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Why does the Central Intelligence Agency sell administrative services? Should the Minerals Management Service be brokering fee-based procurement deals for non-Interior Department agencies? Do the executive coaching and related consulting services being sold by the Treasury Department advance the mission of the Department or its agencies? Should the Transportation Department be marketing and selling human resource consulting to the rest of government? Why haven't more eyebrows been raised about the multibillion dollar growth in "business" revenues at the General Services Administration?

One of the more curious aspects of the Bush administration's management reform agenda has been the way that fee-for-service entities such as those listed above have managed to fly beneath the radar of its controversial competitive sourcing initiative. The Office of Management and Budget has set its sights exclusively on conventionally funded commercial activities, from lawn care to data processing, requiring that 15 percent of jobs in such areas be put up for competition by the end of fiscal 2003 and 50 percent during the president's term in office. Likewise, the recent report of the Commercial Activities Panel, which studied federal outsourcing policy, virtually ignores fee-for-service operations.

Unlike traditional internal administrative shops, which exist to support their agencies' mission offices, fee-charging federal entities also target external markets and deliberately operate much like businesses. As such, one would be hard-pressed to deny that they are classically commercial within the meaning of the 1998 Federal Activities Inventory Reform Act and OMB Circular A-76, the document that governs outsourcing. That begs the question: Why aren't any of these fee-for-service organizations slated for competitive study or privatization?

Matthew Weinstock's article in the June 2002 issue of Government Executive ("Building Entrepreneurs") is the most recent effort to make a case for the benefits to the American taxpayer that accrue from the growth in entrepreneurialism over the past eight years. Among them: leaner support staffs, greater transparency in costs, more sensitivity in prices, and innovation through competition.

As Weinstock rightly points out, many agencies have been authorized to provide reimbursable services to other agencies for more than 60 years. But the acceleration triggered by the Clinton administration's reinventing government initiative has been truly vertiginous. Most notable was the passage of the 1994 Government Management Reform Act (GMRA), which launched so-called "franchise fund" pilot projects in six Cabinet departments.

These funds will soon need to be reauthorized and may be expanded across the entire government. Oddly, neither OMB nor the General Accounting Office has seriously assessed the results of the pilot programs, and no hearings have been scheduled to determine whether reauthorization is desirable. A subcommittee of the federal Chief Financial Officers' Council took the only close look at the pilots several years ago, and the results of its analysis were decidedly mixed.

The growth of these franchise funds has been rapid, to say the least. The Treasury Department alone has at least 11 distinct entities operating under its GMRA authority, and the department's franchise fund revenues have more than tripled in the past four years. Agency managers throughout government can now purchase telecommunications services from the Interior Department, payroll processing from the Agriculture Department, job recruitment and placement assistance from the Treasury Department, information technology consulting from many different governmental sources, a multitude of support services from Transportation's Administrative Service Center, and much more.

Weinstock pegs annual franchise fund revenues in the six pilot agencies at about a half-billion dollars, but other estimates place the amount at well above that number. Treasury's revenues alone totaled $223 million in fiscal 2001, and the department is by no means the largest franchise fund in government.

The franchise funds are only the latest version of working capital, industrial and revolving funds that enable federal agencies to supplement their congressional appropriations with interagency sales, which now total close to $150 billion a year. Franchise fund agencies are unique, however, because GMRA extended interagency sales authority beyond the agencies' core missions to cover common administrative support services - everything from logistics to personnel processing. But unlike traditional administrative shops, franchise fund activities were not established to support the statutory mission of the agencies in which they reside. Rather, they were intended to expand market share, save money, and generate enough revenue to sustain their existence. They were expected to survive - even thrive - without dipping into their agencies' appropriations.

Before GMRA, reimbursable interagency sales under the 1932 Economy Act were, for the most part, limited to those that flowed naturally from the core mission of the providing agency. For example, the Office of Personnel Management (and its predecessor, the Civil Service Commission) has been selling services to sister agencies since the 1950s, but always in the fields of training, human resource management, and background investigations, areas grounded in OPM's authorities found in Title 5 of the U.S. Code. OPM, like all fee-for-service providers, engages in head-to-head competition with private sector firms (as well as other agencies), but its reimbursable services grow directly from the desire of other agencies to tap OPM's personnel expertise and rely on its statutory credibility. This is decidedly not the case with franchise funds.

Conventional wisdom asserts that these entrepreneurial entities reduce overhead costs across government and free up agency resources for mission-directed activities. But no serious study has verified this claim, and there appears to be just as much basis for questioning the relative cost-effectiveness of fee-for-service operations, at least when comparing them with similar private sector services.

When the managers of franchise, revolving, or working capital funds are asked why their activities should not be privatized or outsourced, they usually say that they already contract out 70 to 80 percent of their work. But they rarely mention the number of employees devoted to managing these activities. When the salary, benefits, and unfunded liability costs of the employees are factored in, the amount of governmental money committed to these classically commercial activities jumps markedly.

Indeed, one of the real dangers of fee-for-service entities is their potential to mask the true costs of government and reduce the ability of congressional committees to track the movement of funds and oversee agency operations. A senior director at the government's Joint Financial Management Improvement Program recently characterized interagency sales as being "in a state of chaos. Everybody does something different, even in the same department." Moreover, revolving fund revenues have been known to partly subsidize the costs of some inherently governmental activities within the host agency.

"Entrepreneurs often find themselves at odds with a power structure that does not like losing control," Weinstock writes in his article. Perhaps, but this is probably an area where Congress needs to exercise more control, not less.

Although no serious assessment has yet been launched, the administration has recently taken several steps that indicate it will scrutinize entrepreneurial efforts more intently in the future. Specifically, OMB has proposed a rule amending Circular A-76 that will require all agencies to compete inter-service support agreements (ISSAs) every three to five years. Previously, ISSAs, which have predominantly been creatures of entrepreneurial federal entities such as franchise, working capital, and revolving funds, could be renewed repeatedly by a customer agency non-competitively.

In another effort to get a better handle on interagency transactions, OMB's fiscal 2002 guidance on the Federal Activities Inventory Reform Act required for the first time that agencies include a "...summary table showing the total number of ...[full-time equivalent positions] funded through reimbursable agreements." Administration sources say additional steps are contemplated.

Though these are commendable measures, they fail to address some of the questions that arise when one contemplates the exponential growth in government entrepreneurship in recent years, such as:

• How do fee-for-service organizations square with the Eisenhower-era policy that the "government should not compete with its citizens"?
• Why do these entrepreneurial entities exist in the first place?
• "What do they do that private firms can't do?
• What are the tradeoffs, if any, between entrepreneurialism and the ethos of public service?

It is time for the relevant stakeholders - specifically, congressional oversight committees, GAO and OMB - to take a long, hard look at fee-for-service operations in government. With the administration's push for competitive sourcing in commercial activities, the imminent reauthorization (and likely expansion) of franchise funds, and the seemingly untrammeled growth in entrepreneurialism even in central management agencies such as GSA and OPM, we need to identify the true costs of fee-based entities (including the number of employees devoted to these activities) and, most important, revisit the core questions regarding their very existence.

The Bush administration seems to sense the danger in letting these activities get out of hand. What it has not yet done is start a serious conversation about the past, present, and future of entrepreneurial government.