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Thursday, October 28, 2010

Procurement doesn't end with an award

In its most critical role, procurement only begins once the award is made, because, without diligent contract administration, the government is not assured of getting its bargain. Contract administration includes making sure that what was ordered under the contract is actually delivered, and pursuing damages and rectification if not.

Investigators say a Coos Bay family made millions selling the military defective vehicle and aircraft parts
Two generations of a longtime family business here are under federal investigation for allegedly selling thousands of defective, knock-off parts to the U.S. military — including a critical helicopter part Army mechanics call “the Jesus Nut” because it secures the main rotor to the aircraft.

Kustom Products Inc. and its predecessor companies landed more than $31 million in Defense Department contracts between 2005 and 2009, court records show.

Company president Harold Ray Bettencourt, his ex-wife and the couple’s four adult sons paid themselves nearly $3.7 million between June 2007 and December 2009 from mark-ups of 22 percent to 3,745 percent on their military contracts, according to court documents. A Defense Department investigation allegedly turned up their flawed, look-alike parts as far away as Kuwait.

No criminal charges have been filed against family members, but a spokeswoman for the U.S. Attorney’s Office in Oregon confirmed that an investigation is continuing.

Defense Department special agent James McMaken alleged that owners and employees of KPI and a sister company, Southern Oregon Sterling Parts and Service Inc., “routinely and systematically engaged in a scheme to defraud the United States by providing nonconforming substitute parts and supplies to the (Defense Department)

And Bo Bettencourt told investigators that KPI’s survival depended on providing knock-off parts “like everyone else” in the defense contracting business, the agent wrote.

According to the affidavit, KPI and Sterling won contracts using a Pentagon computer program known as PACE, which automatically awards contracts of $25,000 or less based solely on the lowest bid submitted.

The Bettencourts were low-balling their competition, he alleged, then sending photos of the authentic parts to a Texas company they hired to “reverse engineer” replicas.

Here’s an example from the affidavit of how the scheme allegedly worked: KPI in April 2008 won a contract to supply 675 of the locking nuts at $20.14 each, for a total payment of $13,595. Instead of shipping parts made by a manufacturer specified in the contract, however, KPI ordered 675 facsimiles from Coloc at $11 each — giving them an 83 percent markup on that contract.

When the Defense Department began scrutinizing other KPI and Sterling military contracts, it found 83 different product deficiency reports against the Coos Bay company, McMaken wrote. The defective parts reportedly included generators, alternators, filters and safety relief valves for light armored vehicles, medium tactical vehicles and Humvees.

At one point, the Bettencourts allegedly delivered a vehicle frame with a fake “Freightliner” part number sticker affixed to a look-alike frame, he said. But Freightliner stamps its parts numbers into the metal frame during the manufacturing process, he noted.

This sounds a bit like a story I was told not too long ago about a requisition for some parts (I won't say much more than that here). The higher bidder (who lost the award) inspected the parts when they arrived at the government yard and noticed that the stamped serial numbers had been ground off. Further inspection suggested that the parts tendered, and accepted by the government, were of a different standard than the solicitation required, which will likely lead to a failure of the part much sooner than expected.

From all appearances, I was told, the government did not seem to care to verify the discrepancy, and the parts were quickly incorporated into the project before the higher bidder was able to examine the parts in more detail.

Now in a case like this, certainly the contractor is at fault if materials are delivered which do not conform to the award. But the government is complicit by failing to check the product delivered against the bid specifications.

European Union acts to foster competition

Public procurement: Commission calls on Greece to review award of contract for ICT services
The European Commission has acted to ensure that EU rules on public procurement – the spending of public money by public authorities – are respected in Greece.

EU public procurement rules are designed to ensure fair and transparent competition for public contracts in Europe, thereby creating opportunities for European companies while ensuring best value for public money. If the rules are not respected, there is a risk of a closed market and waste of public money. The Commission’s request to Greece takes the form of a reasoned opinion. If Greece does not reply satisfactorily within two months, the Commission may refer this matter to the Court of Justice.

The Commission is concerned that Greece has breached EU public procurement rules by directly awarding a public service contract for developing an information system used by the Greek Government’s citizens’ services network (KEP).

n 2007, following a public procurement procedure, the Greek authorities awarded a contract to a company for the development of ERMIS national portal, an online one-stop shop where citizens and businesses can go for all their dealings with the Greek Government.

Soon after, the Greek authorities awarded a supplementary contract worth €1.5 million to the very same company for the development of an information system to be used by staff working in the Greek government’s KEP centres. KEP centres are government service centres where citizens can obtain information and official documents such as birth certificates, licences and identification papers.

The Greek authorities used a negotiated procedure to settle the terms with the company for the development of the information system. No prior contract notice was published.

In the Commission’s view, the development of the ERMIS online portal is different from the development of the internal information system. The contract should therefore not have been awarded on the basis of a supplementary contract following a negotiated procedure, but rather in a formal tender procedure with a Europe-wide publication of a tender notice, as required by the rules of the applicable EU public procurement Directive, 2004/18/EC.

Public procurement: Commission acts to ensure fair access to waste management contracts in Sweden
The Commission is concerned that Sweden has breached EU public procurement rules by allowing local authorities to award contracts for waste management without any tendering procedure.

The Swedish municipalities of Ängelholm and Helsingborg awarded several waste management contracts to a company they co-own with other municipalities. The municipalities of Tomelilla and Simrishamn also awarded waste management contracts to a company they co-own with other municipalities. In both cases, no prior call for tender was published.

Only under very strict conditions can authorities directly award contracts to companies they own themselves or co-own with other authorities. In previous rulings, the Court of Justice has made it clear that authorities are only allowed to do so when it concerns an “in-house” situation: this is when an authority exercises the same amount of control over the company as it does over its own administrative departments. Another condition is that the major part of the company’s activities is carried out for their owners, in this case the municipalities.

However, the Commission has learned that the two companies concerned are clearly active in the private market where they make a significant share of their turn-over. Therefore, the so-called “in-house” conditions developed in the case law of the Court of Justice are not met.

Public procurement: Commission requests Germany to comply with Court judgment on the award of a waste disposal contract in Bonn
In a previous European Union Court of Justice case, the Court ruled that Germany had failed to fulfil its obligations under the EU public procurement rules by concluding a contract for the disposal of biodegradable and green waste without any competitive tendering procedure.

The Commission considers that the German authorities have not taken the necessary measures to comply with the judgment of the Court as the waste disposal contract has not yet been terminated.

The Court judgment concerned a combined waste disposal arrangement concluded between the City of Bonn and a private waste management company: the company collects and delivers the household waste that is to be incinerated in the City’s incineration plant and in return treats bio-waste for the City in its composting plants. The Court confirmed the Commission’s position that, with respect to the bio-waste part, this arrangement has to be regarded as a public service contract. By awarding the contract without a competitive tendering procedure, the German authorities failed to fulfil their obligations under the Public Procurement Directives.

Public procurement: Commission refers the Czech Republic to the EU Court of Justice for not complying with EU rules in the purchase of military transport aircraft
The Commission is concerned that the Czech Republic has breached EU public procurement rules by not opening up a public contract for four military tactical transport aircraft to EU-wide competition.

According to the European public procurement Directive 2004/18/EC, public contracts above certain values must be awarded on the basis of an EU-wide tender procedure. However, the Directive provides for an exemption from this obligation in cases where the contracting authority buys specific military material. A public tender would then put the essential security interests of the relevant Member State at risk.

In April 2008, the Czech Ministry of Defence directly awarded a public supply contract worth €132 million for four military tactical transport aircraft of the type CASA-295M without organising a tendering procedure. The Czech authorities considered that no public tendering procedure would be necessary as the aircraft would be used mainly for Czech Republic military missions, i.e. for the protection of essential security interests of the State.

However, a Member State cannot automatically deviate from standard public procurement rules when procuring military equipment. It has to demonstrate that the tendering procedure as such would present a risk for its essential security interests. In the Commission’s view, the Czech Republic has so far failed to demonstrate why a public tender for unarmed transport aircraft would pose a risk for its essential security interests.

EU Pushes China to Open Bidding
EU officials say they hope to pressure China into conceding more openness by urging it to sign up to the Government Procurement Agreement, a little-known 1996 treaty among 41 members of the World Trade Organization.

The U.S. has also called for China to join the GPA, but the EU can afford to be more aggressive because the Buy American provision in recent stimulus spending hurts the U.S. position, say WTO officials. With the exception of defense spending, EU rules stop its 27 members from protecting markets from each other and, by extension, non-EU countries like the U.S. and China.

