Concerns about the procurement of currency paper resulted in Congress including in the 1997 Emergency Supplemental Appropriations Act a requirement that we complete a comprehensive analysis of the “optimum circumstances for government procurement of distinctive currency paper” and report our findings to the House and Senate Committees on Appropriations. In the conference report accompanying the appropriations bill, the Conference Committee expressed concern over the fact that the Bureau of Engraving and Printing (BEP) of the Department of the Treasury has bought virtually all of its paper for the nation’s currency from a single supplier for over 100 years. The Conference Committee directed that we report on any limitations on competition in currency paper procurement and possible alternatives to the way BEP has been buying the paper, the fairness and reasonableness of prices paid for the paper, the potential for disruption of the availability of currency paper from BEP’s reliance on a single supplier, and other matters. In June 1997, the Chairman of the House Government Reform and Oversight Committee asked that we also report our findings to that Committee because of its interest in federal procurement matters, and Senator Lautenberg requested that we report our findings to his office as well. In September 1997, 16 members of Congress informed us of their interest in our analysis and expressed their opinion that a review of the potential benefits and drawbacks of a single-supplier relationship would be appropriate. The overall objective of our review as stated in the 1997 Emergency Supplemental Appropriations Act was to analyze the “optimum circumstances for government procurement of distinctive currency paper.” However, because that objective was broad and numerous congressional parties were interested in this review, we met with the interested Members’ and committees’ offices to determine the specific issues they wanted addressed as well as approaches to address those issues. Although we identified a number of concerns and issues, they are all covered under the following three objectives: • Have BEP’s efforts to encourage competition for procuring currency paper been effective? • Have prices paid for currency paper been fair and reasonable and has the quality of the paper been ensured? Is there potential for disruption to the U.S. currency paper supply from BEP’s reliance on a single supplier? To address these objectives, we reviewed federal procurement statutes and regulations and specific laws related to currency paper. We reviewed various indicators of the competitiveness of the currency paper market, such as the number of paper manufacturers who said they were capable of supplying currency paper to BEP, and the factors that make it difficult for them to provide currency paper. We also reviewed BEP studies of the currency paper market and obtained information from other federal agencies, such as the Secret Service and the Department of Defense (DOD). To address the first two objectives, we reviewed BEP’s currency paper procurement files for paper contracts in effect from 1988 to 1997, analyzed how BEP bought currency paper during this period, and compared certain BEP actions with requirements in the FAR and applicable laws. We surveyed 30 domestic and foreign cotton paper manufacturers on their interests in supplying currency paper and factors that prevented them from competing for BEP currency paper contracts, and we surveyed other G-7 nations on how they procured banknote paper. We interviewed numerous officials of BEP, Treasury, the Secret Service, the Federal Reserve, Crane, and other agencies. We also interviewed several of the domestic and foreign cotton paper manufacturers that were included in our survey. To help us analyze the fairness and reasonableness of prices paid by BEP for currency paper, we analyzed how BEP used audits of the single supplier’s costs and proposals in its negotiations and evaluated whether BEP had an appropriate basis for determining the fairness and reasonableness of prices it paid for currency paper over the last 10 years. We toured paper mills of two cotton paper manufacturers, as well as BEP printing facilities in Washington, D.C., and Ft. Worth, TX, to observe how paper was produced and currency was printed. To address the third objective, we interviewed officials at BEP, the Federal Reserve, and Crane; reviewed BEP’s contingency plan for critical materials; and asked other G-7 nations what type of contingency reserves of banknote paper they maintained. We did our work in accordance with generally accepted government auditing standards from July 1997 to August 1998. We requested comments on a draft of this report from the Chairman, Board of Governors of the Federal Reserve System; the Secretary of the Treasury; and the Chief Executive Officer of Crane. We received written comments from BEP’s Acting Director that incorporated comments from the Treasury Department, written comments from Crane, and oral comments from the Federal Reserve. BEP’s and Crane’s comments are reprinted in appendixes VI and VII, respectively. Our summary of agency and Crane’s comments and GAO’s responses are discussed at the end of chapter 5. BEP