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STATEMENT BY
JACQUE SIMON
PUBLIC POLICY DIRECTOR
AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES
AFL-CIO

BEFORE THE
SUBCOMMITTEE ON READINESS
HOUSE ARMED SERVICE COMMITTEE
UNITED STATES HOUSE OF REPRESENTATIVES

CONCERNING
OUTSOURCING, PRIVATIZATION AND A-76 ISSUES

MARCH 25, 2003
 

Introduction

On behalf of the American Federation of Government Employees, AFL-CIO, which represents more than 600,000 federal employees, including 200,000 in the Department of Defense (DoD), who serve the American people across the nation and around the world, I thank you, Chairman Hefley for the opportunity to testify on behalf of AFGE today before the House Armed Services Subcommittee on Readiness.  And AFGE always appreciates the opportunity to testify before Ranking Member Ortiz, who takes such great interest in federal employee issues.

Over the last several years, AFGE has strived to reform federal privatization policy and thus promote the interests of warfighters and taxpayers as well as federal employees.  In fact, last year, an amendment offered on the floor to the defense authorization by Senator Edward Kennedy (D-MA), which came within one vote of passing and was strongly supported by AFGE, would have ensured real and equitable public-private competition under an objective, cost-based process for work performed by DoD civilian employees, DoD contractors, as well as at least small fractions of work not yet performed by either workforce.  The Kennedy Amendment would have also ensured greater accountability through the establishment of an inventory to track the cost and size of DoD's contractor workforce. 

AFGE will continue to work with other unions and public interest organizations as well as our Republican and Democratic friends in both chambers of the Congress to enact the significant changes in law necessary to improve the delivery of services for warfighters and reduce expenses for taxpayers, including those called for in the Truthfulness, Responsibility, and Accountability in Contracting (TRAC) Act, which claimed the cosponsorships of 215 House and Senate lawmakers in the 107^th Congress.

Today, however, AFGE will limit our written testimony to six main topics:

1. the Office of Management and Budget's (OMB) privatization quotas,

2. the rewrite of the OMB Circular A-76 privatization process,

3. the threat to use "best value" in DoD's public-private competitions,

4. the threat of the Army's "Third Wave" privatization initiative,

5. the threat to eliminate in-house depots and arsenals, and

6. the threatened introduction of the Service Acquisition Reform Act.

1.      OMB privatization quotas

Although well over one-half of all Congressional lawmakers have emphatically repudiated the essence of the Administration's privatization policy-261 in the House of Representatives and another 48 in the Senate-the infamous OMB privatization quotas are still with us.  We're grateful for the strong support for last year's bipartisan floor amendment to the House Treasury Appropriations Bill to free agencies from the OMB privatization quotas from all House Democrats who voted as well as 52 House Republicans, including Armed Services Committee Chairman Duncan Hunter (R-CA), and several members of the Readiness Subcommittee, including Representatives Walter Jones (R-NC), Robin Hayes (R-NC), Randy Forbes (R-VA), and John McHugh (R-NY). 

However, because of the narrow defeat of an identical amendment in the Senate earlier this year, agencies, regardless of their needs or missions, are being forced by OMB to review for privatization, either with or without public-private competition, at least 15% of the positions listed on agencies' Federal Activities Inventory Reform (FAIR) Act inventories.  According to the November 14, 2002, draft proposal to rewrite the A-76 process, it is ultimately the Administration's goal to review every single position on every single agency's inventory, which works out to at least 850,000 positions.

I would like to make these points about the OMB privatization quotas:

1. The use of the term "competitive sourcing" to describe the OMB privatization quotas betrays either bias or ignorance.  OMB explicitly encourages agencies, including DoD, to give work performed by federal employees to contractors without public-private competitions, either through direct conversions or privatizations.  According to the Administration's FY04 budget proposal, some agencies, including the General Services Administration and the National Aeronautics and Space Administration, are using direct conversions exclusively to hit their OMB privatization quotas.  Other agencies are using direct conversions extensively to hit their OMB privatization quotas.  There is nothing "competitive" about this corporate welfare-style privatization.

The "competitive sourcing" (sic) initiative is not about saving money for the taxpayers; it is about replacing federal employees with contractors and shifting money to the private sector.  The Administration's refusal to help already overwhelmed agencies do a better job of conducting competitions fairly and administering their contracts satisfactorily is highly illustrative of this point.  The threatened shift to a loosey-goosey "best value" competition process in which contractors can submit bids that are less responsive to the terms of the solicitation and more expensive than bids submitted by federal employees, but still win contracts is also illustrative. 

Office of Federal Procurement Policy (OFPP) Administrator Angela Styles, who is responsible for the implementation and enforcement of the OMB privatization quotas, now, according to Government Executive, must "caution against judging the (privatization quotas) program on savings alone."  (Emphasis added.)  According to the March 2003 edition, Ms. Styles insists that threatening to privatize the jobs of 850,000 federal employees, either with competition under a privatization process that is being rewritten so that it becomes more pro-contractor, or without any competition whatsoever, "can have a positive effect on morale, and could even help attract young people to government service."  Defending the indefensible can often require intelligent people to say the most preposterous things.  However, as savings from the "competitive sourcing" (sic) initiative fail to materialize, we can expect other highly subjective, to say the least, and conveniently unquantifiable rationales to be served up for our consumption in the months ahead.

Ms. Styles apparently considers public-private competitions to be intrinsically virtuous, whether or not money is actually saved-but only when the work in question is being performed by federal employees.  While OMB is forcing agencies to review for privatization 850,000 federal employee positions, only a tiny handful of contractor positions will be reviewed for possible insourcing, even though contractors acquire and retain almost all of their contracts without ever having to compete against federal employees. 

The Department of Housing and Urban Development (HUD) is one of only two agencies that will be reviewing work performed by contractors for possible insourcing.  In fact, HUD will get credit towards its privatization quotas by reviewing work performed by contractors in the area of home loan programs.  DoD, however, is not reviewing a single contractor job for insourcing, despite a much larger and more unaccountable contractor workforce.  This dereliction becomes even more difficult to comprehend when we remember that 10 U.S.C. 129a requires DoD "to consider particularly the advantages of converting from one form of personnel (military, civilian, or private contract) to another for the performance of a specified job" and DoD, in the person of Undersecretary of Defense for Acquisition, Technology and Logistics E.C. "Pete" Aldrige, said in 2001, that "we (may) have already contracted out capabilities to the private sector that are essential to our mission."

2. As implemented, the OMB privatization quotas have profoundly ugly class, race, and gender biases, and are systematically encouraging agencies to place target signs on the backs of employees who are lower-ranking, female, and/or members of minority groups. 

For example, in the Department of Veterans Affairs (DVA), it is the employees in building maintenance, food services, and laundries who will be the first targets reviewed for privatization, rather than health care professionals.  In fact, OMB has directed that all agencies aggressively review for privatization the jobs of blue-collar, clerical and maintenance workers.  In the Department of Labor's Employment Standards Administration's Office of Federal Compliance Programs, all but two of the 72 employees categorized as candidates for privatization are GS-9 or lower.  All of the employees categorized as inherently governmental are GS-10 or higher.

DVA managers have publicly expressed concern about the impact of the OMB privatization quotas on the hard-won diversity of the agency's workforce.  According to a DVA manager quoted in Federal Times, "(A)ny significant effort to outsource jobs (in the functions listed above) will have huge diversity implications."  Moreover, the Department of Transportation, in its comments on OMB's A-76 rewrite, reported the disproportionate impact of the privatization quotas' direct conversions on women and minorities.  A consultant who has run federal public-private competitions for more than 20 years told Government Executive that, "(I)n looking at the affected workforce, it is disproportionately minority and female."

