United States General Accounting Office

GAO Report to Congressional Requesters

August 1998 CURRENCY PAPER

PROCUREMENT

Meaningful

Competition Unlikely

Under Current

Conditions

GAO/GGD-98-181

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-278747 

August 28, 1998

Congressional Requesters

In response to section 9003 of the 1997 Emergency Supplemental Appropriations Act1

 and your

requests, this report addresses (1) the optimum circumstances for the procurement of

distinctive currency paper, (2) the effectiveness of the Bureau of Engraving and Printing’s (BEP)

efforts to encourage competition in the procurement of currency paper, (3) the fairness and

reasonableness of prices paid for currency paper by BEP and the quality of the paper purchased,

and (4) the potential for disruption to the U.S. currency paper supply from BEP’s reliance on a

single source.

This report contains matters for congressional consideration and recommendations to the

Secretary of the Treasury.

We are sending copies of this report to the Chairman and Ranking Minority Member of the

House Committee on Banking and Financial Services, Subcommittee on Domestic and

International Monetary Policy; the Chairman and Ranking Minority Member of the Senate

Committee on Banking, Housing, and Urban Affairs; the Director of the Office of Management

and Budget; the Secretary of the Treasury; the Director of BEP; the Chairman, Board of

Governors of the Federal Reserve System; the Chief Executive Officer of Crane & Co. (the

current supplier of currency paper); and other interested parties. We will also make copies

available to others upon request.

If you have any questions about this report, please contact me at (202) 512-8387. Major

contributors to this report are listed in appendix VIII.

Bernard L. Ungar

Director, Government Business

 Operations Issues

1

Public Law 105-18, 111 Stat. 158, 196 (1997).
B-278747 

List of Requesters

The Honorable Ted Stevens

Chairman

The Honorable Robert Byrd

Ranking Minority Member

Committee on Appropriations

United States Senate

The Honorable Ben Nighthorse

 Campbell

Chairman

The Honorable Herb Kohl

Ranking Minority Member

Subcommittee on Treasury,

 General Government, and Civil

 Service

Committee on Appropriations

United States Senate

The Honorable Jim Kolbe

Chairman

The Honorable Steny Hoyer

Ranking Minority Member

Subcommittee on Treasury, Postal

 Service, and General Government

Committee on Appropriations

House of Representatives

The Honorable Robert Livingston

Chairman

The Honorable David Obey

Ranking Minority Member

Committee on Appropriations

House of Representatives

The Honorable Dan Burton

Chairman, Committee on Government

 Reform and Oversight

House of Representatives

The Honorable John F. Kerry

The Honorable Edward M. Kennedy

The Honorable Alfonse M. D’Amato

The Honorable Lauch Faircloth

Page 2 GAO/GGD-98-181 Currency Paper Procurement
B-278747 

The Honorable William H. Frist

The Honorable Ernest F. Hollings

The Honorable Kay Bailey Hutchison

The Honorable Frank Lautenberg

The Honorable Barbara A. Mikulski

The Honorable Fred Thompson

United States Senate

The Honorable Joseph P. Kennedy II

The Honorable John W. Olver

The Honorable Rosa L. DeLauro

The Honorable John M. McHugh

The Honorable Gerald B. H. Solomon

The Honorable James A. Traficant, Jr.

House of Representatives

Page 3 GAO/GGD-98-181 Currency Paper Procurement
Executive Summary

Purpose Since 1879, the Bureau of Engraving and Printing (BEP) of the Department

of the Treasury has bought virtually all of the paper used to print U.S.

currency from a single supplier. Concerned about the lack of competition

in the procurement of currency paper, fairness and reasonableness of

prices paid, and possibility of disruptions to paper supplies, Congress

directed GAO, in the 1997 Emergency Supplemental Appropriations Act, to

complete a comprehensive analysis of the “optimum circumstances for

government procurement of distinctive currency paper” and report its

findings to the House and Senate Committees on Appropriations. GAO

received three other requests for a review of the procurement of currency

paper. To fulfill the mandate and the requests, GAO focused on the

following objectives:

• Have BEP’s efforts to encourage competition for procuring currency paper

been effective?

• Have prices paid for currency paper been fair and reasonable, and has the

quality of the paper been ensured?

• Is there potential for disruption to the U.S. currency paper supply from

BEP’s reliance on a single supplier?

Background BEP, a bureau of the Department of the Treasury, buys currency paper

from the private sector and prints the nation’s currency at production

facilities in Washington, D.C., and Ft. Worth, Texas. In recent years, the

currency paper contract has been about $75 million per year. The

Department of the Treasury oversees BEP’s production of currency. BEP

reports to the Secretary of the Treasury through the U.S. Treasurer who is

consulted on policy issues affecting BEP and serves as the national

spokesperson on such issues as currency redesign. The U.S. Secret

Service, another Treasury bureau, works with BEP in assessing the security

of BEP’s money production facilities and works with it on currency

redesign. The Federal Reserve sets monetary policy for the nation and

obtains new currency from BEP and distributes it to the public through

depository institutions. In 1997, the Federal Reserve ordered 9.6 billion

currency notes of various denominations from BEP, at an estimated

production cost of $383 million.

For the last 119 years, Crane & Co., Inc., (Crane) of Dalton, Massachusetts,

has supplied paper for U.S. currency. It currently supplies the three types

of cotton paper being used. The first type, distinctive currency paper, does

not have any security thread or watermark and is used to print all 1- and

2-dollar notes. The second type contains a security thread and is currently

Page 4 GAO/GGD-98-181 Currency Paper Procurement
Executive Summary

used for 5-, 10-, and 20-dollar notes. The third type, new currency design

paper with a watermark and security thread, was introduced in 1995 and is

used for the newly redesigned 100-, 50-, and 20-dollar notes. The newly

redesigned 20-dollar notes are scheduled to be put into circulation later

this year. BEP plans to use this new currency design paper for newly

redesigned 5- and 10-dollar notes next year. In addition, Treasury has

initiated a study to project the future demand for currency that it expects

to be completed by November 30, 1998.

The procurement of currency paper is subject to an appropriations

limitation, called the Conte Amendment, enacted in December 1987 and

set forth at 31 U.S.C. § 5114 note. In effect, the Conte Amendment requires

that distinctive paper for U.S. currency and passport paper be

manufactured in the United States and prohibits the purchase of currency

and passport paper from a supplier owned or controlled by a foreign entity

unless the Secretary of the Treasury determines that no domestic source

exists. The procurement of currency paper is subject to another statutory

limitation, set forth at 31 U.S.C. § 5114, which prohibits the Secretary of

the Treasury from entering into a contract in excess of 4 years for

manufacturing distinctive currency paper.

The United States’ reliance on a single source for currency paper is not

unique; most of the other G-7 nations2

 also rely on single domestic

suppliers for their banknote paper.

Results in Brief The optimum circumstances for the procurement of distinctive currency

paper would include an active, competitive market for such paper, where a

number of responsible sources would compete for BEP’s requirements.

However, these circumstances have not existed because of the unique

market for currency paper and some statutory restrictions. BEP has been

aware of the need to increase competition and has made some efforts

recently to do so in areas under its control. However, BEP must procure

currency paper within the current statutory framework, which limits

currency paper contracts to 4 years, prohibits production of currency

paper outside of the United States, and prohibits purchase of currency

paper from foreign-owned or controlled entities. Of the 20 paper

manufacturers that responded to GAO’s survey, 12 said they were interested

in and have the capability now, or could be made capable in the near

future, of supplying at least part of BEP’s currency paper needs if existing

statutory requirements and some of BEP’s solicitation terms were changed.

2

The other G-7 nations are Canada, England, France, Germany, Italy, and Japan.

Page 5 GAO/GGD-98-181 Currency Paper Procurement
Executive Summary

Seven of the 12 are domestic paper manufacturers, and 5 are located in

foreign countries.

Although the long-term relationship between BEP and Crane has

historically resulted in quality currency paper, BEP was unable to

determine that it had obtained fair and reasonable prices for 13 of the 17

contract actions awarded from 1988 to 1997. BEP sometimes accepted

prices even though it was unable to determine that they were fair and

reasonable because it had no other source for currency paper. GAO

believes that BEP’s assessments of the fairness and reasonableness of

Crane’s proposed prices were hampered by a number of factors, including

the lack of market prices for currency paper and the limited analyses of

proposed costs and prices it performed, especially on earlier contracts in

GAO’s sample. In addition, certain BEP practices, such as understating the

quantities of currency paper needed, caused, or may have caused, the

government to pay more for currency paper than it should have.

As the government’s agent for acquiring currency paper, BEP is responsible

for ensuring that the government’s supply of paper is not disrupted.

Although the potential for disruption in the supply of currency paper

exists, there have been no such disruptions. However, for many years,

because BEP did not maintain a reserve inventory of paper to provide for

contingencies, it was more vulnerable to adverse consequences if a

disruption had occurred and was at a disadvantage in its contract

negotiations because it lacked an alternative source for currency paper.

BEP has recently been purchasing paper to build a 3-month reserve supply

and, under the Conte Amendment, could buy paper from a foreign source

if no domestic source exists.

Principal Findings

Factors That Have

Affected Competition

Obtaining competition in currency paper procurement is challenging,

partly because of the uniqueness of the currency paper, which requires a

relatively large investment in capital equipment. In addition, special

statutory provisions govern the acquisition of currency paper, which

provide a 4-year limit to contracts for the manufacture of currency paper,

require that it be manufactured in the United States, and prohibit the

purchase of currency paper from foreign-owned or controlled entities.

Page 6 GAO/GGD-98-181 Currency Paper Procurement
Executive Summary

Treasury and BEP completed studies in 1983 and 1996 to determine what it

would take to encourage competition for procuring currency paper. The

studies identified the following elements that have affected competition,

the first three of which could be addressed in part by BEP: (1) the high cost

of the initial capital investment to build or retrofit a plant to produce

currency paper, (2) an inadequate start-up period to meet specified paper

deliveries, (3) the absence of a guaranteed minimum production

commitment sufficient to cover the cost of constructing and equipping a

plant, and (4) the ownership and control provision in the Conte

Amendment.

Twelve of the 20 paper manufacturers responding to GAO’s survey of 30

cotton paper manufacturers who said they are capable now, or could be in

the near future, of supplying at least part of BEP’s currency paper needs

also said that they would be interested in supplying currency paper to BEP

if certain conditions were met. Nine of the 12 said that the length of

currency paper contracts would have to be more than 4 years so that they

could recover the necessary capital investment, or BEP would have to offer

to finance the capital equipment cost. Six of the 12 said the ownership and

control provision of the Conte Amendment would have to be relaxed. Five

of the 12 said the amount of start-up time allowed to start delivering the

paper had to be longer than BEP has provided in the past.

BEP has recently taken steps to stimulate competition in areas under its

control. For example, its latest solicitation provides for up to a 4-year

performance period with multiple-award scenarios that allow offerors to

submit an offer on various-sized lots. The solicitation also provides that

BEP will consider “innovative acquisition and financing arrangements”

proposed by offerors and up to 24 months for a start-up period, although

any required start-up period is to be deducted from the 4-year production

period.

Other agencies have used other options for promoting competition that

BEP has not been successful with, such as creating a second supplier. Most

of the other G-7 nations rely on single domestic suppliers for their

banknote paper.

BEP Has Ensured Quality

but Has Not Demonstrated

That It Has Obtained Fair

and Reasonable Prices

BEP said that Crane has been a reliable source for currency paper and has

not missed a paper delivery in over 100 years. Nevertheless, BEP has had

problems negotiating prices with Crane. GAO’s review of BEP’s currency

paper contracts from 1988 to 1997, which included 5 contracts consisting

Page 7 GAO/GGD-98-181 Currency Paper Procurement
Executive Summary

of 17 procurement actions, showed that BEP determined the price to be fair

and reasonable for 4 actions and was unable to determine that the prices

for 5 actions were fair and reasonable. BEP did not reach agreement with

Crane but used Crane’s interim prices on the remaining eight actions. The

interim prices were subsequently reduced about 4 percent by an arbitrator,

and Crane returned $12.7 million to BEP. A primary disagreement between

BEP and Crane has centered on Crane’s profit rates. Recently, BEP agreed to

higher profit levels on the premise that the supplier’s investment in capital

equipment would reduce labor costs and the government would benefit

through lower prices and improved quality. However, BEP’s procurement

records did not reflect any data as to how the prices would be lower or

how the government would otherwise benefit.

Determining the fairness and reasonableness of currency paper prices is

challenging for a number of reasons, including the lack of a domestic

market against which to compare prices and the lack of information on

currency paper prices in foreign countries. To determine whether prices

were fair and reasonable for most of the contracts GAO reviewed, BEP

therefore relied primarily on reviewing (1) costs questioned by

government audits of Crane’s price proposals and (2) Crane’s proposed

profits. The audits and analyses of proposed profits gave BEP a basis from

which to make its determinations and to raise concerns about proposed

prices and profits. However, BEP has not obtained audits of Crane’s

estimating system, and many audits of cost proposals that were requested

pointed out problems in Crane’s cost accounting system. In addition, until

recently, BEP’s analyses of Crane’s proposed costs were limited in scope; it

generally did not do price analyses; and its analyses of profit, in some

cases, were incomplete.

Unrelated to the issue of fair and reasonable prices, GAO identified three

other BEP business practices that caused or may have caused the

government to pay more for currency paper than it should have. First, BEP

significantly understated the quantities of currency paper it needed, which

sometimes resulted in it paying a higher price than it should have. Second,

it did not even out the quantities of paper it ordered over time, causing

inefficiencies in its contractor’s operations. Third, BEP did not obtain

royalty-free data rights for the security thread used in its currency paper.

BEP Is Building an

Inventory of Currency

Paper as a Contingency

No disruption in the supply of currency paper has occurred to date.

Nonetheless, BEP has been vulnerable to such disruptions and in a weak

negotiating position because it did not have a second source for currency

Page 8 GAO/GGD-98-181 Currency Paper Procurement
Executive Summary

paper or have a reserve inventory of currency paper if negotiations were

to require more time than expected. BEP continued to buy paper from

Crane when BEP’s contracting officers were unable to determine whether

the prices were fair and reasonable. Although the Conte Amendment

provides relief to BEP in that it allows BEP to obtain currency paper from a

foreign source if no domestic source exists, BEP officials said the foreign

sources would require at least 3 months to deliver currency paper. BEP

recently decided to change its “just-in-time” approach to one of

maintaining an inventory with a 3-month supply of all three types of

currency paper. As of May 1998, BEP officials reported that it has achieved

its inventory goals with the exception of the currency paper required for

the newly redesigned 20-dollar note, which BEP expects to reach during

calendar year 1999.

Recommendations to

the Secretary of the

Treasury

To strengthen BEP’s capacity to ensure fair and reasonable prices, GAO

recommends that the Secretary direct that BEP improve its procurement

practices in the areas of oversight and audit of the contractor’s cost

accounting and estimating systems, improved analysis and documentation

of the basis for acceptance of prices and profits, and post-award auditing.

In addition, GAO recommends that the Secretary ensure that in all future

currency paper procurements, solicitations more accurately reflect the

expected amounts of paper needed and orders are placed for paper

quantities that permit supplier(s) to maintain a steady production level

and minimize the equipment they have to acquire.

Matters for

Congressional

Consideration

To assist the Secretary in obtaining competition from domestic sources,

Congress may wish to consider lengthening the 4-year limit for currency

paper contracts to give potential offerors a longer time to recover their

capital investments. If adequate price competition among two or more

suppliers can be achieved, concerns over whether the prices paid are fair

and reasonable should be reduced.

Finally, because BEP’s past efforts to encourage domestic competition for

currency paper have been unsuccessful and future efforts are uncertain,

and because BEP has been unable to determine that it obtained fair and

reasonable prices from the current supplier in some past procurements,

GAO has concluded that BEP may need additional authority to protect the

government’s interests in obtaining currency paper. Specifically, GAO

concluded that Congress may want to consider revising the Conte

Amendment, which allows the Secretary of the Treasury to obtain

Page 9 GAO/GGD-98-181 Currency Paper Procurement
Executive Summary

currency paper from a foreign-owned source only if no domestic supplier

is available, to permit the Secretary to obtain currency paper from a

foreign-owned source on a temporary basis if it is determined that no

domestic supplier will provide paper at fair and reasonable prices. Such a

provision should improve the likelihood that fair and reasonable prices

could be obtained.

Agency and

Contractor Comments

GAO provided copies of a draft of this report to the Chairman, Board of

Governors of the Federal Reserve System; BEP; the Department of the

Treasury; and Crane for comment. GAO received written comments from

BEP that included input from Treasury (see app. VI), written comments

from Crane (see app. VII), and oral comments from the Federal Reserve.

BEP and Crane also provided technical comments, which are incorporated

in appropriate sections throughout the report. GAO’s summary of agency

and Crane’s comments and GAO responses are included at the end of

chapter 5, and GAO’s detailed responses to Crane’s comments are in

appendix VII.

The Federal Reserve said GAO’s analysis and recommendations were

reasonable. BEP emphasized its compliance with the Federal Acquisition

Regulation in the award of the five contracts GAO reviewed and generally

disagreed with GAO’s proposed recommendations or said action had

already been initiated. Crane said GAO’s proposed recommendations to BEP

to encourage competition have already been adopted and no further action

was necessary. Crane agreed that the 4-year limit on currency paper

contracts could be lengthened but disagreed that consideration be given to

revising the Conte Amendment. Crane also said its prices were fair and

reasonable.

