59

schedules are likely to be extremely administratively burdensome and may preclude a mix of

saver: ee Jidation, privatization, and cost . :

The FAIR Act provisions do not violate these principles. In our view, the FAIR Act
provisions serve to reinforce ongoing efforts to improve the identification and review of support
activities that are commercial or subject to contract. Agencies are already reviewing which
support activities are: (1) inherently governmental and cannot be contracted out any time, any
place or for any reason; (2) commercial and subject to contract, but are specifically exempt from
the cost comparison requirements of the Circular A-76 for reasons of, for example, the national
defense, patient care, or other specified reasons; (3) commercial and which should be competed
with public and private sector offerors on the basis of quality and cost; and (4) commercial, but
must be retained in-house — for now -- for reasons that need to be explained by the agency,
including the involvement of that function in a larger re-engineering, reinvention, consolidation

or privatization review.

In essence, the FAIR Act preserves our ability to increase opportunities for public-private
competitions and permits us to achieve the quality improvements and cost reductions we all seek

in the acquisition of commercial support activities. Accordingly, the Administration would not

object to passage of the FAIR Act provisions.

Tuming to the third issue, the Administration opposes those provisions of H.R. 4244 that

s




Ce NY AHF wWwN

RBREBBRBREBSREWIEAREBEAS

25

17
for the education and training of the acquisition
workforce are expended for such purposes.

“Gi) In requesting funding as a part of the
budget request of the agency, the agency head shall
take into consideration the results of the assessment
of the performance of the procurement system of the
agency in terms of its efficiency and effectiveness in
supporting the agency in accomplishing its mission,
including the adequacy of the education and training
of the acquisition workforce and whether the work-
foree has the necessary competencies, skills, and
knowledge to effectively support the achievement of
the mission of the agency.

“(B) The Administrator shall—

“(i) review the agency budget requests to
assess the adequacy of funding levels for the
education and training of the acquisition work-
force and make recommendations to the agency
head for adjustments of the funding levels, as
appropriate;

“(ii) inelude sufficient funds in the budget
recommended to the Administrator of General
Services for the Federal Acquisition Institute in
accordance with section 6(d)(5) for the develop-
ment and maintenance of the instructional ma-


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
J, DENNIS HASTERT, Illinois TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jk., West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
ILEANA ROS-LEHTINEN, Florida PAUL E. KANJORSKI, Pennsylvania
JOHN M. McHUGH, New York GARY A. CONDIT, California
STEPHEN HORN, California CAROLYN B. MALONEY, New York
JOHN L. MICA, Florida THOMAS M. BARRETT, Wisconsin
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
DAVID M. McINTOSH, Indiana DC
MARK E. SOUDER, Indiana CHAKA FATTAH, Pennsylvania
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
JOHN B. SHADEGG, Arizona DENNIS J. KUCINICH, Ohio
STEVEN C. LaTOURETTE, Ohio ROD R. BLAGOJEVICH, Illinois
MARSHALL “MARK” SANFORD, South DANNY K. DAVIS, Illinois

Carolina JOHN F. TIERNEY, Massachusetts
JOHN E. SUNUNU, New Hampshire JIM TURNER, Texas
PETE SESSIONS, Texas THOMAS H. ALLEN, Maine
MICHAEL PAPPAS, New Jersey HAROLD E. FORD, JR., Tennessee
VINCE SNOWBARGER, Kansas ——_
BOB BARR, Georgia BERNARD SANDERS, Vermont
DAN MILLER, Florida (Independent)

RON LEWIS, Kentucky
KevIN BINGER, Staff Director
DanteL R. Mout, Deputy Staff Director
Davip A. Kass, Deputy Counsel and Parliamentarian
JupitH McCoy, Chief Clerk
Punt. SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY
STEPHEN HORN, California, Chairman

PETE SESSIONS, Texas DENNIS J. KUCINICH, Ohio

THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania

JOE SCARBOROUGH, Florida MAJOR R. OWENS, New York

MARSHALL “MARK” SANFORD, South CAROLYN B. MALONEY, New York
Carolina JIM TURNER, Texas

JOHN E. SUNUNU, New Hampshire
RON LEWIS, Kentucky

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California
J. RUSSELL GEORGE, Staff Director and Chief Counsel
Mark BRASHER, Senior Policy Advisor
MATTHEW Epert, Clerk
JULIE Moses, Minority Professional Staff Member
FaitH WEISS, Minority Professional Staff Member

dp


119

Mr. ENGEBRETSON. Mr. Chairman, thank you. My remarks will
be brief because John did a great job in explaining some of the
problems that we have within our industries. Second, of course, his
overview of what he thinks government should do and should not
do, but there were some areas that were not covered, and there
was a statement that I have a little concern of.

First of all, I think the amendment is going to do wonders. It will
open up and study positions that have in the past not been studied.
They will come, then, to be before the leadership, and they'll say,
yes, this can be contracted out or no this cannot. This is the first
time in my 11 years of CSA, and since the Eisenhower administra-
tion, that this specific thing is going to happen. I remember, during
the Reagan era, they tried to get the agencies to do a 3 percent re-
view every year, and that failed. Nothing happened; there was
nothing there to push it. So I think this will be good.

The competition is going to be fantastic. This is where the sav-
ings will come in. As the Congressman from Ohio was pointing out,
where do they really save the dollar? The competition is fierce in
this industry. I know of companies that are operating on a 1 and
2 percent margin. That means it forces them to be very competi-
tive. That means that they use the latest techniques to manage the
projects and to manage people. They look for those things that they
can save dollars and so they can do their work well. They do pro-
vide excellent services, and the government does have oversight,
and they can force the companies to do the projects. That doesn’t
mean there isn’t a bad apple in the barrel; there are some bad con-
tractors; we know that. But the savings will be tremendous. We're
looking at a 30 percent savings, as both of you commented earlier,
and we will see that happen.

But here’s the thing that bothers me. They say that our industry,
when the people come from the public sector to work for the private
sector, that we cut wages; we cut benefits; we don’t provide bene-
fits. This is an absolute false statement. We are under the Service
Contract Act. We are under the Davis-Bacon Act. We are under the
Fair Labor Standards Act. We are under the Walsh-Healy Act. All
of them tell us what we must pay as the prevailing wage for our
employees. We do have benefit packages that we are told that we
must pay, and those requirements are there, and it’s a part of the
bidding process. So I do want that to go on the record that we must
pay what the government tells us to pay. And the government and
the contractors, as they put these proposals together—whether it’s
the most efficient organization or the company themselves—many
dollars are spent in putting these together to try to get that sav-
ings for our taxpayers. And we will, and I think that this can work.
And we thank you, again, for the opportunity to be here today.

Mr. Horn. Well, we thank all three of you, and we'll end with
the last person whose got quite a record here on philosophy. i eii-
joyed it. You came up with a lot of answers that I, as a former pro-
fessor, wouldn’t think of, and you’re right. You did well.

Mr. PALATIELLO. Well, thank you, Mr. Chairman. I’m sorry that
Mr. Kucinich left because I wanted to tell him that I enjoyed it as
well.

Three very quick comments. The question you asked was if there
was anything that we heard that we'd like to agree with.



68

attention being paid to the evaluation of contractor performance. Because completed evaluations
(along with contractor responses thereto and any additional agency review comments) are used to
support future award decisions, contractors are motivated to excel in their performance.

In addition, we are making greater use of contracting methods that will help improve the
likelihood of successful contract performance. For example, we are using performance-based
service contracts that include objective performance requirements and standards (which give
contractors latitude to be innovative and adopt the latest, most cost effective management
practices). These contracts are accompanied by a quality assurance plan that allows for the use
of both positive and negative incentives. The contractor's payment is tied to the achievement of
requirements and standards. Poor contractor performance may result in an immediate reduction
in payment and would also be reflected in contractor past performance evaluations which could
impact the contractor's future business opportunities.

If, however, contract performance is unsatisfactory within the time frame for full
recompetition, the agency may terminate the contract and, if specified conditions exist, convert
directly back to in-house performance. It is our view that any additional action beyond this
would necessarily have to be applied to the in-house decision, including scheduled recompetes.

12. What are some of the problems the Government has experienced with outsourcing?

Certainly there are anecdotal stories that can be given to highlight problems with
individual cost comparisons, contracts, contractors or with a particular transition from in-house
to contract performance. Similar anecdotes can be gathered regarding in-house performance,
incentives and costs. In our review of the literature and through reports by the General
‘Accounting Office (GAO) or, for example, the Center for Naval Analysis (CNA) we find few
trends that warrant fundamental policy changes.

As noted in question 11, above, the government is pursuing a variety of initiatives to
motivate our contractors to excel in their performance, including the use of financial incentives
through use of performance based service contracting. A recently completed Government-wide
pilot project conducted by the Office of Federal Procurement Policy and endorsed by the
President's Management Council demonstrated an average 15% nominal price reduction and
18% increase in satisfaction with contractor performance. These findings validated 20 years of
anecdotally reported positive agency experiences with this contracting practice, showing how it
can greatly contribute toward extending programs that rely on service contracts in a time of tight
budgets.

13. When activities are outsourced, what happens to the Government jobs? What
about workers with government pensions — can they carry them over to the private
sector? What about health benefits?

When activities are outsourced, those jobs that are not inherently governmental, such as
those that are created to meet contract administration requirements, are converted to contract
performance. Historically, the number of available jobs has decreased as a result of an A-76


79

Horn, and all the others, the respective staffs, for working so hard,
and that has gone into crafting this legislation, and I offer our con-
tinued support.

This concludes my remarks and I stand by and ready to answer
any questions that you may have.

[The prepared statement of Mr. Engebretson follows:]


Cond nnep wn =

RBREBRBRESVESEWIAARPSESES

15

7

Policy Act (41 U.S.C. 403(11)), completion of
training in duties related to use of the sim-
plified acquisition procedures authorized to be
used under the appointed position (including
any training mandated for such duties by the
Federal Acquisition Regulation) and such addi-
tional requirements, based on the dollar value,
nature, and complexity of the contracts award-
ed or administered pursuant to the appoint-
ment, as may be established by the Federal Ac-
quisition Regulation or the appointing agency
head.

“(ii) For appointments to serve as a con-
tracting officer with authority to award or ad-
minister contracts for amounts above the sim-
plified acquisition threshold as specified in sec-
tion 4(11) of the Office of Federal Procurement
Policy Act—

“(I) completion of the core curriculum
established in the Federal Acquisition Reg-
ulation for contracting officers;

“(II) at least 2 years experience in a
contracting or purchasing position;

“(III) satisfaction of other qualifica-
tion requirements for contracting or pur-


14

an average of 10,000 engineers, surveyors, and mapping scientists
have emigrated into the United States each year during that time
period. This shows clearly that there is a job market for people in
the private sector in our Held. One of the benefits that we see from
this legislation is tremendous employment opportunities for those
Federal employees who wish to transition themselves to private
sector employment, and our member firms welcome that.

Again, we commend all those involved with this compromise.
This is a good bill. We look forward to working with the Congress
on oversight and with OMB on implementation of this important
legislation.

Thank you for the opportunity.

[The prepared statement of Mr. Palatiello follows:]


32

Ss Congress of the United States
‘Bouse of Representatives

Se soam sow (COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

25 a7 homme Orroroo,

Botan wemrene Wassanaton, OC 20515-8143

We would like to express our support for H.R. 4244, as reported out by the full
Committee. In particular, section 302 is extremely important in that it secures temporary
relief for Federal Employee Health Benefit (FEHB) contracts from application of the Cost
Accounting Standards (CAS), accounting standards that are not only incompatible with
health insurance carriers’ accounting systems, but have little value to the carriers, the
federal government, and the federal employees who rely on the FEHB program.

‘After failing to receive a delay in implementing the CAS from the Cost

Accounting Stundants Board (CASB), ‘the Office of Personnel Management (OPM)

‘carriers in a January 15, 1998 letter to commence all
nctsary adjetrens ota accounting procedure and prastces nro conea 0
the requirements of 48 CFR Part 30 and 48 CFR Chapter 99. Carriers were directed to
adopt the CAS to “the maximum extent practicable” for contract year 1998. This was
imposed even though OPM informed the committee in a letter dated June 30, 1998, that,
‘as a general matter, they are satisfied with the cost accounting information provided by
the FEHB carriers, and they have sufficient regulatory authority to ensure that audits are
conducted ately.

On the other hand, Blue Cross and Blue Shield Association (BCBSA), the largest
carrier in the FEHB program (covering 42 percent of all federal employees), has raised
concerns with the difficulties of implementation of the CAS on FEHB program plan
‘contracts. BCBSA has stressed that implementation would be extremely complex, time
‘consuming, and economically unfeasible. More importantly, such an imposition would


103

Efficiency Beats Ideology:
Economizing in the Public Sector

Max B. Sawicky
Economic Policy Institute

Statement submitted to the
Subcommittee on Government Management, Information and Technology,
House Committee on Government Reform and Oversight

August 6, 1998

T would like to thank the Subcommittce for permitting me to provide my
views on Title II of HR 4244, Federal Procurement System Performance
Measurement and Acquisition Workforce Training Act of 1998.

Tam afraid this proposal is of no help at all in improving the delivery of
public services. A tip-off is its genesis as an effort to win “freedom from
government competition.” Such an effort is misbegotten and misconceived.
Surely our business here is to improve efficiency, and in this endeavor we
need to take a fresh look at all public services. What we really need is
freedom from ideological prejudice. Such is my understanding of oversight.

A simple criterion for any effort to promote competition is its success in
establishing fair and equal treatment for all participants and objects. The
proposed legislation takes the wrong tack in basic respects:

© Defense-related functions are not treated the same as domestic ones. It’s
not as if our defense sector enjoys a marked superiority to the rest of the
government in the realm of efficient procurement and management of
contracts;

« Public employees and agencies ate not afforded the same capacity to
participate as are private entities. Often in public contracting there are
few bidders, and this naturally inhibits the effectiveness of the policy.
Preventing public entities from participation is the wrong policy. Strong
advocates of contracting advocate a level playing field in this context. In
this vein, the amendment confuses the process of cost comparison,


39

There are many examples of efforts in Federal agencies that already involve a cross-
section of federal, state, private-sector, and local interests to compile geographic
information. These efforts need to move forward to guarantee that the base data that is
used to compile maps, charts, geographic information systems, and other spatially-based
tools, is of the highest accuracy possible. In one recent example, the National Geodetic
Survey has completed a 50-state “High Accuracy Reference Network” that will ensure
that future surveys and mapping projects in all states will have an accurate base. While
the overall guidance and technical standards were set by the Federal government, many
states, counties, private firms, and state surveying organizations were involved in the
Project. States and local governments across America found the resources to help
complete the project, even during a period of downsizing and reduced budgets. Many
surveyors, realizing the importance of “getting it right the first time,” as well as
documenting their work, supported the effort. The result is a combined network of federal
and non-federal reference points that can be used to prepare accurate geographic
products.

Accurate Geographic Information Affects All Americans

Since the development and use of accurate geographic information is something that
affects all Americans, we believe that outsourcing of this work should meet strict quality
requirements, and that the government must be able to hold the contractor accountable for
performing acceptably. Cost effectiveness is one of several factors that needs to be
considered; and arbitrary percentage targets for contracting out should be avoided.

The American Congress on Surveying and Mapping is a unique organization that
includes many of the individuals and organizations involved in the debate over what is
“inherently governmental.” We welcome the opportunity to participate further with you in
the discussion.

ACSM appreciates this opportunity to present its views on the proposed Federal
Activities Inventory Reform Act (FAIR) and will be pleased to provide additional
information on any point in our statement. Please contact Kevin Flynn, Acting ACSM.
Government Affairs Director, at 301-493-0200.


Legislative Hearing on Title Il of H.R. 4244,
the “Federal Activities Inventory Reform Act”

August , 198

Very little is currently known about the pay, health care benefits, or retirement benefits of
federal contractor employees. In a recent effort to provide some information on this
issue, the General Accounting Office (GAO) contacted OMB, DoD, and OPM officials
knowledgeable about the contractor workforce, but they could not offer much assistance
(GAO/GGD/NSIAD-98-167R). However, in 1995 GAO did find that "53% of federal
employees whose jobs were contracted out said that they received lower wages, and most
reported that contractor benefits were not as good as their government benefits.”
(GAO/T-GGD-95-131)

Why doesn’t the federal government collect this information? What data can you provide
on the contractor workforce? Do we even know how large that workforce is? Please
provide your best estimate of the size of that workforce. Savings from contracting out
often come through lower way and benefit levels. To what extent is this the case in
federal contracting? Is a comprehensive survey of contractor wages and benefits
possible? If so, will OMB commit to performing such a study?

The Federal Activities Inventory Reform Act codifies the requirement in OMB Circular
A-76 that agencies inventory activities performed by federal employees which are not
inherently governmental. This Administration has also stated that contractor-performed
‘work can be contracted-in if federal employees can do the work more cost-effectively.

Please list the instances of contracting-in that have occurred in the last five years and the
value of those contracts. GAO has concluded that “personnel reductions that have
occurred throughout the government could make it difficult to bring work back in-house.”
(GAO/GGD/NSIAD-98-167R) Do you anticipate that contracting-in will increase or
decrease in the next few years? The inventories of federally performed non-inherently
governmental activities may encourage agencies to consider contracting-out. Would an
inventory of work performed by contractors be useful to agencies in considering whether
to contract-in work?

Much contracting out in the federal sector takes place without any cost comparisons,
cither through OMB Circular A-76 or other informal means. According to GAO, OMB is
“not able to provide data on the percentage of commercial activities contracting funds (1)
completed under A-76, (2) competed under an informal competitive framework, and (3)
not competed at all.” (GAO/GGD/NSIAD-98-167R) This is clearly an unfortunate
situation, Please provide answers to the following to the best extent possible.


‘The Honorable Stephen Hom
August 28, 1998
Page 2

For over a year, the Association and the Plans have worked to ascertain how best to
comply with OPM’s directive. The studies and analyses performed in this period have
highlighted the incompatibility between CAS and the typical Blue Cross Blue Shield
accounting system, which we summarized in our August 4 letter to you and which were
described in more detail in an attachment to our July 28, 1998 letter to Chairman
Burton. As we earlier stated, most of the incompatibilities arise from the allocation and
consistency standards, not from the measurement standards, The allocation and
‘consistency standards have not historically applied to the FEHB Program. This is an
important distinction that Mr. DeSeve’s statement does not address. In addition, full
CAS coverage would bring with it the requirements of the CAS Board regulations and
Disclosure Statement requirements, which have also not applied to the FEHB Program.
Mr. DeSeve's statement does not address the fact that OPM is currently satisfied with
the cost accounting information provided by FEHB Program carriers, the fact that OPM
believes that CAS must be modified to fit the Program, or the fact that OPM believes
that some requirements of CAS, most particularly the Disclosure Statement
requirements, pose heavy administrative burdens for both the carriers and OPM without
adding value to the Program.

‘Mr. DeSeve advocates that Congress defer to the administrative CAS waiver process.
This position fails to take into account the fact that the Association and OPM are
currently engaged in negotiations for the 1999 contract, which must be concluded in a
relatively short period of time, The statement that “CAS waivers and exemption should
only be granted upon a thorough investigation and evaluation of the factual and
technical merits of a specific accounting situation by the CAS Board” demonstrates that
reliance on the administrative process is not likely to resolve the problem at hand in a
timely manner. OPM has in fact submitted a request for waiver to the CAS Board.
However, both the carriers and OPM favor at least a temporary moratorium while the
larger issues of CAS modification and/or specific waivers are considered in crafting a
‘Tong term solution. Otherwise, OPM may be forced to include in the 1999 contracts
requirements that they have no practical means of either implementing or enforcing, and
‘carriers will have to consider whether they can even enter into contracts with such
provisions. Mr. DeSeve's statement reflects the opposition of CAS Board staff'to a
moratorium. This opposition, we believe, simply demonstrates that a great deal of
education of the CAS Board staff is necessary before an appropriate long term solution
‘can be agreed upon. This, in our view, underscores the need for a moratorium.


67

has permitted conversions to contract performance without a cost comparison. The March 1996
Revision expanded that provision to permit the conversion of work from contract to in-house
performance. It is felt that cost comparisons requirements at this limited level are burdensome
and that the savings that could be generated by a public-private competition are unlikely to be
offset by the delays and other costs of conducting the cost comparison. Work may also be
converted to contract performance without a cost comparison if it is awarded to a procurement
preference eligible contractor, such as those in the Smal! Business Administration’s 8 (a)
program or a workshop for the blind or severely handicapped. In yet other situations, waivers
from the cost comparison requirements of the Circular may also be granted at the Assistant
Secretary level.

The amount of work that has been converted from in-house to contract or from contract
to in-house performance without a cost comparison and over the past 20 years is not known.
‘Only two waivers are known to have been issued from the cost comparison requirements of the
Circular A-76; the most significant of which was the decision to convert the Federal Aviation
Administration’s Level 1 Towers to contract performance. This was done on the basis of
experience which indicated that savings in excess of 50 percent were being achieved by
converting this work to contract performance.

10. How can we know that outsourcing work saves the taxpayer’s money unless it has
been determined the in-house performance is less cost effective?

We agree that cost comparisons should be conducted to justify the conversion of
competitive work. As noted above, however, the conversion of work from in-house to contract
performance is not always a function of the competitive costs to the taxpayer. In many cases,
conversions may be justified on the need to access special skills (doctors, nurses, research
scientists, DOD defense systems technicians, etc.), technology or to meet other requirements.
For that recurring commercial work that is competitive and for which cost is a deciding factor,
the OMB Circular A-76 requires that a minimum level of taxpayer savings be identified before
work can be converted to or from in-house or contract performance. This minimum differential
or savings is established at 10 percent of the in-house labor costs not to exceed $10 million.
Outsourcing is not always the right answer and this is why we have insisted on the conduct of
cost comparisons when appropriate.

11. Does OMB conduct post-contract reviews of outsourced activities to assess whether
cost savings are achieved over time?

OMB does not conduct post-contract reviews of outsourced activities. The agencies are
expected to conduct such reviews as a normal part of their procurement and contract,
administration process, with full recompetitions generally every three to five years.

‘The Government is doing business with better-performing contractors that are committed
to excellence and to meeting cost, schedule, and performance goals. This achievement is the
result of a concerted effort by contracting activities to increase their focus on the past
performance of contractors when conducting competitions for work. There is also greater



104

lumping overhead costs (which would apply in any case) together with
the costs of provision under public auspices;

© The widest circle of democratic participation in the evaluation of the
process, including public interest groups, is not encouraged. Often these
groups are the only parties without a direct interest in the outcome of the
privatization decision.

« Existing contracting arrangements are not subjected to the same scrutiny
as existing publicly-provided services. There is no reason to expect that
government functions are free of problems in one respect but not the
other.

The notion of “freedom” conjures up that of “rights.” Conservatives have
said, with some merit, that we are more prolific in the generation of rights
than of responsibilities. In the present context, the analogy is that we are
better at issuing fiats about how government is supposed to work, but not as
good at the timely evaluation and remediation of government performance.
This is also true for state and local governments, incidentally. Giving
contracts is casy; analyzing their effectiveness and using this information to
take remedial action is hard and, not surprisingly, contract oversight is often
neglected.

In the proposed legislation, rather than tools for the improvement of
evaluation, we have an exercise in taxonomy. Specifically, we have an
effort to promulgate standards for what is “inherently governmental” and
what isn’t. One problem is the type of standard at issue; the second is the
specific content being proposed.

The type of standard is a definition of “governmental.” I see no reason to
seek such a definition. From an economic standpoint, what matters is input
and output, or cost and performance. The method of provision that satisfies
our goals for cost and performance should be the criterion for what is
governmental or not. The legislation makes no contribution in this vein.
Instead it proposes an abstract definition of what is “governmental.” The
taxpayer’s interest is in cost and performance, not philosophical rumination.

Secondly, the definition proposed is sufficiently broad and vague to admit
everything or nothing. For instance, consider the function of trash pick-up.


45,

The Honorable Steve Horn
August 4, 1998
Page 2

‘The CAS Board promulgated three types of cost accounting standards:
standards on consistency in cost accounting; standards on allocation of cost to
cost objectives; and standards on measurement of individual cost elements.
Many of the measurement standards are incorporated in the Federal
Acquisition Regulations cost principles and have been applicable to the FEHBP
for some time. The provision in H.R. 4244 would not, in any way, alter the
applicability of these principles to FEHBP contracts.

The consistency standards and the cost allocation standards are conceptually
sound but their specific requirements are not compatible with the multiple cost
center accounting approach used by Blue Cross and Blue Shield Plans.
Further, the FEHBP business is integrated with the local Blue Cross and Blue
Shield Plans’ commercial business and the goverment contract, on average,
accounts for only about 5 percent of the typical Plan's business. Thus, to
implement the specific requirements of the CAS would require significant
restructuring of the Plans’ current accounting systems. Such a restructuring
would require abandoning the multiple cost center pracess cost system
approach that now provides Plan management with cost information for
managing their commercial business and pricing their products. A change of
this magnitude would require a significant monetary investment that would be
costly to Plans and to the Government and at the end of the day, would provide
no significant benefit to the FEHBP.

Itis worth noting that the Office of Personne! Management (OPM), the agency
that administers the FEHBP, has stated publicly that it is generally satisfied with
the cost accounting information provided by FEHBP carriers, and believes it
has sufficient regulatory authority to ensure that audits are conducted
appropriately. OPM also has acknowledged that the CAS pose implementation
problems and may require modification to fit insurance products. BCBSA
agrees with OPM's views. Further, BCBSA wishes to assure the Congress
that, in our view, the provision in H.R. 4244 would, in no way, weaken or
undermine OPM's authority with respect to FEHBP oversight, administration, or
audit.


