COMMISSION ON PRIVATIZATION DELIVERY OF GOVERNMENT SERVICES Anchorage, Alaska September 20, 1999 9:10 a.m. COMMISSION MEMBERS PRESENT Representative Cowdery, Co-Chair Senator Ward, Co-Chair Bill Allen, Former Mayor of Fairbanks Tom Fink, Former Mayor of Anchorage Mike Harper, President, Kuskokwim Corporation, Kathryn Thomas, Former Chair of Alaska State Chamber of Commerce George Wuerch, Alaska Municipal League Don Valesko, Business Manger of Public Employees Local 71 COMMISSION MEMBERS ABSENT Representative Brice Senator Adams William Prosser, Chairman of the Board - Cook Inlet Region, Inc. OTHER HOUSE MEMBERS PRESENT Representative Richard Foster COMMITTEE CALENDAR Introduction of new commissioner, Mike Harper Presentation: Competitive Sourcing & Privatization in the Federal Government PREVIOUS ACTION See Commission on Privatization minutes dated 7/20/99 and 8/16/99. WITNESS REGISTER COLONEL MICHAEL SANDBERG, Director of Logistics, US Army, Alaska MARK BRYANT, Chief of Management Services, USARAK MAJOR BRIAN HILFERTY, Public Affairs Officer, USARAK GREGORY ENDSLEY, Deputy Director for the Directorate of Logistics JOHN TOENES, Deputy Director for the Directorate of Public Works POSITION STATEMENT: Each of the above provided information on competitive sourcing & Privatization in the Federal Government. ACTION NARRATIVE TAPE 99-5, SIDE A CO-CHAIR COWDERY called the Commission on Privatization and Delivery of Government Services meeting to order at 9:10 a.m. Members present at the call to order were Representative Cowdery, and Senator Ward, and Commissioners Allen, Fink, Wuerch, Thomas, and Valesko. Senator Adams, Representative Brice, and Commissioners Prosser and Sandvik were not present. CO-CHAIR COWDERY introduced a new commissioner, Mike Harper. MIKE HARPER, President, Kuskokwim Corporation, informed the committee that the Kuskokwim Corporation is one of the village corporations under the Alaska Native Land Claims Settlement Act. He noted that he has some background in business and government. He expressed his pleasure in being able to serve in the state in this capacity. There was a motion for approval of the minutes from the last two meetings. There being no objection, it was so ordered. MARCO PIGNALBERI, Legislative Assistant for Representative Cowdery, Alaska State Legislature, noted that the commission's packet should include a staff report that would be reviewed at the conclusion of the meeting. Mr. Pignalberi introduced the following special guests: Colonel Michael Sandberg, Director of Logistics, US Army, Alaska (USARAK); Mark Bryant, Chief of Management Services, USARAK; Major Brian Hilferty, Public Affairs Officer, USARAK. He reviewed the backgrounds of Colonel Sandberg and Mr. Bryant. COLONEL MICHAEL SANDBERG, Director of Logistics, USARAK, introduced the committee to Gregory Endsley, Deputy Director for the Directorate of Logistics and John Toenes, Deputy Director for the Directorate of Public Works. He noted that both gentleman are intimately involved in commercial activities studies that are ongoing on the post. COLONEL SANDBERG specified that he and the others were requested to discuss what the U.S. Army and the federal government is doing with regard to commercial outsourcing and privatization at Fort Richardson. He clarified that he wasn't present to make any recommendations, although he would be open to general questions. MARK BRYANT, Chief of Management Services, US Army Alaska, presented a slide presentation which began with an overview of the history of competitive sourcing and privatization. In 1955, the Bureau Budget Bulletin indicated the basic fundamental policy of the federal government to rely on the commercial sector whenever possible. That was subsequently embodied in the Office of Management and Budget's OMB Circular, A-76, which continues to this day. Of course, the Department of Defense's and the Army's strategy or core responsibility is war fighting. Therefore, readiness is critical in order to provide the best performance of that mission in the field. To that end, the core processes have been identified. Anything beyond that should be reviewed for potential outsourcing or privatization. Mr. Bryant noted that this program has been referred to as competitive sourcing or commercial activities. He stressed that the program is not outsourcing. He explained that the program is the determination of the location of the best value to conduct a particular service or product: is it in-house with the government or outside with a private contractor? MR. BRYANT informed the committee that there have been 468 competitions completed which were A-76 studies. He specified that almost all of their studies today are multi-function studies in which an entire organization and its functions are reviewed. The push for this began in the early 1980s. In 1987, there was the Nichols Amendment which gave the commander of an installation the prerogative to discontinue commercial activities and competitive sourcing studies. CO-CHAIR WARD inquired as to the meaning of the reference to 25,305 positions on the slide. MR. BRYANT clarified that there were 25,305 positions under review. He also pointed out that the 28 percent savings were linked to dollars which is a projected amount. There are reports by the Army Audit Agency (AAA) and the U.S. General Accounting Office (GAO) which indicate that the actual savings are unknown. In 1995, Colonel Cohen came out with the Quadrennial Defense Review (QDR) which basically discussed how to obtain more dollars for modernization. The report reviewed competitive sourcing studies which were initiated throughout the Department of Defense. At the same time, the anticipated savings have been shifted from sustainment to modernization. He noted that the Nichols Amendment moratorium was lifted in 1995, and therefore allowed the reinvigoration of the competitive sourcing program. MR. BRYANT turned to a GAO audit performed in February 1999 which is somewhat incomplete. Out of 53 studies, there was an average savings of 42 percent, $528 million. In the 1970s and the 1980s, the government was winning about half the time and private contractors were winning about half the time. Currently, the private contractors are winning about 60 percent of the time. He noted that of the 53 studies, 18 of those had to rewrite their performance work statements (PWS) after the contract was awarded. He informed the commission that 32 competitions were won by the private sector. Of those 32, four were terminated based on poor performance. He specified that even after a contract is awarded, things must be modified and there may be appeals, protest, and poor performance. MR. PIGNALBERI inquired as to the meaning behind the term competitions. MR. BRYANT clarified that competitions are studies. He explained, "We developed documentation to tell us what ... particular functions we're