Are Discriminatory and Preferential Government Procurement Practices Damaging to International Trade? One Might Think So . . .

Posted on April 2, 2011

0


Discriminatory or preferential procurement practices can take several explicit forms, including “outright exclusion” in which foreign bidders are excluded from the tendering process (for example, defense contracts are often, but not always, reserved for domestic suppliers).  Under “preferential price margin,” purchasing entities accept the bids of domestic suppliers over foreign suppliers as long as the additional price is not above a specific margin of preference.  A third type of discrimination is the use of a “domestic content requirement” in public purchasing in which the government purchase from foreign sources only if the latter commit to purchase some components from domestic firms.  The above three forms of discriminatory practices are the most explicit and the most amenable for conceptualization in modelling exercises.

The most insidious and pervasive form of discriminatory practices relate to opaque tendering and bidding procedures . . .

from the OECD paper Government Procurement: A Synthesis Report by Denis Audet

As of late, we have been spending a great deal of time contemplating public sector or government procurement practices from many perspectives including it’s potential to drive a State or Municipality’s economic engine during the growing budget shortfall crisis that has many teetering on the brink of bankruptcy.

The utilization of influencing levers such as preferential price margins is nothing new, with the exception that it is becoming more frequent in its use as a means of ensuring that indigenous suppliers are given priority consideration as part of an overall economic stimulus strategy.  For example, a municipality in California is charging out of state suppliers a supplemental fee if they win a contract which while not onerous, will at least give a non-resident business pause for thought before they decide to pursue opportunities beyond their own state’s borders.

Even though, and as the OECD paper reports, there are divided views on the potentially negative impact of such a strategy – especially when executed on a national/international level, there seems to be a paucity of evidence in terms of calculating the actual costs to governments who abide by what can also be considered a protectionist mindset.

Of course the challenges associated with what the OECD report referred to as an information gap means that anecdotal reference points usually serve as key indicators in terms of assessing the economic gain of policies which favors indigenous suppliers, and the potentially negative impact on both the cost and quality of goods or services acquired through an artificially narrowed field of competition.  The irony of a reduction in non-resident supplier participation, which is especially problematic in the public sector, is that many resident suppliers have themselves forsaken the pursuit of government business based on the timeline (on average it takes 19 1/2 months for a supplier to win their first contract), and costs associated with the RFP or bidding process (estimated to be approximately $89K per year).  In essence the situation is tantamount to opening the valve of a tire that is already leaking air.  Pretty soon declining bid response scenarios like what is happening in the City of Ottawa, as well as at the departmental level for a growing number of Federal Agencies in Canada, will become increasingly common place.

Based on the above it is clear that further research is required as it relates to the convergence of inter-reactive procurement policies that while in one instance deliver a much needed benefit can in another area, such as international trade, be detrimental.  As a means of illustrating the complexities of an integrating global market, here is the link to an interview I did with then Canadian Trade Minister Stockwell Day regarding the negotiations surrounding the Buy American Policy and its impact on cross-border trade between Canada and the United States.

 

Click image to access interview with Stockwell Day

Even with a properly coordinated policy, and a negotiated accord along the lines of what Canada and the US achieved in terms of a resolution for the contentious Buy American issues, there is still no guarantee that said intentions of engagement will filter down to the practical execution level.  Nowhere was this reality expressed with such clarity as in the case of the comments of municipal procurement executives who stated in the media that despite the opening of Canadian city contracts to US vendors, their inclination and therefore focus would be on utilizing Canadian suppliers whenever and wherever possible.

In the end, and while there are no easy answers, the real progress in government procurement policy will occur when there is a clearer, more globalized understanding of the ripple effect of exclusionary practices, and the adjunct consequences in both the immediate future as well as longer term.

In future segments in this new series on government procurement and international trade, we will investigate which countries are in fact ahead of the curve relative to implementing programs that balance domestic economic interests with sound international trade policy, as well as how suppliers can effectively navigate these uncertain yet lucrative waters.

30