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Saturday, December 25, 2010

Blanket purchasing pulling the wool over our eyes?

Fair and equitable treatment of buyers and sellers is not a concern of free market economics, except, perhaps, to the extent that competition for demand and supply is externally disrupted. Fair and equitable treatment of buyers and sellers is, however, a democratic philosophy of due process.

It is the purpose of procurement philosophy in practice to balance the constantly shifting tensions between the invisible hand of Adam Smith and the democratic goals of the community. I am not, by the way, demeaning Adam Smith's vision of the pursuit of profit; indeed, I'm a great believer in almost free markets -- markets not so devoid of control that they become manipulated by powerful economic interests, but not so politically controlled that they become manipulated by powerful interests, either. It's a matter of degree in a democratic society, and not an absolute freedom, as even Adam Smith acknowledged:
"All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man or order of men. The sovereign [politician] is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient: the duty of superintending the industry of private people." (The Wealth of Nations, vol. II, bk. IV, ch. 9.)"
There are thus various tensions that must be accommodated for a fair and effective public procurement regime. The root of these tensions is found in the competition of economic theories of pricing and political theories of justice and governance; the balancing of the need to get bang for buck and of the need to maximize fair use of pubic funds for the overall best interests of taxpayers. See, for instance, prior posts here and here.

When, for instance, small purchases for things like office supplies become too frequent and involves "petty cash", the need for precise accountability gives way to a more fungible means of acquisition and accountability, to the law of averages and other sampling statistics.

Under Guam/ABA Model code law, one means of accommodating small purchases is the "blanket purchase agreement" (BPA) See 2 GAR § 3112.1. A similar regime exists for "credit card" type purchases under the US federal GSA regulations.

The BPA is essentially a pre-approved charge account. It is described as

"a simplified method of filling anticipated repetitive needs for supplies or services by establishing “charge accounts” with qualified sources of supply and is to be used only if the services or supplies cannot be properly identified as to the quantity and the type of services or supplies required."
BPAs are appropriate when
"there is a wide variety of items in a broad class of goods (e.g. hardware) that are generally purchased but the exact items, quantities, and delivery requirements are not known in advance and may vary considerably."
"BPAs should be made with firms from which numerous individual purchases will likely be made in the given period. For example, if past experience has shown that certain firms are dependable and have prices considerably lower than other firm as dealing in the same commodities, and if numerous purchases at or below the small purchase amount limitations are usually made from such suppliers, it would be advantageous to establish BPAs with those firms."

"If it is determined that BPAs would be advantageous, suppliers should be contacted to make the necessary arrangements for securing maximum discounts, documenting the individual purchase transactions, periodic billing, and other necessary details. However, quotations for the price of the supplies or services themselves are generally unnecessary."
This is intended to result in something like the GSA Schedules system whereby the government uses its purchasing power to get, in the GSA context, "best customer pricing", or, in the BPA context, "maximum discounts".

These requirements address the "bang for buck" element of government purchasing.

One part of the governance element is addressed by introduction of a competitive context:

"All competitive sources should be given an equal opportunity to furnish supplies or services under BPAs. Therefore, if not impossible, then to the extent practical, BPAs for items of the same type should be placed concurrently with at least three separate suppliers to assure equal opportunity."
"The existence of a BPA does not justify purchasing from only one source. Whenever possible, the Chief Procurement Officer, the Director of Public Works, or the head of a purchasing agency must provide for equal distribution of the blanket purchase to at least three separate vendors."
The accountability aspect of the governance element is established by the prescription of invoicing and monthly accounting and other review and auditing requirements.

The implementation of BPAs in an isolated place like Guam may also benefit local economies and return government funds to the taxpayers where BPAs are established with local providers.

Where this last element of political philosophy begins to run off that rail and head down the pure economic track is when bang for buck completely ignores the political needs. If bang for buck were the ideal, every government, indeed every citizen, would acquire needs in an online controlled auction from the likes of Wall-Mart, Amazon and Office Depot. Government would be operated just like a business.

This consequence becomes even more exaggerated when local governments "piggy-back" on other jurisdiction purchasing regimes, as is the recent trend in municipal purchasing in the US.

Under this "piggy-back" process, a local government is (and many non-profit organizations are) empowered to purchase from vendors selected under source selection methods and procedures approved by another government, local or otherwise, in a region, or within an entire country. This is an abdication of procurement responsibility to a big or better government brother.

A "piggy-back" method would, for instance, allow the Guam government to purchase under the local procurement regime, and from the vendors doing business in, say, North Dakota, without any consideration at all for local Guam providers and the boost they provide to the local economy.

Some of these consequences are illustrated in the following article from Florida, USA.

State official's profitable deal with Office Depot may cost governments and nonprofits nationally

Office Depot now will be allowed to lure government agencies and nonprofits nationwide to the 16,000 products the state competitively bid at low prices without telling those agencies their contract purchasing website will be blended by default with potentially more than 44,000 so-called “non-contract” products priced as the company chooses.

A Brentwood, Tenn., company, National Intergovernmental Purchasing Alliance (NIPA), will market the contract nationwide to governments and nonprofits, which can share it through a process known as “piggybacking.” The purchasing alliance will profit from the amendment, as will the state agency, which came under fire this year from legislators critical of South’s leadership.

The Daily News examined some of the non-contract products listed on the state contract’s purchasing website provided to the city of Naples. The Daily News found Office Depot is selling some of the products at prices higher than it charges the general public, as it has done in the past.

“The offering of our retail website assortment as non-contract items in this instance is not outside of the ordinary and provides a tremendous benefit to agencies that piggyback off of the state of Florida contract,” Office Depot spokesman Jason Shockley said of the amendment.

Office Depot won’t be required to provide a list of the non-contract products, and state purchasing officials haven’t yet released a list of the on-contract products, making it impossible to independently verify which category each product falls under.

For nearly two years, the Daily News has been investigating the contracting practices of Office Depot, spurred by Fort Myers resident David Sherwin, a former government auditor and Office Depot employee. Sherwin launched a nationwide campaign to inform government agencies of the company’s tactics after being fired from his job as an Office Depot account manager in April 2008.

“This lays the groundwork for a bait-and-switch,” Sherwin said of the recent amendment to the state contract.

Since 2007, Office Depot has been accused of selling items without a competitively bid price in an unauthorized manner by the Florida Attorney General’s Office, by auditors with the states of Georgia, Nebraska, California, and North Carolina, and by auditors with Fresno County, Calif., Los Angeles, Calif., Clearwater, Fla., and San Francisco, Calif.

The head of the National Association of State Procurement Officials (NASPO) said it is unusual for a government agency to allow non-contract items to be purchased, and called the Florida purchasing deal a good example of “price shopping.”

“Sounds like from this amendment that they’ve really modified the intent of this contract to allow it to become a nationwide contract,” association director Jack Gallt said. “Certainly, it’s something NASPO would not support.”

The whole story, which contains links to a wider investigation, is required reading if you want the whole "morality play".

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