Procurement remains an unsolved problem

Interesting article in the Toronto Star today about projected delays in the opening of the Spadina subway extension in Toronto. It all comes down to procurement – apparently they went with the lowest bidder, as the public sector is often obliged to do, and now they are “getting what they paid for.” This really is the same-old same-old story, of how the various constraints that we the people put on elected officials create enormous barriers to rational public spending. (The media, it should be noted, is in this case a huge part of the problem. Only last year, the Toronto Star and other local media were harassing the TTC over another contract they had signed. The objections were totally procedural, there was no reason whatsoever for thinking that the contract was not, substantively, in the public interest.)

Anyhow, turning to today’s article:

“If you really are concerned about the public interest and you are truly concerned about tax dollars, you don’t look for the lowest bid, you look for the most intelligent,” said Councillor Maria Augimeri, who still chairs the Toronto Transit Commission.

She made the comment in light of the likely prospect that the opening of the six-stop subway extension will be postponed beyond the already delayed target of fall 2016. Issues with contractors and sub-contractors have been cited among the project setbacks.

“The problem with low bids is they don’t represent the true or fair value of work to be done. We assume the lowest bidder is the smarter one, the most efficient one. It is rarely the case,” Augimeri said Wednesday.

She suggested contracts be awarded based on a points system that would favour companies that present Canadian-content provisions and clean health and safety records.

Anyone who knows how procurement works in the private sector knows that jobs typically don’t go the lowest bidder. Firms develop relationships with their suppliers and their customers, and build up trust over time. Price is a part of the equation, but reliability and quality are another, hugely important part. With the public sector, on the other hand, we do not want politicians or public servants to cultivate relationships, because we fear corruption. The fact that private firms are subject to the discipline of marketplace competition means that there are built-in limits to how much they can ignore prices. In the public sector, there are no such limits. And so instead we impose strict limits on how they go about doing procurement, which dramatically limit the exercise of judgment.

It is worth noting, in this context, that critics of government “waste” are a big part of the problem. By constantly accusing governments of waste and corruption, they contribute to a dynamic that generates stricter and stricter rules, which in turn ties the hands of public officials, making it more difficult for them to do intelligent procurement. So the belief in government inefficiency becomes a self-fulfilling prophesy.

This is a point that was made a long time ago by James Q Wilson, in his book Bureaucracy. His basic argument is that “red tape” is a consequence of distrust in government (or a reaction to public distrust), but as governments become more and more mired in “red tape,” public confidence declines further, generating a sort of death spiral. He doesn’t put it quite like that, but the idea is there. Anyhow, his discussion of procurement remains as insightful now as it was 30 years ago. A few excerpts:

The goal of “fairness” underlies almost every phase of the procurement process, not because the American government is committed heart and soul to fairness as an abstract social good but because if a procurement decision is questioned it is much easier to justify the decision if it can be shown that the decision was “fairly” made on the basis of “objective” criteria… To understand the bureaucratic significance of [procurement] rules, put yourself in the shoes of a Defense Logistics Agency manager. A decision you made is challenged because someone thinks that you gave the contract to an unqualified firm or purchased something of poor quality. What is your response—that in your judgement it was a good buy from a reliable firm? Such a remark is tantamount to inviting yourself to explain to a hostile congressional committee why you think your judgement is any good. A much safer response is “I followed the rules.” Those rules give you vague guidance on how to solicit bids and award contracts—let everyone compete and base the award on price, an “objective” criterion….

The need to publicly justify procurement decisions to a legislature will induce rational managers to base their decisions on the most defensible criteria. To a large degree that means referring not to the achievement of the goal (did the hammer work?) but to the satisfaction of the more objective, quantifiable, and visible constraints on hammer selection. Various critics of this process from time to time have noted that constraint-driven management may be the enemy of goal-oriented management. But it is very difficult to find ways to change things when it is easier for political superiors to observe whether you are obeying constraints than whether you are achieving goals (127-128).

Incidentally, about a year ago someone recommended a book to me, which had recently come out, on the subject of procurement. But I can’t remember the title, and I don’t seem to be able to google it up. If anyone knows what it might have been, please let me know. (And no, it isn’t Jean Tirole’s book, which I don’t plan to slog through, even if he does have a Nobel prize now.)

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