Currency Paper Procurement
Additional Analysis Would Help Determine Whether a Second Supplier Is Needed Gao ID: GAO-05-368 April 29, 2005For over 125 years, the Bureau of Engraving and Printing (BEP), within the Department of the Treasury, has relied on a single contractor to supply the paper for U.S. currency. Such a long-term contracting relationship could contribute to higher costs and other risks. Another federal agency that relied on a single contractor, the U.S. Mint, decided to obtain a second supplier for coin metal. In solicitations for currency paper contracts in 1999 and 2003, BEP took steps to address barriers to competition that GAO had identified in 1998 through a survey of paper manufacturers. This report updates GAO's 1998 report using data from a second survey. It addresses (1) the changes BEP made to encourage competition and the results of its efforts, (2) the steps BEP took to ensure that it paid fair and reasonable prices, and (3) the analysis BEP has done of the advantages and disadvantages of obtaining a second supplier.
To encourage competition for the 1999 and 2003 contracts, BEP modified its solicitations to, among other things, indicate that it would provide bidders with the security thread that is inserted into most currency paper and extend the time for initial deliveries. For the 1999 contract, one additional supplier submitted an initial proposal but later withdrew it, and for the 2003 contract, only the current supplier submitted a proposal. This company remains the sole supplier of U.S. currency paper. According to paper manufacturers, several barriers to competition remain, including the high capital costs of and technological requirements for producing currency paper. BEP said it has not addressed these barriers because the requirements are either essential to preserve the security of currency paper or they are outside BEP's control (e.g., anticounterfeiting features are recommended by a federal committee). While some of the remaining barriers are outside BEP's control, BEP's outreach to paper manufacturers has been limited. For example, BEP does not meet regularly with them, as the Departments of Defense and Homeland Security meet with potential suppliers of their procurements, to identify additional steps that could be taken to encourage competition. To the extent that BEP has reached out to paper manufacturers, it has generally done so in conjunction with other BEP procurements. For the contracts awarded in 1999 and 2003, BEP took several steps, consistent with the Federal Acquisition Regulation's requirements, to determine that the prices it paid under these contracts were fair and reasonable. For the 1999 contract, it used price analysis (a comparison of two proposals) to determine that the two proposals it initially received were fair and reasonable. This analysis was sufficient because BEP had determined that adequate price competition existed. For the 2003 contract, BEP performed several cost analysis activities to ensure that the final agreed-to price was fair and reasonable, since the current supplier was the only company that submitted a proposal. For example, BEP obtained certified cost and pricing data from the current supplier, requested an audit review of the current supplier's price proposal, and established a technical analysis team to examine steps in the current supplier's manufacturing process that affect price. BEP also arranged for postaward audits of the current supplier. BEP has not analyzed the advantages and disadvantages of obtaining a second supplier of currency paper since 1996. At that time, it concluded that the costs would outweigh the benefits, but it did not analyze the long-term effects. As a result, it does not know how a second supplier would affect the costs, quality, security, and supply of currency paper over time. Analyzing the advantages and disadvantages of obtaining a second supplier would help BEP determine the need for one.
RecommendationsOur 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.
Director: Team: Phone:GAO-05-368, Currency Paper Procurement: Additional Analysis Would Help Determine Whether a Second Supplier Is Needed
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Report to Congressional Requesters:
April 2005:
Currency Paper Procurement:
Additional Analysis Would Help Determine Whether a Second Supplier Is
Needed:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-368]
GAO Highlights:
Highlights of GAO-05-368, a report to congressional requesters.
Why GAO Did This Study:
For over 125 years, the Bureau of Engraving and Printing (BEP), within
the Department of the Treasury, has relied on a single contractor to
supply the paper for U.S. currency. Such a long-term contracting
relationship could contribute to higher costs and other risks. Another
federal agency that relied on a single contractor, the U.S. Mint,
decided to obtain a second supplier for coin metal.
In solicitations for currency paper contracts in 1999 and 2003, BEP
took steps to address barriers to competition that GAO had identified
in 1998 through a survey of paper manufacturers. This report updates
GAO‘s 1998 report using data from a second survey. It addresses (1) the
changes BEP made to encourage competition and the results of its
efforts, (2) the steps BEP took to ensure that it paid fair and
reasonable prices, and (3) the analysis BEP has done of the advantages
and disadvantages of obtaining a second supplier.
What GAO Found:
To encourage competition for the 1999 and 2003 contracts, BEP modified
its solicitations to, among other things, indicate that it would
provide bidders with the security thread that is inserted into most
currency paper and extend the time for initial deliveries. For the 1999
contract, one additional supplier submitted an initial proposal but
later withdrew it, and for the 2003 contract, only the current supplier
submitted a proposal. This company remains the sole supplier of U.S.
currency paper. According to paper manufacturers, several barriers to
competition remain, including the high capital costs of and
technological requirements for producing currency paper. BEP said it
has not addressed these barriers because the requirements are either
essential to preserve the security of currency paper or they are
outside BEP‘s control (e.g., anticounterfeiting features are
recommended by a federal committee). While some of the remaining
barriers are outside BEP‘s control, BEP‘s outreach to paper
manufacturers has been limited. For example, BEP does not meet
regularly with them, as the Departments of Defense and Homeland
Security meet with potential suppliers of their procurements, to
identify additional steps that could be taken to encourage competition.
To the extent that BEP has reached out to paper manufacturers, it has
generally done so in conjunction with other BEP procurements.
For the contracts awarded in 1999 and 2003, BEP took several steps,
consistent with the Federal Acquisition Regulation‘s requirements, to
determine that the prices it paid under these contracts were fair and
reasonable. For the 1999 contract, it used price analysis (a comparison
of two proposals) to determine that the two proposals it initially
received were fair and reasonable. This analysis was sufficient because
BEP had determined that adequate price competition existed. For the
2003 contract, BEP performed several cost analysis activities to ensure
that the final agreed-to price was fair and reasonable, since the
current supplier was the only company that submitted a proposal. For
example, BEP obtained certified cost and pricing data from the current
supplier, requested an audit review of the current supplier‘s price
proposal, and established a technical analysis team to examine steps in
the current supplier‘s manufacturing process that affect price. BEP
also arranged for postaward audits of the current supplier.
BEP has not analyzed the advantages and disadvantages of obtaining a
second supplier of currency paper since 1996. At that time, it
concluded that the costs would outweigh the benefits, but it did not
analyze the long-term effects. As a result, it does not know how a
second supplier would affect the costs, quality, security, and supply
of currency paper over time. Analyzing the advantages and disadvantages
of obtaining a second supplier would help BEP determine the need for
one.
