Office of Management and Budget Click to print this document


June 28, 2001


Mr. Chairman and Members of the Subcommittee, I am pleased to be here to discuss with you the Administration's Competitive Sourcing Initiative, the Office of Management and Budget's (OMB) Circular A-76, the congressionally mandated Commercial Activities Panel being coordinated by the General Accounting Office, the implementation of the Federal Activities Inventory Reform (FAIR) Act and the proposed Truthfulness, Responsibility, and Accountability in Contracting (TRAC) Act (H.R. 721).


If there is one point to communicate today, it is this Administration's commitment to public-private competition, or what we commonly refer to as the Competitive Sourcing Initiative. Without regard to whether the public or private sector wins a competition, when a commercial function performed by the public sector undergoes competition, that competition results in significant economic savings to the taxpayer. Indeed, experience demonstrates that the use of public-private competition consistently reduces the cost of public performance by more than 30 percent.

But the dynamics of competition ensure more than just a reduction in cost. Competition results in better value and improves performance by bringing viable, responsive, innovative and cost-effective competitors (public and private) to the table. We believe that the Competitive Sourcing Initiative will continue to result in significant performance improvements. In the past, service improvements have occurred both when the competition has resulted in outsourcing and when the work has been retained in-house. Whether we are looking to reduce costs, improve performance, improve accountability, or increase efficiency, competitive sourcing has been a key program element.

To expand upon these benefits, the President committed to opening one-half of the federal commercial workload listed on the FAIR Act inventories to competition. Implementing this initiative, several steps have already been taken. First, budget was linked to performance planning through the President's Budget Blueprint and through the Director's February 14, 2001 memorandum. This guidance was followed by OMB Deputy Director O'Keefe's memorandum to agencies dated March 9, 2001, which requested agencies to develop performance plans to implement their A-76 competitive sourcing program, including resource and training requirements. For FY 2002, agencies are requested to complete competitions involving not less than 5 percent of their commercial workload, as listed on the FAIR Act inventories. In addition, OMB has requested Federal Register agency and public comments regarding the possible extension of competition to existing Inter-Service Support Agreements (ISSAs). Agencies have long provided commercial support services to other agencies and departments on a reimbursable basis, through ISSAs, without the benefit of competition.

To assist agencies in meeting the Administration's competitive sourcing goals, OMB has undertaken a three-part initiative. First, the plan invigorates the use of OMB Circular A-76 by introducing positive monetary incentives. Agencies may retain the savings achieved through A-76 public-private competitions. Second, OMB will make amendments to the current A-76 Circular to expand and improve the process. And third, OMB will move forward with an A-76 streamlining working group that will be working with the congressionally mandated Commercial Activities Panel, authorized by Section 832 of the FY 2001 Defense Authorization Act, and administered by the General Accounting Office.

Further, OMB has been actively working to ensure the tools and other resources are in place to conduct these competitions government-wide. Because the Department of Defense (DoD) has extensive recent experience with OMB Circular A-76, OMB is working to ensure that DoD's experiences, both positive and negative, can be utilized by the civilian agencies. For example, DoD recently issued an on-line OMB Circular A-76 Cost Comparison Handbook. This document addresses, in detail, questions that have been raised with regard to the implementation of Circular A-76 and the 1996 Revised Supplemental Handbook. DoD also has made available a Revised "A-76 Compare Program," which provides automated costing of the in-house offer and the conduct of the cost comparison itself.

In the short-term, OMB's A-76 competitive sourcing program will be a key component in the Administration's efforts to improve performance, expand efficiency, improve accountability and generate savings. The Circular provides an established policy framework to determine if and when a commercial activity should be converted to or from in-house, contract or ISSA performance. The Circular also provides detailed guidance for the calculation of the in-house offer for comparison with the private sector, recognizing that federal accounting and budget procedures do not now enable a direct comparison of private sector costs with those of federal agencies. Special rules are required to ensure a level playing field and to ensure that the interests of all the parties are protected. This process has resulted in significant performance improvements and in significant economic savings and, while the magnitude of these savings has been challenged, we are not aware of any study that has disputed their existence.

