The risky business of outsourcing essential government services

Britain to tackle doubts about outsourcing risks with new guidelines

Britain, which hires private firms to run parts of its health service, schools, prisons and public transport, has been rethinking how it awards contracts after the collapse of contractor Carillion just over a year ago. Carillion became the largest construction bankruptcy in British history last year, leaving creditors and pensioners facing steep losses and putting thousands of jobs at risk. Its demise reduced the number of big corporate bidders for government contracts and increased scrutiny of how the sector is run, driving down share prices of firms that provide outsourcing services, such as Babcock, Capita, Serco, G4S, Mitie and Compass.

Britain’s government will take measures to identify and reduce risks taken by private firms that provide public services, it will say on Wednesday, in a bid to encourage companies that have become increasingly wary of taking on new government business. “A more considered approach to risk allocation will make us a smarter, more attractive client to do business with,” cabinet office minister Oliver Dowden will tell business leaders at the Confederation of British Industry on Wednesday.

Guidelines, set out in the “Outsourcing Playbook”, will specify that “when designing contracts, departments must seek to mitigate, reduce and then allocate risks to the party best able to manage it”, Dowden will say, according to a text of his remarks released before delivery. The aim is to improve how government works with industry and deliver better public services by, for example, piloting services needed in advance and publishing details of work departments will require, so companies are better able to plan.

Public departments will also be required to say when it is best to deliver public services in-house or when there is benefit from drawing on private sector expertise.

Read this and other articles at the link(s) provided; I tend to slice and dice, rearrange, omit, paraphrase and pretty much destroy the integrity of the original work to try to create a teachable moment fitting the context of this blog.

Professor Steven L. Schooner, of the George Washington Law School, has asked, "what does your government hope to achieve through its government procurement law? It seems reasonable to attempt to describe general aspirations for a procurement system before drafting begins." In a paper he wrote, published in the Public Procurement Law Review in 2002, he identifies the principle of "risk avoidance" as one of nine particular desiderata often mentioned for a successful procurement regime.

It is difficult to describe a procurement regime without acknowledging the role of risk avoidance. Avoiding undue risk is a fundamental responsibility of any governing body. Conversely, improper obsession with risk avoidance can suffocate creativity, stifle innovation and render and institution ineffective. Further, there are infinite mechanisms available to control different types of risk.

No system can fully achieve all of the nine goals. Nor can a state expect that its objectives for its system will remain constant over time. Determining which goals are most important is a daunting, ever-evolving challenge. Because no system can achieve all of the goals, your desiderata entails important tradeoffs. Ultimately, each government must decide how much discretion or flexibility it wishes to delegate to its buyers.

Prof Schooner applied that principle of risk avoidance in testimony before the United States Senate, Committee on Homeland Security & Governmental Affairs, in 2007, commenting on "the benefits, challenges, and risks of agencies’ increased reliance on contractors to provide critical services". He noted:

The challenges associated with extensive contractor reliance include, among others: (1) planning, which includes understanding what outcome will be sought from the private sector; (2) both understanding and accurately describing that outcome (or task) to the private sector; (3) selecting appropriate, qualified contractors in a timely fashion; (4) negotiating cost-effective agreements and drafting clear contracts that contain effective incentives (or profit mechanisms) to maximize contractor performance; (5) managing the contractual relationship to ensure that the government receives value for its money; (6) providing appropriate oversight throughout the process to, among other things, avoid corruption; and, most importantly, (7) maintaining a sufficiently educated, experienced, and motivated government workforce (or augmented workforce) to take on these challenges.

These challenges can be difficult to accomplish because the combination of government recruiting policies, salaries, benefits, opportunities, and quality of work lag much of the private sector, particularly in high-demand career fields. Thus, the “market” reflects that the government undervalues critical skills.

By the same token, slavish focus upon the relative cost of contractor support is misguided. Specifically, it is not productive to criticize agencies for paying contractors “too much” without: (1) permitting an agency to hire additional personnel; (2) confirming that sufficient personnel are available in the marketplace and willing to work for the government; (3) comparing “apples to apples,” such as taking into account all of the costs of civil servants or members of the armed services; and (4) considering critical issues such as flexibility and surge capacity. For example, higher contractor salaries may be offset, at least in part, by long-run costs avoided. Indeed, a strong case could be made that, for short-term demands for additional resources, it makes sense to pay higher, and potentially significantly higher, amounts for contractor support.

Fundamentally, though, it is difficult to conceive of a higher priority for a heavily outsourced agency than to “assess program office staff and expertise
necessary to provide sufficient oversight” of its most important service contracts. And, empirical evidence is scant to demonstrate that government employees are more talented, committed, motivated, or honest than their private sector counterparts, and vice-versa. However, the private sector’s exposure to market forces, and the related corporate purpose of pursuing profit, permits (and, arguably, requires) a more diverse and potent arsenal of employee incentives and disincentives. These tools include compensation (salary, salary increases, bonuses, stock incentives), opportunity for advancement, and, of course, the risk of termination. While the Government can use similar tools, their impact (or the degree to which these tools can influence behavior) is at least perceived as far less dramatic, given a heavily constrained promotion and bonus regime and an impenetrable de facto tenure system. The private sector-government contrast is greatest at the extremes. The private sector offers far greater economic rewards for success and threatens more credible sanctions for less than desirable performance.

Ultimately, however, the debate between in-house services or privatized services is increasingly academic. The government today relies on the private sector because we have restricted the size of government or, more specifically, the number of government employees. The government currently has no short-term choice but to rely upon contractors for every conceivable task that it is understaffed to fulfill. It is not an option to consolidate its missions, jettison a number of its tasks, terminate contracts, and take on only those missions it is appropriately staffed to perform. Nor is it feasible to wait while it embarks upon an aggressive program to identify, recruit, hire, and retain an extraordinary number of civil servants.

Only serious, long term, far reaching personnel reforms can, in any meaningful manner, begin to reverse the current trend. Accordingly, the government must continue to expend its best efforts to achieve its mission with the resources available, acknowledge that it is a rather “hollow” agency, and invest significant energy and resources in improving its use of contractors to help it achieve its mission. This involves conceding that contractors will continue to perform what historically have been perceived as inherently governmental functions. But even that notion is becoming increasingly quaint, outmoded, anachronistic, or simply irrelevant. At least, that is, until our increasing reliance on contractors to perform services for core government activities is matched by the capacity of government officials to supervise and evaluate the performance of these activities.

As our procurement system has struggled throughout this decade, Congress has been quick to call for more auditors and inspectors general to scrutinize contracting. That’s a responsible gesture. But the corresponding call – for more contracting experts to perform the many functions that are necessary for the procurement system to work well – has been both delayed and muted. In order to serve the taxpaying public and meet the needs of agency customers, acquisition professionals must promptly and accurately describe what the government wants to buy, identify and select quality suppliers, ensure fair prices, structure contracts with proper monetary incentives for good performance, and manage and evaluate contractor performance. Accordingly, the contracting workforce – understaffed, under-resourced, and under-appreciated – desperately requires a dramatic recapitalization.

We have witnessed an explosive growth in what we refer to as body shop or employee augmentation arrangements. As the name implies, the government uses this type of contract to hire contractor personnel to replace, supplement, or work alongside civil servants or members of the armed forces. Civil servants work alongside, with, and at times, for, contractor employees who sit in seats previously occupied by government employees. Unfortunately, no one stopped to train the government workforce on how to operate in such an environment. Worst-case scenarios have arisen where contractors have performed work under an
open-ended contracts (e.g., with a vague or ambiguous statement of work) without guidance or management from a responsible government official.

More than fifteen years of ill-conceived under-investment in the acquisition workforce, followed by a government-wide failure to respond to a dramatic increase in procurement activity has lead to a triage-type focus on buying, with insufficient the resources available for contract administration, management, and oversight. The old adage – an ounce of prevention is worth a pound of cure – rings true. More auditors and inspectors general will guarantee a steady stream of scandals, but they’ll neither help avoid the scandals nor improve the procurement system. Conversely, a prospective investment in upgrading the number, skills, and morale of government purchasing officials would reap huge dividends for the taxpayers.

Procurement Controversy du jour - Australian government 'consultants'

Experts flag lack of accountability in procurement contracts

Current contract arrangements often prevent consultants from being held accountable for the advice they give to government while ambiguous reporting makes it difficult to determine the value for money of outsourced work. That’s according to the Melbourne School of Government, which has told a parliamentary committee into government procurement contract arrangements that the commercial-in-confidence privileges often attached to consultants’ work has given rise to concerns about accountability and transparency.