GAO considered BEP’s and Crane’s views, made some modifications to

reflect these views, but believes that additional congressional action to

encourage competition and additional congressional and Treasury actions

to ensure prices are fair and reasonable are appropriate. GAO’s review did

not focus on compliance issues. Although GAO did not determine whether

prices were fair and reasonable because this is BEP’s responsibility, GAO

noted that BEP’s contracting officers were unable to make this

determination in 13 of 17 contracting actions GAO reviewed, primarily

because BEP considered Crane’s profits high.

Page 10 GAO/GGD-98-181 Currency Paper Procurement
Page 11 GAO/GGD-98-181 Currency Paper Procurement
Contents

Executive Summary 4

Chapter 1 

Introduction

14

Objectives, Scope, and Methodology 20

Chapter 2 

Several Factors

Resulted in Limited

Competition

22

Competition Is the Optimum Circumstance for the Procurement

of Currency Paper

22

BEP Has Identified Factors Inhibiting Competition 22

BEP Did Not Obtain Competition for Currency Paper Contracts

Awarded From 1988 to 1997

23

Paper Manufacturers Report That Competition Continues to Be

Inhibited

24

BEP Has Not Successfully Obtained Alternative Sources for

Currency Paper

31

Chapter 3 

BEP Has Ensured

Quality but Has Not

Demonstrated That It

Has Obtained Fair and

Reasonable Prices

33

BEP Has Generally Received Quality Paper 33

BEP Used Limited Cost and Price Analysis 34

Uneconomical Procurement Practices 38

Chapter 4 

BEP Is Now Building

an Inventory of

Currency Paper as a

Contingency

41

Chapter 5 

Conclusions and

Recommendations

43

Recommendations to the Secretary of the Treasury 45

Matters for Congressional Consideration 46

Agency and Crane & Co. Comments 46

Appendixes Appendix I: Objectives, Scope, and Methodology 52

Page 12 GAO/GGD-98-181 Currency Paper Procurement
Contents

Appendix II: Synopsis of Six Paper Contracts Reviewed 56

Appendix III: Interests of Paper Manufacturers Responding to

GAO’S Survey

57

Appendix IV: GAO’s Paper Manufacturers Survey 59

Appendix V: Prices for Currency Paper on Five Contracts GAO

Reviewed

64

Appendix VI: Comments From the Department of the Treasury

and the Bureau of Engraving and Printing

65

Appendix VII: Comments From Crane & Co. 71

Appendix VIII: Major Contributors to This Report 124

Tables Table 2.1: Selected Terms of BEP Currency Paper

Contracts/Solicitations for 1988 to 1997

24

Table 2.2: Factors Affecting Competition Identified by 12 Paper

Manufacturers Interested in BEP Contracts

25

Table III.1 Paper Manufacturers Participating in GAO’s Currency

Paper Survey

57

Table II.1: Per Sheet Prices of Currency Paper Ordered for Five

Contracts GAO Reviewed

64

Abbreviations

BEP Bureau of Engraving and Printing

CAP Contractor Acquired Property

DCAA Defense Contract Audit Agency

DOD Department of Defense

FAR Federal Acquisition Regulation

IG Inspector General

Page 13 GAO/GGD-98-181 Currency Paper Procurement
Chapter 1 

Introduction

Concerns about the procurement of currency paper resulted in Congress

including in the 1997 Emergency Supplemental Appropriations Act a

requirement that we complete a comprehensive analysis of the “optimum

circumstances for government procurement of distinctive currency paper”

and report our findings to the House and Senate Committees on

Appropriations. In the conference report accompanying the appropriations

bill,3

 the Conference Committee expressed concern over the fact that the

Bureau of Engraving and Printing (BEP) of the Department of the Treasury

has bought virtually all of its paper for the nation’s currency from a single

supplier for over 100 years. The Conference Committee directed that we

report on any limitations on competition in currency paper procurement

and possible alternatives to the way BEP has been buying the paper, the

fairness and reasonableness of prices paid for the paper, the potential for

disruption of the availability of currency paper from BEP’s reliance on a

single supplier, and other matters.

In June 1997, the Chairman of the House Government Reform and

Oversight Committee asked that we also report our findings to that

Committee because of its interest in federal procurement matters, and

Senator Lautenberg requested that we report our findings to his office as

well. In September 1997, 16 members of Congress informed us of their

interest in our analysis and expressed their opinion that a review of the

potential benefits and drawbacks of a single-supplier relationship would

be appropriate.

Several Agencies Are

Involved With the

Acquisition of Currency

Paper

BEP buys currency paper from the private sector. It then prints the nation’s

currency at production facilities in Washington, D.C., and Ft. Worth,

Texas. In recent years, currency paper purchases have been about

$75 million per year. Before 1861, state-chartered private banks issued

paper money, and the federal government produced only coins. Partly

because of the need to finance the Civil War and a shortage of coins,

Congress authorized the Secretary of the Treasury to have notes engraved

and printed by private bank note companies in 1862. The actual printing of

currency notes by Treasury employees began in 1863. In 1869, Congress

authorized BEP to produce currency notes.

The U.S. Secret Service, another Treasury bureau created in 1865, is also

involved in currency paper matters. The mission of the Secret Service

includes protecting the President and Vice President, their families, and

visiting foreign dignitaries; and enforcing laws relating to U.S. money and

3

H.R. Report No. 105-119, 105th Cong., 1st Sess., at 108-110 (1997).

Page 14 GAO/GGD-98-181 Currency Paper Procurement
Chapter 1 

Introduction

securities, as well as those relating to electronic funds transfer and credit

card fraud. The Secret Service works with BEP in assessing the security of

the BEP’s money production facilities and works with it on currency

redesign.

The Department of the Treasury performs four basic functions:

formulating and recommending national economic, financial, tax, and

fiscal policies; serving as a financial agent for the U.S. government;

enforcing laws under the jurisdiction of Treasury bureaus; and overseeing

the production of coins and currency. BEP reports to the Secretary of the

Treasury through the U.S. Treasurer and the Assistant Treasury Secretary

for Management and Chief Financial Officer. Among other responsibilities,

the U.S. Treasurer is consulted on policy issues affecting BEP, is a member

of Treasury’s Advanced Counterfeit Deterrence Committee, and serves as

a spokesperson to the public for BEP on issues such as currency redesign.

In addition to Treasury, the Federal Reserve is involved in currency paper

matters. The Federal Reserve sets monetary policy for the nation and

obtains new currency from BEP and distributes it to the public through

depository institutions. The Federal Reserve banks also identify

counterfeit currency and destroy currency that is unfit for circulation. In

1997, the Federal Reserve ordered 9.6 billion currency notes of various

denominations from BEP at an estimated production cost of $383 million

(which includes the $75 million currency paper cost).

BEP Has Relied Primarily

on a Single Supplier for

Over 100 Years

According to BEP officials, virtually all of the paper used in currency has

been bought from a single supplier, Crane & Co., of Dalton, Massachusetts,

since 1879. According to a 1983 Treasury/BEP study on currency paper

procurement, during the 1960s, BEP attempted to develop a second source

of paper by contracting with Gilbert Paper in Wisconsin for about

3 percent of its annual requirements. This supplier declined to submit an

offer on subsequent procurements of currency paper because its prices for

a portion of the BEP’s needs were not competitive with Crane’s prices for

the entire BEP currency paper requirement. The study also stated that BEP

endeavored again in 1982 to encourage competition when it issued a

solicitation that would have split the paper requirement among two or

more suppliers. This effort also failed because Crane offered a

substantially lower price, according to the study.

In the early 1980s, a British paper manufacturer, Portals, Ltd., sought to

sell currency paper to BEP and built a manufacturing plant in Hawkinsville,

Page 15 GAO/GGD-98-181 Currency Paper Procurement
Chapter 1 

Introduction

Georgia. However, the plant closed several years after it was built without

receiving any paper contracts from BEP.

In 1991 and again in 1995, BEP entered into developmental contracts with

another firm, Crown Vantage Paper Co. (formerly the Communications

Paper Division of the James River Paper Company), which had a paper

mill in New Jersey, to develop currency paper with an advanced

counterfeit deterrence device. However, these efforts did not lead to

another currency paper source because (1) BEP discontinued using the

paper that Crown was developing; and (2) Crown had problems in meeting

BEP’s fold endurance specifications and needed technology that was

available only from foreign sources to be able to meet requirements of the

current solicitation, according to BEP officials.

The Treasury Department and BEP studied the currency paper market in

1983 and in 1996 in an effort to increase competition. These studies

identified a limited number of firms capable of producing the cotton/linen

fiber paper (also called “rag” paper). Treasury/BEP reported that the rag

paper industry is an old and stable industry, characterized by 15

independent paper mills producing about 90 percent of the domestic rag

paper capacity. In addition to the domestic producers, Treasury/BEP

identified a number of foreign suppliers. Treasury/BEP identified a number

of firms, both domestic and foreign, capable of producing currency paper,

some of whom might be interested in furnishing all or part of BEP’s needs.

For security reasons, Treasury/BEP and the Secret Service thought

purchasing currency paper produced offshore would be problematic.

Treasury/BEP also identified foreign firms interested in joint venturing with

domestic firms to supply currency paper from locations in the United

States but concluded that the capital investment required would be too

costly for this to be successful. The firms interviewed by Treasury/BEP

indicated that significant BEP subsidies for capital investment, long-term

production guarantees, and economic price redeterminations in contracts

would be crucial to any decision to build or retrofit a currency paper plant

in the United States.

The 1996 Treasury/BEP report concluded that rather than invest in

developing alternative source(s) of currency paper, it would be less costly

to work with the long-standing single supplier of paper. However, the

report also concluded that BEP should continue to explore the marketplace

through competitive solicitations to determine if there were viable

alternative sources. The 1996 study also reported that a number of other

Page 16 GAO/GGD-98-181 Currency Paper Procurement
Chapter 1 

Introduction

countries, such as England and Germany, used single domestic sources to

provide paper for the nations’ banknotes.

Applicable Laws Title III of the Federal Property and Administrative Services Act of 1949

(Property Act), as amended,4

 as implemented by the Federal Acquisition

Regulation (FAR),5

 generally governs BEP acquisitions. As expressed in FAR,

part 15, when contracting in a competitive environment, agencies are to

obtain supplies or services from responsible sources at fair and reasonable

prices that result in the best value to the government. To accomplish this,

agencies are directed to use competitive procedures to obtain full and

open competition in most acquisitions above $100,000. The Property Act

provides for several exceptions to full and open competition, one of which

may be used when supplies or services are available from only one

responsible source and no other supplier can satisfy the agency

requirement. Alternatively, an agency may exclude a particular source

from a contract action to establish or maintain an alternative source of

supply. Such an exclusion may be based on a determination that to do so

would increase competition in the longer term and reduce overall cost or

would ensure the continuous availability of a reliable source.

When competitive procedures are used and a market consisting of a

number of responsible sources for the government’s needs exists, the

expected result would be adequate price competition so that an agency

would be likely to obtain supplies at a fair and reasonable price. For

negotiated contracts, the agency must evaluate the reasonableness of the

prices submitted. When there is adequate price competition the agency

should use price analysis. Generally, when there is not adequate price

competition, both price and cost analyses are to be used.6

 If a contractor

insists on a price or demands a profit that the agency’s contracting officer

considers unreasonable during contract negotiations, the contracting

officer is to refer the contract action to a level above the contracting

officer for disposition. This determination may include consideration of

the feasibility of developing an alternative source. In making the

determination, factors such as ensuring the continuous availability of a

reliable source of supplies may outweigh cost considerations. If cost is the

4

41 U.S.C. § 251-266.

5

FAR implements the procurement statutes and provides uniform policies and procedures for

acquisitions by all executive agencies.

6

See chapter 3 for an explanation of the differences between cost and price analysis.

Page 17 GAO/GGD-98-181 Currency Paper Procurement
Chapter 1 

Introduction

major consideration, one of the difficult questions is to what extent the

agency can expect competition to reduce the cost of supplies.

The procurement of currency paper is subject to an appropriations

restriction, called the Conte Amendment, enacted in December 1987 and

set forth at 31 U.S.C. § 5114 note. In effect, the Conte Amendment requires

that U.S. currency and passport paper be manufactured in the United

States and prohibits the purchase of currency and passport paper from a

supplier owned or controlled by a foreign entity unless the Secretary of

the Treasury determines that no domestic source exists. According to the

Conference Report accompanying the Conte Amendment, the requirement

was to enhance the security capabilities of U.S. law enforcement agencies.7

The procurement of currency paper is subject to another statutory

requirement, set forth at 31 U.S.C. § 5114, which prohibits the Secretary of

the Treasury from entering into a contract in excess of 4 years for

manufacturing distinctive currency paper. Although this provision restricts

the length of contracts, according to BEP, the provision originated in 1916

and was enacted to increase the previous 1-year limitation on Treasury

contracts to improve the United States’ ability to purchase linen and ink

pigments from European sources in the event war broke out.

Three Types of Paper Are

Used for U.S. Currency

BEP currently uses three types of paper for U.S. currency. Distinctive

currency paper is used to print all 1- and 2- dollar notes. This paper, which

does not have any security thread or watermark, was used to print all

currency denominations before 1991.8

 A second type of paper is called

distinctive currency paper with security thread. This paper was first

bought in production quantities in 1991 and was originally used for all

denominations above the 2-dollar note; but it is now used only for 5-, 10-,

and 20-dollar notes. The third type of paper, called new currency design

paper with a watermark and security thread, was introduced in 1995 and is

being used to print the redesigned 100- and 50-dollar notes that are

currently in circulation and the newly redesigned 20-dollar note that is

scheduled to be introduced into circulation in the fall of 1998. BEP plans to

use this paper for newly redesigned 5- and 10-dollar notes next year.

7

H.R. Report No. 100-498, 100th Cong., 1st Sess., at 1177-1178 (1987).

8

Security thread is a thin, clear, polyester strip placed in the paper during its manufacture. The thread

contains an identifiable printed pattern and is not observable in reflected light, but it is observable in

transmitted light and cannot be reproduced by copiers. Watermarks are images of the portrait on the

currency paper and are made when the paper is formed by varying the density of the paper. The

watermark is visible in transmitted light. Both security threads and watermarks are examples of

anticounterfeiting features and are difficult for counterfeiters to reproduce.

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Until recently, the manufacturing and purchasing of currency paper was

relatively simple because only one type of paper was used to print all U.S.

currency. Common paper manufacturing equipment was used in the

process. BEP annually contracted for estimated quantities of paper needed

and subsequently ordered it to print the Federal Reserve’s currency

requirements. Federal Reserve currency needs, in turn, were driven by the

requirement to replace soiled currency removed from circulation and

provide for increased currency demands.

The threaded currency paper and the threaded currency paper with a

watermark were developed as anticounterfeit deterrents. According to the

Secret Service, counterfeiting is becoming more of a problem as electronic

technologies advance and become available to the public. In the past,

counterfeiters had to have access to a printing press to counterfeit money.

Today, counterfeiters use color copiers, digital scanners, personal

computers, and ink jet color printers to replicate money. As a result,

counterfeiters need less skill than before and have more access to

machinery capable of counterfeiting, and the cost to counterfeit is much

less. For example, the Secret Service said that in fiscal year 1995, the

Federal Reserve discovered $32 million in counterfeit currency that was

passed on to the public, of which 0.5 percent was made with computer

equipment. In fiscal year 1998, the Secret Service expects that $45 million

to $50 million of counterfeit currency will be passed, and 40 percent of it is

expected to have been made with the use of computer technologies.

Using more sophisticated paper is one method of making our currency

more difficult to counterfeit. Other nations and BEP are also considering

other materials, such as plastic, on which to print currency to increase its

durability and anticounterfeiting features.

Throughout the world, currency paper is produced using two processes,

fourdrinier and cylinder mold. In both processes, cotton fibers and other

materials are mixed into a pulp with water and formed into a slurry, which

is spread on a wire mesh where the water content is greatly reduced, and

formed into paper. In the fourdrinier process, which is used by Crane for

all BEP currency and is also used for the vast majority of all types of paper

produced, including newsprint, the slurry is sprayed onto a large

horizontal wire cloth. As the slurry moves along horizontally, water is

drained through the wire cloth, and the fibers bind together into a sheet

formation. In the cylinder mold process, used for many European and

other nations’ banknotes, a fine wire cloth is stretched around a cylinder,

which serves as a strainer and rotates within a vat containing the pulp and

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Introduction

water. As the cylinder is rotated, water is removed from the inside of the

cylinder and a layer of fibers is formed on the outside.

Objectives, Scope,

and Methodology

The overall objective of our review as stated in the 1997 Emergency

Supplemental Appropriations Act was to analyze the “optimum

circumstances for government procurement of distinctive currency paper.”

However, because that objective was broad and numerous congressional

parties were interested in this review, we met with the interested

Members’ and committees’ offices to determine the specific issues they

wanted addressed as well as approaches to address those issues. Although

we identified a number of concerns and issues, they are all covered under

the following three objectives:

• Have BEP’s efforts to encourage competition for procuring currency paper

been effective?

