SB 218-STATE PROCUREMENT PILOT PROGRAM  CHAIR BUNDE announced SB 218 to be up for consideration. He said folks had talked to him about the idea of creating a pilot program for the state procurement program that might save some money. The procurement procedures to be used in the pilot program have promoted efficiency and cost savings in private enterprise. The bill has a zero fiscal note. MR. SCOTT HAWKINS, General Manager, Alaska Supply Chain Integrators, said his company has a great deal of interest in the general concept of cost savings through automation and process excellence around supply chain management. The company is four years old and employs 160 people. They provide procurement, requisitioning, receiving, warehouse management and a whole host of other services that support large purchasing institutions. Their tool of choice for automation efficiency is e-commerce and they have quietly become one of the largest business-to-business Internet e-commerce sites in the country, transacting several million dollars a year in purchase orders and tens of thousands of purchase orders per year. He has been able to deliver savings of 35 to 50% in the overhead cost of transactions. Typically, he has been able to deliver another 5 to 10% in the cost of items that are being procured. CHAIR BUNDE said he thought the potential savings could be $5 to $20 million. MR. HAWKINS said he thought that was a conservative estimate. SENATOR SEEKINS arrived at 2:35 p.m. SENATOR FRENCH asked if the state is engaged in e-commerce now. MR. HAWKINS said his understanding is that the state uses some e-commerce tools, such as ordering from websites. SENATOR FRENCH noted this bill is exempt from AS 36.30 and asked for a description of that statute. MR. HAWKINS replied AS 36.30 is the state procurement code and the exemption is for the purposes of the pilot program. MR. VERN JONES, Chief Procurement Officer, told members: SB 218 would allow the Department of Administration to establish the pilot program that includes a privatized procurement model with technological advancements. Under the bill, a private sector contractor would take over a governmental unit's procurement activities with the goal of achieving savings on both the cost of goods and services purchased as well as savings on acquisitions costs. The department believes that there is potential for cost savings. The administration is interested in exploring just how significant those savings could be. Any changes to our current procurement operations, even for a pilot project, would require the administration to do several things. First, we would have to study the organizational structure, the mix of goods and services procured by various state entities in order to select an appropriate unit for the pilot. We would also have to conduct a feasibility study as required by union bargaining agreements. Any time we are displacing state employees we need to do that under our various contracts. If that feasibility study indicates that there are substantial savings, we would then likely develop policies and procedures that would govern the privatized procurement process. Just exempting the contractor from our state procurement code, I think, would create a void. We would probably have to have some policies and procedures that people had some confidence, insured fairness and some sort of due process since we are spending government money. We would then have to select a private sector provider to operate the pilot program. We would intend to do that through our state procurement process that's in place now. If the bill becomes law, those are the steps that we intend to follow. CHAIR BUNDE asked if the agencies that would participate have been chosen yet, and whether the commissioner of the Department of Administration in collaboration with Mr. Jones will decide who will participate. MR. JONES replied the selection of the Department of Administration implies that the agencies are going to be from the executive branch. SENATOR STEVENS asked Mr. Jones to explain a little about the state procurement process and whether a bid process is used. He also noted the sunset date of 2006 and asked if the procurement bid will be awarded for a three-year period. MR. JONES replied: Yes, the selection of any contractor would be subject to our procurement code. The bill does not exempt the selection of the contractor, but rather the procurement activities done by the contractor. Would we do a bid? We would probably not do a bid. We would probably do a request for proposals [RFP] whereby we select the contractor based on a number of factors including cost. I'm not confident that we could write bid specifications sufficiently tight in order to make a selection based on low cost alone. So we would probably use an RFP. The process that I've outlined would likely take a number of months to accomplish. I'm not certain how. It's been a long time since we've conducted a feasibility study and there's a give and take with the unions and there's the developing procedures and the procurement process, itself...The bill allows for a pilot no longer than three years and we feel with a sunset date of 2006 - that's possible, at least. SENATOR FRENCH asked if the executive branch is involved in all electronic purchasing now and, if so, how this program would differ. MR. JONES replied that the executive branch has a limited involvement in electronic commerce, mostly on the reconciliation and payment side. He told members: It would be a stretch, though, to say that we had any kind of a procurement system really, and it's definitely not an automated procurement system. It's more of a manual system. That's one of the inherent problems we have with efficiency in state procurement right now. The Department of Administration is trying to address that through a larger project. MR. LYNN JOHNSON, President, Dowland-Bach Corporation, said his company is 28 years old and headquartered in Anchorage. It is a main supplier of control systems, UL panels and process control systems, instrumentation products, stainless steel piping and sheet metal fabrication. They have other business interests in Alaska including manufacturing and exporting. They are also a minor affiliate of Alaska Supply Chain Integrators. He testified that SB 218 is a great idea and has the potential to save the state a great deal of money by reducing costs and automating the procurement process. SENATOR FRENCH thanked Mr. Johnson for taking the time to testify today. He moved to pass SB 218 from committee with the attached fiscal note. SENATORS DAVIS, STEVENS, SEEKINS, FRENCH and BUNDE voted yea; and SB 218 was moved from committee.