ORGANIZATIONS SUPPORTING DELETION OF SECTION 372 AND SECTIONS 631-633 OF SENATE VERSION OF NATIONAL DEFENSE AUTHORIZATION ACT Business Coalition for Fair Competition Business Technology Association Circuit City Stores, Inc. Citizens Against Government Waste Food Marketing Institute International Mass Retail Association Jewelers of America National Association of Beverage Retailers National Home Furnishings Association National Taxpayers Union National Tire Dealers and Retreaders Association North American Retail Dealers Association Small Business Legislative Council Tandy Corp. World Floorcovering Association During your July 18 hearing dealing with unfair government competition with small business, you heard testimony from Thomas J. Scanlon which contained a factual error regarding the MITRE Corporation. Mr. Scanlon referred to the January, 1996 division of the MITRE Corporation into two companies through the creation of a new not-for-profit company called Mitretek Systems, Inc. As Mr. Scanlon correctly said, MITRE is now focusing its work on its two Federally Funded Research and Development Centers (FFRDCs) serving the Department of Defense and the Federal Aviation Administration. However, Mr. Scanlon went on to say that "Mitretek Systems will manage MITRE's sales to federal, state, and local government." This incorrectly implies a continuing connection between MITRE and Mitretek Systems. In fact, Mitretek Systems has taken over the work that MITRE previously performed for federal agencies outside the scope of its FFRDCs, as well as for state and local governments. MITRE and Mitretek are separate companies with no overlap of members of its Boards, its officers, or employees. Mitretek is not an affiliate or agent for MITRE. I would appreciate it if you would add this letter to the record of the hearing. July 16, 1996 ACIL The Honorable Jan Meyers Chairman, House Small Business Committee U.S. House of Representatives Washington, D.C. 20515 Dear Madam Chairman: We request these remarks to be included in the record of testimony for the July 16, 1996 hearing on unfair government competition. We commend you for holding these hearings. Unfair competition from federal facilities is having a profound effect on the commercial laboratory testing industry. Government laboratories are adding capability -investing in facilities, instrumentation and personnel -- to perform routine testing and analyses already available in the private sector. Other federal laboratories are using excess capacity to carry out routine testing for other federal, state or local entities for a fee. Finally, some government laboratories are entering commercial markets, bidding as subcontractors on private-sector contracts. ACIL is a national trade association representing the commercial testing laboratory industry. Our members provide scientific and engineering testing services for construction materials, pharmaceuticals, food, product safety, and the environment. Our members also routinely work for federal and state agencies. The vast majority of testing laboratories (approximately 80%) are small businesses with annual revenues of $5 million and under. We recognize the need for the federal laboratories to maintain a modest, core analytical capacity for essential functions such as high-level research, emergency response and highly-radioactive analyses. It's not the maintenance of that capability with which we take issue. We object to the federal laboratories competeing withthe private sector. For example: The federal laboratories, primarily Energy Department (DOE) and Defense Department (DOD) and In other instances, Defense Department laboratories are capturing work traditionally procured from the private sector. Using interagency support services agreements, federal laboratories are performing testing for other government entities for a fee. In doing so, they are bypassing the procurement process and denying the private sector an opportunity to compete. More disconcerting are the federal facilities that bid on private-sector contracts. For example, two 1629 K STREET, NW, SUITE 400, WASHINGTON, DC 20006 202/887-5872 FAX 202/887-0021 ACIL Comments for the Record Hearings on Unfair Government Competition July 16, 1996 Page 2 Defense Department laboratories are currently bidding against commercial firms for routine environmental simulation testing for a large manufacturer. This type of testing is not unique in nature and does not require the special research capabilities for which DOD laboratories are designated. These occurrences of direct competition with the private sector are widespread. For example, the Aberdeen facility routinely tests electromagnetic automotive components for a major car manufacturer. The Indian Head and China Lake facilities have utilized unrealistic cost and bidding practices to win environmental simulation testing contracts. The authority that the government laboratories have to compete directly against the private sector is dubious. Various federal departments, however, are trying to legally justify their competition with the private sector. Recently, a Memorandum for Distribution by the Assistant Secretary of the Navy was sent to the Navy laboratories. This memo states that under Title 10, Section 2553 of the United States Code, there are provisions in place that allow the DOD laboratories "to sell to non-Defense customers." However, Title 10, Section 2553 states that the DOD can sell those services "that are not available from any commercial United States source" (See Attachment A, Navy Department Memorandum for Distribution, and Attachment B, Title 10, United States Code, Section 