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Annual Privatization Report 2005 - Federal Update

January 1, 2005

Federal Update


On January 15, 1955 Pres. Dwight Eisenhower issued Bureau of the Budget (now the Office of Management and Budget) Bulletin 55-4 to declare that the federal government should rely on the private sector for goods and services. More directly the policy stated, that:

The directive had one goal: avoid direct competition with the private sector.

Even while this policy has been supported and applied by every administration since, today, more than 800,000 federal employees are in jobs that the agencies themselves consider “commercial” in nature—like cutting grass on federal property and writing software—these jobs, and countless others are readily available in the private economy.

Upon entering office President Bush initiated an ambitious plan to subject these jobs to competition from the private sector (as reported here). Bush’s plan, known as “competitive sourcing,” may be a slight departure from the intent of the Eisenhower bulletin, but it is still good for taxpayers.

Competitive Sourcing Continues to Save Billions

The Office of Management and Budget released data on public-private competitions in FY2004. Federal agencies completed 217 competitions involving 12,573 full-time-equivalent employees (FTEs). An additional 76 competitions have been announced but not yet completed. The competitions are estimated to generate net savings or cost avoidances totaling approximately $1.4 billion over five years. When combined with the $1.1 billion savings from last year, competitive sourcing has saved more than $2.5 billion. This equates to about $552 million in annualized gross savings. One-time, out-of-pocket expenses for conducting competitions were $74 million. This represents a return of $20 for every dollar spent on competition.

What’s more impressive is the greater potential for savings. Competitions resulted in savings of $22,000 per position studied—nearly double the estimated net savings from FY2003—yielding more than 27 percent in savings. Given the number of commercial positions in the federal government, competitive sourcing can potentially generate in excess of $5 billion in annual savings and/or cost avoidance.

Table 1: Competitive Sourcing Results in FY 2003 and 2004

FY 2003

FY 2004

Total competitions completed

662

217

Streamlined

570

116

Standard

92

101

Total FTEs competed

17,595

12,573

Streamlined

5,474

1,201

Standard

12,121

11,372

% of competitions where agency determined best result provided in-house (based on FTE studied)

89%

91%

Results from completed assessments

Gross savings (over 3-5 years)

$1.2 B

$1.5 B

Net savings (over 3-5 years)

$1.1 B

$1.4 B

Annualized gross savings

$237 M

$285 M

Annualized net savings per FTE

$12,000

$22,000

Examples of Improvements Due to Competitions Completed or Announced in FY 2004

Management Objective

Cost-Saving Changes and Other Improvements Facilitated by Competition

Estimated Savings

FAA (DOT): Modernize Automated Flight Service Stations

Consolidation of stations from 58 to 20.

Modernization of facilities and technologies.

$1.7 billion over 10 years

IRS (Treasury): Reengineer support operations

Consolidation of distribution centers from 3 to 1.

Leveraging of technology.

Reduction of labor costs.

$ 207 million over 5 years

Forest Service (USDA): Improve IT support

Consolidation of operations from 150 locations to 10 server farms.

Reduction of labor costs.

$147 million over 5 years

Navy (DoD): Make facilities management more cost-effective

Leveraging of technology.

Restructuring of workflow to adopt customary commercial practices.

$73 million over 5+ years

SSA: Make IT support more efficient

Consolidation and streamlining of help desk and administrative support activities.

Redeployment of labor to understaffed IT-related positions.

$36 million over 5 years

Education: Achieve better payment processing

Consolidation of accounts payable operations.

Leveraging of technology.

Reduction of labor dedicated to payment processing.

Customer-focused performance standards.

$34 million over 5 years

Energy: Make the delivery of financial services support more efficient

Consolidation of financial services operations from 15 to 2.

Restructuring of job mix.

Leveraging of telecommunications technology.

$31 million over 5 years

Public Buildings Service (GSA): Obtain less costly custodial services

Reliance on a more cost-effective mix of federal and contractor support (identified through a series of regionalized competitions).

$14 million over 5 years

FBI (DOJ): Reduce the cost of vehicle maintenance

New performance standards.

Consolidation of operations.

Reduction of labor costs.

More efficient use of resources.

$11.5 million over 5 years

OPM: Reengineer test administration services

Leveraging of technology to automate test scheduling and materials ordering.

Reduction of labor costs.

Restructured customer-focused processes.

$10 million over 5 years

Bureau of Land Mgmt (DOI): Improve maintenance operations

Restructuring of management.

More effective use of resources (sharing of road and maintenance crews between districts).

Use of temporary and term positions to maintain a flexible workforce.

$9 million over 5 years

Coast Guard (DHS): Make public works support for the Academy more effective and efficient.

Streamlined work order process and reporting.

Fewer FTEs dedicated to administration.

Clear, customer-focused performance standards.