87

Testimony of

Elliott D. Sclar,
Professor of Urban Planning,
Columbia University

before the
Subcommittee on Government Management, Information and Technology
of the

Committee on Government Reform and Oversight,
House of Representatives,
Congress of the United States.

August 6, 1998

Re: Title I of H.R. 4244
“Federal Activities Inventory Reform Act of 1998"

Introduction

Chairman Horm and Members of the Subcommittee, I appreciate the
kind invitation you have extended to me to testify on Title II of H.R. 4244
the "Federal Activities Inventory Reform Act of 1998" (Title Il).

My name is Elliott Sclar. I am Professor of Urban Planning at the
Graduate School of Architecture, Planning and Preservation, Columbia
University in the City of New York. I am an economist. I study the
economics of privatization. In the American context the term privatization
is somewhat misleading. It tends to refer to efforts to increase reliance on
contracting in the performance of public service. It is therefore more
accurate to think of the subject matter of domestic privatization as
effectively the economics of public contracting. The crucial issue then
pertains to the relationship between public contracting and organizational
performance. It is always a complex relationship, and often problematic.
Title II will vastly expand the scope of public contracting in the ongoing
operations of federal agencies. Therefore the implications for the cost
effectiveness of federal public service are potentially vast.

Is such change a good or bad idea? The answer depends upon the
goal of the legislation. If the goal is simply to realize a value judgment that
more public contracting is inherently a good idea, Title II is a promising
piece of legislation. If the intention is to contribute to improvement in the


8

Mr. Horn. Well, we appreciate very much you taking the time
to come. We know the tremendous hours you've spent on your legis-
lation, and we thank you for following it, and all the niches and
crannies the Congress can dream up for any piece of legislation. So
thank you for coming.

Mr. DuNcAN. Thank you very much, Mr. Chairman.

Mr. Horn. You’re welcome.

Tm going to read my opening statement now into the record, ba-
sically. Then when Mr. Sessions, the vice chairman comes, he can
continue the hearing, if he gets back first from the floor.

Our hearing today will examine title II of H.R. 4244, the Federal
Activities Inventory Reform Act. This title represents an amend-
ment by Representative Pete Sessions. This topic has been the sub-
ject of previous hearings in the subcommittee in September 1997
and March 1998. Hopefully, our witnesses will be able to shed addi-
tional light on a much-debated topic.

(The text of H.R. 4244 follows:]


H.R. 4244, FEDERAL ACTIVITIES INVENTORY
REFORM ACT

THURSDAY, AUGUST 6, 1998

HOUusE OF REPRESENTATIVES,
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 2:15 p.m., in room
2247, Rayburn House Office Building, Hon. Stephen Horn (chair-
man of the subcommittee) presiding.

Present: Representative Horn, Sessions, Lewis, and Kucinich.

Staff present: J. Russell George, staff director and chief counsel;
Mark Brasher, senior policy director; Matthew Ebert, clerk; and
Julie Moses and Faith Weiss, minority professional staff members.

Mr. SESSIONS [presiding]. I apologize for being late. I’m going to
make an opening statement after your testimony.

STATEMENT OF HON. JOHN J. DUNCAN, JR., A REPRESENTA-
TIVE IN CONGRESS FROM THE STATE OF TENNESSEE

Mr. DuNCAN. Thank you very much. I appreciate that. I would
like to thank you for the invitation to be here with you today.

As you know, this committee accepted an amendment to H.R.
4244 a couple of weeks ago, which I understand is some Federal
procurement legislation. This amendment contained most of the
provisions of legislation which I have introduced in the House, H.R.
716, the Freedom from Government Competition Act. This amend-
ment was offered by Representative Pete Sessions, and I would like
to personally thank him for all of his interest and hard work on
this issue.

The provisions included in the amendment are a scaled-back
version of the original bill that I introduced. Recently the Senate
passed this scaled-back version unanimously, and this legislation
was introduced by our friend, Senator Craig Thomas, over in the
Senate and has received strong support and bipartisan support in
the Senate. The legislation in the House currently has 66 cospon-
sors, and it is, I think, mostly significantly supported by over 100
associations and organizations. Those are such a wide variety that
I won't take the time to list all of them today, but I will tell you
that some of these organizations include the U.S. Chamber of Com-
merce, the National Federation of Independent Business, and
many, many others.

In addition, the Small Business Office of Advocacy supports these
efforts to end unfair government competition with the private sec-

(y


42

PRT CALL To ACTION:
PROCUREMENT WORKFORCE PROFESSIONALISM

Both the Congress and the Administration are taking action to improve the Federal acquisition
system. In 1994 the Congress enacted the Federal Acquisition Streamlining Act (FASA) which,
among other things, establishes a preference for the purchase of commercial items, raises the dollar
threshold permitting the use of simplified procurement procedures, and requires eventual
‘implementation of an electronic procurement system.

FASA builds in part on the recommendations of the National Performance Review (1993) which
contains recommendations for simplifying the procurement process by shifting from rigid rules in
the Federal Acquisition Regulation to a set of guiding principles, delegating more procurement
authority to agencies for information technology, and substantially decreasing the procurement
workforce with particular emphasis on the reduction of middle management layers.

‘The Procurement Round Table (PRT) applauds these efforts. The PRT is a non-profit entity of forty
former senior Federal acquisition officials who volunteer their non-partisan pro bono, efforts to
improving the Federal process for acquiring goods and services.

With these significant changes taking place by law and administrative initiative, the PRT believes
that action is needed now to improve the quality of the procurement workforce. Government and
industry managers alike describe a pressing need for a more professional, highly trained acquisition
corps. A wide range of studies have pointed to the criticality of a highly qualified workforce to obtain
the goods and services the government needs.

The Congress responded to this need in the Department of Defense by passage of the Defense
Acquisition Workforce Improvement Act (DAWIA) in 1990. The Act established minimum
‘education and experience levels for contracting personnel; formed a Defense Acquisition University
to conduct mandatory contracting training financed by means of fenced funding and created an
acquisition corps of seasoned professionals for the most challenging positions in defense contracting.
While implementation of DAWIA has been slow and not altogether perfect, the PRT believes it is
a step in the right direction and provides a strong legislative foundation to improve contracting
professionalism throughout defense agencies.

No legislative counterpart to DAWIA, however, exists for civilian agencies. PRT discussions with

‘senior procurement executives in civilian agencies with significant contracting activity indicate that
there is a need for increased professionalism, but that the issue is not getting the same level of top
management attention as is the case in DoD.

Furthermore, the Office of Federal Procurement Policy (OFPP), charged by law with fostering
government-wide management programs for a competent workforce, does not possess DAWIA-type
authority to exercise effective leadership for professionalism initiatives in civilian agencies. Nor has
the Federal Acquisition Institute (FAI), an element of OFPP housed within the General Services

19

PRT PUBLICATIONS, SPRING 1998


73

As was stated by Mr. Duncan, and mentioned in previous hear-
ings, it was in 1932 that the House first created a special com-
mittee to investigate the issue of the Federal Government’s start-
ing and carrying out of activities that are commercial in nature and
competitive with the private enterprise system. In 1954, a bill to
address this issue was reported by this committee, passed the
House, and was reported by your counterpart committee in the
Senate. At that point, the Eisenhower administration indicated
that they could resolve this matter administratively. Bureau of the
Budget Bulletin 55-4 was issued and further action on the legisla-
tion was suspended.

That policy is now found in OMB Circular A-76. It is our view,
and has been reflected in recommendations of the White House
Conference on Small Business, that that administrative policy has
not worked well.

Today, Federal Government agency officials certainly have the
ability to contract, and they do that with great regularity. This bill
would not, in our view, interfere with that very important manage-
ment tool. It is our view, however, that Federal agencies should not
be able to carry on commercial activities for an indefinite period of
time and never have to review or consider whether using the pri-
vate sector for those activities is a better deal for the taxpayer.

I must say that our members do not believe that the government
should be competing with or duplicating private sector capabilities.
I know in our organization we’ve gone through a long and very de-
liberative process on this legislation, and our members really do
not like the idea of the Federal Government taxing a business, col-
lecting money, and starting a business to duplicate what that tax-
paying entity was doing in the first place. However, we do support
this legislation and we think it is a major step in the right direc-
tion.

As you know, Mr. Chairman, the legislation would ask for an an-
nual inventory. It does set up a very fair challenge process that is
administrative and not judicial. It requires agencies to use a com-
petitive process for those activities on the list within a reasonable
time. It requires fair and realistic comparisons when there are pub-
lic-private competitions conducted. And it requires that procure-
ment processes be consistent with existing law, such as the Brooks
Act, which applies to our services. Finally, it establishes in statute
a definition of what is an inherently governmental function.

Mr. Chairman, as was mentioned by Mr. Horn at the beginning,
OMB Circular A-76 does not work. When you have an activity, like
surveying and mapping, with a capable and qualified private sec-
tor, when you have a government that spends over $1 billion a year
on these activities and employs nearly 7,000 Federal employees to
do this work, and contracts out less than 10 percent of that $1 bil-
lion annually, and that no agency has ever done a start-to-finish
A-76 review of any of their surveying or mapping activities, I think
what you have, is what Senator Brownbac! appropriatel termed
in his hearing, “a systems failure.” This legislation will correct
that.

Td make one final point with regard to the profession that I rep-
resent. We recently obtained information from the Immigration and
Naturalization Service that showed that, between 1985 and 1995,


82

shown that competitively outsourcing the government's commercial activities saves money. The
taxpayer an average 30% regardless of who wins the competition’ This figure represents an average
of 20% savings when an in-house team wins and an average of 40% savings when a private firm
wins.’ At DOD alone, several studies have estimated that potential savings are in the neighborhood
of $30 billion dollars. Even reports that are critical as to the amount of savings achievable through
‘outsourcing conclude that “competition for work, including competition between the public and
private sector - regardless of who wins - can result in cost savings *

Another inaccurate assertion is that contractors put federal employees out of work, only to bring
in their own people.

A study done by the National Commission of Employment Policy (NCEP), a branch of the
Department of Labor, indicates that over half of the workers on outsourced government functions
‘went to work for the private sector firm. while twenty-four percent of the workers were transferred to
other jobs and seven percent retired. The study concluded that less than seven percent of the workers
needed to find new employment.

And then there is the term “Shadow Government.”

Is sounds provocative. but in fact is inapplicable, alarmist and misleading. Oversight of Federal
government contractors is, by its nature. an inherently governmental function. The power to create
the scope of work. dictate the terms of the work and terminate the contract are functions performed
by the Federal government. not the contractor. The contract itself embodies the responsibilities
which contractor must perform in order to keep the business, failure to do so may result in
termination of the contract. and even civil or criminal penalties, As we have already discussed.
many of the employees on Government contracts are the same people who did the work before. The
term shadow government is nothing more than a shadow argument.

In closing, let me reiterate that the legislation being considered will create an environment that
promotes efficiency and encourages cost savings by identifying where and how the Federal
government is directing its resources. We have an extraordinary opportunity to put momentum
behind a policy first initiated by President Eisenhower, but which today remains largely ignored.
‘The ability of Federal agencies to meet the tough budgetary and mission targets that Congress has
set for them hinges, in large past, on the ability of Congress and the American public to know how
agencies are using their resources to meet their core missions, and ensuring that scarce resources are
used most efficiently.

Tcommend you. Mr. Chairman. as well as Senator Thomas. and Representatives Duncan. Sessions.

‘See Testimony of Steve Klienman before the Senate Governmental Affair Committee,
‘Subcommittee on oversight of Government Management and the District of Columbia (June 18,
1997) References cited: by Alan J. CNA Research Memorandwn 92-226.10, Analysis of the
Navy's Commercial Activities Program (1993)

3 Ibid

4 Outsourcing DoD Logistics: GAO Report: December 8, 1997


H.R. 4244, FEDERAL ACTIVITIES INVENTORY
REFORM ACT

HEARING

BEFORE THE.

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS
SECOND SESSION

ON

H.R. 4244

TO AMEND THE OFFICE OF FEDERAL PROCUREMENT POLICY ACT (41
U.S.C. 401 ET SEQ.) TO PROVIDE FOR MEASUREMENT OF THE PER-
FORMANCE OF THE FEDERAL PROCUREMENT SYSTEM, TO ENHANCE
THE TRAINING OF THE ACQUISITION WORKFORCE, AND FOR OTHER
PURPOSES

AUGUST 6, 1998

Serial No. 105-209

Printed for the use of the Committee on Government Reform and Oversight

ae

U.S. GOVERNMENT PRINTING OFFICE
57-270 WASHINGTON : 1998

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-059384-0



108

Economists have quite a few arguments over whether innovation
results from competition or its opposite. We see, in markets where
there are relatively few firms, the ability of these very large firms
which dominate markets to invest a lot and to innovate in that
sense. But often in markets where there’s most bitter, cutthroat
competition, that margin of resource for investment isn’t forth-
coming. So it isn’t clear to economists, which makes it more dif-
ficult as a problem for this committee, whether contracting in that
context is the most effective course to take.

It also, incidentally, is an argument for government support for
investment in areas which would benefit a number of firms, but
where competition prevents individual firms from taking the risk
and not making the expenditure, but not reaping the reward.

Mr. SESSIONS. Good. Thank you. Now I’d like to recognize the
ranking member, the gentleman from Ohio, who has been very ac-
tive with me in working on this issue. I know and you know we've
got to vote, but why don’t you take the time until we get very close,
and then we can continue with the process? Mr. Kucinich.

Mr. KucInicH. Thank you very much. I just wanted to make an
inquiry. We’ve got about 10 minutes to go before we vote. I think
it would add some continuity here. I’m willing to break now.

Mr. Sessions. You'd like to not begin, then, and like to go vote
and then come back?

Mr. KucINIcH. You have a problem with that?

Mr. SEssIons. I will be honest; I have no idea—there is one vote
or two or three? One vote? Thank you.

If I could ask our panelists, please, to stick around, there’s inter-
est in the discussion that we’re having and Mr. Kucinich would
enjoy that. I will say that is the thing to do. We will be in recess
until just immediately after the votes.

[Recess.]

Mr. SEssIons. We will now resume this hearing, and I would
defer to the gentleman from Ohio, Mr. Kucinich.

Mr. KucinicH. Thank you very much, Mr. Sessions, and mem-
bers of the committee, and to our witnesses.

I would like to just ask a few questions, first, that are somewhat
philosophical in their import, and I just want to make sure I have
the pronunciation right. Palatiello? OK, Mr. Palatiello, from a phil-
osop] hical standpoint, what do you see as the purpose of govern-
ment?

Mr. PALATIELLO. I think the purpose of government is spelled out
pretty well in the Constitution.

Mr. KUCINICH. What do you think? I know what the Constitution
says. What do you think government’s about?

r. PALATIELLO. I think it’s about governing, which means estab-
lishing the rules in free society, basically, being the umpire be-
tween competing interests.

Mr. Kucinicu. So you believe in regulation then?

Mr. PALATIELLO. I believe that there is a role for government in
some degree of regulation, yes, sir.

Mr. Kucinicu. OK.

Mr. PALaTIELLO. Providing for our national defense, coining
money, providing for the general welfare.

Mr. KucinicH. What do you mean by the general welfare?




109

Mr. PALATIELLO. Providing an environment where people can
enjoy their liberties and the pursuit of happiness. I don’t think it’s
the role of government to assure happiness, but to assure people
have the right to pursue happiness. I think that’s what providing
for the general welfare means, in my view.

Mr. KuctnicH. Does government have any role in providing serv-
ices to the public?

Mr. PALATIELLO. Yes.

Mr. KucINIcH. What would that role be? I really am interested
in knowing your view because, you know, you do represent think-
ing of probably a broad cross-section of industry, and I'd really like
to know.

Mr. PALATIELLO. Well, for example, I think if you had a com-
pletely unbridled, free enterprise system, you would leave any com-
pany to do business any way it wishes. And I think, for example,
you would not be able to assure public health, welfare, and safety
if that occurred. I don’t think we would have an environment as
clean as we have today if there were not a role for government. So
I think there are things along those lines where the government
provides services to help assure a certain quality of life to the
American people.

Mr. KucInicu. Maybe I could help this line of questioning by get-
ting more specific. Do you believe that government ought to have—
that there ought to be public education government to deal with
the public education?

Mr. PALATIELLO. Yes, I’m a product of public education. I may
not be the best poster child for that, but I’m a product of public
education. [Laughter.]

Mr. KucinicH. Believe me, all of us are modest in making our
claims. Do you believe in public parks?

Mr. PALATIELLO. Yes.

Mr. KucINIcH. Do you believe in publicly-owned electric systems,
of which there are over 2,000 in the United States?

Mr. PALATIELLO. I think that’s an area where government, at all
levels, should take a harder look at private sector delivery.

Mr. Kucinicu. And, what about airports?

Mr. PALATIELLO. I believe—well, we have a lot of private airports
in this country and I think many of them function well.

Mr. KucINnicH. What about public airports?

Mr. PALATIELLO. I think that’s another area where privatization
can be explored.

Mr. KucINIcH. What about water systems?

Mr. PALATIELLO. Again, I think there’s a good track record of pri-
vate sector operation of water systems, and that’s a good thing.

Mr. KucInicu. And what about sewer systems?

Mr. PALATIELLO. Same thing.

Mr. KucINIcH. What about waste collection?

Mr. PALATIELLO. Waste collection—trash pickup? Clearly, I think
that’s something the private sector, should do and should be able
to do more cost-effectively than the public sector.

Mr. Kucinicu. And what about street repair?

Mr. PaLATIELLO. The actual repair of the streets? I think govern-
ment should look at contractors to do that. The responsibility for


30

Mr. Horn. Current policy is governed by Office of Management
and Budget Circular A-76, which says that agencies ought to rely
on private sources for commercial activities, and on government
sources for inherently governmental activities; that agencies should
not start new commercial activities if they can get a contractor to
perform the activities; and that agencies will subject their in-house
commercial activities to competition.

Are agencies following this policy? Sadly, the answer is no. Out-
side the Department of Defense, not one single agency uses A—-76
competitions. Some agencies say they do not have any activities
that can be contracted out at all. These agencies with zero commer-
cial activities include some agencies that brought work in-house
and others that clearly have personnel performing commercial ac-
tivities. Agencies must understand something—if you have an ac-
tivity that was contracted out, that is a commercial activity by defi-
nition.

So how has the Office of Management and Budget responded to
this sleight-of-hand? It has given a try to getting agencies on the
bandwagon, but has fallen short. The results emonstrate that
clearly. The Federal Government needs a clearly-stated policy in
law that describes policy toward commercial activities. That’s what
Mr. Sessions’ amendment attempts to do.

In the private sector, specialization and competition have re-
duced costs and improved performance and consumer choice. The
most competitive sectors of the economy are also the most innova-
tive. Federal antitrust policy is designed to ensure competition in
the private sector so it the customers do not get gouged. We

an antitrust policy for the Federal Government to ensure that
taxpayers do not get gouged.

My own view is that some agencies already have the most experi-
enced and efficient people doing the job, but other agencies do not,
especially as buyouts have removed some of the most capable per-
formers. But we will never know who is a good performer without
review and competition. Competition can be a spur to improve per-
formance. According to the General Accounting Office, competition
can reduce the costs of government by an average of 20 to 35 per-
cent.

I know that there are vendors who have been harmed by govern-
ment competition. I also know that there have been Federal em-
ployees harmed by contracting out. There have been spectacular
failures by contractors, equally spectacular failures in government
agencies in functions performed by Federal employees. But our pri-
mary purpose here today is to focus on good government demanded
by taxpayers who sent us here, and who ultimately pay the bills.

In addition, while the p se of this hearing is to review title
Il of H.R. 4244, Mr. DeSeve decided to expand the scope to get into
other provisions. These additional topics include work force train-
ing. performance measurement, and cost accounting standards.

ile we appreciate your input, this hearing will focus on Mr. Ses-
sions’ proposal. As for the other issues, we would welcome addi-
tional points of view from groups, such as trade associations, for ac-
quisition professionals and Blue Cross/Blue Shield.

I want to add that the staff has received several unsolicited
statements for the record of this hearing. The subcommittee would


89

‘Subcommittee on Government Management. Sclar Testimony - August 6.1998. Page 3

surrounds the pure act of legislating is certainly open to question. Effective
law making depends upon a host of information processing, data analysis
and communication skills that can be supplied by many outside firms. At
present these skills reside an army of competent staff assistants, secretaries
and interns on the Congressional payroll. Although Members of Congress
might disagree, an outside firm or industry association could make a
compelling case under the terms of Title II that they could supply the
needed services at a much lower cost. The nature of objections to such a
"privatization" claim would rest heavily upon the qualitative nature of
relationships among Congressional employees and between them and
Members of Congress. The mission of the United States Congress depends
critically upon the need for workplace flexibilities and individual
employment continuities which would prove infeasible in the more rigid
world of specific services delivered via a public sector contract.

As this legislation now stands, it is an invitation to slice public
agencies into pieces which will become ever more unwieldy to coordinate
and manage as a unit simply because the tasks look like what a private firm
might be able to provide. As a general rule blanket provisos such as the
ones inherent in this title, almost invariably invite the wrath of the law of
unintended consequences to rain down upon us. Only if one believes that
the organizational integrity of public agencies is essentially worthless, can
the risks which inevitably accompany such a drastic policy change be
perceived as a small price to pay.

The Market Economics of Contracting

Title II further mandates that federal agencies use "a competitive
process to select the source" from whom they will obtain services. The
presumption here is that competition among private providers ensures that
the government receives the best product at the lowest price consistent with
efficient production costs. That theory resides quite far from the actual
practice of public contracting. As a matter of general observation it is
important to note that approximately one-half of all public spending is done
via contracting. Too large a percentage of that contracting is carried out in
situations in which there is only one bidder or at most two or three who
scarcely meet the economic test of a competitive market. A recent study by
the State Auditor in California found that a full two-thirds of all public
contracts are let on a sole source basis.! While the situation in Federal
contracting may be better, I suspect that the order of magnitude is similar.

\Califomia State Auditor, “State Contracting Refonms are Needed to Protect the Public Interest.” 1996,


84

Mr. Sessions. Thank y:

Our next witness is Dr. "Elliot Sclar, professor of urban planning,
Graduate School of Architecture, Planning and Preservation, Co-
lumbia University. Dr. Sclar.

Mr. Scar. Thank you, Mr. Sessions. Chairman Horn, and mem-
bers of the subcommittee, I appreciate the kind invitation you’ve
extended to me to testify on title II of H.R. 4244, the Federal Ac-
tivities Inventory Reform Act of 1998.

My name is Elliott Sclar. I am professor of urban planning at the
Graduate School of Architecture, Planning and Preservation, Co-
lumbia University in the city of New York. I’m an economist. I
study the economics of privatization. In the American context, the
term “privatization” is somewhat misleading. It tends to refer to ef-
forts to increase reliance on contracting in the performance of pub-
lic service. It’s, therefore, more accurate to think of the subject
matter of domestic privatization as effectively the economics of
public contracting. The crucial issue, then, pertains to the dynam-
ics of interorganizational behavior between a public agency and a
private contractor. This relationship is often complex and can at
times be problematic. Title II will vastly expand the scope of public
contracting in the ongoing operations of Federal agencies. There-
fore, the implications for the cost-effectiveness of Federal public
service are potentially vast.

The main point I would make is that when you look at organiza-
tional behavior, and sources of organizational efficiency, you'll find
that contracting, or what is known in the business world as the
make-buy, is just one way of improving the situation. More impor-
tantly, if it’s the main strategy, or the only one you use, you quick-
ly learn that your problems have gotten worse and not better.

At the present time, there’s a great deal of fascination with the
notion of contracting out as an analogous way of bringing market
pressures into government. But, if we look back at our rich experi-
ence with public contracting, we find that while it clearly has its
place in the box of management tools, it has never proven to be a
silver bullet for anything. More to the point, it has often been the
source of some of our worst public scandals, as well as more day-
to-day types of petty inefficiency.

Title II seeks to avoid these problems by mandating that Federal
agencies “use a competitive process to select the source” from
whom they will obtain services. The presumption here is that com-
petition among private providers will ensure that the government
receives the best product at the lowest price consistent with effi-
cient production cost, and that competitors will help to keep one
another on the straight and narrow.

That theory resides quite far apart from the actual practice of
public contracting. As a matter of general observation, it’s impor
tant to note that approximately one-half of all public spending is
now done via contracting. Too large a percentage of that con-
tracting is carried out in situations in which there’s only one bid-
der, or at most two or three, who scarcely meet the economic test
of the competitive market.

A recent study by the State auditor in California found that a
full two-thirds of all public contracts are let on a sole-source basis.


12

4

“(2) The assessment required under paragraph (1)

2 shall—

3 “(A) address corrective actions and activities
4 planned by the agency to improve the performance
5 of the procurement system of the agency;

6 “(B) address the adequacy of the education and
7 training of the acquisition workforce of the agency,
8 including whether the workforce has the. necessary
9 competencies, skills, and knowledge to effectively
10 support the achievement of the mission of the agen-
ll cy and information on the amount of funds budgeted
12 and expended to ensure that the acquisition work-
13 force of the agency is appropriately educated and
14 trained; and

15 “(C) evaluate the effectiveness of acquisition
16 workforce training programs in providing necessary
17 competencies, skills, and knowledge.

18 “(e) The Administrator may require the heads of ex-

19 ecutive agencies that are not required to submit a per-
20 formance plan under section 1115 of title 31, United
21 States Code, to submit an assessment to the Adminis-
22 trator similar to the assessment described in subsection
23° (b).”.