The GPA guarantees nondiscrimination for contracts above a threshold — $7.6 million for construction projects, and $500,000 for service agreements. Some $2 trillion in public contracts are tendered every year, according to research published this year by Business Europe, a Brussels-based lobby group.

But the annexes to the GPA contain hundreds of exceptions. For example, European countries don't have to consider U.S.-based bids to supply air-traffic-control equipment. The EU and Canada close their markets for computers and office supplies to each other. Military spending is almost always exempted.

The GPA offers its members a legal recourse at the WTO if one of its companies unfairly loses a bid for a public contract. If discrimination is shown, countries have the right to impose retaliatory sanctions. However, it has only been used three times, and not since 2001 when the U.S. lost a case against South Korea over the building of an airport. Improving enforcement is a key goal of the current round of redrafting the GPA.

China restricts bidders on most public contracts to companies whose trademark and technology are registered in China, a category that includes many foreign companies, but one that can also be used as a tool to keep them out.

Last year, an elaboration of government procurement rules was released, indicating that purchases of high-tech equipment would be limited to locally developed technology. That prompted foreign companies in the U.S., Europe and Asia to make an unprecedented joint complaint.

The government later revised the rules, removing some of the restrictive language, but companies and foreign business associations continue to protest.

Although China's central government maintains that China doesn't discriminate against foreign companies on procurement, the rules have emboldened local governments to shut foreign companies out of bidding for contracts worth billions of dollars.

European countries have traditionally been more conciliatory toward China on trade issues than the U.S., but this is changing amid surging Chinese exports to a region that is grappling with high unemployment.

Wednesday, October 27, 2010

Fair competition saves Guam Dept. of Education $4 million

Guam's Department of Education has finally put out a competitive bid for its copier needs. For the last decade and more GDOE acquired its copier needs non-competitively, in a process the Guam Public Auditor had found to be illegal. The illegal contract expired at the end of 2009.

Since the beginning of this year Xerox has continued to service GDOE in a series of monthly roll-overs of the illegal and expired contract, under dubious if any legal authority.

In May, GDOE issued an IFB for a portion of the copier needs, the bids were opened and the low bidder noted, but GDOE has failed to issue any award under that bid. Island Business Systems & Supplies provided the low bid, against Xerox Corporation's bid.

Subsequently GDOE issued a new bid for all of its copier needs, which was opened this week.

IBSS is protesting the failure to award a contract under the May IFB, which may affect a portion of the machines solicited in this recent bid. IBSS does not believe Xerox should be given a second shot at the same machines after IBSS disclosed its pricing in the May bid.

The incumbent provider of the copier services all this time has been Xerox Corporation. It has been providing copiers at a base price cost of $133,000 per month.

Under the new competitively bid IFB, Xerox cut its price almost in half, to about $68,000 per month, base price.
The award has not yet been made, pending formal review of documentation.

At a savings of roughly $65,000 per month under its old monthly price, over the course of the upcoming 5 year contract, GDOE will save about $4,000,000.

Competitive procedures and competitive specifications are certainly worth the effort.

Australia innovates with same old local preference plan

As has often been cited in this blawg, local preference is as common around the world as another beautiful day on Guam. In broader contexts, it's called protectionism, but I have recognized that, in small doses carefully applied, it does make local economic sense.

Govt urged to include local firms
The government should introduce procurement rules that mandate main parties involved in government tenders have a local business element in their bids, according to a report by the Innovation Review Steering Committee.

"While there is widespread acknowledgement that governments are legally prohibited from biasing procurement decisions towards local providers, a strong expectation remains that government contracts should provide a key source of revenue for innovating businesses," the report said.

The review participants decided that a change to government procurement practice would best foster local innovation.

"The overall aim of the amendment would be to support the conditions for innovative local enterprise to flourish at the SME [small- to medium-sized enterprise] level ... this could be achieved by requiring prime contractors (regardless of their nationality or size) to specify a 'local content inclusion' plan in their bids," the report suggested.

The content inclusion plan would explain how the prime contractor, if it was successful, would partner with local small- to medium-sized enterprise to deliver the needed service or product.

Making a condition of inclusion, but not "picking a winner", would help ease concerns about scale, according to the report.

If you can't describe what you need, you won't know what you'll get

Procurement doesn't begin with the publication of the bid. It doesn't even begin with drafting the specifications. It begins with an honest and critical assessment of what it is the government needs. This can usually only be done once the government knows what is available in the market. See Federal Acquisition Regulations, Part 11.

Canada's auditor general blasts military helicopter purchase
Auditor General Sheila Fraser in her report looked at the military's latest 11 billion-dollar purchase of 15 CH-147 Chinook medium to heavy-lift and 28 CH-148 Cyclone maritime helicopters.

Both experienced significant cost increases and schedule delays.

"National Defense underestimated and understated the complexity and developmental nature of the helicopters it intended to buy," Fraser said.

According to Fraser, the helicopters were described to cabinet as using "off-the-shelf" technologies, but significant modifications to the basic models resulted in one "aircraft that never existed before" and a "new variant" of the other.

As a result of modifications to the Chinook, for example, the helicopters cost 70 percent more than originally quoted by Boeing in early 2006, and will be delivered in 2013, five years later than planned.

Fraser blamed the military for not precisely defining its needs and priorities at the outset, as well as a lack of oversight in the new sole-source procurement process it followed.

Monday, October 25, 2010

Call for reform of IT procurement

Trade Group: Gov't IT Contracting Reform Needed
Federal IT contracting reform is needed because there have been too many failures with major implementations, said the report, authored by a 31-person commission, including representatives of Northrop Grumman, Microsoft, IBM and Hewlett-Packard.

n August, the White House Office of Management and Budget announced it was suspending 26 IT projects worth about US$30 billion while it reviewed why they weren't working, and the Obama administration has "significant concerns" about 55 of 794 current major IT projects, according to the Federal IT Dashboard.

"The administration accurately pointed out that there is a significant productivity gap between government IT and IT across the rest of the private sector," Phillip Bond, TechAmerica's president and CEO, said during a press conference. "That gap is important, given that over the past 10 years, the government has invested more than 600 billion taxpayer dollars in these IT systems."

Comment: I'm often skeptical of attempts to cut out one industry to receive "special" treatment. The general principles of procurement should apply across the board.

That said, special procedures for conducting procurement based on the nature of the thing to be acquired do need to take into account the nature of the acquisition. Acquiring a fleet of automobiles is not the same thing, exactly, as soliciting a major design, build, finance and maintain infrastructure project, though the general principles of fair and equal treatment and opportunity, transparency, accountability and the like apply.

To me, no expert in things IT, one of the difficult features is that IT platforms and software are constantly changing and obsolescence is almost instantaneous. Also, almost by definition, much of the IT product is monopoly protected by patent and copyright law. And then, there is the practical requirement of government to try to have some kind of uniformity across its various parts for good governance and interoperability. There are obvious tensions and countervailing considerations.

Scale is one such factor that cuts both ways. Setting up a government-wide IT solution is almost a new problem before it gets off the specification-drafting drawing board. Allowing and encouraging experimentation with smaller installations will help to keep the whole of government more up to date and responsive to changes in the industry.

Perhaps.

Procurement principles should also apply to disposals

Law Must Protect Public Property
That the system of procurement and disposal of public assets in government is significantly flawed and that this system costs taxpayers billions of shillings each year.

There can be no doubt that the deals outlined in the report resulted in loss of public revenue. Properties such as the embassy plot in Lagos were grossly undervalued.

The nation has come a long way since the 1970s and 1980s when procurement was governed simply by circulars from Treasury.

The Public Procurement and Disposal Act of 2005 was designed to promote transparency. But the system is evidently failing. Amendments should be made to this law to make it far more difficult for public officials and their private sector accomplices to cheat the taxpayer.

Recommendations such as ensuring there are strong departmental internal audit systems, that the Kenya National Audit Office is strengthened and that there should be far more public access of procurement records for all ministries should be implemented urgently.

The overwhelming suspicion is that the Foreign Affairs ministry scandal is only the tip of the iceberg. Parliament should act to avert further loss of public money to corrupt officials who in the current scandal stopped short of auctioning public property.

Friday, October 22, 2010

The debate over applying modern procurement theory to developing countires

Flexibility In Government Procurement Needed For Developing Countries By Riaz K. Tayob.

Riaz K. Tayob is the South African Representative of SEATINI (the Southern and East African Trade Institute), currently reading for a PhD in Technology Governance under Prof. Rainer Kattel at Tallinn University of Technology (Estonia). In this article he presents the debate:
The reality of the global economic crisis seems not to have affected the rationale for trade liberalisation in general, and for government procurement in particular. Given the paucity of standard textbook or neoclassical economics to explain the crisis (including the crisis on the Millennium Development Goals in most developing countries), there ought to be more analysis that grapples with the evidence and the relevance of the theories that underpin liberalisation.

