Applications of R&D in the Civil Sector:

The Opportunity Provided by the Federal

Grant and Cooperative Agreement Act of

1977

June 1978

NTIS order #PB-283035
Library of Congress Catalog Card Number 78-600062

For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402
FOREWORD

The Federal Government now spends about $28 billion per year on research and

development (R&D) activities and facilities in the United States. With another $20 billion

per year from the private sector, the total national investment in R&D approaches $50

billion annually.

Large though this total is, it portrays only a small portion of the overall impact of

R&D on the economy and the quality of life in our society. Research and development

is the engine that drives the currents of change in our civilization. From R&D stem the

inventions, techniques, and processes that propel innovations through our economic

and social systems. Moreover, it has been estimated that, on the average, each person

engaged in R&D eventually generates 6 to 10 other jobs throughout the economy. As a

consequence, the $48 billion annual national investment in R&D has a massive

multiplier effect on our entire socioeconomic system.

Therefore, it behooves Congress to consider this investment carefully and to pay

close attention to the ways in which it is allocated and used, as well as to the framework

of laws, regulations, incentives, and constraints whereby the fruits of scientific research

and development are converted into operational results.

Furthermore, R&D and the process of innovation help to determine the options

and establish many of the parameters whereby specific technologies can be assessed for

their potential impacts on society. In assessing a particular technology, the Office of

Technology Assessment (OTA) compares its advantages and disadvantages with those

of alternative technologies and assesses its impact on economic, social, environmental,

and political factors within a perspective of probable future human needs, capabilities,

and values.

To carry out its assessments effectively, OTA needs a thorough understanding of

the Nation’s R&D effort and of the process whereby R&D results are converted into

useful innovations. While helping to strengthen and integrate OTA’s overall assessment

activities, such understanding also enables OTA to assist the Congress in better shaping

the national investment in R&D by developing more soundly based R&D policies and

priorities. Thus, through such understanding, OTA can more effectively fulfill its mandate to give Congress early indication of the impacts of technological change.

In response to these needs and the urging of a number of congressional committees

and individual Members, the OTA Board authorized a Program of R&D Policies and

Priorities, which became operational in May 1976.

Recognizing that such an assessment cannot be carried out effectively through a

single, comprehensive project which attempts to address all facets of the problem, the

Program was designed to proceed through a series of manageable, interrelated studies

which will help to build an understanding of how to maximize the beneficial impacts of

our total R&D enterprise.

The Program has operated with the guidance of three interrelated Advisory Panels

made up of distinguished leaders of science, technology, industry, labor, the professions, and the consumer, environmental, and public interest movements.

.,. 111
The Panel on the Health of the Scientific and Technical Enterprise, chaired by Dr.

Harvey Brooks, Benjamin Peirce Professor of Technology and Public Policy at Harvard

University, has been concerned with ways we can maintain and enhance the health and

vitality of the entire scientific and technical enterprise.

The Panel on the Applications of Science and Technology, chaired by Dr. Lewis

M. Branscomb, Vice President and Chief Scientist of the IBM Corporation, has been

concerned with how we can more effectively apply science and technology to

ameliorate the processes of innovation, augment America’s international competitive

position, solve national and social problems, and enhance the qualify of life.

The Panel on Decisionmaking on R&D Policies and Priorities, chaired by Dr.

Gilbert F. White, Director of the Institute of Behavioral Science at the University of Colorado, has been concerned with how we improve the decisionmaking processes

whereby the Nation establishes policies and priorities for R&D.

During coming months, OTA will issue a series of reports on the Program all intended to inform and aid Congress in dealing with the complex issues of R&D policies

and priorities.

The first of these reports is the Applications of R&D in the Civil Sector: The Opportunity Provided by the Federal Grant and Cooperative Agreement Act of 1977. This

Act, which was signed into law February 3, 1978, is a major step forward in bringing

greater order to the diversity of Federal assistance programs. The framework established

by the Act has important implications for federally funded R&D and for the Federal impact on innovation involving private industry, the universities and nonprofit organizations, and State and local governments.

Over the next 2 years, the Office of Management and Budget (OMB) will be engaged in a major study of Federal assistance mandated by the Act. Through their oversight function, interested congressional committees have a key role to play in assuring

the effective implementation of this Act.

America’s scientific and technical enterprise is a powerful instrument with enormous

potential for national progress. How effectively this Act is implemented will be an important factor in determining how fully we tap that potential. It is hoped this report will aid

Congress in shaping the effort.

RUSSELL W. PETERSON

Director

Office of Technology Assessment

iv
Program on R&D Policies and

Priorities Steering Committee

Russell W. Peterson

Director

Office of Technology Assessment

Jerome B. Wiesner

Chairman

Technology Assessment Advisory Council

Lewis M. Branscomb

Chairman

Panel on the Applications of Science and

Technology

Harvey Brooks

Chairman

Panel on Health of the Scientific and

Technical Enterprise

Gilbert F. White

Chairman

Pane! on Decisionmaking on R&D Policies and

Priorities

Ellis Mottur

Ex Officio

Application of Science and

Technology Advisory Panel

Lewis M. Branscomb, Chairman

Vice President and Chief Scientist, IBM Corporation

Preston T. Bankston

Deputy Director, Office of Science and Technology

Mississippi Fuel and Energy Management Commission

Barry R. Bloom

President, Central Research

Pfizer, Inc.

Irving Bluestone

Vice President, Director

United Auto Workers

General Motors Division

Edward E. David, Jr.

President

EXXON Research and Engineering Company

Charles J. Hitch

President

Resources for the Future, Inc.

C. Lester Hogan

President and Chief Executive Officer

Fairchild Camera and Instrument Corporation

Alice Tepper Marlin

Executive Director

Council on Economic Priorities

Claire Nader

Independent Consultant

Arthur S. Obermayer

President

MOLECULON Research Corporation

Robert M. Solow

Institute Professor

Massachusetts Institute of Technology

Philip H. Trezise

Senior Fellow

The Brookings Institute

Herbert F. York

Professor of Physics

University of California at San Diego

u
Decisionmaking on R&D Policies and

Priorities Advisory Panel

Gilbert F. White, Chairman ●

Director, Institute of Behavioral Science, University of Colorado

Robert S. Browne Frederic A. L. Holloway

Director Vice President for Science and Technology

Black Economic Research Center EXXON Corporation

Robert A. Charpie

President

Cabot Corporation

John W. Davis

Attorney

Adams and Davis

Martin Goland

President

Southwest Research Institute

Jerry Grey

Independent Consultant

Edward B. Lindaman

President

Whitworth College

Richard R. Nelson

Professor of Economics

Institute for Social and Public Studies

Yale University

Don K. Price

Professor of Government

John F. Kennedy School of Government

Harvard University

Lola Redford

Chairman of the Board

CAN’s Council on Environmental Alternatives

Gerald B. Grinstein Donald B. Rice, Jr.

Attorney President

Preston, Thorgrimson, Ellis, Holman & Fletcher RAND Corporation

● During 1977 Adam Yarmolinsky served as Cochairman of the Advisory Panel but

resigned as of November 18, 1977, to become Counsel for the Arms Control and Disarmament Agency.

● ● ● ●

NOTE: While the Applications of Science and Technology Advisory Panel (listed on

previous page) served as the principal advisory group for this report, the Decisionmaking on R&D Policies and Priorities Advisory Panel also provided advice, critique,

and assistance during the project for which OTA is deeply grateful. Although these advisory panels recommended release of the report, OTA assumes full responsibility for the

report and the accuracy of its contents.

vi
OTA R&D Policies and

Priorities Program Staff

Ellis Mottur, Assistant Director, OTA and Program Manager

John H. Young, Project Director

Judith Angerman Dorothy S. Poole

Contractor

John P. Kottenstette, Denuer Research Institute

OTA Publishing Staff

John C. Holmes, Publishing Officer

Kathie S. Boss Joanne Heming

vii
Acknowledgments

Robert D. Newton, Chairman of the Task Force on Federal Grant-Type Assistance

Programs of the U.S. Commission on Government Procurement, has provided valuable

assistance throughout the project. A preliminary working paper was reviewed in a series

of meetings with representatives of the National League of Cities/U. S. Conference of

Mayors; New England Innovation Group; Public Technology, Inc.; International City

Managers Association; National Security Industrial Association; Industrial Research Institute; and several Federal agencies. The report attempts to incorporate insights that

emerged from those meetings. Comments and criticisms of the many people who

reviewed a draft of this report also are gratefully acknowledged.

.,. Vlll
Federal efforts to foster technological change

in the civil sector through the support of R&D

have met with only limited success. In contrast,

the Federal Government has been very successful in bringing about technological change in

areas such as national security and space exploration, where it is the end user of the products of

R&D. Bringing about technological change in the

civil sector, however, requires that those nonFederal parties who produce, deliver, and use

goods and services accept risk and commit resources. Consequently, the Federal Government’s R&D role in the civil sector should differ in

fundamental ways from its role in areas where it

is the end user of the products of R&D.

Approximately one-third of the Federal budget

is disbursed through procurement or assistance

transactions between the Federal Government

and non-Federal parties. As an initial step toward

eliminating confusion over appropriate Federal

and non-Federal roles and responsibilities in this

major area of Federal spending, the Federal

Grant and Cooperative Agreement Act of 1977:

●

●

●

Requires that assistance relationships be distinguished as a class from procurement relationships;

Establishes uniform, Government-wide criteria for the use of contracts, grants, and cooperative agreements; and

Mandates a comprehensive, 2-year study of

Federal assistance to be conducted by ‘the

Office of Management and Budget (OMB).

This report shows how the requirements of the

Act provide an opportunity to address in a comprehensive, Government-wide manner the appropriate Federal and non-Federal roles in cooperative efforts to foster technological change in

the civil sector. Chapters 11 and 111 show how the

assistance perspective and the framework of Federal/non-Federal relationships established by the

Act could be used to incorporate into Federal

R&D management the considerations that guide

the actions of non-Federal users of the products

of that R&D.

Chapter IV shows how this framework of relationships could facilitate congressional oversiqht

of Federal efforts to foster technological innovation through revealing patterns of management

practices that determine effectiveness.

Topics of particular interest included in the

report are:

●

●

●

●

●

●

●

●

Issues important to consider in the OMB

Study (pp. 22-24) ;

The issue of accountability and its relationship to effectiveness in stimulating technological change (p. 27);

Background necessary for understanding

the full significance of distinguishing assistance relationships as a class from procurement relationships (pp. 7-13);

The issue of balancing public benefits and

private gain in assistance relationships with

commercial firms, and the role of openly

competitive assistance awards (pp. 13-15);

The characterization of Federal/non-Federal relationships reflected by the alternative

legal instruments of grants, contracts, and

cooperative agreements (pp. 19-20);

The “joint business venture” character of

the cooperative agreement and issues such

as costsharing and patent rights associated

with its use (pp. 20-22);

Key questions with brief discussion to assist

the Congress in overseeing Federal efforts

to foster technological change (pp. 27-29);

and

A hypothetical scenario, dealing with innovation to meet a local government problem, to illustrate the approach to civil sector

problems from an assistance perspective

(appendix B).

ix

29-365 0 - 78 - 2
CONTENTS

Chapter Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Definitions and Scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

II. ASSISTANCE AND PROCUREMENT RELATIONSHIPS . . . . . . . . . . . . . . . .

Characteristics of Assistance and Procurement . . . . . . . . . . . . . . . . . . . . . . . . .

Evolution of the R&D System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

4

7

7

9

From R&D to Use. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......11

Profitmaking Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

M. FRAMEWORK OF RELATIONSHIPS . . . . . . . . . . . . . . . . . . . . . . . . .......19

Choice of Legal Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......19

Use of Cooperative Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......20

OMB Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......22

IV. IMPLICATIONS FOR CONGRESSIONAL OVERSIGHT . . . . . . . . . . . . . ....27

Congressional Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......27

APPENDIX A–Text of Federal Grant and Cooperative Agreement Act of 1977. ...33

APPENDIX B—A Scenario for Innovation . . . . . . . . . . . . . . . . . . . . . . . . . .......37
Chapter I

Introduction
Chapter I

Introduction

Federal expenditures for civilian-oriented

R&D have risen rapidly over the past two decades. In authorizing programs and appropriating

funds for civilian-oriented R&D, Congress clearly

intends that the benefits from this public investment will be widely distributed throughout society. However, Federal efforts to harness the potential of science and technology to meet social

and economic needs have met with only limited

success. As recently noted by Presidential Science Advisor Frank Press and Governor George

Busbee of Georgia:

In recent years, Federal funding of R&D

for the CIVIl sector has been growing rapidly

[t is now in excess of $7 billion annually

But lts impact on meeting public expectations --on filling the everyday needs of the

people – often seems disappo]nting.