54

In our view, the FAIR Act provisions serve to reinforce ongoing
efforts to improve the identification and review support activities
that are commercial or subject to contract. Agencies are already re-
viewing which support activities are inherently governmental and
cannot be contracted out at any time; commercial and subject to
contract, but specifically exempt commercial, and those which
should be competed on the basis of quality and cost.

And finally, those which are commercial, but must be retained
in-house for now, for reasons that need to be fully explained by the
agency.

In essence, the FAIR Act preserves our ability to increase oppor-
tunity for public-private competitions and permits us to achieve the
quality improvements and cost reductions we all seek in the acqui-
sition of commercial support services. Accordingly, the administra-
tion would not object to the ssage of the FAIR Act.

Mr. Chairman, this concludes my remarks here today. I'd be
pleased to answer any questions that you, or other members of the
subcommittee, may have.

[The prepared statement of Mr. DeSeve follows:]}


96
Subcommittee on Government Management. Sclar Testimony - August 6.1998, Page 10

production than is the public sector. What is crucial is whether the sum of
both the contract price and the transactions costs are less than the cost of
direct public provision.

During the 1980s a spate of comparative cost studies seemed to
provide overwhelming support for the notion that privatizing public transit
yields massive savings. If true, these findings were of major consequence.
‘They figuratively meant that we could have our cake and eat it too. Transit,
which is so vital to the functioning of our great metropolises, could be
expanded and budgets could be held constant or even cut. Ralph Stanley,
the UMTA head in those years summed up the findings as follows:

...we’ve done a number of policy studies and economic
analyses that show savings in bus operations ranging from 10
to 50%... We've taken a look at the economics of running a
bus system, and shown beyond a shadow of a doubt that it’s
more efficient to be run privately.1! (emphasis added)

Like most “beyond a shadow of doubt” conclusions, these numbers are in
fact too good to be true. Virtually all of them were generated using an
inappropriate accounting methodology. Known formally as fully allocated
cost accounting, it essentially requires that the direct public operating costs
of transit routes such as driver compensation and fuel which would
obviously disappear as a result of privatization be combined with an
estimate of the proportion of fixed system overhead for items such as
payroll administration and marketing which can’t diminish. The result is to
grossly overstate the amount of money which can be saved by comparing
an artificially inflated estimate of the reducible internal costs of public
operation.

Both economic and accounting theory are unanimous on this point.
The proper way to measure the savings resulting from privatization is
through the use of an analytic method called, among other things, avoidable
ing.12 This method compares only the additional costs incurred
as a result of an action with resulting actual cost reductions or revenue
improvements. If the avoided costs exceed the new contract related costs,
savings will result. If not the status quo is preferable.

11 Andy Ryan “Public vs. Private Testing Buses in Miami,” Mass Transit. Vol. 14, no.1/2, January-

12 The technique is sometimes call marginal or incremental cost accounting. These two terms are typically
used by sellers, rather than buyers to assess their additional costs of providing a given product toa new
customer,


Management Association
for Private
Photogrammetric Surveyors

Statement of John M. Palatiello
Before the Subcommittee on Government Management,
Information and Technology
House Committee on Government Reform and Oversight

Federal Activities Inventory Reform Act

August 6, 1998

Mr. Chairman, members of the Subcommittee, 1 am John Palatiello, Executive Director of the
Management Association for Private Photogrammetric Surveyors, (MAPPS) a national trade
association of more than 120 private mapping firms, and Chairman of the Business Coalition for
Fair Competition (BCFC), a coalition of trade associations in a variety of industries all of whom
are affected by various forms of government-sponsored competition.

1am pleased to appear today to indicate our strong support for the Federal Activities Inventory
Reform Act (FAIR), a adopted by the Senate in S. 314 and as approved by the full House
Government Reform and Oversight Committee as the amendment by Representative Sessions to
HAR. 4244,

This legislation is a true compromise between the interests of the private sector, the Federal
employee unions, OMB and the bi-partisan leadership of the committees of jurisdiction in the
‘House and Senate.

Although this bill is significantly different than $.314 and H.R. 716 as introduced, is indeed
different from several draft alternatives discussed over the past several months and is not
everything the private sector would like to see, we do support this compromise. We commend
the Committee and the staff for the time and effort they have dedicated to developing a
consensus on this legislation.

The FAIR Act for the first time in more than 40 years codifies a government-wide policy and
process on the issue of government reliance on the private sector. That is significant and
commendable.

John M. Palatiello, Executive Director
12020 Sunrise Valley Drive, Suite 100, Reston, Virginia 20191
P (703) 391-2739 F (703) 476-2217 E info@mapps.org www.mapps.org


‘The Honorable Stephen Hom
August 28, 1998
Page 3

We thank you for the opportunity to express our views.
Sincerely,

Srohea We cockecnn

Senior Vice President

Federal Employee Program

ec: Mr. G. Edward DeSeve


48

=e cna noren remconaness =e
—-- Congress of the Bnited States Sa
Ecce Joouse ot Representatives =
—— (COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT aS
ee 2167 Raum House Orrice BLD =
Enel Waseanaton, OC 20515-6143 =

“Legislative Hearing on

Title HI of H.R. 4244, the Federal Activities Inventory Reform Act
August 6, 1998
OPENING STATEMENT

REPRESENTATIVE STEPHEN HORN (R-CA)

Chairman, Subcommittee on Government Management,
Information, and Technology

(Our hearing today will examine Title I of HR 4244, the Federal Activities Inventory
it Representative

1998. Hopefully, our witnesses will be able to shed additional light on a much-debated topic.
Current policy is governed by Office of Management and Budget Circular A-76, which

‘commercial activities if they can get a contractor to perform the activity; and (3) that agencies
will subject their in-house commercial activities to competition.

‘Are agencies following this policy? Sadly, the answer is “No.” Outside the Department
‘of Defense, not one single agency uses A-76 competitions. Some agencies say that they do not
have any activities that can be contracted out at all. These agencies with zero commercial
sctivities include some agencies that brought work in house and others that clearly have
personnel performing commercial activities. Agencies must understand something: if you have
‘an activity that was contracted out, that is a commercial activity, by definition.

‘So how has the Office of Management and Budget responded to this sleight-of-hand? It
has given a try to get agencies on the bandwagon. But it has fallen short. The results


117

Wise  pmoumbering them. Sometimes they may need to be encum-
re

But my recommendation in that context is, I guess, more in the
spirit of the reinventing government thing, which is to allow flexi-
bility. But also to have consequences—good ones for good output,
bad ones for bad output—that apply to the people making the deci-
sions, the managers in the executive agencies, rather than trying
to have bureaucrats watching bureaucrats.

Mr. Horn. I don’t want to belabor this because I want to go down
the line here.

Professor Sclar, what did you hear from some of your colleagues
that you didn’t particularly think much of, and what did you like
about what you feard?

Mr. Scuar. Well, actually, it was a very educational hearing be-
cause the breaks actually worked out well. I got to speak to my
other colleagues on the panel whom I’d never met. And, too, you
came with a different set of interests than I came to talk about.

I tell all of my graduate students to begin the answer to every

uestion by saying, “It depends. . . .” Certainly, in the exchange
that just took place, one of the things that’s been clear to me, look-
ing at public service now for a long number of years, is that there’s
a large gray area in which you can make a case, very often either
way, for how things get done. What’s more efficient? There’s noth-
ing automatically more efficient about the public or the private sec-
tor in getting certain things done. If we were in Scottsdale, AZ, our
fire protection would be provided by a for-profit fire company.
Other cities have tried this and they found that it doesn’t work
very well, and it hasn’t gone very far. But certainly people in
Scottsdale are satisfied with it.

This question of trash collection, it’s one that certainly can go ei-
ther way. The village I live in, we’re very happy with our public
collection. They come up in my driveway twice a week and empty
the cans. I have no complaints with the way that works.

The region which I live in, we have a lot of problems with our
private party collections. They seem to be called before committees
all the time, in courts, for price-fixing, and organized crime. I don’t
know if that’s a Northeast problem, but it’s certainly one that hap-

pens.

So it’s not—this question of, “if it depends,” it’s one you really
have to look at. So what I’m concerned with is, how do we begin
to get public organizations, public agencies, to be more innovative?

I worked for the VA. I was hired there once as the Chief of Eco-
nomic Research and Health Plan. I was very impressed, and now
I found out it was the lowest title they could come up with for me,
but I stayed on. There were a lot of things that were very frus-
trating about public work and what I was able to do. But, it’s very
clear that public agencies have to find ways to be inventive, to pro-
vide incentives, to be responsive. There have to be upside and
downside risks.

So, one of the things I was concerned about is this question of
allowing outside parties to challenge these decisions. I understand
from the discussion I had with my colleagues what the frustrations
are that lead them to say they need this in the legislation. But my
concern is not with the good guys who go with this in a modest


53

Mr. SESSIONS. Mr. DeSeve, welcome to this subcommittee, and I
will ask you to please go ahead and lead off as our first witness.

STATEMENT OF G. EDWARD DeSEVE, ACTING DEPUTY DIREC-
TOR FOR MANAGEMENT, OFFICE OF MANAGEMENT AND
BUDGET

Mr. DESEve. Thank you, Mr. Chairman. This is the fourth time
I’ve had the opportunity in the House of Representatives to testify
on this issue. I’m going to limit my remarks today only to title II
of the bill. My entire testimony covers the entire bill because I be-
lieve it’s in a position to move to the floor and we wanted you to
have the benefit of the administration’s position to have a full
setup on the bill within the next couple of days.

Mr. Sessions. Good. Thank you.

Mr. DESEVE. So we just wanted to let you know that.

Td like to discuss the provisions of title II of H.R. 4244 entitled,
the Federal Activities Inventory Reform Act of 1998, or the FAIR

As you know, the government's acquisition of commercial support
services has been the topic of extensive discussions involving the
House and the Senate, the administration, private sectors, and
unions who represent Federal employees. The administration has
urged the Congress to ensure that any legislative initiative in this
area contributes to the process of extending opportunities for pub-
lic-private competitions.

As part of these discussions, we’ve developed—actually, before
this committee—a set of fundamental principles for the develop-
ment of legislation in this area. First, the legislation needs to pro-
mote competition to achieve the best deal for the taxpayer, not sim-
ply to outsource.

Second, the legislation needs to establish the principle that it
would not increase the level of traditional involvement in the gov-
ernment’s management decisions as to whether or not to outsource,
or how that comparison is conducted.

Third, the legislation must recognize that current, and extensive,
OMB Circular A-76 guidance to promote a level playing field is al-
ready in place. Any changes to the management document, em-
ployee participation, costing and source rules for the competitions
must be well understood, as well as to be enforceable and remain
impartial.

Fourth, the legislation must recognize the complexities of public-
public and public-private competition.

Fifth, the legislation must be fair and equitable to all parties.
One-way competition is unacceptable.

Sixth, the legislation must view public-public and public-private
competition in the context of our larger reinvention efforts.
Outsourcing is only one management tool to reinvent and improve
the government.

And finally, it would be inappropriate, and, in fact, maybe detri-
mental, if the legislation were to require the head of each agency
to undertake competitions according to its schedule mandated in
law. The FAIR Act provisions do not violate these principles. In
fact, they encompass and respect these principles.


49

2

demonstrate that clearly. The Federal Government needs a clearly stated policy, in law, that
describes policy towards commercial activities. That is what Mr. Sessions’ amendment attempts
todo.

In the private sector, specialization and competition have reduced costs and improved
performance and consumer choice. The most competitive sectors of the economy are also the
‘mont innovative. Federal antitrust policy is designed to ensure competition in the private sector,
so that the customers do not get gouged. We need an antitrust policy for the Federal
‘Government, to ensure that taxpayers do not get gouged.

My own view is that some agencies already have the most experienced and efficient
people doing the job. But other agencies do NOT, especially as buyouts have removed some of
the most capable performers. But we will never know who is good performer without a review
and competition. Competition can be a spur to improve performance. According to the General
‘Accounting Office, competition can reduce the costs of govemment by an average of 20 to 35
percent.

I know that there are vendors who have been harmed by government competition. I also
‘know that there have been Federal employees harmed by contracting out. There have been
spectacular failures by contractors, and equally spectacular failures in government agencies
functions performed by Federal employees. But our primary pups br ody i feces cn
good government demanded by the taxpayers who sent us here, and who ultimately pay the bills,

In addition, while the purpose of this hearing is to review title I of HR 4244, Mr. DeSeve

‘we would welcome additional points of view from groups such as trade associations for
acquisition professionals and Blue Cross/Blue Shield.

I want to add that the staff has received several unsolicited statements for the record of
this hearing, The Subcommittee would like to encourage additional thoughts on this issue, and
‘we will hold open the testimony for three weeks for any person to provide a statement. We do
not mean to close the door to any point of view, and we encourage healthy debate.


78

Mr. SEssIons. Thank you.

Our next witness will be Mr. Gary Engebretson, president of
Contract Services Association. Sir.

Mr. ENGEBRETSON. Mr. Chairman, members of the committee,
my name is Gary Engebretson and I am president of the Contract
Services Association of America, CSA. It’s the Nation’s oldest and
largest association of government service contractors. I'm also
speaking on behalf of the Coalition for Taxpayer Value, of which
CSA is a member. Collectively, the coalition represents thousands
of employers and hundreds of thousands of government contract
employees.

I thank you for the opportunity to testify today on the Federal
Activities Inventory Reform Act of 1998, which was added as an
amendment to the acquisition work force training bill, H.R. 4244.

While the legislation represents numerous compromises that
were made of necessity, I applaud and encourage you to continue
your efforts to pass this legislation, which embodies a number of
key concepts. We support this compromise measure, which we be-
lieve should move forward without any changes. I want to add,
however, that ensuring its full and proper implementation will take
vigorous congressional oversight.

The language before you represents important progress and op-
portunities on many fronts. First, the legislation clearly delineates
between activities identified as inherently governmental versus
non inherently Governmental, and reiterates a longstanding policy
of the Federal Government to rely on the capabilities of the private
sector. While this policy, embodied in the Office of Management
and Budget Circular A-76, which is more than 40 years old—there
are still activities which are not inherently governmental that the
government itself continues to perform—this bill will help the Fed-
eral Government focus on its core missions and responsibilities
rather than competing with its own citizens. It will further the cur-
rent efforts to streamlining the Federal Government.

This spring, Mr. Frank Raines, before leaving the Office of Man-
agement and Budget, issued a memo requesting all Federal agen-
cies to develop a list of activities they perform. This bill will turn
OMB?’s request into a mandate, ensuring a process that will thor-
oughly identify, categorize, and evaluate all the activities currently
being performed by the government.

While there is concern that an agency may simply ignore the
competition policy in the bill, I would argue that the agencies can-
not afford not to compete their commercial activities. Thus, the leg-
islation will help create an environment that promotes great effi-
ciency and cost-savings.

In closing, let me just say that we have an extraordinary oppor-
tunity to put momentum behind a policy first initiated by President
Eisenhower, but which today remains largely ignored. The ability
of Federal agencies to meet the tough budgetary and mission tar-
gets that Congress has set for them hinges, in large part, on the
ability of Congress and the American public to know how agencies
are using their resources to meet their core missions, and ensuring
that the scarce resources are used most efficiently.

So I commend you, Mr. Chairman. I commend Senator Thomas
and Congressman Duncan; of course, chairman, Congressman


88

Subcommittee on Government Management. Sclar Testimony - August 6.1998. Page 2

performance and cost efficiency of federal agencies. then this title is more
problematic. .

Implications for Organizational Efficiency

Although the language of Tide II builds upon the language of the A-
76 process, it adds a new and ultimately costly mandate to the operation of
federal agencies. It not only requires that each agency distinguish activities
which are deemed "inherently governmental in nature," from those which
are not, but it subjects those executive judgments to challenge from outside
parties with a pecuniary interest in the way the federal government serves
the public interest.

The problem here is that it is often not easy to distinguish tasks
which are inherently governmental in nature from those which are not.
Much depends upon the relationship of those tasks to the overall mission of
the agency. The clear intent of Title II as it is now written is to foreclose
the possibility that agencies can use this type of argument, regardless of its
validity, to avoid contracting on this score. By providing explicit standing
for outside parties with a monetary interest in expanding contracting
options to challenge executive decisions in this area is, in effect, an
invitation to great and expensive mischief at taxpayer expense. The
legislation in no way limits the right of aggrieved outside parties to seek
judicial redress if they are not satisfied by the agency response to their
objections.

It is easy to see this legislation leading inexorably to more, not less
bureaucratization of the public sector. This new bureaucracy will arise to
administer and defend the process by which federal agencies decide which
tasks should be performed directly and which ones should be properly
outsourced. The question of the actual effectiveness of agency performance
will become a secondary consideration, as direct accountability is lost in the
myriad of contractual clauses and rules.

The organizational problem is that two different parties with stakes
in the outcome can look at the same task and draw different conclusions
about its appropriateness as a contractual service. It is easy to foresee that,
if the stakes are sufficiently high, the conflict will quickly spread from an
administrative appeal procedure to a political one and inevitably into an
expensive and time consuming legal adjudication of the decisions required
under this title. Consider what might plausibly occur if Congress was not
exempt from the legislation, Lawmaking is easily identified as an
inherently governmental function. But the bulk of the activity which


43

‘Administration, reached its full potential for offering quality procurement training to
agencies. The PRT concludes that civilian agencies would benefit from a civilian acquisition
workforce improvement statute modeled after DAWIA.

‘The PRT proposes the following:

1. That the President and the Congress take action now to implement the NPR recommendation to
improve the government-wide procurement workforce, and provide civilian agencies with the
authority to do this similar to that of DoD.

2. That the Congress conduct periodic reviews of DAWIA implementation, with emphasis on
employee career progression, assignment duration in key procurement positions, and quality of
training programs.

3. That legislative mandates similar to DAWIA be established for each civilian agency with
significant contracting activity containing the following features:

a. Endorsement of the initiative by top agency officials, with staff leadership and support
provided by a qualified agency procurement executive.

b. Standards and qualifications for entry into the professional procurement ranks, with
emphasis on judgmental aptitudes 2s well as educational requirements. Procurement
intern programs have been effective in the past and are strongly recommended.

¢. Fenced funding for the: delivery and evaluation of quality. procurement/acquisition
training programs focussed on building business management and judgmental skills
rather than on rules and regulations, and emphasizing program manager-contracting
officer cross-training and rotation.

4 A legislative mandate for strong leadership in the OFPP to promote procurement professionalism
im all federal agencies, and the proper level of support for FAI to mest its responsibilities.

5. Re-institution of an interagency council to assist OFPP in gui the professionalism effort.

In conclusion, legislative and executive steps to streamline the procurement process are taking place
coincident with the downsizing of the procurement workforce, reduction of middle management
layers, and empowerment of employees to use judgment rather than regulation. PRT believes that
if these streamlining initiatives are to be successful and if many of the procurement problems of the
Past are to be avoided, a high-quality procurement workforce is the sine qua non to that success. That

PRT PUBLICATIONS, SPRING 1998


113

So I thank Mr. Sessions and Mr. Horn, and all the other com-
mittee members, for taking part in this discussion. This is where
we started a few weeks ago when we finally came to an agreement.
It would be good to have some give-and-take on this, and I appre-
ciate you doing that. I appreciate Mr. Sawicky and Mr. Sclar and
Mr. Engebretson being here as well.

Mr. PALATIELLO. Mr. Kucinich, may I make two comments? I ac-
tually agree with the statement you just made, and I think that’s
why this legislation is so important. I really appreciate all the ef-
fort that all the Members in the House and Senate have put into
crafting it.

First of all, one of the difficulties that we’ve had—you said that
there are instances where contracting out perhaps is advantageous
and desirable, and others where it has not worked. Our experience
is that the current policy and the current process of the Federal
Government is not working in terms of making the determination
of where contracting can work and where it cannot work.

I think the mapping community is a perfect example of that. We
haven’t been able to get agencies to do A—76 reviews of mapping
to make a determination as to whether more of it can and should
be done in the private sector or not. This legislation at least creates
a framework to make those determinations.

The second point that I would make is that there are things that
government should do, and there are things that only the govern-
ment should and can do. But I honestly believe that we're at a
point in the Federal Government today where the government is
trying to do too many things, and trying to be all things to all peo-
ple, and the consequence is government isn’t being the right things
to the people who generally need some assistance, and the govern-
ment is not doing a lot of the things that it should be doing well.
This legislation can help define the appropriate roles of govern-
ment, so that we can start moving resources to those things that
you and I believe the government should do.

Mr. KUCINICH. Just a question: Do you believe in privatization of
Social Security?

Mr. PALATIELLO. Theoretically, yes.

Mr. KucInIicu. How about privatization of Medicare?

Mr. PALATIELLO. No. I think there are some States that are doing
some good work with the management, but I think the provision
of Medicare is an inherently governmental function.

Back to Social Security, I haven’t been convinced that it can be
privatized, but I think there is healthy debate going on as to
whether or not——

Mr. Kucinicu. I think it’s probably going on the last few days
with the market dropping hundreds of points.

Mr. PALATIELLO. I can tell you my private IRA dropped a little
bit over the last few days——

Mr. Kucinicu. I’m sure it did, and I have a great deal of sym-
pathy for all my constituents who are similarly afflicted.

OK. Again, I think it’s useful to have these discussions. I want
to thank—I’ve had the chance to review the testimony of the gen-
tlemen. Thank you. I will remain quite skeptical about efforts at
privatization.




CONTENTS

Hearing held on At st 6, 1998.
Text of H.R. 4:
Statement of:
‘DeSeve, G. Edward, Acting Deputy Director for Management, Office of
Management and Bud;
Duncan, Hon. John J., et a Representative in Congress from the State
of Tennessee
Palatiello, John, executive director, Management Association for Private
Photogrammetric Surveyors, and chairman, Business Coalition for Fair
Competition; Gary Engebretson, president, Contract Services Associa-
tion; Elliott Sclar, professor of urban planning, Graduate School of
Architecture, Planning and Preservation, Columbia University; and
Max Sawicky, economist, Economic Policy| Institute .
Letters, statements, etc., submitted for the record by:
DeSeve, G. Edward, Acting Deputy Director for Management, Office of
Management and Budget:
Additional questions and responses
Prepared statement of .
Duncan, Hon. John J., Jr., a Representative in Congress from the State
of Tennessee, prepared statement of .
Engebretson, Gary, president, Contract Services Association, prepared
statement of

pared :
Various letters for the
Palatiello, John, executive director, e
Photogrammetric Surveyors, and chairman, Business Coalition for Fair
Competition, prepared statement of ..
Sawicky, Max, economist, Economic Policy Institute, prep

statement

of... .
Sclar, Elliott, professor of urban planning, Graduate School of Architec-
ture, Planning and Preservation, Columbia University, prepared state-
ment of
Sessions, Hon. Pete, a Representative in Congress from the State of
‘Texas, prepared statement of ...

ap

53
1

72

48
32

x)
103

87
51


106

Mr. SESSIONS. Good. Thank you, Mr. Sawicky.

What I'd like to do is lead off the questioning, if I could, and then
I will go to our ranking member. Then at that time, I will ask if
he has any opening statement that he would like to make, now
that he’s here.

The first question I would like to ask both of you, Mr. Sawicky
and Dr. Sclar. Dr. Sclar, your No. 4 was of the criteria highly spe-
cific assets. If these, I guess, critical mass, could be achieved, I
heard you say it’s better to keep in-house? I think that what we
have tried to do is come up with a compromise that allows both
government and industry that opportunity to compete for those in-
herently governmental functions, and I think the compromise that
we've tried to reach here is because of the No. 4 that you talk
about.

Many times we are finding within government that government,
because of the allocation of resources from an outside body, mean-
ing the Congress of the United States, does not have those tools—
or I believe ou mentioned the tools in the toolbox—that are nec-
essary to effectively compete with and to be leading edge with a

rivate sector. It then becomes a question—and Id like for you
Both to discuss it—what is critical mass? How big does this have
to be before we have highly specific assets and better to keep in-
house, if you don’t even have leading edge tools and cannot stay
up with the marketplace? So it’s a question of marketplace and
leading ede , and then the ability to get money by government.
Can you help me along that line?

Mr. Scrar. I'll try. If I reinterpret or misinterpret your question,
please keep me on track.

Where that came from—those four criteria—it came from looking
at private organizations, private corporations, and looking at the
conditions under which they would make and buy decisions.

And by critical assets, what I was referring to would come—it’s
often not possible sometimes to know what the specific assets are,
but sometimes we do. The simplest, most famous recent story could
be the International Business Machine Corp. IBM decided in 1982
to go into personal computers, and because they were hardware
companies, they didn’t think much about software. So they found
a little company in Redmond, WA and said, why don’t you produce
the operating system and you can have the copyright on it? Now,
whose stock would you rather own today? I mean, IBM has made
a comeback for sure. The point was, they lost control of a very spe-
cific asset that would have made a very big difference in their busi-
ness. General Motors has a story like that with the Fisher Body
Co. way back in the 1920's.

My only point in this is, where this comes into effect is in items
such as when you get management information systems and some
of these other crucial areas. I consult with public agencies on this,
and with working with management consulting firms, and what be-
comes clear is that you can’t just say, well, contract out the whole
thing. The Union Pacific Railroad, a few years back, decided to con-
tract to IBM its management information system. We've all been
hearing about the development coming in your home State, too, be-
tween Southern Pacific and Union Pacific. But this goes back even

ther.


66

House Subcommittee on Government Management,
Information and Technology
Questions for
Mr. G. Edward DeSeve,
Deputy Director for Management,
Office of Management and Budget (OMB)
regarding

ELR. 4244, "The Federal Procurement System Performance Measurement
and Acquisition Workforce Training Act of 1998.”

