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gram and its socioeconomic effects to the Office of Federal Procurement Policy.

Fourth, to the extent the grantees were divisions of State and local governments, the authorization was inconsistent with congressional intent expressed in the Intergovernmental Cooperation Act of 1968.31

Background

Considerations

The policy of authorizing grantees to use Federal supply sources in fulfillment of grant programs originated in 1967. In 1970, use of Federal supply sources by grantees increased because of two actions: (1) GSA publicized the program and (2) the use of Federal grant funds expanded. The policy specifically included Government sources other than GSA, such as DSA and the Federal Prison Industries, as authorized supply and service sources for grantees.29 Available resources included calls against Government contracts, self-service stores, motor pools, and depot stocks. The policy also extended the authorization to subordinate activities of the prime grantee.

Grantee use of Government sources required the grantor's written authorization, a copy of which was sent to the Government activity on which requisitions would be made. To use Federal Supply Schedules, the grantee simply included a copy of the authorization with the order. Responsibility for assuring appropriate use of the supplies and services rested with the grantors.

During fiscal 1971, sales to grantees by GSA sources totaled about $5 million out of gross sales of $777 million to all agencies.30 The amount of grantee use of Federal Supply Schedules is unknown.

Several reasons were given for discontinuing the program. First, the business community and OMB expressed increasing concern over the expanded use of Federal sources by non-Federal activities. Second, the authorization was concluded to be inconsistent with the Administration's declared policy of reliance on private enterprise. Third, the burden of competing with Federal sources adversely affected small business throughout the country.

Industry concerns regarding the expanded policy and efforts to promote the grantee use of Federal sources of supply were expressed in numerous letters and in public meetings. Most of the protests came from local distributors, dealers, and other small businesses that viewed the policy as unwarranted and as promoting unfair competition with private enterprise. Many distributors indicated they were being taxed to support Federal sources since Government operational costs are financed by direct appropriations not fully reflected in supply prices.

Proponents of the program contended that grant dollars—public funds—went further when Federal sources were used for supplies and services. Grantees were given access to sources of supply at item prices that they could not have obtained independently. They also benefited by avoiding the administrative expense of open market purchasing which would have been charged against grant funds.

Industry and local distributors, dealers, and small businessmen indicated that, if total agency and Federal administrative and operating costs, as well as the socioeconomic impact, were considered, the savings to the Government would be doubtful. This argument was based on the present policy of financing supply and service operations by direct appropriation. In addition, no State and local taxes are paid on these sales, thus cutting into potential revenues of these governments. These critics also contended that there was no realistic way to prevent items purchased through Federal sources from being diverted to uses unrelated to the purposes of the grant.

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29 FPMR, ch. 101-33.

20 Letter from the General Services Administration to the Commission, Feb. 2, 1972; Federal Grantee Use of Federal Supply Sources, GSA Fact Sheet, Mav 2. 1972.

31 Public Law 90–577, 82 Stat. 1098, 42 U.S.C. 4201-4344 (1970). *Commissioners Beamer, Chiles, Gurney, Horner, and Sanders. * U.S. Office of Management and Budget, The Federal Assistance Review (FAR) Program.

Conclusions

Dissenting Position

The growing use of Federal grants in education, health, transportation, law enforcement, and other fields increases the number of potential users of Federal supply and service sources. Policy regarding use of Government resources by grantees should take into account the effects of this use on ordinary business channels and on the national economy and should reflect an analysis of costs and benefits of a program of this magnitude.

Where a Government purpose is clearly accomplished by a grant (that is, when the Government's share is more than 60 percent of the program) and when the most economical way of meeting the equipment and supply needs would be through utilization of Federal supply sources, such sources should be available to the grantee on an optional basis.

Federal sources of supply and services, including indefinite delivery contracts, are established to provide Government agencies with economical or convenient ways to satisfy their requirements. The operation of these procurement and distribution systems is financed in ways that may or may not reflect the total cost to the Government in the charges made to the users. GSA and DSA operations are financed directly by annual appropriations, with the product charges to agencies covering purchase price, transportation, and some related incidental costs.

