How tilting the playing field spilled millions in Homestead
Written by Michael Lewis on December 31, 2013
Homestead just learned a painful lesson: anti-competitive policies cost taxpayers millions.
If city commissioners are wise, they’ll take that lesson to heart and undo a policy that gives local bidders for city contracts a huge edge over others.
Doing so could save taxpayers millions on a new city hall – and actually get it built after more than 15 years.
Moreover, as Homestead wises up to the fallacy of preferences, it can offer its own lesson to Miami-Dade County, the City of Miami, the public schools and others that in recent years have given local firms huge head starts in bidding races under the specious reasoning that it will strengthen local business.
Here’s the case in point:
Homestead sought bids for a city hall. It got 63 firms to a required pre-solicitation meeting, yet only five bid. Those bids ranged from almost $25 million to more than $28 million – far above the city’s $17 million cash for the work. So the city decided to try again.
In the process, the city realized that its 15% preference for local bidders scared off some non-local firms that attended the bidding conference because local firms got an advantage of around $4 million based on the final bids.
That’s a wider gap than the range from highest to lowest bidder among the final five – a huge gulf to overcome.
Because bidding isn’t cheap – one Homestead contender estimated its city hall bid cost $50,000 – why would an outside firm even try when there’s vast potential competition and local firms get a 15% edge? It doesn’t make economic sense.
So potentially less costly and more efficient firms didn’t bid. And local firms, knowing they wouldn’t face low-cost competitors, felt no pressure to beat them and perhaps even pushed their own bids higher.
The bids “did not give us the confidence level that we’re getting the best prices,” Homestead Director of Public Works and Engineering Julio Brea told the city council. “If we increase the competition, we know the prices are going to go down.”
Correct. And the best way to increase competition is simply to knock out the 15% preference and let the free market reign – lowest and best bid wins. Period.
It’s understandable that cities favor local businesses – but it doesn’t work. It just raises final costs and doesn’t strengthen the local firms.
One national study found that a 5% local preference raised final prices 3.8%. Imagine how much prices rise with a 15% margin.
Another study found that winners’ profits under a 5% local preference were actually 3.1% less, not more. Winners became less efficient than in a free market environment.
Across Florida in Pinellas County, administrators said: “It has been proven over time that competition is the primary factor in keeping pricing competitive. If non-local bidders limit their bidding in this market due to local preference laws, ultimately pricing will increase.”
Commissioner Frank Carollo put it this way about Miami’s local bidding preferences: “What I’m afraid of is that there’s an out-of-town firm that is way superior, and now because we have this ordinance, we can’t actually hire them.”
Bid preferences are isolationist: they don’t tell non-local firms not to bid, but they let them know they’re not going to win. And with the best firms around the nation and the globe pushed out, the unintended consequence is that taxpayers pay more – or, as in Homestead, they can’t afford what they want.
Homestead has been seeking a new city hall since 1997. The first requests for bids in 2009 failed. The second in 2013 failed. Now the city is going to try again to get an offer it can afford.
As local government staffers nationally will tell Homestead officials if they ask, the best way to get lower bids is to erase the barrier to strong bidders that the preference ordinance erected.
That doesn’t mean that without preferences a local firm wouldn’t win. Maybe one of the most recent five bidders would.
What would be likely without preferences is that all bidders would know the city, by removing the 15% barrier, was serious about taking the lowest and best bid. So more outsiders would bid and local bidders would sharpen their pencils and trim their own bid prices.
That, at least, is the way bidding works in the rest of the free world. Why not here?
Frankly, the best prices and products show up when the playing field is level for all. Free enterprise should be good for Homestead – and, of course, all of South Florida.
By removing preferences, Homestead can prove to municipal neighbors that a level playing field is best for communities, taxpayers and competition. And it can finally get its new city hall.