A central problem is that for Federal efforts to

be successful in fostering technological change,

such efforts must be effectively linked to the considerations of those non-Federal parties who produce, deliver, and use goods and services in the

civil sector. Incorporating the considerations that

guide the actions of these non-Federal decisionmakers into the management decision processes

of Federal R&D programs poses a major challenge. in R&D programs where the Federal Government is not the end user of the products of

R&D, such factors as

problem definition,

choosing among alternative technological

solutions,

bearing of costs and risks,

criteria for making awards,

testing and evaluation, and

introduction to use

-.

‘Frank Press and George Busbee, “Intergovernmental

Science and Technology, ” Science 196, May 27. 1977,

(editorial).

should all be dealt with very differently than in

areas such as national security and space exploration, where the Federal Government is the end

user,

The requirements of the Federal Grant and

Cooperative Agreement Act of 1977 provide an

opportunity to address in a comprehensive, Government-wide manner this whole range of R&D

management issues—both at the conceptual and

at the operational levels.2

At the conceptual level, the Act requires that

in transactions between the Federal Government

and non-Federal parties, assistance relationships

be distinguished as a class from procurement relationships. Since civilian-oriented R&D is generally not for the Federal Government’s own use,

transactions for its support fall into the category

of assistance relationships. The far-reaching implications of distinguishing assistance from procurement relationships for the conceptualization

of the Federal role and responsibilities are developed in chapter II.

At the operational level, the Act establishes

uniform, Government-wide criteria for the use of

grafits, contracts, and cooperative agreements so

that these alternative legal instruments accurately

reflect the underlying Federal ‘non-Federal relationships. This framework of Federal/non-Federal relationships requires a clear delineation of

Federal and non-Federal roles and responsibilities at the level of individual transactions.

The Act also mandates a 2-year, comprehensive study of Federal assistance to be conducted

by the Director of the Office of Management and

Budget (OMB). This study provides an excellent

opportunity to identify, develop, and promote

those administrative practices most effective in

stimulating technological change in the civil sec2The text O( the Act is presented in aPPend;x A

3
tor. These operational issues are treated in chapter III.

Chapter IV summarizes the implications of the

Act for congressional oversight of Federal efforts

to stimulate technological change.

The scope of the Grant and Cooperative

Agreement Act is far broader than R&D alone.

Approximately one-third of the Federal budget is

disbursed through procurement and assistance

transactions. The Act is intended as an initial step

toward eliminating the waste and ineffectiveness

in this major area of Federal spending resulting

from confusion over appropriate roles and responsibilities in Federal/non-Federal relationships. The framework established for such relationships is to bring greater order to Federal

assistance processes, on the one hand, and preserve the integrity of the procurement system on

the other.

In its comprehensive study of Federal procurement practices, the U.S. Commission on Government Procurement conducted a preliminary

study of Federal grant-type assistance programs.3

The Grant and Cooperative Agreement Act embodies the recommendations of that study. The

Procurement Commission found that Federal

grant-type activities constitute a vast and complex collection of assistance programs that function with little central guidance and in ways often

inconsistent even for similar programs. The

growth of assistance expenditures to State and

local governments, colleges, universities, and

other nonprofit institutions has accelerated to the

point where outlays for FY 1978 are estimated to

total about $80 billion. ’ Not only the dollar volume but the diversity of such programs is enor3U.S. Commission on Government Procurement, Report

oj the Commission on Government Procurement, Vol. 3,

Part F, Washington, D. C., U.S. Government Printing Office, 1972.

‘Executive Office of the President, Budget oj the United

States Government: Fiscal Year 1978, Special Analyses I

and O, U.S. Government Printing Office, Washington,

D. C., 1977.

mous—the Catalog of Federal Domestic Assistance contains descriptions of approximately

1,000 programs.’

This report considers the relationship between

two major streams of activity: (1) Federal efforts

to apply the products of R&D to the resolution of

social and economic problems, and (2) Federal

assistance to State and local governments and

other non-Federal recipients for the support or

stimulation of a broad range of activities in the

public interest. The confluence of these two

streams of activity is largely an unfamiliar area—

even to those separately familiar with Federal

R&D policy or with Federal assistance policy.

Nonetheless, the difficulties encountered in more

fully realizing the public benefits from Federal

support of R&D, together with the recent enactment of the Grant and Cooperative Agreement

Act, require that this particular area be thoroughly explored and understood.

Definitions and Scope

For the sake of precision, it is useful at this

point to offer two definitions. The term technology is used here to denote knowledge required

for the production and delivery of goods and

services. This definition encompasses both physical and social technologies. Technological innovation refers here to the process by which

knowledge is developed and transformed into

specific products, processes, and services. The

innovation process includes the whole sequence

of steps in the development, testing, production,

implementation, adoption, diffusion, and use of

a technology.

The scope of this report is limited to programs

where innovation goals are appropriate. This includes research for specific applications, advanced development, and demonstrations. Basic

research, applied research of a broad generic

character, and exploratory development, whose

purpose is the generation of new scientific and

technical knowledge, are not considered.

‘Executive Office of the President, 1977 Catalog of

Federal Domestic Assistance, U.S. Government printing

Office, Washington, D. C., 1977.

4
Chapter

Assistance and

Procurement Relationships
Chapter II

Assistance and Procurement Relationships

Since World War 11, the great bulk of the transactions the Federal Government has entered into

with non-Federal parties for performing R&D has

been for national security and space exploration.

Over the past two decades, however, the Federal

Government increasingly has sought to apply scientific and technical knowledge to the solution of

social and economic problems. This reorientation

of national priorities is clearly illustrated in figure

1 by the continued increase in the civilian R&D

budget relative to the space and defense R&D

budgets. Efforts to more effectively harness the

power of science and technology to meet civil

sector needs have led to the creation of R&D

programs in such diverse fields as energy, environment, health, housing, transportation, education, manpower training, and law enforcement.

We wish to review the evolution of the R&D

system in light of the requirement of the Grant

and Cooperative Agreement Act to distinguish

between assistance and procurement relationships. Therefore, we first examine the different

objectives, expectations, and administrative practices associated with these two classes of Federal/non-Federal relationships. We then consider

how the procurement system has evolved into a

very effective instrument for drawing upon the

scientific and technical resources of the Nation to

meet national needs in the areas of national

security and space exploration. We also consider

the limitations of that system for drawing upon

these same resources to meet national needs in

the civil sector, and the extent to which these

limitations might be overcome by an assistance

perspective. Finally, we consider the issue of

balancing public benefits and private gain in

assistance relationships with commercial firms,

and the role of openly competitive assistance

awards.

Figure 1.—Obligations for Defense,

Civilian, and Space R&D

$ Billions $ Billions

14

12

10

8

6

4

2

0

14

i

- - - Defense

- ‘2

---- - Space I

b - -

/

/

/

H /

h

- 2

19531955 1960 1965 1970 1975 1976

SOURCE: Special Analy8is P, 1978 Budget.

Characteristics of Assistance

and Procurement

The Grant and Cooperative Agreement Act

differentiates between procurement and assistance relationships by restricting the use of alternative legal instruments to specified types of relationships. For example, contracts are to be used

for procurement relationships, whereas grants

and cooperative agreements are to be used for

specified types of assistance relationships. Before

considering the specific criteria established for the

use of these alternative legal instruments, it is instructive to focus just on the implications of distinguishing assistance relationships as a class

from procurement relationships. It is the difference between these two relationships which

affects the conceptualization of the Federal role in

applying the results of R&D to civil sector needs.

7
For Federal procurement, the basic need to

acquire goods and services at fair value for the

Government’s sake has led to a set of highly developed procedures. To protect the Government’s interest and to provide fair and equitable

treatment of alternative suppliers, the Government maintains the usual buyer-seller, arm’sIength relationship and relies principally upon

competitive bidding for making awards. Sole

source awards can be made only in special circumstances and with sufficient justification. The

operational rules for guiding procurement transactions which are embodied in the Federal Procurement Regulations and the Armed Services

Procurement Regulations,* include procedures

for formal advertising, reviewing bids, making

awards, conducting negotiations, and ensuring

adequate and timely performance on the part of

contractors. The rights and liabilities of the

respective parties in procurement transactions

are well defined by established legal precedents.

Assistance, on the other hand, has neither a

precise, well-defined meaning nor uniform,

widely understood administrative practices

associated with it. The term assistance generally

is taken to connote the provision of money, services, or property to a non-Federal party to accomplish a broad public purpose. The provision

of Federal assistance implies a cooperative or

partnership-type relationship between executive

agencies and the non-Federal recipients with

regard to the attainment of public policy objectives. However, the development of an analytical

basis for Federal assistance, explicitly delineating

those properties shared in common by assistance

programs, and distinguishing between operationally significant categories of assistance programs, has not been carried very far. Consequently, the administrative practices based on

such distinctions are not well developed. The

Procurement Commission found that in the

absence of central guidance, the administration

of assistance programs has varied widely among

different agencies in ways that often were inconsistent. The Commission believed this situation to be not only wasteful and ineffective but

‘U.S. General Services Administration, Federal Procurement Regulations, Washington,

Printing Office, looseleaf services.

‘U.S. Department of Defense,

ment Regulations, Washington,

Printing Office, issued annually.

8

D. C., U.S. Government

Armed Services ProcureD. C., U.S. Government

also to create unnecessary confusion and frustration for the recipients of Federal assistance.

In particular, questions of responsibility and

accountability need to be clarified. In the absence

of clearly defining the respective roles and responsibilities of executive agencies and nonFederal parties, questions of who does what and

why at the operating level are left ambiguous.3

The Commission noted that when there is uncertainty regarding the capabilities of recipients to

adequately perform the assisted activity, Federal

administrators tend to develop more and tighter

rules, procedures, and standards. This response

to uncertainty on the part of Federal administrators may provide a sense of security in the face of

possible scrutiny. However, the unfortunate consequence of this response is that assistance programs lose the flexibility necessary for optimum

performance in achieving policy objectives.

Recipients cannot become routine appliers of

Federal rules and regulations without a consequent stifIing of initiative and responsibility. The

problem created for the management of assistance relationships is well expressed by the Commission in its report:

Assuring adequate contractor project

management in a procurement context is

difficult enough. We have yet to understand

the need for, much less provide, guidance

on assuring adequate project management

in the different, supposedly cooperative,

and admittedly more delicate, assistance

relationship.4

The similarity between the management problem described here for assistance relationships

generally and that posed in the procurement of

R&D is noted shortly.

The remedy proposed by the Commission and

embodied in the Grant and Cooperative Agreement Act is to establish a process whereby the

roles and responsibilities of executive agencies

3Robert D. Newton, in Hearings before the Ad Hoc Subcommittee on Federal Procurement and the Subcommittee

on Intergovernmental Relations of the Committee on

Government Operations, U.S. Senate, on S.3514, Federal

Grant and Cooperative Agreement Act of 1974, 93d Congress, U.S. Government Printing Office, Washington, D. C.,

1974, pp.72-79.

‘Report of Commission on Government Procurement,

op. cit., Vol. 3, p. 137.
and non-Federal parties become more clearly delineated on a transaction-by-transaction basis.

Thus, the Act requires that assistance relationships be distinguished as a class from procurement relationships, and it establishes broad

guidelines for the use of contracts, grants, and

cooperative agreements so that these alternative

legal instruments more accurately reflect the

underlying relationship between executive agencies and non-Federal parties. Recognizing that

these measures provide only a first step in organizing the administration of Federal assistance

programs, the Act also mandates a study to be

undertaken by the Director of OMB:

to develop a better understanding of alternative means of implementing Federal

assistance programs, and to determine the

feasibility of developing a comprehensive

system of guidance for Federal assistance

programs. ’

It is not yet clear whether it is either feasible or

desirable to develop a system of guidance for assistance programs as comprehensive as that for

procurement. What the Act attempts to do is to

force the complex issues involved to be effectively addressed on a Government-wide basis. Thus,

it establishes a process whereby the Government

as a whole can systematically learn from its experience in administering assistance programs.

