Procurement: The Enemy Within

When federal managers talk about resources, they always seem to mean cash. But why can't they find ways to better use what they already have? In fact, there are some federal managers who have used public-private partnering to leverage assets, and, like their counterparts in corporate America, have created strategic alliances with industry.

NIH: A $15 Billion Business

Until 1995, the National Institutes of Health campaigned to win funding for a new $350 million Clinical Research Center (CRC) for state-of-the-art research. The existing hospital was badly out of date and in dire need of replacement. Given budgetary pressures, it was clear NIH would have to join the long line of agencies awaiting appropriation for development projects.

But NIH, the biomedical research arm of the Department of Health and Human Services, has annual appropriations of $15 billion, $12 billion of which supports its grant program providing research funding to private institutions. The agency believed it had an opportunity to leverage its existing assets to help fund a new research center. After all, the $350 million CRC equated to about a $30 million annuity. That is, a $350 million financing to cover the capital costs of the CRC could be paid for at a rate of about $30 million per year. NIH then asked: "What $15 billion-a-year business can't find or create $30 million per year, less than two-tenths of 1 percent?"

Looking at NIH from an asset management perspective, it's not difficult to see the opportunities: Commercial products developed as a result of NIH's grant program are the property of the grantee; carriers of insured patients in the CRC aren't charged for care services; there are 16,000 NIH employees on the 380-acre Bethesda, Md., campus but no retail space; virtually all NIH buildings are named after House members or senators at a time when the commercial sector often sells the rights to name a building; and the campus has about 10,500 parking spaces--all of them free.

New Procurement Tool

NIH's asset-management approach makes sense. Rather than define what they wanted to procure, officials defined whom they wanted to procure--a private development partner with prior experience in creating value for other owners. Creating value is what private developers do best. NIH would give the partner access to its primary asset--the business opportunity--if the developer could create the value necessary to pay for the development.

To implement its strategy, NIH issued the first Federal Request for Qualifications (RFQ), a procurement tool routinely used by state and local governments and corporate America to select private partners in major systems acquisitions, mainly real estate development transactions. The Federal Acquisition Regulation neither provides for nor prohibits an RFQ.

NIH's partner would get the exclusive right to work with the agency to create a business plan that would include an acquisition strategy, an asset management plan for funding the CRC and the terms of the relationship between NIH and the developer. Because NIH was interested only in developers with a prior record of creating value for other owners, the private partner was to be selected solely on the basis of qualifications. We estimate that no prospective partner spent more than $8,000 preparing its submissions. Boston Properties, selected as NIH's development partner for the CRC, was awarded a $350 million development opportunity after only a 10-week procurement cycle.

To implement something new in government, there's nothing more powerful than being able to say "so-and-so at the XYZ Agency did it and he's alive and well." In undertaking the very successful procurement for the CRC, the NIH teamed with the U.S. Postal Service, which has been using the RFQ for about 10 years. The Postal Service has undertaken about $1.5 billion in major development procurements without a single protest or claim. As if that weren't impressive enough, awards are routinely made in about eight weeks.

The Postal Service has quietly undergone its own reuse and closure process. Historically, mail has been brought to urban postal facilities by rail. As mail transport shifted to planes and trucks, distribution centers gravitated to suburban areas, leaving urban facilities underutilized. Rather than treating this as a problem, the Postal Service saw these properties as under performing assets that could be redeveloped to create cash flow. The Postal Service used the RFQ approach to select development partners to reposition these obsolete facilities. As a result, many former postal facilities are retail, residential, office and multi-use complexes creating a cash flow in excess of $100 million annually for the Postal Service. It was accomplished with little Postal Service capital utilizing an RFQ that ran about 20 pages.

The Postal Service has its own procurement regulations, which are substantially the same as the Federal Acquisition Regulation. NIH found a way within those regulations to issue a solicitation similar to that used by the Postal Service with equally successful results. The federal procurement system does not dictate how one structures a procurement, but rather tells what public values and objectives must be considered.

