School Board Needs Schooling On Costs Of Bid Favoritism
Written by Michael Lewis on September 29, 2011
By Michael Lewis
Miami-Dade’s school board needs to hit the books hard before it takes the trendy but misguided step of handing special preferences to local vendors.
The vogue in government is to give breaks to local companies that bid higher than out-of-towners, with the stated aim of keeping money and jobs at home and stimulating the local economy.
Unfortunately, economic realities are counterintuitive. Instead of stimulating the economy, multiple studies show, local preferences actually damage it.
Before the school board votes Oct. 19 to take that erroneous course, members and administrators should review national studies that prove failure of local preferences to meet any aim but public relations claims that officials are aiding local companies.
The side benefit to officials is campaign contributions from winning bidders at the next election, but benefit to taxpayers and the economy is nil.
The school board is considering a plan by Renier Diaz de la Portilla to let any business with a local address that comes within 5% of the lowest bid match the figure and win. It’s a common way to hand local companies a break.
While it seems that this can’t cost government more than taking the low bid to start with, since the local bidder will match the low price, economic studies prove the fallacy.
Knowing that they can lose although they have the best bid, the best and most efficient out-of-towners often don’t bid in the first place because seeking a government contract is a major expense — far higher than bidding in the private sector.
If the most efficient firms that offer the lowest prices don’t compete, those that do bid can jack up prices and government automatically will pay more for worse work. One study shows a 5% preference raises ultimate cost an average of 3.8%.
Interestingly, a 2006 study at the University of California Santa Cruz found that under a 5% preference, winning bidders’ profits are also 3.1% lower because they are less efficient in the first place.
So while taxpayers pay more for local preferences, winning bidders profit less. Instead of a win-win, this becomes a lose-lose.
As for bidders actually being local, Mr. de la Portilla asked the school board to consider as local a firm that had an address here for a year. A one-person satellite would quality, and much "local" money could actually wind up elsewhere.
The Miami-Dade Expressway Authority, which now has local preferences, has much stricter requirements: those who own 60% of the business must reside here; the main office and a majority of principals and employees must have been here for a year; and 60% of all employees must live here. That’s really local.
But there’s no need to struggle to define "local" if we continue to let the free market govern contracts. Once you tilt the playing field to favor one player or group, you’ve removed "free" from the market and begun raising prices and lowering efficiency.
"My intent from the beginning was to have a policy where, all things being equal, a local vendor would win a bid or contract," Mr. Diaz de la Portilla explained last month.
Unfortunately, all things cannot be equal if one group gets an unfair advantage, so a local preference policy can never meet his stated aim.
Board member Carlos Curbelo said he was "in favor of local preference policies as long as they don’t interfere with competitive policies."
Again, since preferences are by definition anti-competitive, and since studies can show him and other board members just how much local preferences harm competition and at what added cost to taxpayers, local preferences cannot be preferred.
After all, what kind of competition is it when costs rise and inferiority wins?