As previously noted, the principal motivation

for the Act is to bring greater discipline to the

diversity of Federal assistance programs. Nonetheless, the importance for Federal R&D policy

of the requirement to distinguish between assistance and procurement relationships becomes apparent as we trace the evolution of the R&D system from an almost exclusive orientation toward

meeting Federal Government needs to an increasing orientation toward meeting civil sector

needs.

Evolution of the R&D System

World War II provided dramatic examples of

impacts that can result from a vigorous scientific

and technical enterprise. Such examples include

nuclear fission, penicillin, electronics, and

‘Federal Grant and Cooperative Agreement Act of 1977,

Section 8.

aeronautics. These wartime experiences led to

the adoption of policies supporting the generation of new knowledge and skills. An effective

means for mobilizing the necessary intellectual

resources has been the contract system for research and development. G The Federal Government was faced with the need to develop complex new technologies at, and even beyond, the

existing limits of scientific understanding. In

meeting this need, the Government turned to private institutions, and even created new institutions rather than rely exclusively, or even primarily, on its own civil service laboratories. Such institutions bring with them their own internal management. It is this technical management capability, as much as the scientific and technical knowledge and skills themselves, that is engaged

through the contract system.

The unique demands of procuring new knowledge and complex technological systems have

caused a considerable transformation in Government procurement regulations. The rather mechanical manner of contractor selection, based

upon price for an item that can be specified in

great detail, is simply not applicable for R&D.

The first departure from sealed-bid procurement

was authorized by the First War Powers Act of

1941. 7 Shortly after the end of the War, the flexibility to negotiate contracts for military R&D in

peacetime was authorized by the Armed Services

Procurement Act of 1947.s The departure from

traditional procurement practices was clearly recognized by President Truman who upon signing

this Act into law wrote:

The bill grants unprecedented freedom

from specific procurement restrictions during peacetime. That freedom is given to

permit the flexibility and latitude needed in

present day national defense activities . . . . There is danger that the natural

desire for flexibility and speed in procurement will lead to excessive placement of

contracts by negotiation and undue reliance upon large concerns, and this must

not occur.9

‘Clarence H. Danhof, Government Contracting and

Technological Change, The Brookings Institution,

Washington, D. C., 1968.

7

50 Appendix U.S.C. 601-622.

s~o u.S. C. 22o2, 2303-2314, 2381, 8012a; 19 U.S. C.

1202.

‘Report Pursuant to Section 4, Public Law 86-89, H.

Rept. 1959, 86th Congress, 2d Sess. (1960), p. 11.

9
Despite the danger of abuse, authority to

negotiate contracts for R&D was extended to the

civilian agencies by the Federal Property and Administrative Services Act of 1949.10 Thus, the

growing importance of science and technology to

agency missions and the inherent uncertainty of

R&D led to the abandonment of the more objective, traditional procurement practices in favor of

the subjective selection procedures based on the

perceived scientific and technical merits of a

potential performer’s capabilities and approach to

a problem.

Such an approach places a responsibility upon

executive agencies to develop the necessary expertise to select among the many technological

alternatives that present themselves and to ensure that the work funded meets Government

needs at a favorable price. Despite the need for

the executive agency to exercise effective control, sufficient latitude must be given the performer if creative work that meets mission objectives is to be attained. Thus, a delicate balance

requiring a high degree of judgment must be

struck in the relationships between executive

agencies and performing institutions in the procurement of R&D.

The management problems posed by such

procurement relationships are strikingly similar to

those posed for assistance relationships generally, as described in the previous subsection.

Despite their different purposes, both relationships share in common a measure of latitude for

initiative and creativity; both involve an effective

sharing of responsibility; and both require Federal/non-Federal cooperation to sustain the delicate balance. These aspects reflect the uncertainty and risk in striving for a national policy objective that requires the joint efforts of the Federal

Government and a non-Federal party, whether

in the public or private sector. It is pertinent to

note that such relationships, which were initiated

for procurement in time of war and authorized

only with great reluctance in peacetime, have become accepted as commonplace. It is not surprising, therefore, that for both relationships there is

an inevitable tension between the provision of

latitude and efforts to ensure accountability .1’

1040 U.S.C. 471 et seq.

‘*Bruce L.R. Smith and D.C. Hague, The Dilemma of

Accountability in Modern Government, St. Martin’s Press,

New York, 1971; Bruce L. R. Smith, The ZVew Political

Economy, Halstead Press, New York, 1975.

The adaptation of the procurement system to

mobilize the Nation’s scientific and technical

talents has produced a whole series of remarkable technological accomplishments in the military and space areas. The question for present

purposes is whether this same system can simply

be redirected toward meeting civil sector needs or

whether more fundamental changes are required. The performance capabilities developed

in various technologies for military and space applications provided the basis for well-known civil

sector innovations in electronics, computers, and

commercial jet aircraft. However, the adaptation

of these technologies for civil sector applications

was carried out entirely by the private sector and

was unplanned and unintended by the Federal

Government. If stimulating technological change

in a particular part of the civil sector is a public

policy objective, it presumably would be more efficient, as well as more effective, to attack that

problem directly rather than rely on “spinoffs”

h-em military and space programs.

A wide variety of such efforts have been

launched. Before World War II, Federal efforts to

apply science and technology to civil sector

needs were concentrated mainly in the areas of

agriculture, health, mining, and civil aviation.

These efforts depended largely on civil service

laboratories, and in the case of agriculture, upon

the land-grant colleges as well. The first major

Federal effort to draw upon the contract system

of research to meet a civil sector objective was

that of the Atomic Energy Commission (AEC) .12

The AEC had its roots in the wartime Manhattan

Project and after the war was charged with the

mission of developing peaceful uses of atomic

energy. Its Power Reactor Demonstration Project

in the mid-1950’s was instrumental in the adoption of nuclear power. 13 In the latter part of the

1960’s, a number of new agencies were created,

such as the Department of Transportation, the

Department of Housing and Urban Development, the Environmental Protection Agency,

and the Law Enforcement Assistance Administration—all of which utilize the contract system in

their research, development, and demonstration

“Harold Orlans, Contracting for Atoms, The Brookings

Institution, Washington, D. C., 1967.

13Arthur D. Little, Inc., Federal Funding o} Ciuilian

Research and Development, Vol. 2, Part 1 (prepared for

the Experimental Technology Incentives Program, National

Bureau of Standards), February 1976.

10
efforts. With the advent of the energy crisis, the

AEC was absorbed into the Energy Research and

Development Administration, which subsequently was absorbed into the Department of Energy

(DOE). There is an especially strong focus on

commercialization in DOE. However, all of the

above-mentioned agencies, as well as a number

of others throughout the Federal Government,

are involved in efforts to foster the adoption and

use of the technologies they develop.

Nonetheless, there is a fundamental difference

in the role these agencies can have in the process

of technological innovation and in the roles of the

Department of Defense (DOD) or the National

Aeronautics and Space Administration (NASA).

DOD and NASA not only procure R&D, they

also procure and use the products of that R&D.

Thus, in these agencies; the innovation process—from the conception of an idea through deployment and use—is under an integrated management control. Not only are technological

goals set and met, but they are set and critically

evaluated within the context of specific operating

conditions. This measure of control over the innovation process is not available to agencies attempting to foster technological change in the

civil sector.

From R&D to Use

For agencies whose mission includes the support of certain activities in the civil sector, the use

of procurement to perform the R&D necessary to

carry out this mission should be clearly distinguished from procurement to provide for internal

needs. The use of the Federal procurement system to meet what are essentially non-Federal

needs appears, in this regard, to be a mismatch

between ends and means. Since an agency has

no control over the adoption and use of the products of its R&D, its responsibilities might be envisioned as being limited to setting and meeting scientific and technological goals.

Transactions with non-Federal parties–the

purpose of which is to meet civil sector needs

through the support of R&D—would fall under

the heading of assistance relationships. It is obviously desirable to accurately designate Federal/non-Federal relationships in terms of the purpose of such relationships. However, whether

there is a deeper significance in the requirement

to distinguish between assistance and procurement relationships depends on whether this distinction is likely to affect the conceptualization of

the Federal role and responsibilities in meeting

specific civil sector needs through the support of

R&D. To try to answer this question, it is useful

to review the record of Federal efforts to meet

civil sector needs through R&D.

Experiences with demonstration projects are

particularly pertinent in this regard—they serve

as policy instruments for bridging the transition

from R&D to use. In a companion report, OTA

reviews this experience. 14 That report covers

demonstrations of both social and physical technologies to compare their similarities and differences and thereby develop a better understanding of the criteria and conditions for their

successful use. For demonstrations aimed at implementing policy objectives, diffusion of the

technology from the site of demonstration is the

measure of success. In this regard, the record of

demonstration projects has been very disappointing because of only a limited number of successes

in stimulating the diffusion of a technology.

The companion study concludes there are two

principal factors that determine the scope of opportunity for policy implementing demonstrations: 1) the nature of the technology, and 2) the

nature of the institutional environment into which

the technology is introduced. In general, when a

technology is sufficiently well developed to be reliably reproduced from site to site, the opportunities for diffusion are enhanced. Similarly, opportunities for the diffusion of new technologies are

enhanced when the institutional participants in a

given policy sector have a tradition of using the

results of R&D. In such cases, the necessar y

means of moving new technologies from R&D

into use are in place and functioning in an effective manner. A well-developed institutional environment implies a certain measure of consensus

among the key participants in a policy sector as to

the criteria for desirable innovations. It further im-

“0ffice of Technology Assessment, The Role Of

Demonstrations in Federal R&D Policy, U.S. Government

Printing OJJice, Washington, D. C., 1978 (in press).
plies an acceptance of the Federal role in that

policy sector with regard to fostering technological innovations to meet national policy objectives. These factors impose certain basic constraints which determine the scope of opportunity

for effectively bridging the transition from R&D to

use. The distinction between assistance and procurement relationships obviously will not affect

these fundamental constraints.

The potential importance of this distinction lies

in its effect upon exploiting those opportunities

that do exist. In this regard, the companion study

reveals further factors that influence the success

of demonstration projects. These include:

1. participation in the demonstration project

by representatives of various segments of

an institutional environment who understand the requirements for success in that

policy sector,

2. initiative for a project coming from nonFederal parties, and

3. willingness of non-Federal parties to share

a substantial fraction of the costs and risks

of a demonstration.

These factors emphasize the need to effectively engage in Federal efforts to meet civil sector

needs of the appropriate non-Federal representatives in a given policy sector. It is these nonFederal decisionmakers who ultimately determine the success or failure of technological innovation.

However, in procurement it is clearly a Federal

responsibility to set the criteria for acceptable performance and to judge whether those criteria are

met, Yet, Federal officials can hardly be expected

to possess detailed knowledge of non-Federal

users’ needs. Without such knowledge, the definition of the problem at the Federal level is likely

to be fundamentally deficient. Furthermore, in

the absence of such knowledge, the technological pathways pursued can easily diverge from

those which would meet the intended objective.

Thus, the Federal responsibility to assure adequate project management in procurement is inadequate to assure critical evaluation of a technology’s capacity to meet specific civil sector

needs. It is therefore not surprising that the products of federally supported R&D frequently encounter difficulty in bridging the transition from

R&D to use in the civil sector.

One response to the concern about getting the

results of Federal R&D out of the laboratory and

into use in the civil sector has been the formation

of a large number of technology transfer programs. A recent directory of such programs includes descriptions of 43 different Federal technology transfer programs .15 The methods employed in these programs to promote technology

transfer or research utilization include demonstration projects, colloquia, distributing reports, and

field agents. The effectiveness of these programs

is still problematical, inasmuch as there is little

adequate evaluation of their effectiveness. 16 For

R&D undertaken against a backdrop of national

need, it is natural that an effort be made to promote its utilization. However, the formation of

special technology transfer programs is itself

symptomatic of the difficulties encountered by

federally supported technologies in making the

transition from R&D to use.

The approach indicated by the requirement to

distinguish between assistance and procurement

relationships is fundamentally different. Fostering

technological innovation in the civil sector should

be carefully distinguished from promoting the

utilization of R&D or the transfer of technology.

The latter emphasizes finding uses for the products of R&D already in hand. The former emphasizes supporting the process whereby unmet

social needs are satisfied through technological

change. That is, it focuses first on needs and on

the overall process of the adoption and diffusion

of a new technology to meet those needs. Only

secondarily does it focus on the R&D required as

part of that larger process.

Thus, the requirement to distinguish between

assistance and procurement relationships establishes a broader context for Federal efforts to

“Federal Council for Science and Technology, Directory

oj Federal Technology Transfer, U.S. Government Printing

Office, Washington, D. C., 1975.