Whether or not it is one of the intentions of those who designed the Administration's policy, it cannot be denied that the consequences of the OMB privatization quotas will ultimately have the effect of turning back the clock to the days when federal agencies were managed and staffed primarily by white males.  This is a concern that has drawn too little attention.  Thanks to the hearing you are conducting here today, Chairman Hefley, perhaps we can rectify this oversight.

3. Although there was an attempt to portray the final result of the FY03 effort to free agencies from the OMB numerical privatization quotas as a compromise, such is not the case.  The Administration agreed that numerical privatization quotas are bad public policy-except when they are based on the Administration's own research and analysis.  Report language requires OMB to submit a report that provides such research and analysis.

The role of the General Accounting Office (GAO) in the defeat of what began as a bipartisan effort to end the use of numerical privatization quotas is disappointing.  On the very day, July 24, 2002, that the House of Representatives passed an anti-numerical privatization quotas amendment, by a vote of 261-166, the Comptroller General went out of his way to criticize the effort in the media. 

Later, he elaborated on his criticism in an August 9, 2002, letter to a Senate lawmaker, in which he insisted that the amendment would be a "blanket prohibition on the use of goals."  As even the most cursory reading of the language would have revealed, the amendment was in no way a "blanket prohibition."  Rather, it would have prevented only the use of numerical privatization quotas.  Agencies could have used research and analysis to establish non-numerical goals if the amendment had been enacted.  In fact, by preventing political appointees from plucking numbers out of thin air and then imposing them on helpless agencies, the amendment would have actually promoted the use of research and analysis in the establishment of goals. 

Moreover, it is well understood by any observer of the federal privatization scene that the OMB privatization quotas are not based on any research and analysis.  Representatives from GAO were in attendance, and one even testified, at the March 6, 2002, hearing of the Senate Governmental Affairs Committee hearing in which Ms. Styles said that the privatization quotas had been established by the President himself-who is unlikely to have had the time to perform any research and analysis.  Indeed, the Comptroller General, in his August 9 letter, correctly asserted that he had "seen no evidence to indicate that its numerical FTE goals were based on considered research and sound analysis."  Unfortunately, the inclusion of a vague research and analysis requirement gives the Administration an obvious out and renders the amendment unenforceable.

Finally, the GAO's recommendation that any prohibition on the use of numerical privatization quotas include an "escape clause" for those quotas that are based on research and analysis was strangely incomplete.  The elaboration provided in the letter was vague management-speak: "a review of historical data and sourcing activity in the public and private sector combined with an analysis of current and emerging market trends."  However, the GAO's recommendation did imply that the OMB privatization quotas should take "into account the capacity of agencies.to conduct public-private competitions."

Unfortunately, some Senators accepted the GAO's fundamentally flawed criticism as a rationale for voting against the anti-numerical privatization quotas amendment.  Consequently, agencies are still being forced to review for privatization, regardless of their needs and missions, tens of thousands of federal employee jobs, either with or without public-private competition.

4. I will conclude this section of my testimony by providing you with my own thoughts on how to reform the OMB numerical privatization quotas so that agencies can, if appropriate, establish non-numerical, agency-specific, equitable sourcing goals:

 

1. Don't use numbers.  Numbers are a lazy person's short-cut, an unworthy alternative to conducting the research and analysis necessary to establish goals that promote good public policy, as opposed to narrow private interests.  AFGE criticized the disastrous use of numbers to manage the DoD civilian workforce during the Clinton Administration.  And we'll criticize the Bush Administration when it perpetrates the same blunder in the context of DoD privatization. 

I would ask the Comptroller General to review a key passage in his own August 9 letter in which he implies that the desired "result (of a goal-setting process) would be the identification of specific functions or activities that should be subject to public-private competition."  In other words, sourcing goals, he believes, should be function- or activity-based; and, of course, I would add, no numbers are needed to establish such sourcing goals. 

2. Take politics out of the process.  Any non-numerical sourcing goals should be designed by managers in the individual agencies, not the politicals over at OMB.  Since they are closer to the action and have an institutional investment in seeing that their customers are well-served, agency managers, although far from perfect, are in a better position to establish appropriate goals that complement agencies' actual needs and missions.  OMB politicals have no business in imposing privatization quotas on agencies, let alone telling managers exactly which jobs to review, as occurs regularly today.  We would do well to remember that OMB's expertise is limited to the indelicate art of telling people what to do, not in actually doing something. 

3. Get rid of the corporate welfare.  Direct conversions and privatizations have no place in any sourcing goals.  With all respect to the Comptroller General, no amount of research and analysis can justify taking jobs away from federal employees and giving them to contractors without public-private competition.  That does a disservice to federal employees, taxpayers, and customers. 

4. Look beyond the usual suspects so that agencies can establish non-numerical, equitable sourcing goals.  DoD has three different workforces: civilian, military, and contractor.  However, only the civilian and military workforces have been looked to for savings.  As Army Secretary Thomas E. White, of all people, has acknowledged, "In the past eleven years, the Army has significantly reduced its civilian and military workforces. These reductions were accompanied by an expanded reliance on contractor support without a comparable analysis of whether contractor support services should also be downsized."  The same is true for the rest of DoD.  If HUD and the Department of Energy can review contractor work for insourcing, there is no reason DoD cannot do the same.  And just as it's important to track the work performed by federal employees, it is also important to track the work performed by contractors.  This means that agencies must have contractor inventories analogous to the FAIR Act, so that managers can determine, as Army managers are currently attempting to do, what work has been privatized already, particularly with respect to whether it is actually inherently governmental work.

5. Any non-numerical, agency-specific, equitable sourcing goals must take into account the need for a diverse federal workforce.  Federal agencies should be model employers, rather than reactionary employers who use, purposefully or not, privatization quotas to roll back all of the progress made in creating a federal civil service as diverse and inclusive as the American people.

6. Non-numerical, agency-specific, equitable sourcing goals should also peacefully coexist with other, more proven techniques-from labor-management partnerships to demonstration projects to reorganizations and consolidations-to make agencies' operations more efficient.  The Administration has broken with bipartisan precedent and emphasized the OMB Circular A-76 privatization process to the exclusion of all other techniques.

7. Non-numerical, agency-specific sourcing goals that are truly equitable cannot possibly be created unless both contractors and federal employees have the same rights to challenge agencies' sourcing decisions.  Currently, only contractors have legal standing to take agencies to GAO and the Court of Federal Claims-and not federal employees and their union representatives.  It is manifestly unfair that the Administration has unleashed a tidal wave of privatization on federal employees without making sure that federal employees as well as contractors can both have their day in court.  

8. Agencies should establish non-numerical, equitable sourcing goals for one reason only: so that customers can receive better services at the lowest possible costs.  Competitions are a means to an end; they are not an end in themselves.  As the costs and consequences of the privatization quotas become more clear, and the resulting savings fail to materialize, OMB officials are, as noted earlier, inventing rationales for their failed policy that have nothing to do with promoting the interests of customers or taxpayers.  Well, conducting competitions for the sake of conducting competitions is not acceptable public policy.  As OMB officials should know, the adverse impact on workforce morale of a privatization review, as well as the commensurate adverse impact on productivity, is significant, as are the direct costs to taxpayers of privatization reviews.

