Amazon’s Potential Defense-Bill Windfall Spurs Industry Concern

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By Sam Skolnik

Amazon has quietly been formalizing and expanding its relationships with several federal agencies as Congress is weighing an online marketplace provision that could enrich the e-commerce giant by billions of dollars per year, Bloomberg Government has learned.

After the company alerted the Homeland Security Department in April 2016 that agency officials already had several thousand accounts with Amazon, and several hundred more with Amazon Business, Amazon’s business-to-business unit, DHS began to consolidate individual government purchase card accounts into one centralized account, agency spokeswoman Lauren Blakeney said.

All DHS components were onboard with the new program by March of this year, Blakeney said. She could not say by deadline whether this effort has resulted in increased sales for Amazon.

Meanwhile, staff from the U.S. AbilityOne Commission, a federal program that provides jobs to people with disabilities who sell products to government customers, began meeting this year with Amazon Business representatives “to discuss opportunities to expand the selection of AbilityOne products online,” agency senior adviser Brian Hoey told Bloomberg Government in a written statement.

Anne Rung, director of government sector efforts for Amazon Business and the former U.S. chief acquisition officer during the Obama administration, participated in the talks with AbilityOne, Hoey said.

Amazon’s efforts to consolidate its business with DHS and AbilityOne comes as a congressional conference committee is deciding whether to include House Armed Services Committee Chairman Mac Thornberry’s controversial governmentwide online marketplace provision into the final 2018 National Defense Authorization Act — what some have termed the “Amazon amendment,” in part because of the possible windfall the provision could bestow on the Seattle-based company.

‘Like a Business’

Section 801 of the House version of the NDAA, which Thornberry (R-Texas) inserted into the bill, would allow the General Services Administration to set up online marketplaces through which contractors would sell commercial items to federal agencies throughout the government.

Thornberry and other advocates argue that online marketplaces would be crucial in allowing government to speed and simplify acquisitions and save taxpayers money.

“Part of these reforms are designed to help the department run like a business,” Thornberry told reporters in May.

Thornberry’s original stand-alone bill on the topic was aimed at the Defense Department and would have allowed GSA to select just one marketplace provider without a full competition to decide which company was best qualified to receive the GSA contract.

Industry groups expressed alarm at that portion of the bill and others. According to the House NDAA provision as it now appears, the GSA would be required to select two or more marketplace providers — making a government-sanctioned marketplace monopoly less likely. But it still allows the GSA to decide which companies to pick without a formal contract competition.

Although they’re reluctant to talk on the record, Amazon’s competitors take issue with what they see as the company’s attempt to gain control of an overly large portion of the federal sales process.

Yet it’s not just other online marketplace providers such as Office Depot, Staples, W.W. Grainger, and Walmart — which in 2016 purchased the e-commerce site Jet.com to compete with Amazon — that note there are potentially billions of dollars in profits at stake.

The federal government spent almost $53 billion on commercial off-the-shelf products in fiscal 2016, according to a recent memo from the Coalition for Government Procurement (CGP). Assuming a 10 percent fee and other charges to suppliers, Amazon could have stood to make between $5.29 billion and $5.88 billion that year alone, had it held a sole online marketplace contract.

“As it stands, Section 801 of the FY18 NDAA embodies the most consequential procurement policy changes in a generation,” according to the memo, which details a proposal for a pilot program to make sure sales data is handled correctly, to assess the economic impact on small businesses, and to address potential cybersecurity risks involved with the widespread use of government credit cards, known as purchase cards.

It’s likely that just one or two companies could meet Section 801’s parameters and be able to participate, according to the memo. “Thus, the proposal could result in monopoly or duopoly control over access to the Federal market for commercial items,” it said.

Amazon is the company most likely at the top of such a list, several industry sources said.

Exempting IT Purchasing

The CGP isn’t the only industry group concerned about the impacts of Thornberry’s online marketplace provision.

“There continue to be a number of questions posed by industry on Section 801’s compliance requirements and supply chain risks that remain unanswered,” Trey Hodgkins, a senior vice president with the IT Alliance for Public Sector, a leading trade group of information technology contractors, wrote in an Oct. 12 letter to Senate Armed Services Committee Chairman John McCain (R-Ariz.) and ranking member Jack Reed (D-R.I.) obtained by Bloomberg Government.

“As such, we respectfully request that all information and communications technology (ICT) products be exempted from purchase activity that would occur on a potential commercial marketplace,” Hodgkins wrote.