OMB, however, is not blind to the fact that in many respects the A-76 process has become difficult to implement. It no longer satisfies the agencies or those who represent the interested parties, public or private. Rather than encourage competition, A-76 is often perceived as an impediment to the evaluation of public and private alternatives. The process takes too long -- in some cases 3-4 years to define what federal employees are doing. The process is not trusted and numerous GAO reports have found weaknesses in the current structure and its application. Solicitations have not been adhered to by the government, source selection panels have been challenged and best value evaluations have been found wanting. Because agencies must collect and realign cost data that has no relationship to ongoing agency operational costs or budgets, a program that was intended to be a transparent cost comparison process is no longer viewed in those terms. What was designed to provide reasonable estimates of cost on a level playing field has, in many respects, become so rigid in an effort to extract exactness that the process itself has become a costly barrier to competition. Even when significant opportunities exist for performance improvements and savings, encouraging agencies to undertake a one-time public-private cost comparison has been difficult at best.

In the long-term, OMB anticipates vastly simplifying this cumbersome process by replacing the complex and artificial A-76 cost requirements with a budgeted measure of full agency costs. We have taken several steps to implement needed changes. The President outlined in the FY 2002 Budget Blueprint a comprehensive management agenda designed to achieve performance oriented and measurable government. This agenda builds on existing laws such as the Government Performance and Results Act (GPRA), the Government Management Reform Act (GMRA) and the Federal Activities Inventory Reform Act (FAIR) and seeks to integrate performance and accountability with the allocation of budgetary resources.

The Director has determined that OMB should pursue administrative and legislative actions designed to fully integrate performance measurement and budgeting to include: (1) identifying high quality outcome measures, accurately monitoring the performance of programs, and integrating this presentation with associated cost; (2) implementing changes to create a market based government, of which this initiative is a part - to open the government's activities to more competition, and to require agencies to budget for costs in a way that will simplify cost comparisons for A-76 competition, and; (3) fully integrating financial (finance, budget, and cost), program, and oversight information processes. With full cost budgeting, the agency's budget costs will substitute for the complex A-76 cost comparison requirements, on a routine basis.

We do not believe that public-private competitions should be one-time events nor should they be conducted only when the function is being performed in-house. To ensure that the taxpayer continues to receive the best deal and the best value, we need to periodically reexamine our decisions to outsource, to retain functions in-house or to use cross-servicing agreements. At the government's discretion, competition should be used on a recurring basis to review the situation and to determine who can best provide required services.

We are, however, opposed to unfair competition and to competition requirements that place unnecessary burdens on the agencies. During the last decade, Congress carefully built a legislative path to strengthen the framework for financial management and performance measurement. The President has called for the government to be accountable, so citizens can judge our performance. As responsible stewards, we must do more to show how funding levels relate to performance levels and how daily business decisions to perform work with federal or non-federal employees bears on that performance. Better linkage between budgetary requirements, costs and performance will be an every-day priority of this Administration. Department and agency heads have been directed that FY 2002 performance plans, include performance goals for Presidential initiatives and for government-wide and agency-specific reform proposals.


The "Federal Activities Inventory Reform Act of 1998," Public Law 105-270 (the FAIR Act), requires federal agencies to prepare and submit to OMB, by June 30 of each year, inventories of the commercial activities performed by federal employees. OMB is required to review each agency's inventory and consult with the agency regarding content. Upon completion of this review and consultation, the agency head must transmit a copy of the inventory to the Congress and make the inventory publicly available. The FAIR Act then establishes a two-step administrative challenge and appeals process under which an interested party may challenge the omission or the inclusion of a particular activity on the inventory. After requesting public comment, OMB issued government-wide guidance for implementing the Act on June 24, 1999 (64 Fed. Reg. 33927). Relying on this guidance, agencies developed and issued FAIR Act inventories for 1999, and responded to the first round of challenges and appeals.