9. Agencies should also be required to conduct and make public "research and analysis" before establishing any non-numerical, agency-specific, equitable sourcing goals, including:

1. whether the agency has the in-house capability to satisfactorily perform these inherently governmental functions: conducting the competitions,1 crafting the most efficient organization plans, and administering any resulting contracts;

2. what experiences the agency, other federal agencies, or state and local governments have had in the past with public sector and / or contractor performance of the work in question, particularly with respect to costs;2 

3. to what extent the work has already been privatized;3

4. whether the agency can easily reconstitute an in-house capability if the work is privatized;

5. whether the private sector market can provide sufficient competition to avoid sole-source contracting if the work is privatized; 

6. what impact, if any, there would be on service if the contractor were to provide its workforce with inferior compensation;4 and

7. what alternatives to privatization exist to make the delivery of services more efficient and what are the costs of those alternatives in relation to the cost of conducting a competition and perhaps privatizing the work.5

Not a single agency has conducted that basic research and analysis. Nor is there any indication that OMB or the agencies feverishly implementing the privatization quotas will rectify that dereliction, although the Army deserves some credit for thinking about these issues, albeit in the service of the indefensible "Third Wave" initiative.

2. The rewrite of the OMB Circular A-76 privatization process

In the past, when I mentioned "OMB Circular A-76," people's eyes glazed over.  Not any more, though.  OMB's controversial rewrite of the A-76 process has subjected this obscure directive to the much-needed glare of publicity.  In fact, 170 House and Senate lawmakers have already signed on to a joint letter of objection to OMB about its November 14, 2002, A-76 rewrite proposal; and others have sent their own individual letters.  And I'm not surprised.  The November draft is so one-sidedly pro-contractor, it defies belief. 

The Army's controversial "Third Wave" privatization initiative, which was designed to review for privatization without any public-private competition at least 210,000 federal and military positions, is widely viewed as being beyond the public policy pale.  In fact, at least publicly, it has even been implicitly repudiated by the Army. 

In summarizing the comments I submitted to OMB last December, I will argue that the A-76 rewrite has many similarities to the "Third Wave," is in some ways even more extreme, and could be used by the Army or other services to implement the "Third Wave."

In other words, the A-76 rewrite is in many ways a stealthy continuation of the discredited "Third Wave" by other means.  It might actually be called the "Fourth Wave"-and, if implemented, it could constitute the final wave for federal employees, effectively wiping out what's left of the in-house workforce.  Triumphant contractors are naturally exultant about the rewrite.  In fact, as a result of the changes proposed by OMB, contractors insist that they will win 90% of all A-76 competitions, instead of the 40-50% they are winning now.6 

1. Like the "Third Wave," the A-76 rewrite would emphasize privatization to the exclusion of all other methods of making the provision of federal services more effective, more efficient, and reliable.7  Also like the "Third Wave," the A-76 rewrite would require agencies to review 100% of their in-house inventories for privatization.

This represents a radical shift in philosophy.  The current circular places the privatization process in its proper context, as just one tool in a manager's toolbox.  The process of improving service delivery, according to the current Introduction, page 1, "must consider a wide range of options, including: the consolidation, restructuring or reengineering of activities, privatization options, make or buy decisions, the adoption of better business practices."  Even DoD employs a "strategic sourcing" approach that involves a range of options similar to those recommended in the Introduction to the current circular. 

2. Unlike even the "Third Wave," the A-76 rewrite would include an explicit bias towards privatization.8

Per the A-76 rewrite, all work performed by federal employees would be considered appropriate for privatization. 

3. Unlike even the "Third Wave," the A-76 rewrite would "rewrite" through a mere circular the law that defines "inherently governmental" in order to make it easier to contract out inherently governmental work.9

4. Unlike even the "Third Wave," the A-76 rewrite does not include an inventory to track the work performed by contractors, making it impossible for agencies to determine which inherently governmental work has been wrongly privatized, even though key figures in the Administration's privatization effort concede that this has already happened.

5. Unlike even the "Third Wave," which ostensibly calls for reviewing work performed by contractors, the A-76 rewrite would subject almost exclusively activities performed by federal employees to review.10

Despite the fact that contractors acquire and retain almost all of their work without public-private competition and precious little private-private competition, OMB has never applied such quotas to the federal government's massive contractor workforce.  For those keeping score, at least 850,000 federal employee jobs would be subjected to privatization under the rewritten A-76.  At the same time, only a tiny handful of contractor workers would be reviewed.  And in DoD, not a single contractor job is scheduled to be reviewed for insourcing.

6. Unlike even the "Third Wave," the A-76 rewrite would not establish a reliable and comprehensive inventory to track work performed by contractors, although the new process combined with the OMB privatization quotas will drastically increase the number of taxpayer dollars given to contractors.     

I will now discuss how the A-76 overtly encourages agencies to directly convert work performed by federal employees to contractors without any public-private competition, a la the "Third Wave." 

7. The rewritten circular retains various direct conversion methods of giving work to contractors without public-private competition that are included in the current circular, including special authorities for smaller functions, whenever it can be claimed not to adversely impact federal employees, waivers, and business case analyses.11 Because of the OMB privatization quotas, agencies would be encouraged to make use of all of these explicit direct conversion methods.

With respect to the authority for direct conversion of smaller functions, OMB has failed to require agencies to employ the Department of the Interior model that first performs a bare-bones cost comparison between the existing in-house workforce and private sector firms performing similar work before shifting any work to contractors.12

The direct conversion authority where there is ostensibly no impact on federal employees has been significantly expanded so that it applies without numerical limitation on the number of federal employees involved and could now also be used when "all directly affected Federal civilian employees within the agency.voluntarily retire."  This is surely smart politics, encouraging agencies to give work to contractors when there might be no opposition from an in-house workforce, but is it good for government?  Of course not.  Divesting an agency of a function through privatization without making a formal make-or-buy decision simply because of its political expediency is clearly bad for government.13

I will now discuss how the A-76 covertly encourages agencies to directly convert work performed by federal employees to contractors without any public-private competition, a la the "Third Wave."

 

8. If managers responsible for conducting competitions for work performed by federal employees are unable to complete those competitions within 12 months, the work can simply be given to contractors.

"If you can't complete the (competition within 12 months) then you are not prepared to do the work, so we will outsource it," thundered OMB's David Childs, according to the November 18, 2002, edition of Federal Times.

In response to intense criticism, Ms. Styles, in a January 28, 2003, article in The Washington Post, spun OMB's position, "saying it was `absolutely not' true that agencies who exceed the 12-month time frame would automatically lose the competitions to a private-sector bidder. `Could one of the alternatives be that this work goes to the private sector? Yes, it is,' she said. `But that's not the favored alternative. It's not the presumed alternative.'" 

The ability of rank-and-file federal employees to perform a service and the ability of management elsewhere in the agency to conduct a competition for that service are obviously apples and oranges.  To say that federal employees should be converted without competition because the agency didn't finish its competition on time is like saying that all OMB staff should be fired because the Director didn't submit his testimony on entitlement spending to the House Budget Committee on time.  No arbitrary deadline for the completion of a competition, particularly one that involves a direct conversion of jobs to contractors as a penalty, is ever appropriate, period. 

9. Agencies should be able to convert work performed by federal employees to contractor performance without competition when management does not punctually submit in-house tenders;14 however, instead of canceling solicitations when contractors submit bad proposals or don't submit their proposals on time, agencies are expected to rewrite their solicitations to address the complaints of contractors.15

If the Agency Tender Official, a management official, fails to submit the in-house tender by the deadline, the jobs of innocent rank-and-file federal employees, who are in no way responsible for the mechanics of the privatization process, could be given to contractors without any public-private competition.  This is obviously unfair to the affected workforce and to the taxpayers.