$ 6 million over 5 years

The report also identified steps that the OMB was taking to better incorporate competitive sourcing with strategic human capital management. Steps include strategic human capital management, for example, identifying and creating appropriate crosswalks between the human capital and competitive sourcing standards for success. In addition, the OMB will work with the Office of Personnel Management’s (OPM) Human Capital Officers and other human resources officials to identify practices for leveraging the shared interests of the human capital and competitive sourcing initiatives.

Reason originally outlined the need for such linkages in a 2003 study Getting the Right People for the Right Job: Solving Human Capital Challenges With Competitive Sourcing.


New Attempts from Congress to Stall

Despite the growing success of competitive sourcing, a number of legislative barriers continue to limit its application. Barriers in FY 2005 agency appropriations include:

Similar attacks on competitive sourcing are anticipated over the coming years.


Opening Up More Jobs to Competition

The Bush administration is considering a plan to open inherently governmental jobs to competition—with other federal employees. Inherently governmental jobs—such as security officers, law enforcement officers and acquisition officers—have never been subject to competition before, and doing so will bring more efficiency and cost savings to those positions.

"The goal is to drive performance in inherently government functions the same way as public-private competitions drive performance in commercial functions," said David Safavian, administrator of federal procurement policy at the Office of Management and Budget.

In addition, a May 23rd memo from Safavian directed agencies to reconsider commercial federal jobs they had determined were off-limits to competition because they are considered critical to the agency’s mission. He said, “a function should be considered core to an agency’s operation only if—and only to the extent that—loss of in-house performance of the function would result in substantial risk to the agency’s ability to accomplish its unique mission.” So-called “Reason Code A” commercial functions (the OMB designation exempting them from competition) have been scrutinized for years. Some agencies like the Bonneville Power Administration have shielded thousands of commercial jobs from competition under Reason Code A. This marks the first time that OMB has publicly and seriously scrutinized the widespread practice.

However, the OMB also is considering new rules that would shield some functions from competition altogether. “High-performing organizations” (HPOs) could exempt themselves from competition if they demonstrate efficient service delivery. The difficulty will lie in establishing the rules determining what qualifies as an HPO to validate bypassing the numerous benefits of competition that go beyond simple efficiency.


Feds May Include Strategic Sourcing on PMA

The Office of Federal Procurement Policy (OFPP) has added “strategic sourcing” to the President’s Management Agenda. Strategic sourcing is a technique aimed at improving purchasing power and saving money. It involves keeping track of how purchases are made, identifying how they could be made in a better way, and then negotiating contracts to fit those goals. Agencies must start analyzing their buying habits and using the data to cut better deals with vendors by October 1st of this year.

A widely accepted practice in the private sector, strategic sourcing has rapidly infiltrated government in the last couple of years. Several states, including California, Illinois, Ohio, Florida, and Texas have fully implemented programs and saved millions of dollars. Perhaps the biggest success story is Pennsylvania, where over $140 million has been saved to date.

As Safavian said, “private sector experience tells us that when companies conduct spend analyses and use strategic sourcing, they cut commodity costs by as much as 30 percent.” The potential that strategic sourcing holds can be seen in a couple of examples.

The Agriculture Department saved $2.5 million off a $28 million office supply budget simply by asking, and the Internal Revenue Service estimates that it saves $4 million annually on photocopiers alone. The Postal Service (the model of efficiency) saved over $600,000 on rubber bands—and has saved nearly $15 million on office products in general.

David Cooper, a director of acquisition and sourcing management at the Government Accountability Office suggests that, “the potential [for savings] is in the billions and billions of dollars.” Still the federal government is years behind both the private sector and the states.


Shared Services Concept Expands

Following successful implementation at the General Services Administration and the Departments of Defense, Agriculture, Interior and Health and Human Services, NASA created a shared services center.

The ten-year, $230 million contract with Computer Sciences Corporation will centralize administrative and transactional duties at one location—these functions currently take place throughout each NASA center and its headquarters. The activities include human resources, procurement, financial management, and information technology operations. NASA expects to save between 20 and 30 percent with the deal in addition to allowing NASA to focus on science and engineering rather than administrative tasks.


Reason's Call for Land Asset Inventory Heard

In December Reason co-produced a policy brief with TSAugust, called What's in the Government's Attic, on the need for an inventory of federal government land assets to determine what they actually hold. And more importantly what lands and assets are excess, unneeded, or underutilized and could be divested.

On March 17th Rep. Chris Cannon (R-UT) introduced the Federal Land Asset Inventory Reform Act ("FLAIR,"  H.R. 1370), which would direct the Secretary of the Interior to develop a multipurpose inventory of federal real property to assist with federal land management, resource conservation, and development of federal real property. Included in the inventory is the identification of any such property that is no longer required to be owned by the federal government, i.e., surplus and unneeded federal lands.

Similar efforts are taking place in state governments, for example: Florida, Maryland, California, and Virginia.


President Bush Expands Real Property Management Effort

In February, President Bush signed Executive Order 13327 requiring agencies to inventory and track real property assets. At the end of FY2003, the federal government owned about $1 trillion in buildings and equipment, $200 billion in inventory, $550 billion in land, and $650 billion in mineral rights. Among other things it called for the creation of a senior manager position responsible for the development of asset-management plans. The plans include the identification and cataloguing of all real property owned, leased or otherwise managed by the federal government.