“This is different to advice provided by, for instance, a government department, which forms part of the public record,” the school says in its submission to the inquiry.

Last week Government News reported on calls for the Department of Finance to carry out a detailed investigation into whether there is “systematic flouting” of the procurement rules, given the high use of government contracts below $80,000, which are not required to be put to market. The Melbourne School of Government said the way in which value for money is reported by Commonwealth agencies is not specified under procurement contracts and often remains unclear. “This means it is not possible to understand the ways in which value-for-money was assessed for specific consultant engagements, and the extent to which a particular engagement did, in fact, deliver that value.”

The school also pointed out the lack of formal accreditation for becoming a consultant or professional body ensuring practitioners meet basic professional or ethical standards.

“This means that there are no generally accepted rules regarding who can legitimately call themselves a consultant,” it said.

The school also highlighted that more than two-thirds of the public service’s consulting work is completed by five organisations, four of these being the Big Four accounting firms. “It would be helpful to understand why exactly this is.”

Dean of engagement at Griffith Business School, Professor Anne Tiernan, who has been involved in several projects examining public service capability, said successive “reforms” had eroded institutional memory and capacity for long-term thinking.

KPMG, which earned $620 million in government contracts from 2012 to 2017 according to the national auditor, argued it was unrealistic to expect public service to possess in-house the myriad technical skills needed to meet rising demands. Departments and agencies required specialist skills including data and analytics, artificial intelligence and business and technology transformation, it said.

While only the primary organisation in a contract is currently reported, the consultancy argued that the reporting of subcontractors would provide an increased level of transparency, particularly for smaller enterprises working as part of a consortium. KPMG also proposed that AusTender should provide information on other companies and consultants that unsuccessfully tendered for a contract, and not just the winner, to provide “an additional level of transparency” to the procurement process.

Read more at the link.

Crikey! Wot a rort!

I remind my reader to click the links to the articles presented and read the originals, as I slice and dice the material for didactic purposes in order to try to present a "teachable moment". These posts are mostly to be considered as hypothetical procurement case studies, not news or other literary content, and omit, paraphrase and rearrange a lot of original material. You've been warned, again.

Allegations of systemic fraud sparked Defence Department internal audit

Confidential documents drafted by a senior defence department investigator reveal allegations of systemic fraud spanning several years inside the government's biggest spender. The 10-month investigation, which finished in February this year, was prompted by an anonymous disclosure about fraud and corruption made to the department in April 2016.

One of the most concerning aspects involved the department awarding companies contracts without a competitive tender process and only a flimsy justification they met "value for money" requirements. In other cases the department was unable to tell whether a contract breached procurement rules or not because important paper work could not be found.

In 2015-16 the Department of Defence reported the largest yearly contract spend of any agency within the public service. The department dialled-up a bill of $30.5 billion on contracts, amounting to 54 per cent of total government contractor spending.

The investigation raised serious questions about the department's use of "single source" tenders, where a single company is awarded a contract without having to compete against other providers. "It is questionable whether true value for money is achieved when [redacted] continually conduct single source limited tenders," Dr Clarke wrote. "Whilst there is less administration and quicker decision making with this approach, it provides limited opportunity for Defence to achieve the best possible outcome. "Single source limited tenders increase the risk of contractor underperformance and corruption."

Defence spending data unreliable, incomplete, national audit office says

Transparency and accountability for billions of dollars of annual defence spending remains suspect despite recent reforms, the Australian National Audit Office (ANAO) has found.

Last year, the Defence Department spent $8.3 billion on keeping its equipment in working order, known as "sustainment" in military jargon. Yet, the audit office found that despite small recent improvements, information about where that money went and whether it was being spent wisely was often unreliable or not available.

The report also questions a claim from Defence that reforms to its sustainment policies had saved $2 billion. "Defence has not been able to provide the ANAO with adequate evidence to support this claim, nor an account of how $360 million allocated as 'seed funding' for Smart Sustainment initiatives was used," it read.

Auditors were also critical of inconsistencies between figures given to the Government during the budget process and those provided in the department's annual report. "It's absolutely not good enough," Andrew Davies, director of defence and strategy at the Australian Strategic Policy Institute, told AM.

Oz military megahack

An Australian Signals Directorate (ASD) presentation to the Australian Information Security Association (AISA) conference yesterday detailed the hack. Suffice to say that a medium-sized defence contractor was breached and gigabytes of aerospace data and commercial arrangements for military aircraft and naval vessels were delivered into the hands of the attackers. The ASD used it as a case study for the AISA conference yesterday.

The government has since said the information was commercial-in-confidence, but not classified. This is not an isolated incident: in Australia, as elsewhere, attackers thwarted by a network's defences then seek out third-party contractors as an easier mark.

This suggests a problem in sub-contractor oversight – you can win a government contract without proving you have adequate network security.

Minister for Defence Industry Christopher Pyne seems to agree. This morning, he told Radio National's Breakfast programme that the government can't be held responsible for a contractor's lax security.

Fat and mismanaged public sector is eating us alive

In a Crikey article, carried by the Community and Public Services Union, Eric Beecher chronicles appalling mismanagement in service delivery.

Then there’s the $11 billion spent by the Defence Department managing 119 bases around Australia which the ANAO says is well in excess of the $9.3bn “expected value” of the 10 services contracts, signed in 2014, to do the work. The department has defended its performance, saying the vast project to renegotiate the contracts has delivered value for money, when considered against increased service demands and changing expectations of the ADF. Yet a new $120 million IT system, meant to manage contracts ­between Defence and the private companies servicing the bases, was $39m over budget and five years late.

There’s also the flawed tendering and contracting processes overseen by the Immigration ­Department, which resulted in the waste of “tens and possibly, hundreds of millions of dollars”. Given these practices were subject to a scathing ANAO report, they could hardly be ignored.

We’re reminded of last year’s Australian Bureau of Statistics census “stuff-up”, the Australian Taxation Office’s massive and damaging IT outage, the Department of Health’s decade-long mismanagement of e-health records, and the embarrassing release of identifiable Medicare information. There’s also the Department of Finance’s lax oversight of ministerial travel arrangements. But not raised is the $576m public service travel bill — a blowout of $75m in just four years.

While this shocking record is acknowledged, Beecher argues the blame lies mainly with outsourcing to powerful private contractors.

Outsourcing failures expose weaknesses in both government and business

The problems of dealing with private sector providers and contractors are a persistent theme in the analysis of government shortcomings. For example, recent Australian National Audit Office reports highlighted contracting problems in Air Services Australia, the Defence Department and the Immigration Department. Contract management issues were at the heart of last year's failed online census and have been a constant factor in the turbulent administration of Australia's controversial offshore detention centres. Over-reliance on contracted consultants was a major cause of the botched home insulation scheme.

Given the extent to which governments rely on private contractors for a large range of goods and services, it is unsurprising that contractors are often in the frame when things go wrong. But many of the recurring issues arise out of factors specific to the contracting process.

A common complaint is that the use of contractors has caused agencies to run down their in-house expertise and technical resources. As a result, it can be argued, agencies lack the capacity to assess whether the contracts they are agreeing to give the government and taxpayer adequate value for money. Without their own professional judgment, grounded in technical knowledge and practical experience of the area in question, public service managers are ill-equipped to decide matters of all-round quality. Instead, they tend to fall back on generic checklists of assessment criteria that emphasise easily specifiable factors, such as cost and timeliness.

Alternatively, if funds allow and time permits, they may contract in an external consultant or commissioner to give an expert opinion on a proposed contract. But such advice carries the risks of perverse incentives attached to all forms of external contracting and consulting. The consultants' objective is to gain future contracts, which encourages them to say what they think governments want to hear in preference to what they ought to hear. Once again, without the professional judgment to tell the difference and without their own in-house, trusted staff to advise them, public service managers are at the mercy of self-interested outsiders. This vulnerability is compounded by the lack of transparency that surrounds contracting. Overuse of commercial-in-confidence provisions has shielded public servants from the bracing effects of public scrutiny.

The lack of in-house capacity can affect not only the initial process of drawing up contracts but also the oversight of how contracts are implemented. However, as the constant stream of scandals illustrates, many commercial providers are more interested in profit than in good service and cannot be trusted to do the right thing. As a result, governments are being driven to impose tighter controls and regulations. Even then, in the face of determined rorting and corner-cutting, most government agencies lack the resources to prevent opportunistic contractors from wrongfully expropriating public funds.

