           on S. 314, the Freedom From Government
           Competition Act

           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.

           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.

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

(410153)   Page 10                                                                   GAO/T-GGD-97-134
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