2553). Clearly, this law was not intended as a mechanism to compete with the private sector on services which are professionally available. It is intended to allow the development of sophisticated technologies to further military and economic competitiveness. Congruent with our interpretation is a recent Department of Justice ruling against a federal laboratory (see attachment C, Battelle Agrees to Pay U.S. $330,000 for Misusing DOE Equipment ). The operators of the Pacific Northwest Laboratory were fined $330,000 by the federal government for performing unauthorized services. ACIL is encouraged to see that the government, given an opportunity, will enforce its policies regarding unfair government competition. However, it's distressing that this action would not have been taken had the suit not been brought by a disgruntled Battelle employee on behalf of the government. Another justification for internalizing this work is based on an assumption that government is the more costeffective provider. However, these assumptions are often based upon ambiguous cost comparisons. The cost comparisons being used to justify competition with the private sector are not the best way to procure analytical services because they fail to take quality into consideration. This is a major shortcoming of OMB Circular A-76, the federal policy that determines whether a service can be performed more cost-effectively if it is outsourced. Unlike the private sector, government agencies do not fully allocate overhead to determine true operating costs. This fundamental difference in overhead allocation results in an apples-to-oranges cost comparison, and should not be used to determine whether a service is outsourced. Nor should it be used as a cost baseline to compete against private-sector firms for commercial contracts. For example, if the DOD saves 31% (a figure submitted to Congress by Deputy Secretary of Defense John P. White) when non-core defense tasks are privatized, how can DOD laboratories continue to assert their cost efficiencies? Such facts call into suspicion the costing techniques used by the federal laboratories. It also underscores the weaknesses in the current system for utilizing the private sector. Yet, DOD cost comparison policies provide DOD managers the excuse to internalize laboratory testing as well as bid on commercial contracts. Even if the government is the lowest unit cost provider of a particular service, does it also mean it is the best ACIL Comments for the Record Hearings on Unfair Government Competition July 16, 1996 Page 3 provider of that service? Quality and timeliness are not part of a cost-based selection process. No doubt, the timeless adage "you get what you pay for" applies. In the end, basing procurement of professional services on cost excuses the government from a realistic assessment of performance capability and quality. The need to ensure quality outweighs the initial cost savings achieved through the lowest bid. For example, in most environmental contracts analytical services usually comprise between 5-10% of the total contract value. However, all environmental decisions are made based upon the laboratory data. The added cost of ensuring that the data is reliable is minimal compared to rework costs and other headaches if the data is of unknown quality. Since commercial laboratories are accredited to perform various types of analyses, they can demonstrate the proficiency to produce data of know quality. The endless cost comparisons and justifications are only diverting resources away from core government functions. With shrinking budgets, it is illogical to continue subsidizing the federal laboratories so they can compete against tax-paying firms. Reliance on the private sector for specialized services, such as laboratory testing, eradicates the continued and costly process of finding new missions for obsolete federal entities. Using commercial laboratories ensures that the government is receiving quality and cost-efficient analytical services -- allowing the government agencies to focus on it core mission of servicing the public. It has never has been the intent of Congress to allow the federal government to compete with the private sector. Since its inception, the government has dedicated itself to protecting and promoting the free enterprise system -- one of the pillars of our democracy Instead, subsidizing government agencies to compete in the commercial marketplace is socialism. However, there is no police force to protect the private sector from the government employees engaged in entrepreneurial activities. The Congress, which appropropriates and authorizes these agencies, is the only mechanism that can check this activity. Therefore, we ask Congress to implement strong and enforceable legislation that discourages unfair government competition. The policy should not hamper the government's ability to perform key functions for public health and safety, nor should the government be stopped from performing basic science and high technology functions that will further the economic competitiveness of the United States. However, the policy should not allow the federal agencies to indiscriminately provide services that are readily available from the commercial sector. We also ask that the federal government also stop the use of interagency support agreements. Such agreements are not in the taxpayers best interest because they avoid the competitive bidding process and does not provide the private sector a fair opportunity. Thank you for allowing us to submit these comments. Sincerely, Anthony Dayhard Anthony P. Pagliaro Director, Government Relations |