• Have prices paid for currency paper been fair and reasonable and has the

quality of the paper been ensured?

• Is there potential for disruption to the U.S. currency paper supply from

BEP’s reliance on a single supplier?

To address these objectives, we reviewed federal procurement statutes

and regulations and specific laws related to currency paper. We reviewed

various indicators of the competitiveness of the currency paper market,

such as the number of paper manufacturers who said they were capable of

supplying currency paper to BEP, and the factors that make it difficult for

them to provide currency paper. We also reviewed BEP studies of the

currency paper market and obtained information from other federal

agencies, such as the Secret Service and the Department of Defense (DOD).

To address the first two objectives, we reviewed BEP’s currency paper

procurement files for paper contracts in effect from 1988 to 1997, analyzed

how BEP bought currency paper during this period, and compared certain

BEP actions with requirements in the FAR and applicable laws. We surveyed

30 domestic and foreign cotton paper manufacturers on their interests in

supplying currency paper and factors that prevented them from competing

for BEP currency paper contracts, and we surveyed other G-7 nations on

how they procured banknote paper. We interviewed numerous officials of

BEP, Treasury, the Secret Service, the Federal Reserve, Crane, and other

agencies. We also interviewed several of the domestic and foreign cotton

paper manufacturers that were included in our survey.

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To help us analyze the fairness and reasonableness of prices paid by BEP

for currency paper, we analyzed how BEP used audits of the single

supplier’s costs and proposals in its negotiations and evaluated whether

BEP had an appropriate basis for determining the fairness and

reasonableness of prices it paid for currency paper over the last 10 years.

We toured paper mills of two cotton paper manufacturers, as well as BEP

printing facilities in Washington, D.C., and Ft. Worth, TX, to observe how

paper was produced and currency was printed.

To address the third objective, we interviewed officials at BEP, the Federal

Reserve, and Crane; reviewed BEP’s contingency plan for critical materials;

and asked other G-7 nations what type of contingency reserves of

banknote paper they maintained.

We did our work in accordance with generally accepted government

auditing standards from July 1997 to August 1998. We requested comments

on a draft of this report from the Chairman, Board of Governors of the

Federal Reserve System; the Secretary of the Treasury; and the Chief

Executive Officer of Crane. We received written comments from BEP’s

Acting Director that incorporated comments from the Treasury

Department, written comments from Crane, and oral comments from the

Federal Reserve. BEP’s and Crane’s comments are reprinted in appendixes

VI and VII, respectively. Our summary of agency and Crane’s comments

and GAO’s responses are discussed at the end of chapter 5. BEP and Crane

also provided technical comments, which have been incorporated as

appropriate in the report. A more detailed discussion of our objectives,

scope, and methodology is contained in appendix I.

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Competition

The optimum circumstances for the procurement of distinctive currency

paper would include an active, competitive market for such paper where a

number of responsible sources would compete for BEP’s requirements.

However, this is currently not the case because of the unique market for

currency paper and some statutory restrictions. After over 100 years of

relying on a single source, Treasury and BEP completed studies in 1983 and

1996 on what it would take to encourage competition for procuring

currency paper, and BEP recently took steps to encourage competition in

matters under its control. However, several paper manufacturers told us

that they would compete for BEP paper contracts if additional changes

were made, such as allowing foreign-owned companies to compete to

supply currency paper and extending the length of contracts to more than

4 years. These changes would require existing statutory limitations to be

amended. There are also other options for obtaining competition that are

allowed under procurement laws and have been used by other federal

agencies.

Competition Is the

Optimum

Circumstance for the

Procurement of

Currency Paper

When the government purchases common commercially available goods

and services, obtaining competition is relatively easy. However, when the

government purchases goods that serve only the government’s needs,

competition is less likely to occur. In currency paper procurements,

obtaining competition is challenging, partly because there are few cotton

paper manufacturers, currency paper is unique to the governments’ needs,

and a large investment in capital equipment is required.

BEP Has Identified

Factors Inhibiting

Competition

Factors that inhibited competition were identified in the 1996 Treasury/BEP

currency paper study. These factors include (1) the cost of the initial

capital investment to build or retrofit a plant to produce currency paper;

(2) the short start-up period required to comply with specified paper

deliveries; (3) the risks and uncertainties inherent in entering a limited,

government-controlled market; and (4) the restriction on acquiring

distinctive currency paper from foreign-owned or controlled companies

contained in the Conte Amendment. Potential suppliers told BEP that it

would take between $20 million and $150 million to build or retrofit the

necessary plant and equipment to provide currency paper to BEP; and that

because of the risks inherent in entering a limited, government-controlled

market, some form of financial assistance from BEP would be necessary.

The 1996 study also cited delivery requirements, usually requiring delivery

starting at or shortly after contract award, as a significant inhibitor, given

that manufacturers said it takes 1 to 2 years to become operational.

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The 1996 Treasury/BEP study also found that the absence of a guaranteed

minimum production commitment sufficient to cover the cost of

constructing and equipping a plant was an inhibitor. Potential suppliers

told Treasury/BEP they would require a long-term commitment to

manufacture a minimum of 40 percent of BEP’s requirements in order to

begin production. According to BEP, Treasury currently has a study under

way aimed at projecting the future demand for currency. The study is

being done by representatives from Treasury, BEP, the Mint, and the

Federal Reserve. The study is expected to be done by November 30, 1998.

BEP Did Not Obtain

Competition for

Currency Paper

Contracts Awarded

From 1988 to 1997

BEP awarded five separate contracts to Crane for currency paper from 1988

to 1997. Two of these contracts, 95-23 and 97-10, were awarded to Crane

on a sole-source basis. The other three contracts, 88-205, 91-18, and 93-14,

were also awarded to Crane because BEP did not receive any other offers

in response to its solicitations. Additionally, in accordance with the Conte

Amendment, BEP was precluded from awarding a currency paper contract

to foreign-owned or controlled firms. Although some matters affecting

competition in the currency paper market are beyond BEP’s control, BEP’s

solicitations for currency paper before 1997 did not attempt to encourage

competition by using means within its control. As shown in table 2.1, some

of BEP’s solicitations contained a 1 or 2 year production period and

required potential suppliers to start providing currency paper shortly after

contract award. Although offerors can always request that financial

assistance be provided, BEP did not offer to provide potential offerors

financial assistance for capital equipment in its solicitations.

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Table 2.1: Selected Terms of BEP Currency Paper Contracts/Solicitations for 1988 to 1997

Contracts/solicitations

Terms of solicitation 88-205 91-18 93-14 95-23 97-10 97-13a

Length of contract 2 years with two

1- year options

1 year with

three 1- year

options

1 year with four

1- year options

1 year with two

6- month options

2 years 4 years

Amount of start-up time

provided

None None None 30 days 30-60 days Up to 24 months

Sole source or

Competitive Solicitation (CS)

CS CS CS Sole

Source

Sole

Source

CS

Financial assistance None offered None offered None offered None offered None offered Proposals

invitedb

aThis is a solicitation for which BEP plans to award a contract in December 1998.

bThe solicitation contained a statement that offerors would be free to propose “innovative

acquisition and financing arrangements.”

Source: BEP 1988 to 1997 currency paper procurement files.

In 1997, BEP made significant changes to its solicitation for currency paper.

Solicitation 97-13, issued in May 1997, provided for up to a 4-year contract

with multiple award scenarios that allowed competitors to submit an offer

on various-sized lots and it also provided up to 24 months for a start-up

period, under certain award scenarios. Because of BEP’s concerns about

violating the 4-year limit on contracts for manufacturing currency paper,

the solicitation provided that any required start-up period would be

deducted from the 4-year production period. In addition, solicitation 97-13

also provided that BEP will consider “innovative acquisition and financing

arrangements” proposed by offerors.

Paper Manufacturers

Report That

Competition

Continues to Be

Inhibited

Although BEP has taken actions to encourage competition in solicitation

97-13, such as providing for a longer contract performance period than in

past solicitations and allowing a 24-month start-up time, some paper

manufacturers responding to our survey told us there were other matters

that prevented them from competing for the currency paper contract.

Some manufacturers said they need an even longer guaranteed contract

period, or financial assistance provided by the government, to recover the

capital investment required to purchase the equipment to produce the

paper. Several paper manufacturers also would like to be able to enter into

joint ventures with a foreign paper manufacturer to produce currency

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paper, but they are unable to do so because of the Conte Amendment, as

interpreted by Treasury.9

Twelve of the 20 paper manufacturers responding to our survey of 30

worldwide firms said that they would be interested in supplying currency

paper to BEP and are capable now, or would be in the near future, of

supplying at least part of BEP’s currency paper needs, but several matters

prevent them from competing. Some of these matters are the same as

those identified in BEP’s 1996 currency paper study. None of the 12

interested paper manufacturers said that the size of the currency paper

market would make it difficult for them to compete. Table 2.2 summarizes

the factors inhibiting competition reported by the 12 paper manufacturers

that said they would be interested in supplying currency paper to BEP.

Table 2.2: Factors Affecting

Competition Identified by 12 Paper

Manufacturers Interested in BEP

Contracts

Factors affecting competition

Number of paper manufacturers

responding

The length of BEP manufacturing contracts

is too short to recover necessary capital

investments. 9

The requirement that joint ventures with

foreign firms must be 90 percent U.S.

owned or controlled. 6

Lack of financial assistance by BEP for

capital investment. 6

BEP’s allowed start-up time is too short. 5

Security requirements for the manufacturing

process. 3

The technology required to incorporate

anticounterfeiting features in currency paper. 3

License or royalty payments to holder(s) of

anticounterfeiting features. 3

Source: 1997 GAO survey of cotton paper manufacturers.

Length of Currency Paper

Contracts

Nine of the 12 interested manufacturers said the performance period in

BEP’s currency paper contracts has been too short to recover the necessary

capital investment. One paper manufacturer said that it is not possible to

recover start-up costs in less than 5 years. A second domestic paper

manufacturer told us the major reason it did not submit a proposal was

that the contract period was too short to recover capital investment, and it

believed it was unlikely that this situation could be improved. As a result,

9

As discussed later in this chapter, Treasury interprets the Conte Amendment as precluding it from

entering into any contracts for currency paper production with any entity that is more than 10 percent

foreign-owned or controlled.

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this paper manufacturer decided that continuing its investment in product

development was too risky and decided not to submit a proposal.

According to another domestic paper manufacturer, the amount of capital

investment necessary to meet BEP’s requirements cannot be recovered

through the price of paper sold to BEP over a 2- to 4-year contract. This

paper manufacturer told us that if BEP extends the length of the currency

paper contract to at least 10 years it would consider submitting an offer.

BEP’s currency paper contracts have generally been for 1 to 2 years with

three 1-year options, with the exception of the current solicitation 97-13,

which has a performance period of up to 4 years. By law, the contract term

to purchase U.S. currency paper cannot exceed 4 years. Additionally, U.S.

money order paper contracts are for 5 years; and U.S. passport paper

contracts are for 3 base years, with two 1-year options. Both passport and

money order paper have security features (i.e., watermarks and security

thread) similar to those of currency paper.

Conte Amendment Affects

Competition

The Conte Amendment provides that:

“None of the funds made available by this or any other Act with respect to any fiscal year

may be used to make a contract for manufacture of distinctive paper for United States

currency and securities pursuant to section 5114 of title 31, U.S.C., with any corporation or

other entity owned or controlled by persons not citizens of the United States, or for the

manufacture of such distinctive paper outside the United States or its possessions. This

subsection shall not apply if the Secretary of the Treasury determines that no domestic

manufacturer of distinctive paper for United States currency or securities exists with

which to make a contract and if the Secretary of the Treasury publishes in the Federal

Register a written finding stating the basis for the determination.”10

Although the Conte Amendment itself does not specify ownership and

control requirements, the accompanying Conference Report states that BEP

may not enter into such a contract with an entity if 10 percent or more of

the entity is owned or controlled by a group of foreign persons. In 1995,

the report of the House Appropriations Committee11 that accompanied the

Treasury, Postal Service, and General Government Appropriations Act for

fiscal year 1996 attempted to redefine the intended meaning of the Conte

Amendment. The report stated that a domestic corporation or other entity

is one “created under the laws of the United States or any one of its states

or possessions, and . . . more than 50 percent of [which] is held by United

10Part B of the Conte Amendment contains a similar restriction on passport paper.

11H.R. Report No. 104-183, 104th Cong. 1st Sess., at 22 (1995).

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States citizen(s).” Treasury’s Office of General Counsel concluded in a

March 1997 legal opinion that the 1995 House Appropriations Committee

Report language cannot modify the constraints established in the Conte

Amendment and the contemporaneous explanation of the provision in the

1987 conference report.

As part of our review, the House Appropriations Subcommittee on

Treasury, Postal Service, and General Government asked us to review

Treasury’s position that the Conte Amendment precludes BEP from

entering into a contract for the manufacture of distinctive currency paper

with an entity of which 10 percent or more is owned or controlled by a

foreign company. Because the language designating a 10-percent limitation

on foreign ownership or control is in the 1987 conference report and is not

specified in the statute itself, Treasury’s interpretation is not mandated by

the statute. Nevertheless, in the absence of language in the statute defining

what constitutes foreign ownership and control, it is reasonable for

Treasury to rely on the 1987 conference report as guidance for interpreting

and applying the statutory language. Thus, we believe that Treasury’s

interpretation of the restriction in the Conte Amendment is within its

discretion.

Six of the 12 paper manufacturers we surveyed that were interested in

supplying currency paper stated that their decisions not to respond to BEP

solicitations had been influenced by the Conte Amendment restriction on

foreign ownership. Three of the five foreign paper manufacturers saw this

as an issue. According to one domestic manufacturer, the need to have

90-percent U.S. ownership limits a foreign entity from participating in a

fashion that gives it any kind of financial incentive. One foreign

manufacturer commented that as a foreign paper company, it would want

a larger participation than the 10 percent currently allowed. Similarly, two

domestic paper manufacturers commented to BEP in 1995 that the

restriction on foreign ownership limited their capability to gain access to

the only source of currency paper manufacturing expertise, particularly

for security threads and watermarks, outside of Crane. Of the 12 interested

firms responding to our survey, only 3 foreign firms said they can currently

produce all 3 types of currency paper.

According to BEP, there are four major currency paper manufacturers that

are internationally recognized in currency paper manufacturing and

security. Only one of the four, Crane, is located in the United States. The

other three, Portals Ltd., Papierfabrik Louisenthal, and Arjo-Wiggins, are

located overseas. Portals Ltd., located in the United Kingdom, said it has

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over 300 years of experience in supplying currency paper to the British

government and 40 other countries. Papierfabrik Louisenthal, located in

Germany, has supplied banknote paper to Germany since 1967.

Arjo-Wiggins, located in France, has supplied banknote paper to France

since 1789.

American companies that we surveyed said that under the 90 percent

U.S.-owned or controlled interpretation, they have difficulty attracting the

interest of foreign companies in a joint venture in which their expertise in

currency production could be shared. Similarly, Portals, a foreign-owned

paper manufacturer, told us it built a paper manufacturing facility in

Hawkinsville, GA, in 1980 for two market segments: U.S. currency paper

and high-security documents. According to Portals officials, they had been

visiting BEP for a number of years regarding their interest in providing

upgraded security features for U.S. currency paper. Portals officials stated

that on the basis of the favorable reception from BEP, Portals built the

Hawkinsville mill, which was capable of producing 2,500 tons of paper a

year immediately and had the potential to move quickly up to 10,000 tons

of paper a year. Ultimately, it was the passage of the Conte Amendment

that caused Portals to sell the Hawkinsville mill in 1988, according to

Portals officials.

Reliance on a single domestic supplier for currency paper is not unique to

the United States. In our survey of the other G-7 countries, Germany,

France, and Italy said they restrict their purchases of banknote paper to

suppliers located in their countries. England and Canada said that they do

not restrict their purchases of banknote paper only to suppliers located in

their countries. However, England has historically always purchased its

paper from Portals; and Canada competes both the manufacture of

banknote paper and the printing of the notes. In Japan, the Japanese

government is responsible for producing the paper and printing

banknotes.

Secret Service officials strongly oppose any production of U.S. currency

paper outside the United States because the Secret Service does not have

authority to exercise security oversight of the personnel or plant facility in

a foreign country. The Secret Service further stated that although it may be

able to make agreements allowing for such oversight, a foreign country’s

law could preclude any investigative action or oversight by United States

law enforcement personnel. The Secret Service also pointed out that the

logistics of moving a critical material across borders via a variety of

transportation modes would pose additional security risks. BEP security

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officials told us that they share the same concerns. Secret Service officials

pointed out that they did not believe that the percentage of foreign

ownership would pose a security problem as long as the paper is produced

on U.S. soil. Officials from both the Secret Service and BEP’s Office of

Security stated that because of their concern about a catastrophe, they

would be in favor of having more than one supplier of currency paper, but

they would strongly prefer that suppliers be located in the United States.

We agree that the Secret Service and BEP security officials have valid

concerns about the manufacture of U.S. currency paper outside the United

States. However, there are other components used for currency

production in the United States that are supplied by foreign companies.

For example, BEP prints U.S. currency on Swiss-designed sheet-fed Intaglio

printing presses made by De La Rue Giori; and it buys the sheet currency

inspection system and interim currency inspection system from Giesecke

& Devrient, located in Germany. Currency ink is bought from Sicpa, a

Swiss-owned company, which has facilities in the United States.