Because the OMB privatization quotas give agencies full credit for completing direct conversions pursuant to OMB Circular A-76, the same as if the jobs had been subjected to real public-private competitions, agencies will have little incentive to submit thoughtful in-house tenders in timely fashion.  Why bother taking the time to craft the best possible in-house tender when the agency can do no work at all and get the same amount of credit, because OMB doesn't care whether the work is competed or converted, as long as any work performed by federal employees is ultimately privatized? 

In the event management fails to punctually submit an in-house tender, the contracting officer can only allow additional time for the resubmission of all offers; she cannot change the solicitation in order to encourage the submission of an in-house tender.  That takes on significance when we review what must be done when contractors don't submit proposals or don't submit good proposals.

Contractors would be painstakingly surveyed about what they might not like about the solicitation and what it might take to get them to submit better proposals, perhaps even submit them on time.  Contracting officers will be encouraged to water down solicitations to accommodate various contractor failings.  (Please remember that in the analogous situation for federal employees the contracting officer can only extend the deadline for resubmission of proposals, not rewrite the solicitation to certain accomodating specifications.)  In fact, this indulgence towards contractors-the equivalent of a child not doing his homework and the teacher then allowing the child to say how much easier he'd like that homework assignment to be-is a form of contracting out the process of writing the solicitation.  There are few things more inherently governmental than an agency determining what services it needs and how it wants those services provided.  OMB's rewrite of the circular will subtly but certainly allow contractors to tell agencies how to write their solicitations and then submit matching proposals.  OMB is actually institutionalizing a wholly anti-taxpayer conflict of interest.

Finally, it should be noted that the recommendation to the agency's privatization czar must be made public, unlike the paperwork associated with a decision to convert to contractor performance work performed by federal employees when management is late with its own tender submission.  Whether it's a big deal or a little deal, OMB has clearly favored the contractors at every possible opportunity.

I will now discuss how the A-76 rewrite requires federal employees-but not contractors-to undergo public-private competition in order to perform or retain new work, segregable work, and existing work.

10. Federal employees-but not contractors-must compete to perform new work.16

11. Federal employees-but not contractors-must compete when they are doing exactly the same work as before, but the value of that work increases by as little as 30%.17

12. Federal employees-but not contractors-must compete to continue to perform work when their contracts expire; or agencies may simply give such work away to contractors through direct conversions.18 

At the outset of this discussion, one point needs to be fully understood.  The rewrite of the circular applies only to the circular, not the Federal Acquisition Regulation (FAR).  However, the rewrite of the circular inserts the FAR into the circular.  Consequently, to the extent the FAR itself has problems with respect to many issues involving competition between and among private contractors to perform the federal government's work-and it does-public-private competition will now be burdened with those problems. 

As Ms. Styles remarked at a House Armed Services Readiness Subcommittee hearing last year,

"There needs to be some recognition that there are problems in the private-private system for competition and FAR based competitions.  It's not a perfect system and we may be exacerbating some of the problems when we try to apply the FAR based system private-private competitions to public-private competition."

Although "full and open competition" is technically still the law of the land, recent "acquisition reform" (sic) law (e.g., the Federal Acquisition Streamlining Act and the Clinger-Cohen Act) has virtually made "full and open competition" the exception rather than the rule in awarding contracts, particularly with respect to service contracts. 

There are so many exceptions to the rule that are technically deemed to involve competitive procedures [e.g., use of Government-Wide Acquisition Contracts (GWACs), multiple and single agency indefinite delivery / indefinite quantity (ID/IQ) contracts, General Service Administration (GSA) schedules, the higher dollar threshold and other requirements for "commercial requirements," etc.] that the "full and open competition" standard is essentially dead.  (And, of course, it's getting worse.  The streamlined acquisition authority under Section 833 of the new Homeland Security Act allows any service to be deemed a commercial item for purposes of federal procurement laws.)  Moreover, many of these "competitive alternatives" are protest proof, meaning that they are not even subject to administrative or judicial review. 

Agency Inspectors General, the GAO, respected procurement judges, and even OMB officials have bemoaned the largely non-competitive state of government contract awards.19  Here are some examples:

According to a 2000 report of the DoD Inspector General, "(I)nadequate competition occurred for 63 of the 105 contract actions" surveyed.

Later that year, the GAO reported that most information technology orders were sole-sourced.  In fact, "only one proposal was received in 16 of the 22 cases" (or about $444 million of the total $553 million). 

The Associated Press reported last year that the federal government,

"bought more than half its products and services (in 2001) without bidding or through practices that auditors say do not fully take advantage of the marketplace.Concerns about the government's new (i.e., post-acquisition reform) style of shopping are simply put: Buying without competition often means the public treasury gets overcharged."

Judge Stephen M. Daniels, Chairman of the General Services Board of Contract Appeals, has declared that,

"Although some parts of the (1984 Competition in Contracting Act) remain on the statute books, the guts have been ripped out of it. Openness, fairness, economy, and accountability have been replaced as guiding principles by speed and ease of contracting. Where the interests of the taxpayers were once supreme, now the convenience of agency program managers is most important. Full and open competition has become a slogan, not a standard; agencies have to implement it only `in a manner that is consistent with the need to efficiently fulfill the Government's requirements.' It is now much easier to acquire goods and services without competition. Notice requirements have been reduced, particularly as the Government increasingly fulfills its needs without conducting formal procurements. The drive to have the Government present a single face to industry has been sent into retreat: agencies have been given greater discretion to procure in their own idiosyncratic ways, Government-wide regulations have been discarded or diminished in importance, and programs and whole agencies (the Federal Aviation Administration being just the first) are being allowed to procure under unique and sometimes vague rules and procedures."

Ms. Styles herself has also said that,

"Since the beginning of the (acquisition) reform movement, over a decade ago, I have not seen a serious examination of the effects of reform on competition, fairness, integrity, or transparency.  As a result, I think we are seeing some serious competitive problems surface with the proliferation of government-wide contracting vehicles and service contracting."

Clearly, contractors are not always required under the FAR to compete against one another to win or retain service contracts.  Consequently, while the rewritten circular will require federal employees to compete to perform new work and segregable work as well as retain existing work, contractors will be able to acquire and keep such work without ever having to compete against federal employees or even one another.

Let's look in particular at segregable work.  Under the rewritten circular, an automatic competition requirement kicks in for federal employees when the value of work that they are already performing merely increases in value by 30 percent.  What happens to contractors in such circumstances?  The FAR does not use the concept of percentage increases in scope of work in order to determine whether a new competition is required.  Rather, the FAR and government contract case law use the concept of "scope." 

For example, if operating a telephone servicing center is expected to cost $10,000,000 but ultimately costs $15,000,000, this does not necessarily mean that new work has been added.  It could just be that the original cost estimates were low, that the winning offeror low-balled his bid, or that more effort was required than originally anticipated.  The general test of whether new work has been added is whether the added work is within the original "scope" of anticipated effort that the contractor was supposed to provide.  Mere dollar value increases in the work under contract does not constitute expanded scope requiring a new competition.  In practice, however, even if new scope is added to a contract, this is almost always performed by the original contractor.  That's just a way of life in government procurement.  If the contract is a high visibility contract, typically a sole source justification will be written, with the justification stating that "given the experience of the contractor in the work already performed, it is the only source that can continue to `practicably' complete the work in process."