and Crane also provided technical comments, which have been incorporated as appropriate in the report. A more detailed discussion of our objectives, scope, and methodology is contained in appendix I. The optimum circumstances for the procurement of distinctive currency paper would include an active, competitive market for such paper where a number of responsible sources would compete for BEP’s requirements. However, this is currently not the case because of the unique market for currency paper and some statutory restrictions. After over 100 years of relying on a single source, Treasury and BEP completed studies in 1983 and 1996 on what it would take to encourage competition for procuring currency paper, and BEP recently took steps to encourage competition in matters under its control. However, several paper manufacturers told us that they would compete for BEP paper contracts if additional changes were made, such as allowing foreign-owned companies to compete to supply currency paper and extending the length of contracts to more than 4 years. These changes would require existing statutory limitations to be amended. There are also other options for obtaining competition that are allowed under procurement laws and have been used by other federal agencies. When the government purchases common commercially available goods and services, obtaining competition is relatively easy. However, when the government purchases goods that serve only the government’s needs, competition is less likely to occur. In currency paper procurements, obtaining competition is challenging, partly because there are few cotton paper manufacturers, currency paper is unique to the governments’ needs, and a large investment in capital equipment is required. Factors that inhibited competition were identified in the 1996 Treasury/BEP currency paper study. These factors include (1) the cost of the initial capital investment to build or retrofit a plant to produce currency paper; (2) the short start-up period required to comply with specified paper deliveries; (3) the risks and uncertainties inherent in entering a limited, government-controlled market; and (4) the restriction on acquiring distinctive currency paper from foreign-owned or controlled companies contained in the Conte Amendment. Potential suppliers told BEP that it would take between $20 million and $150 million to build or retrofit the necessary plant and equipment to provide currency paper to BEP; and that because of the risks inherent in entering a limited, government-controlled market, some form of financial assistance from BEP would be necessary. The 1996 study also cited delivery requirements, usually requiring delivery starting at or shortly after contract award, as a significant inhibitor, given that manufacturers said it takes 1 to 2 years to become operational. The 1996 Treasury/BEP study also found that the absence of a guaranteed minimum production commitment sufficient to cover the cost of constructing and equipping a plant was an inhibitor. Potential suppliers told Treasury/BEP they would require a long-term commitment to manufacture a minimum of 40 percent of BEP’s requirements in order to begin production. According to BEP, Treasury currently has a study under way aimed at projecting the future demand for currency. The study is being done by representatives from Treasury, BEP, the Mint, and the Federal Reserve. The study is expected to be done by November 30, 1998. BEP awarded five separate contracts to Crane for currency paper from 1988 to 1997. Two of these contracts, 95-23 and 97-10, were awarded to Crane on a sole-source basis. The other three contracts, 88-205, 91-18, and 93-14, were also awarded to Crane because BEP did not receive any other offers in response to its solicitations. Additionally, in accordance with the Conte Amendment, BEP was precluded from awarding a currency paper contract to foreign-owned or controlled firms. Although some matters affecting competition in the currency paper market are beyond BEP’s control, BEP’s solicitations for currency paper before 1997 did not attempt to encourage competition by using means within its control. As shown in table 2.1, some of BEP’s solicitations contained a 1 or 2 year production period and required potential suppliers to start providing currency paper shortly after contract award. Although offerors can always request that financial assistance be provided, BEP did not offer to provide potential offerors financial assistance for capital equipment in its solicitations. In 1997, BEP made significant changes to its solicitation for currency paper. Solicitation 97-13, issued in May 1997, provided for up to a 4-year contract with multiple award scenarios that allowed competitors to submit an offer on various-sized lots and it also provided up to 24 months for a start-up period, under certain award scenarios. Because of BEP’s concerns about violating the 4-year limit on contracts for manufacturing currency paper, the solicitation provided that any required start-up period would be deducted from the 4-year production period. In addition, solicitation 97-13 also provided that BEP will consider “innovative acquisition and financing arrangements” proposed by offerors.