After two decades of wholesale outsourcing, some general conclusions are clear. Contracting out is an efficient and effective alternative to in-house provision where the objectives are clear and easily monitored, and where there is a competitive market of alternative providers. It also works well for more complex services where providers can be trusted to pursue public-interest objectives for their own reasons. However, where these conditions of either simplicity or trust do not apply, the risks that governments will not receive value for money start to build. Moreover, extensive experience with outsourcing has itself compounded these risks by reducing governments' capacity to effectively draw up and monitor outsourcing contracts. Some complex service contracts that could have been safely contemplated a generation ago are now beyond the professional expertise of public servants to administer.

politicians need to recognise that outsourcing complex government services requires the development of trust between the parties, which means looking beyond the short-term bottom line and not always preferring the cheapest option. In addition, successful contracting depends on well-resourced government agencies with the skills and experience necessary to manage ongoing relationships with contractors. Running down government staffing levels while relying more on private contractors is a recipe for continuing policy failure.

Contractors, for their part, must earn the right to be treated as trusted partners. They must be prepared for the long haul and willing to learn from experience. They must also be ready to submit to the level of public scrutiny and accountability that public servants take for granted. Indeed, given that the commercial private sector is not imbued with the same commitment to serving the public interest, there is a case for subjecting private contractors to more scrutiny than the public service, not less.

The business of government

I've taken the following article and sliced and diced it to my own editorial fancy, to make particular points about procurement, as is my wont in this blawg. So, if you really want to know the article's author's intent, read it at the title link.

Go on. Click the link and read it from the horse's mouth; some may view it as thought provoking. I did.  My convoluted version follows the link and hopefully does not too much damage to the author's intent.  Pay attention to my identified tags/labels (in the head of this blawg) to put this post in my context.

Thinking about the business of government, By CHRIS DISHMAN, a Ph.D. candidate in public affairs at the University of Texas at Dallas, who wrote it for the Dallas Morning News.

Total spending for the executive branch, known as “discretionary funding,” amounts to 30 percent of all U.S. spending. “Mandatory spending” accounted for 70 percent of total government spending in 2016.

The Department of Defense accounts for half of “discretionary” spending, so agencies like Commerce, Energy, Homeland Security and Veterans Affairs make up 15 percent of total spending. If Congress eliminated the Department of Energy, for instance, the government would save $28 billion annually, which is roughly equivalent to the cost of two new CVN-class aircraft carriers.

Medicare, Medicaid, Social Security and interest on the debt make up the bulk of “mandatory” spending, together with other “entitlements”, social as well as corporate.

The executive branch is the same size as it was in the 1970s, despite the increasing number of laws and regulations passed by Congress. The government remains at 2.1 million people or less.

The government’s workload has skyrocketed, as measured by the amount of spending per government employee, yet neither Congress nor any executive will support additional resources to implement the rules and regulations they advocate. The result of this dilemma is that government contracts out many of its duties to the private sector. And this forces government managers to shift existing resources — those used to undertake other governmental duties — to “manage” those contracts.

The government is paying big dollars to companies to undertake governmental missions. Why? Because it is politically palatable. Mandatory spending must be addressed to balance the budget, but politicians know that threatening a reduction in these programs is electoral suicide. Do you wonder why lobbyists like this approach?

There are fundamental differences between business and government.

Constitutional values, not corporate law and profit, guide the public sector. Ideally, government serves public interests while protecting the competing values that underpin those interests.

The private sector, in contrast, is governed by corporate law and profit, and business executives are, in the main, disinterested in anyone who cannot support that goal.

These differences do not mean that government cannot learn from the private sector. But we should remember that the republic’s founders intended the structure and processes of government to reflect constitutional values, not those of free enterprise.

Good enough for government work

Pentagon Pleads With Contractors to Step Up Fight Against Industrial Espionage

It is a wide open secret that the Pentagon’s complex supplier base has become a huge target. The Pentagon’s nightmare scenario: An orchestrated campaign to not only sabotage U.S. weapon systems but also steal sensitive design data from American companies. “We see growing opportunities for bad people to get at our products,” said Undersecretary of Defense Frank Kendall, who oversees weapons acquisitions.

The security gaps have widened over time, resulting from a combination of economic and technology trends — the globalization of electronics supplies and proliferation of counterfeits, the internet of things and the widespread use of software in military systems. The prospect of malicious tampering has become all too real, said Kendall. “What is my greatest fear? That we’ll find one day when we ask our systems to do something, they won’t work.”

These issues fall under the broad category of “supply chain security,” and they have put the Pentagon in a tight spot because it has limited visibility and control of the vast web of suppliers that design and produce equipment for the military. The security gaps have widened over time, resulting from a combination of economic and technology trends — the globalization of electronics supplies and proliferation of counterfeits, the internet of things and the widespread use of software in military systems. The prospect of malicious tampering has become all too real, said Kendall.

But only in recent years has the Pentagon seen substantial data and evidence of cyber attacks, tampering and other nefarious actions aimed at the defense industry. Without naming names, Kendall said there are mounting concerns about “things that are hidden in the things that we buy.” The Pentagon is taking steps such as increasing cybersecurity training for procurement officials and is trying to raise awareness of the risks, but the overwhelming responsibility for preventing and catching bad actors falls on contractors, simply because they are the first line of defense.

Dan Payne, director of the Defense Security Service, an agency that oversees industrial security, said suppliers are stepping up voluntary reporting on suspected spying. The defense industrial base is “facing a changing threat, one we’ve never faced before, a counterintelligence threat that is unprecedented in our history,” he insisted. “It’s bigger than anything we’ve ever seen.” And it’s all happening behind the scenes,” he said. “We’re in a knife fight and most people don’t know it.”

The DSS is rethinking its internal processes for dealing with industrial espionage. Many of the agency’s methods have not changed since the Cold War, said Payne. “We’re looking at prioritizing technology we truly need to protect, and looking at the companies that are producing those technologies,” he added. “Knowing how enemies are coming at us, we are working with industry on tailored security for each facility.”

In this frightening environment, Payne told executives at the Bloomberg forum, “We have to partner with industry. The nation’s top corporations can afford to spend a lot of resources vetting suppliers, but the majority of defense vendors lack such means. The U.S. government doesn’t have the resources to fight this battle alone.”

One way foreign actors can access U.S. defense industry products and data is by buying up companies. This is a “huge issue,” said Payne. “We’re never gong to be able to guarantee the supply chain 100 percent, it’s too vast.” As globalization has taken over the economy, foreign intelligence services are using businesses to get inside our supply chains to steal our secrets, our technology.”

With a globalized work force, there is a higher risk of “insider threats” that can be even harder to tackle than digital intrusions. “At no time have our adversaries ever had the access and the ability to come from different avenues as they do right now,” said Payne. “The Chinese are very good.” Having cornered 56 percent of the consumer microelectronics industry, the Chinese are in strong position to woo U.S. companies to partner with them. “This is tough one,” said Payne. “Never before have we seen the volume of joint ventures getting into our supply chain.”

The Pentagon admittedly has limited weapons to fight back, but it is slowly gearing up, said Kristen Baldwin, acting deputy assistant secretary of defense of systems engineering. “We understand security, but it’s not in our practices and processes to think about that,” she said. “We worry about quality and reliability.”

Defense program managers have to prepare to cope with counterfeit parts, malicious tampering, reverse engineering and infected software. And as much as the Pentagon needs contractors to share information about potential threats, she said, the government also needs to be more transparent with the industry.

Baldwin suggested the answer might be to rethink how weapon systems are designed so they are less vulnerable to single points of failure. “We should think about not only where the part comes from but also whether we need to design our systems so they are not completely degraded just because we don’t know what’s in that black box.” There is no way to guarantee the performance of every single component, she said.

The Pentagon funds a small number of “trusted foundries” that produce sensitive microelectronics for exclusive government use. But the majority of electronic components found in military systems come from commercial suppliers. “The fact is that we can’t afford to shut ourselves off the global supply chain nor do we want to,” Baldwin said. “That’s technology we need for our systems.”

Read more of the story at the link above.

I was interested in the comment, "The Pentagon funds a small number of “trusted foundries” that produce sensitive microelectronics for exclusive government use." It reminded me of the early years of government contracting in the United States, up to the early 20th century. My perspective of that was informed by the excellent book, "A History of Government Contracting" by the esteemed practitioner and professor, James F. Nagle. See a review of this book here.

As I recall what he wrote, in the earliest days of manufacturing, the US government took to making its own things because there was no defense industry, as such, to speak of, and what industry there was had not mastered the process of making and assembling interchangeable parts. 