I will now discuss how the A-76 rewrite would hold federal employees far more accountable for failure than contractors.

13. When federal employees are found in default, the work must automatically be converted or competed; for contractors, however, it could be business as usual.20

What happens to federal employees under the rewrite is clear.  However, the consequences for defaulting contractors aren't quite so dire.  Per FAR Part 49, "The following courses of action, among others, are available to the contracting officer in lieu of termination (of a contract) for default when in the Government's interest: (a) Permit the contractor, the surety, or the guarantor, to continue performance of the contract under a revised delivery schedule. (b) Permit the contractor to continue performance of the contract by means of a subcontract or other business arrangement with an acceptable third party, provided the rights of the Government are adequately preserved."

Moreover, contractors can and do vigorously litigate to avoid being found in default.21  Federal employees and their union representatives, on the other hand, have no such recourse. 

I will now discuss six different ways the A-76 rewrite favors contractors over federal employees.

14. Agencies should provide much more justification under the A-76 rewrite before canceling an award to a contractor than when the work has been won by federal employees.22

15. Under the A-76 rewrite, contractors-but not rank-and-file federal employees directly affected by privatization or their union representatives-can participate in all appellate processes, to the Administrative Appeal Authority, the GAO, or the Court of Federal Claims.23

16. Under the A-76 rewrite, only the confidential nature of proprietary information of the contractors' bids is protected.24

17. The only conflicts of interest addressed by the A-76 rewrite are those that might conceivably benefit federal employees in the privatization process; the longstanding conflicts of interest which demonstrably benefit contractors will continue to undermine the integrity of the privatization process.25

18. Under existing law and regulation, federal employees-but not contractors-would continue to be subject to a myriad of requirements and obligations under the A-76 rewrite.26

19. Under the A-76 rewrite, tenders submitted by federal employees must include "all" costs, even when they are irrelevant or have already been counted, while contractors should be allowed to exclude significant costs from their own proposals.

The calculation of costs has been an extraordinary obsession for contractors through the years.  They know that if they could ever artificially inflate the cost of in-house tenders, they would win the vast majority of competitions.  And, in OMB, contractors have an ally which is eager to help contractors finally fulfill this long-sought dream.

OMB has made much ado about ensuring that in-house tenders account for all of their "indirect costs."  The existing circular already requires in-house tenders to include such overhead costs.  The rewritten circular would require that in-house tenders be charged twice for the same overhead costs.27

The 12 percent "standardized cost factor" for indirect costs in the existing circular would be retained in the rewritten A-76.28  However, the rewritten circular would allow agencies to charge in-house tenders for indirect costs a second time, under "personnel costs."29 

Not only would the rewritten circular charge the in-house tender twice for the same costs, but the definition of in-house indirect labor costs is so broad as to ensure that any time an agency wanted to ensure the privatization of a function under competition management could easily manufacture the additional superfluous overhead costs.30

But it gets worse.  Not only would the rewritten circular charge the in-house tender twice for indirect labor costs, some of them wholly irrelevant to the MEO, contractors would not even be charged for their indirect labor costs.31

While the rewritten circular would charge in-house tenders with costs not once but twice and even when such costs are irrelevant, OMB is increasingly unwilling to charge contractors for their most basic costs.  This raises serious equity and efficiency issues in the context of the circular and privatization generally.32

The A-76 rewrite changes how costs are calculated to benefit contractors in other ways as well:

Exclusion of the cost of a performance bond, which is executed in connection with a contract in order to ensure performance so as to protect taxpayers and agencies' customers from the consequences of default, would give contractors an unfair advantage.33

Security clearances are another example.34  With respect to security clearances for the federal employee workforce, that is a sunk cost, one that has already been amortized, which is not the case with contractors.

Phase-out costs are yet another example.35 The term "phase-out plans" does not appear in the rewritten circular's "Definition of Terms."  However, phase-out costs are considered to include such significant one-time costs resulting from the transfer or disposal of employees, equipment, and facilities.36 

3. The threat to use "best value" in DoD's public-private competitions

Section 824 of the legislative recommendations submitted by DoD for the FY04 defense authorization bill calls for the end of an objective, cost-based competition process.  It would be replaced by the controversial "best value" competition process, which allows contractors to submit more expensive and less responsive bids and still win contracts.

Contractors are not happy about losing almost three-fifths of the public-private competitions conducted under OMB Circular A-76.  Rather than cut their costs and provide taxpayers with a better deal, contractors want to junk the existing ultimately cost-based process and replace it with a pro-contractor "best value" process.

Instead of making the best decision for taxpayers, i.e., what costs less, acquisition officers would be encouraged to use all manner of subjective criteria to determine the winner of a public-private competition process, including such whimsical notions as a contractor's ability to respond "flexibly" to changing circumstances or the contractor's use of  "innovative" approaches. 

"Best value" would tilt the field of play even farther in contractors' direction by allowing acquisition officials to ignore the standards established in the solicitation in favor of the "bells and whistles" included in the contractor's offer. 

"Best value" would also deny federal employees the opportunity to reformulate their offer in response to a contractor offer that exceeds the standards in the solicitation.   If a contractor includes a feature in its bid that DoD thinks should be included in the solicitation, DoD should be allowed to go back and revise that solicitation-and allow both sides to reformulate their bid so that it includes that feature.

Contractors note that "best value" has been used in private-private competition.  However, its use has been accompanied by extraordinary controversy and litigation because of its intrinsic subjectivity.  Some of its most fervent critics are small business contractors.  And it is precisely that subjectivity that makes a "best value" process so dangerous in the context of public-private competition.  While it is not possible to systematically discriminate against one group of contractors in favor of another group of contractors, "best value" could be used systematically to discriminate against federal employees in favor of contractors, especially when wielded by an avowedly pro-contractor Administration that is rushing to review for privatization 850,000 federal employee jobs.

Contractors know that, historically, "best value" competitions between contractors have cost taxpayers more and taken longer to complete.  However, they try to justify the use of "best value" by falsely asserting that A-76 currently doesn't allow for qualitative improvements in service.  Wrong.  As currently written, A-76 allows agencies, under a highly objective process, to establish the standards they want met by federal employees or a contractor, whether they are the same as before or more exacting, and then choose the provider with the lower cost.  That's what's best for warfighters and taxpayers. 

Unlike other agencies, DoD is protected from a "best value" process by 10 U.S.C. 2462 and 10 U.S.C. 129a.  OMB is breaking with bipartisan tradition and encouraging non-DoD agencies to use a pro-contractor "best value" in public-private competitions.  However, even OMB acknowledges that there are "special considerations" that must be taken into account with the use of "best value" in public-private competitions and that its use in non-DoD agencies should be limited to a pilot project and that there should be testing before wider application is authorized.  There is no reason for DoD to be the guinea pig.  If "best value" boosters are so sure their much-criticized process is superior to objective, cost-based competitions, then let them prove it through the experience of non-DoD agencies participating in the OMB pilot project.

In the A-76 rewrite, OMB has created the worst possible "best value" pilot project process, one that would maximize the possibility of bias against federal employees:

The rewritten circular would include two types of privatization processes, sealed bidding and negotiated.  The latter process includes three different processes:

1. sealed bidding process

2. negotiation processes

1. lowest price technically acceptable process

2. cost / technical tradeoff process

1. phased evaluation process

2. integrated evaluation process

I did not list the various processes randomly.  Rather, I have ranked them in order-from best to worst-with respect to their fidelity to four basic principles of fair competition for government services.

