Factors for Evaluating the Cost Share of Manufacturing Extension Partnership Program to Assist Small and Medium-Sized Manufacturers

GAO-11-437R: Published: Apr 4, 2011. Publicly Released: Apr 4, 2011.

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U.S. manufacturing plays an important role in the nation's economy, producing about $1.6 trillion of value each year--11.5 percent of the U.S. gross domestic product (GDP)--and accounting for over 13 million jobs in the United States in 2008, according to the Department of Commerce. However, over the past decade, increased competition abroad and the migration of manufacturing overseas have led to declines in U.S. manufacturing. To support the manufacturing sector, the federal government has undertaken efforts, including creating programs that are partly funded by the federal government and partly funded by nonfederal entities such as state and local governments. However, according to the Bureau of Labor Statistics, from 2008 to 2009, following the beginning of the recent economic downturn, the United States lost 1.5 million manufacturing jobs. One federal effort aimed at helping manufacturers is the Hollings Manufacturing Extension Partnership (MEP) program. The MEP program was established in 1988 through Commerce's National Institute of Standards and Technology (NIST) to enhance productivity and technological performance, and strengthen the global competitiveness of small and medium-sized U.S. manufacturers, helping them create and retain jobs. Under this program, NIST has established relationships with 60 nonfederal organizations throughout the United States and Puerto Rico--called MEP centers. NIST enters into annual cooperative agreements with each of the 60 MEP centers whereby federal funding is provided to the centers subject to the centers providing matching funds and meeting performance measures. These centers provide services to small and medium-sized manufacturers to help them develop new customers, expand into new markets, and create new products. MEP centers focus on helping manufacturers in five key areas--technology acceleration, supplier development, sustainability, workforce, and continuous improvement. Specifically, MEP centers enter into contracts with companies to deliver technical assistance to improve their manufacturing processes and productivity, expand capacity, adopt new technologies, utilize best management practices, and accelerate company growth. The MEP program has changed over the years. As implemented during the 1990s, the MEP program provided federal funding to reimburse each $1 of nonfederal contributions with no more than $1 of federal funding--referred to as a 1:1 cost share--for the first 3 years that a center operated. For the fourth year of operation, every $3 of nonfederal contributions were reimbursed with $2 of federal funding--referred to as a 3:2 cost share. For the fifth and sixth years of operation, every $2 of nonfederal contributions were reimbursed with $1 of federal funding--referred to as a 2:1 cost share. Under the original legislation, federal funding was scheduled to end once a center had operated for 6 years. In 1998, Congress passed legislation changing the program to, among other things, provide for continued federal funding and set the cost share at 2:1 for all centers that had been in operation for at least 6 years. More recently, there have been a number of legislative and executive proposals to further alter the program. The America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science (America COMPETES) Reauthorization Act of 2010 includes provisions requiring GAO to report to Congress on the MEP program's cost share requirements within 90 days of enactment. Our objectives for this review were to (1) provide information on various cost share structures in the MEP program, including the cost share structure in place prior to such date of enactment; (2) identify the effect of such cost share structures on individual centers and the overall program; and (3) provide recommendations, if possible, on how best to structure the cost share requirement to provide for the long-term sustainability of the program..

Of the 60 current MEP centers, 57 are required to meet a 2:1 (nonfederal: federal) cost share; the others are required to meet a 1:1 cost share because they are in their first 3 years of operation since their contracts were awarded to new operators. From fiscal years 2006 through 2010, NIST received over $530 million in appropriations for the MEP program. In fiscal year 2010, NIST received $124.7 million in appropriations for the MEP program, allocating $87.4 million to the MEP centers. NIST used the remainder to administer and support the program and, in 2010, for competitive grants it awarded to MEP centers. MEP centers meet their nonfederal cost share using various resources, including cash and in-kind contributions--goods or services provided in lieu of cash. These resources are provided by a range of entities, including state and local governments, associations, and user fees provided by manufacturers who use the MEP centers' services. In response to our request for information, MEP centers identified both positive and negative effects of the current cost share structure on individual centers and the overall program. Among the positive effects, some MEP centers reported that it encourages them to leverage resources and improve partnerships with other organizations, to find clients willing to pay fees and take a stake in the program, to emphasize services that are relevant to manufacturers, and to avoid duplication. Among the negative effects, some MEP centers reported that they are spending more time and effort seeking funds, seeking projects outside their mission, shifting their focus to larger clients who can pay higher fees, focusing more on multiple projects with repeat clients, and focusing less on rural clients. To date, most centers have been able to meet their portion of the cost share, but some noted that they are concerned about their continued ability to meet the cost share requirement and remain eligible to receive federal funding in the future because the economic downturn is hurting them, state funding may become more limited, and manufacturers are becoming less willing to pay client fees. We were unable to provide recommendations on how best to structure the cost share requirement to provide for the long-term sustainability of the program because we could not identify criteria or a basis for determining the optimal cost share structure for this program. Instead, we have identified a number of factors that could be taken into account in considering modifications to the current cost share structure. Among other things, past GAO work has found that cost share structures should promote equity by assigning costs to those who both use and benefit from the services. As it applies to the MEP program, manufacturers, state and local governments, and the nation may all benefit from the program to varying degrees, requiring an evaluation of the relative benefits and aligning cost shares to reflect who receives the benefits. NIST also commissioned a study of the MEP program and its cost share mechanism that recommended that the cost share requirements should be consistent with those of other economic development programs--which it noted, in Commerce, had 1:1 or lower cost shares--and should provide flexibility to alter the cost share requirement in response to economic conditions. Finally, OMB, CBO, and others have examined the MEP program and have raised questions about the need for any federal funding. Among other things, in 2009 and 2011, CBO identified the MEP program for potential elimination from discretionary spending, stating that the program's enhancement of U.S. productivity is questionable.

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