Nagle expressed the observation that the government's products, made in its own "trusted foundries", were widely admired and sought around the world. Today, we take the phrase, "good enough for government work", as a cynical statement that government cannot make anything worth its salt. But, back then, when the phrase was first used, it was an admirable statement of the gold standard. If a private supplier could lay claim to have products or services "good enough for government work", he or she could proudly peddle products any where in the world.

In a day when government is intent on outsourcing everything to private contractors, who very often have foreign ownership or other influence, we might find it useful to more often rethink the gold standard. 

Outsourcing pre-judicial review of administrative processing

The following article, and the case which it reports, is not exactly about procurement. It does, though, inform the discussion about how to determine which activities of a government are legislatively determined to be governmental functions that must be performed by the government. The function in controversy here is the initial review of a contested parking ticket.

The article bringing this to light was flagged by the State Bar of California's Daily News Digest August 12, 2016, and appeared on NBC Los Angeles News online.

City of Los Angeles Ordered to Change Parking Ticket Dispute Process

The California Court of Appeal has ordered the City of Los Angeles to change the way it handles parking ticket disputes. A three-judge panel said the city can no longer outsource the handling of the initial reviews of parking tickets requested by motorists, but must do those reviews themselves. The appeals court’s decision, handed down this week, says the state vehicle code requires cities, not outside contractors, to conduct all initial reviews of parking tickets.

The case is Weiss v. City of Los Angeles. Pieces of the case reflected below are my own editorializing, and cut, rearranged, left out, paraphrased and otherwise altered and (mis)construed, as is my practice in this blawg. Thus, you are better served by reading the case in its entirely at the link.

In this appeal by the City of Los Angeles (City) and Xerox Business Services, Inc. (Xerox,) we consider whether the City, as the “issuing agency” for notice of parking violations in the City, must conduct the “initial review” of challenged citations, or whether it may delegate that duty to Xerox, its “processing agency”. [The decision in the case required interpretation of the complex statutory scheme, which had evolved over time. As is the case with many such statutory evolutions, some genes change, some stay the same and some just disappear, making the interpretation process more complex than a simple reading of a single statute might suggest.]

Weiss got a parking ticket, which he contested. After an initial review performed by Xerox, Weiss received a letter advising him that an initial review had been performed and the citation would not be cancelled. [There followed a round-about means of getting the issue before the court, interesting for those studying writs of mandate, standing and the like, but not germane to this post, which is more about the question, how to determine if a particular governmental function can to delegated to a private contractor. Thus, I limit the discussion here to:"Weiss’ claim that the initial review process, as currently constituted, did not comply with the statutory obligations of the initial review under the Vehicle Code".] Since 1985, the City has contracted with Xerox to act as its processing agency. As part of Xerox’s processing duties, the City delegates the duty to conduct the initial review of contested citations. Xerox is paid based on the number of parking citations processed per month, but does not receive additional compensation to conduct initial reviews. Xerox performs the initial reviews through its Parking Violations Bureau (Bureau), which is staffed by a subcontractor. In fiscal year 2013, Xerox conducted 135,291 initial reviews [constituting about 5% of citations processed].

The initial review is conducted by Bureau clerks, who must adhere to 46 Business Processing Rules (BPR), drafted by the City (or by Xerox and approved by the City). When considering a contested citation, the Bureau clerk refers to the applicable BPR, if any; if that BPR permits dismissal of a citation, the clerk dismisses it. If no BPR addresses the particular challenge, but a motorist has presented sufficient evidence to overcome a citation, clerks are instructed to refer the matter to a supervisor for a decision. The motorist learns the result of the initial review through one of 97 form letters drafted and approved by the City, on City letterhead, sent to the motorist by Xerox.

The trial court below concluded that, setting aside the issue whether Xerox was authorized to conduct the initial review, the City’s system of initial review complied with the Vehicle Code requirements in the scope of the review, in the fairness of its procedure to the motorist, and in the fairness of its substantive decision-making process.

The question at issue in this appeal [and this post] is whether the state vehicle code requires that the City, as the issuing agency, conduct the initial review, rather than its processing agency, Xerox. In its ruling, the court below reviewed the statutory framework, its legislative history (including pertinent existing, amended and repealed Vehicle Code sections), and case law. Conceding that the question was close, the court concluded that legislative changes in 1995 to the statutory scheme reflected the Legislature’s intent to place a nondelegable duty to perform the initial review on the City, the public agency that issues parking citations.

The 1993 revision maintained the prior definition of a “processing agency”; ‘processing agency’ means the contracting party responsible for the processing of the notices of parking violations and notices of delinquent parking violations. It also contained an amended version of section 40200.5, which preserved the issuing agency’s authority to contract with a processing agency (“an issuing agency may elect to contract with the county, with a private vendor, or [others] . . . for the processing of notices of parking violations and notices of delinquent parking violations....

Prior to the 1995 revisions, the legislation allowed an issuing agency to contract with a processing agency for the processing of notices of parking violations, including investigating the circumstances of the citation and conducting the initial review as well as giving the processing agency the authority to make the decision whether to cancel the citation.

The 1995 revisions repealed the previous statutes which had expressly provided that the processing agency may conduct initial reviews, and gave the processing agency the authority to investigate challenged citations. It enacted a new provisions assigning responsibility for conducting the initial review to the “issuing agency,” giving that agency the authority to determine whether to cancel the citation, and requiring it to inform the processing agency of its decision, further eliminating any reference to the authority of the “processing agency” to conduct the initial review.

Legislative deletion of an express statutory provision “‘is presumed to effect a substantial change in the law’ [citation].” (Barajas v. City of Anaheim (1993) 15 Cal.App.4th 1808, 1814.) Considered in their entirety, the 1995 changes strongly suggest that by repealing section 40200.7 and former section 40215, and replacing them with a new section 40215, the Legislature intended to give sole authority to conduct the initial review to the issuing agency, and to preclude delegation of that duty to the processing agency. No other rational explanation comports with the breadth of the modifications eliminating references to the processing agency’s authority.

But, the 1995 revisions did not amend section 40200.5 to directly reflect the elimination of the processing agency’s authority to conduct the initial review. Thus it remains that the issuing agency could contract with a processing agency “for the processing of notices of parking violations and notices of delinquent parking violations, prior to filing with the court...." This might be read in isolation, without considering the 1995 changes, as suggesting that the issuing agency may contract with the processing agency to conduct the initial review because that review occurs before the judicial review.

However, given the history of the relevant statutes as we have traced them, it is unreasonable to assume that by failing to amend section 40200.5, the Legislature intended to retain the authority of the processing agency to conduct the initial review and undo the changes it so clearly made in the 1995 amendments.

The 1995 changes deleting any reference to the processing agency’s authority to conduct the initial review, compel the conclusion that the issuing agency (here, the City) must conduct the initial review, and cannot delegate that duty by contract to the processing agency (here, Xerox).

There are, at least, a couple of procurement questions that jumped out at me from the case. First, recall that Since 1985, the City has contracted with Xerox to act as its processing agency, and is paid based on the number of parking citations processed per month, but does not receive additional compensation to conduct initial reviews. I cannot believe that if another contractor held the contract for processing parking citations, that Xerox (or any other contractor) would conduct the initial reviews "for free", recalling again there were 135,291 such initial reviews conducted in 2013. I wonder what the cost of doing that "free" work would be if contracted out to another party, and if that "free" work is actually paid by inflated prices or costs in the "processing" portion of the work.

Second there is an aspect of Guam Procurement Ethics law that stands out. This "free work" is given as part and parcel of getting actual paid work. It is not a gratuity as typically defined because there is nothing paid to a particular person, and no particular person is benefited. But under Guam Procurement Ethics law (5 GCA § 5630(d)):

It shall be a breach of ethical standards for any person who is or may become a contractor ... to offer, give or agree to give any employee or agent of the Territory or for any employee or agent of the Territory to solicit or accept from any such person or entity or agent thereof, a favor or gratuity on behalf of the Territory whether or not such favor or gratuity may be considered a reimbursable expense of the Territory, during the pendency of any matter related to procurement, including contract performance warranty periods.

For purposes of this Section, a favor is anything, including raffle tickets, of more than deminimus value and whether intended for the personal enjoyment of the receiver or for the department or organization in which they are employed or for any person, association, club or organization associated therewith or sponsored thereby.

Guam legislators are (most of the time, on whole) sensitive to "buy in" and bundling and other evils that diminish competition and stain the integrity of the procurement system and undermine the peoples' trust in government.

Taking the cash stream out of streamlining

DCYF likely to bring some services back in-house as part of an overhaul

When Rhode Iland's financially ailing child welfare system decided to purchase most of its services from two private nonprofit networks three years ago, officials praised the new "system of care" as a model for streamlining services and cutting costs. A little more than three-and-a-half years later the continuation of the practice appears unlikely.

