Main points in 1998 GAO Report

“Currency Paper Procurement: Meaningful Competition Unlikely Under Current Conditions”

Purpose: Congress was “concerned about the lack of competition in the procurement of currency paper, fairness and reasonableness of prices paid, and possibility of disruptions to paper supplies.” It directed the GAO to do an analysis the current system and report back on optimum circumstances for procuring currency paper.


  1. Have BEP’s efforts to encourage competition for procuring currency paper been effective?
  2. Have prices paid for currency paper been fair and reasonable, and has the quality of the paper been ensured?
  3. Is there potential for disruption to the US currency paper supply from BEP’s reliance on a single supplier?

Results: the GAO concluded that the best scenario would be an active, competitive market where a number of sources would compete for the BEP’s contract. But, it said, those circumstances don’t exist, because of the uniqueness of the market and certain statuatory restrictions. The GAO also found that:

BEP was unable to determine that it had obtained fair and reasonable prices for 13 of the 17 contract actions awarded from 1988 to 1997. BEP sometimes accepted prices even though it was unable to determine that they were fair and reasonable because it had no other source for currency paper

BEP’s assessments were hampered by a number of factors, including the lack of market prices for currency paper and the limited analyses of proposed costs and prices it performed. In addition, certain BEP practicesmay have caused the government to pay for more currency than it should have.

The GAO identified four factors that affected competition:

  1. The high cost of initial capital investment to build or retrofit a plant to produce currency paper
  2. An inadequate start-up period to meet specifieid paper deliveries
  3. The absence of a guaranteed minimum production commitment sufficient to cover the cost of constructing and equipping a plant
  4. The ownership and control provision in the Conte Amendment

It also pointed out the areas of continual conflict between the BEP and Crane.

  1. A primary disagreement between BEP and Crane has centered on Crane’s profit rates.
  2. To determine whether prices were fair and reasonable for most of the contracts GAO reviewed, BEP therefore relied primarily on reviewing costs questioned by government audits of Crane’s price proposals and Crane’s proposed profits
  3. BEP has not obtained audits of Crane’s estimating system, and many audits of cost proposals that were requested pointed out problems in Crane’s cost accounting system

On top of this, the GAO found other problematic BEP business practices:

  1. BEP significantly understated the quantities of currency paper it needed, which sometimes resulted in it paying a higher price than it should have
  2. It did not even out the quantities of paper it ordered over time, causing inefficiencies in its contractor’s operations.
  3. BEP did not obtain royalty-free data rights for the security thread used in its currency paper.

Recommendations moving forward:

  1. BEP has gotten stuck with prices it didn’t like in the past because it would take up to 3 months to get a shipment of currency from a foreign supplier. Now it’s getting itself a 3-month inventory of paper, in case it would need to take that route in future
  2. The GAO recommends that “the secretary of the treasury direct that BEP improve its procurement practices in the areas of oversight and audit of the contractor’s cost accounting and estimating systems, improved analysis and documentation of the basis for acceptance of prices and profits, and post-award auditing” and that “the secretary ensure that in all future currency paper procurements, solicitations more accurately reflect the expected amountes of paper needed and orders are placed for paper quantities that permit supplier(S) to maintain a steady production level and inimized the equipment they have to acquire.”
  3. The GAO also recommends that Congress consider adjusting some of the restrictive statutes that are contributing to the non-competition problem.
3 Responses to “Main points in 1998 GAO Report”
  1. dem says:

    I love the fact that the “lack of market prices for currency paper” means they can’t determine whether or not they’re paying a fair price. Markets are our tools for figuring out what something is worth, including money itself — whether the value of the paper it’s printed on, or of the currency itself in relationship to other currencies.

    I think this is should really be emphasized in our scene about the GAO audit and report — the inability to determine value in the absence of a market. The issues surrounding potential monopoly — overcharging for product and potential supply disruption — are also interesting, but the absence of a market is what really cuts to the chase in terms of questions of value and the show at large.

    Interesting that, in the absence of a real market, they looked at the costs of production of Canadian currency as a rough substitute (and that it looked favorable for Crane, the Canadian dollar costs more to produce than the U.S. dollar.)

    Also the historical point that Crane originally got the contract from the BEP by undercutting the competitors’ prices by around 50%!

    Lastly, am interested in the assumption (cynical? “realistic”?) that in a monopoly-like situation, a company will of course attempt to abuse its position by overcharging/increasing profits unfairly. Reminds me of the management scientist (McGregor?) with the Theory X and Theory Y managers — if you assume the worst, you’ll create self-fulfilling situations. I’m not trying to be naive, but is it so hard to believe that a company might ask only for what is fair in terms of profit, even if they could easily abuse their position?

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