FEDERAL ACTIVITIES INVENTORY REFORM

8 What percentage of the $120 billion in services annually spent on Government
contractors is subject to the OMB Circular A-76 cost comparison process? Why don’t
you keep this information.

As I testified earlier this year, the Fiscal Year 1997 expenditures for service contracts
were about $112 billion. For Fiscal Year 1998, total expenditures for service contracts are now
estimated at $108 billion. General downsizing, procurement reform, enhanced technology
investment and changes within the DOD for its support services, such as Base Operating Support
(BOS) contracts and the use of Direct Delivery contracts, combined with a very low inflation rate
have served to keep these expenditures from growing.

All currently awarded service contracts (100 percent) are potentially subject to the OMB
Circular A-76 cost comparison process. These contracts may be submitted to competition for the
conversion of work from contract to in-house performance at the discretion of the agency and/or
local commander or may be recompeted normally every three to five years.

9. How much work is contracted out without any cost comparison?

Work that is currently performed in-house by Federal employees can only be converted to
contract performance, in accordance with the provisions of OMB Circular A-76. This includes
the possibility of a conversion without a cost comparison if the function being performed by
Federal employees meets certain conditions. As a general rule, A-76 does not require cost
‘comparisons to convert work to or from in-house or contract performance if the primary reason
for the conversion relates to the acquisition of needed or specialized skills. Exemptions from the
cost comparison requirements of the Circular are provided in the Circular to meet, for example,
the requirements of the national defense, direct patient care, research and development and core
mission requirements. Work can also be converted to or from in-house or contract performance
without a cost comparison if it involves ten or fewer FTE. Since 1979, the 10 or fewer FTE rule


52

During the course of our hearings, it became abundantly clear that there are certain
activities that the Federal government has performed in-house which can and should be
converted to the private sector. Areas such as architecture and engineering, surveying
and mapping, laboratory testing, information technology, and laundry services have no
place in government. These activities should be promptly transitioned to the private
sector.

‘Additionally, this language fixes some of the problems identified in the hearings with
‘OMB Circular A-76. Among the problems we have seen with Circular A-76 are:
(1) agencies do not develop accurate inventories of activities;
(2) they do not conduct the reviews outlined in the Circular;
(G) when reviews are conducted they drag out over extended periods of time; and
(4) the criteria for the reviews are not fair and equitable.
‘These are complaints we heard from the private sector, government employees, and in
‘some cases, from both.

There are several key provisions in the language of my amendment upon which I would
like to comment today. In particular, section 2(4) requires the head of an agency to
review the activities on his or her list of commercial activities “within a reasonable time.”
OMB strongly opposed a legislative timetable for conducting these reviews. As a result
of the compromise language on this matter, it will be incumbent on OMB to make certain
these reviews are indeed conducted in a reasonable time, These reviews should be
scheduled and completed within months, not years. 1 will personally monitor progress on
this matter, as will the Senate Committee on Governmental Affairs. I urge OMB to
exercise strong oversight, as well, to assure timely implementation of this requirement by
the agencies.

This provision also requires that agencies use a “competitive process” to select the source
of goods or services. In my view, this term has the same meaning as the “competitive
procedure” defined in Federal law (10 USC 2302(2) and 41 USC 259(b)). To the extent
that a government agency competes for work under this section of the bill, the
government agency will be treated as any other contractor or offeror in order to assure
that the competition is conducted on a level playing field.

Essentially, I believe that this Congress is about right-sizing the federal government and
Betting the best value for the taxpayer. This language is a step in thet direction and I am
committed to work through this committee to use this bill as a vehicle to do farther
‘oversight on the problems of government competition until we have a satisfactory
solution.

Mr. Chairman, thank you for allowing me to speak on this important matter. I yield back
the balance of my time.


101

Mr. Sessions. Thank you, Doctor.

Our fourth panelist today is Mr. Max Sawicky, economist from
the Economy Policy Institute.

Mr. Sawicky. Thank you. That’s Sawicky and it’s the Economic
Policy Institute. You were close enough; 9 out of 10 people would

et the pronunciation, unless they are from Poland, I think.
flaughter]

As you said, I’m an economist, and like Elliott, I study, among
other things, the question of efficient public sector provision. I am
grateful for the opportunity to address the committee. I understand
that the topic in one sense is the amendment, but since you may
think twice before inviting me back, I can’t help myself in address-
ing some of the broader issues around the amendment and the
other legislations. I will talk about both to some extent.

In a nutshell, I would suggest that the amendment and the bill
put over emphasis on foresight and insufficient emphasis on hind-
sight. At the risk of being mistaken for Reverend Jackson, I think
that doesn’t add up to oversight.

First of all, there’s an inconsistency in the remarks that I’ve
heard from my copanelist in some of the legislation and in some
of the language, between the right of private sector providers—so-
called right—to win a contractor or be awarded a contract, versus
the goal of efficiency. Efficiency meaning simply getting a good
product at a low price—the relationship between cost and output.

The idea of freedom from government competition, it seems to
me, clearly conflicts with an unambiguous goal of efficiency in pub-
lic sector provision. If it proves to be the case, the Government can
do a job more effectively; in other words, at a lower cost and with
a better product than the private sector. Then from the taxpayer
standpoint, that’s where it should be—with Government. So t
could indeed conflict with a private sector operator’s ability to win
a contract. To elevate that to a right seems to me extraordinarily
unusual. We hear a lot—too many rights are being generated these
days. As rights go, that seems to me one of the more unusual ones.
Certainly there’s a right to compete. There’s a right to pursue a
business, but the right to exclude a party to competition, namely,
public sector employees or agencies, is quite a different thing.

Tm a little bit puzzled because it seems like some of the remarks
have gone in both ways. We want efficient provision, but we want
freedom from government competition, or some variation of that.
Now that is an extension of what’s been a more general crusade for
privatization, which we’ve witnessed in the United States for the
past two decades—crusade in the sense that the elevation of pri-
vate sector providers over a public sector is taking on an axiomatic
character that becomes an automatic or reflexive thing. As if in
every case, a private sector operator could always be more efficient.

Now, unlike some people, I would take a firmly ambiguous posi-
tion in the sense that, I would say, in some cases, unquestionably
private sector providers are the preferred choice, but in others it
would be public sector, and the current sorting out may not be the
right one. So there’s no question that some things that are now
public might be privately provided, albeit publicly financed. Some
things that are privately provided, or oursourced, might profitably
be brought back into the public sector. That goes to my hindsight


Cm dN AH BR WN

roy ed
RPBBEBSSEBDABDEBEES

26

18
terials for the core curricula, policy implementa-
tion training, and for the development of tech-
nology-based learning tools and support systems
that will benefit the acquisition workforce
across the Federal Government;

“(iii) prepare a report for inclusion in the
President’s annual budget on the amounts re-
quested by agencies in terms of adequacy for
accomplishing the purposes of this section, and
for maintaining an efficient and effective acqui-
sition system (including information on rec-
ommended funding levels for the Federal Acqui-
sition Institute);

“(iv) in preparing the report under clause
(iii), and after consulting with the head of each
affected executive agency, recommend any ap-
propriate consolidation of funding for inter-
agency acquisition training and education pro-
grams and provide information on actual out-
lays in prior fiscal years for acquisition training
and education along with an evaluation of the
effectiveness of those programs in providing the
workforce with the necessary competencies,
skills, and knowledge.


Cm dt AH PF WN eH

oe oe
nv eF Oo

13

22

14

(1) by striking “and” at the end of paragraph
(12);

(2) in paragraph (13), by striking the period
and inserting “; and”; and

(3) by adding at the end the following new
paragraph:

“(14) establishing requirements for acquisition
professionals to obtain and maintain certification by
a relevant professional association or other entities
as authorized in the Federal. Acquisition Regula-
tion.”.

(b) FEDERAL ACQUISITION REGULATORY CoUN-

CIL.—Section 25(d) of the Office of Federal Procurement

14 Policy Act (41 U.S.C. 421(d)) is amended—

(1) by striking “and” at the end of paragraph
(2);

(2) in paragraph (3), by striking the period and
inserting “; and”; and

(3) by adding at the end the following new
paragraph:

“(2) review, approve, and promulgate in the
Federal Acquisition Regulation certification require-
ments, core curricula, continuing education pro-
grams, and policy implementation training rec-
ommended by the Director of the Federal Acquisi-


105

It does not take much imagination to tell a story of how trash pickup is or is
not inherently governmental under the language of the bill.

In surnmary, the enterprise of defining what is governmental has no value,
and the method proposed is vacuous.

In the spirit of reinventing government, I would commend to the Committee
an entirely different approach: work to reduce the regulation of government
operations and grant public agencies greater, not less, discretion. At the
same time, take greater efforts to evaluate performance and establish good
and bad consequences for outstanding or unsatisfactory results.

Thank you for the opportunity to address the Committee.


mo

BlueCross BlueShield =A, Assecation of

‘Association ue Sule Fas
Eaten
pipinePazste000
femeswiis

August 28, 1998

‘The Honorable Stephen Horn

Chairman

Government Management, Information and
Technology Subcommittee

Government Reform and Oversight Committee

US. House of Representatives

‘Washington, D.C. 20510

‘We appreciate your invitation to submit the views of the Blue Cross and Blue Shield
Association on the subject of Cost Accounting Standards (“CAS”) and their application
to the Federal Employees Health Benefits (“FEHB”) Program. In earlier
correspondence to you (August 4, 1998) and to Chairman Burton (July 28, 1998) we
have set forth in some detail the reasons why FEHB Program experience rated contracts
should be exempt from CAS as commercial item acquisitions, the very real difficulties
faced by insurance carriers in trying to implement CAS, and the fact that CAS would
add little or no value to the FEHB Program. In this letter we provide our comments on
the written testimony submitted by G. Edward DeSeve, OMB’s Acting Deputy Director
for Management, to your committee on August 6, 1998.

‘Mr. DeSeve informed the Committee that the Administration is opposed to those
provisions of H.R. 4244 that “would preclude the application” of CAS to the FEHB
Program. He states that the Administration would also oppose any language imposing a
temporary moratorium on the application of CAS pending receipt and consideration of
the report of the CAS Board Review Panel.

Mr. DeSeve's statement implies that CAS has applied to the FEHB Program since the
1980s, and that Blue Cross Blue Shield is only “recently” trying to prevent the
application of “certain” CAS provisions to their contract. The fact is that, until the early
1980s, even the Federal Acquisition Regulation (“FAR”) did not apply to the FEHB
Program. The cost principles in Part 31 of the FAR incorporate the requirements of
certain CAS standards governing the measurement of costs, such as CAS anes
(pension costs). Thus, once the FAR applied, the CAS requirements i

FAR Part 31 also applied. “These requirements forthe measurement of costs are, forthe
most part, not difficult to comply with and are followed by most government
‘contractors, large and small. Other than through FAR Part 31, however, CAS has not
applied to the FEHB Program until OPM made it applicable “to the maximum extent
practicable” in the 1998 contract.


115

Mr. Horn. I thank the chairman, and I co! tulate you on hav-
ing this very good hearing. I’m sorry we had a few votes on the
floor that disrupted your lives out there, and thank you for sticking
with us.

One question I usually ask in these hearings is, is there anything
any of your colleagues of the four of you said that you'd like to ei-
ther disagree with, or support? And give you each a chance before
you leave because I’d be interested in any new ideas that you’ve
heard out of the three colleagues that are with each of you. I think
we'll start at this end, because you’re going to need throat spray
for easing your brain connecting with the tongue. You were doing
very well, and the ranking member would make an outstanding
professor, as you can see. He put the students right to the wall. It’s

ow as the Socratic dialog.

Mr. Sawicky.

Mr. Sawicky. Sawicky, yes. Thank you. Well, one thing I need
to respond to is what my friend at the other end of the table said,
which is, he thinks government in the United States is trying to
do everything for everybody. I'd like to remind people that, when
compared to other industrial countries, the Unit States public
sector, Federal, State, and local, taken together, are the smallest
typically, maybe with one or two exceptions like Turkey or Japan.
So, we begin in the United States with a lean public sector in
terms size relative to the size of our economy.

At the Federal level, we begin with a public sector whose pri-
mary activity is really sending checks to people under social insur-
ance, antipoverty programs, interest payments on our debts. The
minority of our activity, you know, is actually providing services di-
rectly. We're giving payments to State and local governments, et
cetera. So, the scope for reform in this area is very limited relative
to the size of the Federal Government as a whole.

In that context, as I said in my testimony, there’s ample oppor-
tunity to improve delivery services by moving things in either di-
rection, either things that are public now that ought to be privately
provided, or vice versa.

In terms of this amendment, I would emphasize that we try to
get symmetry in this respect. We treat defense the same as non-

lefense; we treat things that are now public the same as things
that are now private; we allow for movement in all directions, and
most of what we get, beyond classification, to the actual evaluation
and judgment of the efficacy of different approaches. Agencies and
committees like this should—and do to some extent—continuously
review what things cost under different possible methods of provi-

sions.

In the State and local sector, although there’s lots of talk about
contracting, again, there’s a great gap between that talk and the
activity, which would tell you ‘whether contracting or not con-
tracting is the economic thing to do. I would just encourage the
committee to focus on that, and it could turn out that we should
do more mapping outsource and we should do other things by other
means. I would stress that it’s that evaluation which doesn’t lend
itself to basic Brinciples by what’s government and what isn’t.

Mr. Horn. On that ploy, if I might interrupt, mapping rings bells
in my head because I have the largest flood plain problem in the


58

the House and the Senate, the Administration, the private sector and the unions who represent
Federal employees. The Administration has urged the Congress to ‘ensure thst any legislative
initiative in this area contributes to the process of expanding opportunities for public-private

competitions.

Asa part of these discussion, we developed a set of fundamental principles for the
development of legislation in this area. First, the legislation needs to promote competition to
achieve the best deal for the taxpayer - not simply to outsource. Second, the legislation needs to
establish the principle that it would not increase the level of judicial involvement in the
Government’s management decisions as to whether or not to outsource or how that comparison is
conducted. Third, the legislation must recognize that current and extensive OMB Circular A-76
‘guidance to promote a level playing field is already in place. Any changes to the management
documentation, employee participation, costing and source selection rules for the competitions
must be well understood so as to be enforceable and remain impartial. Fourth, the legislation
must recognize the complexities of public-public and public-private competitions. Fifth, the
legislation must be fair and equitable to all interested parties. One-way competition is
unacceptable. Sixth, the legislation must view public-public and public-private competition in
the context of our larger reinvention effort. Outsourcing is only ane management tool to reinvent
and improve Government performance. We must not treat competition as a variable independent
from our other reinvention and management improvement efforts. And finally, it would be
inappropriate and may, in fact, be detrimental, if the legislation were to require the head of each
agency to undertake competitions in accordance with a schedule mandated in law. Such

4


112

think are very important inherently governmental functions within
the field of mapping.

Third, I serve in local government myself, and I'll give you one
example of something that we’re struggling with. Fairfax County,
VA has a wonderful public park system that we're very proud of.
The county happens to mow the lawns in the parks themselves.
They patch the potholes in the roads themselves. And there is a se-
rious question being asked as to whether doing that with govern-
ment employees is the most efficient way to do it—not only efficient
in terms of what it costs per unit, but productivity. How many pot-
holes can you fill in a week?

That leads me to my final point. In the experience that we’ve
had, you'll recall that one of the members of my association testi-
fied when we had the joint hearing over on the Senate side, and
he mentioned the number of former Federal employees that his
own firm had employed. What we are finding among people who
move from the government to the private sector is that the private
sector is much more productive in mapping. The eyre getting a lot
more out of their people and their equipment than these people
were experiencing when they were working in the government.
That’s where a private company can provide the same, if not better,
level of service; the same, if not better, wages, and to still do it effi-
ciently and profitably, because of the increased productivity. The
need to be profitable is what drives the productivity, particularly
in small businesses, and particularly in businesses where the em-
ployees are the owners of the business. They are the stockholders.
They benefit from the efficiency and productivity of their work.

Mr. Kucinicu. Yes, I’m sure that in some discrete areas a case
could be made that there is productivity offered by the private sec-
tor. ’m also very certain, based on information that’s been pre-
sented to this committee on another occasion, that there are areas
where contracting out has been a disaster. HUD comes to mind.

So, I think that—I’d like to just conclude some—and thank you
for engaging in this discussion because I think it is helpful to try
to get an idea of how people view the world. The overall concern
that I have about all privatization is that it inevitably reduces gov-
ernment to being just another unit of market participation, and
that if we’re going to maintain democratic values, I don’t know that
we can go to the marketplace to assure those democratic values are
always going to be u held. Because the marketplace is about seek-
ing after profit, which is fine in and of itself, but it’s not about up-
holding values or democratic traditions. Sometimes certain types of
conduct can be anything but that, the marketplace. I think that’s
that dynamic tension that we are going to continue to see ex-
pressed in these great debates that take place over outsourcing,
contracting out, privatization, whatever you want to call it.

The question is, can we have an accountable government? Caa
we have a maintenance of democratic values if, in fact, we are per-
mitting broad areas of public service to be contracted out? What
are the implications? We have to face this: that there are implica-
tions for the government. It’s not just a financial issue. It is a fi-
nancial issue. We always have to look at ways of making govern-
ment work more efficiently, but there are also issues that relate to
democratic control and accountability.


1%

As you know, Senator Thomas and Representative Duncan introduced S.314/H.R 716, the
Freedom from Government Competition Act. The intent of that legislation was to establish in
statute a workable process by which Federal agencies utilize the private sector for commercially
available products and services. As your hearings and those convened by Senator Brownback
demonstrated, in 1932 the House created a special committee to study the Federal government’s
starting and carrying out activities that are commercial in nature and competitive with the private
sector. In 1954, a bill to address this issue was reported by this Committee, passed the House
and was reported by the Committee on Governmental Affairs of the Senate. At that time, the
Eisenhower Administration indicated that it could resolve this matter administratively. Bureau
of the Budget Bulletin 55-4 was issued and the Senate suspended action on the legislation. That
budget document established a federal policy of reliance on the private sector and said the
government should not compete with private business

That policy is now found in OMB Circular A-76. It has been endorsed by every Administration,
of both parties, since 1955. However, because that policy is in a non-binding circular,
implementation has been uneven from one Administration to another. In recent years, the
problem has been so critical that all three meetings of the White House Conference on Small
Business, in 1980, 1986 and 1995, ranked government competition as one of the top problems
facing America’s small businesses.

Certainly government agency officials have the ability to contract with the private sector for
goods and services needed to carry out governmental activities. Agencies do that and this bill
will not interfere with that important management tool. It is our view, however, that the Federal
government should not start and carry out commercial activities for an indefinite period of time
without even considering whether using the private sector is a better deal for the taxpayer.

I must say that our members do not believe the government should be competing or duplicating
private sector capabilities. However, we support this compromise legislation which will require
the following:

*agencies must annually inventory their activities that are not inherently governmental.

‘interested parties can challenge either the inclusion or exclusion of an activity on the
list. The challenge is administrative (not through a judicial review).

*agencies must use a “competitive process" on those activities on the list within a
reasonable time

* establishment of realistic and fair comparison for determining whether to use a private
source or government source.

* requires that the process be consistent with existing law (such as the Brooks Act's
qualifications based selection process for architecture and engineering services, including
surveying and mapping, as required in 40 USC 541 et. seq.)

establishes a definition of "inherently governmental" similar to that already in an Office
of Federal Procurement Policy letter.

*covers all Federal agencies, except the General Accounting Office, Government
corporations, non appropriated instrumentalities and depots.

*effective date is October 1, 1998

Mr. Chairman, your hearings have demonstrated that OMB Circular A-76 does not work. When
you have a clearly commercial activity, like surveying and mapping, with a capable and qualified


a

BBRSSEeriRaREoERES

28

20

ers appropriate to meet the objectives of that sec-

tion.

SEC. 7, FUNDING.

(a) IN GENERAL.—(1) Funds described in subsection
(b) may be transferred to an account of the Office of Man-
agement and Budget for use by the Administrator of the
Office of Federal Procurement Policy for the purpose of
administering Governmentwide acquisition workforce
training activities and related purposes consistent with the
objectives of the Office of Management and Budget.

(2) The specific amounts to be transferred under this
section shall be determined jointly by the Director of the
Office of Management and Budget and the head of the
applicable department or agency.

(3) Funds transferred under this section shall remain
available for obligation until expended.

(b) FuNpsS AVAILABLE FOR TRANSFER.—Funds
available for transfer under this section are funds appro-
priated for fiscal year 1993 or a subsequent fiscal year.

(c) LimrraTions.—(1) Funds may be transferred
under this section not later than the end of the fifth fiscal
year after the fiscal year for which funds are appropriated
or otherwise made available.


94

‘Subcommittee on Government Management. Sclar Testimony - August 6.1998. Page 8

the less obvious, but highly important, aspects of quality and the greater
degree of uncertainty, force a more complex managerial decision and
monitoring process upon agencies.

We do well to remember that a good portion of the lucrative practice
of corporate law involves nothing more than litigation among parties
claiming breach of contract or seeking resolution of differing
interpretations of contract language. If contracting is that difficult and
expensive in the private sector where the parties at least are clear about the
bottom line they are pursuing, why would one suppose it is going to be
easier in the public sector where the output is not as easily valued by
market criteria?

When is it less expensive to maintain the size of an organization to
accomplish tasks? When is it more economical to purchase them.
from outside vendors? Together these two questions comprise the essence
of what is known as the "make-buy" decision. Put slightly differently and
from an organizational perspective, when are the internal bureaucratic
costs which accompany larger agency size less than the external
transactions costs of using the market?

To answer that question it is necessary to understand that the word
market is too broad a frame of reference for policy making. A helpful
starting point is to distinguish between spot markets and contract markets.
Spot markets are akin to "buying off the rack," and contract markets are
similar to custom tailoring. When an organization decides to buy rather
than make, it goes shopping in either a spot market or a contract market.
Spot markets are typically used to acquire products such as office supplies
and motor vehicles, which come in sufficiently standardized forms that
commercial vendors routinely maintain them in inventories and which
would be virtually impossible for firms or agencies to make themselves.
But some long-term services that organizations can readily perform
themselves also fit in this spot market category. A business firm might
prepare its payroll internally, in its own bookkeeping office, or it could
hire an outside payroll service. A periodical publisher could process its
own subscriptions and mail its own journals, or it could hire an outside
fulfillment company.

When the choice is between spot purchases of standardized products
or internal production, the decision rule is essentially a matter of
comparative direct production cost analysis. The organization must
compare its internal production costs with the cost of purchase. The
transactions costs are virtually zero as a result of the standard units in


105TH CONGRESS
vsesox” Af, R. 4244

To amend the Office of Federal Procurement Policy Act (41 U.S.C. 401
et seq.) to provide for measurement of the performance of the Federal
procurement system, to enhance the training of the acquisition workforce,
and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JULY 16, 1998

Mr. Horn (for himself, Mrs. MALONEY of New York, Mr. Davis of Virginia,

Mr. Sessions, and Mr. KANJORSKI) introduced the following bill; which

was referred to the Committee on Government Reform and Oversight,

and in addition to the Committee on National Security, for a period to

be subsequently determined by the Speaker, in each case for consider-

ation of such provisions as fall within the jurisdiction of the committee
concerned

A BILL

To amend the Office of Federal Procurement Policy Act
(41 U.S.C. 401 et seq.) to provide for measurement
of the performance of the Federal procurement system,
to enhance the training of the acquisition workforce,
and for other purposes.

1 Be it enacted by the Senate and House of Representa-
2 tives of the United States of America in Congress assembled,


qT

private sector, and the government spends $1 billion each year on these activities, and employs
nearly 7,000 Federal workers in this activity, and contracts out less than 10% of that $1 billion,
and no agency has performed a start-to-finish A-76 review on a surveying or mapping function,
you have what Senator Brownback called a “systems failure”.

This legislation will replace OMB Circular A-76 with a more workable and fair process. It will
help assure proper implementation of Executive Order 12615, the Economy Act (31 U.S.C.
1535), with regard to services for other agencies and the Intergovernmental Cooperation Act (31
U.S.C. 6505(a)) with regard to services for State or local government by assuring that the rights
of the private sector under those provisions are indeed honored.

Mr. Chairman, we recently obtained information from the Immigration and Naturalization
Service showing that between 1985 and 1995, an average of 10,000 engineers, surveyors and
mapping scientists have emigrated to the United States annually. That shows clearly that when
contracting out is applied to our field, there will be jobs in the private sector for any Federal
employee who wants to make that move or is requested to make that move.

We commend all those involved in working out this compromise. We believe this is a good bill
and we look forward to working with the Congress on oversight and with OMB on
implementation on this important legislation.


83

Hor and their staffs for all of the hard work that has gone into crafting this legislation and I offer
our continued support. This concludes my remarks and I stand ready to answer any questions you
may have.


The problem of government competition is not a new one.

In fact, since the Eisenhower Administration in 1955, it has been U.S.
policy that:

“the Federal Government will not start or carry on any
commercial activity to provide a service or product for its
own use if such product or service can be procured from
private enterprise through ordinary business channels.”

Every Administration, Republican and Democrat, for the past 40 years,
has endorsed this policy, but unfortunately, it has never been
implemented.

Let me briefly explain the most recent draft of this bill and how it will
address this problem.

Simply put, this legislation will require federal agencies to prepare a list
of activities which are not inherently governmental functions that are
being performed by federal employees.

These lists are then to be submitted to the Office of Management and
Budget for review and consultation.

In addition, this legislation will make these lists public and require
federal agencies to give consideration to private sector sources for
providing these goods and services.

It does not make the federal agencies contract everything out.

