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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.

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 2 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

U.S. Office of Management and Budget, The Federal Assistance Review (FAR) Program.

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

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 de

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.

IMPLEMENTATION BY GRANTOR AGENCIES

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, experience has shown, during the period immediately 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.

INCREASED GOVERNMENT-WIDE CONTRACT PRICES

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

cover the loss of revenue from Government contract prices.

LOSS OF TAX REVENUES

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.

EFFECT ON SMALL BUSINESS

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.

Use of Federal Supply Sources
By Cost-type Contractors

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 por

tion 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.

CHAPTER 5

Special Products and Services

The commercial products study covered policies, procedures, and practices used in the acquisition of a wide range of products and services. Our findings, conclusions, and recommendations apply generally to all commercial product acquisitions made by the Government. However, certain products and services require special treatment due either to their nature or to that of the marketplace. These unique characteristics apply to automatic data processing equipment (ADPE), food, and products and services of regulated industries. ADPE procurement is unique because of its recent dramatic growth as an industry and its importance to all Government operations. These characteristics have resulted in special organizational and regulatory treatment by Congress and the executive branch. In contrast to ADPE as the newest major industry, food processing and distribution is probably the oldest of industries.

Several other products and services, such as public utilities, have come under Government regulation to provide the public with protection from monopolistic endeavors and to ensure the economic health of these vital

resources.

requirements for software (computer programs), peripheral equipment, systems maintenance, and compatibility with other equipment or systems. Due to the extraordinary growth of this industry, the market has become highly competitive. This has resulted in reduced equipment prices, while personnel expenditures related to the acquisition and use of ADPE have increased. These factors, when coupled with lengthy interagency procedures, extend acquisition time and increase the total cost to the Government.

The U.S. Government is the world's largest single user of ADPE. From June 30, 1960, to June 30, 1971, the number of systems in the Government's inventory increased from 531 to 5,961. Of the 5,961 systems, 4,296 were owned wholly or partially and 1,665 were leased. As of June 30, 1971, the Government owned or leased ADPE valued at $3.1 billion. This growth is much slower than for the Nation as a whole. During this same period, the total number of computers used in the United States increased from 6,000 to 73,077.3 In fiscal 1971, total expenditures for ADPE in the Government approached $800 million as shown in figure 1.

Prior to 1965, Federal agencies independently procured ADPE in accordance with policy guidance from OMB and technical guidance from the National Bureau of Standards (NBS), but without central control. The rapid

AUTOMATIC DATA PROCESSING EQUIPMENT

Government acquisition of ADPE represents a large and rapidly growing portion of a dynamic market. The equipment is commercial. There are no standard Government procurement specifications. In addition to basic control and computer units, there are

1 U.S. General Services Administration, Inventory of Automatic Data Processing Equipment for Fiscal Year 1971, pp. 13, 15. 2 U.S. General Services Administration, Automated Data and Telecommunication Service, Summary of Federal ADP Activities for Fiscal Year 1971, June 1972, pp. 35-36.

'Supplemental Views of Senator Percy, in: U.S. Congress, Joint Economic Committee, Economy in Government: Automatic Data Processing Equipment, report of the Subcommittee on Priorities and Economy in Government, 92d Cong., 1st sess., May 21, 1971, p. 13.

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processing centers. OMB exercises fiscal and policy control over all aspects of ADPE acquisition, including feasibility studies. GSA negotiates Federal schedules for use by all agencies, makes specific purchases for agencies, establishes acquisition controls and procedures, and delegates procurement authority on a case-by-case basis. FPASA also authorizes the Secretary of Commerce to (1) provide agencies and the Administrator of GSA with scientific and technological advisory services for ADP and related systems and (2) make recommendations to the President for the establishment of uniform Federal ADP standards. The National Bureau of Standards (NBS) provides advisory services to agencies regarding technical aspects of the selection and use of ADPE in Federal Information Processing Standards Publications (FIPS PUB).

Agencies are responsible for requirements determination and also for procurement when authorized by GSA. Agencies have established organizational controls including staff review of all actions required by GSA. Some agencies, such as DOD, have also established high-level source selection procedures patterned after the process used in selection of a major weapon system.

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