One such approach included in a recently published journal article considered whether it is advisable for developing countries to use public or government procurement for development and whether developing countries should join the World Trade Organization (WTO) Government Procurement Agreement (GPA). The paper concludes that if public procurement for innovation (PPfI) is to be seen as part of their industrial-policy portfolio, accession to the GPA would not help, and advises against it.

And public procurement as part of industrial policy has a lot more to offer developing countries than is generally demonstrated in the typical studies undertaken, it finds. It does, however, mean that developing countries would first have to develop more robust innovation policy skills and competences, which may be lacking, and they should not directly transfer the respective policies from the developed world.

The article “Public Procurement as an Industrial Policy Tool: An Option for Developing Countries?” by Prof. Rainer Kattel and Veiko Lember appears in the Fall 2010 issue of the Journal of Public Procurement. It surveys the key arguments for and against joining the GPA, and argues that government procurement should not be seen only as an indirect support measure for development, but as a direct vehicle for promoting innovation and industries, and thus growth and development.

WTO Government Procurement Agreement

Only about 40 countries have joined the WTO GPA (a plurilateral agreement) including from the developing world Hong Kong (China), South Korea and Singapore and through the European Union, ten Eastern European countries. The GPA requires that signatories apply the principles of openness, transparency and non-discrimination (most-favoured nation treatment and national treatment) to national public procurement laws. The agreement applies above certain thresholds, for those sectors included in the positive or negative list annexed to the agreement, with exceptions allowed for “high national interests” or military products.

Government procurement, which constitutes more than 10 percent of the national economy in most countries, is perceived as one the main barriers to free trade. Discriminatory government procurement, according to the (neoclassical) theory of comparative advantage, makes states worse off in the long run because it leads to inefficient allocation of resources and limits the benefits of free trade: access to other markets, increased competition, job creation and budgetary savings.

The article states that the current debate on WTO and government procurement has been mostly about the relationship between trade and procurement and not so much about public procurement and economic development as such. The WTO approach assumes that liberal trade rules and maximum competition will eventually lead to sustainable economic growth both in developed and developing countries.

According to the article, using public procurement for developmental goals, in particular innovation (PPfI – public procurement for innovation), is seen in the literature as a demand-side policy measure through which governments can generate new markets for companies in order to develop new technological capabilities and solutions. However, the paper distinguishes PPfI from government purchases of “off-the shelf” products, procurement for innovation involves procurement that needs additional research and development work and thereby influences the innovative capacity of providers.

The article notes that while policy space has become much narrower for industrial policy under the WTO, it shows why it is still important for developing countries to use the still-available policy options. This would allow for the needed policy learning to take place through experimentation and is less open to rent-seeking and capture by interest groups.

A maximum level of competition may not be the best solution for developing countries and, instead, a more strategic policy view could be used that mixes competition with cooperation.

Direct public procurement for innovation represents one possibility that can be used to affect the technology life cycle, promote clusters and innovation systems, and thereby increase urban, regional and national competitiveness, the authors argue. The role of the public sector could be seen as a facilitator of innovation processes especially in the fluid phase of technology development because both social and economic benefits for the region and/or nation state might follow.

Concretely, the authors suggest several ways that public agencies can support innovations through procurement: The creation of new markets for products and systems that go beyond the state-of-the-art; the creation of demand “pull” by expressing its needs to the industry in functional or performance terms; the provision of a testing ground for innovative products; the provision of the potential of using public procurement to encourage innovation by providing a “lead market” for new technologies/solutions.

Compared to the (traditional) supply-side innovation policy measures, the public sector can use PPfI to act as a demanding first buyer by absorbing risks for socially/ecologically demanded products (where significant financial development risks prevail) and by promoting learning (where procurement introduces strong elements of learning and upgrading into public intervention processes). The government can also be the demander, bear higher entry costs, create critical mass, signal the market and link innovation to production – and not just increase internal capacities of producers.

Comment: The article is much longer than this extract, eliciting and examining many issues in the academic debates over the subject matter of procurement per se and the social policy context of government contracting and economic development.

While most of the academic argument is way over my head, I sense an agenda that strives to return to the "pick a winner" past of economic "development" practice. It is disturbing the extent to which this article lauds the ability of government to pick up the cost of technological advance, with the implication that profits might be privatized whilst losses are socialized. Quoting from extracts of the article:
For evolutionary economists, entrepreneurs seek technological innovation in order to create market failures, where technological development is anything but linear and technology is anything but freely available. The paper favours the perspective of procurement from the evolutionary economics

using public procurement for developmental goals, in particular innovation (PPfI – public procurement for innovation), is seen in the literature as a demand-side policy measure through which governments can generate new markets for companies

the public sector can use PPfI to act as a demanding first buyer by absorbing risks for socially/ecologically demanded products (where significant financial development risks prevail)

the government can also be the demander, bear higher entry costs, create critical mass, signal the market and link innovation to production – and not just increase internal capacities of producers.

The role of the public sector could be seen as a facilitator of innovation processes especially in the fluid phase of technology development because both social and economic benefits for the region and/or nation state might follow.
To me, the article lays a framework for rationalizing the removal of government contracting from the spotlight of transparency, accountability, planning and fair and equitable treatment, and placing it in the smoke-filled back room, to be protected by social preferences whose social good has not been opening studied and decided.


I hope I'm mistaken.

When government picks "winners" to allocate resources to, it backs them for political purposes whether the "winner" in fact wins or fails. The political incentive to cover-up losses is greater than the economic incentive that drives business. Competition is the umpire between businesses. Influence and corruption and conflict of interest is the umpire in government demand economy.


It might work, but the need for absolute transparency, accountability and fairness at every stage of the process is even greater in that regime than the usual competitive procurement regime.

Procurement reform -- India

A procurement policy to curb corruption soon The government is working on a new central public procurement policy to bring transparency, curb irregularities and corruption.

The policy aims to plug the inconsistencies in the government purchases as there is no uniformity in guidelines.

he procurement of services will also be part of the new policy for engaging experts on contracts instead of permanent employment involving salary, service benefits and pension to avoid a big drag on the government's economy.

The services are sought to be procured in the PPP (Public, private partnership) mode. So far there are absolutely no rules for hiring experts and others for providing services.

He points out that many countries have such a policy in practice for many years while it is for the first time when India is drafting a foolproof policy.

Raman gives credit for the whole idea to Central Vigilance Commissioner Pratyush Sinha who wrote to the Cabinet Secretary in February, stressing need to put in place a comprehensive public procurement standards in India with a single authority to handle the task.

There will be, however, no centralised procurement, clarified M Raman, who has prepared a concept paper on the draft public procurement policy before laying down the office as the Director General of Supplies and Disposal (DGS&D) last month-end.

Officers who held a round of meetings on Sinha's suggestion, however, disagreed on the controls going into the hands of a single agency.

Raman's draft paper suggests a Central Public Procurement Law to cover purchases by all government departments and organisations and lay down rules for different type of procurements.

He has recommended two laws: A substantive law enacted by Parliament to lay down rights and obligations of the public procurement entities and a procedural law that may be laid down by the government, without going to Parliament, to specify the sector-specific rules and procedures for procurement.

The ministries can tweak the second but it should be "in complete concordance with the public procurement law, both substantive and procedural."

Thursday, October 21, 2010

What happens when procurement is entrusted to politicians

This is the latest entry in a saga that has been previously reported in this blawg here and here.

Report: Top New York officials guilty of favoritism
A scathing report from the state Inspector General's Office paints an extraordinary picture of Gov. David Paterson, his aides and top Democratic legislative officials working in conjunction with well-paid lobbyists and AEG officials to award the contract to the company.

Inspector General Joseph Fisch knocked a 2008 law that put the decision-making in the hands of the governor and legislative leaders, saying, "the statute removed lobbying restrictions and allowed campaign cash to flow to the decision makers."

Fisch described a "political free-for-all" in which confidential information was leaked to AEG officials and campaign contributions were made to key lawmakers to help AEG, which was run by influential businessmen and New York City community leaders.

AEG, founded by Karl O'Farrell, an Australian investor, was granted the contract in January, but under public scrutiny and news reports about the shady deal, the contract was rescinded in March. A new bidding process was started and in August the contract was awarded for $380 million to Genting New York, a Malaysian-based company.