‘bNational Science Foundation, Federal Technology

Transjer: An Analysis of Current Program Characteristics

and Practices, prepared for the Federal Council for Science

and Technology, 1975.
meet specific civil sector needs through R&D. It

thereby provides a Government-wide, institutional means of broadening the scope of concern

of Federal R&D program managers to the entire

process of technological innovation, rather than

just the setting and meeting of technological

goals.

This is not to suggest that the use of procurement methods precludes a focus on technological

innovation and the specific requirements that

federally supported technologies must satisfy if

they are to be adopted and used in the civil sector. Individual program managers can and have

recognized such requirements. However, the

designation of assistance provides an institutional

rather than an individual recognition that such requirements are to be met. Consequently, it facilitates the conceptualization of the Federal role

appropriate for meeting these requirements. It

further allows for a systematic, rather than ad

hoc, delineation of the Federal and non-Federal

responsibilities most effective for meeting these

requirements. The delineation of responsibilities

in the procurement system is for the express purpose of meeting Federal, not non-Federal needs,

and the system admits of only limited flexibility in

this regard.

It should also be noted that a focus on scientific

and technological goals is entirely appropriate

when the principal objective is the generation of

new knowledge. Insofar as such knowledge is not

for the Government’s own use, it would be designated assistance rather than procurement. Nonetheless, a principal focus on innovation is appropriate only when specific needs are being addressed.

It might also be noted that in its discussion of

civil sector R&D, the Commission on Government Procurement focused primarily on the role

of the Federal Government in building a science

and technology knowledge base for innovation.

In this regard, the Commission considered the

important role that technological advances in

military and space programs had in stimulating

well-known civil sector innovations. Correspondingly, most of the Commissions discussion of the

Federal role in supporting civil sector innovation

was under the heading of procurement of

R&D. ” However, insofar as the principal purpose of individual transactions is for broad public

purposes rather than the Government’s own use,

the recommendations of the Commission embodied in the Grant and Cooperative Agreement

Act would require that such transactions be

labelled assistance rather than procurement.

Before proceeding to the specific means provided by the Act for more clearly delineating

Federal and non-Federal roles and responsibilities in assistance relationships, it is useful to consider the issue of assistance relationships with

commercial firms.

Profitmaking Organizations

As already noted, the term assistance encompasses a wide variety of meanings, most of which

refer to grant-type programs for State and local

governments and nonprofit institutions. For example, the Grants Act of 195818 authorized all

agencies which possessed the authority to support basic scientific research through contracts to

also support such research through grants. However, it restricted the recipients of such grants to

institutions of higher education and nonprofit institutions whose primary purpose is the conduct

of scientific research. The Grant and Cooperative

Agreement Act places no restrictions whatsoever

upon candidates for assistance awards. Unless

authorizing statutes exclude profitmaking organizations, they are therefore eligible for assistance

awards. In view of their central role in technological change, they are clearly important candidates.

Insofar as innovation entails the deployment of

commercial technologies, private gain is a prerequisite for the realization of public benefits.

However, when the award of public funds entails

private gain, care must be taken that such awards

are made in a recognized and impartial manner.

Furthermore, the connotation of assistance is

generally to support and stimulate activities that

provide widely distributed public benefits without

“Report of the Commission on Government Procurement, op. cit., Vol. 1, Part B.

“42 U.S.C. 1891-1893.

2f4-3h 5 (1 - 78 - 4
direct private gain. The use of the term assistance

in this context, therefore, has the potential for

creating serious confusion and deserves further

attention.

It is important to distinguish between assisting

ongoing functions in the civil sector and assisting

the process of technological innovation. In assisting the activities of State and local governments

and nonprofit institutions, aid often is awarded

on the basis of need or geographical distribution.

The connotation of subsidy is perfectly consistent

with public policy objectives. The recipients of

such assistance awards provide a clear locus of

responsibility for carrying out the reasonably welldefined functions and activities being assisted.

However, no one can be responsible for technological change per se. Executive agencies may

be charged by Congress with supporting and fostering innovation in various policy sectors, but

they exercise no administrative control over the

process itself. Innovation involves a variety of

participants having different roles and being

driven by their own particular motivations.

Regarding State and local governments, there

is little need to distinguish between assisting their

ongoing delivery of services and assisting improvements in the delivery of those services

through technological innovation. Regarding

commercial firms, however, it is essential to distinguish between assisting the process of technological innovation and assisting a particular firm.

The purpose of the assistance is clearly a widespread distribution of public benefits, not the

welfare of a particular firm.

The Government’s objectives and those of the

firm may be in agreement as far as achieving the

production, use, and widespread diffusion of a

socially beneficial technology. Insofar as market

incentives are deemed inadequate to bring about

such a technology without Federal assistance,

there is a common objective shared by the Government and the firm. However, there is also a

sense in which the firm and the Government

have an inherent divergence of interests.

Whereas the firm seeks to capture for itself as

much of the benefits of the innovation as it can,

the Government seeks to assure a widespread

distribution of such benefits at the lowest cost to

the general public. In a market economy, competition is the principal means relied upon to accomplish these public objectives.

Competition also provides a means for making

procurement awards in a recognized and impartial manner. Competitive bidding not only

serves the Government’s interest in obtaining a

favorable price; it is intended also to assure that

the Federal Government selects among alternative suppliers in an equitable manner.

However, the means for selecting among

alternative recipients of assistance awards are

relatively undeveloped. Thus, Federal administrators generally have tended to use the

procurement system for supporting efforts such

as development and demonstration projects to

meet specific civil sector needs. The explicit inclusion of such efforts within the class of assistance

relationships points up the need to develop a

system for making assistance awards that are

equitable as well as effective.

If assistance to a firm is effective, it would tend

to give that firm at least a temporary competitive

advantage. Such assistance also runs the risk of

displacing private funds with public funds,

thereby enhancing private gain without corresponding increases in public benefits. Openly

competitive assistance awards would minimize

these difficulties. Moreover, the Grant and

Cooperative Agreement Act encourages the use

of competition, where appropriate, in the making

of assistance awards.

It should be emphasized that procedures for

making competitive assistance awards to commercial firms ought to differ in fundamental ways

from the corresponding procedures for procurement awards. Assistance awards would be aimed

at stimulating the widespread adoption and diffusion of a new technology. However, Federal officials generally would have inadequate knowledge of the market factors which govern a new

technology’s rate of adoption and diffusion. And

contrary to the case in making procurement

awards, Federal officials likely would lack the

knowledge necessary for setting the terms of an

award to ensure that it meets the desired objective. Thus, in setting the terms for such competitive awards, there would be a need for in14
volvement of representatives from the various

segments of a given policy sector who understand the requirements for successful innovation

in that sector. It would clearly be the responsibility of Federal officials to assure that this be done in

an open manner and with all-interested parties

represented to protect against abuse.

Such an approach presumes that there is a

basis for cooperative dialogue between the

Federal Government and the non-Federal participants in a given policy sector. Without mutual

acceptance of the Federal and non-Federal roles

and responsibilities in a given policy sector, the

opportunity for effective Federal support of technological innovation in that sector is limited.

In the next chapter, we briefly discuss the issue

of openly competitive assistance awards within

the context of the OMB study. We also offer an

example of how the terms for such awards might

be set in the hypothetical scenario presented in

appendix B. However, it is well beyond the

scope of this report to prescribe detailed procedures that would strike the proper balance between equity and effectiveness in making assistance awards to commercial firms. Rather, the intent is to focus attention on an issue raised by the

requirement of the Grant and Cooperative

Agreement Act to distinguish between assistance

and procurement relationships.

15
Chapter Ill

Framework of Relationships
Chapter Ill

Framework of Relationships

The Grant and Cooperative Agreement Act

establishes criteria for the use of contracts,

grants, and cooperative agreements so that these

legal instruments reflect the underlying relationships between executive agencies and non-Federal parties. We considered in the previous section the implications of distinguishing assistance

relationships as a class from procurement relationships without reference to the specific means

the Act employs for making this distinction. As

recommended by the Procurement Commission,

the Act also distinguishes between different types

of assistance relationships. For each relationship

distinguished, the Act requires that a specific

legal instrument be employed to reflect that relationship.

The framework of relationships thereby established is intended to provide a first step toward

the development of a more consistent and effective set of practices for the administration of

Federal assistance. Recognizing that it is only a

first step, the Act mandates a 2-year comprehensive study of Federal assistance to be conducted

by the Director of OMB. We therefore pose

issues important to consider in this study.

Choice of Legal Instruments

The Procurement Commission examined the

administration of different assistance programs

by various agencies. It found that the enabling

and appropriation statutes often are inconsistent

in specifying the circumstances for using grants.

Furthermore, the agencies’ perceptions of what is

required to effectively administer programs are

often incompatible with the statutes’ requirements. Agencies generally prefer to use grants

for transactions that require little involvement or

participation during performance. However, the

statutes often require the use of grants for programs that the agencies believe require substantial agency participation during performance.

The Commission also found that some agencies

use grants for procurement purposes and procurement contracts for assistance purposes.

The situation is further confused by the lack of

any precise meaning for the terms “grant” or

“grant-in-aid, ” which cover a range of transactions from the simple to the complex. The Procurement Commission sought ways to draw operationally significant distinctions between granttype transactions. However, it found that on an

operational level none of the usual distinctions,

such as discretionary grant vs. mandatory grant,

formula grant vs. project grant, or categorical

grant vs. block grant, proved adequate. Similarly, it found distinctions based on factors such

as cost-sharing or the type of recipient to be inadequate operational distinctions.

To bring greater consistency and effectiveness

to the administration of Federal assistance, the

Commission recommended distinguishing between three basic relationships and restricting the

use of each legal instrument to one of these underlying relationships. The three basic relationships distinguished provide broad operational

definitions for the roles and responsibilities of the

executive agency and the non-Federal party. The

Grant and Cooperative Agreement Act embodies

this recommendation with one exception.

The first type of relationship is that of procurement. Here the “executive agency is ultimately

responsible for assuring performance. The agency must therefore establish the specific requirements to be met, judge the acceptability of the

product or service against those standards, monitor the work, and be involved to the extent necessary to assure timely and satisfactory performance. It has the right to unilaterally change the

work and terminate it for default, if necessary.

The Act requires that only contracts be used for

procurement relationships.

The second type of relationship is an assistance relationship where the executive agency has
little or no need for involvement during performance of the activity assisted. The agency’s responsibility lies in defining the scope of the work

and in such monitoring as may be necessary to

assure that the work is performed within the

agreed-upon scope. It is the recipient who ultimately is responsible for assuring performance

and expending funds within this agreed-upon

scope, as in a basic research grant. The Act requires that a type of grant be used to reflect this

relationship. The scope of the work to be performed may be either broadly or narrowly defined. The central point is that the ultimate responsibility for assuring performance lies with the

recipient, not the agency. Although grants currently account for the great bulk of assistance relationships,it should be noted that existing grants

frequently do not conform to this description.

The third type of relationship also is an assistance relationship, but one in which the agency is

substantially involved during performance. In this

case, responsibility for assuring performance is

shared by the agency and the recipient. Correspondingly, defining the performance roles of the

respective parties also is a shared responsibility.

Examples of this type of relationship are provided

in large, project-type assistance awards where

executive agencies are actively involved during

performance because of technical or managerial

complexity, a need for coordination with other

federally supported projects, or a need for involvement to launch a new activity. The Act requires that a type of cooperative agreement

be used to reflect these relationships.

One exception to these three basic relationships should be noted. Section 4(2) of the Act

provides that a type of procurement contract

shall be used in specific instances where an executive agency determines it would be appropriate. Thus, a type of procurement contract

could be used for an assistance relationship in

specific instances. For example, in a two-step

transaction, a Federal agency could first obtain

medicines through a procurement contract, and

then provide the medicines to non-Federal

hospitals through grants.

‘Report oj the Committee on Governmental Ajjairs, U.S. Senate, S.431, Federal Grant and Cooperative Act of 1977, 95th Congress, U.S. Government Printing Office, Washington, D. C., 1977, p. 9.

Table 1 presents a comparison of the three

basic relationships and the legal instruments used

to reflect them. It describes the Federal and nonFederal roles, responsibilities, involvement, and

rights in both procurement and alternative assistance relationships. All of these alternative relationships can be used within a single program.

