Buy Lines: Today's challenges require innovative contracting

Stan Soloway

The extraordinary financial and human capital challenges facing the federal government will be with us for many years. Because their dimensions and impacts are so significant, it is more important than ever that agencies have access to a wide range of innovations that will let them do much more with much less.

These innovations include energy savings performance contracts (ESPCs), share in savings, private finance initiatives and enhanced use leasing, all of which are variations on the same theme.

In these techniques, contractors take greater up-front business risks -- often capital investment -- or rely solely on actual back-end savings in return for profits that are potentially higher, though still modest, or even ownership of a facility or system.

If done correctly, these techniques offer the government substantial mission and cost benefits that otherwise might not be possible, especially given growing resource and staffing constraints. Unfortunately, these techniques also face numerous obstacles to broader implementation.

First, the congressional budget scoring rules need to be revised.

The rules require that all possible, long- and short-term financial liabilities be accounted for, or scored, in the first year of a contract. There is no flexibility to account for the likelihood that those liabilities actually might not be incurred.

The scoring rules are based on functional rather than holistic analysis of a project's budget impact.

For example, while the funds obligated under a contract might come from a construction or operations and maintenance account, the benefits of the work performed (enhanced energy efficiency, for example), might well be experienced in areas covered by other budget accounts (i.e., utility payments).

Although doing so makes eminent sense, accounting for such "offsets" across budget lines is prohibited.

Thus, the rules can distort the business case by overstating the costs and understating the savings to the government, making it virtually impossible to move forward.

A wholesale rewrite of the budget rules is not necessary, but some modifications are essential to enable nontraditional business models.

Second, with regard to these innovations, although there are legitimate issues that merit debate, at least some of the opposition is more parochially political in nature.

Opponents of competitive sourcing and outsourcing in general routinely oppose any and all innovations in government procurement. It seems they fear the possibility that these innovations might work and thus demonstrate the positive attributes of a robust partnership between the public and private sectors.

As we continue the discourse about these and other innovations, we must be acutely aware of this dichotomy.

Further, some argue that it is preferable to handle all the government's needs through direct appropriations. However, in this budget environment, doing so is not possible. Moreover, these innovations can help free up some federal dollars for other needs -- something we ought to applaud, not fight.

These contracting techniques are complex and require real business acumen on the part of the government and its private-sector partners. It is no surprise that there are early examples that have failed. But that does not obviate either their essential logic or the importance of supporting, rather than inhibiting, further efforts to pursue this kind of innovation.

The government today faces daunting, long-term challenges. Meeting these challenges requires innovations much like ESPCs, share in savings and more. Fortunately, such innovations enjoy bipartisan support, and key leaders in the Bush administration and Congress have made clear their continued belief in and support for moving them forward.

For starters, addressing outdated budget rules and seeing past politically driven opposition will help greatly to ensure their long-term viability. We cannot afford to do otherwise.

Stan Soloway is President of the Professional Services Council. His e-mail is soloway@pscouncil.org.

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