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

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

Statement 

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

initiative;

• enact legislative changes and/or reduce resources available to government

agencies in order to encourage greater use of privatization;

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).

Page 1 GAO/T-GGD-97-134
Statement 

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

Reliable cost data

Reliable cost data on

 government activities

 are needed to support

 informed privatization

 decisions and to assess

 overall performance.

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

resource changes

Governments may need to

 enact legislative changes

 and/or reduce governmental

 resources to encourage

 greater use of privatization.

Strategies for 

workforce transition

Governments need

 strategies to manage

 workforce transition.

Monitoring and oversight

More sophisticated

 monitoring and oversight

 are needed to protect the

 government's interests

 when its role in the delivery

 of services is reduced

 through privatization.

Implementation Source: GAO analysis.

Page 2 GAO/T-GGD-97-134
Statement 

Privatization and Competition: Comments

on S. 314, the Freedom From Government

Competition Act

S. 314 Provides a Tool,

but Not a Substitute

for a Political

Champion

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

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;

Page 3 GAO/T-GGD-97-134
Statement 

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

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).

Page 4 GAO/T-GGD-97-134
Statement 

Privatization and Competition: Comments

on S. 314, the Freedom From Government

Competition Act

Implementation of S. 314

Would Be Helped by

Integrating It With

Agencies’ Strategic and

Performance Planning

Activities

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

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).

Page 5 GAO/T-GGD-97-134
Statement 

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.

The Relationship of S.

314 to Other Relevant

Laws Is Unclear

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.

Page 6 GAO/T-GGD-97-134
Statement 

Privatization and Competition: Comments

on S. 314, the Freedom From Government

Competition Act

Reliable and

Complete Cost

Information Needed

for Privatization

Decisions

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

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.

Page 7 GAO/T-GGD-97-134
Statement 

Privatization and Competition: Comments

on S. 314, the Freedom From Government

Competition Act

S. 314 Recognizes

Federal Workforce

Transition Needs

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

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.

Page 8 GAO/T-GGD-97-134
Statement 

Privatization and Competition: Comments

on S. 314, the Freedom From Government

Competition Act

Effective Monitoring

and Oversight of

Contractor

Performance Are

Essential

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

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).

Page 9 GAO/T-GGD-97-134
Statement 

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 publicand 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.

(410153)

8

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

Page 10 GAO/T-GGD-97-134
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