Additionally, the Federal Reserve’s high speed currency processing

machines are made in Germany.

High Capital Equipment Cost Six of the 12 interested paper manufacturers we surveyed said that given

the short length of a currency paper contract, the high cost to finance

capital equipment inhibits their ability to compete. Financing

arrangements to assist these manufacturers could involve extraordinary

measures, such as the government sharing in the cost of obtaining the

capital equipment needed to build a currency plant by providing

government-furnished property or by financing contractor acquired

property (CAP).12 According to one domestic manufacturer, a new supplier

would incur significant capital expenditures in order to meet BEP’s

requirements, and the use of CAP would be essential to mitigate the capital

investment needed. According to the 1996 Treasury/BEP study, the

estimated capital investment needed to produce currency paper averaged

$40 million and ranged from a low of $20 million to a high of $150 million,

depending on whether an existing mill could be retrofitted or a new mill

needed to be built. Moreover, the Treasury/BEP 1996 currency paper study

also suggested that government financing of potential contractors’

equipment might be necessary to secure competition for currency paper.

12Under CAP, the government would advance some or all of the funds needed to acquire or construct

needed facilities. This advance would be factored into the evaluation of the price submitted by the

offeror, and the government could recover its CAP payment over the life of the contract through

decreased prices paid for paper it ordered and would have title to the property acquired. FAR allows

the use of CAP as a means to achieve competition but also requires the elimination of any competitive

advantage that this might create.

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In July 1996, BEP posted a draft of solicitation 97-13 on the Internet stating

that BEP would consider the feasibility of providing CAP. However, in

May 1997, Treasury’s former Director of Procurement decided to remove

CAP from the solicitation because, in his view, in the form that it was being

proposed by BEP, CAP would not have increased competition. The Treasury

Procurement Director concluded that a 4-year contract, inclusive of

start-up time, would not allow enough actual production time to generate

sufficient revenues for the contractors to make it worthwhile for them to

risk the substantial investment required to compete, even using CAP.

Treasury recommended that BEP revise solicitation 97-13 to state that

offerors would be free to propose “innovative acquisition and financing

arrangements.”

One interested paper manufacturer told us that the removal of CAP from

the final solicitation and replacement with language that said BEP would

consider “innovative acquisition and financing arrangements” left too

much uncertainty about the capital investment issue for the manufacturer

to proceed with a proposal. Two other interested paper manufacturers

said they would still be interested in competing for the contract without

CAP, if the length of the contract were to be extended to at least 5 years.

Length of Start-Up Period The start-up period historically allowed by BEP is too short, according to

five of the paper manufacturers we surveyed who were interested in

competing for BEP currency paper contracts. One domestic paper

manufacturer said that a short start-up period permits only the incumbent

to submit an offer. This paper manufacturer further stated that the

24-month start-up period allowed by BEP in solicitation 97-13 would result

in the forfeiture of 2-1/2 years of manufacturing, thus providing for less

than the 4-year production period. The paper manufacturer further

believes that the start-up period should be added to the manufacturing

contract, i.e., a 2-1/2 year start-up period followed by a 4-year contract;

otherwise, no paper company would invest in the specialized plant and

equipment that are required to meet the government’s security paper

production needs before the contract is awarded. Another domestic

supplier said that to prepare a facility for currency paper manufacturing

would take 1 to 2 years. As noted previously, current law as interpreted by

BEP restricts the total period for currency paper production contracts to 4

years.

Prior to 1997, BEP required the supplier of currency paper to provide

currency paper immediately or shortly after contract award. The start-up

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Several Factors Resulted in Limited

Competition

period for all distinctive currency paper in solicitation 97-13 is up to 24

months.

Other Factors Mentioned by

Some Paper Manufacturers

The requirements to pay a royalty license to use the data and process for

insertion of the security thread, the security requirements for the

manufacturing process, and the technology required to incorporate

anticounterfeiting features in paper were also cited as factors inhibiting

competition by 3 of the 12 paper manufacturers that were interested. One

paper manufacturer filed a protest with BEP over the security thread

license and other issues relating to the current solicitation. Specifically,

the paper manufacturer stated that the solicitation places potential

offerors, other than the incumbent, in the position of violating a patent

held by Crane if they supply currency paper containing security thread

made to the specifications outlined by BEP. According to this

manufacturer, potential offerors are effectively precluded from providing

distinctive currency paper with security thread and new currency design

paper with watermark and security thread. In solicitation 97-13, BEP stated

that it would provide the security thread as government-furnished

material. However, BEP would have to negotiate with Crane to buy the

security thread.

BEP Has Not

Successfully Obtained

Alternative Sources

for Currency Paper

BEP’s attempts to develop alternative sources in the 1960s and 1980s were

not successful for a variety of reasons, including the following:

• One firm was unable to price its product competitively with BEP’s

traditional supply source for a portion of the currency paper requirement.

• BEP discontinued its use of paper that another firm was developing.

• The firm that had been developing paper that was discontinued needed

technology from a foreign supplier to help it produce other types of paper

that met BEP specifications.

In 1996, BEP studied the possibility of developing a second currency paper

source. It concluded that two sources would probably be more costly than

a single source, but it should continue to explore the marketplace through

competitive solicitations to determine if there were viable alternative

sources. The costs used in the 1996 study were based on an informal

survey of paper producers that asked them how much capital investment

would be required to prepare paper for BEP. For production costs, BEP

assumed that a second producer would incur the same costs as Crane had.

BEP’s analysis showed that a second source, producing about 40 percent of

BEP’s needs, would increase costs of producing paper by at least

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Several Factors Resulted in Limited

Competition

$21 million per year and possibly $37 million per year, depending on the

amount of capital equipment the second producer acquired. However,

BEP’s analysis did not reflect its subsequent decision to accept a higher

profit rate with Crane to compensate for Crane’s investment in capital

equipment, such as it did on the two most recent contract actions with

Crane.

Other agencies have found it advantageous to develop a second source.

DOD officials told us that they have used a strategy referred to as dual

sourcing to develop a second supplier in a sole-source situation for some

weapon systems. For example, according to Air Force officials, dual

sourcing was used to develop a second supplier to purchase engines for

F-16 fighters.

Between 1967 and 1972, with few exceptions, the U.S. Mint has awarded

the contracts for clad material13 to one company. However, the Mint

realized the vulnerability of having only one supplier, and it attempted to

develop additional sources by awarding developmental contracts to firms

that were interested in competing for future clad material contracts.

However, the vendors selected were unable to produce the material at an

acceptable level of quality, according to Mint officials. Although the Mint

did not have much success with developmental contracts, it currently has

more than one supplier, according to Mint officials. Since 1993, the Mint

has purchased clad material from two vendors that share 50 and

45 percent of the contract, respectively. The other 5 percent of the

contract is divided between two developmental contractors. Mint officials

told us that they did not have a developmental contract with the Mint’s

current second supplier, but the second supplier responded to a

competitive solicitation issued in 1993. Mint officials said that having two

suppliers is better than one because competition helped prevent prices of

clad material from rising as rapidly as they would have if there had not

been any competition.

13Clad material consists of different metal alloys bonded together and is used to produce 10-cent,

25-cent, and 50-cent coins.

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BEP Has Ensured Quality but Has Not

Demonstrated That It Has Obtained Fair and

Reasonable Prices

Although the long-term relationship between BEP and Crane has

historically provided quality currency paper, BEP did not generally

demonstrate that it obtained fair and reasonable prices for the contracts,

options, and extensions awarded between 1988 and 1997. To the contrary,

the evidence available in the contract files showed that BEP sometimes

paid what it believed to be too high a price when buying currency paper.

BEP’s contracting officers recommended accepting prices that they could

not determine were fair and reasonable with respect to five contracting

actions because there was no other source for currency paper. BEP would

not accept Crane’s proposed prices for half of the 10-year period covered

by our review. Instead, BEP agreed to pay Crane’s proposed prices as

interim prices. The dispute was eventually settled by an arbitrator. The

major disagreement between BEP and Crane involved profits until recently,

when BEP increased its negotiated profit objectives.14

In determining whether Crane’s proposed prices were fair and reasonable,

BEP relied primarily on audits of Crane’s proposals. However, BEP has not

obtained audits of Crane’s cost estimating system or post-award audits of

some contracts until recently, made little use of other cost analysis

techniques in the earlier contracts in our sample, and made very little use

of price analysis. Further, some of BEP’s procurement practices relating to

the quantities of paper ordered and its failure to obtain royalty-free rights

to the security thread caused, or may have caused, the government to pay

more for currency paper than it should have.

BEP Has Generally

Received Quality

Paper

According to BEP officials, Crane has been a reliable source for paper. BEP

and Crane officials said that a paper delivery to BEP has not been missed in

over 100 years. BEP officials also said that the overall quality of the

currency paper supplied by Crane has been good.

In reviewing the files for currency paper contracts in effect from 1988 to

1997, we found only two references to problems with the paper that Crane

supplied to the government during this period. The first problem involved

bonding of the security thread to the paper. This problem began in 1991

and was due to a change in the adhesive system that was mandated by an

environmental ruling in New Hampshire, where the thread was produced.

BEP gave Crane a waiver to the contract until the problem was solved in

1994. According to BEP, the resolution of this problem created a second

problem, which involved the inability of Crane to meet BEP’s standards for

the folding endurance for the security threads. The folding endurance

14Profit objective is the level of profit that BEP hoped to attain during negotiations.

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BEP Has Ensured Quality but Has Not

Demonstrated That It Has Obtained Fair and

Reasonable Prices

standard specifies how many times paper can be folded before it tears and

is a measure of durability. The problem occurred in 1994, after the thread

bonding adhesion was changed, and it was brought to BEP’s attention by

Crane. BEP granted Crane a waiver from the folding endurance standards

for the contract in effect at the time (95-23) and lowered the standard for

the subsequent contract (97-10).

BEP Used Limited

Cost and Price

Analysis

Of the five contracts awarded from 1988 to 1997, two were awarded on a

sole-source basis to Crane. For the other three contracts, BEP issued

competitive solicitations. Crane was the only company to submit an offer.

In the absence of competition, BEP had to rely on cost and price analyses

to evaluate proposed prices to determine if the prices paid for currency

paper were fair and reasonable. Price analysis is to be used to verify that

the overall price offered is fair and reasonable in comparison with current

or recent prices for the same or similar items. Examples of price analysis

include comparing proposed prices with (1) prices obtained for similar

items through market research, (2) parametric estimates such as dollars

per pound, and (3) previous prices.

Under the Truth in Negotiations Act,15 offerors are required to submit and

certify cost or pricing data to support the reasonableness of individual

cost elements, under certain circumstances, when adequate price

competition does not exist. Separate cost elements and profits are

evaluated to determine how well the proposed costs represent what the

costs of the contract should actually be, assuming reasonable economy

and efficiency. Examples of cost analysis include the comparison of costs

proposed for individual cost elements to historical costs and the

evaluation of the need for and reasonableness of proposed costs.

Contracting officers are to determine whether a proposed price is fair and

reasonable on the basis of both a cost analysis to ensure the

reasonableness of individual cost elements and a price analysis to ensure

that the overall price, including profit, is fair and reasonable. The

contracting officer’s determination is a judgment based on the results of

the cost and price analyses.

For the most part, BEP limited its cost analysis techniques to audits of

Crane’s price proposals. The audits were done by the Treasury Inspector

15The Truth in Negotiations Act, codified at 41 U.S.C § 254b for civilian agencies, provides for a

prospective contractor to submit cost or pricing data in connection with the negotiation of certain

contracts when adequate price competition is not obtained. The act requires the prospective

contractor to certify that the data are accurate, current, and complete and provides for a possible price

reduction when the data are found to be inaccurate, incomplete, or noncurrent.

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BEP Has Ensured Quality but Has Not

Demonstrated That It Has Obtained Fair and

Reasonable Prices

General (IG) for contracts awarded before 1992 and by the Defense

Contract Audit Agency (DCAA) for contracts awarded after 1992. The audits

generally consisted of a review of the proposed costs and a test of the

reliability of the underlying data and records supporting the proposed

costs, as well as the accounting principles used in developing the proposal.

In several of the audits, the auditors qualified their work because of

Crane’s cost accounting system. For example, for contract 88-205, option

1, the auditors observed that standard costs used in estimating were not

adjusted for actual variances, which made them less reliable as a basis for

estimation.

BEP generally obtained audits of Crane’s price proposals, but it did not

conduct a comprehensive price analysis for the five contracts we

reviewed. BEP procurement records showed that it did not analyze the

changes in prices from one contract to the next and did not compare

proposed contract prices to the prices paid for similar items by other

government agencies or countries. It did not always review cost trends,

such as product yield rates, material prices, and proposed escalation over

time, for the earlier contracts in our sample. More specifically, according

to BEP’s procurement records:

• Audits of proposed costs were obtained for the first three contracts

(88-205, 91-18, and 93-14) included in our review, and this information was

used to evaluate Crane’s proposed costs; however, additional cost or price

analysis was not done for these contracts. BEP stated that it did not have

time to do a cost analysis for contract 91-18.

• Audits of proposed costs were also obtained for contract 95-23, and this

information was used to evaluate Crane’s proposed costs. BEP said that it

performed additional cost and trend analysis.

• For contract 97-10, BEP again used audit results and did more thorough

cost analysis than it had previously done. BEP also did limited price

analysis; for example, it compared proposed prices to prices under its

existing contracts.

A BEP contracting officer said she attempted to obtain prices paid for

currency paper from some other governments by telephoning them, but

they said they were not willing to share this information due to its

proprietary nature. We recognize that other governments may consider

such information to be proprietary or be unwilling to share the

information with an agency contracting official over the telephone.

However, given the interest of the government in achieving a fair and

reasonable price in this unique market, other more official and formal

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BEP Has Ensured Quality but Has Not

Demonstrated That It Has Obtained Fair and

Reasonable Prices

efforts to obtain the information, such as inquiries from the Secretary of

the Treasury or the State Department, might be more successful.

BEP procurement officials said they did not attempt to compare the prices

proposed for currency paper with the amounts the U.S. Postal Service paid

for money orders or the Government Printing Office paid for passport

paper, because the products were different. Although we agree that the

products are not identical, they are similar and they are bought

competitively. The passport paper is cotton and pulp based, has security

thread, and contains a watermark. Money orders also have security

threads and watermarks, but they are made from wood pulp instead of

cotton. Nonetheless, although comparisons among these types of products

would not in themselves have provided a basis for definite conclusions,

they may have provided some insight for assessing cost and price trends

over time and in demonstrating the effects of competition on prices.

The only other analysis used by BEP was for negotiating contract 97-10, and

it included an analysis of the effects of changes in quantities ordered on

Crane’s production costs. Similar analyses would have been helpful for the

other contracts we reviewed. In accordance with section 9003(b) of the

1997 Emergency Supplemental Appropriations Act, the Secretary of the

Treasury was required to certify that the price for contract 97-10 was fair

and reasonable and that the terms of the contract were customary,

appropriate, and in compliance with procurement regulations. The

Secretary delegated this determination to the Director of BEP, who made

these certifications on September 3, 1997.

Results of BEP’s

Determinations of Fair and

Reasonable Prices

The five contracts we reviewed from 1988 to 1997 and their options and

extensions resulted in 17 contract actions.16 The prices for the contracts

and options are listed in appendix V. For these 17 actions, BEP determined

the price to be fair and reasonable for 4, but it was not able to determine

the price to be fair and reasonable for 5. BEP did not reach agreement on

price for the remaining eight contract actions. For these eight, BEP used

interim prices, which were later finalized and reduced by an arbitrator.

For the eight contract actions that were finalized by an arbitrator, BEP and

Crane were unable to reach agreement on (1) royalties paid to Crane’s

affiliated subcontractor that produced the security thread, (2) allocation of

commercial sales commissions to government contracts, (3) allocation of

16Three contract actions, relating to contract 95-23, contained an unpriced line item at the time of

contract award. This line item was subsequently priced and considered to be fair and reasonable. We

did not include this line item as a separate contract action.

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BEP Has Ensured Quality but Has Not

Demonstrated That It Has Obtained Fair and

Reasonable Prices

legal and consulting costs, and (4) profit. The arbitrator concluded in

January 1995 that there was no common control of the affiliated company

producing the thread, the allocation of Crane’s sales commissions to

government contracts was not appropriate, and Crane’s allocation of legal

and consulting costs was proper. The arbitrator also decided that Crane

was entitled to higher profits than BEP had been willing to accept because

of Crane’s needs for a fair return on its capital investments made to

produce paper with less labor. The arbitrator commented that had the DOD

weighted guidelines been used, the government’s and Crane’s positions

would have been closer. The DOD guidelines provide a structured approach

to develop a contract profit objective, and they emphasize the usefulness

of facilities’ capital for buildings and equipment used by the contractor to

improve productivity or to provide other benefits, such as improved

reliability.

The arbitrator decided that the settled price should be $212 million, which

was $9.7 million (4.4 percent) lower than the interim payments that BEP

had made to Crane. According to the arbitration settlement, billings for the

subsequent 5 months of one contract action were also settled. During this

period, BEP paid $2.1 million more in interim payments than the settled

amount, bringing the total amount returned to BEP to $12.7 million.