What GAO Recommends:
GAO recommends that the Secretary of the Treasury direct the Director
of BEP to (1) increase outreach to paper manufacturers before issuing
solicitations and (2) assess the need for a second supplier of currency
paper and if a second supplier is needed, take the necessary action to
obtain one. BEP, the Mint, and the Federal Reserve Board generally
agreed with the report‘s findings and/or recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-368]
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Katherine A. Siggerud at
(202) 512-2834 or [Hyperlink, siggerud@gao.gov]
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
BEP Has Modified Its Solicitations for Currency Paper to Address Some
Barriers:
BEP Took Several Steps, Consistent with the FAR, to Determine Fair and
Reasonable Prices for Currency Paper:
BEP Has Not Recently Analyzed Advantages and Disadvantages of Obtaining
a Second Supplier:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Summary of GAO's Previous Recommendations and Bureau of
Engraving and Printing's Actions:
Appendix II: Objectives, Scope and Methodology:
Appendix III: Comments from the Bureau of Engraving and Printing:
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Figure:
Figure 1: Estimated and Actual Currency Paper Orders, Fiscal Years 1999
through 2004:
Abbreviations:
BEP: Bureau of Engraving and Printing:
DCAA: Defense Contract Audit Agency:
DOD: Department of Defense:
FAR: Federal Acquisition Regulation:
Letter April 29, 2005:
The Honorable Carolyn B. Maloney:
Ranking Minority Member:
Subcommittee on Domestic and International Monetary Policy, Trade, and
Technology:
Committee on Financial Services:
House of Representatives:
The Honorable Peter T. King:
House of Representatives:
For over 125 years, the U.S. government has relied on one contractor to
supply virtually all of the paper for U.S. currency. The Bureau of
Engraving and Printing (BEP), which is responsible for printing U.S.
currency, is currently under a 4-year contract with this supplier and,
according to BEP data, is paying about $115 million a year for currency
paper. Although BEP has historically received a steady, timely supply
of paper that meets its requirements from its current supplier, having
one supplier for currency paper raises a number of concerns. Among
these concerns are (1) the lack of competition for the currency paper
contract, (2) the fairness and reasonableness of price, and (3) the
adequacy of the currency paper supply in the event of an attack or
other disruption of the currency supply.
These concerns, combined with the importance of U.S. currency to
domestic and international commerce, have led to reviews of this unique
situation. For example, in a 1996 report, the Department of the
Treasury and BEP concluded that competition was not immediately
feasible because the current supplier was the only domestic source that
could supply currency paper that met BEP's requirements. At the request
of Congress, in 1998 we also completed a review and reported that the
optimum situation for the procurement of currency paper would include
an active, competitive market with several responsible
bidders.[Footnote 1] However, this situation did not exist because,
according to paper manufacturers we surveyed, there were several
barriers to competition. These barriers included the large initial
capital investment required to produce currency paper and a legislative
provision generally precluding foreign-owned companies from competing
for the contract. We also reported that BEP could not determine a "fair
and reasonable" price for some of its paper contracts--a requirement in
negotiating a federal contract that involves the judgment of the
contracting officer based on various defined techniques and established
procedures for analyzing proposed prices. To help BEP improve its
contract oversight and increase competition, we made several
recommendations, most of which BEP has implemented. (See app. I.)
In 1998 we reported that a number of BEP's actions to encourage
competition were too new for us to assess their impact. Since that
time, BEP has entered into two additional contracts, in 1999 and in
2003, and has taken further steps to encourage competition. BEP is now
scheduled to award another currency paper contract in the fall of 2006.
Moreover, the U.S. Mint (the Mint), which is responsible for producing
coins, has now had over a decade of experience with having a second
supplier for coin metal after having had a single supplier for decades.
Given these developments, you asked us to update our 1998 report. To do
so, we determined:
* the changes BEP made to encourage competition for the 1999 and 2003
currency paper contracts and the results of its efforts,
* the steps BEP took to determine that the prices it paid for currency
paper under these contracts were fair and reasonable, and:
* the extent to which BEP has analyzed the advantages and disadvantages
of obtaining a second supplier for currency paper.
To determine the changes BEP made to encourage competition for the 1999
and 2003 currency paper contracts and the results of its efforts, we
reviewed the changes that BEP made to its solicitations and contracts.
We also conducted a survey of domestic and foreign paper manufacturers,
using a questionnaire similar to the one we used for our 1998 report.
Of the 15 manufacturers we identified as having the potential to
compete for the currency paper contract, 14 responded to our survey,
and 8 of these said they were interested in providing currency paper to
BEP. The remaining 6 manufacturers told us that they were not
interested in competing for the currency paper contract. We reviewed
economic literature to identify barriers to competition for the
currency paper market, and we reviewed applicable procurement laws and
regulations to identify requirements affecting the procurement of
currency paper. Among these are the Conte Amendment, a statute that
requires that paper for U.S. currency be manufactured in the United
States, and another statute that limits the procurement of distinctive
currency paper to 4-year contracts. To determine the steps BEP took to
determine that the prices it paid for currency paper under these
contracts were fair and reasonable, we reviewed the Federal Acquisition
Regulation (FAR) and compared its requirements with the steps BEP took.
Finally, to determine the potential advantages and disadvantages of
obtaining a second supplier for currency paper, we reviewed economic
literature as well as interviewed former and current officials from BEP
and the U.S. Mint about their efforts to develop a second supplier. We
performed our work in Washington, D.C., from August 2004 through April
2005 in accordance with generally accepted government auditing
standards. Details of our objectives, scope, and methodology are in
appendix II.
Results in Brief:
To encourage competition for the 1999 and 2003 contracts, BEP made a
number of changes to its contract solicitations to address some of the
barriers that paper manufacturers we surveyed had identified. For
example, BEP modified the solicitations to indicate that it would
provide the security thread that is inserted into most currency paper
to other successful bidders as government-furnished property rather
than requiring them to obtain the thread themselves. In addition, BEP
increased the mobilization period--the time between the contract award
and the start of deliveries to BEP--to 24 months. This period had
previously been limited to 60 days. In response to the solicitation for
the 1999 contract, one additional supplier submitted an initial
proposal, but later withdrew it, and for the 2003 contract, only the
current supplier submitted a proposal. This company remains the sole
supplier of U.S. currency paper today. Although BEP addressed a number
of barriers, several other barriers, such as the high costs and the
technological difficulties of producing currency paper, still exist,
according to paper manufacturers we surveyed for this report. According
to BEP, it has not addressed these barriers because they are due to
requirements that are outside its control or they are essential to
preserve the quality and security of currency paper. For example, the
anticounterfeiting features in currency paper are recommended by the
Advanced Counterfeit Deterrence Steering Committee, which consists of
members from BEP, the U.S. Secret Service, the Federal Reserve System,
and the Department of the Treasury. We agree with BEP that some of the
remaining barriers are outside its control; however, we found that
BEP's outreach to paper manufacturers is limited and is generally done
in conjunction with its other procurements. For example, BEP does not
conduct industry briefings for potential suppliers. We found that the
Departments of Defense and Homeland Security hold industry briefings as
frequently as possible to provide potential contractors with
information and an opportunity to comment on future solicitations and
procurements. Before BEP issues solicitations for currency paper
contracts in the future, we recommend that the Secretary of the
Treasury direct the Director of BEP to increase outreach activities
with paper manufacturers to allow them to provide their views on the
barriers to competition, suggest what steps BEP should take to address
these barriers, and comment on future solicitations.