The report said Senate Democratic Leader John Sampson in November 2009 "disclosed one or more confidential internal Senate analyses" of the competing bids to Andrews.

Sampson claimed he was unaware the information was confidential.

Wednesday, October 20, 2010

Ontario cuts down on paying for publically funded lobbying services

Rules on consultants not followed
Hiring consultants without competition, getting uncontested project extensions and lobbying government have likely been systemic issues at all Ontario hospitals, says provincial auditor general Jim McCarter.

Among McCarter’s more shocking findings was the extent of single-sourced contracts — 75 per cent — and follow-on contracts that saw consultants work related jobs without having to reapply.

In one example, a consultant hired for a $160,000 job ended up being paid more than $1 million in add-on jobs.

Raising The Bar For Accountability And Transparency
Ontario is proposing strict new rules that would prevent organizations funded with taxpayer dollars from using public funds to hire external lobbyists to ask for more funding.

The proposed Broader Public Sector Accountability Act would, if passed, bring in new rules and higher accountability standards for hospitals, Local Health Integration Networks (LHINs) and the broader public sector around the use of external lobbyists, consultants and expenses. Hospital and LHIN executives could see reductions in pay, should they fail to comply with the requirements under the proposed Act.

The new rules would also apply to school boards, colleges, universities, hydro entities, community care access centres, Children's Aid Societies and other public sector organizations that receive more than $10 million in government funding.

In addition to ending the use of taxpayer dollars to hire lobbyists, the new rules would:

* Expand Freedom of Information legislation to cover hospitals.
* Require hospitals and LHINs to post expenses of senior executives online.
* Require hospitals and LHINs to report annually on their use of consultants.

The government is implementing the recommendations of the Auditor General and is taking further initiatives to raise the bar for accountability and transparency, whenever taxpayer dollars are spent. Increasing transparency and accountability is a key component of the government's Open Ontario Plan.

European review of procurement

Public Procurement: Quo vadis?
The Academy of European Law’s Annual Conference on European Public Procurement Law cast a glance at the latest developments in the field.

Keynote speaker Savvas Papasavvas, Judge at the General Court of the European Union, addressed European public procurement rules from the Court’s perspective. He pointed out that due to the number and complexity of cases the average duration a public procurement case at the Court was 33 months. He emphasized the Court’s concern with public procurement and its attempt to handle cases in the most efficient way.

The current law and future challenges in e-procurement, which will also be addressed by the Commission in a green paper in the coming weeks, was highlighted by Michael Varney, Deputy Director of the Institute of European Public Law at the University of Hull.

Hinting at the benefits of public procurement, Mr. Varney said that e-procurement offered the potential to integrate the whole procurement process – from initial notices to electronic payments – electronically. E-procurement not only offers the potential to access a wider range of bidders throughout the EU, he said, but it also reduces transaction and research costs.

Furthermore, said Mr Varney, the benefit of time savings should not be underestimated.

The challenge for wider implementation of e-procurement, however, will be the use of standardized non-discriminatory and interoperable technology.

Procurement oversight extends beyond acquisition

Procurement doesn't end with the award and signing of a contract. It involves contract administration through the life of the contract to make sure the government gets what it sought or bargained for.

And it includes collecting information and usable information, and then getting that information to the right person who will actually use it to improve best performance the next go-round. Even in cases where there is no abuse of the system, this is necessary to continually assess and improve the government's purchasing activities.

Military contractors' epic overcharging
There used to be laws in the US to make sure that the government knew what a product cost, so that it could determine reasonable profit margins. The Truth in Negotiations Act (Tina), which was signed into law in 1962, required that companies seeking a negotiated government contract submit "cost and pricing" data.

Unfortunately, Tina did not require cost and pricing data for so-called "commercial" items, which were defined as items sold to the general public in substantial quantities. Government contractors lobbied to have the definition of "commercial" significantly broadened, so that, today, no one really knows how many high margin contracts the government is on the hook for.

BioThrax is considered a "commercial item" – despite the fact that consumers cannot buy it on the open market. Originally developed by military scientists at Fort Detrick, Maryland, in the 1960s, the state of Michigan public health service obtained a licence to produce the vaccine in 1970. At the time, BioThrax was used to help protect mill workers in the textile industry who processed animal hair contaminated with naturally-occurring anthrax. In 1998, the state of Michigan sold off the facility.

Emergent BioSolutions has billed the Pentagon $1.3bn for BioThrax, which one analyst calculates cost the company roughly just $250m to manufacture. Richard C Loeb, a former deputy administrator of the Office of Federal Procurement Policy, whose tenure in that office extended across four presidents, says that he has seen government contracts with even higher gross margins. (By contrast, a 2009 study (pdf) of 6,000 Army and Air Force contracts by the Institute for Defence Analysis found that normal margins on such contracts were typically around 10% of production costs.)

Inferior metal used on Navy subs
The Navy is searching for metal used in submarines that fails to meet military specifications and was supplied by a Pennsylvania contractor who recently pleaded guilty to one count of major fraud against the U.S. government.

In a statement provided to The Day, the Navy called the fraud "calculated and widespread."

The search has so far cost the government more than $1.3 million, and the Navy said it may take years to determine the scope of the problem.

Bristol Alloys Inc. and its president, James Bullick, admitted in court last week to selling metal that had not been heat-treated to be used in Virginia-class submarines to meet the contract's requirements. Heat treatment is used to make metal stronger. The company also admitted that it provided counterfeit certifications that the metal had been treated.

I have heard unsubstantiated similar reports about contractors providing materially nonconforming materials to the Government of Guam, but in those cases the contracting personnel either knowingly or negligently failed to verify that what was ordered under a contract corresponded to what was delivered.

If true, that would constitute a woeful failure of proper procurement. It is as much an unlawful expenditure of government funds to pay, or authorize such a payment, for something that was not ordered as it is to contract under unauthorized procedures in the first place. It is not only costly to the government, but detrimental to safety, and undermines the confidence of other, more scrupulous vendors.

Tuesday, October 19, 2010

Chicago sole source emergency contract questioned

Chicago emergency officials skirted bidding rules on Motorola deal, city watchdog says
City officials circumvented competitive bidding rules to steer a $23 million digital-radio contract to Schaumburg-based Motorola, according to City Hall's top watchdog and documents obtained by the Tribune.

Inspector General Joseph Ferguson concluded that officials at Chicago's 911 center falsified paperwork to justify giving the contract to a preselected firm.

Office of Emergency Management and Communications officials said using Motorola would preserve "the city's prior investment of nearly $2 million" in Motorola equipment bought earlier. But the city actually paid only $350,000 for that equipment, according to Ferguson's report.

When investigators began asking questions, they had trouble determining "who was responsible, because of the debilitating combination at (emergency management) of high turnover, endemic finger-pointing, poor or nonexistent internal controls and missing paperwork," the report stated.

The agency justified not going through a formal bidding process in May 2005 when Ron Huberman was executive director. Huberman, a longtime lieutenant to Mayor Richard Daley who is now chief of the Chicago Public Schools, said Monday in a telephone interview that he led the department for only 13 months.

In a follow-up written statement, Huberman said he "was disappointed" that employees of his at the time did not follow proper procedure. "I regret that some of this misconduct occurred during my tenure," he said.

The request to award the contract without bidding was approved by the city's Sole Source Review Board, and Ferguson recommends in his report that the board's meetings be public. The Department of Procurement Services, which oversees that board, rejected that idea, the report states.

Sunday, October 17, 2010

A get-out-of-jail-free procurement system ?

Some jurisdictions have actual procurement regulation, others have, by practice or express policy, a veneer of procurement a systematized procurement regime.

The Bahamas, for instance:

Public procurement in The Bahamas
The law in this field is designed to regulate the market and open it up to competition, to counteract corrupt practices and to promote the free movement of goods and service.

Financial Administrative and Audit Act Public Procurement in The Bahamas is governed by the Financial Administrative and Audit Act and the Financial Regulations.

The Financial Administrative and Audit Act is used to guide the policy of the procurement process presently.

This Act does not specifically deal with the process but rather provides guidance for the formation of the Go-vernment Tender Board and the monetary value of goods or services they could make approval for.

Details of the actual procurement process are just referred to as government policy; it has no legal footing.

The proposed legislation, the Public Procurement Bill, attempts to legitimize the government's policy by giving it a legal framework.

The government uses a variety of tendering methods such as; select tendering, invited or negotiation tendering or public tendering.

Select Tendering is specifically geared towards contractors who are already known to meet certain prerequirement standards.

Invited or Negotiation Tendering is directed towards one company which the government has had a relationship with to satisfy emergency tendering obligations.