If grantee use of Federal sources of supply were reconsidered, the total computed cost should include the cost of the delivered product to the grantee, the agency's cost of authorizing and administering the use of the sources, and indirect effects on the national economy. A policy or program that authorizes grantee use of Federal sources should recognize all of these factors and establish workable implementing guidelines.

These guidelines should be practical and enforceable. Agency personnel responsible for authorizing access to Federal supply sources should determine that the likelihood of conformance by the grantee is high, that the means of insuring conformance exist, and that costs of surveillance are recognized in the prices charged to grantees.

A number of Commissioners* do not support the recommendations to authorize use of Federal sources by grantees except when absolutely necessary. They contend that:

'The procurement services which would be furnished grant recipients under the recommendations of the Commission majority would very nearly constitute a business activity that parallels those services already available to grantees from private distributors and retailers. Under those recommendations, GSA would purchase, warehouse, and make deliveries from its stocks to grantees in exactly the same way as private distributors do. GSA personnel would call on grantees in much the same manner as salesmen of private companies. They would provide grantees with printed catalogs and other material publicizing their services and price advantages and in some instances would conduct training courses for grantee personnel on how to place orders with GSA. This type of activity would clearly and effectively place the Federal Government in competition with commercial suppliers. This would be in direct conflict with the basic Commission recommendation of Part A, Chapter 6, which states, “it is the national policy to rely on private enterprise for needed goods and services to the maximum extent feasible.”

Government efficiency in providing supplies to grantees is not superior to that available from the private sector. Consequently, the Government cannot provide such sources more economically, from a long-term national standpoint, than can private enterprise. While the Government has in the past provided grantees supply items at less than commercial prices, this was possible because the Government did not recover many of its costs. Instead, these were paid from appropriated funds which served as a hidden subsidy to the purchasing grantees.

There is no doubt that if all costs to the public are considered, including total economic cost factors, the administrative task of determining eligibility of grantees, the expense of enforcement, the burden of determining when purchase from Federal sources would be economically feasible, and the socioeconomic effects on the economy, the commercial business sector, and State and local communities, the comparison would strongly favor grantee procurement directly from the commercial sector.

The majority recommendations are also wholly inconsistent with the thrust of recent Federal efforts to reduce Federal strings and red tape involvements with grantees, while at the same time striving to strengthen grantee capability for effective management.

Dissenting Recommendation 1. Prohibit the use of Federal supply sources by grantees, except where unusual circumstances dictate and under express statutory authorization. Dissenting Recommendation 2. Charge grantees on the basis of total economic cost to the Government for Federal supplies and services made available to them.

confusion among grantees, particularly those with multiple grants who would be eligible under some grants and not eligible under others. In addition, a complex system of eligibility controls would be necessary so that Federal supply sources and schedule contractors would be able to limit services to eligible grant purposes.

An effective system for reviewing each grant, including the grant's purpose and the extent of Government participation, would require added personnel and considerable administrative effort and expense on the part of the Government, thereby adding to the price to be charged grantees for supplies from Government sources as their allocated share of increased agency appropriations.

TOTAL ECONOMIC COST

DETERMINATIONS OF ELIGIBILITY

One of the majority recommendations is that grantees be authorized to use Federal sources of supply and service where Federal financing of the grant exceeds 60 percent.

Aside from the overriding consideration that such activity violates the national policy of avoiding Government competition with commercial business, it is necessary to recognize the adverse socioeconomic impact of such action on the public sector and the additional administrative costs for the Government which are associated with such a proposal.

A recent study to revealed that there are now more than 80,000 Federal grantees, and the number is steadily growing. The purposes of these grants vary widely, ranging from undefined purposes involving research to specifically defined areas such as hospital construction. There is also a variety of cost sharing formulae which consider not only dollar outlays by participants but “in kind” contributions of material and manpower resources, the evaluations of which are sometimes questionable.