This point is well illustrated by the hypothetical

scenario constructed in appendix B.

The Act excludes from the definition of grant

or cooperative agreement any agreement which

would provide only direct Federal cash assistance

to individuals, a subsidy, a loan, a loan guarantee, or insurance.

Use of Cooperative Agreements

Federal assistance often has been equated

with the provision of financial assistance alone.

However, the cooperative agreement reflects a

relationship where substantial agency involvement during performance of the assisted activity

is an integral part of the assistance.

Before passage of the Grant and Cooperative

Agreement Act, DOE already had the authority

to use cooperative agreements. Although DOE

has little operating experience with this important

new instrument, it is instructive to briefly consider

the approach taken toward its use. The following

excerpt from the Energy Research and Development Administration (ERDA) Federal Assistance

Manual emphasizes the central role of negotiation in arriving at a mutual understanding of the

roles and responsibilities of the parties to a

cooperative agreement:

. . . . under a cooperative agreement

it is the partner/joint venture relationship

itself which in each case is the subject of negotiation. Rather than having a host of nonnegotiable terms and conditions, the rights

of the parties are the subject of negotiation,

The object of the negotiation of a cooperative agreement is to establish a “business

agreement” which carefully defines the performance responsibilities of the parties, and

describes the proper allocation of rights appropriate to the parties involvement and investment.2

2U.S. Energy Research and Development Administration, Federal Assistance Manual (fifth draft), March

1977, p. 503.

20
Table 1.—A Context for Federal Transactions*

Procurement contract Cooperative agreement Grant

Federal role

Primary

responsibility

Type of Federal

involvement

Right to redirect

or change within scope

“Purchaser”

Federal

Whatever involvement is

necessary, consistent with

Federal procurement

regulations

Unilateral Federal right

to change or redirect

“Partner” or “active

supporter”

Shared

Substantial management or

technical involvement during

performance on specific decisions, substanrds, provision

of guidance or technical

assistance, collaboration

Recipient right to change

or redirect, subject to

“Patron” or “passive

supporter”

Recipient

Federal delegation or

devolvement of decisions

and approvals

Recipient right to change

or redirect

Federal advice, assistance, persuasion, or concurrence

● Modified version of table in: Robert D. Newton, “Contracting Under Grants: The Need to Define the Federal Role,” Public

Contract Law Journa/ 9:1 (June 1977), pp. 35-44.

As in a joint venture between two private parties, the whole range of factors affecting the venture and its outcome are the subject of negotiation. These include performance responsibilities,

cost-sharing and cost recoupment, data and patent rights, termination rights and procedures,

cost-accounting, subcontracting, and liability and

indemnification. Although cost-sharing is a common feature of cooperative agreements, as it is

with grants, it should be noted that the criteria

established by the Act for the use of these instruments does not require cost-sharing.

Much attention has been given to the question

of patent rights for the products of Governmentsupported R&D, and there is as yet no uniform,

Government-wide patent policy, The approach

reflected here is to treat patent rights merely as

one among many items to be negotiated between

an agency and a non-Federal party. Such flexibility is consistent with the fact that the public

benefits from the support of R&D come only

from the widespread deployment of the products

of that R&D in the civil sector. Since experience

clearly indicates that there is no assurance of

realizing such benefits from Federal support of

R&D, it is not apparent that the attention given to

patents is fully warranted. In part, this attention

may derive from the focus on utilizing federally

supported R&D, as opposed to fostering technological innovation in the civil sector. In the former

perspective, the R&D is perceived as something

of public value. In the latter perspective, public

benefits are perceived as deriving from the widespread deployment of socially beneficial technologies, and Federal ownership rights are no more

important than a number of other issues to be negotiated in seeking an accommodation of public

and private interests. However, all agencies do

not have the statutory latitude to deal with patent

rights in this manner. The explicit focus on

Federal assistance established by the Grant and

Cooperative Agreement Act may provide an opportunity for Congress to reconsider this question

in the light of assistance objectives.

Flexibility in negotiating such matters as costsharing and data and patent rights presupposes a

clear understanding on the part of an executive

agency of its objectives and priorities. It further

presupposes an understanding of the risks and

rewards for the non-Federal parties. Such factors

provide the necessary context for an agency to

negotiate the terms of a joint-venture relationship.

In testimony before Congress on this legislation, the Department of Health, Education, and

Welfare objected that the cooperative agreement

is unnecessary since any degree of Federal agency involvement in an assistance relationship

could be assured simply by adding the necessary

provisions onto a grant.3 However, it should be

3Hon. John R. Ottina, in Hearings before the Ad

Hoc Subcommittee on Federal procurement and the

Subcommittee on Intergovernmental Relations of the

Committee on Government Operations, U.S. Senate,

on S.3514, Federal Grant and Cooperative Agreement Act of 1974, 93d Congress, U.S. Government

Printing Office, Washington, D. C., 1974, p. 64.

21
emphasized that the principal motivation in establishing the Government-wide authority to use

cooperative agreements is not some unique

property inherent in this legal instrument as opposed to a grant or contract. Rather, the Procurement Commission believed that assistance relationships involving substantial agency involvement constituted an operationally significant class

of relationships which should be distinguished by

a separate legal instrument. It was felt that formally recognizing this class of relationships would

protect the integrity of the procurement contract,

on the one hand, and the traditional grant, on

the other. Both instruments, especially the grant,

were being undermined by their use in inappropriate circumstances.

Coordinating the activities of the various institutions that need to be involved in technological innovation is likely to provide much of the

basis for the substantial Federal involvement that

characterizes the cooperative agreement. Where

these institutional linkages are already in place,

and there is a tradition of drawing upon R&D to

better meet user needs, technological innovation

proceeds without direct Federal support or stimulation, so long as the necessary incentives are

not substantially altered. Such institutional environments already draw effectively upon the science and technology knowledge base. In these

cases, the Federal Government can ensure the

satisfaction of unmet civil sector needs through

directing adequate resources to the enrichment

and expansion of that knowledge base. However, in the absence of the necessary linkages

between users, suppliers, and R&D performers,

technological innovation in the civil sector cannot

proceed.

This situation is fundamentally different than in

procurement relationships. The Federal Government has very effectively utilized procurement

relationships to draw upon a wide range of R&D

performing institutions —Government-owned,

contractor-operated laboratories; universities;

nonprofit institutions; and commercial firms.

However, fostering technological innovation requires more than matching technological opportunities to user needs. It also requires the commitment of resources. Without engaging those

non-Federal parties who have the incentive and

the resources necessary for making technological

change actually happen, there is no purposeful

fostering of such change. Thus, R&D-performing

institutions must be effectively linked to those institutions that actually produce and deliver goods

and services, whether in the public or private sector, if the assistance of innovation is to be effective. Forging the necessary linkages where they

do not exist is likely to require substantial involvement on the part of executive agencies. A hypothetical example of such involvement, to aggregate a local government market, is presented in

appendix B.

OMB Study

The effectiveness of the Grant and Cooperative Agreement Act in stimulating technological

innovation depends entirely on how well it is implemented. Consequently, the OMB study of

Federal assistance is of central importance.

Purposes of the study are to develop a better

understanding of alternative means of implementing Federal assistance programs and determine the feasibility of developing a comprehensive system of guidance for such programs. To

the extent practicable, the study is to involve

representatives of the executive agencies, the

Congress, the General Accounting Office, State

and local governments, other recipients, and interested members of the public.

The Procurement Commission already has offered a number of suggestions on how this study

might proceed, as a means of improving the

management of Federal assistance. The Commission proposed focusing attention on generalizing management methods applicable to whole

categories of assistance programs. 4 This proposed focus contrasts with the current focus on

achieving the objectives of hundreds of individual

programs. The Commission believed such generalizations would contribute not only to greater

simplicity and consistency in the administration of

Federal assistance, but to greater program effectiveness as well. In developing such generaliza4

Report of Commission on Government Procurement, op. cit., Vol. 3, Part F, pp. 168-171.

22
tions, the Commission recommended considering the whole range of program inputs which determine or influence program outputs. These inputs include both formal and informal interactions between Federal agencies and non-Federal

parties before, during, and after the activity

assisted. This empirical approach would reflect

not only the state of current practice, but indicate

opportunities for improvement as well.

Although the approach of the present report

has been primarily at the conceptual, rather than

the descriptive level, it is also aimed at defining

opportunities for improvements in current practice. The following issues are important to consider

1.

2.

3.

in the OMB study:

Program Categories. -In civilianoriented R&D programs, it is important to

distinguish between categories of programs

aimed primarily at generating new knowledge, on the one hand, and fostering technological innovation, on the other. Distinguishing the latter as a separate category

would focus attention on the important differences between innovation goals and

R&D goals. It also would focus attention on

the administrative practices most effective in

achieving innovation goals.

Non-Federal Involvement. -To help ensure that the innovation process, once initiated, continues beyond the stages of

Federal support, non-Federal users, suppliers, and other interested parties should

be involved in the development of a programmatic strategy. Guidelines for their effective involvement need to be developed

to ensure that information is developed

about risks, costs, markets, and the capacity

and incentive of non-Federal participants to

carry through with the innovation process to

the point where widespread public benefits

ensue.

Alternative Approaches. -The involvement of non-Federal parties also helps to

ensure that alternative approaches are considered in defining a basis for effective

Federal/non-Federal cooperation in achieving a common objective. Thus, for example, if the principal barrier to bringing about /

4.

a desired innovation is perceived by nonFederal decisionmakers as being nontechnical in nature, Federal support for developing the technology would generally be ineffective in stimulating the desired innovation.

If the nontechnical barrier were removed,

Federal support for developing the technology might become unnecessary. The point

is that the full range of alternative approaches toward attaining a desired innovation are far more likely to be identified and

adequately assessed with non-Federal participation.

The formal methods used for evaluating

alternative approaches in major systems acquisitions provide a provocative analogy in

this regards Obviously, any formal methods for evaluating alternative approaches

toward meeting assistance objectives would

have to be specifically developed to meet

the unique needs of cooperative Federal/

non-Federal efforts. Nonetheless, their consideration emphasizes the Federal responsibility in managing a strategic approach for

making technological change actually happen.

Competitive Assistance Awards. -The

need for a strategic approach also is apparent in considering competitive assistance

awards to commercial firms along the lines

discussed in the previous section. Both

DOE and the National Science Foundation

have developed procedures for making

assistance awards on a competitive basis

through program opportunity notices, program research and development announcements, and program solicitations.6

These methods are suitable for selecting

among alternative proposals on the basis of

their scientific or technical merit. However,

for fostering the adoption and widespread

5

Report OJ Commission on Government Procurement, op. cit., Vol. 2, Part C.

6Energy Research and Development Administration, Federal Assistance Manual (sixth draft), April

1977, Sections 211 and 301; National Science Foundation, Grant Policy Manual, Section 202, FR 42:20,

Januarv 1977.

23
5.

diffusion of a new technology, the use of

such methods presumes that Federal officials possess the knowledge of market factors that govern a technology’s rate of adoption and diffusion. Since this generally

would not be the case, there is a need to

develop procedures for making competitive

assistance awards in which non-Federal

parties who do possess this knowledge

would be involved in setting the terms for

the awards. There is an obvious need for

executive agencies to assure that the terms

for such openly competitive awards be set in

a public manner with all important

stakeholders represented. The point to be 6. emphasized here is that it would be easier to

strike an adequate balance between equity

and effectiveness if such awards were an integral part of a recognized, well-articulated

strategy for achieving a desired objective.

Negotiating Cooperative Agreements.–The guidelines established for

negotiating cooperative agreements will set

the framework within which broad public interests and the particular interests of nonFederal partners in a cooperative agreement can be accommodated. Negotiating

prerequisites for executive agencies are: 1)

a clear understanding of public policy objectives; 2) the steps necessary to attain those

objectives; 3) the risks and awards involved

for the non-Federal party; and 4) how a

particular transaction fits into the larger programmatic strategy. Within this context, the

need for flexibility in negotiating such matters as cost-sharing and data and patent

rights should be carefully assessed.

Personnel Policy. -Effective implementation of the Grant and Cooperative Agreement Act depends heavily on the capabilities and attitudes of Federal personnel. It is

therefore essential to have adequate incentives for Federal personnel to become effectively engaged in cooperative efforts with

non-Federal parties t o stimulate

technological innovation.