For the contracts awarded in 1999 and 2003, BEP took several steps
consistent with the FAR's requirements to determine that the prices it
paid under these contracts were fair and reasonable. Since BEP
initially received two proposals for the 1999 contract, it used price
analysis--a comparison of the two proposals--to determine that the
prices were fair and reasonable. This analysis was sufficient because
BEP determined that adequate price competition existed. For the 2003
contract, BEP performed several cost analysis activities to ensure that
the final agreed-to price was fair and reasonable, since the current
supplier was the only company that submitted a proposal. For example,
BEP obtained certified cost and pricing data from the current supplier,
requested an audit review of the current supplier's price proposal, and
established a technical analysis team to examine steps in the current
supplier's manufacturing process that affect price. BEP also arranged
for a postaward audit of the current supplier, as we recommended in
1998, to ensure that the price negotiated for the contract was based on
adequate data. In 1998, we reported that BEP had engaged in two
procurement practices that could contribute to a higher-than-necessary
price for currency paper. For example, BEP did not obtain royalty-free
data rights to, or fund the development of, the security thread used in
currency paper. Consequently, under the current 4-year contract, BEP is
paying about $650,000 in royalties related to obtaining the security
thread. Although royalty payments are an allowable expense under FAR,
according to the current supplier, these payments will end in December
2006. In addition, to prevent this situation from recurring, BEP plans
to purchase royalty-free data rights to new anticounterfeiting features
that it obtains in the future from any sources for a cost to be
determined. Such an arrangement could enable BEP to use the technology
at its discretion, including allowing currency paper contractors to use
the technology without having to pay royalty fees.
Although BEP has stated that it favors competition for currency paper
and has taken some steps to encourage competition, it has not recently
analyzed the advantages and disadvantages of obtaining a second
supplier, including the impact on the cost, security, quality, and
adequacy of the supply of currency paper. In its August 1996 currency
paper report, BEP concluded that competition was not immediately
feasible because the current supplier was the only domestic source that
could furnish currency paper that met BEP's requirements. Moreover, BEP
estimated that it would pay an additional $21 million to $37 million
per year for currency paper if it purchased the paper from more than
one supplier, primarily because the new supplier would have high
capital costs. However, BEP's 1996 report did not analyze the long-term
advantages and disadvantages of obtaining a second supplier. Such an
analysis would help BEP determine if obtaining a second supplier would
be cost effective over the long term, decide whether the benefits of
obtaining a second supplier outweigh the potential security and quality
concerns associated with a second supplier, and ensure that BEP can
maintain an adequate supply of currency paper. We are recommending that
the Secretary of the Treasury direct the Director of BEP to determine
if there is a need to obtain a second supplier for currency paper by
preparing an analysis of the advantages and disadvantages of a second
supplier, including the impact on the cost, security, quality, and
adequacy of the supply of currency paper. If the analysis determines
that there is a need to obtain a second supplier, the Secretary should
then determine what steps are necessary to obtain a second supplier for
currency paper. We provided BEP, the Mint, and the Federal Reserve
Board with draft copies of this report for their review and comment.
They agreed with the draft report's findings and provided some
technical comments which we incorporated where appropriate. BEP also
agreed with our recommendations and described its plans to implement
them. See appendix III for BEP's comments.
Background:
BEP, a bureau of the Department of the Treasury, buys currency paper
from a private company and prints the nation's currency at production
facilities in Washington, D.C., and Fort Worth, Texas. According to BEP
data, the currency paper contract amounts to about $115 million per
year. Currency paper is a highly specialized product that includes
cotton and linen fibers as well as anticounterfeiting features to
enhance the quality and security of the paper. Several agencies affect
the production of currency paper. The Department of the Treasury
oversees BEP's production of currency, including its procurement of
currency paper. The U.S. Secret Service, now within the Department of
Homeland Security, is responsible for anticounterfeiting activities and
works with BEP in assessing the security of BEP's money production
facilities and currency redesign. The Federal Reserve Board sets
monetary policy for the nation, obtains new currency from BEP, and
issues the new currency to the public through depository institutions.
The Advanced Counterfeit Deterrence Steering Committee, which includes
members from BEP, the Department of the Treasury, the U.S. Secret
Service, and the Federal Reserve System recommends to the Secretary of
the Treasury the anticounterfeiting features to be placed in U.S.
currency. If the Secretary of the Treasury accepts these
recommendations, they become part of the specifications or requirements
for the currency paper.
The procurement of currency paper is subject to an appropriations
limitation, called the Conte Amendment, enacted in December
1987.[Footnote 2] In effect, the Conte Amendment requires that
distinctive paper for U.S. currency and passports be manufactured in
the United States. The amendment further prohibits the purchase of
currency and passport paper from a supplier owned or controlled by a
foreign entity unless the Secretary of the Treasury determines that no
domestic source exists. The procurement of currency paper is also
subject to another statutory limitation that prohibits the Secretary of
the Treasury from entering into a contract in excess of 4 years for
manufacturing distinctive currency paper.[Footnote 3]
BEP Has Modified Its Solicitations for Currency Paper to Address Some
Barriers:
BEP changed the solicitations for the 1999 and 2003 currency paper
contracts and intends to include these changes in the solicitation for
the next contract, which will be awarded in 2006. Some of the changes
addressed barriers we reported in 1998. These changes included the
following:
* Switching to a 4-year contract. Previously, BEP negotiated a 1-year
contract with three 1-year options, which meant that manufacturers were
not assured that they would receive the contract from one year to the
next. According to BEP officials, a 4-year contract creates less risk
for manufacturers because the contractor is almost guaranteed to
receive the contract for 4 years when the government no longer has the
option to renew the contract each year.
* Allowing multiple awards. Previously, BEP required any bidder to bid
on the entire currency paper contract. BEP divided its total currency
paper requirements into several different lots and allowed companies to
select the parts of the solicitation they would bid on. For example, a
company could choose to bid only on the paper for the $1 and $2 bills.
Thus, the contract could be awarded to two companies. Potential
suppliers told BEP that, in order to begin production, they would need
a long-term commitment for at least 40 percent of the contract.
* Allowing a 24-month mobilization period. Previously, the mobilization
period--the time between the contract award date and the date for
starting deliveries to BEP--was no more than 60 days. In 1998 some
paper manufacturers told us that the start-up period historically
allowed by BEP was not long enough for companies that are not currently
manufacturing currency paper.
* Allowing representative rather than identical samples. Previously,
companies had to produce samples during the bidding process using the
same machines they would use to produce currency paper if they received
the contract. BEP required these samples, which are called identical
samples, so that it could determine whether the companies were capable
of manufacturing paper that met its specifications. BEP now allows for
representative samples during the bidding process. Representative
samples are manufactured on equipment that is similar to what the
company would use if it were awarded the contract. Allowing
representative samples enables companies that do not currently own the
required equipment to produce paper samples on another company's
equipment and avoid purchasing costly equipment until they have been
awarded the contract. Domestic paper companies, for example, could use
the equipment of European paper companies to produce representative
samples and then acquire the appropriate equipment if they were awarded
the contract.
* Agreeing to consider innovative financing and acquisition
arrangements. Previously, solicitations did not provide any help to
companies that would have had to make a considerable financial
investment to purchase the equipment needed to compete for the
contract. To facilitate such an investment, the 1999 and 2003
solicitations stated that BEP would "consider innovative financing and
acquisition arrangements" proposed by a potential supplier, but the
solicitations did not specify what these arrangements might be. BEP
officials told us that these arrangements could include having the
government pay for some capital equipment if the contractor repaid the
government at the end of the contract. However, two of eight paper
manufacturers who said they were interested in competing for the
contract told us that the lack of financial assistance continues to
make it difficult for them to compete for the contract.