going to study ... and how many personnel and material belong to those functions. ... It's what we term a single function or a multi-function." For example, a single function would be something like snow plowing while a multi-function would be snow plowing, grass cutting, facility maintenance, supply, services, and administration. There are few whole base studies. CO-CHAIR WARD recalled Mr. Bryant's comments regarding the 50-50 split between the federal government and the private sector in the 1970s and 1980s. That breakdown has since leaned more heavily to the private sector which Co-Chair Ward interpreted as government being less efficient. He asked if there have been any determinations as to why that turn in efficiency. MR. BRYANT commented that Mr. Pignalberi has a copy of the GAO report which reviewed those studies. The GAO report said that there is not enough statistical information to determine why the turn to the private sector other than its increase in efficiency. He explained that, basically, the private contractor has to beat the in-house government work force bid by ten percent or up to $10 million of the personnel costs. In other words, if the government bids $1 million and the contractor bids $899,000 for the labor portion, all things being equal, the private contractor would win. The ten percent is built-in to cover the costs of transitioning the work force to the private industry. The GAO report also cites a 12 percent overhead factor which is also inconclusive. When the government determines its bid, 12 percent is added for the overhead. He believed that whether the overhead is the same as the private industry or less could be determined upon the review of some upcoming studies. MR. BRYANT, in response to Mr. Pignalberi, clarified that MEO is the acronym for most efficient organization. The contractor's bid is the in-house bid, the government work force bid. COLONEL SANDBERG interjected that there isn't a central database which houses how other installation bids were developed so that another base could utilize that information. He believed that this army, governmental coordination is improving which was not the case earlier. Some of these large contractors have means and have determined how to share data in order to produce a better bid. COMMISSIONER VALESKO asked if the military monitors the contractors with regard to requiring the same requirements the government work force would be required to follow. For example, would contractors be required to follow the same minority hire and veterans' preference rights and provide health insurance? He inquired as to whether there has been review as to whether contractors are meeting the standard of living. He commented that the standard of living for those in Alaska has been decreasing over the last dozen years. MR. BRYANT explained that when there is competition, the private contractor must comply with the Fair Labor Standards Act which specifies for the positions in the government the contractor would have to pay a certain wage. Secondly, there is the "right-of- first-refusal." He explained that if the private contractor wins and has to write this in his bid document, the contractor must provide the current government employee the "right-of-first- refusal" over the job he needs to fulfill, so long as the employee is qualified and the position is necessary. With regard to the veterans' preference and other areas mentioned, Mr. Bryant wasn't familiar with those nor was he sure if there would be a tax advantage for a private contractor who allows those. There are many rules and regulations a private contractor must follow. MR. BRYANT turned to competitive sourcing of inherently governmental activities. There are certain areas that a taxpayer would not want the government to contract out, the most fundamental of those is combat forces. He explained that, in general, the studies have two time limits which must be followed. The OMB Circular A-76 says a single function study must be completed in 18- 36 months or there must be a report as to why more time is necessary. Furthermore, Congress doesn't allow funding to complete a study. For a single function study the time is 24 months and for a multi-function study the time is 48 months. In response to Co- Chair Ward, he stated the aforementioned time lines are the two major ones, but there are others. MR. BRYANT commented that there is somewhat of a misunderstanding of competitive sourcing and privatization. He explained that competitive sourcing is when the government retains ownership and control of the operation. That control would be maintained through oversight of contractor performance or the government running the operation. If the government does it, in-house personnel or another government service will be utilized. He turned to privatization in which the government decides to sell the asset and take a service from that point forward. For example, utilities at Fort Richards as well as the Department of Defense are being reviewed for such. MR. BRYANT turned to the determination of the core government in nature functions (GIM); what is inherently governmental? The Office of the Secretary of Defense provides the criteria and definitions regarding the determination of what is inherently governmental and what can be competitive. He highlighted the following examples of what federal functions can be studied: food services, security, transportation, and management support services. Those areas that can't be studied are those inherently governmental which he defined as follows: "...if it has to make a decision that the commits the government to a particular course of action, that is inherently governmental." He provided the following examples of inherently governmental activities: intelligence, public affairs, and inspection contracting. Mr. Bryant said they are always reviewing whether they can do it better or if someone else can. From the Office of the Secretary of Defense's perspective, savings can be spent more on modernization versus sustainment. MR. BRYANT acknowledged that A-76 competitions are difficult and controversial. However, the notion that A-76 competitions always lead to appeals isn't necessarily true. For example, of the 53 studies previously mentioned, only 10 were appealed with only one winning the appeal. Since 1989, 174 cost comparisons were completed, of which 40 lead to appeals and two appeals had the original decision overturned. Whether such a record would be maintained in the new revised program will require a few more years and the completion of a few more studies. COMMISSIONER ALLEN inquired as to the time delay caused by an appeal. MR. BRYANT explained that an appeal must be filed within 30 days. He believed the appeal must be answered within 60 days. COLONEL SANDBERG interjected that those time lines are in accordance with federal acquisition regulations