I recognize that there are things that government does best and that there
are functions that only government should do.

It requires only that federal agencies look at those things they do which
are commercial in nature.


111

One of the reasons why I’m so skeptical about so much privatiza-
tion is that, once contracts go from the public, the work goes from
the public to the private sector, we often have a condition where
people end up having limited accountability. Usually accountability
is through elected officials (a), and (b), that they don’t have any
way of holding a line on cost, because once you let your infrastruc-
ture get out of your control, you’re basically at the mercy of those
who are providing the services.

That’s some of the concerns that people have about privatization.
And if you don’t have that control, inevitably your taxes go up to
pay for the same services that you used to have some control over.
That’s why privatization ends up being so contentious from the mu-
nicipal level, where I have a few decades of experience.

On a Federal level, some of the other issues that people are con-
cerned about are as follows: People are concerned about the wages
which are paid to employees who may stay in a contractual rela-
tionship with a new contractor, and government often profits. The
private sector comes about as a result of cutting wages and bene-
fits, because at some point something has to give. You cannot tell
the public you’re going to give them the same amount of services,
same quality of service, pay the same wage levels and the same
benefit levels, and at the same time hope to make a profit where
you’re answerable to your stockholders. It’s almost as if you have
to serve two masters. You have to serve the public, on one hand,
and then you have to serve the stockholders who put together the
company.

I just offer these thoughts for your consideration, not to challenge
your right to seek business opportunities in government, because
certainly I happen to believe there are some areas where public-
private partnerships can be quite healthy, and I propose such in
the area of the National Aeronautics Space Administration. But I
also have some doubts about privatization in some areas of the gov-
ernment where you might hurt the case for privatization by taking
it over.

Mr. PALATIELLO. Can I comment in response? Thank you.

First of all, ’'m saying this not to be critical, but to clarify the
issues. Privatization is a very broad term. I don’t view this legisla-
tion as a privatization bill. Privatization encompasses a number of
different strategies. This legislation, in my view, provides a frame-
work for potentially contracting out services. I think that’s an im-
portant distinction, and I’ll explain why I think that’s important in
a moment.

We believe in the fact that, particularly in the industry that I
represent, there is the need for a core capability within the govern-
ment. There is a governmental mission. For example, the govern-
ment has to administer the contracts. The government has to set
the specifications. If you’re doing a national mapping program and
you don’t set good standards and specifications, particularly in dig-
ital mapping today, you go out and you want to map each of the
50 States—you’re going to have 50 different datasets, and you’re
not going to be able to do environmental analysis or other applica-
tions if you don’t have a coordinated database that’s set to govern-
ment standards. So, those are two areas right off the top that I


81

versus non-inherently governmental and reiterates a long standing policy of the Federal government
to rely on the capabilities of the private sector. While this policy, embodied in the Office of
Management and Budget Circular A-76. is more than forty years old, there are still activities which
are not inherently governmental that the Government itself continues to perform. The purpose of this
legislation is to identify and evaluate those activities which remain in house. In doing so. the bill
will help the Federal government focus on its core missions and responsibilities and in the long run,
allow the Federal agencies to focus on their core missions rather than competing with its own
citizens. This measure will further the current efforts to streamline the Federal government.

‘This spring. Mr. Franklin Raines. before leaving the Office of Management and Budget, issued a
‘memo requesting all federal agencies to develop a list of the activities they perform. However. like
the A-76 policy itself, this request is not mandatory and such efforts in the past have not met with
much cooperation from federal agencies. As Christopher Mihm of the General Accounting Office
testified in a hearing before the Senate Government Affairs Committee (June 4, 1998), OMB had
made a similar request in 1996 but did not receive any agency inventories or else those received
were based on previous inventory efforts.

This bill will tum OMB?s request into a mandate. ensuring a process that will throughly identify and
categorize all activities currently being performed by the government. In other words, it will require
the Federal government to do what business and taxpaying families do everyday: to take stock in
how they can best direct their scarce resources, Activities determined to be commercial in nature
should and must be subjected to competitive sourcing. The legislation also includes a reasonable
timetable for phasing in the competitive process. This is designed to ensure that no significant
disruptions to the Government's ability to carry out its missions occurs and forces a legitimate
discipline in carrying out the intent of this legislation. While there is concer that an agency may
simply ignore the competition policy in the bill. I would argue that the agencies cannot afford NOT
to compete their commercial activities. Thus, the legislation will help create an environment that
promotes greater efficiency and costs savings.

At this time. I would like to take a moment to dispute some of the inaccurate assertions that have
repeatedly been made about our industry and these bills. The first assertion is that service
‘contractors achieve savings by paying their employees less. This is misleading and wrong. The
service contract industry is governed by a host of wage laws. among them the Service Contract Act'.
Under the SCA, the Government provides wage rates for a variety of employees in addition to
requiring money to be spent on fringe benefits. Violations of the Service Contact Act can result in
fines and debarment. CSA has a successful program with the Department of Labor to promote
understanding of and compliance with the Service Contract Act.

It is disputed that outsour of Government functions actually saves

‘Study after study. from sources as diverse as the GAO. OMB and innumerable think tanks. have

1 ‘See The Service Contract Act, 41 U.S.C. § 351: “Every contract entered into by the United States
through the use of service employees must contain the following: (1) A provision to specify the
minimum monetary wages to be paid to the various classes of service employees in the performance

of the contract ... (2) A provision specifying the fringe benefits to be furnished. ..~


107

Earlier in the decade, when they contracted, they turned over
their whole MIS system to IBM, which would seem logical in terms
of cutting-edge technology and who would know things. But the
truth was that there was a lot of in-house information. As a result,
they were at some point sorting out trains by hand because they
lost control of it. I think the situation is getting better.

But my point simply is that one of the tests that one should use
is, what technology or what assets does the government have that
over time it wants to maintain control of, even if it parcels out
pieces of it to private contractors?

On the question of leading-edge technology, I think in a lot of
cases a lot of the things that we’re talking about contracting out
are often not at the leading edge. Oftentimes, they’re very labor-
intensive jobs and the technology that’s used very much is in the
public domain. The question there becomes, how do those jobs tie
into a larger mission?

I mentioned Congress earlier. In my longer, lengthier testimony
which I submitted, I hypothetically stated if Congress came under
this, what would happen if you had to contract out all your secre-
taries and interns to an employment service? The argument
against it would be that there is certain information-flow that
would be lost in the discontinuities, and even though it’s not an in-
herently governmental function, it very much is crucial to the legis-
lation, which is inherently governmental function.

As I began looking through the A-76 and the legislation, I real-
ized it had sidestepped the very important question by saying, “in-
herently government.” So what I was trying to do was make some
suggestions of a better way to begin to cut through that and to
begin to look at those things. Of course, the other piece is my con-
cern about how you sustain competitive markets.

Mr. SESSIONS. Mr. Sawicky.

Mr. Sawicky. Yes. I just have a couple of things to add. The
more grand and complicated a particular asset, that would be
something less likely to be provided by a number of different sup-
pliers in a market. It would tend to be dominated by relatively few
suppliers, as we’ve seen in the defense industry. We need to distin-
guish between a market working well from the standpoint of effi-
ciency, which means good product, least cost, and a market work-
ing well from the standpoint of quality, which means very good out-
come but not necessarily low cost. A handful of providers could
prosper in such a setting, but we wouldn’t necessarily call it effi-
cient.

That goes to Elliott’s point that there’s a case for keeping such
things in government, because in the event that this is routinely
contracted, then one could easily end up with a situation resem-
bling government residence of such an asset; namely, a very few
number of providers, or maybe only one for that kind of asset, and
something very like a monopoly without some of the advantages of
monopoly from a private sector standpoint; maybe not as much in-
vestment in innovation, and maybe less advantages from the public
standpoint, because being as how it was provided by a private sec-
tor provider, there wouldn’t be quite as much control over the asset
that would be most consistent with the public mission.


92

Subcommitiee on Government Management. Sclar Testimony - August 6.1998, Page 6

to $112.3 million.’ This sharp increase was particularly troubling because
when privatization was initiated, the RTD was one of the nation's most
tightly run transit operations. Between 1986 and 1988, it had actually
reduced operating expenses by about 4 percent. Between 1990 and 1995,
the cost of contracted service swelled from approximately $14 million to
almost $29 million--more than 100 percent. Meanwhile the cost of directiy
provided service increased by just a little over 11 percent. In six years,
privatization cost the RTD more than $9.2 million.*0)

Today two providers control the private transit market in Denver,
and their oligopolistic interdependence has become apparent. A recent
round of bidding resembled a game of musical chairs. There were only
three bidders in 1997 for four newly configured packages of routes, and
ATC/Vancom made the winning bid for all of them. (The second, higher-
priced bid came from an "outsider," Grosvenor Bus Lines.) This turn of
events might have seemed surprising, since Laidlaw had previously
controlled the lion's share of operations. But this time around, Laidlaw bid
on only one of the bundles. In early 1997 Laidlaw purchased
ATC/Vancom's national school bus business. ATC/Vancom was shedding
its school bus operations in order to concentrate on public transit. And
Laidlaw? Perhaps it bowed out of the bidding in Denver because it
preferred to concentrate on the school bus market. But that did not deter
the company from lobbying the Colorado legislature during its spring 1997
session to expand privatization to 50 percent of the RTD's service. The
campaign failed.9 Since then Laidlaw has purchased the operator of the
RTD's paratransit service.

The cost and efficiency considerations that should be the alpha and
omega of competitive contracting are now besides the point. Contracting
decisions in Denver are driven by the strategic considerations of the
contractors in control of the Denver market. Once a regional leader in
public transportation, RTD's management has been reduced to a nearly
passive broker attempting to mediate the often conflicting claims of the
Tiding public, taxpayers, labor unions and the powerful contractors with
greater designs on the national transit business.

Westchester County, New York privatized its entire bus service in
1975. In the beginning, sixteen companies were operating routes, none of
them carrying more than a third of the county's passengers. Within a

7 Unless otherwise specified, all the financial data in this report are taken from the Comprehensive Annual
Finical Reports of the Regional Transportation District. They are all audited by a national CPA firm.
‘®These figures are derived from "RTD Bus Cost Model Documentation. October, 1996."

Aq subsequent campaign was attempted in early 1998. It too failed.


60

would preclude the application of Cost Accounting Standards (CAS) to experieace rated
contracts awarded under the Federal Employees Health Benefits Program (FEHBP). Various
provisions of CAS have applied to FEHBP contracts since the 1980s. Recently, the Blue Cross
and Blue Shield Association has sought to stem application of certain CAS provisions to their
FEHBP contracts. CAS, and its underlying cost accounting principles, are applied to all
contractors (including FEHBP contractors) that perform under negotiated, cost-based pricing
arrangements with the Federal Government in order to ensure that costs are properly allocated to
the Federal Government, and, in the case of the FEHBP, to the Federal employees and annuitants

who pay more than one-quarter of the premium costs.

Congress has already provided in statute for a formal waiver process that appropriately
considers circumstances that are so unique as to make the application of CAS inappropriate. For
this reason, the Administration would also oppose any language imposing a temporary
moratorium on application of CAS to FEHBP carriers pending fature action to be taken by the
CAS Board Review Panel. CAS waivers and exemptions should only be granted upon a thorough
investigation and evaluation of the factual and technical merits of a specific accounting situation
by the CAS Board. The proposed statutory CAS exemption for FEHBP contractors does not

meet this important criterion.

Mr Chainman, this concludes my remarks. I will be pleased to answer any questions that
you or the other Subcommittee Members may bave.


56

Working with OFPP, the President's Management Council commissioned the Procurement
Executives’ Working Group to develop agency procurement system performance measures. A
menu of 54 measures was established. Agencies selected measures from the list based on their
individual missions, organizational structures, types of procurement, and availability of data
collection systems. OMB has made increased use of performance based service contracting a
priority management objective requiring regular progress reports from the 20 agencies that award
the most service contracts, OMB also is committed to working with the agencies to determine
‘whether other core performance measures should be required. In addition, certain agencies
submit specific performance measurement information as part oftheir annual performance plans
‘under the Government Performance and Results Act (GPRA).

‘Thus, we beliove that the performance measurement sections of proposed H.R. 4244
would duplicate existing requirements for the establishment of government wide procurement
system standards already contained in both the OFPP Act and GPRA, and would impose

potentially burdensome and duplicative reporting requirements.

‘The Administration also opposes those sections of H.R. 4244 which address the
Government's acquisition workforce. The Administration shares the goal of ensuring the quality
and professionalism of the Government's acquisition workforce. Rather than reflecting an
ecophasis on the goals of flexibility and streamlining of personnel policies, these sections would
instead impose rigid and inflexible personnel, training, and ausociated budgetary policies upon
agencies. This would detract, rather than enhance, their ability to manage and train their

2


Com NAH Rw DN &

RBRPEBBEBSSEVIABDESERES

18

10
“(2) For appointments to serve as a contracting
officer with authority to award or administer con-
tracts for amounts above the simplified acquisition
threshold as specified in section 4(11) of the Office
of Federal Procurement Policy Act (41 U.S.C.
403(11))—

“(A) completion of the core curriculum es-
tablished in the Federal Acquisition Regulation
for contracting officers;

“(B) at least 2 years experience in a con-
tracting or purchasing position;

“(C)(i) a baccalaureate degree from an ac-
credited educational institution authorized to
grant baccalaureate degrees;

“(ii) completion of at least 24 semester
eredit hours (or the equivalent) of study from
an accredited institution of higher education in
accounting, business, finance, law, contracts,
purchasing, economics, industrial management,
marketing, quantitative methods, and organiza-
tion and management; or

“(iii) passage of an examination considered
by the Secretary of Defense to demonstrate
skills, knowledge, or abilities comparable to that
of an individual who has completed at least 24


47

Mr. Horn. With that, I’m going to recess at 2:30, and when Mr.
Sessions comes, he can begin with the witnesses. I will try to be
back by 10 minutes of 3, and we'll just be in recess until that time.

[The prepared statement of Hon. Stephen Horn follows:]


51

CONGRESSMAN

PETE SESSIONS
News

1318 Longworth House Office Building + 202-225-2231 + Contact: Pam Arruda

STATEMENT OF THE HONORABLE PETE SESSIONS
BEFORE THE COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
REGARDING HOUSE RESOLUTION 4244

August 6, 1998
‘Thank you, Mr. Chairman.

| appreciate your decision to take the opportunity to discuss this very important bill on
procurement training for the Office of Federal Procurement Policy. The amendment I
offered on July 23, 1998 was supported by both sides of the aisle, since identical
Ianguage was passed on voice vote by the Senate Governmental Affairs Committee, and
later by the entire Senate.

‘The business community, including the U.S. Chamber of Commerce, has publicly
endorsed this language. Notably, the Executive Branch and the federal government
unions have also publicly indicated their neutrality on this language. As a result of all of
these groups coming together for a compromise, this language is NOT H.R. 716, the
Freedom From Government Competition Act, which I have cosponsored with
Representative Duncan, and have discussed with you in hearings and meetings throughout
this year. Instead, this language only requires an inventory of commercial activities by
the federal agencies and also a consideretion for whether the agency should continue
performing the activity in-house or compete it out to the private sector. I realize that
there will be some on both sides of the aisle who believe that this language does not go
far enough in one direction or the other, but it isa true compromise. This is important
legislation that believe will truly result in a government that works better and costs less.

Certainly, government agency officials should have the ability to contract with the private
sector for goods and services needed for the conduct of government activities. This
language will not inhibit that ability. However, it should not be the practice of the
government to carry on commercial activities for months, years, even decades, without
reviewing whether such activities can be carried out in a more cost effective or efficient
manner by the private sector.


80

STATEMENT OF
Gary D. Engebretson, President
Contract Services Association of America

BEFORE
‘The House Government Reform and Oversight Committee

HEARING 01
‘The Federal Agency Inventory Reform Act of 1998

‘Mr. Chairman, members of the committee. My name is Gary Engebretson and I am the President of
the Contract Services Association of America (CSA). the nation’s oldest and largest association of
government service contractors. Now in its 34th year, CSA represents more than 250 companies
that provide a wide array of services to the federal government. as well as numerous state and local
governments. I am also speaking on behaif of the Coalition for Taxpayer Value of which CSA is a
leading member, The coalition membership includes the American Council for Independent
Laboratories. the American Consulting Engineers Council, Chamber of Commerce. MAPPS and the
Professional Services Council. Collectively. the coalition represents thousands of employers and tens
of thousands of government contract employees. I thank you for the opportunity to testify today on
Federal Agency Inventory Reform Act of 1998, which was added as an amendment to an acquisition
workforce training bill. H.R. 4244.

First, let me stress that we have significant philosophical reservations regarding public-private
competition. Indeed. we feel that it is not in the best interest of the taxpayer for the Federal
government to compete directly with its citizens: this is partly reinforced by the lack of
comparability between Government and industry cost accounting systems. However. we recognize
the broad based support for public-private competition on the part of the Government. Given that
reality. we support this legislation as a rational. appropriate and measured step towards achieving
the proper balance between public and private resources.

While the legislation represents numerous compromises that were made, of necessity, I applaud and
encourage you to continue your efforts to pass this legislation. which embodies a number of key
concepts. We support this compromise measure, which we believe should move forward without
any changes. I want to add, however. that ensuring its full and proper implementation will take
vigorous Congressional oversight.

“The language before you represents important progress and opportunities on many fronts:

First, the legislation clearly delineates between activities identified as inherently governmental


13

5
(b) CONFORMING AMENDMENT.—The table of con-
tents of such Act is amended by adding at the end the

following new item:

“See. 39. Performance measures for the Federal procurement system.”
SEC. 3. PROFESSIONALISM OF THE ACQUISITION WORK-
FORCE.

(a) MANDATORY TRAINING AND EDUCATION.—Sec-
tion 37(f)(3) of the Office of Federal Procurement Policy
Act (41 U.S.C. 433(f)(3)) is amended to read as follows:

“(3) MANDATORY TRAINING AND EDU-

CATION.—The head of each executive agency shall

establish, for each career path, requirements for ini-

tial and continuing education in the critical acquisi-
tion-related duties and tasks of the career path.

Such requirements shall include, at a minimum, the

core curriculum, continuing education programs, and

policy implementation training required by the Fed-
eral Acquisition Regulation.”.

(b) ACQUISITION WorKFORCE.—Section 37(e) of the
Office of Federal Procurement Policy Act (41 U.S.C.
433(e)) is amended to read as follows:

“(e) APPLICABILITY TO ACQUISITION WORK-
FORCE.—The programs established by this section shall
apply to the acquisition workforce of each executive agen-
ey. For purposes of this section, the acquisition workforce
of an agency consists of—


55

STATEMENT OF
G. EDWARD DESEVE
ACTING DEPUTY DIRECTOR FOR MANAGEMENT
OFFICE OF MANAGEMENT AND BUDGET
BRFORE THE U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION AND

TECHNOLOGY

AUGUST 6, 1998

‘Mr. Chairman and Members of the Subcommittee:

Tam before you today to discuss LR. 4244, I would like to address three matters in
particular: (1) performance measurement and acquisition workforce training; (2) the
Government's acquisition of commercial support services; and (3) the proposed moratorium on

the applicstion of the CAS to FEHBP contracts.

Let me begin by addressing the provisions on performance measurement and acquisition
workforce training. While the Administration shares the Committee’s goal of ensuring the
quality and professionalism of the Government's acquisition workforce and measuring the
performance of procurement operations, the Administration opposes those sections of HR. 4244
that would establish 2 new statutory basis for measuring progress in procurement performance
and would require reporting by agencies that allocate greater than 50 percent of their budget to
procurement programs. Section 6 of the Office of Federal Procurement Policy (OFPP) Act
already assigns the development of government wide procurement system standards to OFPP.


2

tor. The last time the White House Conference on Small Business
met, it listed unfair competition with government agencies as one
of it’s very, very top concerns. Furthermore, Ms. Karen Hasty Wil-
liam, the Administrator of the Office of Federal Procurement Policy
under President Carter, also has endorsed this bill.

The problem of government competition with a small business is
not a new one. In fact, since the Eisenhower administration, it has
been official U.S. policy promulgated in 1955 that “The Federal
Government will not start, or carry on, any commercial activity to
provide a service or product for its own use, if such product or serv-
ice can be procured from private enterprise through ordinary busi-
ness channels.” Every administration, Republican and Democratic,
for the past 40 years has endorsed this policy, but, unfortunately,
it has never been implemented; it has been more lip service.

Let me briefly explain the most recent draft of this bill and how
it will address this problem. Simply put, this legislation will re-
quire Federal agencies to prepare a list of activities which are not
inherently governmental functions that are being performed by a
Federal employee. These lists are then to be submitted to the Office
of Management and Budget for review and consultation. In addi-
tion, this legislation will make these lists public and require Fed-
eral agencies to give consideration to private sector sources for pro-
viding these goods and services. It does not make or require that
the Federal agencies contract everything out. In fact, the bulk of
the activities of most departments and agencies would continue as
present, I would feel certain, even under this legislation.

I recognize that there are things that government does best, and
that there are functions that only the government should do. This
legislation requires only that Federal agencies look at those things
they do presently, which are commercial in nature. If these com-
mercial goods and services can be obtained from the private sector
in a more efficient and, much more importantly, cost-effective man-
ner, then, and only then, would the agency give consideration to
contracting out that work. The goal of this legislation is to ensure
that the public receives the best goods and services at the lowest
cost to the taxpayers. In the long run, I think this legislation will
help us do just that.

Within the last couple of years, for instance, the Defense Science
Board found that $30 billion could be saved each year if the De-
partment of Defense did more contracting out; $30 billion a year
is a lot of money, even here in Washington, DC. This is $30 billion
we would not have to ask the American public to send to Wash-
ington every year.

The Heritage Foundation and many other organizations have
made similar estimates about cost-savings throughout the govern-
ment. I think all of us would agree that the American public wants
the Federal Government to improve the services it provides without
increasing taxes.

Mr. Chairman, I would like to conclude by quoting one of our
Founding Fathers, a great American, Thomas Jefferson, who once
said, “It’s better for the public to procure at the common market,
whatever the market can supply, because there it is by competition
kept up in its quality and reduced to its minimum price.”


72

Mr. Sessions. OK, we're going to call up panel two: Mr. John
Palatiello—and he is entitled to say his name correctly since I
butchered it—Mr. Gary Engebretson, and Dr. Elliott Sclar. Why
did we get all these names? I’m a Texan. You shouldn’t expect me
to do this. [Laughter.]

And Mr. Max Sawicky.

So if I can have each of you rise please, and I’m going to admin-
ister your oath. If you'll please rise and raise your right hands.

[Witnesses sworn.]

Mr. Sessions. Thank you. If you'll please be seated. Let that re-
flect that all four of the witnesses have answered in the affirma-
tive.

For the record, ’m going to ask, when you give your opening
statements, if you'll please do me a favor and correct my pro-
nunciation of your name and please accept yt my apology. Part of the
problems that I have are that I’m from ‘exas, and the other half
is I didn’t practice before I got in here today.

So what we will do, please, is start with Mr. Palatiello. Sir, we
are delighted to have you here to testify about the Federal Activi-
ties Inventory Reform Act, H.R. 4244, title II. You’re the executive
director, Management Association for Private Photo—anyway, you
like to take pictures and you’re a surveyor—[laughter}—and chair-
man of the Business Coalition for Fair Competition. I might sug-
gest that Mr. Horn, next time, recheck before he has his vice chair-
man, and at least have me practice.

Sir, please go ahead.

STATEMENTS OF JOHN PALATIELLO, EXECUTIVE DIRECTOR,
MANAGEMENT ASSOCIATION FOR PRIVATE PHOTO-
GRAMMETRIC SURVEYORS, AND CHAIRMAN, BUSINESS COA-
LITION FOR FAIR COMPETITION; GARY ENGEBRETSON,
PRESIDENT, CONTRACT SERVICES ASSOCIATION; ELLIOTT
SCLAR, PROFESSOR OF URBAN PLANNING, GRADUATE
SCHOOL OF ARCHITECTURE, PLANNING AND PRESERVA-
TION, COLUMBIA UNIVERSITY; AND MAX SAWICKY, ECONO-
MIST, ECONOMIC POLICY INSTITUTE

Mr. PALATIELLO. Thank you, Mr. Chairman. I am John
Palatiello, executive director of the Management Association for
Private Photogrammetric Surveyors. You have it right; those are
folks that do make maps from aerial photographs and from sur-
veying data.

fe are pleased to appear today to indicate our very strong sup-
port for the Federal Activities Inventory Reform Act, and we com-
mend you, Mr. Sessions and Mr. Horn, all the members of the sub-
committee, for their hard work in bringing about this compromise.

This legislation is a true compromise between the interests of the
private sector, the Federal employee unions, OMB, and the bipar-
tisan leadership of the committees of jurisdiction of both the House
and Senate. We commend you for the time and effort that you have
put into to developing this consensus.

The FAIR Act, for the first time in more than 40 years, will cod-
ify a governmentwide policy and process on the issue of govern-
ment reliance on the private sector. We believe that in itself is sig-
nificant and commendable.


Co ery AH eR WN

PSsxgertaanurosp es

REBB

27

19

“(C) The President shall include the report in
the annual budget submitted pursuant to section
1105 of title 31, United States Code.”; and
(2) by adding at the end the following new paragraph:

“(3) PROFESSIONAL ORGANIZATIONS.—Not-
withstanding section 4109(b) of title 5, United
States Code, the head of an executive agency may
pay membership fees and fees for certification test-
ing for individual employees to organizations to fur-
ther acquisition professionalism.”.