In many instances determinations of eligibility would be controversial and would produce

Associated with the administratively complex task of determining grantee eligibility would be an equally complicated and expensive procedure for determining the factors to be included in arriving at a "total economic cost" formula to be applied when grantees use Federal supply sources.

To assure full recovery on a full socioeconomic basis and to prevent overcharging to grantees for these Government services would, in all likelihood, require the establishment of some disinterested group to oversee continuously the assessment of overhead costs, volume of grantee usage, value of Government capital investment, and the socioeconomic factors such as effects of such purchases on individual markets and the general economy, as well as the value of lost sales and property taxes to States and local communities.

OPTIONAL USE

To be workable, the conditions for use of Federal supply sources by grantees would need to be prescribed or regulated in a uniform manner which would protect the interests of all the parties. Leaving to a participating contractor the option of denying grantees access to his contract items would lead to inequities in application, confusion for grantees, and do

cover the loss of revenue from Government contract prices.

lays in grantee missions. Many contractors would likely choose to make a blanket exclusion of grantee participation while others might discriminate from grantee to grantee.

The entire option concept would be disruptive of the current efforts of the Government in cooperation with its grantees to provide a uniform system for grant administration that minimizes Federal control.

LOSS OF TAX REVENUES

IMPLEMENTATION BY GRANTOR AGENCIES

To the extent that the Government supplants local commercial business in supplying Federal grantees, the State, local, and Federal governments lose tax revenues. In addition to the Federal and State income tax they pay, private suppliers account for a significant amount of State and local revenue related to property, inventory, and franchise taxes, as well as taxes on the salaries of employees. Also, the transactions of private suppliers produce sales tax revenues which are not applicable to GSA transactions. Thus, the use of Federal sources by grantees could be disadvantageous to State and local governments.

The majority position proposes that grantor agencies promulgate regulations, audit product or service use, and oversee implementation of policies governing grantee use of Government supply sources. Aside from the enormous bureaucracy and cost of every agency developing and conducting such a policing effort,

EFFECT ON SMALL BUSINESS

mediately preceding the November 14, 1972, termination of grantee procurement through Government supply sources, that grantor agencies have a strong bias to encourage such grantee procurement. This bias often overrides national policies concerning total economic cost and reliance on the private sector. It is not realistic to expect grantor agencies to effectively police access by their own grantees to Government supply sources.

Of similar importance is the fact that the availability of a strong distributor system is vitally important to manufacturers. It is frequently an impossible financial burden for small manufacturers to maintain an effective nationwide distribution organization of their own. They can obtain representation in many markets only by taking advantage of the existing marketing organizations of independent distributors and retailers. Taking the grantee market away from these local suppliers could spell disaster for them as well as the manufacturers which they represent.

INCREASED GOVERNMENT-WIDE CONTRACT PRICES

Use of Federal Supply Sources By Cost-type Contractors

Allowing grantees to make purchases from Federal contracts and schedules at the Government discounted price may ultimately result in higher contract prices for the Federal Government. The extension by a contractor of his discounted prices to grantees results in a loss of revenues which can be significant when a major portion of the grantee market shifts from the commercial to the Government contract source. In such cases, contractors must recoup these lost revenues from increased prices to their commercial customers. The Government will have no means for assessing the impact on the prices it pays. Most likely the competitive market would force the contractor to re

The practice of permitting contractors performing under cost-reimbursable contracts to have direct access to Federal sources of supply and services has prevailed for many years without controversy. Under a cost-reimbursable contract, the contractor in many ways is treated as if he were acting as an agent of the Government in carrying out that portion of the contract involving purchase of supplies or services. Title to the acquired property passes to the Government upon delivery by the vendor. Records of purchase, cost, and accountability are maintained in accordance

with the terms of the contract, and the supplies or services can readily be controlled for intended use. There do not appear to be any reasons not to continue access to Federal sources by cost-reimbursable contractors.

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