and procurement laws, not the A-76. MR. BRYANT then turned to the federal employee and union roles. He informed the commission that federal employees, through their union, are involved in all parts of the study. These employees actually participate in the team developing the PWS. He said that without the employees who actually perform the functions, this process can't be accomplished. The employees help document the work load, review the performance work statement, and identify areas for improvement. However, the employees can't be involved in the final decision which is ultimately a management decision regarding what the Department of Defense wants to buy. He noted that there is a source election board which formalizes the process of evaluation with regard to the contract proposals. Again, the employees would not participate in this area. CO-CHAIR WARD recognized that the employees providing input in the study is important and inquired as to how that was facilitated. He asked if there was any opposition. MR. BRYANT said, in general, there wasn't any opposition. He commented that there is a good relationship with the union. Furthermore, the commanding general is very instructive that the employees participate in all meetings. MR. BRYANT continued with the slide presentation and reviewed the federal A-76 cost competition process. There is much preparation before the study with regard to the identification of what is under review. By law, what is under review must be announced to Congress. The largest portion of the preparation is the development of the PWS which determines all the functions that are to be purchased. The PWS goes to the management review team and out for solicitation. The management review team takes what the government wants to purchase from the commercial sectors and attempts to develop a management study to streamline it. He noted that the multi-function studies are performed in order to review the entire organization, not just the portion to be competitive. There is an attempt to streamline the entire organization. The PWS is also given to the procurement director of contracting for solicitation of contract offers. Furthermore, the AAA performs an independent validation and review of the PWS and MEO documents. Those proposals are received and a formalized process is established to evaluate the contract proposals. The information regarding the cost, how it will be performed and processed result in a cost comparison form. The initial decision is made and the process automatically moves on to appeals. A specified amount of time is allowed for appeals and those appeals and protests are processed. If the result is successful, then Congress is notified within 30-60 days of the initial decision. Then it takes about six months - a conservative figure - for implementation. CO-CHAIR COWDERY inquired as to the difference between selecting the lowest bidder and the best value proposal. MR. BRYANT explained that private industry has the option during bidding to inform the government that it can do better than what is desired with a little more cost. That is the consideration of the best value. The least cost is a fixed price in which there is no offer to do what is desired any better. MR. ENDSLEY clarified: On the least cost, technically acceptable, it is a price competition - the lowest cost wins. Best value, a higher bid may win because of some things that they're offering that may exceed the requirements of the contract, but the government determines that that is in the best interest of the government to go with that. ...There is a process that they go through to get to that determination, but it all has to be approved by the government, ultimately. MR. BRYANT reiterated that the contractor has to beat the in-house proposal on the personnel, manpower costs by at least ten percent which was built-in to cover all the transitional costs. Mr. Bryant moved to the milestone requirements or time lines. He explained that single and multi-function studies must be completed within 24 months. The Office of the Assistant Chief of Staff for Installation Management has a 13-24 month goal. The Cost and Academic Analysis Agency says that certain sized studies should take between 13-21 months. He reminded the commission of the congressional and reporting requirements. He pointed out that AAA has performed a review of completed studies and has indicated about the time line that is being utilized now. For large multi-function studies, it takes about 33 months for completion. CO-CHAIR WARD inquired as to the meaning of the reference to spaces on the slide entitled, "Federal A-76 Study Milestone Requirements." MR. BRYANT explained that the term refers to manpower spaces as opposed to positions. There may be 100 spaces that the Army authorizes, but only 90 are filled by positions. COMMISSIONER ALLEN inquired as to whether there is a spending cap on the fiscal note for the studies. MR. BRYANT answered that there is no spending cap. JOHN TOENES, Deputy Director for the Directorate of Public Works, explained that the only cap related to the federal appropriation law is that first line of the slide entitled, "Federal A-76 Study Milestone Requirements." The first line of that slide refers to Congress' time requirements for single function and multi-function studies. He specified that appropriated funds may not be spent on a single function study the duration of which exceeds 24 months. Similarly, on a multi-function study federal appropriated funds can't be used on such a study with a duration of more than 48 months. Mr. Toenes clarified that is the cap on the time limit, not on the dollar amount. COMMISSIONER ALLEN asked if the cost of the study is deducted from the appropriations. MR. PIGNALBERI understood Commissioner Allen to be aiming towards the question of how these studies are funded. Are the studies funded in the overall appropriations from Congress or is the cost of the study taken out of the overhead? MR. BRYANT responded that both scenarios are utilized. He noted that consultants are primarily used to perform these studies. However, the Army has realized that it must participate 100 percent as well. Therefore, in-house teams which complete the study have been developed. Now there is a partnership with the consultant and the private contractor performing the studies. He noted that the private consultant contractor is funded centrally by the headquarters portion of the Army. MR. PIGNALBERI asked if the congressional appropriation is enumerated as a line item in the budget. MR. BRYANT replied no. These are Department of Defense management prerogatives to spend its resources from some pot of money, what is referred to as operations and maintenance of the Army funds. COLONEL SANDBERG interjected that it is important to understand that. He explained the funds appropriated to support these studies