SEC. 6. EVALUATION BY THE COMPTROLLER GENERAL.
The Comptroller General shall conduct an independ-
ent evaluation of the actions taken by executive agencies
to carry out the requirements of section 37 of the Office
of Federal Procurement Policy Act. On or before February
10, 2000, the Comptroller General shall submit to the
Committee on Government Reform and Oversight of the
House of Representatives and the Committee on Govern-
mental Affairs of the Senate a report on the evaluation
required by this section. Such report shall include—

(1) an analysis of the effectiveness of the ac-
tions taken by executive agencies to carry out such
requirements; and

(2) any legislative and administrative rec-
ommendations that the Comptroller General consid-


10

competition with the private sector. Each time the agency considers contracting with a private
sector source for the performance of ‘an activity, the agency shall use a realistic and fair
competitive process to select the most cost effective source (except as may otherwise be provided
in a law other than this Act, an Executive order, regulations, or any Executive Branch circular
setting forth requirements or guidance that is issued by competent executive authority).

15. Can you provide a reasonable estimate of the numbers of contractor employees that
currently work for the Federal Government. S, 314 and OMB Circular A-76
require agencies to report on the inventory the number of federal workers
performing non-inherently governmental activities. Why is this information useful?
‘Why don’t we require Federal contractors to report the same information?

‘There is currently no system of reports that will identify or aggregate contract employees
by contract type, location or contract number. Agencies need to know the scope of contracted
workload, that contract prices are reasonable, that the work is of appropriate quality, and the
dollars being spent. It is not, however, useful or important that an agency know the specific
number of employees hired by a contractor on a full-time or part-time basis to meet the
performance requirements of the contract. Collecting this kind of information would be arduous
and costly to both the agencies and to the contractors themselves. It would be time sensitive and
subject to significant distortions over time, by contract, by contract type, by location, by
function, individually or in aggregation. To collect this information, OMB would be obligated,
in accordance with the Federal Paperwork Reduction Act, to demonstrate the practical utility of
the information requested and that the administrative burden associated with its collection was
‘outweighed by the benefit of having access to the information on a recurring basis. We do not
believe that this information is particularly useful on a recurring basis. It would have little or no
impact on the conduct of individual A-76 cost comparisons and would contribute little to
understanding the growth or decline in overall Federal employment levels.

The OMB Circular A-76/FAIR Act inventory provides detailed in-house employment
(FTE) information by location and industry function code for functions currently performed in-
house, including savings (whether retained or converted to contract) and the function’s current
status. The Federal Procurement Data System (FPDS) is the primary source for information on
contracted activities and provides, among other data, contract dollar information by agency,
contract number, location and business type. Although the FPDS does not provide any
contractor FTE data, the information that it contains, which is available to the public, could be
used to develop reasonable estimates of the number of Federal contract employees, based upon a
range of economic and performance assumptions and using reported contract dollar values.

16. The Government has little information on contractor workforces. Moreover, very
little is known about the pay, health care benefits, and retirement benefits for
contractor employees. Why doesn’t the Government collect this information? If the
data indicates that pay and benefits for the contractor workforce are well below that
of Federal employees, would the Administration support legislation that would
address this issue?


63

EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503

DEPUTY DIRECTOR DEC - 7 198

‘The Honorable Stephen Horn
Chairman, Subcommittee on Government

Management, Information and Technology
United States House of Representatives
Washington, D.C. 20515-6143

Dear Chairman Horn:

‘Thank you for your joint letter with Representative Kucinich, dated September 25, 1998,
forwarding several follow-up questions to our hearing on H.R. 4244, “the Federal Procurement
System Performance Measurement and Acquisition Workforce Training Act of 1998.”

Based upon discussions with your staff, attached are responses to question numbers 8
through 17.

Again, thank you for you letter. Please let me know if we can be of further assistance.
Sincerely,

G. Hurt Nee

G. Edward DeSeve
Deputy Director for Management

IDENTICAL LETTER SENT TO REPRESENTATIVE DENNIS KUCINICH


a

Se oe ee ee
Aa PwNH SO

17

RRBB

20

12
433(h)(2)) is amended by striking “in accordance with”
and inserting “notwithstanding the provisions of”.

(g) ACCELERATED PROMOTIONS.—Section 37 of the
Office of Federal Procurement Policy Act (41 U.S.C. 433)
is further amended by adding at the end the following new
subsection:

“() RECRUITMENT AND PROMOTIONS.—

“(1) RECRUITMENT.—(A) For purposes of sec-
tions 3304, 5333, and 5753 of title 5, United States
Code, the head of an agency (including the Secretary
of Defense) may determine that certain Federal ac-
quisition positions are ‘shortage category’ positions
in order to recruit and directly hire employees with
unusually high qualifications, such as employees
who—

“(i) hold masters or equivalent degrees
from accredited institutions of higher education
in business administration, public administra-
tion, or systems engineering; or

“(ii) have had substantial, outstanding pri-
vate sector experience with commercial acquisi-
tion practices, terms, and conditions.

“(B) Personnel actions under this paragraph
shall be subject to policies prescribed by the Office
of Personnel Management for direct recruitment, in-


Statement
Of the American Congress on Surveying and Mapping
To the House Committee on Government Reform and Oversight
Subcommittee on Government Management, Information, and
Technology
On H.R. 4244, the Federal Activities Inventory Reform Act

The American Congress on Surveying and Mapping (ACSM) is pleased to submit its
views on H.R. 4244, the Federal Activities Inventory Reform (FAIR) Act. ACSM is an
individual membership society that represents more than 7,500 professionals in the fields
of surveying, cartography, geodesy, and geographic information systems technology who
work in both the public and private sectors throughout the world. ACSM is made up of
four member organizations that serve as special interest groups. ACSM’s member
organizations are the American Association for Geodetic Surveying, the Cartography and
Geographic Information Society, the Geographic and Land Information Society, and the
National Society of Professional Surveyors.

In commenting on H.R. 4244, ACSM seeks to represent the interests of its private- and
public-based members, the surveying and mapping profession as a whole, and the
nation’s long-term interest in ensuring the availability of comprehensive, timely,
accurate, and useful geospatial information.

General Comments

ACSM commends Chairman Horn, Representatives Sessions and Duncan, as well as
Senator Thomas for finding a common ground that addresses the needs of the Executive
Branch, without unnecessarily burdening federal agencies. The substitute amendment
proposed by Congressman Sessions is a major improvement over the original language in
HR.716.

ACSM Supports H.R. 4244

In March 1998, ACSM submitted a statement on proposals known as the Fair
Competition Act of 1998 and the Competition in Commercial Activities Act of 1998. At
that time, we noted that these bills were improvements over the original proposals,
termed the Freedom from Government Competition Act (S. 314 and H.R. 716), that we
had opposed. However, at that time, we stated that we could not endorse either the Fair
Competition Act of 1998 or the Competition in Commercial Activities Act of 1998. At
this time, after review of the legislation, we feel that H.R. 4244 is consistent with our
ideals and we would like to express our support of the bill.

The substitute bill avoids many of the problems that we had with earlier versions,


57

acquisition workforce. These sections would aiso drain limited training funds from the various
agencies in order to enhance the budget of the Federal Acquisition Institute (FAI), a small
subdivision of the General Services Administration. Proposals to increase fimding for FAI
should instead be addressed through the regular budget process. The bill would also assign to
OFPP, an operational role in the funding and direction of FAL This is not an appropriate role for
an office whose primary mission is to develop and oversee broad procurement policies. The
Administration belicves that the issues raised in the acquisition workforce sections of HR. 4244
are better handled by administrative action tailored to each agency’s specific needs, rather than
through inflexible statutory requirements.

In addition to these basic concerns about the acquisition workforce provisions of HR.
4244, the Administration also notes that neither FAI nor the Federal Acquisition Regulatory
Council has the expertise to determine functionel training requirements for members of the
Government's acquisition workforce beyond contracting personnel. H.R. 4244 would also upeet
many of the Administration’s recent initiatives designed to improve the education and training of
the Government’s contracting workforce, including activities sponsored by the Department of
Defense, the Office of Personnel Management (OPM) and OFPP.

z ivities I Ref

‘I would now like to discuss the provisions of Title Il of H.R. 4244, entitled the “Federal

Activities Inventory Reform Act of 1998” or the “FAIR Act.” As you know, the Government's

acquisition of commercial support scrvices has been the topic of extensive discussions involving
3


oOo N AH PB wWwN

23

15

tion Institute under section 6(d)(5)(F) and (J) to

ensure that instructional materials provided for the

Federal acquisition workforce accurately incorporate

the provisions and intent of the Federal Acquisition

Regulation and are effective in providing the skills

and knowledge necessary to competently implement

those provisions and otherwise enable the workforce
to obtain the best value in awarding and administer-
ing Federal contracts.”.

(c) FEDERAL ACQUISITION INSTITUTE.—Section
6(d) of the Office of Federal Procurement Policy Act (41
U.S.C. 405(d)) is amended—

(1) in paragraph (5)(B), by inserting “, and
provide fellowships and grants for researching acqui-
sition issues” before the period;

(2) by amending paragraph (5)(F) to read as
follows:

“(F) develop and recommend core curric-

ula, continuing education programs, policy im-

plementation training, and other instructional

materials for acquisition personnel in coordina-
tion with private and public sector acquisition
colleges and training facilities (to the maximum
extent practicable), and integrate those instruc-
tional materials with electronic performance


90

Subcommittee on Government Management Sclar Testimony - August 6.1998. Page 4

Scarcely a week passes in which somewhere in America a controversy
erupts around the letting of public contracts. This happens for a complex
set of reasons, not the least of which is that while we all love competition
when we are buyers we hate it when we are sellers. Sellers spend more
time in the marketplace than do buyers hence they devote a great deal of
energy to undermining competition with its thin profit margins.

When one looks at public contracting, it is noteworthy for the speed
with which competition consistently evaporates on the supply side of the
market. In 1988 the Colorado legislature passed a law requiring that,
beginning in mid 1989, 20 percent of fixed route public bus operations in
metropolitan Denver would have to be provided by private contractors.
The experience there illustrates the way in which a seemingly competitive
public contracting opportunity evolves into an oligopolistic market
structure.

The Denver privatization experience is of particular note because of
the lengths to which its architects went to try to ensure that the contracting
would remain competitive. To discourage a new, private monopoly from
developing, the statute prohibited any single contractor from winning more
than half of all the contracted business. After four years, the packages were
to be rebid. The intention was to create an ongoing system of competitive
rebidding in which the Regional Transportation District (RTD) would
always be able to purchase the needed service from the lowest-priced
acceptable provider among a continuing cast of several potential
contractors. This intention relied on what proved to be an untenable
assumption--that a market with a sufficient number of qualified sellers
could somehow be self-sustained.

Eighteen companies, some of them local charter operations and cab
companies, attended the initial bidders meeting. The turnout gratified
privatization advocates in Colorado, who, like advocates of privatization
elsewhere, based their hopes that a large competitive market would
materialize from the dozens of small transportation companies listed in the
yellow pages of any metropolitan area. However, when one examines the
actual market for privatized urban transit, it turns out that a handful of
national firms consistently win the major contracts. These firms have the
resources to write expert proposals that respond directly to an agency's
request, They have easy access to the requisite bonding and insurance, and
hence to the financing necessary to fulfill any commitments into which they
enter. This is no small consideration for the public boards charged with
fiduciary responsibility for public funds. Consequently, the effective
contract transit market has never consisted of the many small suppliers


m9

‘An Association of
BlueCross BlueShield mot cess
‘Association ‘and Blue Shield Plans
federal Employes Program.
{$510 Stree, RW.
‘Dc. 20008
902.042.1000
Fax 202.942.1125

August 4, 1998

The Honorable Steve Hom
Chairman
Government Management, Information
‘And Technology Subcommittee
Government Reform and Oversight Committee
U.S. House of Representatives
Washington, D.C. 20510

Dear Mr. Chairman:

On behalf of the Blue Cross and Blue Shield Association (BCBSA), | am writing
to express our strong support for the provision in H.R. 4244, as reported by the
full Committee on July 23, that would provide a moratorium on applying the
Cost Accounting Standards (CAS) to contracts under the Federal Employees
Health Benefits Program (FEHBP) pending receipt by the Congress of the
report by the CAS Board Review Panel. The BCBSA and the participating Blue
Cross and Blue Shield Plans have administered the Government-wide Service
Benefit Plan under the FEHBP since its inception in 1960. The Service Benefit
Pian is the largest plan in the FEHBP, providing health insurance benefits to
millions of federal employees, retirees, and their families.

The typical Blue Cross and Blue Shield Plan accounting system is a process
cost accounting system combined with an activity-based, multiple cost center
approach. This approach is a well accepted, and, in fact, preferable approach
for health insurance carriers. The CAS Board Standards were developed for
manufacturers of defense products, most of whom use a job order cost center,
with only a few large indirect cost pools. Accordingly, there isa significant and,
at times, irreconcilable conflict between the requirements of individual
standards and the typical Blue Cross and Blue Shield Plan accounting system.


85

While the situation in Federal contracting may be better, I suspect
that the order of magnitude is similar.

Scarcely a week passes in which somewhere in America a con-
troversy erupts around the letting of public contracts. This happens
for a complex set of reasons, not the least of which is that while
we all love competition when we are buyers, we hate it when we're
sellers. Sellers spend more time in the marketplace than do buyers,
and hence, they devote a great deal of energy to undermining com-
petition with its thin profit margins.

When we look at public contracting, it is noteworthy for the
speed with which competition consistently evaporates on the supply
side of the market. Situations in which the first round of bids on
a new service produce many bidders are usually followed by rounds
in which the agency and the chosen contractor merely moves to a
stylized performer, and then back to doing whatever they got used
to doing after several years together.

To say that government must learn to contract smarter is simply
not helpful. It essentially puts the weight of blame for a situation
in which the strongest incentives to undermine competition are
“built-in” on the supply side on to the buyer. The committee must
appreciate the difficulty of sustaining competition for public con-
tracts. Firms engage in mergers and acquisitions, as well as other
legal practices to eliminate and dominate competitors. This is espe-
cially true among firms engaged in public contracting. Absent
meaningful competition, the rationale for extending contracting be-
comes weak to nonexistent.

It’s also important to remember that privatization via contracting
relies heavily on the belief that most contracts can be made almost
self-enforcing. Yet the necessity for written contract arises precisely
because each party to a transaction fears that the other party, or
parties, may fail to deliver or perform. Thus, contracts contain de-
scriptions of the future behavioral obligations of both parties, to the
extent that such behavior can be anticipated, and the sanctions to
be imposed if either party fails to hold up its end of the bargain.
Such future-oriented obligations, created in an atmosphere of un.
certainty, place the public agencies and its contractors in a far dif-
ferent relationship to each other than the cut-and-dried contracts
typical of discrete purchases, such as a fresh coat of paint in the
hearing room. The extent of this divergence between markets for
clearly defined and limited products and ongoing services is critical
in determining the comparative efficiency of the privatization op-
tion.

We do well to remember that a good portion of the lucrative prac-
tice of corporate law involves nothing more than litigation amon;
parties claiming breach of contract or seeking resolution of dif-
fering interpretations of contract language. If contracting is that
difficult and expensive in the private sector where the parties at
least are clear about the bottom line they are pursuing, why would
one suppose it is going to be easier in the public sector, where the
output is not as easily valued by market criteria?

Public contracting is not an end in itself. To be an effective ele-
ment in improved agency operation, it must be integrated into a
comprehensive effort of agency reform. The problem with this title
as it now stands is that it fails to address the other elements,


62

ment, if I could call it that, that we would pursue this avenue of
legislation.

jo you believe that you will continue within the administration
to listen to those concerns on the implementation of this, and that
we provide you an element to do that?

Mr. SESSIONS. Very much so. I give you my commitment of the
prior hearing. I know you question me very closely about our will-
ingness to take on the leadership here.

I give Senator Thomas my commitment on the Senate side, as
well as Senator Levin and others, that we would be activist in
managing this process and we would find a way to get to a legisla-
tive solution that, if parties couldn’t embrace, at least they would
not object to. We found ourselves able to do that.

I believe you'll hear testimony later today from many of the com-
mercial groups and associations. I believe the union has indicated
that they have no objection at this time. So we've gotten to that
legislative compromise that we think is appropriate, and we are

committed to implementing that compromise.
ir. SESSIONS. Good, » good. I don't see any of my colleagues from
the minority are here. any of my colleagues wish to engage in
a discussion with Mr. DeSeve? No. No discussion.

Mr. DeSeve, I want to thank you for being a part of what we are
doing today.

Mr. Horn. I would like to congratulate the gentleman on being
confirmed as Deputy Director of OMB for Management. And now,
maybe if we can pass our Office of Management bill, you'll be Di-
rector of Management. [Laughter.]

Mr. DESEVE. Thank you, Mr. Chairman. I must, however, for the
accuracy of the record indicate, although my confirmation was slat-
ed on Friday, it did not occur. I suspect pressing business kept it
from coming up. I believe there’s a full agreement that it will go
forward. We actually had a schematic on at one point at OMB, not
during my tenure, to show an extension to the West Wing in the
old Executive Office Building, which would house the new Depart-
ment of Management. [Laughter.]

Mr. SESSIONS. We're getting there.

Mr. DESEVE. I look forward to it, Mr. Chairman.

Mr. SEssIONS. I want to add, or pile on, to the comments made
by my, chairman, Mr. Horn, and say that we are very impressed,
not onl: ly with your forthrightness, but we’re very, very proud of the
work that you’re doing on behalf of not only the President of the
United States, but all the American people, and the spirit which
you have presented yourself here today with an opportunity to keep
this ball rolling and make it prove this opportunity, and we appre-
ciate you taking time.

I will now excuse the witness, since there are no further ques-
tions.

Mr. DESEVE. Thank you very much, Mr. Chairman.

[Additional questions for the record follow:}


86

which must also be in place if increased contracting is to make a
contribution to improvement. By itself, it would run the risk of
making matters much worse.

Such far-reaching change will not occur by legislative fiat. It will
require cooperation between the executive branch and the legisla-
tive branch, along with the active involvement of the managers and
employees who actually carry out the important day-to-day work of
the Federal Government. Congress can plan an important role in
bringing players together to launch this change process.

I would just add—in going through the legislation and going
through the A-76; I hadn't looked at it for a few years—the prob-
lem with the term “inherently governmental” is that really and
truly, when you think of most things that government employees
do, they really are very similar, and often identical, to the things
that private employees do, even things that staff of this Congress
does. The information processing, analysis, communications are all
things which private firms do and supply. I would suggest in going
forward with this that there be four principles rather than using
the term “inherently governmental.”

One test would be the centrality of a mission of a function to the
overall mission of the agency. The second would be the frequency
with which the transactions would need to occur. In the private
sector it is the case that, the more frequent the number of trans-
actions are, the more wisdom there is in using the make decision
rather than the buy decision. The more uncertainty there is
about—certain products are very clear. You know if the wall has
been painted or the wall hasn’t been painted. But when you start
to deal with services where there can be real differences of opinion
about what’s been accomplished, it’s often wiser to think about
keeping those functions in-house. So that would be my third cri-
teria.

My last one would be whether or not there are very highly spe-
cific assets that are used to undertake the work. When they’re very
specific and vital, it’s much wiser to keep those things in-house and
keep control of them. It’s very different hiring somebody with a
pickup truck to mow the lawn than to try and find someone with
say an M-~1 tank. That’s to make the most polar case I can.

I would urge, in moving forward, if contracting is going to move
forward, that these broader concerns be taken into account.

I thank you for your time in listening to me and I'll be more than
happy to answer questions.

tthe prepared statement of Mr. Sclar follows:]


121

in a little different context. Dr. Sclar, in particular, as we chatted,
is at a little bit of a disadvantage because he wasn’t aware of that
legislative history too well.

. Horn. Well, on that optimistic note, I’ll pass it back to the
presiding officer. If he wishes to adjourn the meeting, none of us
are going to cry about it. [Laughter.]

We've enjoyed it.

Mr. SESSIONS. Yes, sir. Thank you, Mr. Chairman. I want to
thank each of the panelists who have been here before us today.
I agreed to hold this hearing in the spirit of trying to make sure
we provided one more hearing. I think we've had three on this sub-
ject. But I felt like it was important for us to tee up a little bit

igher those expectations to hear from people about the opportuni-
ties that will be before us. I want you to know that I believe that
not only Mr. Horn and myself, but Mr. Kucinich, have engaged our-
selves, and thrown ourselves at this issue. I have great respect for
each of you who have taken time to be with us today.

As always, we have a team of people who have made this hearing
successful. There are people who have contacted you and worke
with you on your delivery today, and I would like to thank a few
of those people. J. Russell George, who is staff director and chief
counsel for Government Management, Information, and Tech-
nology; my adult supervision today, Mark Brasher, who is the sen-
ior policy director; Matthew Ebert, who is a clerk; Mason Alinger;
Frank Cruz—now watch this one—Mark Urciuolo—there you go—
Solomon Bartel, those three were interns; Julie Moses, who is with
Mr. Kucinich’s staff; Faith Weiss and Earley Green, who is also
with the minority staff, and Anne Paine West, who is the court re-

porter.
On behalf of each one of us, I want to thank you for being here
today. This concludes our hearing.
(Whereupon, at 5:05 p.m., the subcommittee proceeded to other
business.]
@)


31

like to encourage additional thoughts on this issue, and we will
hold open the testimony for 3 weeks for any person to provide a
statement. We do not mean to close the door to any point of view,
and we encourage healthy debate.

Without objection, the letter from Dan Burton, chairman, and
John Mica, chairman, Subcommittee on Civil Service, will be in-
cluded at this point in the record. And, without objection, the letter
of Steven W. Gamarino, senior vice president, Federal Employee
Program, Blue Cross/Blue Shield Association, will be inclu in
the record at this point.

[The information referred to follows:]


Mr. Chairman, I want thank you again for giving me the opportunity to
come here today to explain why I believe it is imperative that the
Congress pass this legislation.


46

Honorable Steve Hom
Koos 4, 1998
Page 3

Enactment of H.R. 4244 would eliminate @ current ambiguity in the FEHBP with
respect to 1998 and would enable the carriers and OPM to conclude
negotiations for 1999 while avoiding unnecessary disruption and instabilty in
the program.

‘Thank you for the opportunity to express our views.
Sincerely,

Pp abe) Gommanis

Senior Vice President
Federal Employee Program

SWGiw


If these commercial goods and services can be obtained from the private
sector in a more efficient and cost-effective manner, then, and only then,
would the agency give consideration to contracting out that work.

The goal of this legislation is to ensure that the public receives the best
good or service at the lowest cost to the taxpayers.

In the long run, I think this bill will help us do just that.
Within the last couple years, the Defense Science Board found that $30

billion could be saved annually if the Department of Defense did more
contracting out.

$30 billion a year is a lot of money even in Washington terms.

This is $30 billion that we would not have to ask the American public
to send to Washington every year.

I think all of us would agree that the American public wants the federal
government to improve the services it provides without increasing taxes.

Mr. Chairman, I would like to conclude by quoting one of our Founding
Fathers, Thomas Jefferson, who once said:

"It is better for the public to procure at the common market
whatever the market can supply; because there it is by competition
kept up in its quality and reduced to its minimum price."


40

PROCUREMENT ROUND TABLE
‘410 Masachasetis Ave, NW, Suite 404
DC 20016
wea seiaeL ool
FAX 301-261-9918

August 7, 1998

Congressman Steve Horn
438 Cannon House Office Building
‘Washington, D.C. 20515-0538

Dear Steve:

‘The Procurement Round Table (PRT) is a non-profit organization
chartered in 1984 by former Federal acquisition officials. Its members are
private citizens and serve pro bono. The PRT’s chairman is Elmer B. Staats,
former Comptroller General of the United States, and I serve as Acting

Chairman.

The PRT is of the view that priority should be given to training and

Acquisition Reform Act are to be fully implemented. Our position paper on this
subject is enclosed for ready reference (Enclosure). In continuing pursuit of our
objective to assist in efforts co enhance the civilian agency acquisition workforce,
the PRT hosted a seminar of procurement professionals from federal civilian
agencies in November 1997. At the seminar, there was universal agreement on the
need to improve the professionalism of people involved in the acquisition of goods
and services in the federal civilian agencies. All agreed the first step in this process
is to improve training and education provided to civilian agency acquisition
professionals.

The PRT believes H.R. 4244, "Federal Procurement System Performance
‘Measurement and Acquisition Workforce Training Act of 1998,” addresses many
of the deficiencies in current efforts to train and educate the civilian agency
acqusition workforce. We endorse provisions in the bill aimed at professionalizing
the civilian agency acquisition workforce and urge early passage of the bill.

Members of the PRT have worked closely with you and your staff over the
course of the last year to secure legislation addressing acquisition training and
education shortfalls. Therefore, we will be pleased to assist you and your staff in
efforts to secure passage of H.R. 4244 in the House.

With kindest personal regards,

Frank Horton


120

Mr. Horn. Or disagree with.

Mr. PALATIELLO. Well, I don’t mean to be gratuitous, but I agree
with your statement that you just made about mapping. I'll start
with that. [Laughter.]

The second point I would make is to underscore what my friend,
Mr. Engebretson, has said that—one thing that he admitted—it is
in the regulations under the Service Contract Act that the Labor
Department, when determining that prevailing wage, must con-
sider what would be paid to government employees if the activity
was performed in-house. That’s in the regulations.

Mr. Horn. In the Walsh-Healy or Service?

Mr. PALATIELLO. Service Contract.

Mr. Horn. What’s the difference between Walsh-Healy and Serv-
ice Contract?

Mr. PALATIELLO. Walsh-Healy is for government acquisition of
manufactured products and goods. Service Contract Act covers
service contracts. Davis-Bacon covers construction contracts.