24
.
Chapter IV

Implications for Congressional Oversight

The Grant and Cooperative Agreement Act

places Federal support of civil sector R&D explicitly within the larger context of Federal

assistance. The effectiveness of this R&D in producing public benefits is viewed therefore from

the perspective of Federal/non-Federal relationships. From this perspective, effectiveness and

public accountability are two closely related

issues. Accountability is frequently interpreted as

exercising control over the expenditure of public

funds. In a larger sense, however, accountability

is being answerable to society for its public investments. Assuring the effectiveness of those investments in producing the intended public benefits, therefore, becomes an essential element of

accountability. As previously noted, the Grant

and Cooperative Agreement Act expresses no

policy preference as to whether there should be

more or less Federal involvement or control in

assistance relationships. Rather, it establishes a

framework of relationships that require explicit

delineation of the Federal and non-Federal roles

and responsibilities most effective for achieving

public policy objectives. It is at the level of choosing among alternative Federal and non-Federal

roles and responsibilities that effective management control of Federal assistance is exercised.

This conception of accountability and effective

management control is essential for Federal efforts to foster technological innovation. The central fact to bear in mind in fostering innovation is

that successful innovation requires the commitment of resources by those non-Federal parties

involved in the production and delivery of goods

and services, whether in the public or private sectors.

Only to the extent that Federal agencies are

successful in linking the objectives of public policy

to the willingness of non-Federal parties to

undertake risks and commit resources can they

be successful in bringing about technological innovation. Thus, effective management control is

essential at the level of choosing among the alternative means of providing assistance that might

lead to this objective. Obviously, individual transactions also must be managed in a manner appropriate to the character of the relationship.

However, it is at the level of choosing among

alternative roles and responsibilities that the

Grant and Cooperative Agreement Act places

the greatest emphasis for attaining the objectives

of Federal assistance.

This stress upon choosing among alternatives

is especially appropriate for assisting technological innovation. Innovation is an inherently

uncertain and high-risk venture, so failure often is

inevitable. Therefore, redirecting or terminating a

project is in itself no indication of inadequate

project management. The support of R&D is a

limited policy instrument for achieving social and

economic goals. Failure to achieve a linkage between public policy objectives and the necessary

commitment of resources by non-Federal parties

may indicate a need for other policy measures,

rather than inadequate mar agement by executive agencies.

Congressional Guidelines

The assistance perspective and framework of

relationships established by the Grant and

Cooperative Agreement Act could be very helpful in evaluating the effectiveness of Federal efforts to stimulate technological change in the civil

sector. The following questions are designed to

assist the Congress in overseeing these Federal

efforts:

1. Is the distinction clearly drawn between: (1) generating new knowledge

to expand the range of technological

options, and (2) fostering specific

technological innovations’?

27
In the former case, R&D goals are appropriate; in the latter case, innovation goals are

appropriate. A distinguishing feature of innovation goals is that their attainment lies beyond the

limited period of Federal support and involvement. Thus, executive agencies must develop effective program strategies which engage those

non-Federal parties that have the capacity and

incentive to actually deliver the goods and services from which public benefits derive. Otherwise, the realization of public benefits is simply

left to chance.

As previously discussed, in policy sectors

where there is a tradition of using the results of

R&D and the necessary institutional linkages are

in place and functioning, the Federal Government can effectively satisfy unmet civil sector

needs through expanding the range of technological options. Where such linkages are inadequate, however, expanding the range of technological options is unlikely to lead to the adoption

and use of new technology without further efforts

to foster specific innovations. It is therefore

essential that executive agencies correctly

analyze the institutional environments they encounter in each particular circumstance and

adopt goals appropriate to each situation.

2. Are the Federal and non-Federal roles

and responsibilities appropriate to

assistance relationships reflected in

the use of alternative legal instruments?

Assistance relationships imply a cooperative

effort between the Federal Government and nonFederal parties in achieving a common objective.

The cooperative nature of assistance relationships is especially important in achieving innovation goals, since the attainment of these goals lies

beyond the limited period of Federal involvement

and support. Thus, in implementing a cooperative assistance perspective, the retention of the

same measure of Federal control as in a procurement contract is likely to be the exception rather

than the rule. The introduction of the cooperative

agreement on a Government-wide basis provides

a means for sharing responsibility with nonFederal parties while retaining the degree of

Federal involvement deemed necessary to

achieve public policy objectives.

The relative proportion of assistance relationships handled through contracts, cooperative

agreements, and grants readily reveals the

overall extent of an executive agency’s control or

involvement. Thus, the framework of assistance

relationships reveals perceptions at the operating

program level as to what level of control or involvement is most effective for attaining mission

objectives. The framework of assistance relationships, therefore, offers the opportunity to require

of executive agencies explicit rationales as to how

a particular level of control or involvement is

related to their mission.

One of the purposes of the Grant and

Cooperative Agreement Act is to help eliminate

unnecessary administrative requirements of

recipients of Federal awards through clarifying

the operational roles and responsibilities of both

executive agencies and non-Federal recipients.

The establishment of a framework of Federal/non-Federal relationships facilitates congressional shaping of policy on the extent of Federal

involvement or control in the assistance of nonFederal activities, rather than such policy being

shaped, as it were by default, through the promulgation of unnecessary rules and regulations.

3. Are program strategies for achieving

innovation goals systematically developed?

As previously emphasized, technological innovation requires the commitment of resources

and the acceptance of risk by non-Federal parties. Therefore, stimulation of innovation should

be oriented toward engaging those non-Federal

parties, whether in the public or private sector,

who have the capacity and incentive to actually

produce and deliver the desired goods and services. Developing and assessing alternative

strategies for accomplishing this goal requires the

involvement of interested non-Federal parties

who understand the conditions for successful innovation in a particular policy sector.

Such program strategies provide the necessary

context for making informed choices among

alternative legal instruments in individual transactions. Such strategies also provide the context for

making assistance awards on an openly competitive basis. The key point is that an agency mission to stimulate socially desirable innovations in

28
a particular

to develop

lead to that

policy sector implies the responsibility

and manage program strategies that

goal.

Such strategies are pertinent for assessing the

causes of failure when it occurs. As already

noted, innovation is an inherently uncertain venture, and failure often is inevitable. However, if

an agency has exhibited a pattern of adequate

management, and has attempted to engage the

appropriate non-Federal parties, then failure may

simply indicate the limitations of R&D as a policy

instrument for achieving a particular objective.

The emphasis upon choosing among alternative

roles and responsibilities and exercising management control at a strategic level offers a means of

reconciling the demands of accountability with

the inherent risk of assisting innovation.

4. Is the potential of a uniform

Government-wide framework for systematically learning which program

inputs produce the desired program

outputs being fully exploited by executive agencies?

Congress seeks to ensure the integrity of the

management process in executive agencies, so

that set policies can be effectively implemented.

In this regard, the establishment of a uniform

framework for assistance relationships would

greatly facilitate more effective project and program evaluation. Moreover, a Government-wide

framework makes possible meaningful comparisons between different agencies. If the OMB

study mentioned earlier is successful in developing more adequate administrative practices for

assisting technological innovation, the potential

for systematically learning on a Governmentwide, institutional basis what works and what

does not could be enhanced even further. Thus,

if the opportunity for improving program management is fully exploited, an understanding of

which program inputs produce the desired outputs could be systematically acquired.

5. Are the limitations, as well as the opportunities of R&D as a policy tool for

meeting social and economic needs

being fully reflected in Federal

assistance of innovation?

In seeking reauthorizations and annual appropriations for their programs, it is natural that

executive agencies emphasize the opportunities

their programs offer for dealing with important

national problems. However, the limitations of

R&D as a policy instrument also provide important information to Congress in the ongoing formulation and reformulation of national policy.

The mere matching of technological opportunities and user needs reveals little in this regard.

However, efforts designed to lead to the commitment of the non-Federal resources necessary for

technological change should reveal the extent to

which such commitments can be linked to public

policy objectives. Where such a linkage appears

infeasible, further policy measures may be required if the objective is to be attained.

● ● ● ●

The Grant and Cooperative Agreement Act

clarifies the basis for relationships between the

Federal Government and non-Federal parties in

the support and stimulation of technological

change in the civil sector. If the provisions of the

Act are effectively implemented, the R&D system sustained by the Federal Government for the

purpose of meeting civil sector needs will be

much more explicitly oriented toward meeting

those needs than heretofore. This R&D system

should therefore become more responsive to the

range of non-Federal parties and institutions it is

intended to serve. Such responsiveness should

lead to more effective exploitation of opportunities for meeting social and economic needs

through R&D—while recognizing 1) the limitations of this policy instrument and 2) the need for

its effective integration with other policy instruments in meeting public policy objectives.

29
Appendixes
Appendix A

Text of Federal Grant and

Cooperative Agreement Act of 1977

PUBLIC 1.AW 95-224—FEB. 3, 1978 92 STAT. 3

Public Law 95-224

95th Congress

An Act

Feb. 3, 1978

41 Usc 501.

(1) tl,cre is a need to distinguish l’rtl~rul ussisttince relttionII Ients w-hirll rc}ect such reltttlonships;

(~) unc(’r~uillty M t? thr nwning of such terit~s IM ‘yontrnct”,

“~rant”, :lJl~ “coopcra.tlve agreement” and the relationships thuy

reftect ca IIses operat ionnl inconsistencies, con ftlsion, inefhciency>

ilIl(lwwt c for recipients of awards ns wel 1 as for IJxecilt i l-c II ~~rn -

cies; and

(3) the Con]mission on Government I’rocurcment has floclrmented t Iwse fil)dings and concluded that a retiuct ion of the existing inconsistencies, ronfusion, inetlkienvy, nml waste is feasible

and necessary through legislative action.

(b) The pIIIqmCS of this Act are-

(1) to cllarnctcrizc tllc relationship lwtwcen the Fcflernl Government WI(I contractors, State and local governments, and ot]]er

recipients in the acquisition of property aml servires nnd in tl~e

furnishing of assistance by the Federal Government so as to promote a. better understanding of Federal spending and hell) el]l~~i-

]mte linneccssnry adnlinistrative requirements on recipients of

[re(lcral awards;

(Q) t. ~~sta~l]is]l (lovet’r~llic]~t-wide critrriz forselection of appropriate legal instrunicnts to nchievc uniforn)ity in the usc lj~~ tl]c

[~xm:ut ivc ftgcncirs of sIIch instrunlentsl n elm r dPfin it ion of tlw

rel:lt ionsl]ips tl)e

{

reflect, and a better un(lerstnn(ling of tlw

I“cs])ol)sil)illties o the pm-tics;

(3) to promote increased discipline in tile sektion MINI IISe of

types of contract, grmnt ngreement, and cooperative agrwments

nnd to maximize competition in the award of contrncts an(l

encourage cornpetit ionj where deemed ap ~ropriate, in the nwnr(l

of grants Nnd cooperntlve agreements.; an J

(4) to require n stu(ly of the relationship between the Federal

Governrnent and gmntees nnd other recipients in Federal assistance programs and tho feasibility of developing a comprehensive

system of guideline for the use of grant and cooperative agreements, nnd other forms of Federal assistance in cnrrying out such

programs.

33
92 STAT. 4

.

41 USC 502.

41 USC 503.

41 USC 504.

Transfers

PUBLIC LAW 95-224-FEB. 3, 1978

DEFINITIONS

SEC. 3. As used in this Act, the term—

(1) “State government” means any of the several States of the

United States, the District of Columbia, the Commonwealth of

Rim-to Rico, any tcrritory or possession of the United States any

agency or instrumentality of a State, and any multi-State,

regiouol, or interstate entity which has governmental functions;

(2) “local government” means any unit of government within

a state, a county, mnnieipality, city, town, tm~’n+ip~ local public

a~jthority, special district, intra.stt-tte distric$ councd of govmmnlcnt+ slmnsor gro~i~ representative organumtion, other interstate gofwrnment cnt]tyj or any other instrumentality of a local

government;

(3) “other recipient” means any person or recipient other than

a State or Iocnl government who is authorized to receive Federal

assistance or rocurement contracts and includes any charitable

or edncat,ionaf institution c

(4) %xccutive ngency?’ menns nny executive department as

dcfinwl in section 101 of title 5, United States Code, a military

department as clefincd in section 102 of title 5, United States Code,

an inde endent establishment as.defined in section 104 of title 5

United 6~ tntes Cmle (except that it shall not inclnde the Genera [

Accounting OtTice), a wholly owned Government corporation;

and

(5) “grant or cooperative agreement” does not include any

agreement under which only direct Fcde.ral cash as.sistmwe

to in(liviflumls, a subsidy, a loan, a loan guarmtee, or insurance is

provided.