* Furnishing the security thread. Previously, BEP expected potential
paper manufacturers to obtain the security thread used in currency
paper on their own, which some paper manufacturers cited as a barrier
because the sole manufacturer of the security thread is a subsidiary of
the current supplier. As a result, potential manufacturers would have
had to purchase the thread and make royalty payments to that company.
BEP modified the solicitations for the 1999 and 2003 contracts to
indicate that it would provide the security thread that is inserted
into most currency paper to other successful bidders as government-
furnished property rather than requiring them to obtain the thread
themselves.
BEP awarded the first contracts with these changes in fiscal years 1999
and 2003. According to documents in BEP's contract files, one company
in addition to the current supplier submitted a proposal for the 1999
contract, but ultimately withdrew because, according to this company,
it was unwilling to continue to expend the resources required to
produce fully compliant paper samples without a contract. Four other
companies expressed interest in the 1999 contract, but did not submit
proposals. One company said it did not submit a proposal because it
determined that the estimated capital expenditures exceeded any
potential profit that might be realized over the 4-year contract
period. Another company that had expressed interest in the contract
said it did not submit a proposal because it was unable to obtain a
commitment for the large capital investment required. Additionally, the
company said the contract's provision for ordering a wide range of
paper quantities made it difficult to calculate a return on investment.
A third interested company did not submit a proposal because of
durability requirements for the currency paper. A fourth interested
company did not give a reason for not submitting a proposal. For the
2003 contract, the current supplier was the only company to submit a
proposal. Three paper companies other than the current supplier asked
to receive the solicitation, but these companies took no further
action. The next solicitation for the currency paper contract is
expected to be issued in the fall of 2005, and the contract is
scheduled to be awarded in 2006. This solicitation will include all the
changes that BEP previously made, according to BEP officials.
BEP Has Not Addressed All Barriers:
Despite the changes BEP made to the contract solicitation, paper
manufacturers we surveyed in 2004 told us that significant barriers to
competition remain.[Footnote 4] Specifically, the eight paper
manufacturers we surveyed who said they would be interested in
providing currency paper to BEP told us that the following barriers,
which we reported in 1998, still exist:
* Security requirements for the manufacturing facility. Three of the
eight manufacturers told us that implementing these security
requirements--which include ensuring that all waste is accounted for,
controlling access to sensitive production areas in the paper mill, and
erecting physical barriers around the mill--make it difficult for them
to compete for the currency paper contract because of the high costs to
upgrade their facilities.
* Technology required to incorporate anticounterfeiting features. Three
of the eight manufacturers told us that the cost of the equipment and
the technical expertise necessary to insert the security thread into
currency paper make it difficult for them to compete for the currency
paper contract.
* Requirement for U.S. ownership. Three manufacturers told us that this
legislative restriction, known as the Conte Amendment, continues to be
a barrier because it mandates that the company that produces U.S.
currency paper be domestically owned--that is, at least 90 percent
U.S.-owned, according to the Department of the Treasury.
* Lack of financial assistance for capital investment. Although BEP has
indicated that it will consider innovative financing proposals from a
potential supplier, two of the eight manufacturers told us that the
lack of financial assistance for capital investment continues to make
it difficult for them to compete for the contract. According to BEP,
under the FAR, it can make advance payments to manufacturers for
capital investment only if the manufacturer pays the money back to BEP,
with interest, during the life of the contract.
* Length of contract. One of the eight manufacturers, who said it plans
to submit a proposal for the 2006 contract, told us that the length of
the contract, which is restricted by statute to 4 years, makes it
difficult to compete for the currency paper contract. This manufacturer
said that, to make a profit during this contract, it would need a 5-
year contract and at least 40 percent of the contract.
According to BEP, these five barriers continue to exist because they
either are outside of BEP's control or are essential components of
producing currency paper. For example, the restriction against foreign
ownership and the length of the currency paper contract are both
legislative provisions that would require congressional action to
change. In addition, U.S. Secret Service officials told us that there
are tremendous benefits to producing U.S. currency paper inside the
United States because, according to the Secret Service, it does not
have the authority to oversee the security of personnel or plant
facilities in a foreign country. The Secret Service further stated
that, although it may be able to make agreements allowing for such
oversight, it can be difficult to take quick, decisive action in a
foreign country. The Secret Service also pointed out that the logistics
of moving currency paper across great distances and borders would pose
additional security risks. However, Secret Service officials indicated
that, in their view, foreign ownership would not pose a security
problem as long as the paper was produced in the United States and the
employees who produced the paper had undergone background checks. BEP
officials also believe that providing financial assistance for capital
investment is outside of their control because, as previously
mentioned, under the FAR, BEP can make advance payments to
manufacturers for capital investment only if the manufacturer pays the
money back to BEP, with interest, during the life of the contract.
Two of the barriers to competition that paper manufacturers identified
are within BEP's control, but these barriers--the security requirements
for the manufacturing facility and the technology required to insert
anticounterfeiting features, such as the security thread--remain
because they are essential for currency paper. Officials from BEP, the
Federal Reserve Board, and the Secret Service noted that currency paper
is a valuable asset that must be guarded and protected from
counterfeiting. Potential security features for U.S. currency are
reviewed by the Advanced Counterfeit Deterrence Steering Committee,
which is made up of representatives from BEP, the Department of the
Treasury, the Federal Reserve System, and the U.S. Secret Service. This
committee recommends which security features should be in U.S.
currency, and the Secretary of the Treasury decides which features to
incorporate. These security features require that manufacturers of
currency paper use advanced technology to insert anticounterfeiting
features into paper. Furthermore, to ensure the security of the paper
and of the anticounterfeiting features, manufacturing facilities must
have greater physical security than paper mills generally.
We agree with BEP that some of the remaining barriers are outside its
control; however, we found that BEP's outreach to paper manufacturers
is limited and is generally done in conjunction with its other
procurements. For example, BEP does not conduct industry briefings for
its potential suppliers. We found that the Departments of Defense and
Homeland Security hold industry briefings as frequently as possible to
provide potential contractors with information and an opportunity to
comment on future solicitations and procurements. BEP's outreach to
potential paper manufacturers generally consists of publishing its
draft currency paper solicitation in Federal Business Opportunities and
waiting for the paper manufacturers to contact them.[Footnote 5] One
paper manufacturer we surveyed commented that it was unaware of the
solicitation for the 2003 contract. In commenting on a draft of this
report, BEP stated that, in addition to the outreach efforts we
describe, it is pursuing other outreach efforts. For example, BEP
stated that it attends fairs and banknote conferences where potential
suppliers are consulted to determine if their company has an interest
in contracting with BEP for various currency materials, primarily
currency paper, inks, and counterfeit deterrent features.
BEP Took Several Steps, Consistent with the FAR, to Determine Fair and
Reasonable Prices for Currency Paper:
The FAR states that an agency's contracting officer is responsible for
evaluating the reasonableness of the offered prices to ensure that the
final price is fair and reasonable. The FAR does not define "fair and
reasonable," but establishes various techniques and procedures for a
contracting officer to use in evaluating prices. Furthermore, the
contract pricing reference guidance available from the Department of
Defense (DOD) discusses the application of these requirements. For a
price to be fair to the buyer, it must be in line with either the fair
market value of the product or the total allowable cost of providing
the product that would be incurred by a well-managed, responsible firm
using reasonably efficient and economical methods of performance, plus
a reasonable profit. To be fair to the seller, a price must be
realistic in terms of the seller's ability to satisfy the terms and
conditions of the contract. A reasonable price, according to the DOD
guidance, is a price that a prudent and competent buyer would be
willing to pay, given available data on market conditions, such as
supply and demand, general economic conditions, and competition. For
the currency paper contract, there is currently only one buyer and one
seller, domestically. As a result, pricing is established through
negotiation.