through the hiring of contractors have been found to be insufficient, in the Army's case, to complete the study in the time frame allotted. Therefore, each directorate at Fort Richardson that is under study has dedicated many in-house employees to help write the PWS. In the case of Fort Wainwright, there are upwards of 20 individuals who occupy between 30-90 percent of their time working to write the PWS. MR. TOENES informed the commission that Army Public Works, which involves Fort Richardson and Fort Wainwright, currently has 20 full-time management and nonmanagement people developing the PWS. Those folks have been moved to a separate building with their own database systems due to the secure nature of the PWS. TAPE 99-5, SIDE B [Tape begins midspeech.] MR. TOENES said, "...the completion of funds to complete the Public Works Study is going to run about $8 million over about a 38 month period." UNIDENTIFIED SPEAKER (COLONEL SANDBERG) commented that that doesn't take away from the requirements to complete the normal job. COMMISSIONER VALESKO understood that there is a 24 month period in which to complete the study. That requirement is from the USARPAC. If there is the decision to do a study on a function, and the decision is to contract out the function. He understood then there would be study of that for the 24 month period. What happens at the end of the 24 month period? For instance, take snow removal which would be studied. He assumed that the snow removal is currently done in-house and now a contractor is awarded a bid to perform the snow removal. At the end of the 24 months, is the contractor done and the function goes back in-house or does the contracting continue on and no study is done beyond that 24 months. COLONEL SANDBERG said he believed there is confusion regarding the different contractors. There is a contractor to help perform the study itself. If the successful bidder is a commercial contractor, that's when the contract for snow removal would be awarded to that contractor who would then begin performing that particular function. COMMISSIONER ALLEN asked if at some point there is a performance review of the contractor. MR. BRYANT stated that these are the goals by the bosses. At the end of the time, there will be the determination as to whether the function will be performed in-house or by private contract. If a private contract is awarded, the contract is normally awarded for five years - one year plus four review years. Each year that contract will come up for review and may be succeeded by four additional years. He pointed out that government oversight is built into this process. If the function does go to a contract, then the government determines what it actually would cost to continuously review the contract on a daily basis. The cost of the contracting officer's representative (COR) is built into the estimates. Mr. Bryant indicated agreement that the 24 month requirement is merely study before there is a determination as to whether the function will continue in-house or become a private contract. He noted that the contracting officers are located in the Directorate of Contracting. However, if the Public Works goes to contract, the additional people will be hired to represent the contracting officer in Public Works in order to daily monitor the performance of the contract. Yearly, the contract would come up for review by the entire Directorate of Contracting Staff in order to review if the performance is as projected. MR. BRYANT continued with the slide presentation and reviewed the key success factors. He expressed the need to ensure communication from the planning stage to the completion of the process. There are no controls on communication, save certain areas that are sensitive to procurement actions. Staff and employees are involved from the beginning and everyone must work as a team. He noted that the union plays a key role on the management study team and are actually a team member. He reviewed the various methods utilized to keep the employees involved in the process and keep communication open. He restated that current civilians have the right-of-first-refusal. MR. BRYANT pointed out that it has been learned that business can't be performed as usual. One must continue to benchmark what the best practices are. He said that USARAK is attempting such in the management study. With regard to performing the study, the best people to perform it must be obtained. He commented on the need for training in the A-76 experience as well as continued communication. Mr. Bryant informed the commission that the four largest USARAK organizations are under study: Directorate of Logistics(DOL), Directorate of Public Works(DPW), Directorate of Community Activities(DCA), and Directorate of Plans, Training, Security, & Mobilization(DPTSM). Those organizations, both the military and civilian aspects, comprise 78 percent of the nonwar fighting installation work force. He clarified that although those organizations are under study, it doesn't mean all those positions are being competed. As stated earlier, multi-function studies are performed in order to review the commercial activity as well as the inherently governmental activity. MR. BRYANT turned to the slide which illustrated the USARAK's time lines. He noted that the two largest organizations, DOL and DPW, take the longest amount of time. The studies on the DCA and DPTSM are being reviewed in order to determine if merely a management study should be performed. If the management study occurs, then there wouldn't be a solicitation although there would be attempts to streamline the organizations at all levels. JOE HENRI, Chair, Privatization Subcommittee on the Department of Administration, requested that Mr. Bryant provide a rough estimate of how much the most expensive the four studies may cost over the next 24 months. MR. BRYANT answered that the DPW study would result in a total in- house cost of about $8 million. He clarified that cost would include the many associated administration things. CO-CHAIR WARD inquired as to the total budget of the function being studied. MR. TOENES informed the commission that the DPW appropriated budget for this year is about $150 million. MR. BRYANT specified that the $8 million for the study is for multiple years; it is the total over the course of the study. The maximum time allowed is 48 months. CO-CHAIR WARD surmised then that it would be $2 million per year and in total $600 million over a four year period. Therefore, it is a $600 million increment as compared to $8 million for the study. MR. BRYANT returned to the time line slide. He returned to DCA and DPTSM. He informed the commission that other army organizations that tried to compete child development services received no offers. In that case, the government performs that function cheaper than others. From a postmortem on that function, he