OMB and the agencies learned a number of lessons from the 1999 experience. We also received recommendations from agencies and interested members of the public on how the FAIR Act process could be improved. As a result, OMB developed revised FAIR Act guidance applicable to June 2000 submissions. For example, OMB directed agencies to use a standard format to make the inventories within and across different agencies easier to understand and compare. OMB also expanded the number of function codes that the agencies could use to describe commercial activities. Reflecting comments received from the agencies and from industry, the expanded codes more accurately capture the commercial activities being performed by the agencies with the aim of increasing agency and public understanding. Other OMB initiatives for the 2000 FAIR Act process included using the Internet to make the agencies' inventories more easily accessible to the public. Finally, OMB directed each agency to include a summary of the agency's review process, referred to as the "Management Report."

For the 2001 FAIR Act inventories, agencies have been requested to submit inventories in the formats and in accordance with the guidance issued for the 2000 FAIR Act submissions. In addition, agencies were requested to submit a separate report that lists the agency's civilian inherently governmental positions. This report will be used as a part of OMB's statutory review and consultation process, but it will not be released as a part of the FAIR Act inventory, nor will it be subject to the FAIR Act's administrative challenge and appeal process.

Certainly, the most contentious issue surrounding the development of the FAIR Act inventory is the decision as to what is or is not inherently governmental, by agency, location and function. OMB has requested that the agencies supply a list of inherently governmental positions to meet OMB's statutory review and consultation obligations. Therefore, OMB considers the request a part of our commitment to improve the quality of the inventories under the Act.


The Administration supports competition, public accountability, the efficient delivery of services, and the development of reasonable cost savings estimates. There is no aspect of the proposed TRAC Act that would contribute to competition, efficiency or accountability. Indeed, the proposed legislation would put at risk the Federal government's ability to acquire needed support services in both the short and long term. The Administration is strongly opposed to its enactment.

The proposed TRAC Act relies on several false premises:

  1. TRAC would find there has been a major increase in service contracting (relying on private contractors to provide services to the Federal Government) since 1993. While service contracting does appear to be rising in absolute terms, a comparison of data after adjustment for inflation shows that the amount of service contracting has remained relatively stable since 1993.

  3. TRAC would find there are no reliable and comprehensive reporting systems in place to determine whether service contracting has achieved measurable cost savings or improved services for taxpayers. The General Accounting Office, the Center for Naval Analysis and others have consistently found that A-76 cost comparisons generate between 20 and 35 percent savings even when the functions are retained in-house. There is no argument regarding the existence of these savings, only their magnitude over the long term.

  5. TRAC would find federal employees are being replaced by contractor employees without even knowing with certainty if the result is reduced costs or improved services. This statement is simply not true. Conversions that occur without a cost comparison must be justified by the contracting officer and must result in reasonable contract prices or a significant quality improvement or both.

In an effort to correct these and other misleading premises, TRAC would freeze all currently contracted activities to determine if they could be performed more cost effectively by the public sector, and would require an entirely new set of financial and other reporting systems that would not contribute to the government's ability to administer contracts, improve performance or enhance accountability. By suspending all facilities and operations contracts including, for example, all federal scientific and criminal lab contracts, many of the primary functions of government would be seriously affected - constituting a serious threat to our national defense. Even Medicare would not be able to issue payments since this is performed by contract. TRAC also would require public-private competitions for all future contracts, including the exercise of all options, extensions, and renewals by any contracting officer. We estimate that TRAC would affect over 230,000 contract actions involving contracts over $25,000 totaling $100.3 billion in 2000 -- an untenable outcome.


As a group, federal employees are some of the nation's most highly trained and dedicated employees. OMB recognizes that, in many respects, we are fundamentally reorganizing the way they and the Federal Government conduct business. Working with the Congress, we seek to develop comprehensive performance and cost data that will lead federal agencies to reconsider how they accomplish their missions - to get the best bang for the buck. Circular A-76 has room for improvement, but, for now, it will remain a key component of our effort to increase performance and realize savings. There is no question that savings are being generated by A-76 competitions. This initiative, however, does not ignore the challenges of the A-76 process: the competitions take too long, are administratively burdensome and are viewed with suspicion. Fundamental changes will be made to our budget systems and to the A-76 process to better reflect the true costs to taxpayers.

Competition has made the American economy the envy of the world. We support the provision of government services by those best able to do so, whether in the private sector or within the government.

Mr. Chairman, that concludes my prepared statement. I would be pleased to respond to any questions that you might have.

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