The FAR further states that the contracting officer may use any of
several analysis techniques to ensure that the final price is fair and
reasonable. The techniques the officer uses depends on whether adequate
price competition exists. For the 1999 contract, BEP determined that
adequate price competition existed because of the expectation that at
least one additional meaningful proposal would be submitted.
Consequently, BEP used price analysis--a comparison of the two
proposals--as a basis for determining that the 1999 contract prices,
which totaled $207 million, were fair and reasonable. BEP also compared
the proposed prices with an independent government cost estimate, which
BEP prepared for the contract.
For the 2003 contract, BEP determined that adequate price competition
did not exist because, although several companies requested copies of
the solicitation, only the current supplier submitted a proposal. Under
such circumstances, the FAR requires agencies to use one or more of
several proposal analysis techniques to ensure that the final price is
fair and reasonable. BEP took the following steps to determine its
prenegotiation pricing objective:
* Obtaining certified cost data from the current supplier, as required
by FAR 15.403-4.
* Requesting that the Defense Contract Audit Agency (DCAA) audit the
current supplier's price proposal. DCAA found that the current
supplier's proposal was acceptable as a basis for negotiating a fair
and reasonable price. To perform its audit, DCAA used the applicable
requirements contained in the FAR, the Treasury's Acquisition
Procurement Regulations, and the Cost Accounting Standards. BEP
officials said they also independently reviewed and assessed the
current supplier's proposed costs and did not rely solely on DCAA's
findings.
* Establishing a technical analysis team to examine various aspects of
the current supplier's manufacturing process that affect price. The
technical analysis concentrated on production yield factors, paper
machine speeds and capacity, and labor requirements, among other
things. According to BEP, these areas have a major impact on cost and
are an essential part of a cost analysis.
* Performing a price analysis using comparison with previous contract
prices for currency paper to verify that the overall price offered was
fair and reasonable.
In 1998, we recommended that BEP arrange for postaward audits of the
current supplier's costs and ensure that the supplier maintains
acceptable cost accounting and estimating systems for future contracts.
The purpose of a postaward audit is to determine if the price,
including the profit, negotiated for the contract was increased by a
significant amount because the contractor furnished cost or pricing
data that were not accurate, complete, or current. For the 1999
contract, a postaward audit was not required because the supplier was
not required to submit cost or pricing data. Following the award of the
2003 contract, BEP requested that DCAA perform a postaward audit of the
current supplier. DCAA found that the current supplier's certified cost
or pricing data were accurate, complete, and current. DCAA also
performed a postaward audit of the subcontractor that provides the
security thread for U.S. currency and found that the subcontractor's
data were accurate, complete, and current. Finally, DCAA reviewed the
current supplier's estimating system and found it to be adequate to
provide estimated costs that are reasonable, compliant with applicable
laws and regulations, and subject to applicable financial control
systems.[Footnote 6]
BEP Has Taken Some Action to Address Uneconomical Contracting Practices
Identified in 1998:
In 1998 we reported that two BEP procurement practices contributed, or
could contribute, to higher-than-necessary currency paper costs. These
practices included not obtaining royalty-free data rights for the
security thread used in currency paper and ordering inconsistent
quantities of paper. We found that BEP continues to make royalty
payments for the use of the security thread and will have to do so
until December 2006. We also found that BEP continues to have
difficulty in accurately estimating the amount of paper it will
require, but inconsistent order sizes have not yet adversely affected
the prices it pays.
We previously reported that a subsidiary of the current supplier holds
patents for manufacturing the security thread used to deter
counterfeiting. This thread is inserted into all U.S. currency
denominations greater than $2. According to a BEP official, the current
supplier approached BEP with the idea for the security thread in the
mid-1980s, and BEP encouraged this company to develop the thread, but
BEP neither entered into a research and development contract to help
fund the effort, nor did it attempt to negotiate rights to that
technology or technical data, according to another BEP official.
Because the government did not obtain royalty-free data rights to, or
fund the development of the security thread, it does not have any
rights to the associated technical data and must pay for any use of the
thread. The price BEP currently pays for currency paper includes the
cost of royalty payments, which are generally allowable under the FAR.
For the 2003 contract, these payments totaled $663,000 over 4 years.
According to the current supplier, these royalty payments will end in
December 2006. As a result, beginning with the next currency paper
contract--which BEP expects to award at the end of 2006--BEP will not
have to pay royalties for the use of the current security thread or
negotiate a license to provide the thread to a second supplier. In
addition, to avoid a recurrence of this situation, BEP plans to
purchase, for an undetermined price, royalty-free rights to any new
anticounterfeiting features that it obtains in the future from any
sources. Properly written, such an agreement could enable BEP to
incorporate new technology at its discretion and allow currency paper
contractors to use that technology in manufacturing paper to meet the
government's requirements. In addition, BEP included a special
provision in the 2003 currency paper contract stating that BEP will not
incorporate any new anticounterfeiting feature into U.S. currency paper
unless it has negotiated an exclusive license to the feature.
We also reported in 1998 that BEP actually ordered more paper than it
estimated during some years.[Footnote 7] As a result, BEP paid a higher
unit cost for the paper, because the price was based on the estimated
amount, and therefore the contractor's fixed costs were spread over
fewer units than BEP purchased. If BEP had accurately estimated the
quantity of paper it ordered, the contractor's fixed costs would have
been spread over more units, resulting in a lower per-unit price. We
recommended that BEP ensure that its paper estimates more closely
reflect the expected amounts needed. BEP responded that its estimates
are based on the best available estimate from the Federal Reserve Board.
Since 1999, BEP's currency paper orders have remained inconsistent, but
this inconsistency has not yet adversely affected BEP's prices.
Specifically, for 4 of the last 6 years, BEP's orders were at or below
the estimates the contractor used in setting its price, and therefore
the orders should not have resulted in a higher price for currency
paper. (See fig. 1.) However, in fiscal years 2003 and 2004, BEP's
actual orders were considerably higher than the minimum quantities
estimated in the contract. In fiscal year 2003, the minimum quantity
was 151 million sheets, and BEP ordered almost 280 million sheets; and
in fiscal year 2004, the minimum quantity was 203 million sheets, and
BEP ordered 296 million sheets. Although BEP's order amounts exceeded
the minimum quantities, the price BEP paid for currency paper was not
adversely affected because of the pricing approach used by the
contractor in the current contract.[Footnote 8]
Figure 1: Estimated and Actual Currency Paper Orders, Fiscal Years 1999
through 2004:
[See PDF for image]
[End of figure]
BEP Has Not Recently Analyzed Advantages and Disadvantages of Obtaining
a Second Supplier:
In its August 1996 currency paper report, BEP concluded that
competition was not immediately feasible because the current supplier
was the only domestic source that could supply currency paper that met
BEP's requirements. In addition, BEP estimated that it would pay $21
million to $37 million more per year for currency paper if it purchased
paper from more than one supplier. These increased costs would result
from, among other things, high capital equipment costs for a new
supplier, according to BEP. BEP also made several recommendations,
including that it continue to improve its relationship with the current
supplier by working to resolve problems before they arise; continue to
try to identify alternative sources for currency paper, and if a viable
source of currency paper is identified, analyze the costs and economic
feasibility of having two sources; and review the possible catastrophic
occurrences that could interrupt currency paper supplies, and if
necessary, increase the inventory of currency paper to mitigate the
effects of such an occurrence. Analyzing the advantages and
disadvantages of obtaining a second supplier would help BEP determine
if a second supplier would be cost effective over the long term, weigh
the benefits of obtaining a second supplier against the potential
security and quality concerns associated with a second supplier, and
ensure that BEP can maintain an adequate supply of currency paper.