1. While taking into account issues of quality, is the process ultimately cost-based, and thus in the best interest of taxpayers?

2. Does the process minimize possibilities for bias and conflict of interest that could undermine the integrity of competitions?

3. Does the process prohibit the use of inappropriate evaluation factors and subfactors that encourage subjectivity, and thus allow for favoritism?

4. Does the process ensure that all offerors will be evaluated on a common basis?

Sealed bidding is the process that is most faithful to the principles of fair competition because of its emphasis on the objective criterion of cost.  The absence of negotiation ensures that competitions under the sealed bidding processes focus on facts and figures in the proposals instead of politics and personalities in the process.  Sealed bidding is also the best process because it doesn't use subjective evaluation factors and subfactors and does judge all bids against the same solicitation. 

Although involving negotiation, which inevitably introduces the possibility for bias and conflicts of interest, the lowest priced technically acceptable process is the second most faithful because it essentially awards the contract to the technically acceptable proposal that is least expensive to the taxpayers.

The phased evaluation process is similar in nature to the lowest priced technically acceptable process in that there is a prior determination whether the bids are technically acceptable. The crucial difference is that in the phased evaluation, offerors can add features that were not required in the solicitation.  However, if the contracting officer decides that the agency needs and can afford the features, the solicitation must be amended, and all other offerors are allowed to compete on the same basis.  This process does allow for the unlimited use of subjective evaluation factors and subfactors-the specific weights of which need not be disclosed-that can erode the integrity of the competitions.

The least faithful is the integrated evaluation process.  A contractor can offer features that exceed the solicitation's requirements, and the contracting officer can then decide that these features are desirable without ever telling federal employees that their tender should also include those additional features.  In other words, federal employees can submit a more responsive and less expensive bid and still lose if the contracting officer changes his mind about what he wanted.  Offerors are not being judged on a common basis-a breach which undermines the very essence of fair competition.  Like the phased evaluation process, this process does allow for the unlimited use of subjective evaluation factors and subfactors-the specific weights of which need not be disclosed-that can erode the integrity of the competitions.  Also like the phased evaluation process, this process actually gives credit to contractors for submitting proposals in excess of the requirements in the solicitation, thus encouraging contracting officers to spend taxpayers dollars too freely, buying what they want, instead of what they need, in violation of the venerable minimum needs doctrine.  Even under FAR private-private competitions, there is no requirement to report those, often excessive, price premiums on any of the standard contract reports under agency contract tracking systems.

Here are my specific criticisms of the regimen of privatization processes established under the rewritten circular.

1. No guidelines regarding the use of subjective competition processes, even though OMB acknowledges the need for caution.

There are few requirements or limitations regarding the use of competition processes that are not ultimately based on cost. The announcement specifically recognized that there are "special considerations" that must be taken into account with a public-private competition and that, at least with integrated evaluation techniques, there should be limited use and testing before wider application is authorized.  (67 Fed. Reg. at 69773)  However, that appropriate caution is recognized nowhere in the rewritten circular because there are few hurdles that must be overcome before subjective evaluations based on factors other than price can be authorized.

2. No traditional preference for sealed bidding, which would minimize management bias against in the in-house workforce.

Negotiation has become unduly popular in private-private competition in large part because contracting officers can much more easily control the outcomes of competitions through their selection of evaluation factors and subfactors and their assignment of weights to those evaluation factors and subfactors.  In the context of public-private competition, which is simply politics by other means, such discretion could be systematically used against in-house bids.

Under FAR 6.401(a), sealed bidding should be used if time permits and it is not necessary to conduct discussions with responding offerors about their bids.

The only constraints on time in the context of the rewritten circular are those arbitrarily imposed by OMB, and thus are a wholly inadequate excuse to avoid sealed bidding.  

Moreover, an agency's requirements in a public-private competition will be particularly well-known where the work is already being performed by the public sector (i.e., the preparation of the performance work statement will be based on known and previously performed requirements). Moreover, the members of the Source Selection Evaluation Board can be expected to have extensive expe­rience with the activity to be described in the performance work statement.

Under FAR, no government contract can be awarded unless the con­tracting officer makes an affirmative determination of "responsibility." [FAR 9.103(b)] The detailed requirements for an affirmative determination of responsibility are set forth in FAR 9.104-1, including adequate resources, organization, facilities, quality, etc. An affirmative determination of responsibility basically requires a finding by the contracting officer that the offeror can perform the contract satisfactorily and in accordance with the required schedule.

An offeror has the burden of convincing the contracting officer that it is "responsible" (i.e., can perform satisfactorily and on time). [FAR 9.103(c).]  Contracting officers have broad discretion in making responsibility determinations. The Comptroller General generally will not even question a negative determination of responsi­bility unless the protester can demonstrate a lack of any reasonable basis for the contracting officer's negative determination.

If the required activities are known, and if an affirmative finding of responsibility must be made reflecting that the public or private sector offeror can perform satisfactorily and in accordance with the required schedule, there should be few circumstances in which it will be necessary to conduct "discussions" with offerors about their bids.

However, the rewritten circular fails to express a strong preference for sealed bidding in all but the most extraordinarily exceptional circumstances. 

3. No preference for the use of a lowest price technically acceptable process in the event it can be shown why sealed bidding absolutely cannot be used.

If it can be conclusively demonstrated that the preferred sealed bidding method is impractical, the secondary preference should be for the lowest price technically acceptable process. The determination of "tech­nically acceptable" is basically a finding that the proposal fully meets the requirements of the performance work statement and that the offeror can perform the contract satisfactorily and in accordance with the required schedule (much like a "responsibility" determination).

In the competitive procurement system, it is the responsibility of the offeror to submit a proposal that fully demonstrates the technical acceptability of the proposal. The offeror has the burden to convince the source selection official "within the four corners of its proposal" that it is capable of performing the contract.  If the proposal fails to demonstrate that the offeror can comply, there is a reasonable basis to find the proposal technically unacceptable. 

If a proposal or tender does not demonstrate that the offeror can perform the performance work statement "satis­factorily" and in accordance with the required schedule, the proposal or tender is, by definition, not "technically acceptable." Therefore, there is minimum risk to agencies in using the lowest price technically acceptable process. Under these circumstances, the "lowest price" of a technically acceptable proposal assures an objective determination of the "best value" to the agencies.

4. No limitation on the use of evaluation factors and subfactors, both objective and subjective, in the "best value" process.

The rewritten circular allows an unlimited number of evaluation factors and subfactors to be used in the crafting of the performance work statement, giving contracting officers unlimited opportunities to bias the "best value" process against in-house proposals.  For example, in one notorious case, the contracting officer employed 10 factors with each having up to 19 subfactors. 

The rewritten circular's "best value" process places no limitations on the use of subjective evaluation factors and subfactors, including those which are, by their nature, not appropriate to apply to public sector competitors operating under civil service and other government directed policies, but which are commonly used in private-private "best value" competitions (e.g., uncompensated overtime, political views, government contracts, vendor relationships, public relations, and business systems and practices).  

The rewritten circular's "best value" process would also allow the use of subjective evaluation factors and subfactors that could easily be used by contracting officers to skew competitions.  Examples of such highly subjective factors and subfactors that are commonly used in private-private "best value" competitions include vision, reputation, aesthetics, efficiency, intrinsic value, and the availability of pop-up towel dispensers.