FDA Headquarters

The General Services Administration is representing the Food and Drug Administration in developing a new 2 million-square-foot headquarters in the Washington area. FDA offices are scattered around more than 20 locations in the capital area. The agencies have identified the former Naval Surface Warfare Center at White Oak, Md., with its approximately 700 acres, as a prospective site. The site is to be transferred to GSA as part of the base reuse and closure process.

GSA and FDA have unsuccessfully sought appropriations for a new FDA facility for about five years. Severe competition for appropriated funds and the "scoring" rules from the Office of Management and Budget on capital improvement projects have thwarted their efforts. When a lease is scored, funding must be available as though the project were directly appropriated.

Now, the two agencies are using the RFQ approach. Their 18-page solicitation calls for the selection of a developer who will have the exclusive right to work with the government in the development of a business plan. As with NIH, the plan will include acquisition, financing, asset management, community relations and the draft legislation required to implement the plan. The government will maintain the option of negotiating a development agreement and rates for the plan's implementation.

Again, as potential partners compete for the right to jointly develop a business plan with the government, they won't be asked to prepare the plan in their offers. As a result, the procurement cycle will be substantially compressed and costs held to a minimum. Of course, a key ingredient of the business plan will be identifying the assets controlled by GSA and FDA that can be leveraged into the new headquarters. The additional development rights at White Oak come immediately to mind: Will tenants pay to co-locate with the FDA and will that be acceptable to FDA and the surrounding community? Can intellectual assets be created to fund the new project? Will the government consider creating new fees for FDA's various regulatory functions? All these are matters for the partnership's business plan. Like NIH, FDA is leveraging access to the business opportunity, the private partner's incentive to find the values that will make the deal work.

Where could a new RFQ-type of procurement tool be used? With any complicated procurement. The RFQ is especially valuable where real estate development is involved, such as the redevelopment of military bases facing closure and the privatization of military housing. In addition, major information technology procurements often are characterized by conflict between the government and its suppliers, which makes it a good environment in which to develop advanced technology with government oversight.

Making the System Work

These procurements are based on a number of fundamental principles that run contrary to accepted practice in the federal government:

There's nothing wrong with the federal procurement system; it's the way we choose to use it that causes the problem. The system doesn't tell us how to develop a project, it tells us the public policies and values that must be promoted when conducting government business.

  • For complicated systems procurements, the government should move from specifying what it wants to procure to whom it wants to procure as its private partner. Pick a private partner and let that partner design the best tools for accomplishing the public's purposes.
  • Do less appropriating of funds for major systems procurements and increase flexibility and authority instead. Federal executives, whether they know it or not, control an enormous array of assets. They should be encouraged to tap those assets before asking for public funding. Public debt should be the last recourse, not the first.
  • We must perceive issues not as problems, requirements and costs, but as opportunities, leverage and assets. In real estate, for example, if an agency requires 100,000 square feet of office space it usually requests the necessary funding. The private sector would encourage managers to consider what values might be created by the space and look at ways to tap into those values to fund the requirement.
  • Rather than seeking congressional authorization for major systems acquisitions at the outset, we should authorize them after the private sector has helped define the best business solution. Use the procurement system more powerfully. Bring in private partners to create projects and identify opportunities, then seek the necessary congressional authorization. Obtaining authorization in the beginning puts constraints on our ability to take advantage of good ideas when they emerge.
  • You don't need money to start a procurement. Often the most significant asset controlled by the federal manager is access to the business opportunity. Leverage that asset. Choose prospective private partners and let them work with the public sector to create the opportunity, then give them the option to negotiate the business opportunity they helped create.

Members of the private sector are better at being developers and systems integrators; the public sector is best at overseeing public values. Create partnerships that give expression to each partner's strengths.

Patrick J. Keogh, who began advising NIH on the Clinical Research Center deal while at GSA and later as a consultant, started Bostonia Government Services in August 1996. Kim McCarson is an associate with BGS, which specializes in creating public-private partnerships.

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