Public Tendering or Open Tendering means that all interested members of the public are invited to submit bids regardless of any prerequirements.

This is arguably better than no procurement guide at all, but it is hard to find any teeth to enforce this law or critically evaluate its acts and efficacy, at least as described in this editorial; I have no independent knowledge of the actual laws of The Bahamas.

The Commonwealth of the Northern Marianas Islands has what, at a glance, looks like a much more particular and objectively assessable procurement regulatory regime, adopted by regulation. See Northern Marianas Islands Administrative Code Chapter 70-30.

But digging deeper, the consistency and efficacy of the law is, at least theoretically, compromised by decentralization and exceptions that, perhaps, swallow the rules.

For instance, although the Commission Comment to Chapter 70-30 suggests that legislation authorizes the Department of Finance "to be in control of and be responsible for procurement and supply in the Commonwealth", one of the largest agencies in the government, the Board of Education, has its own rules and rule-making authority. (See, NMIAC Chapter 60-40.)

And so does the Marianas Visitors Authority (NMIAC Chapter 90-20), and the Port Authority (NMIAC Chapter 40-50), and the Utilities Corporation (NMIAC Chapter 50-50).

It reminds me of the Fleetwood Mac song, "Go Your Own Way".

And, when it comes to exceptions swallowing the rule, consider the general regulation, under the Department of Finance, regarding sole source procurement.

In this example, sole source section is governed by NMIAC § 70-30.3-225. Before examining this, however, consider the American Bar Association's Model Procurement Code for sole source selection, § 3-205, and corresponding regulation R3-205.01.

The ABA code and regulation make it explicit that sole source procurement "is not permissible unless a requirement is available from only a single supplier." Thus, if there are more than one potential sources from which to obtain the requirement, competition is required.

R3-205.01 requires that the determination as to whether a procurement shall be made as a sole source, "and the basis therefor", shall be in writing.

R3-205.01 provides only four "examples of circumstances which could necessitate sole source procurement", and it must be emphasized, each of these presumes only one potential provider:

(a) where compatibility of equipment needs is "paramount".
(b) where a sole supplier's item is needed for trial use or testing.
(c) where a sole supplier's item is to be procured for resale.
(d) where public utility services are to be procured.

NMIAC § 70-30.3-225, however, is much broader. It does not condition all sole source selection on the primary condition that there is no other source. It begins with sole source as a criterion, then goes on to allow other criteria, regardless if there are other providers.

§ 70-30.3-225(a) allows a contract to be awarded without competition when
"(1) The Director determines in writing that there is only one source for the supply, service, or construction; or (2) ... ; or (3) or ... (7) For policy consultants of the Governor, Lt. Governor, and presiding officers of the Legislature."
This last sole source authority can arguably be read quite broadly.

On the bright side (for transparency and accountability), § 70-30.3-225(b) requires a
"written justification for sole source procurement shall be prepared by the official with expenditure authority and shall contain the specific unique capabilities required; the specific unique capabilities of the contractor; the efforts made to obtain competition; and the specific considerations given to alternative sources and specific reasons why alternative sources were not selected."
I read this section as being applicable to any sole source procurement, not just the "classic" kind specified in § 70-30.3-225(a)(1).

Further regulatory "teeth" for sole source selection is found in NMAIC § 70-30.3-215(b), including,
"(b)(1)(iv) Reasonableness of Price. No presumption of reasonableness shall be attached to the incurring of costs by a contractor. The following factors will be used in determining whether costs are justified: cost information in sufficient detail to support and justify the contract; [etc.]"
I am not saying by any stretch of implication that the CNMI's procurement regime is a get-out-of-jail-free system, but only that, in some critical use of the language in its regulations, it is broader than appears at first glance. Indeed, I have not conducted the kind of close examination of the CNMI procurement law as I have done for Guam. Maybe some day. A casual review suggests they have many common provisions. But the devil is always in the detail.

Of course, regardless what any jurisdiction's laws and regulations prescribe and proscribe, any regime is only as efficacious as the will of the government to abide by it, and enforce it.

If government ignores it's well intended procurement regime, it may as well hand out get-out-of-jail-free passes for its procuring officers and staff.


Related articles:
$392K sole-source contract to Ada planned as early as Sept.

Biden looking into awarding of non-bid contract

Tuesday, October 12, 2010

Why not run government like business?

What if we ran our governments like businesses? You know, user pays, profit value above social value. Economy of scaling out over scaling in.

Well, there are limits to that idea, obviously. It would be like applying the rules of business to art. The business bottom line is not society's bottom line. At some point quantity and quality diverge, and that is for the people to decide, in a democracy.

So far, anyway, we tend to strive for a democratic form of capitalism, where public matters are decided on a principle of one person, one vote; not one dollar one vote.

But in the UK, the government hired a very successful business person to have a look at how government conducts its business. And I think it is a very good idea to see how the other half does things where that can lead to improvements. But not all efficiencies are necessarily improvements, in different contexts. Which is not to say that inefficiency is a valuable goal of either government or business.

See, Is the economy of scale tipped against policy of competition?

And, government and big business are different contexts, let us not forget.

Philip Green: Govt procurement 'wasteful'
Sir Philip Green, the billionaire owner of Topshop and other clothing chains, was commissioned by prime minister David Cameron to carry out a review of spending to establish how better value for money can be obtained for taxpayers.

In his report, he claims that the government is not making the most of its size and credit rating to get the best deals from suppliers.

"The conclusion of this review is clear - credit rating and scale in virtually every department has not been used to make government spending efficient.

"There is no reason why government should not be as efficient as any good business."

Piles of waste in the minefield of public procurement
The UK has a tradition of doing everything strictly by the EU’s rules which means that the time from announcing a tender to awarding the contract can be rather long. It can also lead to complaints from those bidding for government work. They say there’s been a trend to “salami slicing” the contracts into far too small and thus wasteful portions.

As evidence of the government’s poor procurement, the document claims to have found an unnamed IT contract which still has six years left to run with no option to amend or end it. In Green’s eyes, the whole method of buying both hardware and software is of poor quality “with no provision in the contract to reduce the annual amount payable should the work not be required”.

Certainly, the figures Sir Philip found make interesting reading. His report points out that taxpayers paid out £38 million for a remarkable 400,000 hotel nights in London last year. He suggests that Government departments look at video conferencing instead, at least for some of their work.

He also says it’s been hard to get basic information. He says he was first told that transport cost £2 billion. When he queried this, a second estimate put it at £500 million and then a third came out at £768 million. The actual figure was £551 million.

He’s questioned the government’s management of property, currently costing £25 billion a year. The report describes how one agency had located from London to the Midlands. The agency has now been abolished but the contract left the state with a decades-long financial legacy. It had agreed a 20-year lease guaranteed for 15 years, leaving £18 million to pay in rent with no opt-out clause.

There are also clear signs of uncoordinated spending. Printing costs for instance varied wildly, with one department spending £1.31 a leaflet, compared with a market price of 26p. He found examples of departments paying anything between £8 and £73 for a box of paper and between £86 and £396 for printer cartridges. The prices paid for laptops varied from £353 to £2,000.

So he wants to see a centralised body to take responsibility for procurement of all kinds. He particularly wants much better control over the more expensive contracts, recommending an audit of everything with more than £100m of remaining value.

His report says that inefficiencies within government are there because “there is no process for setting and challenging detailed departmental budgets.” adding that: “Government acts as a series of independent departments rather than as one organisation.”

Telecommunications come in for particular criticism. He says that departments purchase telecoms separately from a range of different suppliers. A recent estimate claims that total government spending on phones is more than £2bn per annum, a figures he says “could be 30-40 percent cheaper” if the government bought its own capacity.

The report suggests that there is no standard specification across departments, adding that the government does not “leverage its buying power, nor does it follow best practices”. Amongst his recommendations include setting up a team of three to four individuals with financial and commercial expertise to review departmental spending “with an emphasis on efficiency and accountability”.

Personally, I think most of the observations made are quite valid issues, deserving of betterment. I simply caution against a blinkered profit motive business model for the delivery of government services. Democracy is a cumbersome process, and democratic capitalism an expensive one. It is a question of balance and fine tuning to get the proportions about right.

One of the debates that is consistent with and reflective of this concern is the one concerning which functions of the government are "core" or "inherent" or "governmental", as often discussed in this blawg. (See/click the Label, "governmental function".)

Sunday, October 10, 2010

So government contracts underwrite wage and safety violations?

The United States Government Accountability Office has some evidence suggesting that's quite likely the case in many contracts.
What GAO Found

The federal government awarded contracts to companies that previously had been cited for violating wage regulations enforced by WHD and health and safety regulations enforced by OSHA.

