Currency Paper Procurement

Since 1879, virtually all paper purchased by the Bureau of Engraving and Printing for U.S. currency production has come from one supplier--Crane & Co. Although Crane has consistently provided quality paper, the Bureau at times was forced to pay prices it was unable to determine were fair and reasonable because it had no other U.S. source for paper. The Bureau's assessment of Crane's proposed prices were hampered by several factors, including the lack of market prices for currency paper and the limited analyses of proposed costs and prices it performed, especially on earlier contracts in GAO's sample. In addition, some Bureau practices, such as understating the quantities of currency paper needed, caused the government to pay more for currency paper than it should have. The Bureau is responsible for ensuring that the government's supply of paper is not disrupted. Although no disruptions have occurred, the Bureau for many years did not maintain a reserve inventory of paper to provide for contingencies. As a result, it was more vulnerable to adverse consequences if a disruption had occurred and it was at a disadvantage in its contract negotiations because it lacked an alternative source for currency paper. The Bureau recently has been purchasing paper to build a three-month reserve supply and, under the law, could buy paper from a foreign source if no domestic source exists.

GAO noted that: (1) the optimum circumstances for the procurement of distinctive currency paper would include an active, competitive market for such paper, where a number of responsible sources would compete for BEP's requirements; (2) however, these circumstances have not existed because of the unique market for currency paper and some statutory restrictions; (3) BEP has been aware of the need to increase competition and has made some efforts recently to do so in areas under its control; (4) however, BEP must procure currency paper within the current statutory framework, which limits currency paper contracts to 4 years, prohibits currency paper production outside of the United States, and prohibits purchase of currency paper from foreign-owned or controlled entities; (5) of the 20 paper manufacturers that responded to GAO's survey, 12 said they were interested in and have the capability now, or could be made capable in the near future, of supplying at least part of BEP's currency paper needs if existing statutory requirements and some of BEP's solicitation terms were changed; (6) 7 of the 12 are domestic paper manufacturers, and 5 are located in foreign countries; (7) although the long-term relationship between BEP and Crane & Co., Inc. has historically resulted in quality currency paper, BEP was unable to determine that it had obtained fair and reasonable prices for 13 of the 17 contract actions awarded from 1988 to 1997; (8) BEP sometimes accepted prices even though it was unable to determine that they were fair and reasonable because it had no other source for currency paper; (9) GAO believes that BEP's assessments of the fairness and reasonableness of Crane's proposed prices were hampered by a number of factors, including the lack of market prices for currency paper and the limited analyses of proposed costs and prices it performed; (10) as the government's agent for acquiring currency paper, BEP is responsible for ensuring that the government's supply of paper is not disrupted; (11) although the potential for disruption in the supply of currency paper exists, there have been no such disruptions; (12) however, for many years, because BEP did not maintain a reserve inventory of paper to provide for contingencies, it was more vulnerable to adverse consequences if a disruption had occurred and was at a disadvantage in its contract negotiations because it lacked an alternative source for currency paper; and (13) BEP has recently been purchasing paper to build a 3-month reserve supply and, under the Conte Amendment, could buy paper from a foreign source if no domestic source exists.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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