For 5 of the 17 contract actions, BEP was unable to determine the prices to

be fair and reasonable. However, it accepted prices for these five contract

actions because, according to the BEP contracting files, (1) there was no

other source of paper and (2) the Federal Reserve’s currency requirements

could not be met if the contract with Crane were not awarded. The major

reason why BEP was not able to determine the prices to be fair and

reasonable was that BEP contracting officers questioned the profit

proposed by Crane. In general, BEP contracting officers were not willing to

accept Crane’s proposed profit levels until after the award of contract

95-23, when BEP modified its profit objective by adopting the DOD weighted

guidelines. BEP’s application of these guidelines resulted in BEP’s adoption

of a higher profit objective.

Crane told us that the use of the DOD guidelines resulted in a fair return on

the investment made in capital equipment with a minimum amount of

labor costs.17 BEP’s contract files did not indicate that any analysis was

17The specific profit percentages negotiated for the BEP contracts are proprietary information. Crane

asked that we not disclose that information, other than to report that its negotiated profit rate was

19.6 percent in 1988, 11.8 percent in 1991, and 21.5 percent in 1995. Crane would not authorize us to

disclose the negotiated profit percentages for the other years in our review period, nor would it

provide the actual profit rates earned on currency paper.

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BEP Has Ensured Quality but Has Not

Demonstrated That It Has Obtained Fair and

Reasonable Prices

done to demonstrate that on BEP contracts for which the DOD guidelines

were used to analyze profits, including contract 97-10, the profits were

beneficial to the government in that prices would be reduced, labor costs

would be reduced, or the government would otherwise benefit.

BEP Had Incomplete Audit

Information

Although BEP primarily relied on audits of Crane’s proposals to determine

if the prices proposed were fair and reasonable, two factors qualified the

usefulness of these data. First, in a 1994 post-award audit of a cost

proposal, DCAA identified about $3 million in over-pricing attributed to

Crane’s accounting system. The auditors observed that Crane’s cost

accounting system was based on standard costs that were not periodically

adjusted to reflect actual costs. Also, in several audit reports covering the

proposals for contracts we reviewed, DCAA reported that it had not been

asked to review the contractor’s budgeting/estimating system.

A second factor was the lack of post-award audits of the contractor’s costs

for contracts 95-23 and 97-10. In post-award audits, DCAA attempts to verify

whether the costs proposed were based on accurate, complete, and

current data as required by the Truth in Negotiations Act. BEP officials said

that they asked for DCAA audits of the contractor’s budgeting/estimating

system and post-award audits of contracts 95-23 and 97-10 in May 1998.

BEP officials said they did not ask for these audits earlier because the

contractor’s staff who would be responsible for working with the DCAA

auditors were engaged in preparing cost proposals, and BEP did not want

to interfere with these activities.

Uneconomical

Procurement

Practices

Although unrelated to the issue of whether the government paid fair and

reasonable prices for currency paper, which is based on the judgment of

the contracting officer on the prices proposed for given quantities of

supplies, we also found that certain BEP procurement practices

contributed, or could have contributed, to higher than necessary currency

paper costs. The practices included ordering inconsistent quantities of

paper, understating quantities expected to be ordered, and not obtaining

royalty-free data rights for security thread used in U.S. currency.

According to a former Crane official we interviewed, BEP did not order

consistent amounts of the paper under the contracts. Consequently, Crane

was not able to maintain a steady production schedule and had to have

more equipment than necessary to produce paper to meet BEP’s

inconsistent ordering. This official said there were times when Crane’s

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Chapter 3 

BEP Has Ensured Quality but Has Not

Demonstrated That It Has Obtained Fair and

Reasonable Prices

paper mill would be operating only a few days a week due to

lower-than-usual orders for paper; but at other times, the mill would have

to operate at full capacity for weeks in order to fulfill a larger-than-usual

BEP order. Similarly, the BEP contracting officer noted in an October 1996

trip report on a visit to Crane that Crane requested BEP to commit to

leveling out production orders. The contracting officer reported that Crane

had experienced four layoffs that year that were costly and could result in

the loss of skilled workers.

The five contracts awarded from 1988 to 1997 were either fixed-price

requirements contracts or indefinite delivery/indefinite quantity contracts.

Under either type of contract, the government provides an estimate of the

quantities of paper to be bought, and the contractor proposes a

price-per-sheet of paper based on that quantity. Because of the relatively

high fixed costs in producing currency paper, primarily due to high

equipment costs, a higher volume equates to a lower unit cost as the fixed

costs are spread over more units. Because paper contracts are awarded on

a price-per-sheet basis, government orders in excess of the estimated

quantity would be expected to result in lower per sheet actual costs and

increased profit per sheet.

For example, under the base period for contract 88-205, the contractor

provided a price of $.1254 per sheet, based on an estimated quantity of

360 million sheets. BEP actually bought 435 million sheets under this

contract, which we estimate to have contributed about $1.5 million in

additional contract profits. Other contracts we reviewed also had

differences between the estimated contract quantities and the actual

orders.

A third issue involves BEP’s failure to obtain royalty-free data rights to the

security thread used in currency and the process used to insert the thread.

Crane, with its affiliated company, Technical Graphics, Inc., holds patents

for the thread and the process used to insert the thread in the currency

paper. Although this thread is unique to U.S. currency, a BEP official said

that the government does not have the patents or a royalty-free license to

use the thread because the government never directly paid for their

development. The BEP official said that in the early 1980s, Crane

approached BEP with an idea for the thread. BEP encouraged Crane to

develop it but did not enter into a research and development contract with

Crane to develop the concept. A BEP official observed that a research and

development contract would have been the vehicle for the government to

obtain an interest in the concept. According to BEP officials, Crane used its

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BEP Has Ensured Quality but Has Not

Demonstrated That It Has Obtained Fair and

Reasonable Prices

own funds to develop the thread and insertion process, so Crane is entitled

to the patents. BEP officials also said that the government indirectly paid

for much of Crane’s development cost.18 They said the government cannot

obtain the royalty-free data rights unless it contracts to do so.

18We were able to identify about $2.4 million of research and development costs that Crane proposed

and BEP accepted as independent research and development to develop the security thread and the

process used to insert it into the currency paper. However, the extent to which other BEP funds may

have been included in Crane’s contract costs is unclear because Crane did not segregate its

independent research and development costs by project.

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Chapter 4 

BEP Is Now Building an Inventory of

Currency Paper as a Contingency

Although there have not been any disruptions in the supply of currency

paper for the last 119 years, BEP has not been in a good negotiating

position and has been vulnerable because it did not have a second source

for currency paper or have a reserve inventory of currency paper. The

Conte Amendment allows BEP to contract with a foreign entity if a

domestic source is not available, thus providing some relief if the current

supplier were to encounter a catastrophic incident and be unable to supply

currency paper. However, BEP officials told us that a foreign source would

require at least 3 months to prepare, produce, and ship watermark and

threaded paper and between 1 and 2 months to deliver currency paper

without watermarks. BEP is in the process of establishing a 3-month

contingency supply of currency paper, which BEP expects to be completed

in 1999.

Although the longstanding single supplier has been a reliable source of

currency paper, the combination of relying on a single supplier and not

having an inventory placed BEP in a weak negotiating position and

presented some risks. In BEP’s price negotiation memorandums for

contracts 88-205 and 95-23, BEP’s contracting officers stated that despite

the fact that they considered Crane’s price to be too high, BEP awarded

contracts to Crane at the prices proposed by Crane in order to ensure a

continuous supply of currency paper.

Furthermore, in a meeting between BEP and Crane to negotiate contract

95-23, the parties could not reach agreement over price. The former Chief

Executive Officer of Crane said that “BEP would just have to run out of

paper,” according to a memo written by a Treasury official dated June 21,

1995. Although BEP and Crane were eventually able to reach agreement,

the former Chief Executive Officer of Crane told us that in June 1995 he

told Treasury officials, in effect, that he would not agree to another paper

contract and that BEP would have to run out of paper. He said that this

statement stemmed from issues surrounding the arbitration settlement. He

said that a few months earlier, Crane and BEP signed the agreement to

accept the terms of the arbitration settlement; however, BEP was still

questioning the prices covered by the agreement. According to the former

Crane official, the only leverage Crane had to settle with BEP was to not

agree to enter into any new contracts.

Under the Conte Amendment, if the Secretary of the Treasury determines

that no domestic source of currency paper exists in the United States, the

requirement for currency paper to be produced in the United States and

the prohibition against the purchase of currency paper from a supplier

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BEP Is Now Building an Inventory of

Currency Paper as a Contingency

owned or controlled by a foreign entity would not apply. In order to

procure currency paper from a foreign supplier, several actions would

need to be taken. First, under the Conte Amendment, a written finding by

the Secretary of the Treasury justifying the basis for the determination that

no domestic manufacturer of currency paper exists must be published in

the Federal Register. According to BEP officials, this could be done within

a matter of days. Second, BEP would need to contract with Crane to

acquire the security thread so BEP could provide the thread as government

furnished property. Finally, it would take the foreign paper manufacturer

about 3 months to start providing BEP with the currency paper, according

to BEP officials.

To its credit, BEP recently decided to replace its “just-in-time” approach to

maintaining an inventory with a 3-month contingency supply of currency

paper. According to its 1996 strategic contingency plan for critical

materials, BEP determined that a 3-month contingency supply of currency

paper would be adequate. BEP officials said that they will have the

inventory built up by 1999. According to the Federal Reserve, it maintains

a 40-day supply of finished currency at each of it reserve banks, which

would also provide some additional time to bring on another source of

currency paper if this were needed.

In our survey of other G-7 nations, we were told that the amount of

banknote paper maintained in reserve ranged from 1 month in England

and Japan to 2 to 3 months in France and Italy. In Canada, the banknote

printers are responsible for procuring their own banknote paper. Germany

would not provide information on its inventory. Additionally, like the

United States, none of the other G-7 nations maintain a second supplier of

banknote paper to protect against possible disruptions in the supply of

their banknote paper.

BEP appears to be ahead of achieving its goal to have a 3-month reserve for

each denomination. According to BEP, as of May 1998, it has a 3-month

reserve for each individual denomination with the exception of the $20

denomination, which has been recently redesigned. BEP officials anticipate

reaching the 3-month reserve for the newly designed $20 note during

calendar year 1999.

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Conclusions and Recommendations

Obtaining competition in currency paper procurement is challenging,

partly because of the uniqueness of the currency paper, which requires a

relatively large investment in capital equipment. In addition, special

statutory provisions govern the acquisition of currency paper that provide

a 4-year limit to contracts for the manufacture of currency paper and that

it be manufactured in the United States, and prohibit the purchase of

currency paper from foreign-owned or controlled entities. Although most

BEP solicitations issued before 1997 were competitive, it was not

successful in obtaining competition because no firm other than Crane

submitted an offer. BEP efforts in the 1960s and 1980s to establish a second

source for currency paper also were not successful, for similar reasons.

We recognize that there are some uncertainties to the competitive process,

even if the existing problems are solved. For example, 12 paper

manufacturers told us that they are capable now, or would be in the near

future, of supplying at least part of BEP’s currency paper needs if further

changes are made.

However, we cannot say with any certainty how many, if any, would

submit an offer; whether they would be price-competitive with Crane; or if

the quality of paper and reliability of delivery would be maintained. In

addition, 5 of the 12 paper manufacturers are foreign-owned and are

precluded from receiving a contract award under current law.

It is uncertain whether the government can successfully develop a second

domestic source for future paper needs, primarily because it is unknown

how prices would change. Prices might increase if more than one supplier

were used. For example, if the same quantity of paper is obtained from

two or more suppliers, each with substantial capital investments, the unit

price for paper is likely to be higher from each. Therefore, although having

a second supplier could lessen the government’s vulnerability to a

disruption in supply, having two suppliers could result in an increased cost

to the government. On the other hand, a single supplier has less incentive

to be efficient or to keep prices and costs to a minimum than suppliers

who have to compete with each other, and DOD has reportedly benefited

from having a second source in some instances.

In its most recent currency paper solicitation, BEP has taken several

actions to encourage competition, including providing up to 24 months for

potential suppliers to start production for currency paper with additional

security features and providing for longer contract performance periods,

within the statutory 4-year limit. However, if these steps are not sufficient

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Chapter 5 

Conclusions and Recommendations

to encourage offers from additional suppliers, additional actions to

promote competition by Treasury and BEP may be appropriate. Given the

current statutory constraints; previous efforts to study this problem, as

well as Treasury’s ongoing study of future currency demand, which could

affect the economic viability of having more that one currency paper

supplier; and uncertainties discussed in our report, we believe it is

premature to recommend specific steps at this time. Moreover, additional

insight on this issue should be available after Treasury completes its

ongoing study on future currency demand and as other information

becomes available, such as the currency paper prices BEP obtains under its

current solicitation and any changes in legislation affecting currency paper

procurement that might occur.

BEP has not generally been adequately prepared to be in a position to know

what it should be paying for currency paper because, until recently, it has

done only limited cost analysis and has not used price analysis. BEP could

improve some aspects of its currency paper procurements. The evidence

demonstrates that BEP (1) lacked an aggressive effort to encourage Crane

to develop an acceptable cost accounting system; (2) did not always

arrange for post-award audits and audits of the supplier’s cost estimating

system; (3) did not include data and analyses in the procurement record

that demonstrated the benefit that BEP was to receive when it approved

profits that were to recognize or provide an incentive for capital

investment; (4) conducted limited analysis of supplier costs and prices, in

the context of the worldwide market for currency paper; (5) failed to

accurately estimate the amount of paper it needed to procure and ordered

inconsistent amounts of paper; and (6) did not take action to arrange for

royalty-free access to security thread. In addition to actions to correct

these problems, recent efforts to establish a 3-month inventory of currency

paper should provide an additional tool to help BEP better ensure that fair

and reasonable prices can be achieved.

As noted above, BEP has taken several actions to encourage competition.

For example, BEP extended the period for potential suppliers to start

production for currency paper with additional security features and

provided for longer contract performance periods than it had in the past.

However, BEP must acquire currency paper within the existing legal

framework. According to BEP, the legal framework requires that offerors’

start-up period be included in the 4-year contract period, thus reducing the

manufacturing period and limiting the effect of BEP’s actions. According to

BEP, the 4-year statutory limit on contracts was created in 1916 to extend

the contracts beyond the 1-year statutory limit then in effect, in order to

Page 44 GAO/GGD-98-181 Currency Paper Procurement
Chapter 5 

Conclusions and Recommendations

better ensure a reliable supply of materials. BEP’s options for encouraging

competition could be further enhanced if Congress lengthened the 4-year

limit for currency paper contracts to give potential offerors a longer time

to recover their capital investments.

If efforts to obtain competition continue to be unsuccessful, BEP’s capacity

to achieve fair and reasonable prices could be enhanced through

congressional action. BEP’s strategy options could be further strengthened

if Congress provided additional authority by modifying the Conte

Amendment’s prohibition on procuring currency paper from

foreign-owned or controlled suppliers to permit the Secretary of the

Treasury to do so on a temporary basis if it is determined that currency

paper is not available from a domestic source at fair and reasonable

prices. Such a modification could provide additional leverage for the

government in its negotiations with the current supplier, or any future

domestic supplier(s), and increase the likelihood that fair and reasonable

prices can be achieved.

Recommendations to

the Secretary of the

Treasury

To strengthen BEP’s capacity to ensure fair and reasonable prices, we

recommend that the Secretary direct BEP to

• ensure that the contractor maintains acceptable cost accounting and

estimating systems for future contracts and that they are periodically

audited;

• arrange for post-award audits of the contractor’s costs;

• include data and analyses in the currency paper procurement record that

demonstrate the benefits the government is to receive when it approves

profit levels that are aimed at recognizing or providing an incentive for

capital investments; and

• to the extent possible, make more extensive use of price analysis to

determine the fairness and reasonableness of prices, including the

collection of data from foreign countries on their currency prices and data

on similar supplies purchased by other agencies, such as paper for

passports and money orders.

To further enhance opportunities for other paper manufacturers to offer to

provide currency paper to the government and to obtain offers that

represent the best value to the government for the paper, we also

recommend that the Secretary ensure that all future currency paper

procurements reflect the expected amounts of paper needed and orders

against contracts are for consistent amounts. This would allow the

Page 45 GAO/GGD-98-181 Currency Paper Procurement
Chapter 5 

Conclusions and Recommendations

supplier(s) to maintain a steady production level and stabilize workforce

levels. Finally, we recommend that the Secretary ensure that the

government obtains royalty-free data rights to any future security

measures incorporated into currency paper.

Matters for

Congressional

Consideration

To further assist the Secretary in obtaining competition from domestic

sources, Congress may wish to consider lengthening the 4-year limit for

currency paper contracts to give potential offerors a longer time to

recover their capital investments. If adequate price competition among

two or more suppliers can be achieved, concerns over whether the prices

paid are fair and reasonable should be reduced.

Finally, because BEP’s past efforts to encourage domestic competition for

currency paper have been unsuccessful and future efforts are uncertain,

and because BEP has not always been able to ensure fair and reasonable

prices from the current supplier in some past procurements, additional

authority may be necessary to protect the government’s interests in

obtaining currency paper. Specifically, Congress may want to consider

revising the Conte Amendment, which allows the Secretary of the

Treasury to obtain currency paper from a foreign-owned source only if no

domestic supplier is available, to permit the Secretary to authorize

obtaining currency paper from a foreign-owned source on a temporary

basis if it is determined that no domestic supplier will provide paper at fair

and reasonable prices. Such a provision should improve the likelihood that

fair and reasonable prices could be obtained.