GAO investigated 15 federal contractors cited for violating federal labor laws enforced by WHD, OSHA, and NLRB. The federal government awarded these 15 federal contractors over $6 billion in government contract obligations during fiscal year 2009. Several of these companies also had other types of violations, such as hiring undocumented workers, violating environmental standards, and fraudulently billing Medicare and Medicaid.

GAO did not evaluate whether federal agencies considered or should have considered these violations in the awarding of federal contracts, thus no conclusions on that topic can be drawn from this analysis.

Of the 50 largest WHD wage assessments during fiscal years 2005 through 2009, 25 wage assessments were made against 20 companies that received federal contracts in fiscal year 2009. From GAO’s analysis of OSHA data, GAO also found that 8 of the 50 largest workplace health and safety penalties assessed during the same time frame of fiscal years 2005 through 2009 were assessed against 7 other companies that received federal contracts in fiscal year 2009.

Because OSHA and WHD databases do not contain Data Universal Numbering System numbers, GAO’s analysis was limited to the 50 largest WHD assessments and OSHA penalties, which GAO manually searched. Because of this, the full extent of the federal government’s contracts awarded to companies cited for labor violations is not known.

Failing to Protect Your Employees? Here’s Your Federal Contract.
A new GAO report shows that the government awarded contracts to firms after they were cited for violations or fined by the Occupational Safety and Health Administration (OSHA) and the Wage and Hour Division (WHD), the federal agency responsible for worker rights issues like back wages and child labor.

Some of the contractors GAO reviewed are receiving the big bucks. In FY 2009 alone, the USDA, Pentagon, and Department of Justice awarded about $500 million to a food supplier that had been cited by OSHA more than 100 times since 2005. WHD and a federal jury found that the same supplier had failed to properly pay its workers.

The report reveals the perils of poor information sharing within government. You have some labor law violation data over here and contractor award data over there, but agencies are not making the proper connections – and that leaves, in this case, workers at risk. (The GAO report also showed that some of the scofflaw contractors violated other laws, including environmental laws.) Nor can the public use available data to link contractors to their labor or environmental records.

Even GAO, the government’s official auditor, ran into trouble: “GAO’s analysis was limited to the 50 largest [Wage and Hour Division] assessments and OSHA penalties, which GAO manually searched. Because of this, the full extent of the federal government’s contracts awarded to companies cited for labor violations is not known.”

The White House is aware that unscrupulous employers are making off with mountains of taxpayer dollars, and Vice President Biden appears to be developing a so-called High Road contracting policy. Thus far, the White House has focused its ire on employers who don’t pay fair wages and don’t provide adequate benefits.

But, as the Center for American Progress and others have argued, a High Road contracting policy also ought to limit, or even ban, contracting dollars for occupational safety and health violators, polluters in violation of environmental laws, food facilities or product manufacturers that put consumers at risk, and tax cheats. Bottom line: Taxpayer dollars shouldn’t be used to subsidize illegal behavior, especially behavior that puts those same taxpayers in harm’s way.

Little big men

SBA contract errors are result of deception
In 2003, the Government Accountability Office uncovered more than 5,300 large businesses that were receiving federal small-business contracts.

An analysis of the most recent small-business data by the American Small Business League (ASBL) found that of the top 100 recipients of federal small-business contracts, 60 were actually large businesses. Those large businesses received 64.5 percent of the contract dollars awarded to the top 100 companies.

For the last seven years, the Small Business Administration has persistently argued that the diversion of billions of dollars in federal small-business contracts to many of the largest companies in the world is simply the result of "miscoding," "computer glitches" and "simple human error."

The SBA Office of Inspector General has a different explanation. In a March 2005 report, the inspector general found large businesses had received small-business contracts by making "false certifications" and "improper certifications." A similar investigation by the SBA Office of Advocacy found large businesses had received small-business contracts as a result of "vendor deception."

Visualize a federal database of suppliers with several dozen fields. One of those fields signifies whether a firm is a small business or a large business.

SBA has consistently maintained that the error rate on this field is thousands of times higher than any other field. More astonishing, SBA claims that when federal contracting officials and government suppliers "miscode" this field, 100 percent of the time they "miscode" the field in a way that reports small-business contracts to large businesses.

Lloyd Chapman is president of the American Small Business League, an advocacy group based in Petaluma, Calif.

HUBZones demoted

Well, that didn't last long.

It was reported here a couple of months ago that the courts had ruled, along with GAO, that the HUBZone set aside was more equal than the other social preference statuses for small businesses.

What the courts have given, the Legislature has taken away. As is its right.

As the law firm Greenberg Traurig LLP points out in a recent alert,
President Obama signed the Small Business Jobs and Credit Act of 2010 into law on September 27. The new law converts "shall" into "may" for HUBZone set-aside contracts, thus relieving contentions that HUBZone entities are entitled to a priority over other small business entities (e.g., 8(a), service-disabled veteran-owned and women-owned small businesses).

Wednesday, October 6, 2010

It all depends on how you describe "small" -- and "business" -- and why

One size does not fit all, and business is not business, in the US Small Business Administration's view of "small business". Among other things, it depends on what kind of business you're talking about. Furthermore, "small business" may mean one thing for SBA assistance and another thing altogether for procurement "small business" set-asides. And this is critical for those seeking small business set asides under HUBZone or the other status-based small business preferences.

Federal Register: October 6, 2010 (Volume 75, Number 193), Page 61604-61609

To determine eligibility for Federal small business assistance
programs, SBA establishes small business size definitions (referred to
as size standards) for private sector industries in the United States.
SBA's existing size standards use two primary measures of business
size--annual receipts and number of employees. Financial assets,
electric output and refining capacity are used as size measures for a
few specialized industries. In addition, SBA's Small Business
Investment Company (SBIC) and the Certified Development Company (CDC)
Programs determine small business eligibility using either the industry
based size standards or net worth and net income based size standards.
Currently, SBA's size standards consist of 45 different size levels,
covering 1,141 NAICS industries and 17 sub-industry activities. Of
these size levels, 32 are based on average annual receipts, eight
are based on number of employees, and five are based on other measures.
In addition, SBA has established 11 other size standards for its
financial and procurement programs.
Over the years, SBA has received comments that its size standards
have not kept up with changes in the economy and, in particular, that
they do not reflect changes in the Federal contracting marketplace. The
last overall review of size standards occurred during the late 1970s
and early 1980s. Since then, most reviews of size standards have been
limited to in-depth analyses of specific industries in response to
requests from the public and Federal agencies. SBA also makes periodic
inflation adjustments to its monetary based size standards. The latest
inflation adjustment to size standards was published in the Federal
Register on July 18, 2008 (73 FR 41237).
SBA recognizes that changes in industry structure and Federal
marketplace over time have rendered existing size standards for some
industries no longer supportable by current data. Accordingly, SBA has
begun a comprehensive review of its size standards to determine whether
existing size standards have supportable bases relative to the current
data and, where necessary, to make revisions to existing size
standards. Rather than review all size standards at one time, SBA has
taken a more manageable approach to reviewing a group of related
industries within an NAICS Sector. SBA expects to complete its review
of all NAICS Sectors in two years.
In addition, SBA established its ``Size Standards Methodology'' for
reviewing small business size standards and modifying them, where
necessary. SBA published in the October 21, 2009 issue of the Federal
Register (74 FR 53940) a notice of its availability, for public
comments, on its Web site.
In evaluating an industry's size standard, SBA examines the
industry's characteristics (such as average firm size, startup costs,
industry competition and distribution of firms by size), Federal
government contracting trends, impact on SBA financial assistance
programs, and dominance in field of operations. SBA analyzed the
characteristics of each industry in NAICS Sector 72 mostly using a
special tabulation obtained from the U. S. Bureau of the Census from
its 2002 Economic Census (the latest available). SBA also evaluated
Federal contracting trends using the data from the Federal Procurement
Data System--Next Generation (FPDS--NG) for fiscal years 2006-2008.
If that is a bit mind-numbing, the following article from Portfolio.com may help.

At the SBA, Size Definitely Matters
The Small Business Administration today made 17,000 additional businesses eligible for its programs, including loans and preferential treatment for federal contracts.

New rules, published in the Federal Register, change the size standards in the retail, hospitality, restaurants and “other services” industries. It’s part of the SBA’s phased, industry-by-industry approach to updating the size standards that are used to determine whether—in the government’s eyes—a firm is a small business.

The SBA, however, often sets separate size standards for federal procurement purposes. These also vary from industry to industry. Sometimes a company can qualify as a small business for one type of contract and not qualify as a small business for another type of contract. Defining a small business isn’t as easy as it looks.