After years of cost overruns, Jamia R. McDonald, chief strategy officer and the agency's new de facto head, no longer believes that networks are the most efficient way to deliver services. Instead, it's likely that the agency will bring some services back in house and bid out others individually. "The theory was these administrative efficiencies could be gained by overseeing multiple activities .... The agency didn't posture itself well to manage that. We moved administrative oversight. We didn't restructure in any way in-house, and we also didn't create any oversight that ensured [the networks] delivered," McDonald said.

"When you have to change a system, I don't think you turn it off one day and turn on another. If we really want to think differently, the longer we bind ourselves into certain activities, the less opportunity we have to pivot," McDonald said.

Marty Sinnott, chief executive officer of Child & Family Rhode Island and head of the Rhode Island Care Management Network, put it more bluntly: "The contracts were poorly designed and poorly written right out of the gate. The networks have at least kept the lid on what is a poorly designed and poorly managed child welfare system," Sinnott said. "The system of care contracts are neither the problem or the solution. They have functioned under bad public policy and bad public leadership."

In 2012, the state Department of Children, Youth and Families signed three-year contracts with the two providers. The networks assign children under state care to residential and congregate care and subcontract with shelters and other service providers — and have consistently overspent their budgets. There are currently 3,095 children in DCYF care, a number that has grown over three years. (Sinnott pointed to a 30-percent increase over three years in the number of reports of abuse and neglect.) The contracts were set to expire June 30. After months of negotiations, they have been extended, but only for six months.

The fact that the DCYF appeared poised to make changes is not unexpected. In July, Governor Raimondo promised that the "dysfunctional" agency would be overhauled amid a litany of problems, including millions freely spent on contracts with no performance management, and state payment and procurement procedures that had been skirted.

The large network contracts are not the only DCYF agreements headed for change. McDonald said the agency has allowed some contracts for "redundant" services to expire, and other contracts have been reduced. "There were examples where we bought the same service two or three times, and we never used any of those vendors so there was no point in extending," McDonald said, referencing an issue highlighted in an audit of the DCYF this summer.

PPPs: Extolling the virtues, examining the risks

I am usually skeptical of those who trumpet the virtues of PPPs. While they can certainly be a tonic for a cash strapped state or municipality, they can also be a toxic waste.  It takes a careful and sober analysis before rushing into one.

The following article, published on the Lexology website and elsewhere, offers a balanced perspective. I offer highlights, but you should read the whole piece.

P3S: managing risks and rewards by attorney Barbara A. Geisman of the firm Thompson Coburn LLP.   Interest in P3s is growing as governments search for ways to access expertise, deflect risk, speed up project completion, lower capital and operating costs, avoid public votes and increased taxes, and keep what might otherwise be counted against public debt limits “off the books.”

Successful P3s — Public-Private Partnerships — can be blessings for state and local governments searching for new ways to finance many types of critical “infrastructure”—roads, schools, prisons, and more—and control operating costs. Success or failure depends on how well each partner plans ahead and how realistic each partner can be.

In all P3s the government partner attempts to tap private sector expertise and financial resources while the private partner hopes to make a profit. Successful and unsuccessful partnerships of the past offer valuable lessons and can help both private and public partners considering P3s negotiate deals that make sense for both.

This tool is worth a hard look for any capital-strapped governmental entity in need of new infrastructure. But public officials must approach potential P3 arrangements with eyes wide open and a clear understanding of both prospective benefits and prospective risks.

Similarly, P3s can be a source of profit and accolades for private partners in a P3 venture. But private partners, too, must carefully evaluate potential benefits against a variety of risks: If a private entity accepts responsibility for long-term situations it cannot control or pledges too much of its capital and borrowing power to a single project, then the entity places its overall future at risk.

These arrangements must be carefully structured from both sides of the partnership to create the desired “win-win.” Without well-informed attention to detail and more than a modicum of foresight, a P3 can cause significant damage to both public and private reputations and balance sheets. Structuring a P3 is very challenging because P3s come in an almost unlimited variety of flavors, depending on the public entity’s goals.

Some types are familiar, like the federal low-income housing tax credit, or LIHTC. That program was intended in part to shift responsibility for providing affordable housing for the nation’s working class families from traditional “housing authorities” to the private sector. The LIHTC program shifts cost, operating, and financing risks to the private developer. It accomplishes its goal of providing affordable residential rental units by subsidizing annual debt service and operating costs with federal tax credits and limiting the rent the private developer can charge. Because this specific type of P3 has a sufficiently long history and is appropriately targeted to one particular purpose, most of the potential “bugs” have been worked out of the structure, and the program is generally considered a success.

At the other end of the spectrum, some P3s are essentially “one offs” — that is, there is no universally accepted and time-tested model for the contract arrangement. Those P3s present greater uncertainties and risks for public and private partners alike.

The risk that both sides may lose in a P3 deal can increase if the deal is “too good” for either side. An important key to successful P3s is responsible management of risks and benefits—that is, an allocation that is fair to both parties.

In a P3 whose structure is relatively “simple” — for example, the public sector seeks to shift only construction cost and possibly operating cost risk to the private sector — associated public sector risks can be mitigated to a significant extent by careful up front due diligence and by incorporating protections like net worth maintenance requirements or letters of credit into the construction and operating documents. Associated private sector risks can be mitigated by including clear parameters for design and construction outcomes, sharing arrangements for mitigation of unforeseen circumstances, and fair, carefully drafted cost-escalation provisions in the agreements. In long-term arrangements, both partners must recognize that the future is uncertain and that innovation or public policy changes may impact the validity of demand or cost projections.

In P3s that rely on the private sector to generate all of the income required to pay project-related debt, due diligence becomes much more complex.

Equally important, both private and governmental entities moving down the path toward a P3 partnership must have the courage to pull off the road when a collision of interests is imminent. That can be very hard when a company or a government has invested significant amounts of time and money in documenting a deal that has been essentially “promised” to shareholders or constituents. Deal momentum snowballs in the rush to schedule the groundbreaking, fill a gaping budget hole, or announce a big contract to shareholders and deal documentation can easily pick up unintentional debris in the dash to the finish line. If obstacles to a successful relationship seem insurmountable or the deal presents risks that have not or cannot be reasonably allocated or shared in a manner that adequately protects each party’s interests, it may be time to put on the brakes regardless of how near the finish line may seem.

Government officials and private decision-makers must carefully consider the long-term public policy implications of the deal under consideration. Will it unacceptably limit the government’s ability to monitor and refine long-term strategies to address changing needs? If an agreement prohibits the development of new roads in an area served by a P3 toll road, citizens may be forced to endure unacceptable traffic congestion for the term of an agreement which may last many decades. If an agreement prohibits expansion of a region’s mass transit system to preserve demand for a toll road, that region’s sustainability efforts may be intolerably hampered—and the only remedy may be for the public sector to “buy back” the project at significant cost and re-assume the operating and maintenance burden when the public sector’s primary interest in the agreement in the first place was to shed that burden. If an agreement requires a private company to operate and pay for operating a facility when that private entity cannot control the market for the facility’s “outputs,” the company’s assets can be decimated even to the point of bankruptcy.

The operating pro forma must make sense for each party and the P3 agreement must allow for changes in that pro forma as new situations develop. New technologies are coming on the market every day and public polices change over time. Such issues can be addressed by reasonable partners: for example, instead of inking a 75-year “all or nothing” term, the partners can agree to 5-year or 10-year agreement increments where each partner may decline to renew the agreement at the end of the incremental term but once the agreement is renewed neither can terminate during the renewal period. That arrangement strikes a balance between predictability and inability to foresee what tomorrow will bring: either party can completely bow out when the agreement comes up for renewal but, if the working relationship has been a good one, it is more likely that each party will view the renewal as an opportunity to tweak the agreement and work out bugs.

Each partner must understand, empathize with, and fairly respond to the legitimate concerns of its counterpart. Risk allocation imbalance is dangerous for both sides. If the government unreasonably over-allocates risk to the private sector partner, either no one will respond to the request for proposals or those who do respond will be more likely to fail because they have little experience in evaluating and quantifying P3 types of risks. If the private partner loads too much risk on the public partner, the government will be criticized by its constituents. Appropriately balanced risk is the hallmark of a win-win deal.

A corollary here is that the private sector partner must always remember that all of the terms of a P3 deal are [-- or should be, see here and here --] public. Virtually all governments are subject to some type of “Sunshine law” that enables reporters and others to access virtually all of the final documents involved in any deal. Each P3 deal must withstand public scrutiny — if a big or even medium-sized deal cannot pass a “smell test,” it is likely that some reporter will discover the deal’s flaws by poring through the public record.