Obtaining a second supplier could have advantages. Economic literature
shows that a key advantage of obtaining a second supplier is that it
can generate competition, which helps to ensure that the buyer receives
the best price possible. In general, with more competition, each
individual firm has less control over the final price in the market. In
contrast, a single supplier has the potential to restrict output and
set market prices above competitive levels. In addition, some economic
studies have found that the entry of additional firms into a market
lowers prices.[Footnote 9] An additional advantage of obtaining a
second supplier is that new entrants can stimulate innovation in
certain markets, whereas some researchers have found that a single
supplier may not be particularly innovative.[Footnote 10] Another key
advantage of obtaining a second supplier could be greater assurance of
a steady supply of currency paper. With more than one supplier and more
than one production site, the buyer would have greater assurance of a
steady supply of goods even if one site were disrupted by, for example,
a strike, natural disaster, bankruptcy, or terrorist attack. This would
be an important advantage for BEP, because currency paper is essential
to U.S. and world commerce, and an adequate supply must be assured.
Some actions have already been taken to avoid these potential problems.
To mitigate a disruption to the currency paper supply, the current
supplier says it could produce currency paper at two separate
locations. In addition, BEP keeps about a 3-month supply of currency
paper in reserve.
Obtaining a second supplier could also have disadvantages. First, even
though it could create competition, it might not lower prices initially
because each new supplier would have expensive start-up costs (such as
the capital costs of specialized paper-making equipment) and would
therefore need to charge a high price for currency paper. Second, the
risk of changes in product quality and design would increase with more
than one supplier in more than one location. For instance, according to
a physicist who specializes in paper production, two companies, given
the same specifications, could produce paper of consistent strength,
but would have much more difficulty adjusting for the texture of the
paper, and slight differences could exist within the same
specifications. Even slight changes can adversely affect a buyer such
as BEP, which requires adherence to very specific technical standards.
Federal Reserve Board officials told us that they are concerned that
minor differences in the quality of currency paper could diminish the
reputation of U.S. currency. Secret Service officials, who are
responsible for protecting U.S. currency from counterfeiting, said they
would need to be assured that a second supplier had proved that it
could produce paper of consistent quality over a period of time because
even slight variations between the papers produced by the two
manufacturers could hamper their anticounterfeiting efforts and lower
confidence in U.S. currency. Finally, increasing the number of
suppliers, production locations, or both would increase the potential
for security breaches because more people would know about the
classified anticounterfeiting features incorporated in currency paper,
and more sites could be vulnerable to intrusion. Federal Reserve Board
officials, who are responsible for issuing U.S. currency, maintained
that awarding the contract to several different suppliers could
compromise the secrecy of the paper's anticounterfeiting features
because more people would have access to and could potentially disclose
information about them.
Finding itself relying on a single supplier in the early 1990s for the
clad metal it uses to make coins, the U.S. Mint weighed the advantages
and disadvantages of obtaining a second supplier and decided that the
advantages outweighed the disadvantages. To obtain a second supplier,
the Mint worked closely with a new company and allowed it to begin
producing a small amount of material. Initially, the Mint's second
supplier had some difficulty producing a product of consistent quality,
and the unit costs of the material were higher than the original
supplier's unit costs because the second supplier was producing smaller
quantities. But as the quality of the material improved, the company
began to increase its production for the Mint, and it now produces 55
percent of the metal that the Mint uses to make coins. According to
Mint officials, the use of a second supplier enabled the Mint to
maintain a steady supply of material when the demand for coins spiked
in 1999 and 2000 (because coins were collected for the new millennium)
and when each supplier experienced labor strikes. Mint officials also
told us that they believe that obtaining a second supplier for clad
material initially increased the Mint's costs, but they were not able
to quantify the amount of the increase. Nonetheless, according to Mint
officials, the price for clad metal has decreased since the Mint began
using a second supplier. In commenting on a draft of this report, the
Federal Reserve Board noted that, regardless of price issues, the
issues of security and quality are not the same for clad metal and
currency paper.
Conclusions:
Obtaining effective competition for the currency paper contract
continues to be a challenge for BEP, despite the changes it has made
and plans to continue making to its contract solicitations. Barriers to
competition remain, and the current supplier continues to be the sole
supplier of currency paper. We agree with BEP that some of the
remaining barriers are outside its control or are essential for
security purposes, and we recognize that the current supplier has
generally provided BEP with a steady, timely supply of paper that has
met its requirements for the past 125 years. However, we believe the
uniqueness of the currency paper procurement and the disadvantages of
having a single supplier are sufficient to warrant a regular effort on
BEP's part to reach out to paper manufacturers before issuing
solicitations to help BEP determine what additional steps should be
taken to encourage competition for the currency paper contract.
Although BEP concluded in its August 1996 currency paper study that
competition was not immediately feasible because the current supplier
was the only domestic source of currency paper that could meet its
requirements, BEP has not weighed the advantages and disadvantages of
obtaining a second supplier--including the impact on the cost,
security, quality, and adequacy of the currency paper supply--since
1996. Consequently, while BEP can demonstrate that it is receiving a
fair and reasonable price for currency paper, it is unclear if that
price is higher or lower than the price BEP would pay if there were a
second supplier. But cost is not the only factor in deciding whether or
not to use a second supplier. The security and integrity of the paper,
and of U.S. currency, are also important. A second supplier must be
able to demonstrate that it can produce paper that contains the same
security features and technical specifications as the current paper.
Slight changes to the quality and make-up of currency paper have the
potential to hamper anticounterfeiting efforts and could result in an
overall loss of confidence in U.S. currency. Analyzing the advantages
and disadvantages of obtaining a second supplier would help BEP assess
whether a second supplier of currency paper is needed to ensure an
adequate supply of quality currency paper at a fair and reasonable
price.
Recommendations for Executive Action:
To obtain the views of paper manufacturers on barriers to competition
and to determine if there is a need for a second supplier of currency
paper, we are recommending that the Secretary of the Treasury direct
the Director of BEP to take the following two actions:
* Before issuing solicitations for currency paper contracts in the
future, increase outreach activities with paper manufacturers to allow
them to provide their views on the barriers to competition, identify
the steps BEP should take to address these barriers, and comment on the
solicitations.
* Determine if there is a need to obtain a second supplier for currency
paper by preparing an analysis of the advantages and disadvantages of
obtaining a second supplier of currency paper, including the impact on
the cost, security, quality, and adequacy of the currency paper supply.
If the analysis determines that there is a need to obtain a second
supplier, the Secretary should then determine what steps are necessary
to obtain a second supplier for currency paper.
