Private investment could play a role in government modernization

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Unstoppable budget trends are, more and more, starving the government of the funds it needs to invest in itself. Money for modernizing systems and processes. More governments are looking to private capital to see if there’s a mechanism by which to bring it in. That’s the topic of a new study by the IBM Center for the Business of Government. Joining Federal Drive with Tom Temin in studio, two of the study’s authors. Ken Buck, adjunct professor at the University of Virginia, and Steve Redburn, a lecturer at George Washington University.

Interview transcript:

Tom Temin: Let’s begin with what it is you were trying to discover with this study. The idea of private capital investing in government, that sounds like something other than just buying service’s of contractors.

Steve Redburn: The federal government has a big backlog of capital needs various kinds, including the need to modernize many of its systems. Its IT and communications system. And at the same time the budget has really constrained the resources available to meet those capital needs. So the IBM Center for the Business of Government, working with shared services leadership coalition convened a round table last fall of people who have a variety of perspectives, both private sector and public sector, both people on the hill, people in the executive branch who have were challenged by Margaret Weichert, who’s been leading the administration’s government improvement efforts government wide..

Tom Temin: Or had been had been..

Steve Redburn: ..challenged by her to come up with new ways of thinking about this problem. How do we mobilize the private sector’s capital, not only its capital, but its expertise in this technology to address this set of needs within the constraints of the budget and the complexities of the procurement process. So we have then taken that set of ideas and developed them.

Tom Temin: And Ken, what are some of the ideas?

Ken Buck: Well, I can speak to the acquisition area. Basically, what we did is we teamed up with DeSeve, our other partner in crime, and what we looked at as a way to solve this problem is to look at the holistic view. Meaning, it isn’t a procurement solution, it isn’t necessarily a budget solution or an HR solution. So we worked as an integrated team to basically say “what are the barriers to our to the federal government accepting private equity money?’ We looked at venture capitalists. It was very interesting view. Our research looked at how other other governments are doing this national government say in foreign countries as well, the states and local government. So on the acquisition side, what we determine is there are mechanisms that exist today within the federal acquisition regulation. I’m talking strictly from a contracting perspective in terms of the flexibilities that are stated in part one. If it’s not illegal, immoral or unethical, assume it can be done. That’s the mantle. Now that isn’t always practiced. So there are incentive type contracts that we may use. So I won’t get into the recommendations right now and we can explore those.

Tom Temin: Well, let’s talk about how other governments do take in private capital, say other national governments. What is their mechanism?

Steve Redburn: Well there is a separate capital budget in many countries, most countries and also at the state level in the U. S. The federal government doesn’t have a separate capital budget. So that means that same appropriations process, the same decision making process that applies to social security or spending on administration applies to investments in capital improvements.

Tom Temin: Everything is a one year cash basis, basically.

Steve Redburn: Not necessarily cash, but certainly one year at a time. That means that for a capital project where the conventions as they are currently applied in the budget process require that the full cost be appropriated upfront for what could be a very large lump sum of money is at a disadvantage relative to annual spending for maintenance or services procurement. So it’s easier, ironically, to continue maintaining legacy systems in the federal system because of this one obstacle that would be to build a new system that could serve maybe multiple agencies and created efficiency saving.

Tom Temin: That’s where you get into the shared service’s idea.

Steve Redburn: That’s right. And the other problem with the budget process, as it exists from this perspective, is that it’s stovepiped by agency and department. So it’s very difficult to get an appropriation for a system that’s gonna serve multiple agencies. You can create some sort of franchise fund, perhaps, but then the mechanisms for repaying that fund cross agency boundaries are another challenge to the way budgets are constructed.

Tom Temin: Yeah, the old pass the hat method, so to speak, has never been all that successful at the federal level, has it?

Steve Redburn: Right. And the key is to give appropriators confidence that they’ll actually recover those costs if there are efficiency savings down the road from capital investment today and be able to reflect those savings in their appropriations.

Tom Temin: What are some of the recommendations for getting around this and maybe bringing in private capital in such a way that the government could benefit from it and get what it needs for investment?

Ken Buck: Well, focusing on contracting and procurement area, there have been efforts over the years to try to make it more flexible, more innovative. It’s an evolutionary process. So one of the areas I worked 20 years ago now is the concept of share and savings where basically the government didn’t have to fund the full amount of the first year obligation, if you will. In essence, they could enter a contract by partial funding and in some cases no funding, depending on the opportunity. And the contractor would be paid from the savings that actually occurred.

Tom Temin: And they used that a lot for building modernizations and getting some better HVAC systems and that kind of thing.