believed that since the government has such standards and doesn't have liability insurance costs, no one would compete against those functions. He indicated that a similar situation arose with the Director of DCA which is such a mixture of military and civilian employees as well as volunteers. The mixture was such that it couldn't be determined how to break it up and put it back together while maintaining efficiency. Therefore, a management study resulted in order to streamline the functions. The same result occurred with DPTSM; it wouldn't be a good return on the investment to perform a full study on that organization. MR. BRYANT provided an example of the difficulties involved in such a process. He posed a situation in which a contractor was told to mow and trim the lawn, as necessary, in order to maintain a good appearance. The contractor was also instructed to water the lawn as necessary. Mr. Bryant stated that more detail is necessary. He presented a slide which gave exact specifications as to the height, pH, sprig density, and use of water with a rain correction table. MR. ENDSLEY commented that the four studies mentioned, with regards to competition, are all or nothing. A contractor can't pick and choose portions of a multi-function activity. The entire activity must be bid on and the contractor either wins or looses that contract. COLONEL SANDBERG clarified that in the lawn maintenance example, a contractor may be able to perform the function to the specifications better than the government. However, the contractor may not be able to perform the plumbing, heating, road clearing, et cetera as efficiently, and therefore the contractor doesn't necessarily win the contract. COMMISSIONER ALLEN asked if there is any encouragement of a joint venture. MR. ENDSLEY said that they don't encourage contractors to bid on any part, and therefore it is left to the contractors. In fact, other installations have utilized joint ventures as proposed by the contractor. From the government side, a joint venture could be proposed as well and a subcontractor could be part of the government's, in-house, bid. CO-CHAIR WARD inquired as to how "cherry picking" is avoided. How was the total package to bid on determined. MR. ENDSLEY clarified that the PWS or contract includes all the functions within the current directorates. Within DOL, there are the Division of Supply and Services which consist of a multitude of functions in the various classes of supply. There are also a variety of service type functions within that division as well. He noted that the DPW is probably three times larger than DOL with regard to the number of functions. MR. TOENES commented: There might be a yet unspoken, overarching question: why would normal people performing any of these commercial activities or functions go through a protracted cost comparison in order to determine whether they wish to go contract? As part of federal appropriation law, which this portion of it reenacted with each Congress. In this current year, Public Law 105262 Section 8104 prescribes that if more than ten federal civil service people are to be involved in a decision to contract out commercial functions, appropriated funds may not be used to do that unless there is a form of cross comparison. And that's what does it. He posed the following example. In Canada, absent a treaty, legislation or a labor contract there is no requirement to go through a cost comparison adventure in order to determine whether to privatize. Such would be the case for mayoralties and state governments that aren't bound by the federal appropriation regulation, unless there is a treaty, legislation, or a labor contract requiring privatization initiatives to go through a cost comparison. Mr. Toenes specified that the decision within the defense department to choose to privatize is latent in the executive branch. When that occurred in the 1950s, Congress legislated under what terms competition would take place. In reaction to the Congress, the president had the Office of Management and Budget build a set a rules that have resulted in Pamphlet A-76 in its current form. The A-76 pamphlet was most recently modified in 1966. Those rules have been approved by the appropriations subcommittees over the years. From those rules, the process here was born. MR. BRYANT returned to the slide presentation and said that the source selection authority (SSA) is the Commanding General. The Commanding General will have an entity evaluate the proposals. He indicated that the Source Selection Advisory Council and the Source Selection Evaluation Board evaluate the proposals which takes about six to eight weeks. He noted that this is a core team. For each of the organizations under study, the technical evaluation team is rotated; various experts are pulled from various organizations within the Army in order to review the proposals for the DOL, DPW, DCA, and DPTSM. Mr. Bryant noted that pending approval, those will be management studies rather than cost competition studies. MR. PIGNALBERI commented that it is difficult to equate the state structure in the executive branch with the structure illustrated on the slide entitled, "SSEB Structure." He understood the ultimate authority in the Army to be the Commanding General. In the state structure, would that be the governor or a commissioner of one of the departments. MR. BRYANT indicated that he didn't have enough background in Alaska's state structure and thus would hesitate to make a recommendation. MR. TOENES interjected that in the Army's structure the Commanding General would be similar to a commissioner with regard to the number of people involved and horizontal dissimilar functions. MR. BRYANT moved on to the next slide which included a definition of privatization. He informed the committee of some of the on- going utility and housing studies. CO-CHAIR WARD turned to the subject of utilities and the deregulation of utilities. He noted that he has heard discussion that once a contractor takes over a utility and the other organization is dismantled, the new contractor can begin to increase the costs. MR. BRYANT said that he didn't believe so, because the cost has to be amortized over many years. He believed the cost had to be amortized for minimum of ten years. He agreed with Co-Chair Ward that if the power agreement went through, it would be a long-term agreement. Mr. Bryant stressed that the agreement would have to be economical. MR. BRYANT, in conclusion, stated that this process would make a big impact on people and culture. Therefore, caution should be taken and the process should be well planned. He specified that ASARAK's ultimate goal is mission performance that is, hopefully, accompanied by some cost savings. COLONEL SANDBERG informed the commission that he would now present a portion of the briefing which was presented to the work force at