Agency Comments and Our Evaluation:
We provided the BEP, the Mint, and the Federal Reserve Board with
drafts of this report for their review and comment. These agencies
generally agreed with our findings and provided technical comments,
which we incorporated as appropriate. In written comments, BEP
commented that our draft report does not recognize all of its outreach
efforts to paper manufacturers and that the royalty payments associated
with purchasing currency paper are an allowable expense under FAR. We
incorporated this additional information in our report as appropriate.
BEP also agreed with our recommendations and described its plans to
implement them. BEP's comments are provided in appendix III.
We are sending copies of this report to the cognizant congressional
committees; the Chairman of the Board of Governors of the Federal
Reserve System; the Secretary of the Treasury; the Directors of BEP and
the Mint; the Director, Office of Management and Budget; and other
interested parties. We will also make copies available to others upon
request. In addition, the report will be available at no charge on the
GAO Web site at [Hyperlink, http://www.gao.gov.] [Hyperlink, http://
www.gao.gov]
If you or your staff have any questions about this report, please
contact me at [Hyperlink, siggerudk@gao.gov] or Tammy Conquest at
[Hyperlink, conquestt@gao.gov]. Alternatively, I can be reached at
(202) 512-2834. Major contributors to this report are listed in
appendix IV.
Signed by:
Katherine A. Siggerud:
Director, Physical Infrastructure Issues:
[End of section]
Appendixes:
Appendix I: Summary of GAO's Previous Recommendations and Bureau of
Engraving and Printing's Actions:
GAO's recommendations: Ensure that the current supplier maintains
acceptable cost accounting and estimating systems for future contracts
and that they are periodically audited; BEP's actions: As appropriate,
the Bureau of Engraving and Printing (BEP) has the Defense Contract
Audit Agency (DCAA) perform audits.
GAO's recommendations: Arrange for postaward audits of the current
supplier's costs;
BEP's actions: When required, BEP has DCAA conduct postaward audits of
the current contractor's costs.
GAO's recommendations: Include data and analyses in the currency paper
procurement record that demonstrate the benefits the government is to
receive when it approves profit levels that are aimed at recognizing or
providing an incentive for capital investments; BEP's actions: When
required, BEP plans to comply with the FAR.
GAO's recommendations: To the extent possible, make more extensive use
of price analysis to determine the fairness and reasonableness of
prices, including the collection of data from foreign countries on
their currency prices and data on similar supplies purchased by other
agencies, such as paper for passports and money orders; BEP's actions:
BEP stated that a comparison of the price of U.S. currency paper with
the price of foreign currency paper or money order and passport paper
would not be a valid comparison because of technical differences.
GAO's recommendations: Ensure that all future currency paper
procurements reflect the expected amounts of paper needed and that
orders against contracts are for consistent amounts; BEP's actions: BEP
bases the amount of paper needed on the best available estimate
provided by the Federal Reserve System.
GAO's recommendations: Ensure that the government obtains royalty-free
data rights to any future security measures incorporated into currency
paper;
BEP's actions: BEP plans to obtain royalty-free data rights to all
future security measures that it incorporates into currency paper.
Source: GAO.
[End of table]
[End of section]
Appendix II: Objectives, Scope and Methodology:
To determine the steps the Bureau of Engraving and Printing (BEP) took
to encourage competition for the 1999 and 2003 currency paper
contracts, we interviewed BEP officials and reviewed the changes BEP
made to the contract solicitations. To determine the results of these
efforts, we reviewed the solicitations for the 1999 and 2003 contracts
and sent a questionnaire to 15 domestic and foreign manufacturers of
cotton-based security paper to determine the factors that have made it
difficult for them to compete for the currency paper contract. We used
a questionnaire that was similar to the questionnaire used for our 1998
report, allowing us to compare responses for the two time periods. Our
survey universe consisted of manufacturers we had surveyed for our 1998
report, manufacturers identified by the American Forest and Paper
Association, manufacturers identified by BEP as having expressed
interest in the currency paper contract, and the current supplier. We
received responses from 14 of the 15 manufacturers and made several
attempts to obtain a response from the one manufacturer who did not
respond to our survey. We also performed structured telephone
interviews with all 14 manufacturers to clarify their survey responses.
Our primary variable for analysis was interest in providing currency
paper to BEP. We considered the eight manufacturers who responded that
they were "very interested" or "somewhat interested" in providing
currency paper to BEP as our most important group for the purposes of
this study because they have a stated interest in supplying paper to
BEP. We reviewed economics literature and interviewed several academic
experts to determine the relevant barriers to competition. Finally, we
analyzed the Conte Amendment, the statute limiting the procurement of
distinctive currency paper to a 4-year contract, and other applicable
procurement laws and regulations to identify requirements affecting the
procurement of currency paper.
To determine the steps BEP took to determine that the prices it paid
for currency paper under the 1999 and 2003 contracts were fair and
reasonable, we reviewed documents in BEP's contract files for the 1999
and 2003 contracts. We reviewed the process BEP must follow to
determine fair and reasonable pricing. We reviewed the prenegotiation
memorandums and negotiation summaries from the contract files and
interviewed BEP procurement officials to determine what cost and price
analysis activities BEP undertook to establish a fair and reasonable
price. We then compared these actions with the requirements for cost
and price analysis techniques under FAR part 15.404-1. We also obtained
and reviewed audits of the current supplier that BEP requested from the
Defense Contract Audit Agency and that have been issued since 1998.
To determine the extent to which BEP has analyzed the advantages and
disadvantages of obtaining a second supplier for currency paper, we
reviewed BEP's most recent currency paper study, which was issued in
1996. We also interviewed several industry analysts and academic
experts, and reviewed relevant economics literature. Although economic
research on competition in government contracting is abundant, it has
never been applied to the currency paper market. Therefore, we reviewed
economic studies of other markets to determine the advantages and
disadvantages of obtaining a second supplier. We also interviewed
officials from BEP, the U.S. Secret Service, and the Federal Reserve
System to obtain their views on the implications of obtaining multiple
suppliers for currency paper. To gain additional perspective on the
potential effects of obtaining a second supplier for currency paper, we
interviewed former and current officials from the U.S. Mint about their
experiences with a second supplier. The Mint was not able to provide us
with financial data to demonstrate whether the price it paid for clad
material changed after it began using a second supplier.
We performed our work in Washington, D.C., from August 2004 through
April 2005 in accordance with generally accepted government auditing
standards.
[End of section]
Appendix III: Comments from the Bureau of Engraving and Printing:
Department Of The Treasury:
Bureau Of Engraving And Printing:
Washington, D.C. 20228:
April 11, 2005:
Ms. Katherine A. Siggerud:
Director, Physical Infrastructure Issues: U.S. Government
Accountability Office:
441 G Street, N.W.,
Washington, D.C. 20548:
Dear Ms. Siggerud:
Thank you for the opportunity to review and comment on the GAO's report
"Currency Paper Procurement: Additional Analysis Would Help Determine
Whether a Second Supplier is Needed." Our comments concern the issues
of the Bureau of Engraving and Printing's (BEP) outreach to paper
manufacturers and the purchase of royalty-free data rights to new anti-
counterfeiting features. We have also included our plans for
implementing your recommendations.
