Is there potential for disruption to the U.S. currency paper supply from BEP’s reliance on a single supplier? We reviewed various indicators of the competitiveness of the currency paper market, such as the number of paper manufacturers who said they were capable of supplying currency paper to BEP, and the factors that make it difficult for them to provide currency paper. Several Factors Resulted in Limited Competition

The optimum circumstances for the procurement of distinctive currency paper would include an active, competitive market for such paper where a number of responsible sources would compete for BEP’s requirements. However, this is currently not the case because of the unique market for currency paper and some statutory restrictions. These changes would require existing statutory limitations to be amended. Twelve of the 20 paper manufacturers responding to our survey of 30 worldwide firms said that they would be interested in supplying currency paper to BEP and are capable now, or would be in the near future, of supplying at least part of BEP’s currency paper needs, but several matters prevent them from competing. In Japan, the Japanese government is responsible for producing the paper and printing banknotes. BEP Has Ensured Quality but Has Not Demonstrated That It Has Obtained Fair and Reasonable Prices

Although the long-term relationship between BEP and Crane has historically provided quality currency paper, BEP did not generally demonstrate that it obtained fair and reasonable prices for the contracts, options, and extensions awarded between 1988 and 1997. In determining whether Crane’s proposed prices were fair and reasonable, BEP relied primarily on audits of Crane’s proposals. For 5 of the 17 contract actions, BEP was unable to determine the prices to be fair and reasonable. BEP Is Now Building an Inventory of Currency Paper as a Contingency

Although there have not been any disruptions in the supply of currency paper for the last 119 years, BEP has not been in a good negotiating position and has been vulnerable because it did not have a second source for currency paper or have a reserve inventory of currency paper. Under the Conte Amendment, if the Secretary of the Treasury determines that no domestic source of currency paper exists in the United States, the requirement for currency paper to be produced in the United States and the prohibition against the purchase of currency paper from a supplier owned or controlled by a foreign entity would not apply. BEP could improve some aspects of its currency paper procurements. However, BEP must acquire currency paper within the existing legal framework. Recommendations to the Secretary of the Treasury

To strengthen BEP’s capacity to ensure fair and reasonable prices, we recommend that the Secretary direct BEP to • ensure that the contractor maintains acceptable cost accounting and estimating systems for future contracts and that they are periodically audited; • arrange for post-award audits of the contractor’s costs; 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; and 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. Crane & Co.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO provided information on the: (1) optimum circumstances for the procurement of distinctive currency paper; (2) effectiveness of the Bureau of Engraving and Printing's (BEP) efforts to encourage competition in the procurement of currency paper; (3) fairness and reasonableness of prices paid for currency paper by BEP and the quality of the paper purchased; and (4) potential for disruption to the U.S. currency paper supply from BEP's reliance on a single source.

What GAO Found

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