VJ6E OF C~NTRACTS

SEC. 4. Each executive agency shall use a ty e of procurement contract ns the le@l instrument reflecting a re ationship between the I’

Federal Government and a State or local government or other

recipicnt—

(1) whenever the principnl purpose of the instrument is the

acquisition, by purchase, lease, or barter, of roperty or services

for the direct benefit or use of the Federal overnment; or 8

(2) whenever an executive agency determines in a specific

instance that the use of a type of procurement contract is

appropriate.

USE OF GRANT AOREEM~NTS

SEC. 5. Each executive a~ncy shall use a type of grant agrecment as

the legal instrument reflecting a relationship between the Federal Government and a State or local government or other recipient whenever—

(1) the principal purpose of the relationship IS the transfer of

money, property, services, or anything of vaf ue to the State or

local government or other recipient in order to accom Iish a ublic purpose of support or stimulation authorized [y Fe&nl

statute, rather than acquisition, by purchase, lease, or barter, of

property or services for the direct benefit or use of the Federal

Government; and

(2) no substantial involvement is anticipated between the

executive agency, acting for the Federal Government, and the

State or local government or other recipient during performance

of the contemplated activity.

34
PUBLIC LAW 95-224-FEB. 3, 1978

USE OF COOPERATIVE AGREEMENTS

SEC. ~. Each execlltive agency shall use a type of cooperntivc agreement as the legal instrument reflecting a relationship between the Federal Govmmm&t and a State or local government or other recipient

whenever-

(1) the principal purpose of thr relationship is the transfer of

monr.y, proprrty, services, or ttnything of value to the State or

local gov~rnment or other recipient to accomplish a public pllrpose of support or stimulation allthorizwl hy Federal statlltc,

rnther than acqllisition, by purchase, lwuw, or barter, of property

or s~rviws for the direct benefit or usc of thp Fwlcrn] Go\”crnmrnt; and

(2) sllhstnl]tinl involvement k ~ntirip~to~ betwwm the exerll-

[ i~.c ngcnc,v, net ing for the Fwl~rnl (%n”ernnwnt, and the Stnte or

lmml government or other r~cipicnt {lllring perfornmnw of thp

contwt]platwi nctivity.

,\ UT110R1ZAT10Nf3

SEC. 7. (a) Notwithstanding any other provision of law, ettch executive ngcney nut horizml !)v law to enter into contracts, grantor coopernt ive ngrcements, or similar arrangements is authorized and directed to

enter into nnd use ~yp~s of contracts, grant agreements, or cooperative

ngrocments ns requlrcd by this Act.

(h) Tho authority to rnnke contracts, grants, and cooperative ngrocments for the conduct of basic or applied scientific research nt nm~-

proftt institutions of higher wlucatim or at nonprofit orgnnizntions

whose l)rin]ary purposp is the conduct of scientific resenrch shall

incl~lde (lism”e~ionary ttuthorit.v, when it is deemed by the hend of tho

exccuti~o agency toobe ~n furtherance? of-the objectives of the agency,

to vest ]n such Instltutmns or orgnnlzatlons, without further obligation to the Government, or on such other terms find conditions as

demwd appropriate, title to equipment or otlm tangible personnl

property purchased with such funds.

STL”I)l” OF FEDERA1/ ASSISTAN(”I? I’RIMIRAMS

Sin’. 8. Thp Director of the CMce of h[anagrmertt an(l Illl(lgct, in

moperrtt ion with the rxeclltivc ngencim , shrill ~ln~lertt-tke R stll(l~’. to

(l(~\’eIop R better ~ln(lerstanding of nlternal ive nwans of in]plemmt Ing

l“edcrttl nssistttnce I)rogrmiw, nnd to determine tlw fwwibilit y of dcvvloping a (’(}l~~IJ1=t’llrnsil’e system of guidance for Federd assistmw

progran]s. Such study sM1 include a thorough consideration of the

tindings and l.cco]i~ll]cnllatiolls of the Conm]itxion on Governmen t

l’rocurelllent relating to the feasibility of developing such a system.

‘1’he I)ircctor shall consult with and to the extent practicable, invol~e

rcpresentatitrcs of the executi}’e agencies, the Congress, tl~e (kwcrnl

~lcco~lntin~r (_) ffice, and State nnd local gotrcrnl) wnts, other rrc i p imts

and other interested mcmbcrs of the public. Tlw result of the study

shall be reported to the Comnlittee on Go\x’rnn]vnt Operations of the

1 IOUSC of l{eprcsentnt ives and the Conmlittce on Governmental Affttirs

of the Senate at the earliest practic~ble date, but in no event later than

two years after the date of enactment of this Act. The report on the

study shall include

\)

1 detailed descriptions of the rtlternative moans

of in~plenmt ing Fw eral wsistance programs an(l of the circmstmccs

in wl~ich tlke use of each appears to b most desirable, (2) detailed

92 STAT.

41 USC 505.

Transfers.

Contracts, grant

or cooperative

agreement.

41 USC 506.

Scientific

research.

41 USC 507.

Contents.

Consultation.

Report to

congressional

committees.

35
92 STAT. 6

41 USC 508.

Repeal; effective

date.

41 USC 501 note.

41 USC 509.

Excepted

transactions.

41 USC 501 note.

Expiration date.

PUBLIC LAW 95-224-FEB. 3, 1978

descriptions of the lm.sic characteristics and an outline of slwh ccm~prcIwnsive system of fglidnncc for Feclernl assista.ncr I)rogralils, the (lt~velopnwnt of whicl~ may be deterii]inml frusible, Onti (3) reconlt]wndat ions

concerning arrangements to proceed with the full develo~nwnt of surh

comprrhcmsive system of guidance and for such admln istrative or

statutory cl]nngcs , inclmling changvs in the provisions of swtions 3

through 7 of this Act, rts nmy be dem)wd nppropri:~t~: on tlw lmsis of t he

findings of the st Idy.

(11! I I) E1,l N ES

Sm. 9. ‘1’ho I~ircctor of the (Mwc of Mantqpwnt and J]l@q~t i s

nuthorizw] to issue sup~)lenmntttry inter~)ret:tt ii-e ~11 i(lolines to I)rollmtc

consistent anti t’lTirimt Ilse of contract, grants agrwwwnt, and cooperat ive ngrrenmnts W+ (Icfincd in this Act.

1{ EI’EAT.8 .\ND RAVI N(M3 1’NOVISIONS

SE C. 10. (a) ‘l%e Act entitled “An Act to autlmrizc the expemliture

of funds througl~ grants for support of sc.ient ific research, and for other

[)llrposes”j approvrd f!kptenher 6, 1958 (72 Stnt. 1793; 42 IJ.S.C. 1891

und 1892), is repealed, effective one year after the dnte of ennctnwnt of

this Act.

(b) Nothing in this Act shall be construed to render voidorvoidable

any exist ing contrttct, grant, cooperative agreement, or other contract,

grant, or cooperative a~reemertt entered into up to one year after the

date of ennctment of this .lct.

(c) Nothing in this Act shall re uirc the establishment of a single

relationship bctwwm the Fecleral &overnnmnt and a Stale or local

uov~rnment or ot}~er recipient on a jointly funikxl project, involving

%,nds from more than one program or a~profriation where different

relationships would otherwise be appropriate or diticrcnt components

of the project.

(d) The Director of the office of Management and Budget may

except individual transactions or programs of my executive agwtcy

from the application of the provisions of this Act. This authorit shall

expire onc year aft~r receipt by the Congress of the stdy provi(rWI for

in section 8 of this Act.

Approved February 3, 1978.

LEGISLATIVE HISTORY:

HOUSE REPORT No. 95-481 (Comm. on Government Operations),

SENATE REPORT No. 95-449 accompanying S. 431 (Comm. on Governmental Affairs).

CONGRESSIONAL RECORD:

Vol. 123 (1977): Sept. 27, considered and passed House.

Oct. 1, considered and passed Senate, amended, in lieu of S.

431.

Vol. 124 (1978): Jan. 19, House agreed to Senate amendment.
Introductory Note

The real significance of the Grant and Cooperative Agreement Act for stimulating technological change depends on its impact upon major

problem areas such as energy, transportation,

housing, sewage treatment and so forth. However, any scenario which attempts to deal realistically with one of these major problem areas from

the assistance perspective established by the Act

would constitute a major undertaking in itself.

Furthermore, it would be necessary to delineate

the similarities and differences in the hypothetical

scenario relative to actual past or current efforts.

To avoid these difficulties, a problem of more

modest dimensions that has no significant history

of past efforts to deal with it has been chosen.,

Thus, it is the approach to a problem from the

assistance perspective, rather than the problem

itself, which the scenario presented in this appendix is intended to illustrate.

A Scenario for Innovation

This scenario for innovation illustrates how a

Federal agency has worked to foster a quiet revolution in the administration of bonded indebtedness by county and municipal governments. The

description is hypothetical, although the problem

providing the driving force for the innovation is

not. The purpose of the scenario is to provide a

context in which the several types of transactions

between Federal and non-Federal entities, introduced in chapter 111 of this report, may be better understood. Five major concerns are addressed here to develop the needed context. They

are:

Appendix B

A Scenario for Innovation

Prepared by James P. Kottenstette

Denver Research Institute, University of Denver

1.

2.

3.

4.

5.

A description of a significant civil sector

problem;

How innovation goals were established to

solve the problem;

Alternative pathways to achieving the innovation goals;

The transactions undertaken to foster the

innovation; and

Outcomes and evaluation.

The Problem

The Urban Observatory Network, originally

established by the Department of Housing and

Urban Development (HUD) approximately 10

years ago, presently involves six organizations

operating in cities with populations of 500,000 or

more. These observatories bring specialized research capability to address urban problems—

sometimes working independently; sometimes

through the coordinated efforts of the network.

The Denver Urban Observatory, along with its

several planning functions, operates a federally

funded Public Technology program that brings

the problem-solving resources of organizations in

the metropolitan area into contact with city problems. The cost of bond- and coupon-accounting

was one such problem, examined and reexamined over a 2-year period.

In the City and County of Denver, for example, a staff of six persons, excluding supervisory

personnel, verify and catalog some 30,000 interest coupons and 400 redeemed bonds each

month. With inflation figured in, the personnel

costs are estimated at $2 million over the next 20

years. To further aggravate the Denver situation,

the city charter requires that the physical record

of all coupons honored be maintained indefi37
nitely —because any interest or bond redemption

claim is payable after maturity, regardless of

when the claim is made. And all such claims must

be verified. The value of storage space for retired

coupons and bonds is estimated at $400,000

over the 20-year period; a similar dollar estimate

was made for the cost of work space required for

the six persons.

In the face of ever-expanding indebtedness

(the present long-term obligations are more than

$300 million ), Denver’s Director of Finance was

concerned about how to reduce the cost of bondand coupon-accounting. The Denver Urban Observatory was examining technical, legal, and financing issues involved in a potential solution to

this problem, when a Department of the Treasury/Securities Exchange Commission study

team examined the Denver situation as part of a

national survey related to the same problem.

One of the consequences of recent Department of Treasury involvement in avoiding default

on New York City’s municipal bonds was broad

exposure to the accounting and control practices

of non-Federal entities during the retirement of

bonded indebtedness. This exposure made it apparent that State and local governments often

were incurring large and continuing expense

simply by administering the payout of the interest

and redemption of general obligation bonds and

anticipation warrants.

The Treasury found that the finance department of most large cities in the United States

maintains a separate clerical staff to account for

redemptions and to verify and catalog the stream

of coupons representing interest payments to the

owners of “bearer bonds. ” This did not seem like

an important city problem until it was realized

that a $20 million bond issue, with interest

payments due every 6 months for 20 years,

would force a city to account for some 160,000

to 900,000 coupons, depending on the bond

denominations. The scale of the problem began

to emerge when it was considered that a

medium-sized city might have $200 million in

debt-financing being serviced at any one time,

and that nationwide, the cities have some $60

billion in long-term debt being serviced, using

essentially the same labor intensive methods of

50 years ago.

The Treasury’s Office of the Comptroller

sought the advice of the Securities and Exchange

Commission (SEC) concerning its understanding

of this situation and its knowledge of past initiatives to help reduce the cost of servicing State

and local indebtedness. Although these debt obligation issues are excluded from regulation by the

SEC, it was aware of past efforts by local governments to improve on this system. The SEC also

was aware of the fundamental stumbling block

that frustrated these past efforts. The investment

community generally asserts that the vitality of

the local debt-financing system lies in the nature

of “bearer bonds:” that is, bearer bonds are

highly negotiable securities with interest payable

to the person having possession of the bonds.