This development can be linked to the August 2003 Government Accountability Office report that the General Service Administration, the Veterans Affairs Department and the Postal Service controlled 927 vacant or underutilized properties. In addition, it found that the federal government continued to waste money maintaining these properties—for example, that the VA spent $348,000 in fiscal 2001 to maintain a building in Milwaukee that had been vacant for 14 years. What’s worse is that the Department of Energy has 1,200 excess facilities and that the Pentagon spends up to $4 billion each year maintaining its excess facilities.


Other Federal Opportunities

The federal government operates numerous business enterprises that could be converted into publicly traded corporations, including the USPS, Amtrak, and a number of electricity utilities. Other countries have in-depth experience in privatizing such services that Congress can use when it moves ahead with reforms.

Postal ServicesA 2003 report by the President’s Commission on the U.S. Postal Service and other studies have concluded that the USPS outlook is bleak because of declining mail volume and rising costs. Moving forward calls for privatizing USPS and repealing the first-class mail monopoly that it currently holds. New Zealand and Germany have implemented reforms that Congress should examine. Since 1998, New Zealand’s postal market has been open to private competition, with the result that postage rates have fallen and labor productivity at New Zealand Post has risen markedly. Germany’s Deutsche Post was privatized in 2000, with the result that the company has improved productivity and expanded into new lines of business.

Electricity UtilitiesPublicly traded corporations have always dominated the U.S. electricity industry. The exceptions are the federal government’s Tennessee Valley Authority and four Power Marketing Administrations, which sell power in 33 states. These government power companies have become an anachronism as utility privatization has proceeded around the world from Britain to Brazil and Argentina to Australia. TVA and PMA privatization would reduce the federal deficit, eliminate the utilities’ artificially low power rates that encourage excess consumption, and increase efficiency in utility operations and capital investment. President Clinton proposed to sell off the four PMAs in his FY1996 budget. It is time to dust off those plans and move ahead with reforms.

Loan ProgramsThe federal government runs a large array of loan and loan guarantee programs for farmers, students, small businesses, utilities, shipbuilders, weapons purchasers, exporters, fishermen, and other groups. The Federal Credit Supplement in the federal budget lists 59 different loan programs and 70 loan guarantee programs. Loan guarantees are promises to private creditors that the government will cover borrower defaults. At the end of 2003, there was $249 billion in outstanding federal loans and $1.2 trillion in loan guarantees.

In the 1970s, federal loans and loan guarantees grew rapidly as politicians discovered that they could pay off special interests with loan programs, while not paying any political cost for supporting higher spending directly. Like other federal programs, loan programs that make no economic sense can survive by creating an “iron triangle” of interests that resist reform. Loan program supporters include loan beneficiaries, financial institutions, federal loan administrators, and congressional committees that authorize loan programs.

In the 1980s, the Reagan administration tried to cut federal loan programs, but did not have much success. Policymakers should revive Reagan’s initiatives and begin terminating or privatizing federal loan programs. The provision of credit is a centuries-old market institution that does not need government help, especially given the sophistication and liquidity of financial markets today.

Some federal loan programs target borrowers who could have received private financing. In such cases, there is no need for government loans because they simply displace private loans. Other loan programs target borrowers who cannot secure private financing. In this case, federal loans support borrowers who are poor credit risks, and taxpayer money is likely to be wasted when loans are defaulted on. For example, Farm Service Agency loans are aimed at farmers who are unable to obtain private credit at market interest rates. But such farmers are probably bad credit risks with poor business prospects. Indeed, FSA loans have high default rates.

The FY2005 federal budget says that government loan programs are needed because private markets suffer from “imperfections,” such as lack of perfect information about borrowers. For example, banks might be more hesitant to lend to start-up businesses because they do not have lengthy credit histories. But rather than an imperfection, it is appropriate that start-up firms face more scrutiny and pay higher interest rates because of their higher risk of failure. Since failure creates economic waste, thus it is good that creditors are more hesitant to lend to riskier businesses. Government loan subsidies result in too many loans going to excessively risky and low-value projects.

Free market allocation of credit is far from perfect, but markets have developed mechanisms to fund risky endeavors. For example, venture capital and angel investment (people who invest in a business venture, providing capital for start-up or expansion looking for higher rates of return) pump tens of billions of dollars of investment into new businesses every year. There is no need for the government to compete with such private financial mechanisms.

Government distortions are a bigger problem than market “imperfections.” For example, federal loan guarantees make financial institutions over-eager to lend to those with shaky credit because the government will cover losses in case of default. Also, federal loan programs are generally poorly managed. For example, federal student loans have been on the GAO’s high-risk list for waste, fraud, and abuse every year since 1990. Lax enforcement of student loan repayments has led to large losses from defaults, costing taxpayers billions of dollars.




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