Fort Richardson and Fort Wainwright just as the study began. This is a director's perspective on what could be expected over the next two to three years. The presentation began with a slide indicating that USARAK is now at war with potential commercial bidders and doesn't want to see a headline indicating hundreds of jobs lost. The work force was told it would have to help identify what they do in order to ensure that the PWS was reality. MR. PIGNALBERI said that the problem is that all the information is on USARAK's side, while the contractors would have to develop a bid on the basis of the information put out in a request for contract. All the analytical data available is within the expertise of the work force. Therefore, he asked how the private sector could compete with that. COLONEL SANDBERG clarified that the private sector would receive everything developed. He stressed that he wanted to make sure that what is developed is what is actually performed in the directorate. Everything written would be placed in the PWS which is provided to each potential bidder. The key is that the PWS is all inclusive. CO-CHAIR WARD asked if Colonel Sandberg had found that employee's tasks had not been identified to this point. COLONEL SANDBERG replied that he didn't believe the tasks had been fully documented. MR. ENDSLEY interjected that tasks are being performed that one doesn't realize he/she is doing. There are also tasks that aren't being performed which should be. This process really fleshes out the functions and those areas which aren't currently being performed which should be and should be included in the contract. COLONEL SANDBERG pointed out that in order to do this process, the employees had to be trained to some degree. Each employee was told that he/she must be brutally truthful in their tasks in order to ensure that PWS covered their function appropriately. Furthermore, the employees were told to be brutally efficient. Colonel Sandberg said, "We [USARAK] have to be prepared to cut off an arm to save the body." He believed that everyone understood that not everyone would remain on board at the conclusion of the study. Therefore, employees were asked to "think out of the box." In response to Co- Chair Ward, Colonel Sandberg clarified that every employee was told this from the employee who received four hours of training to the employee who received 30 hours of training. He noted that through each process a union representative sat through the training. MR. PIGNALBERI observed that the employees would then receive two bites at the apple. First, the employee would get to compete for his/her position and if the competition is won, the employee would be fine. If the employee looses the competition, that employee would have the first-right-of-refusal before the position goes to the contractor. COLONEL SANDBERG specified that would be correct to a certain level, certain management employees are not included in the right- of-first-refusal. MR. ENDSLEY explained that those employees involved in the development of the in-house cost proposal, cost estimate, technical proposal are precluded from being able to work for the contractor. Therefore, the employees involved in the management study are restricted to those management employees whose jobs are not in the commercial activities part of the directorate that will perform the management study to completion. Everyone is involved to a point, after which people must be disconnected so as not to jeopardize their right-of-first-refusal. The team completing the study becomes very small and very secretive. The team develops the most efficient organization and the in-house cost estimate. Those few folks are the only ones who have jeopardized the right-of-first- refusal. He noted that those folk's jobs were probably government in nature to begin with and wouldn't be part of the contract - they may be effected, but aren't in a competition. COLONEL SANDBERG continued by saying that the end result was to allow the employees in his directorate to compete efficiently and win this competition. From the management standpoint, there is a push toward getting the employees behind this as well as performing the study properly. All of which would provide the best chance for competition. CO-CHAIR COWDERY asked if a union member ends up working for a contractor who has prevailed in a competition, would that union member carry his benefit and retirement package. COLONEL SANDBERG stated that all the government employees who have the right-of-first-refusal to work for the contractor lose their government status and become contractor employees. CO-CHAIR COWDERY understood then that the employees know what the contractor has to offer. COLONEL SANDBERG agreed, but pointed out that the contractor has to offer a competitive wage, according to the Davis Bacon wage which is determined by local wages. AN UNIDENTIFIED SPEAKER reiterated that the right-of-first-refusal doesn't apply to those on the management study team. COMMISSIONER VALESKO surmised that unlike the Canadian system, this system can fully justify outsourcing. He asked if the presenters felt confident that the results could be supported by documentation. MR. ENDSLEY informed the commission that the end of this process is a cost comparison which lays out the costs for both the contractor and the government work force bid. The government work force has to perform the same steps as the contractor such as a writing a technical proposal and determination of the costs to perform the contract. After cost comparison, both parties can review each other's bid. CO-CHAIR WARD asked if the same process would apply for a five year contract with several reviews, when the governmental entity winning the contract. MR. ENDSLEY said that when the governmental entity is awarded the function, the review process would be slightly different because the function would still be a government function. The government is not obliged to fulfill some of the requirements required of a contractor from the private sector. Mr. Endsley noted that there is a review process performed by an internal firm which reviews the governmental organization. The firm reviews the governmental organization in order to ensure that it has organized as specified and utilized the work force specified. The costs are also reviewed. Such a review occurs annually for the five year period. COMMISSIONER WUERCH commented that thus far much of the discussion has focused on the decision-making process. He indicated his interest in implementation successes or failures in Alaska. He recalled that in the mid 1980s, two major contracts were awarded under A-76. One contract was for the maintenance of the Kodiak Coast Guard Base and the other being a contract awarded to Brown and Root(ph) for Army public works functions. He asked if those contractors remained and if not, what changes