Agency and Crane &

Co. Comments

We provided copies of a draft of this report for comment to the Chairman

of the Board of Governors of the Federal Reserve System, the Acting

Director of BEP, the Secretary of the Treasury, and the Chief Executive

Officer of Crane. On July 29, 1998, the Assistant to the Board of Governors

of the Federal Reserve System provided oral comments on our draft

report. He said the Federal Reserve considered the analysis and

recommendations to be reasonable. We also received written comments

from the Acting Director of BEP, dated July 29, 1998, which are reprinted in

appendix VI; and we received written comments from Crane dated July 28,

1998, which are reprinted in appendix VII. According to BEP officials, the

BEP comments included input from the Department of the Treasury.

Finally, in a meeting with us on July 29, 1998, BEP provided a number of

oral technical clarifications to our report that we made where appropriate.

Page 46 GAO/GGD-98-181 Currency Paper Procurement
Chapter 5 

Conclusions and Recommendations

BEP Comments The Acting Director of BEP stated that our report does not recognize that

BEP complied with the FAR in the award of the five contracts we reviewed

and provided comments on our recommendations. We did not make a

comprehensive assessment of BEP’s compliance with FAR in connection

with the five contracts we reviewed and thus are not in a position to make

an overall statement on BEP’s compliance.

Our draft report included recommendations that BEP (1) consider

amending solicitation 97-13 and future solicitations to provide financial

assistance if deemed to be economically advantageous to the government;

and (2) consider excluding Crane from some or all of BEP’s currency paper

requirements, as an example of a strategy to establish an alternative

source. In its comments, BEP endorsed the idea of providing financial

assistance but did not agree with amending solicitation 97-13 because it

believes solicitation 97-13 provided for financial assistance. In addition,

BEP said that Treasury is currently studying the future demand for

currency, and once the study is completed, BEP will be in a better position

to assess the cost reduction potential associated with developing

additional suppliers. BEP also disagreed with our recommendation that

Treasury consider excluding Crane from some or all of BEP’s currency

paper requirements. BEP said that excluding Crane from competing for all

of its requirements was not feasible because of the lack of an alternative

domestic source; and excluding Crane from part of its requirements would

not be practical or economically feasible, citing a previous determination

that the price for currency paper could increase significantly due to the

high capital investment cost for a potential new supplier.

After carefully considering BEP’s comments as well as reconsidering the

uncertainties we identified in our draft report, we agree with BEP that

amending solicitation 97-13 to offer financial assistance and excluding

Crane from all of its requirements could create difficulties for BEP in

meeting its responsibilities to ensure an adequate supply of currency

paper. We also agree with BEP that it should be in a better position to

evaluate the feasibility of establishing additional suppliers after Treasury

completes its ongoing study of future currency demand, which Treasury

expects to be done soon. In fact, our draft report recognized that future

currency paper demand was one of the factors that needed to be

considered in deciding on the feasibility of additional suppliers.

Accordingly, we deleted our recommendations to the Secretary aimed at

encouraging competition to reflect BEP’s concerns, the uncertainties

identified in our report, and because of Treasury’s ongoing effort to

Page 47 GAO/GGD-98-181 Currency Paper Procurement
Chapter 5 

Conclusions and Recommendations

project future currency demand. However, we believe that future

consideration by Treasury of additional measures to encourage

competition may be appropriate after it finishes its study of future

currency demand for a number of reasons. First, significant changes in

future currency demand could affect the economic feasibility of

establishing other suppliers. Second, BEP’s statement that it has

determined that establishing another supplier would not be economically

advantageous appears to be based on its 1996 currency paper study, which

was done before BEP accepted higher prices for newly designed currency

paper under contract 97-10; higher prices could affect the conclusions

Treasury reached in its 1996 study. Third, Treasury’s report on its 1996

currency paper study did not fully address the economic feasibility of

establishing a second supplier under different scenarios that would be

possible if existing restrictions on the contract period or percentage of

foreign ownership and control were changed.

Regarding our recommendation to ensure the contractor maintains

acceptable cost accounting and estimating systems, BEP said that it has

audited the contractor’s cost accounting practices and will continue to do

so. However, on July 29, 1998, BEP officials told us that they still had not

obtained an audit of Crane’s estimating system. We believe that this should

have been done earlier because the estimating system helps to ensure that

cost proposals are based on reliable and consistent data.

In reference to our recommendation to arrange for post-award audits for

the contractor’s costs, BEP said that it had requested audits and that

ongoing IG and DCAA investigations and audits occasionally interfered with

timely post-award audits. We believe BEP should continue to pursue these

audits because past efforts to follow up on obtaining post-award audits

have not always been timely and because they help protect the

government’s interests.

With respect to our recommendations that solicitations reflect expected

paper needs and that orders be evened out, allowing the supplier to

maintain a steady production level, BEP agreed that improvements were

needed and says it has taken corrective actions to ensure that the

quantities bought under contract 97-10 represent actual requirements. We

believe these actions are a step in the right direction and should be

continued in future orders of currency paper.

BEP disagreed with our recommendation that it make more extensive use

of cost and price analysis. BEP pointed out that in its two most recent

Page 48 GAO/GGD-98-181 Currency Paper Procurement
Chapter 5 

Conclusions and Recommendations

contracts, it had applied a number of cost analysis techniques. Our draft

report recognized that BEP had done more cost analysis on contract 97-10

than had been done in previous contracts. However, BEP did not do

adequate price analysis for any of the five contracts we reviewed,

including 97-10, and did not do adequate analysis to support the profit

levels it accepted. Accordingly, we modified our recommendation to

address the need for greater analysis of proposed profit levels. Regarding

our recommendation to collect pricing data from foreign countries, BEP

said it would continue to try to obtain foreign country currency paper

data. We added some language to the report to clarify how this might be

done. With respect to the related suggestion that BEP collect pricing data

on similar supplies purchased by other agencies, such as passport and

money order paper, BEP said it believed comparison of currency paper

prices to passport and money order paper would not produce any

meaningful information. BEP said these papers are different from currency

paper. Our report recognizes that although comparisons of these types of

papers would not provide a basis for a definitive conclusion, they may

provide some insight for assessing pricing trends.

BEP said it agreed with our recommendation to obtain royalty-free data

rights to future security measures. BEP pointed out that the cost of such

royalties for the security thread is less than 0.2 percent of the cost of the

currency paper contract. However, BEP did not address the effect these

patents had on its 1997 competitive solicitation or could have on future

solicitations. As discussed in chapter 2, several paper manufacturers

stated that the requirements to pay a royalty license to use the data and

process for insertion of the security thread made it difficult for them to

compete. One paper manufacturer filed a protest with BEP over the

security thread license and said that the solicitation places potential

offerors in a position of violating a patent held by Crane if they supply

currency paper containing security thread made to BEP’s specifications. In

response to this protest, BEP agreed to provide the security thread as

government-furnished property.

Crane & Co. Comments Crane provided very lengthy comments on many of the issues addressed in

this report. Our specific responses to the comments are included in

appendix VII. In general Crane said that although it agreed with many of

our factual findings, it disagreed with most of our recommendations and

one of our matters for consideration of Congress. Crane also suggested

specific technical changes to clarify our report that we have made where

appropriate.

Page 49 GAO/GGD-98-181 Currency Paper Procurement
Chapter 5 

Conclusions and Recommendations

In objecting to our recommendations that BEP and Treasury take further

steps to encourage competition in the supply of the nation’s currency

paper, Crane said that they have already been adopted by BEP and no

further action was necessary. Crane specifically objected to the

recommendations in the draft report that BEP further consider options for

providing financial assistance to other potential suppliers and that BEP

consider excluding Crane from all or some of its currency paper

requirement to encourage participation by other potential suppliers. While

these strategies are permitted under law, Crane said that they would result

in higher costs and possible disruptions to the supply of currency paper.

As we explain in response to BEP’s concern about these recommendations,

we acknowledge and stress in the report that the impact of alternative

strategies is uncertain and that many factors would have to be weighed in

considering any option. In light of BEP’s concerns and to recognize the

uncertainty involved, we have deleted the recommendations proposed in

our draft report to encourage Treasury and BEP to further consider the

feasibility and advisability of additional measures to encourage

competition.

Crane agreed with our suggestion to Congress that consideration be given

to modifying the 4-year limit on currency paper contracts. However, Crane

opposed our further suggestion to Congress that the Secretary of the

Treasury be given additional authority to acquire currency paper from

foreign-owned firms in the event that fair and reasonable prices cannot be

obtained from a domestic source. We can understand Crane’s position on

this matter, since it believes that its prices have been fair and reasonable,

and that the alternative of acquiring currency paper from a foreign source

is not necessary. However as our report clearly states, there have been

occasions in the past in which BEP has not been able to determine that

Crane’s prices were fair and reasonable, but the lack of other domestic

suppliers and the current restriction prohibiting acquiring currency paper

from foreign-owned sources unless no domestic source exists has limited

the negotiating strategies. For these reasons, we continue to believe that

Congress should consider limited expansion of the Secretary’s authority.

Page 50 GAO/GGD-98-181 Currency Paper Procurement
Page 51 GAO/GGD-98-181 Currency Paper Procurement
Appendix I 

Objectives, Scope, and Methodology

Section 9003 of the fiscal year 1997 Emergency Supplemental

Appropriations Act required that we complete “a comprehensive analysis

of the optimum circumstances for government procurement of distinctive

currency paper” and report our findings to the House and Senate

Committees on Appropriations. According to the conference report

accompanying the appropriations bill, the Conference Committee

expressed concern over the fact that BEP has bought virtually all of its

paper for the nation’s currency from a single supplier for over 100 years.

The Conference Committee directed that we report on any limitations on

competition in currency paper procurement and possible alternatives to

the way BEP has been buying the paper, the fairness and reasonableness of

prices paid for the paper, the potential for disruption of currency paper

from relying on single supplier, and other matters.

In June 1997, the Chairman of the House Government Reform and

Oversight Committee asked that we also report our findings to that

Committee because of its interests in federal procurement matters.

Senator Lautenberg, in June 1997, also requested that we report our

findings to his office. In September 1997, 16 Members of Congress

informed us of their interest in ensuring that our analysis was carried out

in an objective manner and expressed their opinion that a review of the

potential benefits and drawbacks of a single supplier relationship was

appropriate.

As a result of the large number of congressional parties interested in this

matter and because the public law that initiated it contained a general

statement that we analyze “the optimum circumstances for government

procurement of distinctive currency paper,” we met with the interested

Members’ staffs to obtain the specific issues they wanted addressed, and

we suggested approaches to address those issues. We identified numerous

concerns and issues, which are covered under the following three broad

objectives:

• Have BEP’s efforts to encourage competition for currency paper been

effective?

• Have prices paid for currency paper been fair and reasonable and has the

quality of paper been ensured?

• Is there potential for disruption to the U.S. currency paper supply from

BEP’s reliance on a single supplier?

To address the first objective, the effectiveness of efforts to encourage

competition for currency paper, we reviewed BEP procurement files for 5

Page 52 GAO/GGD-98-181 Currency Paper Procurement
Appendix I 

Objectives, Scope, and Methodology

contracts with 17 procurement actions awarded during 1988 to 1997 and

the current solicitation. We also reviewed the 1983 and 1996 Department

of the Treasury/BEP studies on currency paper procurement.19 We

interviewed and obtained documents from officials at BEP, Treasury,

Crane, and the Federal Reserve.

In addition, we identified and surveyed 30 paper manufacturers of

cotton-based security paper to determine their interest in and ability to

supply currency paper to BEP. We identified the 30 manufacturers by

(1) reviewing the 1996 Treasury/BEP currency paper study, which identified

7 producers; (2) reviewing the Lockwood-Post Directory of Pulp, Paper,

and Allied Trades, 1995 edition, which listed 21 producers; and

(3) interviewing a representative of the American Forest and Paper

Association’s Cotton Fiber Council, who identified 9 producers. The three

sources, in some cases, identified the same producers. In total, we

identified 30 different producers. See appendix IV for a copy of our

questionnaire.

Our primary variable for analysis was interest in providing currency paper

to BEP. We considered the 12 manufacturers who responded with “very

interested” and “somewhat interested” in providing currency paper to BEP

our most important group for the purposes of this study because they have

a stated interest in supplying paper to BEP. These are referred to in our text

as the “interested paper manufacturers.” Of these 12, 7 were domestic and

5 were foreign manufacturers.

We conducted site visits to two paper manufacturing facilities, Crane in

Dalton, Massachusetts; and FiberMark, Inc., in Bloomsbury, New Jersey.

We selected Crane because it has been the long-standing single supplier of

currency paper to BEP. The second manufacturing facility we visited was

FiberMark, Inc., which was selected because of its expressed interest in

competing to become a U.S. currency paper supplier.

To obtain a perspective on how other countries procure banknote paper,

we sent a separate questionnaire to representatives of the other G-7

nations: Canada, England, France, Germany, Italy, and Japan.

19Review of Distinctive Currency Paper, Aug. 1983, and the U. S. Currency Paper Study, June 1996. The

1983 study was initiated to determine whether alternative sources of distinctive currency paper were

available to BEP. Concerns about a single supplier of currency paper prompted the 1996 study, which

was undertaken to determine options for ensuring a reliable source of currency paper at a reasonable

price.

Page 53 GAO/GGD-98-181 Currency Paper Procurement
Appendix I 

Objectives, Scope, and Methodology

We analyzed the Conte Amendment and its legislative history, the statute

limiting the procurement of distinctive currency paper to 4-year contracts,

and other applicable procurement laws and regulations to identify

requirements affecting the procurement of currency paper. We

interviewed Secret Service and BEP procurement and security officials

regarding off-shore manufacturing issues—specifically, the security

concerns that may have an impact on opportunities for competition. We

also interviewed officials at the U.S. Mint; Government Printing Office;

U.S. Postal Service; and the Departments of the Army, Navy, and Air Force

to identify possible alternatives to BEP’s approach to procuring currency

paper.

For our second objective, to determine the fairness and reasonableness of

price and assurance of quality goods and services, we reviewed BEP

procurement records from 1988 to 1997. Originally, we planned to review

the files for currency paper contracts awarded by BEP for the past 15 years.

However, BEP contract files contained records for only a 10-year period,

1988 through 1997. We examined documents in the files, such as price

negotiation memoranda, cost and price analyses, and other supporting

documents, to determine whether the contractor had provided the

government with a quality product at a fair and reasonable price. We also

reviewed Treasury IG and DCAA audit reports relating to the supplier’s cost

proposals and cost accounting system.

To help us review the fairness and reasonableness of BEP prices, we

contracted with Joe D. Quicksall, a consultant with specialized experience

in procurement issues. Mr. Quicksall, who is a GAO retiree, added to this

review his extensive knowledge of fair and reasonable pricing issues

gained over his more than 30 years of auditing experience.

Mr. Quicksall analyzed the supplier’s cost proposals and the related IG and

DCAA audit reports to assess how BEP used these data to evaluate and

negotiate costs. Mr. Quicksall examined the impact of an arbitration

decision related to questioned contract costs and profit and provided his

opinion on BEP’s basis for determining fairness and reasonableness of

price for contracts awarded from 1988 to 1997. Finally, we obtained

IG/DCAA audit reports and interviewed BEP, IG, and DCAA staff concerning

defective pricing practices of the currency paper supplier. We also

interviewed BEP officials and reviewed BEP’s procurement records to

obtain information on the quality and reliability of Crane’s currency paper

deliveries.

Page 54 GAO/GGD-98-181 Currency Paper Procurement
Appendix I 

Objectives, Scope, and Methodology

To address the third objective, the potential disruption to the U.S.

currency paper supply from BEP’s reliance on a single supplier, we

reviewed inventory reports and BEP’s contingency plan for critical

materials; and interviewed officials at BEP, the Federal Reserve, and the

current supplier to determine current inventory levels, the potential for

disruption to the supply of currency paper, and what steps, if any, would

have to be taken to procure currency paper if it could not be obtained

from Crane. We also toured the BEP facilities in Washington, D.C.; and Fort

Worth, TX; and the Federal Reserve Bank in Dallas, TX, to determine the

storage capacity for currency paper inventory. In addition, by survey, we

collected information on currency paper inventories maintained by the

other G-7 countries.

We conducted our review in Washington, D.C.; Dallas and Fort Worth, TX;

Dalton, MA; Bloomsbury, NJ; and Hartford, CT, from June 1997 through

August 1998, in accordance with generally accepted government auditing

standards. We obtained written comments on a draft of this report from

BEP and Crane. These comments are reprinted in appendixes VI and VII

and are discussed at the end of chapter 5.

Page 55 GAO/GGD-98-181 Currency Paper Procurement
Appendix II 

Synopsis of Six Paper Contracts Reviewed

88-205 was a procurement action classified as a competitive solicitation

that resulted in a letter contract awarded to Crane in December 1987.