5. No requirement that the weights given to evaluation factors and subfactors, both objective and subjective, be revealed before proposals are submitted.

Although the FAR requires that the "relative importance" of evaluation factors and subfactors be revealed in the solicitation, there is no requirement that the specific weight of all evaluation factors and subfactors be revealed before offerors submit their proposals.  That means contracting officers can wait until offerors have submitted their proposals until deciding how much weight to give the objective and subjective evaluation factors and subfactors.  The possibilities for gaming the system are as numerous as there are evaluation factors and subfactors.

6. No requirement that federal employees be given a chance to reformulate their proposal if the contracting officer changes the solicitation in the "best value" process.

The integrated evaluation "best value" competition process is particularly discriminatory against in-house proposals.  Federal employees can submit a less expensive, more responsive proposal-and still lose if the more expensive, less responsive contractor proposal includes a feature that management did not include in the performance work statement but subsequently determines is desirable.  This arrangement maximizes the possibility for anti-federal employee bias.  If an offer that exceeds requirements contains a feature that is sufficiently important, the solicitation should be amended to permit competition from all offerors for the additional feature (as is done in rewritten circular's phased evaluation "best value" competition process).  "Innovation" should be encouraged to perform the government's requirements. However, if different performance standards are to be permitted, the solicitation should specifically describe the alternatives to be permitted, or the solicitation should be amended to incorporate the higher performance standard desired by the agency.

7. Despite OMB protestations about reviewing for privatization as many as 1,000,000 federal employee jobs in order to save dollars for taxpayers, the rewritten circular's "best value" process would not require cost to be emphasized in the weighting of evaluation factors and subfactors.

If OMB is really interested in using privatization to save money, why does the rewritten circular not assign a minimum weight to cost of at least 75%, especially considering that contracting officers can still obtain assurance that the offerors are technically qualified and otherwise able to perform satisfactorily through diligent responsibility determinations?

If OMB is really interested in using privatization to save money, why does the rewritten circular not specify that solicitations include a maximum amount or percentage by which the award price can exceed the cost of the lowest offer from a respon­sible offeror (i.e., the "price premium" paid for factors other than cost)? 

If OMB is really interested in using privatization to save money, why does the rewritten circular's "best value" process allow offerors evaluation credit for exceeding the requirements of the performance work statement?  If there is a "need" for higher performance, service, or quality, it should be set forth in the original solicitation so that all offerors have a fair opportunity to compete. Giving extra evaluation credit for exceeding the agency's requirements violates the historical "minimum needs" doctrine (i.e., that the federal government has implied authority from an appropriation of funds to purchase only what it needs, not what it wants). The practice of giving credit for exceeding requirements also is subject to corruption by "leaking" desired features that are not contained in the performance work statement.

8. The rewritten circular's use of "past performance" is intrinsically biased against in-house proposals.

Actual Text [Attachment B, C.2.a.(13), page B-7]: "Solicitation requirements for the following shall not apply to an Agency Tender:...(6) past performance criteria."

FAR 15.304 requires evaluation of "past performance" in all competitions, although it provides an out if a contracting officer "documents the reason `past performance' is not an appropriate evaluation factor for the acquisition."  The FAR also provides that if an offeror has no record of "past performance," the offeror "may not be evaluated favorably or unfavorably" on this factor.  Historically, GAO has allowed agencies broad discretion in determining how to proceed.  GAO has held that a Source Selection Authority, in making a trade-off decision, can weigh the value of a good (or poor) "past performance" rating against a neutral rating and conclude that the proposal with a good "past performance" rating offers better value than the offeror with a neutral rating.  If this rule applies here, in competitions where cost and other technical factors are close a contractor's good "past performance" rating can make the difference and result in a decision in favor of the contractor on the basis of a factor not applicable to the agency.  In other words, the approach to "past performance" could skew the evaluation results against the in-house bidder.

Actual Text [Attachment B, C.2.a.(13), page B-7]: "For agency tenders where a government MEO has been implemented in accordance with.a previous competition, the Contracting Officer shall include Agency Tender past performance criteria in the solicitation and evaluation criteria."

The actual text includes references that are either mistaken or do not exist.  Moreover, it is not clear if the MEO is to be evaluated on the same "past performance" criteria as contractor offerors.  If so, that would be clearly inconsistent with the basic requirement of competition that all offerors be evaluated on a common basis.

9. Arbitrary imposition of a performance based standard on all privatization efforts.

Actual Text [Attachment B, C.2.a.(1), page B-5]: "A performance work statement that is developed in a Standard Competition shall be performance based with measurable performance thresholds and may encourage innovation."

Under performance based contracting, the contracting officer essentially specifies the outcome or result it desires and leaves it to the contractor to decide how to best achieve the desired outcome.  Obviously, this is a standard that should be used with considerable caution. 

The rewritten circular's blind mandate for the use of performance based service contracting is clearly premature.  A recent GAO review "raise(d) concern as to whether agencies have a good understanding of performance based contracting.Agency officials themselves pointed to the need for better guidance on performance based contracting and better criteria on which contracts should be called `performance based.'"

Moreover, many activities targeted for privatization are clearly unsuitable for performance based contracting because they present the sort of safety, cost, and technical risks that require that contracting officers be prescriptive and exert rigorous oversight.

Performance based contracting is clearly inappropriate for all but genuinely fixed-price contracts.  If a contractor is going to determine precisely how a service should be provided, it is clear that he should be held to a fixed price.  Cost reimbursement contracts or fixed price contracts that include cost evaluations are clearly incompatible with performance based service contracting.  Otherwise, a contractor would have an obvious incentive to prescribe the most expensive and lucrative methods to fulfill the contract.

After ensuring that the decision whether to use performance based contracting is: a) handled on a case-by-case basis,  b) is deemed appropriate only for the most common services, and c) is restricted to only genuinely fixed-price contracts; it is imperative that any performance based service contracting include detailed requirements in terms of results, strong performance standards, and comprehensive quality assurance plans.

4. The Army's "Third Wave" privatization initiative

In his October 4, 2003, memorandum, Secretary White set in motion a process he called "Third Wave," by which the agency would review for privatization, without any public-private competition, as many as 210,000 federal and military positions.  Some of the non-competitive privatization mechanisms endorsed by Secretary White, such as employee stock ownership plans and transition benefit corporations, were even criticized by OMB officials.  Other options mentioned by the Secretary were quasi-governmental corporations and the ever-popular "negotiate with private sector."  The one thing all of these options have in common is that they are not provided for in law.  Even the Secretary acknowledged that "Most of these alternatives to A-76 will require enabling legislation that does not exist yet."

What a difference three months make.  Come January 2003, the Army's privatization-related Congressional correspondence included this paragraph:

"The implementation of competitive sourcing will adhere to congressionally approved process, e.g., A-76.  The only known exceptions to the requirement for public-private competition are where 10 or fewer civilian employees perform the function where preferential procurement programs are used, and where legal restrictions against using the A-76 process apply to the function."

Whether the Army will keep this assurance obviously remains to be seen.  However, there are several disturbing questions that need to be answered:

1. Is the Army out there all by itself? 

Some would write off the Army's preference for corporate welfare-style privatization as anomalous.  However, senior DoD officials have expressed similar preferences.  For example, on March 3, 2002, Michael Wynne, the Principal Deputy Undersecretary of Defense for Acquisition, Technology & Logistics, wrote in his written testimony, that the department intended to "divest" itself of "non-core" work.  When asked what he meant, Mr. Wynne said that "divestiture means that you transfer assets to the private sector, and, actually, they absorb the assets in line and the employees as well, as is different, if you will, than competitive outsourcing where you only compete the positions. You might want to just transfer the assets and essentially convert that activity to the private sector."