The CGP and ITAPS issued their concerns after about 30 industry representatives met with Cord Sterling, the SASC’s deputy staff director.

The Senate’s NDAA bill doesn’t include an online marketplace provision, meaning congressional conferees may have to craft a compromise provision. Sterling indicated that a compromise provision was much more likely than no provision, according to a meeting attendee who asked not to be named.

Conference talk may be speeding up. Although committee staffers have been hashing out pieces of the NDAA for the past several weeks, the formal conference process began Oct. 25.

Claude Chafin, communications director for the HASC, declined to talk about the conference process. But he told Bloomberg Government that rumors that Thornberry’s online marketplace provision was written largely by Amazon lobbyists, and for the company’s benefit, are false.

People love to float rumors about Amazon’s involvement in the legislation, Chafin said, “but it’s just not true. Not even remotely true.”

The Partnership Question

News that the Federal Emergency Management Agency, a DHS counterpart, had boosted its relationship with Amazon came out in March after a Feb. 21 letter from FEMA management to the agency’s purchase card holders was noted by Roger Waldron, president of the Coalition for Government Procurement, in a column for Federal News Radio expressing concern about what he termed the “partnership relationship” between the agency and the company.

“DHS and FEMA are excited to announce that we have partnered with Amazon Business in order to simplify the purchasing process, increase visibility, and allow you to take advantage of the wide selection and competitive prices of the Amazon marketplace,” says the letter, obtained by Bloomberg Government.

The letter announced that over the next couple of days, all FEMA cardholders except acquisition officers “will receive an invitation to register for the centralized DHS Amazon Business account. This email will come directly from Amazon Business.”

This letter, which incorrectly termed the relationship between FEMA and Amazon as a “partnership,” according to DHS spokeswoman Blakeney, was sent as part of the broader effort to move individual purchase card accounts from throughout DHS into one centralized account. This occurred after DHS ran a pilot program involving the purchase card holders at just one agency, the Transportation Security Administration.

All purchases made through Amazon or Amazon Business are made in compliance with DHS policy and Federal Acquisition Regulations, Blakeney said in a written statement. “DHS does not have a partnership with Amazon or Amazon Business, and is under no contractual agreement to use Amazon or Amazon Business,” she wrote.

DHS spends about $450 million per year on the purchase card, Blakeney wrote in a subsequent statement — but Amazon makes up just a small percentage of that spend.

Legal Propriety

The FEMA letter sparked two industry consultants to file Freedom of Information Act (FOIA) requests.

Consultants Larry Allen, president of Allen Federal Business Partners, and Ray Bjorklund, president of BirchGrove Consulting, in April and May of this year, asked the DHS FOIA office to provide copies of documents and communications associated with the establishment and implementation of FEMA’s relationship with Amazon, according to DHS FOIA Privacy Logs. Allen also sought information about contracts between DHS and/or FEMA and Amazon, and “analyses relating to the legal/regulatory propriety of the relationship” between the parties, the logs show.

Allen declined to comment. Bjorklund said neither DHS nor FEMA had yet responded.

“I have had many discussions with colleagues in the contracting world who are wondering how the kind of online marketplace invoked by (Section) 801 may evolve,” Bjorklund told Bloomberg Government in a written statement. “(T)here are questions about how such an online marketplace might affect pricing and how accessible the channel might be to vendors.”

Absorbing Answer

Another pressing question is whether there would be any connection between online marketplaces as envisioned by Thornberry, and the use of government purchase cards at agencies like DHS to buy mostly smaller “micro-purchase” items not subject to official contracts.

The two are qualitatively different, Blakeney said, adding that she couldn’t comment on Section 801 because it’s pending legislation.

An Amazon spokeswoman declined comment in response to questions and an interview request for Rung. The GSA’s press office didn’t respond to questions.

A colleague of Rung’s may have provided a hint as to Amazon’s thinking.

Dan Smith, the general manager for education at Amazon Business, told an interviewer at a December conference held by the National Contract Management Association that formally negotiated contracts and “off-contract spending” through government purchases cards need to be brought together.

“I think one way to do that — instead of having these [purchase]-card purchases and off-contract purchases happening outside of the contracting process — is to absorb that into the contracting process,” Smith said. “You do that with data. You do that with transparency. I think organizations like Amazon can help in this area.”

To contact the reporter on this story: Sam Skolnik in Washington at sskolnik@bna.com

To contact the editor responsible for this story: Daniel Ennis at dennis@bna.com

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