These rules were last updated on a comprehensive basis in the 1980s. The SBA expects to complete its new update in two years.

New car dealers will be one of the biggest beneficiaries of the new size standards in retail trade. The SBA is changing its maximum size threshold for new car dealers from $29 million in average annual sales to an employee-based standard of 200 workers. This will make 5,700 more dealers eligible for the government’s small business programs. In all, the SBA increased size standards for 46 industries in retail trade, turning more than 14,400 retail firms into small businesses with the stroke of a pen.

The SBA also increased size standards for hotels, limited-service restaurants, cafeterias and food service contractors, turning more than 2,000 businesses in these industries into small businesses. The hotel size standard jumped to $30 million in annual revenue, up from the previous $7 million. Limited-service restaurants got a smaller bump, from $7 million to $10, while the size limit for food service contractors jumped from $20.5 million to $35.5 million.

Size standards for the catchall “other services” category were increased for 18 industries, including a big jump for industrial launderers from $14 million to $35.5 million. About 1,400 additional firms in this category will qualify as small businesses as a result of these changes. The Small Business Jobs Act, which was signed into law September 27, already made many more businesses eligible for SBA loans. It authorizes lenders to use an alternative size standard when determining whether a business is eligible for an SBA loan.

Instead of using the company’s annual sales or number of employees, lenders can look at the businesses’ tangible net worth and net income to determine its eligibility. Businesses with a tangible net worth of $15 million or under are now eligible for SBA loans as long as their average annual net income after taxes doesn’t exceed $5 million. Larger small businesses also will benefit from a provision in the new law that increases the maximum size of the SBA’s flagship 7(a) from $2 million to $5 million. Size limits for 504 loans, which primarily are used for real estate, also were increased.

Read more: http://www.portfolio.com/views/blogs/capital/2010/10/06/sba-makes-loans-available-to-thousands-of-bigger-firms#ixzz11d4mzBIs

Tuesday, October 5, 2010

One pill makes you larger, and one pill makes you small

Federal Contractor Suspended
SBA suspended GTSI, a Herndon, Virginia-based company, from receiving future contracts. GTSI posted $762 million in revenue last year, nearly all of that from government contracts.

In a letter sent Friday to GTSI, the SBA said it was suspending the company from federal contracting because GTSI did almost all of the work on contracts that were awarded to other businesses—firms that, unlike GTSI, actually qualified for these small business contracts.

“There is evidence that GTSI’s prime contractors had little to no involvement in the performance of its contracts, in direct contravention of applicable laws and regulations regarding the award of small business contracts,” SBA’s letter read. “The evidence shows that GTSI was an active participant in a scheme that resulted in contracts set aside for small businesses being awarded to ineligible contractors.”

The aftershocks of the suspension were felt today, when Eyak Technology, an Alaskan Native Corporation, withdrew its offer to buy GTSI for $7.50 per share. By noon, GTSI’s stock had fallen by 40 percent, to only $4.34.

GTSI’s relationship with two ANCs were highlighted in a series of stories published last week by the Washington Post. As a result of treaties with Alaskan tribes, there are no size limits on contracts set aside for ANCs. Although ANCs contend they distribute two-thirds of their profits to their shareholders, the Post reported that individual members of Alaskan tribes received little money from ANCs. Much of ANC’s contracting dollars go to their non-native Alaskan managers, and their subcontractors, the Post concluded.

ANCs, however, are just one problem area when it comes to small business contracting. The federal government routinely misses its goal of awarding 23 percent of its contracting dollars to small businesses. But agencies that miss their goals don’t suffer any consequences, other than a poor grade on an SBA scorecard.

Plus, large businesses keep showing up on lists of contracts that supposedly were awarded to small businesses, meaning small businesses actually are getting much less money than the government’s numbers indicate.

Government contracting is a swamp that needs to be drained. Too many companies are gaming the system, getting money that should be going to legitimate small businesses.

Social preference or corporate welfare?

In response to the WaPo attacks on ANC social preference in US Federal procurement, the moneyed interests behind the ANC are striking back. To me, it is cynicism writ large.

The context here is a group of small business interests who have been given a 23% piece of the multi-billion dollar US Federal procurement budget. This is to be divvied up between small business HUBZone interests and small business socially stigmatized status businesses.

The effect, if not the intent, of this social preference policy is to set the various small business groups against each other, thereby distracting one and all from the larger issues of social policy. Not to mention the tension that any form of sole source contracting generates.

We have already seen how the HUBZone interests have recently gained a leg up on the other socially stigmatized groups. This just heightens the tension between the beneficiaries of the preferential policy. And it has to be asked if there are other, more direct and cost-effective means, of achieving at least equal if not more effective social outcomes?

The ANC matter is a cynical tactic, designed by people who have had agendas other than social welfare, to buy off the mineral rich lands of the Alaskan Native peoples with the preferential pieces of the US procurement pie. Who are the real intended beneficiaries of this type policy?

It is cynical because the plan would have no effective means of implementation without the interjection of non-Native players in the game, who take the prize and leave the crumbs to fall off the table where they may. It is cynical because these players are given a preferential grab at the portion of the pie set aside for the small business group as a whole.

It is classic divide and conquer political tactic, with only a micron-wide veneer of social welfare. It is, in fact, corporate welfare for the non-stigmatized majority who provide the "responsibility" and expertise and networking to skim the cream from the procurement pot of gold with the benefit of social preference monopoly.

But I editorialize too much. This is what the apologists for the ANC social preference say on the subject, and you can decide the merits as you will, with fair and balanced reporting:

First, this Press Release: Native American Contractors Association Responds to the Washington Post Series on Alaska Native Corporations
Last week’s Washington Post series by Robert O’Harrow contained a number of inaccurate and misleading characterizations about the important work of Alaska Native Corporations (ANC). In response, the Native American Contractors Association (NACA) has dedicated a page on its website challenging the accuracy and objectivity of these articles. The information sets the record straight regarding the critical mission and strong value of ANCs to the U.S. government and Alaska Native people.

On August 26, 2010, NACA Executive Director Sarah Lukin sent Mr. O’Harrow an eight-page document spelling out the facts regarding the history, role and significance of ANC participation in the SBA 8(a) program. The majority of these facts and viewpoints were dismissed altogether in the Washington Post’s print articles.

A glaring omission from the entire Washington Post entire series was a balanced, thoughtful examination of the enormous sacrifice Alaska Native people made in exchange for promised business development opportunities to ensure long-term economic success. This includes the U.S. government’s commitment to honor and economically support the Alaska Native people after it seized millions of acres of oil-rich Native land worth hundreds of billions of dollars in exchange for the formation of ANCs and the promise to provide access to important economic initiatives such as the SBA 8(a) program. 8(a) embodies this promise; ANC participation in this program is core to Federal Indian Policy and honors the government’s promise to bring economic self-sufficiency to the Alaska Native people.

In the Washington Post’s second round of news coverage on October 1, 2010, reporter Robert O’Harrow continued his unprecedented attack on ANCs and the indigenous people they serve by misleading readers on industry efforts to bring greater transparency and accountability to ANC 8(a) contracting. The story, entitled “Breaking With Tradition, Native Executives Propose Reforms to ANCs,” irresponsibly led readers to believe the broad ANC community opposes efforts to strengthen ANC accountability. Just the opposite is true. In fact, NACA has joined other Native American organizations, such as the National Congress of American Indians and the National Center for American Indian Enterprise Development, in calling for increased compliance, transparency and education of Native Boards to closely monitor 8(a) company activities for years. (Read NACA’s joint recommendations.)

Mr. O’Harrow glossed over the fact that new regulations and legislative provisions already in motion will substantially improve oversight of ANC 8(a) participation. Specifically, new SBA proposed rule changes will establish a system to report benefits provided to the Native community from 8(a) participation. Additionally, these rules will impose new annual financial reporting for ANC 8(a) firms, create additional oversight by the SBA and agencies, and place new restrictions on ANC participation in the 8(a) program. In addition, the National Defense Authorization Act of FY2010 includes a provision (Section 811) which requires agencies to go through a formal Justification and Approval process for any sole-source award to a Native 8(a) over $20 million.

The ANCs that drafted the alternative policy proposal cited by Mr. O’Harrow have unique and significant access to natural resources and other investments, which provide them a reliable revenue stream outside of the 8(a) program. In essence, they can afford to compete outside of 8(a), unlike the vast majority of ANCs that do not have such resources and require participation in programs like 8(a) to build business capacity.

