Local Preference Will Raise Costs But Not Add Many Jobs
Written by Michael Lewis on September 13, 2012
By Michael Lewis
To any list of unintended consequences, add Miami-Dade rules passed last week aimed at giving big contract advantages to local firms.
The intent is clear: push contracts to locals by giving them a second chance if they bid near the low price of an out-of-county vendor.
That, in theory, would build local firms and jobs, a hometown economic stimulus. It might even lower prices to the county. What a great thing commissioners can say they’ve done.
Unintended consequences, however, would almost surely raise costs to government — read "to taxpayers" — and might help less-efficient local bidders without actually adding jobs.
The ordinance allows a local firm whose offer is within 15% of a non-local low bid to go into a second round of competition for a best final offer that doesn’t define "best" as merely lowest price.
In theory, as vendors vie in this runoff, prices fall, saving tax dollars while giving a local bidder another chance to win.
In practice, however, study after study shows that now-trendy local preferences actually cut competition. Efficient, low-priced bidders often stay away, leaving final bids higher than normal because the best firms never bid.
Reasons might not be obvious, but they’re clear.
First, government bids consume more money and time than private-sector contracts. Add a second level of competition against local bidders and costs soar further.
So non-local firms either boost bid prices by the cost of a second round — the best and final stage — or, knowing that loaded dice favor hometowners, stay away entirely.
Second, they know that "best and final" isn’t price alone. The county wants the locals to win. It’s like a Miami Marlins game with their manager calling balls and strikes. Why get into that mess?
Third, the added layer of preferences encourages local firms that lose out to challenge winning bids, either in court or through commissioners, once more raising the ultimate cost of a contract to bidders and government too. Lawyers and lobbyists, after all, aren’t cheap.
All this discourages non-locals from bidding, narrowing the choice.
That might not matter much if many local firms bid. But the more expertise a contract involves, the fewer who try. In some cases, only one or two local firms might bid, virtually assuring much higher taxpayer cost because free market competition narrows.
We might overlook all this if the new rule would vastly expand local jobs. Unfortunately, it won’t, as academic and government studies how.
When Kalamazoo, MI, looked at a similar preference, it found that at best it would add 15 jobs while forcing up costs to taxpayers, a bad tradeoff.
Further, the way Miami-Dade defines local doesn’t include jobs. A bidder merely needs a county business tax receipt and a local address that’s not a post office box. One person in an 8-by-8 cubicle qualifies as local, gaining a 15% advantage in bids. Goods can be trucked in; distant consultants can provide services.
The Miami-Dade Expressway Authority closes that vast loophole. It requires that 60% of those who own the business reside here, the main office be here a year, most principals be here a year and 60% of employees live here to gain local status.
The county schools also added local preferences last year, as did the City of Miami.
Still, government staff — not those who win votes by promising jobs, but folks who make things run — often oppose favoritism. Here’s what Pinellas County administrators across the state 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. While local preference policies are intended to improve a local vendor’s chance of securing work, they may actually disadvantage local vendors."
They note as well that verifying whether each vendor is local would add to county spending on every bid.
The expanded local preference bias that passed the Miami-Dade commission last week will become an expensive new law unless Mayor Carlos Gimenez vetoes it within a few days.
Deputy Mayor Ed Marquez, in sending the rules to commissioners, noted that they "may add more time to the competitive bid process" — read that "added cost to bidders and to taxpayers."
Mr. Marquez did say the public might save if some bids actually lowered prices in second-round negotiations, but he didn’t mention the less obvious: initial prices probably will shoot higher, so after a second round costs might still exceed normal levels.