2. Where does OMB stand on "Third Wave"-style privatization?

While offering criticisms of parts of the "Third Wave," OMB officials refused to repudiate the initiative, notwithstanding that it was completely contrary to the Administration's ostensible emphasis on "competitive sourcing."  In fact, when AFGE National President Bobby L. Harnage, Sr., challenged Ms. Styles to condemn the wholly anti-competitive nature of the "Third Wave," she, according to GovExec.com, "refused.  `It's quite an exaggeration to say it's a privatization effort," she said.Styles had no reservations about the size of the Army plan. `It certainly is up to the departments and agencies to determine how they want to do it,' she said."37

Moreover, at the 2002 hearing in which Mr. Wynne extolled the benefits of divestiture, Ms. Styles did not rebuke him.  And when the discussion turned to how DoD would hit its 50% privatization quota after achieving its 15% privatization quota, Ms. Styles said purposefully, "there will be appropriate elements of competition for the next 35%."  (Emphasis added.)  What does that mean? 

3. What changes might OMB and DoD seek that would allow the Army to pursue the "Third Wave" and still keep its pledge?

For example, it is rumored that DoD will submit in its next FY04 legislative package a proposal to gut or even eliminate 10 U.S.C. 2461, which, however inadequate, does ensure that Pentagon privateers cannot simply give away the department to contractors. 

Moreover, OMB has never repudiated its September 2001 proposal to drastically expand the preferential procurement program to allow small businesses to receive contracts of any size to perform work that is currently performed by federal employees without any public-private competition.

However, it is actually OMB's ongoing rewrite of the A-76 process that will allow the Army-and the other services as well-to ride the anti-public-private competition "Third Wave."  The rewrite expands on the already-existing direct conversion authorities to give work performed by federal employees to contractors without public-private competition.  More importantly, as noted earlier in my testimony, the rewrite creates hidden direct conversion authorities, particularly if competitions are not concluded within arbitrary deadlines.  A DoD official who appeared at a recent American Bar Association event, in Annapolis, MD, confirmed during a question-and-answer session that all of the services are interested in the direct conversion possibilities of the arbitrary competition deadline.  In other words, the A-76 rewrite is in many ways a stealthy continuation of the discredited "Third Wave" by other means.

5.  The threat to eliminate in-house depot maintenance and arsenal capabilities

Section 324 of the defense authorization bill would lead to the destruction of any in-house depot maintenance capacity by radically changing the 50/50 rule governing the split of depot maintenance workload between federal employees and contractors.  Under the Pentagon's proposal, contractors would keep their 50% of the depot maintenance workload and then be given a chance to gradually take away the 50% of the work performed by federal employees. 

Without that safeguard DoD would have privatized all public sector depot maintenance workload long ago.  Although chronically underfunded, the depots are the one part of DoD that has managed to escape the devastating consequences of DoD's self-inflicted "human capital crisis," precisely because of rules like 50/50, that ensure a strong in-house capability. 

It is important to note that even with the necessary statutory safeguards, depot employees are still better service providers than their contractor counterparts.  According to GAO, depot prices are lower for 62% of items repaired by both depots and contractors. 

The Pentagon's recommendation ignores the reason for having public sector depots--so the warfighters always have a reliable capability to maintain national security-critical hardware that can respond instantly to ever-changing geopolitical conditions. 

Some may try to sell this unwise proposal by arguing that the only way depots will be able to bring more work on site, and thus make the installations less vulnerable to the next round of base closure, will be through public-private partnerships, and that the only way to establish such partnerships is by gutting the 50/50 rule.  Wrong.  Per 10 U.S.C. 2474, work performed by contractors at depots with Centers of Industrial and Technical Excellence, which were established by the Congress precisely to encourage public-private partnerships, doesn't count towards the 50/50 rule.  Consequently, there is no rationale for gutting the 50/50 rule other than destroying the in-house depot maintenance capacity. 

AFGE is also concerned about the privatization threat faced by the Army's arsenals.  Per 10 U.S.C. 4532, Secretary White could "abolish any United States arsenal that he considers unnecessary" without any Congressional input.  Given the Army's "Third Wave" privatization bias, it is imperative that such unfettered discretion be restricted, perhaps in the same fashion as the Congress restricted Secretary White's discretion to privatize, divest, or transfer the Corps of Engineers in the FY03 Omnibus Appropriations Bill. 

6. The threatened introduction of the Service Acquisition Reform Act

Perhaps the most anti-taxpayer bill to be considered in the House of Representatives during the last Congress was the Service Acquisition Reform Act (SARA, H.R. 3832).  The legislation was strongly criticized by agencies' inspectors general; public interest groups such as the Project on Government Oversight; and several unions, including the American Federation of Government Employees, American Federation of State, County, and Municipal Employees, International Association of Machinists, National Association of Air Traffic Controllers, National Treasury Employees Union, Professional Airways Systems Specialists, and AFL-CIO Professional Employees Department.

Last year's SARA was a lengthy service contractor wish-list that would have, among other things, drastically reduced government oversight of service contractors, created many additional possibilities for service contractor conflicts of interest, substantially reduced competition between service contractors, and significantly increased the losses to taxpayers from service contractor waste, fraud, and abuse.  SARA is being redrafted, and it is rumored that the legislation may have found something it didn't have in the 107^th Congress: a Senate sponsor.  If the SARA to be introduced in the 108^th Congress is anything like its predecessors, keep your hands on your purses and wallets at all times.

Among other things, the SARA legislation would have encouraged the use of risky share-in-savings contracts, which are proven losers and completely antithetical to public-private competition.  Share-in-savings contracts are grievously mislabeled since they require agencies to borrow from contractors at high interest rates in exchange for services.  This form of contracting has been criticized for locking agencies into long-term contracts that prevent shifting to superior contract or in-house options.  Moreover, according to Ms. Styles' own testimony, although in existence for more than 25 years, share-in-savings contracts have not produced any savings. 

A contractor lobbyist, who is close to the bill's House sponsor, had touted the bill in testimony on the basis of a share-in-savings contract at the Department of Education (DoEd).  It wasn't until recently that an Inspector General (IG) investigation determined that DoEd's experience with share-in-savings was actually disastrous.  According to the IG, "Performance measures were so inadequate that it could not be determined if the contractor was in compliance with the terms of the contract. There was no annual comparison of costs under the agreement to an outside market to determine whether the agreement actually provided the "best value".  Even more alarming, an overstated baseline "create(d) a larger contractor payment than is actually earned."

Finally, the use of share-in-savings is indisputably anti-public-private competition and clearly promotes privatizing the jobs of federal employees without giving them a chance to compete.  At the last moment, as an amendment to a popular piece of E-Government legislation, a controversial pilot program was established late in 2002 allowing agencies to undertake a handful of share-in-savings contracts.  These experiments will surely be the subject of very thorough scrutiny because of the serious threat each and every one of them poses to the interests of taxpayers.

Conclusion

Chairman Hefley, I thank you again for holding this afternoon's hearing and inviting AFGE to testify about the important issues raised in your invitation letter as well as those important to rank-and-file DoD employees.  Please let me know if AFGE can be of any service as you prepare your subcommittee's portion of this year's defense authorization bill.  I look forward to attempting to answer any questions that you and your colleagues might ask.