This means that there are no transfer fees or

registration necessary when such bonds exchange hands. It is this feature that makes the

bonds attractive to many investors, as well as to

the diverse governmental units issuing the bonds;

it is precisely this feature that has made it impossible to introduce computer technology to aid

in the management and control of bond redemption and interest payments. Coupons, for example, are redeemed on demand by the issuing

jurisdiction and/or cooperating banks as the interest becomes due and payable. No one has

discovered a way of simplifying the process

without some form of registration for the bonds, a

step that would change the basic character of

bearer bonds.

The interaction between the Treasury and

SEC led to the competitive award of a jointly

funded study contract to a major accounting firm.

The study was designed to obtain a clear picture

of just how much it costs State and local jurisdictions to service and account for bearer bond payments. The Treasury Department was concerned

because the banking system is so intimately involved in the redemption of bonds and in the

payment of interest coupons, as well as in the

provision of accounting services for certain local

jurisdictions. The SEC was concerned because of

the importance of municipal bonds in capital

markets. In the face of increasing local reliance

on bonded indebtedness as a means of funding

capital improvements (it is growing at the rate of

10 percent per year), the possibility of reducing

the cost of servicing this debt could have impor38
tant long-term advantages to local governments,

particularly in their ability to retire these obligations. The costs of bond- and coupon-accounting

were found to be extremely high.

The study found that about half of the Nation’s

local governments maintain internal staff for

bond- and coupon-accounting (usually as a result

of local charter requirements or State law). The

other half of the governmental units or jurisdictions rely on the services of cooperating and correspondent banks to develop administrative records, in addition to handling the actual cash payments made to bond owners. There are important savings involved in allowing the banking

system to provide the administrative records,

because the coupons and redeemed bonds are

handled only once (by the bank). But there is, of

course, the associated loss of control over the

redemption and interest payouts—a situation not

permitted by the statutes of most large cities and

some States.

While the Denver experience is typical of jurisdictions maintaining systems for bond- and

coupon-accounting, the situation encountered in

the banks providing accounting services to local

governments is similar in many respects. The

coupon redemption system is basically a manual

system that is burdensome to the banks because

of its labor intensity. Consequently, the study

showed, the banking system would welcome any

improvement in handling the coupons that also

would help jurisdictions reduce the cost of internal control. An idea to address the family of constraints was needed.

Establishing Innovation Goals

The Denver Observatory appeared to be well

along in the development of an idea, and exploratory meetings were held by Treasury and

Observatory staff. The idea focused first on the

essential requirements for mechanizing the

handling of coupons after redemption. It was

necessary to unambiguously associate a coupon

with a specific bond, the bond issue of which the

bond is a part, and the date after which the interest payment represented is due and payable.

A code was visualized to accomplish this, not

unlike that now being used on the labels of merchandise at supermarkets. Such a code, if printed

on the back of the bonds and coupons, could be

read with an optical scanner and the data obtained processed by computer if suitable bondand coupon-handling equipment were also

designed.

The question was: Who designs the code and

guarantees that no two bonds would ever have

the same code? Further, if this uniqueness can be

assured, how could the system be phased into

city finance operations? The Observatory staff

envisioned that a new institution would have to

be created, perhaps along the lines of the title

guarantee company found in the real estate field.

The company would provide the codes used in

new bond issues, perform the accounting functions for a large group of cities on a subscription

basis, and guarantee the cities that the system

would perform over the life of a bond issue.

Treasury’s Office of the Comptroller began to

pursue the idea, not fully recognizing that its role

should be one of a catalyst for institutional

development and not that of the technologist.

Certainly technology was needed, and its development for this application could be undertaken

consistent with Treasury R&D mandates. The

basic question regarding institutional development was, how does the Treasury help put some

group into the bond guarantee business no matter how indirectly and not be open to criticism—

even though public benefits (i.e, reduced costs)

must be present for the venture to work in the

long run? This was a very clear insight into the inherent tension between assisting in technological

change and the essential questions of equity that

are always present. This issue was considered to

be so serious, however, the whole problem was

put on the “back burner” for almost 1 year.

After almost a year, following the passage of

the Federal Grant and Cooperative Agreement

Act of 1977, the issue was reexamined in light of

the distinction between Federal and non-Federal

use of research results. A new perspective was

gained by examining the reasons the private sector was not already providing this service. While

the idea itself was significant, it also appeared

that the most important single factor was the

need to aggregate a market for the idea. Cities,

for example, have different procedures and traditions that would have to be accommodated; the

39
—

promise of future savings is not necessarily the

only criterion for adopting a technology. For this

reason, the Federal role was determined to be

one of supporting the aggregation of the municipal market through the development of detailed

knowledge of city procedures and requirements,

conducting a thorough demonstration of the concept, and in consultation with the SEC, developing guidelines for coupon coding. These guidelines were considered necessary to ensure that

the coding concept, when used in conjunction

with future municipal and possibly other types of

bond issues, would conform to basic standards

and not upset existing systems.

Even though new equipment was required,

the Comptroller’s Office was satisfied that it

should be assumed 1) the technology resided

within the capability of the manufacturing sector

and 2) this capability could be directed to the

problem through the workings of the marketplace, rather than through direct Federal support

of R&D. Further, it was recognized that the consequences of fostering the introduction of this innovation should include private gains for “bond

guarantee and accounting services” that might

emerge from their initiatives. In fact, such gains

are crucial to the change sought, and the challenge to the Treasury was really one of assuring

equity rather than avoiding private gains.

Alternative Pathways To Achieve

Innovation Goals

With this rationale as a starting place, the

Comptroller’s Office began a series of planning

conferences, bringing together the wide range of

interests in bond- and coupon-accounting to develop a strategy. These interests included the

American Bar Association, representing the law

firms specializing in municipal bond issues, city

finance officers, the National Association of

Security Dealers, and the American Association

of Commercial Banks. The initial meetings dealt

with institutional issues almost exclusively, but

the results were monitored closely by representatives of the electronic data processing trade

media. This monitoring was encouraged as being

essential to future involvement of manufacturing

firms in the demonstration phase of the effort.

The broad outline of the program that

emerged from these planning meetings was as

follows:

1.

2.

3.

4.

A corporation was to be formed by the

directors of the six Urban Observatories

operating in major U.S. cities. The corporation was to be wholly owned by the

Urban Observatory System, a corporation

chartered in the State of California. The

corporation would service only the 48 largest cities and be sold to private interests at

the end of a 10-year operating period, All

Federal monies would be recouped with

the sale. Any excess from the sale would

be divided between the cities that were

charter subscribers to the service.

The corporation was to be profitmaking,

with all unretained earnings divided between the observatories to further support

their basic city planning role.

Each of the observatories was to be given a

$20,000 planning grant to develop a

charter for the corporation and coordinate

with the management consulting firm (see

below), with their respective city administrations, and with the Department of the

Treasury.

A management consulting firm was to be

competitively selected to provide market

and risk analysis, design the services of the

corporation, plan the demonstration

phase, and oversee the equipment specification and evaluation.

The approach to development of the equipment needed to process the coupons and redeemed bonds followed the same pattern of conferences used earlier in the institutional planning

effort. Instead of the typical bidder’s conference

format, however, these conferences focused on

the potential commercial demand for the equipment that would be functionally specified by the

management consulting firm. The reason for this

emphasis was to set the stage for a rather unique

invitation for industry involvement in equipment

development. The equipment manufacturers

were promised the opportunity to participate in

the demonstration phase of the program, if in40
dustry would establish the technical and cost

criteria for competitive selection among the interested firms.

The Department of the Treasury, on a cooperative basis with the new corporation, promised

to place $250,000 in escrow for the purchase

and trial of at least two separate systems for city

coupon- and bond-accounting. It was up to industry itself to decide on the ground rules for

competitive selection of industry participants,

The industrial firms, through the Western

States Electronic Manufacturers Association, offered the following proposal, which subsequently

was adopted:

1.

2.

3.

4.

A date would be set (by industry consensus), at which time all interested firms must

be ready to demonstrate their respective

equipment systems.

The systems would be rated against the

functional specification and participation

awards made on the basis of highest ratings. In the event that many systems qualified functionally, a cost/performance formula would be employed as a second selection criterion.

The rating was to be performed by an independent board involving industry and

city representatives.

An additional $50,000 was to be placed in

escrow to ensure that operating and maintenance expenses incurred by manufacturers with the prototype equipment

would be reimbursed.

. The Department of the Treasury was to pay

the expenses incurred in implementing the

industry proposal.

6. In the event that the code standards were

not promulgated on a timely basis, the

$250,000 would be forfeited to the industrial firms incurring development expenses as a result of the Treasury initiative.

The Transactions

The main reason that the Urban Observatories

were selected as the focal point for the organization of the corporation was to capture their longstanding relationships with the city government.

Further, by working through the observatories, it

was possible to emphasize the profitmaking dimension of institution building and yet have these

profits flow back to the cities—first, in an indirect

manner by supporting the observatories in their

normal functions, and then through the liquidation of the corporation after the 10-year period.

The arrangement ensured that both the observatories and the subscribing cities would have a

“vested interest” in the success of the project.

The initial study by the accounting firm on the

costs to State and local governments of servicing

bearer bond payments was obtained through a

procurement contract. This instrument was used

because the study was primarily to serve the

planning needs of the Federal agencies.

The $20,000 planning grants were chosen as

the mechanism for funding the activities involved

in establishing the corporation because the Department of Treasury had no reason to be directly

involved in the arrangements being made by the

observatories either individually or by the observatory network. The Treasury was interested only in the establishment of the corporation, and

that its charter conformed to the plan.

Subsequently, the Treasury entered into a

cooperative agreement with the corporation, to

(1) financially support the start-up operations, (2)

ensure that the demonstration phase was properly completed, and (3) discharge its responsibility

for the development of code standards together

with SEC. The latter two responsibilities required

Treasury involvement during performance of the

assistance activity.

The management consulting firm was awarded a procurement contract on a competitive basis

that equally weighted technical competence and

cost factors. A procurement contract was the instrument chosen for the transaction, despite the

fact that the purpose was primarily assistance.

The Comptroller’s Office was, in effect, procuring

the services of the consulting firm for use by the

new corporation. Furthermore, the Comptroller’s

Office had to ensure that the consulting firm

would be responsive to its needs, particularly in

the demonstration phase and in developing code

standards. Making the award on a competitive

basis also was important; the winning firm would
be in a unique position to help in the introduction

of the concept into bank operations and other

State and local settings. Thus the use of the procurement process was appropriate in this specific

instance.

Finally, the Treasury and the corporation

entered into a cooperative agreement with the

Western States Electronic Manufacturers Association to implement the industrial proposal. This

joint activity led to the selection of two participating manufacturers who subsequently contracted with the corpoation to provide and maintain equipment. Similarly, the corporation

entered into contracts with the charter member

cities to provide bond and accounting services for

new bond issues.

The rest is history. The corporation began

working with 16 cities on a backup basis—that is,

duplicating the accounting work routinely performed on new bond issues employing the code

system for a 3-year period. By the time this experience was gained and the system adopted as

the primary accounting method for all new bond

issues, 21 other cities also had subscribed to the

service. In addition to the two firms participating

in the demonstration, three other firms have

established bond-accounting systems in the commercial banking field, and 13 firms have been

formed to provide bond-accounting services to

States, local governments, and corporations on a

national and regional basis.

The Treasury estimates that the corporation

will be worth $4 million to $6 million when it is liquidated in 6 years. This net worth will easily

provide funds for recovering the $900,000 (plus

interest) of public money involved. The fact that

other firms, with private funds, have entered the

bond and accounting field, and that the Treasury

Department is getting out of the business provides the most useful form of project evaluation.

Comment

In preparing this scenario for innovation, probably the most difficult challenge was to find a

plausible basis for Federal involvement in the

solution of bond- and coupon-accounting problems. It is not easy to place a State or local problem on the R&D agenda of a Federal agency. Attempts to solve such problems frequently are

sidetracked as agencies perform their regular

duties. This situation may be the fundamental

limitation in the effectiveness of the Federal R&D

policy tool—at least in terms of R&D expenditures used to stimulate desired technological

change at the State and local levels.

o

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