Mr. Horn. And Walsh-Healy doesn’t cover services at all.

Mr. PALATIELLO. No. Three separate laws.

Mr. Horn. I hadn’t thought of it in 30 years. I was Assistant to
the Secretary of Labor under Eisenhower, and I knew Davis-Bacon
very well, and we have that up here, of course, those arguments,
all the time. But I just hadn’t heard anybody even mention Walsh-
Healy; that it’s still on the books?

Mr. PALATIELLO. Yes, sir.

Mr. Horn. Learn something every day.

Mr. PALATIELLO. The third, very quick, and final comment that
I would make is I really do tend to agree with Mr. Sclar and Mr.
Sawicky on one point. I think, again, this is a very important dis-
tinction to make, and that is theyre at a disadvantage, and Dr.
Sclar and I spoke during the break. I have been involved in work-
ing with the Congress on this legislation for quite some period of
time. And when you look at this particular proposal, Mr. Sessions’
amendment, in a vacuum, you have one entirely different perspec-
tive as opposed to looking at it chronologically in terms of where
we've been with this legislation.

The legislation that Senator Thomas and Congressman Duncan
had in past Congresses was much more philosophical and ideolog-
ical. It basically said, if it’s commercial, it gets contracted. Well,
we've had negotiations and deliberations that you all have engaged
in on this legislation. We’ve come to the point where we are today,
where it says we're going to inventory of activities and then go
through a methodology to determine what’s best for the taxpayer
in terms of who delivers the service or who provides the product.

So, this legislation is not a Draconian, knee-jerk, all-or-nothing-
at-all proposition. It is a much more methodological—methodical—
way of making a determination as to whether something should be
contracted or not. This doesn’t say all contracts are good, and all

fovernment employees are bad. This legislation says, let’s take a
fook and see how we can get the best bang for the buck for the.tax-
payer. Let’s determine where contracting is appropriate, and let’s
determine where contracting is not appropriate.

So I think when you understand the progression of the legisla-
tion and the development of this legislation, you might look at it


Co wm NAH eB WN &

Soe
A Akh ON = SD

17

REBB

19

11
semester credit hours (or the equivalent) of
study from an accredited institution of higher
education in any of the disciplines listed in sub-
paragraph (ii); and
“(D) such additional requirements, based
on the dollar value, nature, and complexity of
the contracts awarded or administered pursuant
to the appointment, as may be established by
the Federal Acquisition Regulation or the Sec-
retary of Defense for the appointment.”.

(d) QUALIFICATIONS STANDARDS.—Section 1724(b)
of title 10, United States Code, is amended by adding at
the end the following new sentence: ‘The Secretary of De-
fense shall also require employees to meet any additional
qualification requirements established by the Adminis-
trator of the Office of Federal Procurement Policy for sen-
ior contracting positions in the GS—1102 series pursuant
to section 37(g)(1)(ii) of the Office of Federal Procure-
ment Policy Act (41 U.S.C. 433(g)(1)(ii)).”.

(e) CERTIFICATION EXAMINATIONS.—Section
1732(c)(2) of title 10, United States Code, is amended
by striking “is serving” and all that follows through “if
the employee’’.

(f) CouRSEWORK TUITION.—Section 37(h)(2) of the
Office of Federal Procurement Policy Act (41 U.S.C.


14

6

“(1) all employees serving in acquisition posi-
tions listed in subsection (g)(1)(A) of this section;

“(2) program managers with significant acqui-
sition responsibilities;

“(3) contracting officers and contracting officer
representatives with authority to award or admin-
ister contracts for amounts above the micro-pur-
chase threshold; and

oOo NAH a wWN

“(4) other Federal employees who are assigned
10 significant acquisition roles and responsibilities.”

11 (c) CONTRACTING OFFICERS.—(1) Section 37(g) of
12. the Office of Federal Procurement Policy Act (41 U.S.C.
13 433(g)) is amended by adding at the end the following
14 new paragraph:

15 “(4) CONTRACTING OFFICERS.—(A) Beginning
16 on October 1, 2000, the head of each executive agen-
17 cy shall require, in order to serve as a contracting
18 officer with authority to award or administer con-
19 tracts for amounts above the micro-purchase thresh-
20 old, the following:

21 “G) For appointments to serve as a con-
22 tracting officer with authority to award or ad-
23 minister contracts that do not exceed the sim-
24 plified acquisition threshold as specified in sec-

25 tion 4(11) of the Office of Federal Procurement


3

Mr. Chairman, I want to thank you again for giving me the op-
portunity to come here to explain why I believe that it is very im-
portant that the Congress pass this legislation. I can say, finally,
that I personally, for a long time, have felt that we should almost
pin a medal on anyone who survives in small business in this coun-
try today. Now, it seems to be that it’s difficult even for medium-
sized businesses to survive. I can tell you from many, many con-
tacts throughout this Nation, and talking to many people, that it’s
tough enough for businesses to survive against ordinary competi-
tion, but when they have to take on their own government to boot,
it becomes almost too much for many of them to handle. So this
in a small way would help alleviate what has become a very, very
serious problem. It would not only help the small to medium-sized.
businesses, but it would help the U.S. taxpayer.

I thank you for letting me come here today, and I thank you for
your support for this very moderate attempt to help alleviate to
some extent a very major problem.

(The prepared statement of Hon. John J. Duncan Jr. follows:]


110

assuring that streets are well maintained is a governmental re-
sponsibility.

Mr. KucINnIcH. When people pay their taxes to government, what
do you think they ought to get?

Mr. PALATIELLO. I think they ought to get, for example, a judicial
system that provides a forum for people to resolve differences and
grievances.

Mr. KucInicu. Do you believe in privatization of prisons?

Mr. PALATIELLO. Yes, I do think that there is a good track record
with private operation of prisons. Yes.

Mr. Kucrnicu. So, do you see anything that government really
ought to do as a service, that ought to be government and not pri-
vate sector? Should there be, for example, would you believe in a
professionally trained private army?

Mr. PALATIELLO. No.

Mr. Kucinicu. Why not?

Mr. PALATIELLO. Because I think if you had a professionally
trained private army, you would create competiny interests and
you would not have a single unified force to defend the country.

Mr. KucinicH. Do you believe that there’s anything in public
service that really ought best be handled by the government?

Mr. PALATIELLO. Certainly. I think police protection is clearly
something the private sector should do. Again, as I said before——

Mr. KucINICcH. That who should do?

Mr. PALATIELLO. I’m sorry, the public sector should do. I think
again, as I mentioned before, assuring a clean environment and
providing a reasonable regulatory framework, and then a tradi-
tional framework for enforcing environmental laws is clearly a gov-
ernmental responsibility.

Mr. KucinicH. What’s the overall goal of the private sector?
Business, what’s the goal?

Mr. PALATIELLO. I think what you're getting at is the goal of a
private company is to make a profit.

Mr. Kucinicu. And what’s the role of government?

Mr. PALATIELLO. The role of government is to serve the people.

Mr. Kucinicu. Is the role of government to make a profit?

Mr. PALATIELLO. No.

Mr. Kucinicu. If the role of government is not to make a profit
and to provide service, do you see any difference then between the
role of government and the role of the private sector?

Mr. PALATIELLO. Yes. I think that there’s a very clear distinction
between both——

Mr. Kucinicu. Are their goals, would you say, often exclusive?

Mr. PALATIELLO. Of one another?

Mr. KucInicu. Yes.

Mr. PALATIELLO. Yes, I think, by their nature, the two goals are
exclusive of one another.

Mr. KucinicH. I think you’re right. My constituents back in
Cleveland, OH—I can see there's a relationship between what they
pay for service with their taxes and the service that they get to
public accountability. There’s a great concern that they lose ac-
countability and they lose the ability to hold the rein on their taxes
once great amounts of service, public services, get out of their con-
trol. I thought we’d show this dialog here.


69

‘cost comparison - whether or not the function is retained in-house or converted to contract
performance. The in-house Most Efficient Organization (MEO), for example, has historically
reduced the number of available jobs by - on average - 20 percent. While the number of
Government jobs may be further reduced by a conversion to contract performance, the
requirement is not terminated or otherwise eliminated. Jobs are created in the private sector to
perform the work.

The employees themselves may be placed in other Federal jobs through, for example, the
DOD placement program or other priority lists or they or may be placed in the contractor’s
workforce through the A-76 Right-of-First-Refusal-clause. Involintary Reductions-in-Force into
a non-employed status have been rare.

Federal employees cannot directly carry their current Federal pensions with them into the
private sector. Of course, this is a more serious concem for those employees in the Civil Service
Retirement System (CSRS) than it is for those in the Federal Employment Retirement System
(FERS) which is much more portable, including its social security and 401(K) type Thrift
Savings Plan provisions. FERS as a defined contribution plan is much more akin to the private
sector pensions requirements as compared to the defined benefit plan of the CSRS. Federal
employees with 5-years of service under CSRS are vested in this plan and are eligible for pension
benefits at age 62. Health care benefits do not transfer directly, but are managed through the
Service Contract Act, which requires that both wages and fringe benefits reflect those prevailing
for that industry in that area - not minimum wages and benefits.

14. Could you comment on the review provisions for challenges to agencies’ inventories
under H.R. 4244, as amended; will these provisions impact agencies governmental
activities?

The Administration did not object to the provisions of P.L. 105-270, the “Federal
Activities Inventory Reform Act of 1998 (FAIR).” We believe the Act reinforces efforts to
identify non-inherently governmental activities, permits agencies to assess which functions
should be submitted to competition with the private sector and allows the Government to choose
the source - public or private - which is the most cost effective and in the best interests of the
taxpayer. As such, it places greater attention on the need to identify those functions that could be
competed with the private sector.

The FAIR Act requires the head of each executive agency to submit to the Director of the
Office of Management and Budget a list of commercial activities performed by Federal
employees, The Director shall review the agency’s list for a fiscal year and consult with the head
of the executive agency regarding its content. Upon the completion of the review, the head of the
executive agency shall transmit a copy of the list to Congress and make the list available to the
public. An interested party, including the employees, the private sector and their representatives
may submit to the agency a challenge of an omission or the inclusion of a particular activity on
the list. This challenge is limited to an administrative review within the agency. Then, within a
reasonable time after the final decision to include or exclude an activity on the list is made, the
head of the executive agency concerned shall review the activities on the list for possible


a a SO

eee Be Be Be
A aR BN HEH SG

17

24

16

support systems for just-in-time delivery of ini-

tial and continuing education in critical duties

and tasks).”;

(3) by striking “and” at the end of subpara-
graph (1); ,

(4) by redesignating subparagraph (J) as sub-
paragraph (K); and

(5) by inserting after subparagraph (I) the fol-
lowing new subparagraph:

“(J) enter into partnerships with private
and public sector employers of acquisition per-
sonnel and with nonprofit professional associa-
tions in developing and maintaining valid and
reliable professional certification programs for

acquisition disciplines; and’.

SEC. 5. FUNDING FOR ACQUISITION WORKFORCE TRAIN-

ING AND EDUCATION.

Section 37(h) of the Office of Federal Procurement

Policy Act (41 U.S.C. 433) is amended—

(1) by amending paragraph (1) to read as fol-
lows:

“(1) FUNDING LEVELS.—(A)(i) The head of
each executive agency shall be responsible for ensur-
ing adequate funding is included in budget requests
of the agency and for ensuring any funds provided


10

2
1 SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

(a) SHorT TITLE.—This Act may be cited as the
“Federal Procurement System Performance Measurement
and Acquisition Workforce Training Act of 1998”.

(b) TABLE OF CoNTENTS.—The table of contents for
this Act is as follows:

aA np WN

See. 1. Short title; table of contents.

See. 2. Establishment of performance measures for the Federal procurement
system.

Sec. 3. Professionalism of the acquisition workforce.

Sec. 4. Responsibilities for acquisition workforce training.

See. 5. Funding for acquisition workforce training and education.

See. 6. Evaluation by the Comptroller General.

we

7 =SEC. 2. ESTABLISHMENT OF PERFORMANCE MEASURES
FOR THE FEDERAL PROCUREMENT SYSTEM.

9 (a) PERFORMANCE MEASURES.—The Office of Fed-
10 eral Procurement Policy Act (Public Law 93-400; 41
11 U.S.C. 401 et seq.) is amended by adding at the end the
12 following new section:

13 “SEC. 39. PERFORMANCE MEASURES FOR THE FEDERAL
14 PROCUREMENT SYSTEM.

15 “(a)(1) The Administrator shall establish a system
16 for measuring the performance and effectiveness of the
17 procurement system, including standards for measuring
18 the performance of the various elements of the system.
19 The performance standards shall be structured—

20. “(A) to enable the Congress, the Office of Fed-
21 eral Procurement Policy, and the heads of executive

22 agencies to track progress of achievement of acquisi-


29

21
(2) The aggregate amount to be transferred in any

fiseal year under this section shall not exceed the lesser

(A) the amount that is 20 percent of the unob-
ligated balance of funds appropriated for operating
expenses and salary and other expenses available to
each department and agency during the fiscal year
for which the funds are appropriated; or

(B) $30,000,000.

(3) Funds transferred under this section shall only

be made available if—

(A) the Director of the Office of Management
and Budget notifies the Chairmen of the Committees
on Appropriations of the House of Representatives
and the Senate of the proposed transfer of such
funds; and

(B) 30 days have elapsed following the date of
such notification.

Oo


98
Subcommittee on Government Management. Sclar Testimony - August 6.1998. Page 12

analysis of the FIZ. It concluded that the FTZ generated a 43% cost
savings.!+ However the SCRTD commissioned an avoidable cost study by
Coopers & Lybrand which found that in fact SCRTD and FTZ costs
differed by less than one percent, and that when the figures were corrected
for cost differeuces engendered by differences in the ages of the two
operators' bus fleets, SCRTD, the public operator, was actually 7.6% less
expensive.'5 This conclusion was confirmed by a follow-up study done by
MIT for the Los Angeles County Transportation Commission. 6

In general, fully allocated cost accounting is favored by those seeking
to promote privatization. In a candid letter to Jack McCroskey, the former
Chairman of the Board of Directors of the Denver Colorado Regional
Transportation District Robert Peskin a senior manger at the consulting
firm KPMG Peat Marwick wrote:

There are convincing arguments that such a fully-allocated
approach is not appropriate (my emphasis) in the context of
contracting (Peat Marwick's emphasis) of transit service, as in
the case of privatization.!7

He concluded that "Incremental cost (read avoidable cost) analyses yield
hard ‘out-of-pocket’ estimates of savings that are useful in real world
decision-making." Even the staunchly pro-privatization Reason Foundation
concurs:

The use of fully allocated costs is generally inappropriate in
estimating the savings to be realized by contracting out a
target service that is currently being conducted in-house...
When attempting to determine the potential cost savings
associated with the contracting out of a target service, the
appropriate in-house costs to use in the comparison are the
“avoidable costs.” '8

14 Emust & Young, “Evaluation of the Foothills Transit Zone, Fiscal Year 1990 Report to the LACTC,”
July 1991.

15 Coopers-Lybrand “RTD/Foothills Transit Zone: Review of Marginal Cost Analysis Approach,” July,
1991.

16 Richmond, Jonathan, “The Cost of Contracted Service: An Assessment of Assessments.” prepared by
the MIT Center for Trasaparaton Studies fr te Los Angles County Transporation Commision July,

17 Gearespondence from Robest Peskin/KPMG Peat Marwick to Jack McCroakey, February 11, 1991.
18Martin. Lawrence, “How to Compare Costs Between In-House and Contracted Services.” Reason,
Foundation How to Guide #4, March 1993, pp. 9-10.


91

‘Subcommittee on Government Management. Sclar Testimony - August 6, 1998. Page 5

listed in telephone directories, but of the few big ones found side-by-side in
the exhibition booths at national transportation conferences.

The RTD ultimately received eight bids and awarded three contracts.
All of them went to national companies: Mayflower, Laidlaw and
ATC/Vancom. Typically, the strategy of such large firms is to capture a
new market quickly and drive out small competitors by submitting an
extremely low initial bid. Sure enough, Mayflower offered an exceedingly
low price of $28.26 per vehicle revenue hour on the first contract. A
vehicle revenue hour is the cost of operating a bus one hour in passenger
service. This bid price was below the cost that the RTD's privatization
consultant, KPMG Peat Marwick, concluded was necessary to break
even.20] Even if smaller local firms could have cleared the hurdles of
proposal writing and fiscal security, they lacked the cash reserves to take a
Joss on a first contract. KPMG Peat Marwick warned the RTD that the
initial prices it was being charged were strategically motivated and did not
reflect what the service actually cost.30] By 1993 Mayflower's price had
tisen to $54.65 per hour, almost double the initial price but far more
realistic. The 1996-97 rates ranged from $62.74 to $64.51 per revenue
hour. This is about the same cost as public operation.+

Once the Denver market became established, there was scarcely a
whiff of competition. Mayflower and Laidlaw merged in 1995. Under the
terms of the 1988 privatization law, this should have triggered a search for
new competitors for the next round of contracting. However, the
consolidated operation successfully lobbied the Colorado legislature to
modify the law, effectively legitimating its de facto market dominance.5

The original privatization bill had been sold to the legislature with
the argument that the efficiency engendered by competitive privatization
would reduce operating costs by 40 percent if enacted system-wide.Cin
1988, the year the legislation was enacted, the RTD had an operating
budget of approximately $100 million per year. By the end of 1990, the
first full year of privatization, operating costs had jumped over 12 percent

2XPMG Peat Marwick (Danzer RID Prvsinaion Prformnace Adit Update: Joly 1990- June 1991,"

November 1, 1991.
Srtiou Knowledge ofthe overall srategy ofeach cour. which is subject to change, the financial
Prsfornmnce of individual nite of larger business may aot give any indication ofthe fare rice sraegy

f each contactor." KPMG Peat Marwick (‘Denver RTD Pivatization Performance Audit Upeate: July
1990 - June 1991,” Final Report, November 1, 1991, pg. 2.
4Sclar, Elliott, “Paying More, Getting Less: The Denver Experience with Bus Privatization 1990-1995,"
for the Amalgamated Transit Union, February 1997.
Bill 96-1360, signed into law on June 8, 1996.
‘SMB would privatize RTD bus operations." Rocky Mountain News, Jammary 9, 1988, pg. 12.


Ce NI AH ew N

il
12
13
14
15
16
17
18
19
20
21
22
23
24

11

3

tion reform objectives on a Government-wide basis

and to gauge the effectiveness of the procurement

system in supporting the accomplishment of the mis-
sion of such agencies; and

“(B) to benchmark the performance of execu-
tive agencies against the performance of private and
public sector procurement operations.

(2) The objective of the procurement performance
measurement system shall be to use the performance data
to improve executive agency acquisition practices and poli-
cies in order to enhance support for the accomplishment
of the mission of such agencies.

“(3) In developing and implementing the procure-
ment performance measurement system, the Adminis-
trator shall, to the maximum extent practical, use existing
data sources and automated data collection tools.

“(b)(1) The head of each executive agency for which
more than 50 percent of the funds appropriated are ex-
pended for procurement shall include, as a part of the an-
nual performance plan of the agency submitted under sec-
tion 1115 of title 31, United States Code, an assessment
of the performance of the procurement system of the agen-
cy in terms of its efficiency and effectiveness in supporting
the agency in accomplishing its mission.


97

‘Subcommittee on Government Management. Sclar Testimony - August 6.1998, Page 11

The differences between fully allocated cost accounting and
avoidable cost accounting can be substantial. Indeed, fully allocated cost
accounting often demonstrates savings even when an agency actually loses
money as a result of the privatization. This is precisely the trap into which
the Santa Barbara Metropolitan Transportation District fell when .
privatization was vigorously promoted by UMTA as the solution to the
nation's transit problems. According to then General Manager Gary
Gleason:

We had a private sector bid a year ago... They bid about
$980,000 on this 20 percent segment of our service and our
fully allocated costs are within the neighborhood of
$1,000,000 so that there was about a $20,000 savings over a
year's period to operate this part of Santa Barbara's service.
However, in looking at our incremental costs and being able to
identify... what people in the shop would be laid off, we were
able to identify very precisely where a cost reduction would be
and as we found out, our cost reduction would, in fact, only be
about $380,000 per year. So in order to take advantage of this
so-called private sector situation, it was actually going to cost
us an additional $600,000 to participate with the private
sector. And right now we are in the process where the sole
bidder that we had on the project has protested both to the
Washington headquarters of UMTA and the regional’
headquarters and they have won their protest... as the general
manager, I'm the one that's responsible every year for writing
the checks, and I know, in fact, that if I accepted the bid, that I
would have an additional $600,000...cost.13

To understand in a less anecdotal and more systematic manner the
way in which these costs can vary, consider a series of cost studies done of
the Foothill Transit Zone (FTZ), established in 1988 by the Los Angeles
County Transportation Commission as a privatized operation. The FTZ is a
quasi public agency which contracts with private providers to runs 14 lines
formerly served by the Southern California Rapid Transit District
(SCRTD) in the San Gabriel and Pomona valleys. The Los Angeles County
Transpoitation Commission hired Ernst & Young to conduct an FAC

13 Tape transcription, American Public Transportation Association tape #88-19, “Privatization: Is a Level
Playing Field Possible?” Session held at the 1988 Annual APTA meeting, Montreal, Quebec, Canada,
October 2-6 1983.


102

point. It seems to me that’s the emphasis that needs to be upheld,
which I find lagging a little bit in the legislation.

As Elliott said, there is a presumption in this privatization cru-
sade that contracts are self-enforcing; whereas, of course, the con-
tract is only the first stage in the process which requires moni-
toring by public managers, collecting information, evaluation of
that, and reaction to that information by public managers.

In the breach, it’s typically those latter stages that are neglected.
This is not only true of the Federal Government, but State and
local governments. When you look at surveys of why contracting is
done, you often do not get answers like, “This is the best way to
do it.” You get answers like, “This is the law,” or answers like,
“This is the way we’ve always done it”—or other things outside of
what we would think would be our primary goal, which is effi-
ciency—a better output for a lower price.

Now, in particular, in terms of the amendment, I would go a lit-
tle further than Elliott and others in saying I don’t see the point
of a list at all based on an abstract criteria for what looks like gov-
ernment and what doesn’t. If you look at the language of the
amendment, it’s not hard to tell a story that would qualify almost
anything as on one side or the other, I think.

Rather than a list, my recommendation to the committee is that
whether something ought to be public or not is a question of cost
analysis or efficiency analysis. At the end of the day, it’s whether
you determine which method gives you the best bang for the buck
that determines whether something is better done out of the public
sector or via private sector providers. To promulgate abstract defi-
nitions in this vein, I don’t think is helpful at all.

This goes to the value of competition being applied equally, not
only to things that are now public, but which might better be done
privately, but, as others have said, things that are now privately
done which might better be done publicly. I think competition is
the goal, not oursourcing per se, not contracting per se, not privat-
ization per se. Efficiency is a goal. The taxpayer’s interest is what’s
in question here—the public interest. I don’t see an abstract list
which refers to some empty philosophy as superior to the ongoing
and perennial task of analyzing what we’re getting, what it’s cost-
ing, and how we feel about that result.

In closing, let me say I commend the committee for pursuing the
goal of competition, but I urge you to, in promulgating rules that
make it a fair competition, not set conditions or bias the process
such that public sector employees, present or future, existing or po-
tential, not have the opportunity to make their case that they can
do something more efficiently than private sector providers can do.
In the end, if that rule is followed, that rule of competition—unvar-
nished competition—with full participation on by both sides, in full
Democratic evaluation, incidentally—by outside parties, not merely
parties with a vested interest—one way or the other, I think in the
end we'll all feel better about the results of this pursuit.

Thank you very much.

(The prepared statement of Mr. Sawicky follows:]


118

way. My concern is that, once you put something into place, how
do you avoid the law of unintended consequences? My concern is,
let’s say something is put in—let’s say the Pinkerton Co. doesn’t
like the notion—they could protect the President. Why do we need
the Secret Service? They don’t agree. The Treas Department
gives them a very rational answer, and we would. probably all
agree with the Treasury, but nowhere in the legislation then pro-
hibits them from going to court and have this adjudicated. Nor does
it prevent them to begin to lobby in Congress to try and change
these things.

What I envisioned is another bureaucracy grows up in OMB that
does nothing but oversee the way in which a decision is made to,
one, protect against those things happening, to when those things
happen, to be there to deal with them. Then the question of ac-
countability moves down one level. So whereas the intention here
is to make something more efficient, one of the fears I have, look-
ing at this, is there’s a law of unattended consequences, and how
do you begin to preclude some of these very normal, human reac-
tions that go on with this (a). And then (b), how do you begin to
inject more organization into the public agencies? That was why,
in my remarks, I talked about the need to bring—it’s not just the

juestion of unions bidding on the work. I don’t really think it’s not

tt unions shouldn’t bid. I think it really is a question of employ-

ees and managers getting together and saying, we think we could
do the job better; this is how we could do it.

It seems to me there are interesting things that could be done.
In Indianapolis, where they didn’t contract out their motor vehicle
maintenance, one of the most shining examples, that you have a
real reduction in cost, the employees of the Indianapolis Fleet Serv-
ices, they receive a portion o! what they save over what’s budgeted
for their department. They are also penalized when they don’t turn
vehicles around on time. They’re docked for that. When I went out
and interviewed them, I remember going to the body shop and
there were four employees. They used to have, the ratio of a fore-
man, I think there was one foreman for every three or four employ-
ees before they started innovating themselves. We don’t have the
foreman, and we do about 25 percent of all the bodywork in Indian-
apolis. And my question to them was, why aren’t you doing 100
percent? Their answer to me was, we figured out that it cost us $33
an hour, and we do it in-house. We can send this work out for $25
and we won’t take the work back in-house until we get our costs
better in line.