Crane was the only firm to submit a proposal to BEP for distinctive

currency paper for 1-dollar and 2-dollar notes. The contract was for a

2-year period, with two 1-year options, definitized in May 1988, with an

estimated value of $45,144,000. Option year one was exercised effective

May 1990, and option year two was exercised in May 1991. At the

completion of option year two, the contract was extended for 6 months.

91-18 was a procurement action classified as a competitive solicitation.

The contract was awarded to Crane in February 1991, the only firm to

submit a proposal. The solicitation was to manufacture denominated

distinctive currency paper with security thread, specifically, 20-, 50-, and

100-dollar notes. The contract was for a 1-year period with three 1-year

options, with an estimated value of $66,309,320. All options were exercised

on the anniversary date of the contract, and the contract was also

extended from February 1995 to May 1995.

93-14 was a procurement action classified as a competitive solicitation.

The contract was awarded to Crane in January 1993, the only firm to

submit a proposal to BEP. The solicitation was to manufacture distinctive

currency paper. The contract was for a 1-year period with four 1-year

options with an estimated value of $16,471,779. Option one was exercised

on the anniversary date of the contract. The remaining options were not

exercised.

95-23 was a sole-source contract awarded to Crane in June 1995 for the

manufacture of all three types of paper currently being used, distinctive

currency paper, distinctive paper with a security thread, and the new

currency design paper containing security thread and a watermark. The

contract was for a period of 1 year, with two 6-month options and with an

estimated value of $54,342,281. The new currency design paper was not

priced in the initial contract but was priced in a modification.

97-10 was a sole-source contract awarded to Crane in September 1997 for

the manufacture of all three types of currency paper. The contract, known

as the bridge contract, is for a period of 2 years, with no options and at an

estimated value of $171,458,298.

97-13 is a competitive solicitation for a possible 4-year contract to

manufacture three types of currency paper and is expected to be awarded

in December 1998.

Page 56 GAO/GGD-98-181 Currency Paper Procurement
Appendix III 

Interests of Paper Manufacturers

Responding to GAO’S Survey

Table I.1 lists the 30 paper manufacturers to which we sent our

questionnaire, identifies those that responded, and identifies those that

stated that they were interested in supplying currency paper to BEP.

Table III.1 Paper Manufacturers

Participating in GAO’s Currency Paper

Survey Paper Manufacturer Responded to survey?

Interested in supplying

currency paper to BEP?

Arjo-Wiggins

Paris, France

Yes Yes

Boise Cascade

Portland, OR

Yes Yes

Buckeye Cellulose Corp.

Memphis, TN

No No

Cheney Pulp & Paper

Franklin, OH

No

Cottrell Paper Co.

Rock City Fall, NY

Yes No

Cross Pointe

Dayton, OH

No

Crown Vantage

Milford, NJ

Yes Yes

Domtar Security Papers

Montreal, Canada

Yes Yes

Eastern Paper

Amherst, MA

No

Esleek Manufacturing

Turner Falls, MA

Yes No

FiberMark

Bloomsburg, NJ

Yes Yes

Filter Materials

Waupaca, WI

Yes No

Fletcher

Alpena, MI

Yes Yes

Fox River Paper

Appleton, WI

Yes Yes

Fraser Paper Company

Stamford, CT

No

Georgia Pacific

Port Edwards, WI

Yes No

Gilbert Paper

Menasha, WI

Yes Yes

International Paper Co.

Memphis, TN

Yes Yes

Knowlton Specialty Papers

Watertown, NY

No

(continued)

Page 57 GAO/GGD-98-181 Currency Paper Procurement
Appendix III 

Interests of Paper Manufacturers

Responding to GAO’S Survey

Paper Manufacturer Responded to survey?

Interested in supplying

currency paper to BEP?

Louisenthal

Frankfurt, Germany

Yes Yes

Lunday Thagard Company

South Gate, CA

No

Neenah Paper

Neenah, WI

Yes No

NVF Company

Yorklyn, DE

No

Parsons Paper Company

Holyoke, MA

No

Portals

Overton, United Kingdom

Yes Yes

Rolland, Inc.

Quebec, Canada

Yes No

Southworth Company

West Springfield, MA

Yes No

Spexel

Quebec, Canada

Yes Yes

Strathmore Paper

East Granby, CT

Yes No

Wausau Papers of New

Hampshire

Groveton, NH

No

Total 20 12

Page 58 GAO/GGD-98-181 Currency Paper Procurement
Appendix IV 

GAO’s Paper Manufacturers Survey

Page 59 GAO/GGD-98-181 Currency Paper Procurement
Appendix IV 

GAO’s Paper Manufacturers Survey

Page 60 GAO/GGD-98-181 Currency Paper Procurement
Appendix IV 

GAO’s Paper Manufacturers Survey

Page 61 GAO/GGD-98-181 Currency Paper Procurement
Appendix IV 

GAO’s Paper Manufacturers Survey

Page 62 GAO/GGD-98-181 Currency Paper Procurement
Appendix IV 

GAO’s Paper Manufacturers Survey

Page 63 GAO/GGD-98-181 Currency Paper Procurement
Appendix V 

Prices for Currency Paper on Five Contracts

GAO Reviewed

Table II.1: Per Sheeta Prices of

Currency Paper Ordered for Five

Contracts GAO Reviewed

Types of paper

Contract Unthreaded Threaded

Threaded with

watermark

88-205

Letter contract $.1240

Base period (2) .1254

Option I .1542

Option II .1542b

Extension .1542b

91-18

Base period (1) $.3932

Option I .2977b

Option II .2686b

Option III .2627b

Extension .1550b

93-14

Base period (1) .1599b

Option I .1640b

95-23

Base period (1) .1643 .2484 $ .4230

Option I (6 mos.) .1633 .2452 .4036

Option II

(6 mos.)

.1641 .2456 .4034

97-10

year 1 .1802 .2471 .4480

year 2 .1705 .2375 .4818

aContract prices are given on a per-sheet basis. Each sheet produces 32 currency notes.

bPrices shown are interim prices that were settled at a lower price in arbitration on an aggregate

contract basis.

Source: BEP contract files.

Page 64 GAO/GGD-98-181 Currency Paper Procurement
Appendix VI 

Comments From the Department of the

Treasury and the Bureau of Engraving and

Printing

Page 65 GAO/GGD-98-181 Currency Paper Procurement
Appendix VI 

Comments From the Department of the

Treasury and the Bureau of Engraving and

Printing

Page 66 GAO/GGD-98-181 Currency Paper Procurement
Appendix VI 

Comments From the Department of the

Treasury and the Bureau of Engraving and

Printing

Page 67 GAO/GGD-98-181 Currency Paper Procurement
Appendix VI 

Comments From the Department of the

Treasury and the Bureau of Engraving and

Printing

Page 68 GAO/GGD-98-181 Currency Paper Procurement
Appendix VI 

Comments From the Department of the

Treasury and the Bureau of Engraving and

Printing

Page 69 GAO/GGD-98-181 Currency Paper Procurement
Appendix VI 

Comments From the Department of the

Treasury and the Bureau of Engraving and

Printing

Page 70 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Now on p. 6.

See comment 1.

Now on p. 7.

See GAO comment 2.

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Comments From Crane & Co.

See GAO comment 3.

Page 72 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

See GAO comment 3.

See GAO comment 4.

See GAO comment 4.

See GAO comment 1.

Page 73 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

See GAO comment 5.

See GAO comment 6.

See GAO comment 7.

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Comments From Crane & Co.

See GAO comment 7.

See GAO comment 6.

See GAO comment 8.

See GAO comment 7.

Now on pps. 7-8.

See GAO comment 9.

See GAO comment 4.

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Comments From Crane & Co.

See GAO comment 6.

See GAO comment 10.

See GAO comment 6.

See GAO comment 2.

See GAO comment 6.

Now on pps. 33 and 41.

See GAO comment 8.

See GAO comment 8.

See GAO comment 11.

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Comments From Crane & Co.

Now on p. 5.

See GAO comment 12.

See GAO comment 12.

See GAO comment 13.

See GAO comment 13.

Page 77 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

Now on p. 22.

Now on p. 22.

See GAO Comment 13.

See GAO comment 14.

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Comments From Crane & Co.

See GAO comment 15.

Now on pp. 27-28.

See GAO comment 16.

See GAO comment 15.

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Comments From Crane & Co.

Now on p. 32.

See GAO comment 13.

Now on p. 44.

See GAO comment 17.

Page 80 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

See GAO comment 17.

Now on p. 5.

See GAO comment 19.

Page 81 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

Now on p. 18.

Now on pps. 6-7.

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Comments From Crane & Co.

Now on p. 16.

Now on pp. 15-16 and 28.

See GAO comment 20.

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Comments From Crane & Co.

See GAO comment 21.

See GAO comment 20.

See GAO comment 7.

See GAO comment 23.

See GAO comment 22.

See GAO comment 22.

Page 84 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

Now on pp. 4 and 41.

See GAO comment 22.

Now on p. 22.

See GAO comment 22.

See GAO comment 22.

Now on p. 43.

See GAO comment 22.

Now on p. 43.

See GAO comment 22.

Page 85 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

Now on p. 43.

See GAO comment 22.

See GAO comment 22.

Now on p. 44.

Page 86 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

Now on p. 29.

See GAO comment 23.

See GAO comment 24.

See GAO comment 24.

Page 87 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

See GAO comment 26.

See GAO comments 7

and 13.

Now on p. 24.

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Appendix VII 

Comments From Crane & Co.

Page 89 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

See GAO comments 4

and 7.

See GAO comments 6

and 7.

See GAO comments 6

and 7.

Page 90 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

See GAO comments 6

and 7.

See GAO comment 6.

See GAO comment 25.

See GAO comment 6.

Page 91 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

See GAO comment 6.

See GAO comment 26.

Now on p. 34.

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Comments From Crane & Co.

See GAO comment 26.

Now on pp. 34-35.

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Comments From Crane & Co.

Page 94 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

See GAO comment 27.

Now on p. 40.

See GAO comment 28.

Page 95 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

See GAO comment 2.

See GAO comment 2.

Now on p. 8.

See GAO comment 32.

See GAO comment 2.

Page 96 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

See GAO comment 29.

See GAO comment 31.

Page 97 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

See GAO comment 31.

Page 98 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

Now on pp. 33 and 41.

Now on p. 42.

Now on p. 42.

See GAO comment 30.

See GAO comment 35.

Page 99 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

See GAO comment 30.

See GAO comment 36.

Page 100 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

See GAO comment 36.

Page 101 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

See GAO comment 36.

Page 102 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

See GAO comment 36.

See GAO comment 33.

Page 103 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

See GAO comment 8.

Page 104 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

See GAO comments 8

and 36.

See GAO comments 8

and 12.

See GAO comments 8

and 36.

Page 105 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

See GAO comments 4, 7,

12, and 18.

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Comments From Crane & Co.

Now on p. 6.

See GAO comment 14.

Now on p. 24.

See GAO comment 9.

See GAO comment 9.

Now on p. 31.

See GAO comment 34.

Page 107 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

Now on p. 41.

See GAO comment 30.

Page 108 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

Page 109 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

Now on p. 49.

See GAO comment 13.

See GAO comment 13.

Page 110 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

See GAO comment 13.

Page 111 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

The following are GAO’s comments on Crane’s letter dated July 28, 1998.

GAO Comments 1. Crane said that unlike in other industrialized countries, the single source

of the United States’ currency paper has been selected in an open and

competitive process, for the most part, and that the absence of multiple

suppliers is not the absence of competition. As we point out in chapter 2,

no firm other than Crane has submitted an offer to BEP for the five

solicitations covered in our review. Further, the paper manufacturers we

surveyed identified several factors that make it difficult for them to

compete, including the length of the currency paper contracts and the

exclusion of foreign-owned and controlled firms from supplying paper

under the Conte Amendment.

2. Crane said that (1) it has supplied paper at prices that are significantly

lower than prices paid by other G-7 nations to their currency paper

suppliers; (2) its currency paper prices have decreased after it introduced

new technology; (3) in real terms, its prices for unthreaded and

unwatermarked paper have declined between 1965 and 1995; and

(4) historical comparisons of its prices and comparisons of Crane’s prices

to currency paper prices of other countries are more appropriate than

comparisons to prices of other types of paper, such as passport paper and

money orders. BEP was unable to obtain prices paid by other countries,

and Crane did not provide us with any information substantiating the

prices paid by other countries when we requested it. Later in its letter

(page 8) Crane states that Treasury had surveyed other countries and

concluded Crane’s costs were lower. We found no evidence to support this

statement. However, we noted that in an unsolicited 1995 letter to BEP, a

foreign supplier offered currency paper to BEP at considerably lower prices

than Crane’s contract prices.

Crane said its inflation-adjusted prices for currency paper without a thread

and watermark and threaded currency papers were lower in 1995 than in

1965. However, we note that the rate of inflation alone is not a good

indicator of the fairness and reasonableness of currency paper prices

because there is no evidence that the 1965 base price was fair and

reasonable. In addition, Crane’s prices for threaded and watermarked

currency paper were higher for contract 97-10 than under contract 95-23.

Threaded and watermarked currency paper was introduced under

contract 95-23.

Page 112 GAO/GGD-98-181 Currency Paper Procurement
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Comments From Crane & Co.

Although we agree with Crane that historical comparisons of its prices and

comparisons of its prices to prices foreign countries pay for currency

paper would be useful, we also believe that comparisons to other types of

paper, such as passport paper and money order paper, would provide

useful information. However, none of these comparisons is likely to be

definitive by itself. For example, according to BEP, the volumes of currency

paper produced by the G-7 nations are considerably less than the volumes

produced annually in the United States, and this difference should be

considered in any price comparisons. Furthermore, although price trend

data provide information that is helpful in assessing the fairness and

reasonableness of prices, they were not conclusive because it is not

known whether the base-year prices were fair and reasonable. Overall, we

believe that competition, where several offers are received, would provide

the most objective means for determining whether currency paper prices

are fair and reasonable.

3. Crane disagreed with our recommendation to authorize the Secretary of

the Treasury to procure currency paper from a foreign source if a fair and

reasonable price cannot be obtained from a domestic supplier and

suggested that arbitration would be a better alternative, given security

issues associated with production in a foreign country. We disagree and

believe that given the limited number of suppliers of currency paper and

BEP’s weak negotiating position, the government’s interests would be

better protected if BEP had the option to obtain paper from another source

until a domestic source can be found that provides the paper at a fair and

reasonable price. Although we fully recognize the security concerns

associated with production of currency paper outside the United States,

our recommendation is aimed at providing a temporary solution similar to

what Congress has provided for most federal agencies in general. For

example, the Buy American Act, 41 U.S.C. 10a, which limits certain

purchases to items produced in the United States, also provides that the

limitations do not apply if the cost of the domestic item is determined to

be not reasonable. Further, we believe the ability to arrange for a foreign

currency paper source would provide BEP with needed leverage should it

find itself in the same position it was in during the period covered by our

review, when it was unable to determine that Crane’s prices were fair and

reasonable. We did, however, clarify the intent of our recommendation to

recognize Crane’s issue regarding security.

4. Crane said the inhibitors to competition we identified in our survey of

manufacturers were no different from those identified by BEP and

incorporated into solicitation 97-13; thus, according to Crane, BEP has

Page 113 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

already adopted our recommendations and it would be premature to take

further action until decisions are made on solicitation 97-13. This

statement is incorrect. Some factors, including the 4-year contract length

and the restriction against the participation of foreign firms, are beyond

BEP’s control; they cannot be adequately addressed in the solicitation

unless Congress makes legislative changes. In addition, there are options

beyond willingness to accept “innovative” proposals for financial

assistance that could be considered.

5. Crane said we did not explain why the fundamental concepts of fairness

in federal procurement should be abandoned for the special benefit of a

few companies. Our report does not suggest that fairness be abandoned.

To the contrary, we suggested that fairness to all interested competitors be

ensured in the acquisition of currency paper through the use of techniques

that are provided for in the procurement laws.

The measures that we proposed in our draft report are authorized by

procurement statutes to address situations in which questions exist as to

product availability and/or whether prices paid by the government in

single-supplier situations are fair and reasonable. Further, providing CAP to

a domestic supplier is authorized under the FAR and could enable suppliers

to overcome the high initial investment impediment, but the value of the

CAP would have to be reflected in the evaluation of the offeror’s price.

Reserving a portion of the requirements to target opportunities for

potential alternative suppliers could allow another supplier some time to

achieve a production level that would determine whether the supplier

could produce quality currency paper at a competitive price. Moreover,

given the special legislative provisions that apply to currency paper

production, it appears unlikely that potential suppliers would be willing to

enter the market without additional action to encourage competition.

However, as we have discussed previously, after considering the

comments we received on our draft report and reconsidering the

uncertainties we identified in our report, we deleted these two

recommendations from our final report but recognize that additional

measures by Treasury to encourage competition may be appropriate in the

future.

6. Crane said that (1) it and BEP have usually been able to reach agreement

on prices, (2) independent analyses confirm that agreed-upon prices have

been fair, and (3) the report offers no evidence that negotiated prices were

anything but fair and reasonable. As pointed out in chapter 3, for the 17

contract actions we reviewed, BEP and Crane were unable to reach

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Appendix VII 

Comments From Crane & Co.

agreement on 8, and BEP was unable to determine whether the prices for 5

others were fair and reasonable. Crane did not furnish convincing data or

analyses to us in support of its view that the prices have been fair and

reasonable. In any event, the determination of whether the prices are fair

and reasonable is to be made by BEP, and, as pointed out above, it was

unable to do so in several instances.

