HOUSE BILL NO. 313 "An Act authorizing a pilot program relating to state procurement and the use of electronic commerce tools; and providing for an effective date." REPRESENTATIVE LESIL MCGUIRE, SPONSOR spoke in support of HB 313. The legislation would look at the state of Alaska's procurement process. This is the overhead portion of government: buy and selling. The legislation would streamline procurement through e-commerce tools. Vice-Chair Meyer asked the potential savings. Representative McGuire estimated that there would be between $5 and $20 million dollars in overall savings. The pilot program would start with two distinct departments and two distinct areas to see if the savings can be proved over a three-year period. She felt that the savings would be closer to $20 million. In response to a question by Vice-Chair Meyer, Representative McGuire stated that there is an Alaskan company, which is very advanced in procurement, particularly in the North Slope. She noted a Alaskan preference. Vice-Chair Meyer expressed his support of the bill. He asked if the bill would follow Alaskan guidelines for hiring, for example in hiring veterans, etc. Representative McGuire responded that the selection of the out source company would be implemented under the existing procurement code. There is an exception for the pilot program to allow the commissioner of Administration as much flexibility as possible using the principle set out in the procurement code. She noted that British Petroleum (BP) has similar procurement policies. An on-line action was created [for BP] with their procurement policies. Representative Hawker asked whether the sponsor would object to a friendly amendment requiring an annual report by the vendor. Representative McGuire stated that she would not object. SCOT HAWKINS, ALASKA SUPPLY CHAIN INTEGRALS responded that the intention is to prove the concept and be able to expand it and demonstrate its value. A report would be inherent in the intent. Representative Kerttula noted that the procurement did not actually fall under the Alaskan procurement code and asked why not. Representative McGuire noted discussions with the Administration about ways to provide the most flexibility, including purchase orders. VERN JONESS, CHIEF PROCUREMENT OFFICER, DEPARTMENT OF ADMINSTRATION clarified that the selection of the original contractor, that would run the pilot, would be subject to the procurement code. The contractors in the pilot would not be subject to the code. Representative Kerttula asked why the contractors in the pilot would not fall under the code. Mr. Jones stated that there was a recognition that the state procurement code was not designed with efficiency in mind. Parts of the procurement code are inefficient, entailing timelines that the private sector could not follow. He speculate that the intent of the bill was to take advantage of the efficiencies of the private sector and technologies and not to saddle the pilot with the inefficient and time consuming process of government. Representative McGuire emphasized that e-commerce allows the financial authority to commit and revise purchase orders as an agent of the state. She maintained that for the pilot program to succeed, it must have the required flexibility. She stated that the challenge was to rewrite the entire procurement code or to allow a pilot program in a small area to go forward to see if it can work. She suggested that this may precipitate a change to the procurement code. Representative Chenault observed that the fiscal note was zero and asked about the potential cost. Mr. Jones noted that the note was zero since it involves an element of privatization. The idea is that the private sector is able to use cheaper labor, run a cheaper process and obtain cheaper goods and services. He noted that if the pilot did not result in a savings, it would be a failure. Representative Chenault maintained that there would be some cost involved in putting on the program and asked to know what it is. Mr. Jones noted that there are a number of steps before the pilot can be implemented. The mix of goods and services purchased by various state agencies would have to be studied, along with current bids to select a study. A feasibility study would have to be conducted, per union bargaining agreements. He noted that that the feasibility study would enlighten the potential costs. He acknowledged that there would be a fee involved for the procurement, but stated that unless the program generated a savings, it would not be undertaken. Representative Chenault stressed that it would cost something to initiate a pilot program, whether or not the program was successful. Mr. Hawkins noted experience in the private sector, and observed that companies generally worked within the existing budget for a department and demonstrated their ability to reduce the budget for that activity. Regarding start up costs, he stated, that these costs would be integrated within the department's budget. He maintained that the funding was found within the savings. He noted that if savings were not realized, then the business would not be undertaken. In response to a question by Representative Chenault, Mr. Hawkins confirmed that if savings are not demonstrated, costs would not incurred. Vice-Chair Meyer observed that the intent is to use Alaskan services where possible. Mr. Hawkins agreed. Representative Berkowitz spoke in support of the legislation. He observed that the two departments in which the pilot program would occur could be quite large, such as