Outreach to Paper Manufacturers:
The report presents several statements that the BEP's outreach to paper
manufacturers is limited and is generally done in conjunction with
other procurements. These statements are found on the GAO Highlights
page under the paragraph entitled "What GAO Found," first paragraph,
last sentence, on page 4 under "Results in Brief," first paragraph,
sixth sentence and on page 12 under "BEP Has Not Addressed All
Barriers," the third paragraph, first sentence. These statements do not
recognize the various methods of BEP's outreach efforts. The outreach
methods BEP uses include:
An annual sources sought synopsis is posted at the Federal Business
Opportunities web site (www.fedbizopps.gov) and remains open for one
year. This announcement advises industry that the BEP is interested in
promoting competition for its currency production materials and to
continuously improve the quality of U.S. currency through product
development of currency production materials. Currency paper is
specifically identified as a material in which the BEP is interested in
promoting competition.
BEP subscribes to various paper manufacturing journals to identify
sources that potentially possess the capability to manufacture currency
paper.
* BEP technical officials attend various trade fairs, bank note
conferences and other symposiums where potential suppliers are
consulted to determine if their firm has an interest in contracting
with the BEP for various currency materials, primarily currency paper,
inks and counterfeit deterrent features.
* Firms that express an interest in contracting opportunities for
currency paper are invited to a meeting at the BEP to discuss our
currency paper requirements and needs. If a firm is interested in
developing its product line to include the manufacture of currency
paper, it is encouraged to submit material samples for press trials to
determine if its material sample is suitable from the standpoint of
facility of use, general "feel" and durability.
Draft solicitations for currency paper are also posted at the Federal
Business Opportunities web site (www.fedbizopps.gov) requesting
industry's comments in an effort to ensure that the solicitation
strategy and structure is as conducive to promoting competition as
possible. E-mails are sent to the firms on the source list advising
them where they can download the draft currency paper solicitation from
the Internet and our request for their concerns and comments.
BEP technical officials have also directly contacted domestic paper
manufacturers to solicit their interest in becoming a supplier of
currency paper to the BEP. This effort has resulted in two domestic
firms which have aligned their corporate structure to position their
firms to effectively compete on the upcoming currency paper
solicitation. These firms have obtained corporate support for expanding
their product line and have begun development of currency paper through
submission of material samples to the BEP for press trials and
technical feedback on the performance of their material samples.
Royalty-Free Data Rights:
The report discusses the BEP's plans to purchase royalty-free data
rights to new anti-counterfeiting features that it obtains in the
future. This issue is discussed on page 5 under "Results in Brief,"
first paragraph, and on page 16 under "BEP Has Taken Some Action to
Address Uneconomical Contracting Practices Identified in 1998," first
paragraph. The BEP intends to purchase royalty-free data rights to new
anti-counterfeiting features, if obtainable, and shall employ all
efforts to do so. However, payment of royalties is an allowable cost
under the Federal Acquisition Regulation Contract Cost Principles.
Therefore, if the BEP is unable to purchase royalty-free data rights,
then a determination will be made as to whether or not the future
payment of royalties is offset by the anti-counterfeiting value
provided by a new feature.
Recommendation: The Secretary of the Treasury should direct the
Director of BEP, before issuing solicitations for currency paper
contracts in the future, to increase outreach activities with paper
manufacturers to allow them to provide their views on the barriers to
competition, identify the steps BEP should take to address these
barriers, and comment on the solicitations.
Response: The BEP plans to continue pursuing various outreach
activities with paper manufacturers and plans to engage in more
proactive interaction with the paper industry to obtain not only their
views on the competition barriers, but recommendations on how to
increase the competitive attraction of the solicitation. These efforts
would include a pre-solicitation bidder's conference to which a wide
range of paper manufacturing firms would be invited.
Recommendation: The Secretary of the Treasury should direct the
Director of BEP to determine if there is a need to obtain a second
supplier for currency paper by preparing an analysis of the advantages
and disadvantages of obtaining a second supplier of currency paper,
including the impact on the cost, security, quality, and adequacy of
the currency paper supply. If the analysis determines that there is a
need to obtain a second supplier, the Secretary (Director of BEP)
should then determine what steps are necessary to obtain a second
supplier for currency paper.
Response: The BEP plans to conduct market research and obtain an
independent consultant that is capable of conducting an impact analysis
of this magnitude including the advantages and disadvantages of
obtaining a second supplier. The results of this analysis will be
presented to the Advanced Counterfeit Deterrence Steering Committee to
address potential concerns related to counterfeit deterrence and
security issues. Additionally, the Federal Reserve Board may be
consulted as the study results may impact future costs and pricing. The
Bureau will formulate an appropriate policy position taking into
consideration the results of the study and these consultations.
If you have any questions about our comments, please call Gregory D.
Carper, Associate Director (Chief Financial Officer) on (202) 874-2020.
Signed by:
Thomas A. Ferguson:
Director:
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Katherine Siggerud, (202) 512-2834 or [Hyperlink, siggerudk@gao.gov]
Tammy Conquest, (202) 512-5234 or [Hyperlink, conquestt@gao.gov]:
Staff Acknowledgments:
In addition to the individuals named above, Robert Ackley, Tim
DiNapoli, Elizabeth Eisenstadt, Barbara El Osta, Heather Halliwell,
Susan Michal-Smith, Terry Richardson, and John W. Shumann made key
contributions to this report.
(542043):
FOOTNOTES
[1] GAO, Currency Paper Procurement: Meaningful Competition Unlikely
Under Current Conditions, GAO/GGD-98-181 (Washington, D.C.: Aug. 28,
1998).
[2] 31 U.S.C. § 5114 note.
[3] 31 U.S.C. § 5114.
[4] In the economics literature, these barriers to competition are
referred to as "barriers to entry." Barriers to entry include
conditions or circumstances that make it very difficult or unacceptably
costly for outside firms to enter a particular market and compete with
established firms. Entry barriers generally listed in the economics
literature include economies of scale, product differentiation, and
capital requirements. Barriers to entry are important in a market
because they can ultimately determine how much market power, or
influence over price, established firms have in the market.
[5] Federal Business Opportunities is a government Web site designed to
publicize procurements over $25,000.
[6] In addition, for the 2003 contract, BEP included a standard FAR
clause on defective cost or pricing data, which would provide the
government with a refund if it were later determined that the current
supplier submitted inaccurate, incomplete, or out-of-date cost or
pricing data and that these data resulted in a higher price to the
government.
[7] For every currency paper contract, BEP provides minimum and maximum
order quantities, which the contractor uses in setting prices. Because
currency paper manufacturing has high fixed costs, a higher quantity of
paper equates to a lower unit cost because the fixed costs can be
spread over more units.
[8] We are not disclosing the contractor's pricing approach because it
has been designated as source selection information.
[9] Timothy F. Bresnahan and Peter C. Reiss, "Entry and Competition in
Concentrated Markets," The Journal of Political Economy, vol. 99, no. 5
(October 1991), 977-1009. Diana L. Strassman, "Potential Competition in
the Deregulated Airlines," The Review of Economics and Statistics, vol.
72, no. 4 (November 1990), 696-702.
[10] P.A. Geroski, "Innovation, Technological Opportunity, and Market
Structure," Oxford Economic Papers, New Series, vol. 42, no. 3 (July
1990), 586-602.
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