So it seems to me that what I fear in moving forward without
thinking these things through is that we preclude the opportunity
of bringin some innovation of flexibility into the public sector.
Troni , here’s a case where, by bringing it in, you got more con-
tracting out, whereas if these employees didn’t have responsibility,
they would have been fighting the contracting out of the bodywork.
And now, here they were making the decisions. That’s one of the
concerns I would share with you, is my concern that this does not
subject to this law of unintended consequences.

oo Horn. It’s hard to protect anything we do from that law, by

e way.

Mr. Bingebretson.


65

‘What percentage of the $120 billion in services spent annually on government contractors
was subjected to the OMB Circular A-76 process? How much work is contracted out
annually without any cost comparison? Is it the Administration’s position that work
currently performed by contractors should not be subjected to public-private cost
comparisons?

According to the GAO, “post-contract reviews of activities outsourced by military
services have been limited; as a result, (GAO has) questioned whether they provide a
basis for projecting with reliability the magnitude of savings achieved over time.”
(GAO/GGD/NSIAD-98-167R) In addition an internal DoD study has stated that “most
of the contractor workforce has never been competed under the A-76 process; and when it
has been, there is no on-going scrutiny...”

What sort of follow-up does OMB conduct to ensure that contractors actually live up to
the terms of their contracts? Is there need for legislation or regulation to address the
savings problem -- to ensure that whatever savings are alleged by initial contracting out
decisions will actually be generated?


7

‘The Government collects an enormous amount of information on contract salaries and
benefits, through the Department of Labor. In Federal contracting, each contract is given specific
wage and fringe benefit requirements as a part of the contract that reflect the prevailing wages
and benefits for that industry and location, under the Service Contract Act and/or the Davis
Bacon Act.

17. Does the Administration support “contracting-in” when it is cheaper and more
efficient to do so? Please list the instances when contracting-in has occurred and the
value of those contracts. Do you anticipate that contracting-in will increase or
decrease? Why doesn’t the Federal Government compile inventories of work
currently performed by contractors so that agencies can also be encouraged to
consider “contracting-in?”

The Administration fully supports “contracting-in” when it is cheaper and more efficient.
A number of important revisions were made to the March 1996 A-76 Revised Supplemental
Handbook to facilitate this opportunity, including changes to permit the conversion of work from
contract to in-house performance without a cost comparison when it involves 10 or fewer FTE
and changes to the A-76 costing rules when applied to new starts and expansions.

Such conversions have taken place - though not in the numbers one would expect. This is
partly due to the fact that the opportunities to accomplish such conversions were limited prior to
March of 1996 and partly because agencies have opted not to conduct such studies since 1996, as
they faced general downsizing pressures.

‘Asa general matter, we expect more studies to be conducted to convert work from
contract to in-house performance. OMB no longer manages by FTE controls, which should
never be viewed as a barrier to either retain functions in-house or to convert them from contract
to in-house performance. The perception that once a function is contracted the agency cannot
reconstruct the function in-house needs to be overcome. We also believe that functions will be
converted to in-house performance as a result of increased public-private competition, where the
March 1996 Revision specifically permits public offerors to bid for recompeted contract work
and for other Interservice Support Agreement (ISSA) work between agencies. Finally, it is our
sense that as we move away from the lower graded commercial work (custodial, grounds and
even mechanical maintenance work) and move into the more technical IT, communications,
finance, inspections and other program oversight work, Federal salaries will be more and more
competitive with those of the private sector.


CoN AH PF WN

es + ee ee
BesSBseerwtanrsanes

23

16

8

chasing positions at the same grade level
established under paragraph (1)(A); and

“(IV) such additional requirements,
based on the dollar value, nature, and com-
plexity of the contracts awarded or admin-
istered pursuant to the appointment, as
may be established by the Federal Acquisi-
tion Regulation or the head of the ageney
for the appointment.

“(B)(i) The head of the executive agency may
waive any of the requirements in subparagraph (A)
(except those coritained in qualifications standards
approved by the Office of Personnel Management
under subsection (g)(3)) with respect to an employee
of the agency if the agency head determines that the
employee possesses significant potential for advance-
ment to levels of greater responsibility and author-
ity, based on demonstrated job performance and
qualifying experience.

“(i) The head of the agency shall provide to
the administrator in writing the rationale for any de-
cision to waive such requirements.”.

(2) Section 1724(a) of title 10, United States Code,

24 is amended to read as follows:


99

Subcommittee on Government Management. Sclar Testimony - August 6.1998. Page 13

Increasingly public audit and fiscal oversight agencies at the state and local
levels are becoming unanimous in calling for the use of avoidable cost
models to perform the kind of comparative analysis privatization decisions
demand.'9

Although it can be argued that fully allocated cost accounting can
estimate long-term savings because as direct public service activity shrinks
over time, so too will overhead, the contingent future is a poor basis on
which to defend privatization in the present. If a change does not lead to
cash savings in the short run, given the vagaries of public operations, it is
unlikely that taxpayers will see them the long run.

In defense of fully allocated cost accounting, it is argued that it is
“unfair" to private contractors who must absorb all of their costs to be
forced to compete with a public agency that only has to consider its
avoidable costs. The problem with this argument is that it loses sight of the
goal. The goal is fairness to the taxpayer. Contractors are just a means to
that end. The taxpayer is ultimately stuck with all the overhead costs,
regardless of how they are allocated. The question from a taxpayer point of
view concerns how to get the most intensive use of the resources for which
they have already paid.

Conclusions

Public contracting is not an end in itself. Even in its own terms
public contracting has a long and spotty history as a means of obtaining
needed public goods and services. To be an effective element in improved
agency operation, it must be integrated into a comprehensive effort of
agency reform. The problem with this title as it is now stands is that it fails
to address the other elements of which must also be in place if increased
contracting is to make a contribution to improvement. By itself it runs a
great risk of making matters worse.

Such far reaching change will not occur by legislative fiat. It
Tequires the cooperation between the executive branch and the legislative
branch along with the active involvement of the managers and employees
who actually carry out the important day to day work of the Federal

19 See for example, New York City Office of Management and Budget "Contracting-In Cost Comparison
Manual.” Office of the State Auditor, Commonwealth of Massachusetts "Guidelines for Implementing the
‘Commonwealth's Privatization Law"


Co On AW eR WD

Pe ee ee ee we ee
Se ew IA AN RE YWNH eK ST

21
22

21

13
cluding the appointment of a preference eligible as
long as preference eligibles are available who satisfy
the stipulated high level of qualifications.

“(2) ACCELERATED PROMOTIONS.—(A) The
Director of the Office of Personnel Management
shall authorize the rapid promotion of Federal ac-
quisition personnel (including personnel in the De-
partment of Defense) who satisfactorily complete
programs of training and education required by the
Federal Acquisition Regulation for positions at high-
er General Schedule grade levels in their respective
fields and otherwise meet or exceed standards for
satisfactory performance.

“(B) The heads of agencies may provide any
such personnel with a maximum of 2 promotions
during any 52-week period.

“(C) No employee may be promoted under this
paragraph without adherence to competition require-
ments under law or regulation.”.

SEC. 4. RESPONSIBILITIES FOR ACQUISITION WORKFORCE

TRAINING.

(a) ADMINISTRATOR FOR FEDERAL PROCUREMENT

23 Powicy.—Section 6(d) of the Office of Federal Procure-
24 ment Policy Act (41 U.S.C. 405) is amended—


50

[Recess.]

Mr. SEssIoNs. I call the subcommittee to order and would ask
that our witness, as he is rising, please raise his right hand.

{Witness sworn.]

Mr. SEsSIONS. The record will please reflect that our witness has
answered in the affirmative.

Mr. DeSeve, I am delighted to have you here today. I will forego
any opening statement that I have, but will insert that in the
record. Without objection, so ordered.

[The prepared statement of Hon. Pete Sessions follows:]


95

Subcommittee on Government Management. Sclar Testimony - August 6.1998. Page 9

which the product is traded and used. Learning the price and quality often
entails little more than two or three phone calls. Typically, goods available
in spot markets are sold in competitive environments. Product quality is
usually obvious to all buyers and sellers. Competition ensures that retail
prices hover just above the level of wholesale prices and that average
quality suits the taste of average buyers.

Such simplicity is not the rule when the make-buy decision involves
contracting for ongoing customized services, as will be the case with this
title. The choice of sellers is almost invariably more limited, and both
product quality and the relation of contract price to underlying costs are
governed at best vaguely by market competition. Indeed in many instances
quality is not known until the product is purchased. Economists make a
distinction between search goods and experience goods. Most of the goods
sold in spot markets are search goods. Quality is known and price is the
principal concern. Experience goods are goods which can only be evaluated
once they are tried. This is almost invariably the situation agencies face
when they hire contractors to take over tasks they formerly performed. As
a consequence of these characteristics of the markets and goods, decisions
to contract out usually involve complex and significant time and money
transactions costs related to the specification of product, the negotiation of
Prices, the close monitoring of quality, and the need to anticipate
unforeseen contingencies. In such cases the managerial decision process
involves analyzing not only the comparative production costs typical of
spot markets, but also the less tangible transactions costs associated with
contract design and monitoring in cases in which the short comings of a
particular supplier only become apparent after the deal is struck and
breaking the contract imposes new costs.

Comparative Costs

Title II does properly call for a comparative cost analysis as part of
the process of deciding on contracting. However it fails to consider some of
the important complexities of comparative cost accounting. Three sets of
cost must be considered when deciding between public contracting and
public production: the direct costs of public production, the costs of the
outside service and the internal transactions costs a contractual arrangement
incurs. Public production costs include the personnel, equipment and
materials. The costs of outside service are typically the agreed upon price
of the contract. Transactions costs include everything related to bidding the
contract, letting it, and supervising the contract work. The calculus
comparing public and private production must include the transactions
costs. It does not matter whether the private sector is more efficient at


33

force BCBSA to make an assessnient as to whether continued participation in the FEHB
‘Program is possible as a prudent business matter.

‘We are concerned that continued application of the CAS would run a real rizk of
increasing costs to the FEHB program and may result in program disruption if the
impracticability of applying the CAS forces the withdrawal of plans from the FEHB

program. Moreover, it seems imprudent to require FEHB carriers to implement such
Eisdensome and complex standards when the CASB Review Panel, panel eabliched
by Congress to examine and analyze the CASB’s mission and the application of CAS to
‘government contractors, is expected to report its recommendations by the beginning of
1999. Our stafis have conferred extensively with BCBSA, OPM, OMB, and others
‘regarding the appropriateness of applying these standards to the FEHB. These
‘consultations have convinced us that the wisest course for Congress at this juncture is to
‘enact a temporary moratorium and await the report of the CAS Review Panel, Once these
‘experts have analyzed the complex issues involved in this controversy and issued their
recommendations, Congress will be better equipped to resolve this matter permanently.

In the meantime, section 302 of H.R. 4244 is necessary to ensure that no
disruption or any other unforeseen consequences occur in the FEHB program. Inno way
‘would this provision limit or restrict OPM's authorities with respect to audits, oversight
or program administration. OPM will continue to have the regulatory flexibility to adapt
‘certain principles of the CAS. More importantly, this provision would ensure the
continued stability of the FEHB program and the continued health care coverage of our
federal employees.

‘Thank you for your attention to this important matter.

Sincerely,
th S>—-

Reform and Oversight Civil Service


17

9

“(a) CONTRACTING OFFICERS.—Beginning on Octo-
ber 1, 2000, the Secretary of Defense shall require, in
order to serve as a contracting officer with authority to
award or administer contracts for amounts above the
micro-purchase threshold as specified in section 32(g) of
the Office of Federal Procurement Policy Act (41 U.S.C.
428(f)), the following:

“(1) For appointments to serve as a contracting
officer with authority to award or administer con-
tracts that do not exceed the simplified acquisition
threshold as specified in section 4(11) of the Office
of Federal Procurement Policy Act (41 U.S.C.
403(11))—

“(A) completion of training in duties relat-
ed to use of the simplified acquisition proce-
dures authorized to be used by the appointment
(including any training mandated for such du-
ties by the Federal Acquisition Regulation); and

“(B) such additional requirements, based
on the dollar value, nature, and complexity of
the contracts awarded or administered pursuant
to the appointment as may be established under
the Federal Acquisition Regulation or by the
Secretary of Defense for the appointment.


61

Mr. Sgssions. Thank you, Mr. DeSeve. I find, with great inter-
est, that your evaluation talks very clearly about quantity and the
cost improvement that can be achieved. What kind of discussions
have taken place, at least within OMB, about how your work with
agencies can improve these or offer some lead when this becomes
law and signed by the President? Because I heard you said that the
administration is supportive of this. What ideas and thoughts do
you have about how this will improve quality and cost?

Mr. DESEVE. What we found is that when activities were exposed
to competition, whether they were won by union offers or whether
they were won by private sector offers, everyone sharpened their
pencil and they learned how to do things more efficiently and more
effectively. The GAO studies that exist on this show cost-savings in
the 20 and 30 percent range, just from the conducting of competi-
tion along the way.

We are currently working with agencies under the OMB memo
that Frank Raines put out this spring to make sure, even in antici-
pation of the legislation’s passage, that the inventories are being
updated in the agencies. We've had several meetings with them;
T’ve been in meetings with them. I’ve talked to the chie? operating
officers of the agency and told them the seriousness which both
Congress and the administration view this—the increased serious-
ness, if you will.

So I look forward in October to seeing those submissions come
in, whether or not they are required to by law, and then to review
those submissions with the agencies very directly as part of the
overall budget review process in the fall to see that they are (1)
looking carefully at the opportunities to conduct competitions; (2)
that they haven’t walled-off inherently-governmental functions;
but, most of all, if they've bothered to comply at all.

As you and the chairman have indieated before, some agencies
the last time out in the inventory process simply didn’t submit any
inventories that were responsive. So we want to make sure that
doesn’t happen in anticipation of whatever happens with this bill.

Mr. SESSIONS. So you believe that you will be able to be a cata-
lyst and a leader in working each of the agencies? You believe that
it is a very good thing for them to have within their arsenal of op-
portunities to work with, and that it will be seen as a favorable
and positive step?

Mr. DESEVE. Yes, sir, I think so. And I think one of the nice
things we have now is the lead of the Defense Department. They've
shown us that by planning to expose more than 200,000 FTEs to
competition, that it can be beneficial and it can give them the cost-
savings they need to be able to spend more money more wisely on
other things.

Mr. Sessions. One of the things that very clearly came up as a
result of the discussion about this legislation was the need for labor
and management to be able to work together on a bill that seems
to indicate a direction that we would go, and that is the oppor-
tunity to have this available. But one thing that was very clear to
me is that, what I would call, union representatives, were very in-
terested in having part of a discussion, to being a part of the dia-
log, to understand the direction we were going. I am pleased to re-
port, I believe—and you are aware of this—that this was an agree-


114

When I was mayor of Cleveland, I saw that privatization of com-
puter contracts, prior to my administration, had cost the city of
Cleveland over $10 million. People said, well, the city shouldn’t be
doing computers. Well, we went outside and the city got skinned.
They had various types of outsourcing—if you want to call it that—
which, unfortunately, turned out that it was done for less than al-
truistic purposes, shall we say. So, I always like to ascribe the best
intentions to people who are looking to do business with govern-
ment at all levels. I always like to do that. Sometimes I’m dis-

appointed.
K, thank you.

Mr. Sessions. Thank you, Mr. Kucinich. I think the dialog that
we have heard today is one that is healthy. I think it’s good for
each one of us. I have engaged Mr. Kucinich several times in these
philosophical debates. I will tell you that change is difficult.
Change is hard for everybody.

On a philosophic basis, I will tell you that, while I believe Mr.
Kucinich has talked about several things that he had on his mind,
I have one on my mind, and it’s probably a rambling dialog rather
than a question, but it’s an application of one that I had thought
about many times. It’s one that the military is in, militaries all
around the world, in hundreds of countries around the world. They
perform many manual functions—functions that wear out men,
women, and machines, ones that cause a good number of fractures
of bones and bodies.

In particular, working with the VA in the military, I became
aware that they have trouble recruiting radiologists. Radiologists
are among the highest paid physicians in the business, the medical
community. They had trouble getting a good radiologist all around
the globe, wherever military installations are. But because they
were given the opportunity to manage their business properly, they
have made a decision that they want to utilize distribution chan-
nels through FedEx, UPS, DHL—those types of overnight carriers.
They now take pictures of fractures of bones and overnight express
them to one or two locations in the United States. And they have
a team of radiologists, and instead of having radiologists all
around, multiplied in every installation, they can overnight express
it somewhere, have a team of radiologists look at all these things,
get two and three evaluations, render an immediate opinion to a
surgeon, and perform a function.

I think this has to do a lot with what Dr. Sclar talked about
when he talked about the central part of a mission, the frequency
and highly specific assets. I think that it is philosophic, but I hope
that what we have done in the compromise and attempting to craft
this bill is to take into account what Mr. Kucinich talks about, but
also to take into account that marvelous thing called change and
wisdom; that a manager and workers of a business could see how
change could evolve and make it better for everybody.

As I said, mine was more rambling dialog than philosophy, but
it’s another application of a way that I think relates directly to
what we have had.

I will now defer to my colleague and my chairman, Mr. Horn, for
such time as he may consume.


116

country, in Los Angeles, with three rivers and 500,000 people of
low income living in the flood plain—not rich people, low-income
peo le, $20,000 a year, $30,000 a year, $35,000 a year. One city

the bright idea, let’s not accept FEMA, the Federal Emergency
Management Agency’s maps. Let’s go redo those. They did them in
the normal way and they got hundreds of people out of the flood
plain because the Federal maps were inaccurate. We brought to
them the possibility of a New York firm where they would have
satellite maps, and presumably they could come within 1 inch of
accuracy, which is very important if you’re going to be putting
stilts on your house or jacking it up, or whatever crazy thing that
happens in some other part of the country.

IT think that sometimes it is that government either hasn’t been
given the funds by the legislative body, State or national, but they
don’t keep up on the latest technology in many of these things.
That’s certainly one place where you wouldn’t want in-house people
still drafting; you’d want people you could have available for a par-
ticular job, and that’s certainly the ones with computerized archi-
tecture that we’ve had for the last 15 years where you can draw
those plans. You're a professor of architecture. I’m sure you've seen
a revolution in that. Well, you’re in a school of architecture.

Mr. Scar. Yes, I hang around with those guys, yes. [Laughter.]

Mr. Horn. Yes, but you know what we're talking about. You
hang around with them and you no longer have to sit there all day
long doing a column. I mean, they can pop up like that now and
you see the whole dimensions, three dimensions, all that.

Anyhow, you triggered a few thoughts that——

Mr. SAWICKY. Well, you triggered a thought, too. The capitaliza-
tion of the public sector is referred to by your remark. The way we
look at our budget is implicitly biased against capital or invest-
ment. We count a dollar that is going to be useful many years into
the future, but it buys capital the same as the dollar that goes out
the window tomorrow. So we have an artificial constraint on the
ability of public agencies to tool up in the manner you're referring
to, which puts them at an implicit disadvantage relative to private
operators that can raise capital by various means. So again, it goes
to the complexity of making fair comparisons between public and
private. It usually doesn’t reduce to a principle that you can use
to categorize functions.

There’s one exception, which is things that are inherently func-
tions of a sovereign government, which has been eluded to: mili-
tary, law enforcement, judiciary, legislative, prisons, corrections.
There are things where the way things are done are so important,
not the least because they can bring legal liability to taxpayers in
the form of civil suits, that those argue much more forthrightly and
a priori terms for being inherently governmental. Beyond that, I
think there’s very broad precepts and really a large task of all
three branches of government to try to look at cases and judge
them separately on their merits.

In the context of this legislation, one of the things that’s bother-
some is that there seems to be a blurring of boundaries between
the legislature and executive. We seem to be opening doors for the
Congress and the judiciary to be sitting next to people trying to
make executive decisions, looking over their shoulders and other-


I would like to thank the Chairman and Ranking Member for giving me
the opportunity to come here today.

As you know, this Committee accepted an amendment to H.R. 4244.

This amendment contained provisions of legislation which I have
introduced in the House, H.R. 716, the Freedom From Competition Act.

It was offered by Rep. Pete Sessions, and I would like to personally
thank him for all his interest and hard work on this issue.

The provisions included in the amendment are very scaled back from the
original bill I introduced.

Recently, the Senate passed the scaled back version of this bill by
unanimous consent.

This legislation is bipartisan, with 66 cosponsors, and it is supported by
over 100 associations and organizations.

Some of these organizations include the U.S. Chamber of Commerce,
the National Federation of Independent Business, and many many others.

In addition, the Small Business Office of Advocacy supports these
efforts to end unfair government competition with the private sector.

The last time the White House Conference on Small Business met, it
listed unfair competition with government agencies as one of its top
concerns.

Furthermore, Ms. Karen Hastie Williams, the Administrator of the
Office of the Federal Procurement Policy under President Carter, also
supports this bill.


93

‘Subcommittee on Government Management. Sclar Testimony - August 6.1998. Page 7

decade the number of contractors was cut by half. and the largest
remaining company was collecting 93 percent of the fares.!°C] By 1997, the
largest operator controlled 97 percent of the operation.

To say that government must learn to contract smarter is simply not
helpful. It essentially puts the weight of blame for a situation in which the
strongest incentives to undermine competition are "built-in" on the supply
side on to the buyer. The Committee must appreciate the difficulty of
sustaining competition for public contracts. Firms engage in mergers and
acquisitions as well as other legal practices to eliminate and dominate
competitors. That is especially true among firms engaged in public
contracting. Absent meaningful competition, the rationale for extending
contracting becomes weak to nonexistent.

It is also important to remember that privatization via contracting
relies heavily on the belief that most contracts can be made almost self-
enforcing. Yet the necessity for a written contract arises because each party
to a transaction fears that the other party or parties may fail to deliver or
perform. Thus contracts contain descriptions of the future behavioral
obligations of both parties, to the extent that such behavior can be
anticipated, and of the sanctions to be imposed if any party fails to hold up
its end of the bargain. Such future-oriented obligations, created in an
atmosphere of uncertainty, place the public agency and its contractors in a
far different relationship to each other than cut-and-dried contracts typical
of discrete purchases such as a contract to put a fresh coat of paint on the
dome of the Capital. The extent of this divergence between markets for
clearly defined and limited products and ongoing services is critical in
determining the comparative efficiency of the privatization option.

In much of the privatization debate, the expensive transactional
complexity of ongoing contracts is typically ignored. The contracting
process is treated as if it were effectively a trivial modification of discrete
contracting situations. Accordingly, all one need do is announce the
availability of the contract through a request for proposals or RFP, specify
the contract contingencies and terms to all the potential bidders and allow
the bidders to set the price competitively - typically lowest bid wins. To the
extent that it is that simple and straight forward, the use of contracting for
long term service provision becomes identical with discrete purchasing.
However the type of contracts which will be encouraged by Title II will
most likely be for less standardized and more specialized outputs in which

10DYAdamo, R. Raleigh “Westchester’s Public/Private Partnership in Transit: A Decade of Experience.”
Paper presented at the APTA Annual Meeting, Los Angeles, CA, October 1985.


38

including restrictions on Inter Service Support Agreements (ISSAs) under which agencies
obtain goods or services from, or provide goods and services to, other government
entities.

Inventory Will Provide Useful Information

We agree with the provisions of the bill that will provide for a way to thoroughly identify
and categorize all activities currently performed by Federal agencies. It should move
forward a process found in Circular A-76 of the Office of Management and Budget, and
strengthen efforts to identify activities in federal agencies that are “non-governmental” in
nature.

The Inventory, we believe, will be a useful project for many agencies, although several of
the agencies in our industry, including the U.S. Geological Survey and the National
Geodetic Survey, have made great strides in recent years in improving their efficiency
and in contracting.

We also note that the FAIR Act includes provisions that require the process be consistent
with existing law, such as those requiring Qualifications Based Selection, and that the
definition of “inherently governmental” is similar to that already in an Office of Federal
Procurement Policy Circular.

We are somewhat concerned that provisions of the Bill would require an administrative
burden on many of the agencies that our members deal with. However, in view of the
benefits of the bill, we believe the compiling of an inventory of activities is a worthwhile
one.

NAPA Study Still Needs to be Considered

Many of our members are involved in compiling geographic information, and in using
that data. In 1996 and 1997, we worked closely with the National Academy of Public
Administration (NAPA) on a study of government use of geographic information. The
study’s sections on balancing public and private sector roles, the public purposes served
by geographic information, and outsourcing may be helpful to the committee as you
consider this or future government competition bills.

ACSM believes it can look at outsourcing objectively because its membership includes
surveying and mapping professionals who work in private firms as well as government
agencies. ACSM also can contribute to the debate from its experience over the past two
years in generating the NAPA study. Unfortunately, at least one Federal agency, the U.S.
Department of the Interior, has expressed opposition to the findings of the NAPA study,
particularly in regard to creation of a National Spatial Data Council, with representatives
from public and private sectors. We feel that this position is not in keeping with the spirit
of private-public partnerships, or in the spirit of the FAIR bill.


100
Subcommittee on Government Management. Sclar Testimony - August 6.1998. Page 14

Government. Congress can play an key leadership role in bringing the
players together to launch this change process.


41

FYH:sms
Enclosure

ce: Congressman Dan Buston
2185 Rayburn House Office Building
‘Washington, D.C, 20515

Mr. Dan Moll
2157 Rayburn House Office Building
Washington, D.C. 20515

Mr. Mark Brasher
8373 Rayburn House Office Building
Washington, D.C. 20515