have occurred. Furthermore, he inquired as to the cost performance of those jobs that were outsourced. MR. TOENES addressed the Brown and Root(ph) contract for which he was involved in the writing of the specifications of that contract as well as the evaluation of contractor proposals. That contract wasn't a competitive sourcing action. He explained that as the Defense Department drew down, decisions regarding how to reduce the civilian work force were necessary. The civilian work force had become quite large at Fort Richardson and Fort Wainwright. The determination was to package project-like work into a bundle. Large reductions in the work force were run because there wasn't the funding available to pay those employees. Therefore, a contract form solicitation, a task-order-type contract, was put out. Brown and Root(ph) was the successful offerer. The contract included a base year plus five option years. Mr. Toenes informed the commission that since that time, the contract has been re- advertised and is now in the second full contract, near the end of that term. Therefore, Brown and Root(ph) has performed those functions for almost a decade. Mr. Endsley commented that the result with Brown and Root(ph) has been excellent in all areas. CO-CHAIR COWDERY asked if Brown and Root(ph) hired any of the employees who were performing the job before Brown and Root(ph) was awarded the contract. MR. TOENES replied no. This contract wasn't covered under the commercial activities program nor did it precipitate the previously mentioned legislation. He explained that the work force had to be reduced under any circumstances and an alternative had to be found for those functions. Therefore, the Brown and Root(ph) contract wasn't a commercial activities review and didn't have the right-of- first-refusal or any other features of the commercial activities review. COMMISSIONER WUERCH asked if there are any examples of use of the A-76 by the Army in Alaska. MR. TOENES informed the commission of one of the most disastrous situations. In 1975, a commercial activities study was put out on the central heat and power plant at Fort Wainwright which was won by a large utility provider. TAPE 99-6, SIDE A MR. TOENES discussed how the contractor's staff left the plant. He informed the commission that twice now, there have been attempts at individual function studies on refuse collection. There have not been responsive bidders on refuse collection. Therefore, refuse collection is being bundled in the whole public works study. He noted that no other DPW functions have gone to contract, primarily because of nonresponsive offerings. AN UNIDENTIFIED COMMISSIONER commented that perhaps, the Coast Guard could inform the committee of its experience with the A-76 project. He noted that he was running a company that was going to bid on the Kodiak Coast Guard project. He discussed how that project was an emotional and difficult adjustment for Kodiak. Kodiak's experience could be instructive in reviewing functions in remote areas, where there aren't many alternatives to the employee structure. MARYANN PEASE, Chair, Privatization Subcommittee on the Department of Revenue, asked if there is any preferred list of subcontractors that expedites the process. For example, is there a set of criteria or contractors that have applied and have been approved and could automatically step in and take over a privatized function. MR. TOENES pointed out that the aforementioned statutes would preclude automatic takeover, except under three very limited circumstances. Those three circumstances are as follows: businesses owned by persons of which 51 percent are severely disabled persons, businesses owned by persons of which 51 percent are blind, businesses owned by persons of which 51 percent Native American corporations. Those are the only exceptions to a cost comparison under the federal statute which is reenacted each year. He reiterated that this year it is PL 105262 Section 8104. MS. PEASE asked if once there is a cost comparison, is there then a preferred subcontractor list. MR. TOENES explained that the prime contractor who is the successful offerer puts together a package for evaluation which can consist of subcontractors. One of the source selection teams will study the subcontractors. However, the government doesn't have, in its technical area or its contracting office, a list of preferred subcontractors. MR. ENDSLEY noted that if one were looking for a list of companies that do this, one could inquire of the purchasing officer as to who bid on the last job. Such information is public and a list of companies could be obtained in that manner. MR. PIGNALBERI understood Mr. Toenes to have said that once a contract has been identified for competitive procurement, an Alaska Native corporation could make a proposal and take it out of the competitive procurement process. MR. TOENES clarified that there are some conditions attached in such a case. The Commander would have to perform a study that would indicate that the Alaska Native corporation would likely produce the most cost effective solution. CO-CHAIR WARD said that he had understood that the American Native corporation had to be part of the original bid process. MR. TOENES stated that he didn't know the answer to that. AN UNIDENTIFIED SPEAKER interjected that those exceptions would have to be early in the process. Those exceptions were placed into the Authorizing Act this past year. He explained that if the process hasn't started yet, then those three exceptions would have the first right. He said that those exceptions wouldn't affect the studies at USARAK. FRANK DILLON, Chair, Privatization Subcommittee on the Department of Transportation and Public Facilities, indicated that the discussion had provided some clarification into the process which may be useful in Alaska's efforts to privatize. Mr. Dillon commented that his approach has been to only privatize if it makes sense to do so. He posed a situation in which the task was to change light bulbs. He asked, "Is the mission, in other words changing the light bulb, what you look at when the contractor bids on it or what people [employees] are telling you it takes to change that light bulb. ...is being busy what you're looking for or getting the mission accomplished?" MR. ENDSLEY explained that a contract would be written that specifies the light bulbs have to be changed or rather that light has to be provided within a specific time frame. Then a management study would review that, go to the work force, and determine the most efficient manner to provide light. That review could find that changing the light bulb may take 15 minutes due to some things imposed by management. Therefore, the team would determine what could be changed in order to allow the light bulb to be changed in three minutes rather than 15 minutes. That would become the