Each party should think hard before it agrees to overt or “disguised” non-compete provisions. For example, a trash-to-energy arrangement may require the public sector to deliver a minimum volume of trash each month to a privately owned incinerator at a set price for a multi-decade term. Prospectively, that may look like a reasonable private sector “ask” but, in hindsight, such a provision could prevent the government from competing with the private incinerator by diverting part of its waste stream to a recycling facility.

Both parties must choose their partners carefully. A government with an unstable political climate will be a bad partner for an established private company because political battles can lead to capricious reconsideration of decisions and generate bad publicity for the company as political opponents seek to discredit each other. A government with an unfriendly business climate may, wittingly or unwittingly, hamper the project’s success. Careful due diligence on both sides of the partnership is essential for P3 success: mistakes are inevitable and each partner must be able to responsibly and successfully shoulder its negotiated share of responsibility for those mistakes.

Both parties must also look carefully at the quality of the public sector “assets” upon which the deal is predicated. Is there a market for the asset or service? Is that market likely to grow or decline? Will the government partner support or thwart private efforts to sustain and grow the market? Can and will the private partner invest sufficiently in the asset to fulfill the government partner’s goals? What happens if the market assessment was “off”?

Each party should approach untested technologies with a large grain of salt. P3s should not be viewed by either party as opportunities to experiment: risks associated with experiments are difficult if not impossible to allocate and a failed experiment will inevitably generate bad press.

Beware of projects that attempt to address too many goals by placing unrealistic burdens on the private partner. If a project is overburdened with requirements that do not relate directly to the core purpose of the project—e.g., excessive minority participation, local training, and workforce requirements—the cost of the project will escalate.

While local government charters and other organizational documents are often flexible as to the types of contracts permitted, a local P3 will almost certainly require passage of a specific law that authorizes the particular P3 agreement. On the federal and state levels, special legislation empowering agencies to enter into P3 types of arrangements is almost always required, although many states and the federal government have recently enacted legislation authorizing some types of P3s.

Each party must be willing to invest in good professional help in structuring the P3 agreement—and must be willing to pay for that help, even if it ultimately decides to crater the prospective deal. Private parties unused to dealing with prevailing wage, public bidding, and local benefit concerns may find themselves saddled with unanticipated costs and negative media coverage. Public parties unused to negotiating with sophisticated businesspeople may lose on key points if they cannot benefit from equally sophisticated help.

How to distinguish a cooperative contract from a procurement contract in US federal law

The US Court of Appeals for the Federal Circuit case CMS Contract Mgmt. Servs. v. Mass. Hous. Fin. Agency 2013-5093 (Fed. Cir. Mar 25, 2014) is final; the US Supreme Court Petition for Certiorari was denied on April 20, 2015.  

The gist of this case, as I see it, is that an agency relationship created by the federal government and a third party to deliver the government's services to its clients is not a procurement contract; but, a contractor relationship created to enable the third party to assist the government to perform its task of serving its clients is a procurement contract.  Feel free to correct me if this interpretation is wrong.

As usual, you cannot rely on the rendition here; read the decision at the link if you really need to know about it.

The Federal Grant and Cooperative Agreement Act (FGCAA) sets forth the type of legal instrument an executive agency must use when awarding a federal grant or contract. 31 U.S.C. § 6301. In pertinent part, "[a]n executive agency shall use a procurement contract as the legal instrument . . . when . . . the principal purpose of the instrument is to acquire (by purchase, lease, or barter) property or services for the direct benefit or use of the United States government." 31 U.S.C. § 6303. When using a procurement contract, an agency must adhere to federal procurement laws, including the Competition in Contracting Act (CICA), 41 U.S.C. § 3301, as well as the Federal Acquisition Regulation (FAR).

In contrast, an "agency shall use a cooperative agreement as the legal instrument . . . when . . . the principal purpose of the relationship is to transfer a thing of value to the [recipient] to carry out a public purpose of support or stimulation authorized by a law of the United States instead of acquiring . . . property or services." 31 U.S.C. § 6305. The FGCAA notes that "substantial involvement is expected between the executive agency and the [recipient] when carrying out the activity contemplated in the [cooperative] agreement." 31 U.S.C. § 6305(2). When using a cooperative agreement, agencies escape the requirements of federal procurement law.

Section 8 of the Housing Act of 1937 authorized HUD to provide rental assistance benefits to low-income families and individuals. These benefits included payments to owners of privately-owned dwellings (project owners) to subsidize the cost of rent. Traditionally, HUD entered into Housing Assistance Program contracts (HAP contracts) directly with project owners and paid the subsidies directly. However, the 1974 amendment to the Housing Act gave HUD a second option—to enter into an Annual Contributions contract (ACC) with a Public Housing Agency (PHA). The PHA would then enter into HAP contracts with project owners. HUD provided the PHAs funds to pay the subsidies to the project owners.

In 1997, when many of the HAP contracts under the 1974 amendment were beginning to expire, Congress enacted the Multifamily Assisted Housing Reform and Affordability Act (MAHRA), which permitted HUD to renew existing HAP contracts. MAHRA defined "renewal" as the "replacement of an expiring Federal rental contract with a new contract." MAHRA was enacted at a time when HUD was facing extensive budget cuts.

It had just announced a plan to reduce staff by one-third by the end 2000. MAHRA's "Findings and Purposes" noted that HUD "lacks the ability to ensure the continued economic and physical well-being of the stock of federally insured and assisted multifamily housing projects." Thus the 1997 Act addressed this problem through "reforms that transfer and share many of the loan and contract administration functions and responsibilities of the Secretary to and with capable State, local, and other entities." MAHRA § 511(11)(C).

Accordingly, HUD began to outsource certain contract administration services. While outsourcing these services, HUD still had the obligation under the 1983 amendment to engage a PHA for any new HAP contracts. Thus, on May 19, 1999, HUD initiated a nationwide competition to award an ACC to a PHA. The ACCs were performance-based; that is, in addition to "basic" administrative fees, PHAs could earn "incentive" fees by entering into HAP contracts beyond the number specified in their contract. With existing HAP contracts, HUD's Request for Proposals (RFP) stated that it would assign such contracts to the PHA, and that "the PHA [would] assume[] all contractual rights and responsibilities of HUD pursuant to such HAP contracts."

The RFP stated that "[t]his solicitation is not a formal procurement within the meaning of the Federal Acquisition Regulations (FAR) but will follow many of those principles."

In response to the 1999 competition, HUD awarded 37 of the PBACCs. PBACCs were awarded in the remaining jurisdictions through later competitions. PHAs administering these PBACCs assumed the title of Performance-Based Contract Administrators (PBCAs).

On February 25, 2011, HUD chose to re-compete the PBACCs to ensure that the "Government was getting the best value." Many PBCAs adamantly opposed HUD's decision to re-compete and requested that, at a minimum, incumbent PBCAs get priority consideration. HUD denied this request on the ground that stricter competition would lead to greater savings for the government. In July 2011, HUD announced awards for all jurisdictions and stated that its decision to re-compete the PBACCs saved HUD more than $100 million per year.

Appellants were awarded multiple contracts in multiple states; however, a number of other PBCAs and PHAs were not as fortunate. This led to a total of 66 post-award protests being filed with the Government Accountability Office (GAO). Among other things, protestors argued that the PBACCs were procurement contracts and that HUD had not complied with federal procurement laws.

On March 9, 2012, HUD re-issued its solicitation for competition. However, for the first time, HUD expressly characterized the PBACCs as cooperative agreements, and thus, outside the scope of federal procurement law. HUD also announced that it was choosing not to allow PBCAs (including Appellants) to compete for PBACCs outside their home states. This change in policy excluded from consideration many applicants, including Appellants, who HUD previously determined in 2011 provided the government the best value.

Appellants filed pre-award protests with the GAO, arguing that the PBACCs under the NOFA are procurement contracts and thus subject to federal procurement laws.

The GAO agreed with Appellants that the PBACCs are procurement contracts. It rejected HUD's argument that the PBACCs "transfer a thing of value" under 31 U.S.C. § 6305 merely because HUD is required to provide funds to the PHAs to make subsidy payments to project owners. The GAO found that, although the payments are made through a depository account to the PBCAs, the PBCAs have no rights to, or control over, the payments and that any excess funds and interest earned on those funds must be remitted to HUD or invested on its behalf.