The Washington Post’s article series also misrepresented the fiduciary obligations required by all ANCs in reporting their financial statements. This, too, was pointed out in Ms. Lukin’s August 2010 letter to O’Harrow. Ms. Lukin wrote that “the overwhelming majority” of ANCs do file their annual reports with the state of Alaska – and “are completely open with the federal government regarding their respective financial pictures.” Ms. Lukin added that “every ANC 8(a) firm must submit an annual report to the SBA outlining and updating their business plan,” and that “new SBA regulations will require ANC, Tribal, and NHO 8(a)s to submit financial reports to the SBA annually.” Native Enterprises will continue to engage in full and open disclosure of their financial reports to their shareholders. None of these facts were included in Mr. O’Harrow’s articles.

Ms. Lukin also addressed statements by Senator Claire McCaskill: “Senator McCaskill’s position that Alaska Native people are being ‘used’ is offensive,” she stated. “ANCs are working hard to provide for Native communities, and the facts show 8(a) is helping Alaska Native communities. Since the formation of ANCs, the Alaska Native high school graduation rate has tripled, inflation-adjusted household income has risen by 50 percent and the proportion of Alaska Native people living below the poverty line decreased by roughly 50 percent. These facts prove ANCs and 8(a) are making a difference.”

Ms. Lukin continued: “Senator McCaskill’s assertion that Alaska Native people should be paid directly by the government and excluded from participating in the federal procurement marketplace suggests a return to the welfare system which has provably failed America’s indigenous people. Native people don’t need a hand out; we need the opportunity to contribute to our nation’s economy and experience our share of the American Dream.”

The Washington Post also failed to challenge Senator McCaskill’s questionable, and arguably hypocritical, characterization that ANCs are awarded “ridiculously, over-priced, noncompete government contracts.” Ironically, on September 30th, the day the first Washington Post story published, Missouri-based Boeing announced it had received a single sole-source contract totaling $11.9 Billion – more than twice what ANCs collectively received last year.

NACA’s website includes rebuttals to specific articles from the Washington Post series. Ms. Lukin stated the articles were “weak on substance and short on the facts.” She added: “Native communities are in need, and that need is undeniable. 8(a) is one of the only programs in history that has produced a positive impact for Native people across the United States. Congress must demonstrate, through action, that it stands with Indian Country and supports programs like 8(a) that promote economic self-sustainability for America’s indigenous people.”

The Native American Contractors Association (NACA) is a national Native advocacy organization based in Washington, DC. NACA represents and serves almost 40 Tribal, Alaska Native Corporations (ANCs), and Native Hawaiian Organizations (NHOs) across the nation on issues relating to the economic self-sufficiency of America’s indigenous people, focusing on our members’ participation in government contracting and the Small Business Administration’s 8(a) Business Development Program. NACA’s members represent over 475,000 Tribal Members, Alaska Native Shareholders, and Native Hawaiians.

In the same vein, this Huffington Post piece, Appropriating Native Economies: When Is Enough, Enough?
When is enough, enough? Native Americans have been asking this question for centuries. The answer is clear, at least as it relates to the systematic and unrelenting quest to strip Native communities of their lands, sovereignty and access to economic recovery: It's never enough.

The latest salvo in this unyielding attack is highlighted in, and furthered by, a recent series of Washington Post articles by Robert O'Harrow. In his skewed and context-deficient articles, Mr. O'Harrow targets Alaska Native Corporations, entities created by the U.S. government to help settle historic land and other claims by Alaska Natives. ANCs were sold to Alaska Natives as a way to build their economic futures. Overnight, their indigenous rights and claims were transformed into shares of corporations. The quid pro quo was giving up tremendously valuable resources, as the U.S. sought to acquire hundreds of millions of acres of oil-rich land to meet its burgeoning energy needs. Implicit in this exchange was a responsibility of the U.S. government to assist the ANCs in building their economies, so that their shareholders, Alaska Natives, might be able to escape the grinding poverty crippling many of their communities. This responsibility is similar to the U.S.'s relationship with Indian Nations, and its fundamental obligation to honor treaties guaranteeing crucial rights.

Mr. O'Harrow, both explicitly and implicitly, complains about the ability of ANCs to participate in a level-setting federal contracting initiative administered by the Small Business Administration. Under this initiative, known as the "8(a) program," companies owned by economically-disadvantaged minority individuals can access procurement channels in an effort to help level the playing field in the often relationship-driven world of federal contracting. ANCs, Indian Nations and Native Hawaiian Organizations also have this ability as the faces of Native community groups and sovereign nations. The 8(a) program is one of the few real opportunities available to ANCs, Indian Nations and NHOs to help better their poverty-challenged communities, arguably the most disadvantaged people in the U.S. Because the 8(a) program views Indian Nations and Native Hawaiian Organizations as essentially the same as ANCs, Mr. O'Harrow's attacks against ANCs are leveled against all Native communities.

As an enrolled citizen of the Seneca Nation of Indians, who works every day to help try to bring economic sustainability to our people, it saddens me to witness yet another assault on our efforts to rise above the effects of generational poverty created by years of governmental oppression. Our lands were stripped away. Our people were killed in a systematic removal process sponsored by governments offering cash for dead Indians. We were corralled onto tiny "reservations," where we were expected to adapt almost overnight to foreign systems and values. In the face of all this, we've persevered. We're still here, fighting to be self-sufficient and retain our priceless sovereignty as a people. However, outside forces often conspire to turn this uphill battle into a sheer cliff. We constantly face attempts to strip us of our remaining resources and opportunities, as state and federal governments consistently remind us that enough is never enough.

The Seneca Nation has experienced this onslaught in spades. We retained tiny pieces of our original lands as the U.S. steamrolled over our communities. In the 1960s, despite our reliance on sacred treaty promises that it would never take more land, the U.S. built the Kinzua Dam, which put much of our territory literally underwater and resulted in the forcible relocation of many of our people. Just this year, the U.S. passed the PACT Act, which was purposefully designed to eviscerate the Seneca Nation's successful tobacco industry, an industry that employed and supported thousands of people. It's no secret that big tobacco corporations maneuvered and manipulated legislative backrooms to guarantee the passage of the PACT Act, as they quickly reacted to Indians taking slivers of their precious market share. And now, as we begin to enter the federal contracting space in an effort to build a sustainable and diversified economy, we're hit by broadside attacks like Mr. O'Harrow's.

Mr. O'Harrow focuses on exceptions to prove the rule. Potential for abuse is inherent in any governmental system. To focus on a small number of isolated cases, however, just isn't fair. His facts are selective. Many of his statements are opinion-laden and conveniently ignore important counterpoints. For example, Mr. O'Harrow attempts to characterize the contracts that ANCs receive as outsized. However, he doesn't point out that ANCs, Indian Nations and Native Hawaiian Organizations combined receive less than 1.3 percent of all contracting dollars. He also tries to paint ANCs as cornering the market on sole-source government contracts. Again, he fails to put this into context. Just this year, Boeing received a single-source contract totaling $11.9 billion -- more than twice what ANCs earned last year on a collective basis.

Mr. O'Harrow also takes issue with the fact that Native companies hire some Non-Natives to help build operations. I am the first person to advocate for more Natives in leadership positions. We're getting there, but it takes time. After years of forced boarding schools, substandard educational systems and efforts to marginalize our communities, we're making great strides to build our business acumen while staying true to our traditions, culture and ways. As a Native educated in the "outside" world, it's a privilege and honor for me to have the opportunity to come back to my nation to help further its economy. There are many others like me, and many more who work day-to-day to build the skills necessary to advance our nations within an environment with different systems and values. It's a challenge to walk in two worlds, and it's foolhardy to expect these important skills to be developed overnight on a broad scale. Our Native companies generate the funds necessary to continue to send our children to school and prepare for our collective future. It takes time to do this in a systematic way.

Many new rules previously proposed by the SBA are designed to deal with the potential for abuse that Mr. O'Harrow highlights, rules that many ANCs, Indian Nations and other Native groups support. However, Mr. O'Harrow uses a broad brush as he attempts to paint all ANCs (and by association, Indian Nations and Native Hawaiian Organizations) with the color of a few self-selected, and non-representative, examples. To not put these isolated examples in the overall context of a necessary program that has demonstrably helped struggling Native communities is both inappropriate and irresponsible. Enough is enough.

David Kimelberg is an enrolled citizen (Bear clan) of the Seneca Nation of Indians. He is the CEO of Seneca Holdings LLC, the investment arm of the Seneca Nation, and the founder of nativeinvestment.com, an online forum and blog about economic development in Indian Country. His views are his own and not necessarily those of the Seneca Nation of Indians or Seneca Holdings.