organization's bid. COMMISSIONER WUERCH commented that the PWS is terribly important, from the contractor's standpoint, because that is what is being bid upon. If the employees didn't define all the work, the contractor's bidding on the statement could have the competitive advantage. He stated, "The importance of defining the work that is to be done is the element that protects the existing employees from the contractor whose looking for a leverage or looking for an opportunity." AN UNIDENTIFIED SPEAKER(COLONEL SANDBERG) posed a situation in which the employee says that light must be provided, but doesn't note that every time the light bulb is changed it must be recorded in order to capture the cost of the bulbs. In such a situation, the contractor will not record when the light bulb is changed and won't capture the cost. AN UNIDENTIFIED SPEAKER(MR. BRYANT) informed the commission that Colonel Brandt, the head of commercial activities studies for the Army, performed a postmortem regarding why the private industry wants some of those competitions. He discovered that about 80 percent of the time there were poorly written PWS. Therefore, it is critical to provide the detail of a function. MR. TOENES noted that USARAK has guidelines, a booklet produced by the Army, based on very sound industrial engineering techniques. There are detailed work load analyses which allow the individual motions and activities of each function. Those are cataloged in a formalized fashion and distilled into a PWS. COMMISSIONER VALESKO echoed the importance of identifying that work in order to determine the costs. CO-CHAIR COWDERY noted that he has been in the contracting business and reviewed the specs closely. If a road job is being performed, and contaminated soil is found then those costs are negotiated. He didn't know any other way to deal with such a situation. MR. HENRI referred to the profiles that refer to the manpower required for a job; is that a time-in-motion study? MR. TOENES explained that a time-in-motion study would be one type of those activity analyses. Additionally, every single activity performed by an employee must be collected which is accomplished through group meetings. Specialist then review it to determine if there are any steps missing. He said that it ultimately becomes time-in-motion type studies when costing each activity. JAN FREDRICKS(ph), Small Business Development Center, University of Alaska, understood that the Brown and Root(ph) contract wasn't an-76 contract. She said that it sounded as if there were specifications for use of local business, small and disadvantaged businesses. However, she understood the A-76 guidelines to have no criteria at all with regards to local preferences or subcontractors. She asked if, included in the study, there is any study on the affect to the local economy. AN UNIDENTIFIED SPEAKER stated that socioeconomic factors are not a decision factor in these studies. MR. FREDRICKS(ph) commented that the state may have different concerns when using such a model for the state. After the 24 months to complete the study, how long does it take to reach the release of the solicitation. MR. ENDSLEY clarified that the release of the solicitation is included in the 24 months. The 24 months takes the process to the point of cost comparison. The award is made on the day of cost comparison when the bids are opened. He noted that there is a transition period of up to six months. AN UNIDENTIFIED SPEAKER interjected that after the initial cost comparison, the appeal process begins. Once the appeal process is completed, the transition period begins. ANDRE McCLOUD(ph) asked if the detail of the work load analysis is necessary or can the various objectives and mission statements of the departments dictate that. MR. TOENES stated that the contractors will base their bid on the details of the services. He pointed out that in addition to the PWS, there will be a performance requirement summary which details what is a successful completion of that element of the PWS. He referred to the aforementioned detail of the lawn mowing function as presented in the slide presentation. Mr. Toenes didn't know of an alternative to the detail. COMMISSIONER WUERCH commented that performance standards are valuable. In the example where the function was to provide illumination, that contractor could by choice replace all the light bulbs on a schedule on the same night. Performance standards have a very definite place in certain functions. MR. PIGNALBERI observed that the PWS seems to be the lion's share of the work. He recalled that one of the slides said that PWS was revised in 18 of 53 competitions, within 15 months after the award of the contract. What happens when the changes in the PWS change the economics of it? AN UNIDENTIFIED SPEAKER said that in such instances perhaps everything involved in the function wasn't captured or maybe there was some unknown such as contaminated soil. MR. ENDSLEY noted that those PWS changes were major and significant changes. He indicated that the changes were, perhaps, rewrites of the PWSs. MR. PIGNALBERI asked if a competitive procurement would be reversed if changes to the PWS were significant. MR. ENDSLEY said that he believed that it would have to be appealed in order to reverse the competitive procurement. CO-CHAIR WARD thanked the guests for bringing clarity to the process. CO-CHAIR COWDERY complimented the guests and staff on their preparedness. MR. PIGNALBERI announced that a revised schedule is being proposed. After the next scheduled meeting, October 20, 1999, the commission would meet weekly through November because the subcommittee reports will begin to appear. CO-CHAIR WARD announced that his staff would contact the Canadian government with regard to their privatization efforts. That information will be distributed to all commissioners. MR. PIGNALBERI pointed out that the commission's packet should include an interim status report which may stimulate discussion. COMMISSIONER WUERCH referred to page 2 of the "Interim Status Report" and highlighted the statement: "..it is somewhat amazing that most departments cannot relate their expenditures of money, manhours and resources to specific work tasks that fulfill their mission." Today's presentation stressed the importance of a PWS. Perhaps, the PWS process should be adopted as mandatory, before any new employees are added to the state payroll. COMMISSIONER VALESKO noted that he is a former employee of the Department of Highways and Transportation. He related his experience in having to detail the routes and equipment utilized in his job. The detail can go over board and leave a frustrated employee and an increased office staff. ADJOURNMENT There being no further business before the commission, the Commission on Privatization and Delivery of Government Services meeting was adjourned at an unspecified time.