The GAO also rejected HUD's argument that the administrative fees paid to the PBCAs qualify as a "transfer [of] a thing of value." The GAO found that the purpose of the fee was not to assist the PHAs in carrying out a public purpose. "Rather, . . . the  administrative fees are paid to the PHAs as compensation for . . . administering the HAP contracts." In other words, the fees merely cover the PHAs' operating expenses.

The GAO determined that "the circumstances here most closely resemble the intermediary or third party situation, ... where the recipient of an award [i.e., a PBCA] is not receiving assistance from the federal agency but is merely used to provide a service to another entity which is eligible for assistance." As such, the principal purpose of the NOFA and ACCs to be awarded under the NOFA is for HUD's direct benefit and use. Thus, the GAO held that the PBACCs are procurement contracts. Specifically, these agreements procure the contract administration services of the PBCAs.

However, on December 3, 2012, HUD announced on its website that "[t]he Department has decided to move forward with the 2012 PBCA NOFA and plans to announce awards on December 14, 2012." An agency's decision to disregard a GAO recommendation is exceedingly rare. The Court of Federal Claims has explained that it "give[s] due weight and deference" to GAO recommendations "given the GAO's long experience and special expertise in such bid protest matters."

Soon after HUD's announcement, Appellants filed pre-award protests in the Court of Federal Claims asking it to enjoin HUD from proceeding with the NOFA. Appellants argued that the PBACCs under the NOFA are procurement contracts.

The Court of Federal Claims ruled in favor of HUD.   Appellants appealed.

This court agrees with Appellants that the PBAACs are procurement contracts and not cooperative agreements. Based on this record, the primary purpose of the PBACCs is to procure the services of the PBCAs to support HUD's staff and provide assistance to HUD with the oversight and monitoring of Section 8 housing assistance. HUD acknowledged its intention "to procure the services of contract administrators to assume many of these specific duties, in order to release HUD staff for those duties that only government can perform and to increase accountability for subsidy payments." HUD sought new ways to conduct its business[,] such as the Request for Proposals for outside contractors to administer HUD's portfolio of Section 8 contract[s]." HUD has also consistently described the role of the PBCAs as "support" for HUD's Field Staff.

The record belies HUD's argument that the housing assistance payments it makes to the PBCAs are a "thing of a value" within the ambit of 31 U.S.C. § 6305. HUD has a legal obligation to provide project owners with housing assistance payments under the HAP contracts. Transferring funds to the PBCAs to transfer to the project owners is not conferring anything of value on the PBCAs, especially where the PBCAs have no rights to, or control over, those funds. Likewise, the administrative fee paid to the PBCAs do not constitute a "thing of value" either. While money can be a "thing of value" under 31 U.S.C. § 6305 in certain circumstances, the administrative fee here appears only to cover the operating expenses of administering HAP contracts on behalf of HUD.

At most, HUD has merely created an intermediary relationship with the PBCAs "[w]here the [PBCAs are] not receiving assistance from the federal agency but [are] merely used to provide a service to another entity which is eligible for assistance." "The fact that the product or service produced by the intermediary may benefit another party is irrelevant." In the case of an intermediary relationship, "the proper instrument is a procurement contract."

Because the PBACCs at issue are procurement contracts, and because HUD concedes it did not comply with federal procurement laws, the decision of the Court of Federal Claims must be reversed and remanded for disposition consistent with this opinion.

Of croquet and magicians

A couple of years ago or so, I posted a note on the efforts of the UK Ministry of Defense to outsource its procurement selection process. Yes, privitise procurement of the UK's defense apparatus: UK considers outsourcing defense procurement

So, what has become of that?

Fraudulent arms companies charged taxpayers for magicians, croquet and speeding fines

Plans to privatise the arms procurement sector collapsed in 2013 after bidders withdrew from the process. The Labour party described it as a “complete shambles". Defence Minister Michael Fallon will lift the lid on the abuses and tell the audience at an Institute of Directors dinner in Durham that “vital” work is required to overhaul the procurement process used by the Ministry of Defence, the FT reports.

This will include a new Whitehall defence watchdog, which will have the power to fine arms companies up to £1m for breaching contract rules.

As noted in that short article (not as short as this excerpt, so you should always read the full source-linked citations in this blawg), the FT has a story on the matter:

Arms companies charged taxpayers for croquet and magicians

“It will now be up to suppliers to justify, rather than for us to disqualify, every pound of their contracts,” the defence secretary will tell the audience, adding that the MoD will demand “100 per cent transparency”.

A bit more is available here:

Exclusive: UK single-source procurement reportedly led to claims for 'croquet and magicians'

Fallon claimed that a "lack of commercial leverage" and "information" led defence contractors to claim for costs including croquet, horse racing trips, motoring fines, and "close-up magicians". He stated that there were expenses that the "taxpayer had no business paying".

Fallon - in his current role since July 2014 - expanded on reforms to single-source procurement that were enshrined in the Defence Reform Act of May 2014.

On the reforms, Fallon said that "the bottom line is that we [UK MoD] spend around GBP6 billion [USD8.9 billion] a year on single-source contracts - nearly 50% of our procurement budget".

The measures outlined in the Defence Reform Act include a single-source pricing framework for non-competitive procurements valued at GBP5 million or more; the establishment of a Single Source Regulations Office to ensure value for money and the payment of what was described as a "fair and reasonable" price to contractors; and the requirement for contractors to disclose costs through a standard reports. The latter measure gives the MoD "full open-book rights" according to Fallon.

Not all commentators seem to understand the new direction (or maybe they do and are trying to lead it off track):

BEN GRIFFITHS: Prosperity firmly linked to safety and security - and that's why defence MUST be an issue for this election

Michael Fallon was looking to the past when he unveiled reforms of the procurement process for military equipment.

He flagged up a shocking and unacceptable culture where arms-makers claimed back costs including croquet, horse racing trips, motoring fines and even two magicians. Fallon was right to castigate the previous regime of suppliers exploiting a lack of competitive pressure and transparency. Today’s defence sector is changing for the better, however.

As Ian King noted this week, partnership between government and industry is essential so that the armed forces get the equipment they need at a price the taxpayer can afford to bear over the long term.

Getting "equipment they need at a price the taxpayer can afford to bear" is an invitation to "soak 'em". A pricing model that is intent on getting whatever the market can bear will always be more expensive for the government and other consumers than it could be.

A pricing model that focuses on the cost and fair and reasonable value of that item shifts attention away from what the market can bear to "do we really need it at that price?" It often turns out that our perception of need is quite faulty, especially when close attention is not paid to fighting the next war but fixated on fighting the last one or supporting the military industrial complex that supplied the last war.  See, Recycling the procurement cycle

We don't need a model that justifies expense of an item because, on someone's assessment, the taxpayer can bear the burden. We should balance the cost against the perceived need and evaluate both need and cost with scrutiny.

I think the Defense Minister is on the right track when he says the government will require suppliers to justify costs. The federal procurement regime in the US, as well as the state and local regimes based on the ABA Model Procurement Code, like Guam's, have that focus. But, of course, it does little good to have that power in a regime if it is ignored or implemented poorly.

Contractors to Procurement Law: You ain't my sunshine

In a hattip to Sunshine Week, and the obvious particular procurement focus of this blawg, I note the following couple of articles:

How Government Contractors Hide Public Information (Click link to article)

When governments outsource public services, contractors attempt to circumvent sunshine laws and shield important public information from disclosure using broad exclusions to the Freedom of Information Act and state open records laws that exempt "trade secrets" or "proprietary information" from public scrutiny. Contractors use those loopholes as justification to hide basic public information from taxpayers including the fees they charge the public, how they spend public funds, and the details on the quality of public services they are paid to provide.

For example:

• When the New York State Comptroller audited National Heritage Academies Inc.'s (NHA) Brooklyn Excelsior (charter) School in 2012, NHA staff refused to provide details on how the school spent its money, preventing taxpayers from knowing "the extent to which the $10 million of annual public funding benefited students." According to the audit, NHA staff refused to provide details on how the school spent $1.6 million, claiming that "the expenditures were private and proprietary."

• Recently, Connecticut public radio station WNPR submitted a records request for the billing rate of the state's health care exchange call center operator, Maximus Inc. In response WNPR received a heavily-redacted version of the contract with details of Maximus' costs blackened-out. Only after WNPR filed a complaint with the Freedom of Information Commission did the state release an un-redacted version of the contract allowing the public to see if Maximus' fees were reasonable for the service provided.