the Department of Transportation and Public Facilities or the Department of Health and Social Services. He suggested that if it were a pilot program it would be a C5 [procurement]. Representative McGuire responded that the chief procurement officer is working closely with the commissioner of Administration. They would examine the potential costs and determine where savings would be realized. She stated that the intent was to implement a mechanism for a feasibility study. Mr. Jones stressed that there had not been any studies to target any agencies and noted that a division or office could be targeted. Organizational structures must be analyzed. He expressed the hope that a self-contained unit could be found to use as a test case. TAPE HFC 03 - 90, Side B  Representative Berkowitz asked if it was possible to model the program. He asked if one could simply complete a comparison for the entire state procurement, rather than for two departments. Mr. Jones stated that the idea was to examine smaller portions of the administration, since there were great complexities and a wide variety of goods and services. He stated that a test case was desired before taking broad action. He pointed out that private firms had lower labor costs, and life cycle costs. He stressed that while a model would reflect potential benefit, it might not reflect a complete picture. Representative Berkowitz referred to the procurement code, and pointed out that there were reasons that the government did not operate in the manner of the private sector. He expressed concern with deviations from the procurement code, and questioned if policy problems were considered in abandoning the code. Mr. Jones responded that this was the reason for a pilot program, to prevent widespread out- sourcing. Policies and procedures for contractors need to be developed; these may be more than that needed for private sector clients. There is a lot of due process. The intent is not to end up with a private sector contractor, which is operating in the same manner as the state. Representative McGuire reiterated the commitment to Alaskan business. She recounted her experience with the Alaska Supply Company, and pointed out that procurement requirements could be programmed into the process. She emphasized that parts of the state procurement code would remain unchanged and could be programmed in. Mr. Hawkins explained that the procurement code requires three quotes. He noted that the company could set up a mini marketplace of providers to create a "smart catalogue" of suppliers, chosen to compete on a regular basis. When procuring, the electronic system provides the best price from those providers on any given day. The electronic process would replace the need to get three quotes by telephone or mail. He pointed out that the code did not allow the same process to realize these savings. He noted that his company would not advocate choosing too large a pilot program. It is important that the pilot be successful and not overreach. The challenge is to right size the program. Representative Stoltze referred to the current procurement code and the number of changes to it that have been necessary. He noted the advantage of technological advances. Representative Berkowitz asked if any consideration was given to allowing state procurement offices to compete in the bidding process. Mr. Jones stated that this was not the intent of the bill, but the process did allow for counter proposals as part of the union bargaining process. Representative Kerttula expressed concern with the potential amount to be expended without any sidebars. She asked how preferences of the procurement code might be maintained. Mr. Jones speculated that any policies and procedures developed would be contained in a contract, which the contractor would be required to adhere to. The presumption of the bill is that the private sector can achieve savings, if it is not encumbered with governmental procedures. He acknowledged that there were many preferences that would be difficult to administer. He did not envision writing requirements substantially equivalent to the state system into the contract. Representative Moses expressed concern that legislation was required to implement the pilot program. Representative McGuire noted that in discussions with the Administration, it was decided that this was the proper avenue, since it proposed potentially large policy changes. She felt that, in a few years, they would be able to view preferences contained in the contract. Representative Berkowitz MOVED to AMEND Page 2 line 8 of the bill to delete "with a person from the private sector". Vice-Chair Meyer OBJECTED. Representative McGuire observed that [using the private sector] is the would of the bill. She clarified that partnerships would be included. Representative Berkowitz explained that the private sector would not be precluded, but that it would allow cities and other entities to participate. Representative Moses suggested the use of "entity". Representative McGuire expressed opposition to the amendment. Co-Chair Williams OBJECTED to the amendment. A roll call vote was taken on the motion. IN FAVOR: Berkowitz, Kerttula OPPOSED: Chenault, Foster, Meyer, Moses, Stoltze, Whitaker, Williams Co-Chair Harris was absent from the vote. The MOTION FAILED (2-8). Representative Foster MOVED to report HB 313 out of Committee with the accompanying fiscal note NO OBJECTIONS HB 313 was REPORTED out of Committee with no recommendation and with a new zero fiscal note by the Department of Administration.