7. Crane said our report offers no facts or analysis to support the

conclusion that more effort is needed to encourage competition and that

the history recounted in our report demonstrates that BEP has focused

adequate attention on competition. The report details how BEP has not

been successful in obtaining competition, discusses the impediments to

competition, demonstrates that BEP has not been in a good position to

protect the government’s financial interests, and provides options to

encourage competition. As the report points out, Crane has supplied

virtually all currency paper since 1879. The report notes BEP’s efforts in

recent years to obtain competition, as well as the inhibitors that have

affected its success; and the report clearly points out that certain

inhibitors were beyond BEP’s control and others were within its control.

Further, the report discusses BEP’s efforts in connection with its most

recent solicitation and the issues interested paper manufactures have

raised.

8. Crane said the report fails to address the most important aspect of the

currency paper market, which is that the direct benefit to the government

of maintaining the quality and reliability of currency is worth more than

200 times the cost of the paper itself. We believe the benefit Crane refers

to is the interest earned by the Federal Reserve on government securities

that are held to back up the value of currency issued. We agree with Crane

that the quality of U.S. currency paper is important. However, we do not

understand how this benefit can be linked to the currency paper market.

Also, any firm awarded a contract would be required to maintain the

quality and reliability of the paper used for currency.

9. Crane pointed out that our draft report incorrectly characterized the

start-up period in solicitation 97-13. We have corrected this in the report.

10. Crane, in referring to the arbitration settlement in which $12.7 million

was returned to BEP, said that under a fixed-price contract, such

“givebacks” are not the norm. We agree. However, the normal procedure

under a fixed-price contract is to establish the price before contract

award; but in this instance, the parties were not able to agree on prices for

Page 115 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

several years because the government believed Crane’s proposed prices

were too high.

11. Crane said our report, in discussing the potential for disruptions to the

supply of currency paper, does not address the importance of advanced

anticounterfeiting technology in the paper itself. Chapter 1 of our report

acknowledges that the use of more sophisticated paper is one method of

making U.S. currency paper more difficult to counterfeit. Specifications

for anticounterfeiting features are included in BEP’s solicitations, and any

contracts that are awarded must be performed in accordance with these

requirements.

12. Crane said the report does not adequately define the optimum

circumstances for the procurement of currency paper and fails to explain

why “perfect competition” is deemed either unattainable or undesirable

by most large industrialized nations. We do define optimum circumstances

in chapter 2 and also explain why competition has not been obtained in

the United States. Although we attempted to collect data from the other

G-7 nations on how they procured banknote paper, it was beyond our

scope to explain the merits of the use of single currency paper suppliers in

those countries or to compare the procurement processes of the United

States with those of the other G-7 nations. Also, as BEP notes, the volume

of currency production in the other G-7 nations is less than in the United

States; this raises the question of whether there is sufficient volume of

currency paper production in other countries to support more than one

supplier.

13. Crane said the recommended options in our draft report to provide

financial assistance or exclude Crane from some or all of BEP’s

requirements would be anticompetitive and would jeopardize the currency

supply by replacing Crane with an inexperienced supplier. Further, Crane

said that the report offered no evidence that these options would be

effective and ignores the potential costs to the government and risks

associated with these options if they do not work. Also, Crane said that

there is no relevant precedent for taking these kinds of actions, and the

report does not support the use of the concept of dual sourcing for

currency paper production. In fact, the options we suggested—offering

financial assistance or excluding Crane from being able to offer on some

part of BEP’s requirements—are provided for in the procurement statutes

and regulations. They are designed to enhance competition in the long run,

not lessen it. Although we continue to believe that such types of

alternative strategies could be appropriate in the future, we recognize that

Page 116 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

there are currently many uncertainties involved and that Treasury may be

in a better position in the future to consider whether BEP should take

additional measures to encourage competition.

As our report says, DOD has taken steps to help establish a competitive

market in some instances in which it had concerns about price and/or

quality. Although we agree with Crane that the products involved in DOD’s

dual sourcing examples are certainly different from currency paper, we

believe that the dual sourcing concept is relevant to currency paper as

long as there is sufficient volume to economically support multiple

suppliers, and the interested paper manufacturers we surveyed appear to

believe a sufficient volume exists. Crane pointed out that according to a

former Commander of the Air Force’s Systems Command, DOD uses this

approach only when the manufacturing process by a single source is

inefficient and there are clear opportunities to achieve technological

breakthroughs by funding another source. However, the current

Undersecretary of Defense for Acquisition and Technology and DOD

officials we interviewed said that dual sourcing can yield significant

improvements in quality and reduction in cost in certain circumstances.

They said that this result occurs because, in a sole source environment,

there is very little incentive for the producer to drive down cost, and the

sole source provider may have an incentive to raise costs because, in

subsequent years, price negotiations are based on the preceding year’s

actual costs. One DOD official we interviewed recognized that dual

sourcing may not work for currency paper but did not conclude that the

concept was inappropriate for consideration.

Crane also raised other objections to our draft report’s recommendations

to consider providing financial assistance and excluding Crane from

submitting an offer on some of BEP’s requirements. For example, Crane

said that our proposed recommendations were based on our concern

about possible disruptions to the supply of currency paper and that we did

not assess the capability of potential suppliers to meet BEP’s specifications.

We did not base these proposed recommendations on a concern over a

supply disruption resulting from a security problem or a catastrophic

event, as Crane suggests. Rather, they were based on the difficulties of

entering the currency paper market, concerns BEP had over the fairness

and reasonableness of Crane’s prices over most of the 10-year period

covered by our review of BEP’s procurement records, questions that exist

over Crane’s profit levels in the absence of a domestic market that could

be used to assess the fairness and reasonableness of Crane’s prices, the

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Appendix VII 

Comments From Crane & Co.

difficulties BEP encountered in reaching agreement with Crane over most

of the 10-year period, and BEP’s lack of leverage in negotiations with Crane.

As Crane notes, we did not independently assess the capability of potential

suppliers to meet BEP’s requirements. BEP is responsible for making such

an assessment in determining the responsibility of a prospective

contractor, and we did not propose that BEP award a contract to a firm that

could not meet its requirements.

14. Crane pointed out that our report incorrectly identified two paper

manufacturers with U.S. addresses as being headquartered in the United

States. We made this correction.

15. Crane said that BEP never offered financial assistance to it. However,

we noted in the contract file for contract 97-10 that BEP offered various

financial incentives to Crane in an attempt to reduce Crane’s proposed

profits and that Crane rejected these incentives.

16. Crane surmised that the substance of our survey to paper

manufacturers was derived from a letter sent to BEP by two of Crane’s

potential competitors. This letter asked BEP to lengthen its contracts for

currency paper, provide a split-quantity award, and allow a longer start-up

period. Although we did not use this letter as a basis for our survey,

similar factors were identified by several paper manufacturers who

responded to our survey.

17. Crane said that obtaining best value should be the ultimate objective in

government procurement, not competition. We agree. However, we

continue to believe that when competitive procedures are used and a

market consisting of a number of responsible sources for the government’s

needs exists, the expected result would be adequate price competition so

that an agency would be likely to obtain supplies at a fair and reasonable

price.

18. Crane believes that (1) our findings show that BEP’s efforts to promote

competition have been adequate; (2) despite BEP’s historical use of full and

open competition and special BEP efforts to develop alternate sources,

BEP’s lack of success was due largely to Crane’s low prices and the other

companies’ inability to meet BEP’s requirements; and (3) our

recommendations to Congress and BEP aimed at enhancing competition

are not necessary and would not be beneficial. As Crane notes, our report

discusses BEP’s efforts since the 1960s to promote competition and the

Page 118 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

varied reasons for their lack of success. Also, as Crane notes, BEP cannot

be faulted for statutory restrictions, and our report clearly recognizes this.

Because BEP did not have procurement records for contracts prior to 1988,

we could not obtain detailed information on BEP’s procurement practices

or efforts, its assessment of Crane’s prices, or the extent to which

competition was sought prior to contract 88-205. Thus, we cannot provide

additional insights on Crane’s views of BEP’s efforts prior to 1988 other

than what has already been discussed in our report.

On the other hand, the report identifies certain BEP practices in the 1980s

and 1990s that may have inhibited competition. These practices included

contracts with short performance periods and start-up periods. These

were among the factors interested paper manufacturers cited as inhibitors

to competition. The report also notes that BEP addressed these as well as

other issues in solicitation 97-13. Contrary to Crane’s view, paper

manufacturers we contacted cite the statutory 4-year maximum currency

paper contract length and the Conte Amendment provisions as inhibitors

to competition. In fact, several of the manufacturers said that they would

be interested in submitting offers if the contract term was extended and

that they would not need CAP if the term was more than 4 years.

19. Crane said that it is not clear that any significant benefit would be

achieved by extending the statutory 4-year limitation on currency paper

contracts. In chapter 2, we point out that many potential currency paper

manufacturers disagree and said they would be interested in submitting

offers if the contract term was extended.

20. According to Crane, Portals decommissioned its Georgia mill in 1985

and sold it in 1986. Officials from Portals and the company that purchased

the mill told us that the mill was sold in 1988, after the Conte Amendment

was enacted.

21. In replying to our statement that currency paper was easier to produce

before security threads and watermarks were introduced, Crane

questioned why other paper manufacturers either failed to meet the

technical requirements or decided they could not match Crane’s prices.

The manufacturers told us, as reported in chapter 2, that certain

provisions in BEP’s solicitations prevented them from competing, not the

manufacturing process. The paper manufacturers did not identify Crane’s

prices as a factor that inhibited competition. Because BEP did not have

procurement records for contracts prior to 1988, we could not determine

the effect, if any, that the possibility of competition had on Crane’s prices.

Page 119 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

22. Crane said our report does not discuss how the government would be

protected if a subsidized contractor could not meet Crane’s prices or the

government’s requirements. Crane pointed out that Portals abandoned its

Georgia plant in the 1980s because it could not meet BEP’s requirements

and that Gilbert withdrew from the market because it could not meet

Crane’s low prices. Our draft report proposed that BEP consider the

feasibility of offering financial assistance and that any actual use of

assistance be predicated on it being cost-effective. Further, according to

Portals officials, the company abandoned its Georgia plant due to passage

of the Conte Amendment.

23. Crane pointed out that the Mint’s experience shows that open

procurements, not subsidies, are the best approach to encourage true

competition. Although we did not study in detail the market for clad-strip

material, Mint officials told us that it is different from the market for

currency paper. For example, the officials said that clad material can be

used for other products.

24. Crane said our report does not recognize the difficulties and

disadvantages associated with establishing a second source, such as

ensuring quality, increased research and development costs, and ensuring

that subsidized facilities are used in subsequent procurements. Crane also

points out, as does our report, that in its 1996 currency paper study,

Treasury concluded it would be more economical to work with Crane than

to develop a second source. We agree that our report does not discuss all

of the advantages and disadvantages of developing a second source; but

any ultimate decisions on whether to establish a second source should

consider these factors, as well as others, including the prices in contract

97-10. The questions that exist regarding the fairness and reasonableness

of Crane’s prices and the inhibitors that exist for new suppliers to enter

the currency paper market suggest to us that additional exploration of the

advantages and disadvantages of establishing a second source could be

beneficial in the future if BEP does not get adequate competition otherwise

and obtains more information on relevant issues.

25. Crane said that when a contractor provides full disclosure of its cost

and prices, a government agency is not required to determine that prices

are fair and reasonable. FAR 15.402 requires that contracting officers

purchase supplies and services from responsible sources at fair and

reasonable prices.

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Appendix VII 

Comments From Crane & Co.

26. Crane said that under the FAR, either a cost or a price analysis was a

legitimate technique to determine a fair and reasonable price. This is not

consistent with our understanding of the regulations. FAR 15.403-4 requires

the contracting officer to obtain cost or pricing data when adequate price

competition is not achieved. FAR 15.404-1 provides for both a cost and

price analysis to be conducted when cost or pricing data are submitted.

27. Crane said that the suggestion in our report that Crane took advantage

of BEP for the contracts covered by the arbitration settlement does not

fairly reflect the facts because Crane settled for prices that were lower

than Crane’s proposed price estimates. We do not make such a suggestion

in our report.

28. Crane disagreed with our observation that the government paid for at

least some of Crane’s cost of developing the currency paper with security

thread. We modified the report to show that Crane proposed $2.4 million

to develop the thread, which BEP accepted, according to BEP contract

records for contract 91-18. The extent to which additional costs for

developing the thread may have been paid for by BEP was not clear in BEP’s

contract records.

29. Crane said our report was incorrect in stating that Crane does not

periodically adjust its standard costs to reflect actual costs. We obtained

this information from the 1994 DCAA post-award audit of contract 88-205,

option 1, which stated that the contractor submitted inaccurate,

incomplete, and noncurrent data for material cost. This was identified by

DCAA as a systemic weakness because “the contractor does not reconcile

its standards and budgets with its actual cost experienced.” This systemic

weakness was identified by DCAA as the primary concern for about

one-third of the $3 million overpricing on this option. We modified our

report to show the specific contract action affected by this adjustment

problem.

30. Crane asked us to revise our description of a meeting that Crane and

BEP had regarding contract 95-23. We did not make the change as

suggested by Crane because our sources for the statements were a

memorandum in BEP’s files and statements we obtained from

representatives of Treasury and Crane who were at the meeting, and Crane

provided no evidence that these statements were inaccurate.

31. Crane commented that the arbitrator applied established government

guidelines to determine an appropriate level of profit consistent with

Page 121 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

prevailing standards for a capital intensive industry and made

recommendations for settling contract pricing for the period 1992 through

1995. In reviewing the decision, we noted that the arbitrator did not cite a

source for the “prevailing standards” for return on investment. Crane also

cited other statements by the arbitrator on the success of Crane’s efforts

to control costs. We note that these statements reflect the views of the

arbitrator and would not necessarily reflect the views of other

independent parties who would review the same issues.

32. Crane raised the possibility that it may be difficult for multiple

currency paper manufacturers to produce homogenous paper. BEP

apparently does not share this concern as evidenced by solicitation 97-13,

which allows offers from multiple suppliers.

33. Crane said our report failed to consider that savings achieved through

competition for currency paper would be far exceeded by the budgetary

value of currency to the Treasury. We agree, but we do not believe this

should be a factor in obtaining competition.

34. Crane said that a manufacturer’s concern over providing distinctive

currency paper threads and watermarks has been addressed by

solicitation 97-13. The report recognizes in chapter 2 that the security

thread will be provided by the government.

35. Citing our 1997 testimony on Coin and Currency Production: Issues for

Congressional Consideration (GAO/T-GGD-97-146), Crane said there were

several low-impact options available to the government to reduce risk of

interruption to the supply of currency paper, including stockpiling

currency and reducing the destruction rate of soiled notes. Crane did not

recognize that we were referring to temporary alternatives to having a

backup printing facility. Crane also did not mention, in its comments, that

we also reported as other alternatives reciprocal printing agreements with

foreign countries and arrangements with the private sector. We pointed

out in our testimony that these latter two alternatives involved security

concerns because the Secret Service has no investigative authority outside

of the United States and that nongovernmental personnel and facilities

would be involved if a private sector printer were used. We concluded that

issues such as these would have to be discussed with Treasury before

decisions on these matters were made.

36. Crane said that our discussion of the possible disruptions to currency

paper supplies ignored the threat of disruption due to counterfeiting and

Page 122 GAO/GGD-98-181 Currency Paper Procurement
Appendix VII 

Comments From Crane & Co.

that Crane’s development of anticounterfeiting features has assisted in the

deterrence of widespread counterfeiting. Crane also said that the

willingness of citizens and foreigners to hold U.S. currency provides

$10 billion to $16 billion in annual savings to the Treasury and that even a

slight decline in the usage of U.S. currency resulting from doubts

concerning authenticity, such as lack of uniformity in the manufacturing of

the paper, would result in major financial loss to the government. In both

of these issues, Crane appears to be implying that only one producer of

currency paper is capable of producing paper that has anticounterfeiting

features and that meets government standards. We believe that Crane is

not the only currency paper manufacturer capable of producing

anticounterfeiting features or currency paper acceptable to the public. As

pointed out in chapter 2, producers that say they have this capability are

located in foreign countries, but the Conte Amendment has made it

difficult for U.S. firms to form joint ventures with those firms that have the

technological capability. Also, according to a Federal Reserve official,

people throughout the world use our currency because of our stable

government, economy, and superpower status, in spite of the fact that our

currency continues to be counterfeited, not because it is printed on paper

produced by a specific producer.

Page 123 GAO/GGD-98-181 Currency Paper Procurement
Appendix VIII 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

John S. Baldwin, Sr., Assistant Director

Tammy R. Conquest, Assistant Director

Geraldine C. Beard, Senior Evaluator

William R. Chatlos, Senior Social Science Analyst

Stuart Kaufman, Senior Social Science Analyst

Dallas Field Office Seth D. Taylor, Senior Evaluator

Office of General

Counsel, Washington,

D.C.

John G. Brosnan, Assistant General Counsel

Susan Michal-Smith, Senior Attorney

(240251) Page 124 GAO/GGD-98-181 Currency Paper Procurement
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