• In Florida, after transportation officials began linking design changes in highway guardrails to fatal car accidents, a consumer safety research firm requested documents and communications about the Florida Department of Transportation's (FDOT) contract with Trinity Industries, which manufactures the guardrails. In response, FDOT provided 13 files and explained that Trinity was reviewing more than 1,000 emails to redact confidential information before releasing them. According to FDOT, Trinity had obtained a protective order that prevented the release of "trade secret" records about the guardrail design.

• In Florida, the Department of Corrections (DOC) contracts with Corizon Correctional Healthcare to provide health care for inmates at 41 state correctional facilities. When an investigative news agency -- Broward Bulldog -- requested companies history of malpractice litigation from Corizon, the company refused to release the documents, claiming that the information was a "trade secret."

• Public pension systems -- government entities that manage retirements for public employees such as teachers and police officers -- contract with financial firms to invest pensioners' funds. In 2014, the Securities and Exchange Commission (SEC) expressed concern over the fees charged by buyout firms, prompting The Wall Street Journal to ask the Iowa Public Employees' Retirement System for information on the fees paid to private equity contractor KKR & Co. for a $70 million investment. In response, the IPERS conferred with KKR and released a heavily-redacted document that provided little information on KKR's fees. KKR's lawyer stated that disclosing the company's fees could cause "competitive harm."

Contractors may have legitimate reasons for keeping some company information private. But government contracting shouldn't create a black box that hides public information from public scrutiny.

Note that I have previously mentioned this topic, in other contexts:

Will FOIA be foiled by outsourced subcontracting?, and
Transparency is collateral damage when major work is contracted out

How Many Contractors Work for the Government? It’s a Mystery. (Click link to article)

How large is the U.S. government’s contract workforce? The answer could help gauge how much federal agencies are outsourcing work to the private sector. But no one has managed to nail down a definitive number to date. That includes the nonpartisan Congressional Budget Office, which took a crack at it after the top Democrat on the House Budget Committee requested an analysis.

“Regrettably, CBO is unaware of any comprehensive information about the size of the federal government’s contracted workforce,” the CBO said in a letter to Rep. Chris Van Hollen (D-Md.) on Wednesday. But, the CBO said government agencies spent more than $500 billion on outside products and services in 2012, based on the federal contracting database. The number represents a rapid increase over the past dozen years, with the costs growing more rapidly than inflation. Federal spending on contracts grew by 87 percent between 2000 to 2012, an average of about 5 percent per year. By comparison, inflation averaged less than 3 percent each year during that span. Contracting also grew as a percentage of total federal spending during that time.

The government may not have a handle on the size of its contract workforce, but the CBO analysis gives federal-employee advocates a sense of how much recent administration’s have relied on the private sector instead of their own personnel.

The eyes of Texas are not on its procurement system -- yet?

As is customary with this post, you must read the mentioned article. I tend to cut, paste, rearrange, paraphrase, leave out important stuff and otherwise use the material for didactic purposes, not literature, legal or otherwise. 

For instance, in the following article there is a catalog of big-name contractors (e.g., Accenture, Xerox, IBM) and big money contracts that went awry that are mentioned. You may find reading about those much more interesting and juicy than reading the about the context in which they went awry.

In Texas contracting, failure is an option

For two decades, Texas has pursued a wave of privatization of public functions with the belief that corporations could save taxpayer money while improving the delivery of essential government services. But multiple contracts representing billions in public dollars have blown up in the state’s face, leading to lawsuits, ethics investigations, wasted funds and frustrated Texans.

The pattern that emerges is one of famously business-friendly Texas repeatedly fumbling its efforts to hold the businesses it hires accountable.

Dozens of audits going back to the 1990s have found similar problems with contract management and procurement across a wide stretch of state agencies. And conflict of interest questions similar to those now dogging the 21CT deal have periodically emerged over other state contracts.

“I think it’s gotten worse rather than better in terms of the oversight, the accountability and making sure that people aren’t taking advantage of the contracting process,” said state Rep. Sylvester Turner, D-Houston, who has been critical of privatization efforts since joining the Legislature in 1989.

“My observation over the years is we have often entered into contracts that may not have been in the best interest of the state, and we try to overcome it by managing them poorly,” said Carl Isett, a Republican state representative from Lubbock from 1997 to 2010 who worked on contracting issues and is now a lobbyist. “It’s just the recurring theme.”

While contracting problems have arisen in nearly every corner of state government, including foster care, standardized testing and border security, Texas’ highest-profile disasters have coincided largely with big information technology projects that come in over budget, behind schedule or both.

In 1991, the Texas attorney general’s office signed an $11 million contract to computerize its child-support payment system. By 1997, the deal with Andersen Consulting had ballooned to more than $68 million and was three years behind schedule. A state audit found that the company deserved a share of the blame for overpromising and underperforming.

A decade later, Andersen Consulting had renamed itself Accenture and was in the crosshairs of Texas law Poorly trained personnel and technical problems led to a series of well-publicized snafus, including applicant backlogs growing by thousands and misinformed workers denying benefits to eligible families. Texas ultimately paid Accenture $244 million and canceled the contract.

Despite the two high-profile flubs, Accenture’s relationship with Texas appears stronger than ever. The company is in charge of most of the state’s Medicaid claims processing, as well as a $99 million upgrade of the attorney general’s child support payment system, two areas synonymous with its past missteps.

State Rep. Garnet Coleman, D-Houston, who was first elected in 1991, said he would support temporary “freeze-outs” from future bidding by companies that have been shown to handle past contracts poorly. Yet more important than holding vendors accountable, he said, is boosting the state’s resources so that agencies aren’t outgunned when dealing with the private sector.

“The only way to do outsourcing properly is to have enough people working on the agency side to do appropriate oversight of the company that has the contract,” Coleman said. “What we don’t want is the tail wagging the dog, which is what usually happens.”

Coleman recalled being in the Legislature in the 1990s, when “outsourcing” emerged as a buzzword, coming up constantly in hearings and policy proposals. Texas was drawing national attention for its efforts to transfer responsibilities onto the private sector, which Republican lawmakers predicted would lower costs while producing a reliable, efficient and technologically sophisticated delivery of services.

In 1997, under Gov. George W. Bush, the state began taking bids to outsource the state’s welfare, Medicaid and food stamp programs, predicting that doing so would save the state at least $10 million a month. The concept, viewed at the time as the most ambitious privatization effort by any state, fell apart after President Bill Clinton denied Bush’s request for a waiver from federal rules requiring that government employees handle much of that work. Bush accused Clinton of siding with politically powerful labor unions over good policy solutions.

The setback slowed, but didn’t stop, Texas’ march toward privatization. In 2003, Gov. Perry signed House Bill 2292, which consolidated 12 health and human services agencies into five and ultimately replaced thousands of state workers with private contractors handling duties like screening welfare recipients.

More than a decade later, the bill’s author and lead proponent, former state Rep. Arlene Wohlgemuth, described the bill as a success in its goal of shrinking state government and outsourcing services better handled by the private sector. Yet contracting oversight needs to be reformed, she said.

“In my opinion it is one of the greatest weaknesses of state government,” said Wohlgemuth, executive director of the Texas Public Policy Foundation, a conservative think tank. “We need to do a better job of enforcing the contract once we have agreed upon it and auditing those contracts.”

Last month, newly elected Gov. Greg Abbott directed all state agencies to follow new, enhanced contracting rules, including requiring agencies to publicly disclose all no-bid contracts, as well as a “public justification” for use of the no-bid method.

Abbott’s order is just one reaction to the health commission’s no-bid contract with 21CT, which has drawn allegations of cronyism and incompetence. Yet for all the coverage that deal has received, it is a relatively small item in state contracting. Most big contracts are for highway projects and involve organizations providing health services to Texans. And for the most part, they operate without incident.

The health plan vendors, who handle billions of state and federal dollars, deliver on time and with fewer problems because there’s more than one contractor in the region, Goodman said. If one had to be pulled, the others remain and there’s no interruption in service.

Contractors are also required by state lawmakers to be more transparent than in the past. If they’re late or are fined for performance, you can see it on the health commission’s website. The agency has also, in recent years, shortened the time it takes to go from a warning to a fine for a contractor.

“You don’t get a whole lot of warning now,” Goodman said. “You are out of compliance; you get a fine.”

“We’re prepared to throw the book after the welfare mom, but the people who are getting the $10 or $20 or $150 million contract, we deal with them in a very different fashion,” Rep. Turner said. “When there are questions raised about whether there’s been abuse of the contract, we’re not as animated or outraged.”

Discussions continue among lawmakers on what they can do this session to improve contract oversight.

I note that Guam has long required that all sole-source contracts be identified by an annual report to the legislature. It is also considering more stringent disclosure of the determinations that must be made to engage in a sole-source solicitation.