Ken Buck: Energy savings were good. I mean that was a good example because there was a meter on the wall and it was clear to know what the cost were before some renovation and then if they were reduced as a result of, say, thermal windows, the electricity bill went down. Then  part of the reimbursement of the investment by the contractor was paid from those savings a portion thereof. So the E-GOV act of 2002 was very innovative. It basically trumped the Anti Deficiency Act. It established that any savings that were accrued, the government would be able to reinvest those in other programs. We put the infrastructure in place, we put the policies that were ready to be signed over at the Office of Federal Procurement Policy and basically we ran out of time and so it was a five year pilot and it basically expired. So one of our recommendations is that let’s look at resurrecting it now that we’ve learned more. I mean, it is an evolutionary process.

Tom Temin: Shared savings mechanisms.

Ken Buck: Absolutely. And it’s being done at the state level where, in essence, they’re focused on balance budgets, etc. So there are some controls that can be put in place, but for the most part, we think that that is certainly a recommendation in the long term, permanently authorize it. But now we think they should be another follow on pilot. Another area, and this gets to the whole issue of accepting private equity money, under the current structure. I don’t know so much about the budget rules, but certainly if you go to a contracting office today and they’ll say, augmentation of appropriations, and that’s a scary word, and those of us that grew up our first contracting course, they said, if you make a mistake, you could go to jail. So that environment is still there. There are pockets of innovation. So the second recommendation is toe look at other transaction authority because that is a completely different animal than it is in the federal procurement sector, where private investment is actually encouraged and it’s in there in statute. We don’t look at it as a panacea, but it is the type of viewpoint, the type of environment that’s going to promote innovation. And it’s not to say the procurement rules are stodgy or they’re inappropriate. They’re restrictive in a lot of ways. So our recommendation is really to explore expanding the scope of OTAs beyond research and development and prototyping and more into production. And the third one was public private partnerships. It’s almost like the other federal US agencies, not federal, but it’s state, local level and also in other countries. And in our report we give some specific examples of how states are using it to enhance infrastructure, which is something this country needs. And so we believe that that should also be used.

Tom Temin: And Steve, what does the appropriations process in the budget request process look like in those situations?

Steve Redburn: Ken’s correctly described the conservatism and the anxieties that budgeters feel, appropriators especially, about innovative practices that might expose the government to risks down the road. So and the budget concepts in their application have grown out of that desire to make sure that the governments taxpayers protected. And there’s proper stewardship of funds, and also that cost are properly recognized upfront before the government gets too far into a deal that could be problematic. So to give them more confidence and to reduce their anxiety about these arrangements, it’s necessary to build a body of experience and evidence systematic demonstration to them that this is what could be recovered in terms of cost savings or efficiencies down the road. And here’s a mechanism that you can use as a model to do this over and over again. One of the examples of how that could be done is the current technology modernization fund, which was authorized two years ago and has been used now by OMB and GSA to essentially run an internal competition among agencies to tap those funds for innovative approaches to generate administrative savings through IT modernization. As that is documented, as it’s shown that this is a working model, it’s still very small, but it could be expanded and built on and expanded to a wider range of capital needs. So that’s just a example of how you give confidence to people by building evidence, scorekeepers don’t like to be uncertain about what the cost savings are gonna be, so you have to demonstrate that there real.

Tom Temin: I guess the biggest hurdle to getting any of this done is convincing Congress, not just about the idea, but about the fact that agencies can deliver on what it is that Congress would let them do.

Ken Buck: In some cases way we think that there is within existing authority, for example, from a procurement perspective. We may need authorization to do share and savings as it was originally structured 20 years ago. But there are incentive contracts. That type of mechanisms we can use to incent federal contractors from absorbing some of the cost, if you will. But I think when we look at historically at the share and savings concept, and Steve did a great job of explaining come some of the restrictions, if you will. The accountability of cost. If somebody is going to invest in a company, say you know it’s a federal agency is the company. They’re gonna want to look at the books. And heretofore, the government’s been reticent to share basically what the costs were. 20 years ago, we didn’t have very good cost accounting systems. I would hope they’re improved today with the CFO Act and balance sheets, etc. So looking at a private sector partner, not just a contractor that’s on the other side of the fence. And again, that’s why OTAs are good, because the whole concept of cost sharing and partnership is inherent in that. And so that’s a model, if you will, I think we could adopt.

Steve Redburn.:We also looked at some longer term possibilities and looking farther down the road to facilitate these kinds of innovative practices. The government may want to review the set of budget concepts that we’ve lived with basically since 1967 when the president’s commission established what we currently have as a budgeting concept approach. And that could include changing the way investment is looked at in the budget process. So that’s one change that could be made farther down the road. And we could have an organized capital planning process that develops a pipeline of projects that helps reduce the uncertainties that private investors face when they have to deal with the federal government.

Tom Temin: Thank you very much both for being here.

Steve Redburn & Ken Buck: Thank you.