HOUSE BILL NO. 257 "An Act relating to a procurement and electronic commerce tools program for state departments and instrumentalities of the state; and providing for an effective date." KEVIN BROOKS, DEPUTY COMMISSIONER, DEPARTMENT OF ADMINISTRATION, provided a brief overview of the legislation. House Bill 313, which introduced a procurement pilot program, was authorized by the legislature several years previously. The first year was spent to set up the pilot. A pilot program was set up with the Department of Transportation and Public Facilities, Southeast Region and a private contractor (Alaska Supply Chain Integrators). House Bill 257 would extend the sunset date for the procurement pilot program to June 30, 2007. Bidder preferences would also be brought into statute. He pointed out that the process is in the early stages. There has not been sufficient time to demonstrate if privatization of procurement process would result in a savings. Representative Weyhrauch observed that the contractor, Alaska Supply Chain Integrators, does not have to follow state procurement codes and questioned why have procurement codes if the contractor does not have to follow it. Mr. Brooks stressed that the intent of the procurement code is to give entities in competition for state dollars a fair chance at winning awards. The Administration feels that the procurement code is a valid and useful tool [for state government]. He could not address why the procurement code was not included in the legislation. Representative Weyhrauch referred to A.S. 36.30.180: The legislature finds that there exists in the state continuing high unemployment, underutilization of resident construction and supply firms, and high costs unfavorable to the welfare of Alaskans and to the economic health of the state. The purpose of bidder preference for resident firms when the state acts as a market participant is to encourage local industry, strengthen and stabilize the economy, decrease unemployment, and strengthen the tax and revenue base of the state. Mr. Brooks noted that the intent of the pilot project is to analyze the process. 2:56:58 PM Representative Weyhrauch questioned if the information should be present before the program is expanded. Mr. Brooks clarified that the legislation would not expand the program; the program would only be extended by one year. The bill does not expand the program beyond original concept. 2:57:31 PM Representative Joule spoke of a legal review contract by the employee's review union. He thought the program was found to be discriminatory. Mr. Brooks did not know. He referred to Line 10, Page 1, and noted that the statutory cite should be changed from "A.S. 36.30.100 - 36.30.190" to "A.S. 36.30.100 - 36.30.265." This would include both sealed proposals and bids. 2:59:29 PM SCOTT HAWKINS, GENERAL MANAGER MATERIAL SERVICES, ALASKA SUPPLY CHAIN INTEGRATORS (ASCI), ANCHORAGE, provided a brief history of the company and its perspective as a program operator and specialist firm. He emphasized that ASCI has the tools and specialties to make advantages and achieve meaningful reductions. He noted that they are operating with six people, where the state used 10. He addressed cost savings and pointed out the advantage of consolidating purchasing for state agencies, which would allow the state to go to market and achieve better arrangements. The legislation can accomplish its goals, driven in part by computer automation, made possible by using computer automation and contracting out non-core business. The program shifts funds from overhead functions to direct program outcomes. The state recently issued its first Internet order and has begun to order from catalogs. He acknowledged that change is not easy. Representative Croft asked if there have been cost savings. Mr. Hawkins responded that there are start up costs that are shared. The contract is a fixed price contract and provides a $160 thousand improvement in the cost of personnel. 3:06:08 PM Mr. Hawkins noted that the vast majority is for smaller purchases. Representative Croft questioned where the cost savings are coming from. Mr. Hawkins responded that initial cost savings occur through personnel and the use of web tools. Automation of the order delivery process accounts for much of the initial savings. He stressed that as orders are placed through the catalog, better prices can be obtained. 3:08:01 PM Representative Croft asked if the program had the effect of shifting purchases to outside suppliers. Mr. Hawkins responded that the program would not shift to outside vendors. The program does not change the vendors; it makes the ordering process quicker and more efficient. The agenda is to encourage the Alaskan process. 3:09:55 PM Representative Croft noted that the initial savings are from the paper system. He noted that the use of market power would pressure vendors to lower their prices and questioned if local suppliers will have to lower their prices to respond to that pressure. Mr. Hawkins did not think that there was anything inherent in volume accumulation, which would disadvantage Alaskan vendors. 3:11:37 PM Representative Holm disagreed. He pointed out that larger quantities allow vendors to reduce their freight rates. He expressed concerned that it would be difficult for local businesses to compete against catalog companies. He referred to vendor kickbacks. He wanted more assurances and sideboards. 3:14:19 PM Mr. Hawkins emphasized that the state of Alaska would benefit from any "kickbacks". He observed that Alaskan suppliers are often better off, in that they have experience in calculating freight costs. 3:16:59 PM Representative Holm reiterated that freight is a big concern and is a disadvantage for Alaskan companies. He observed that Home Depot has the ability to spread freight costs over all their stores. He maintained that large box stores could destroy small businesses. He wondered how small businesses would be affected. He asked why state procurement codes were not followed. Mr. Hawkins explained that the legislation exempted them from the procurement codes. He explained that they follow the contract terms, which are astringent rules and are effectively their procurement code. He recalled that the decision was made to exempt them from the procurement code because it was too difficult to rewrite [the codes into the contract] in a way that would apply to current practices. Representative Holm urged him to not adversely impact small businesses. Mr. Hawkins noted that their contract requires them to be pro-Alaskan. 3:21:17 PM Representative Weyhrauch asked what the start-up costs are. Mr. Hawkins listed several of their start up costs: developing a 5,000-item catalog and integrating web tools. Representative Weyhrauch asked the state's share of the cost. Mr. Hawkins noted that the total startup costs were $180 thousand, of which the state paid $60,000. 3:22:18 PM In response to a question by Representative Kelly, Mr. Hawkins explained that the original bill allowed the Administration to extend the program to other agencies, the current version only extends the program a year. He emphasized that this type of change is difficult because there is natural opposition. He clarified that their contract expires in 14 months. The legislation allows the Administration to negotiate an extension. 3:23:47 PM LARRY HOWE, GENERAL MANAGER, ALLIANCE, encouraged support of the bill. He maintained that the pilot program has demonstrated efficiencies and that the cost savings can be achieved in other areas. Representative Weyhrauch asked if Mr. Howe had reviewed any reports, which demonstrate the economic benefits seen in the cost analysis. Mr. Howe replied that he had seen a power point presentation by ASCI that showed $163 thousand in savings. 3:25:52 PM LYNN JOHNSON, PRESIDENT, DOWLAND-BACH CORPORATION, ANCHORAGE, testified in favor of HB 257. His company competes daily with outside firms. He emphasized the ability of e-commerce to lower the state of Alaska's costs. 3:27:37 PM Representative Foster MOVED to REPORT CSHB 257 (JUD) out of Committee with individual recommendations and the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. CSHB 257 (JUD) was REPORTED out of Committee with a "no recommendation" recommendation and with zero fiscal impact note #1 by the Alaska Court System, and with indeterminate note #2 by the Department of Administration. 3:28:44 PM At ease. 3:36:35 PM