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Monday, February 17, 2014

Giants don't know Jack

Little Jack can be pretty scrappy.


New procurement rules for prison stores scrapped
A chief state procurement officer has nixed changes in how Illinois purchases snacks, toiletries and other goods sold to prison inmates — apparently heeding criticism from small businesses that they gave supply giants an unfair advantage.

State puts hold on bids for prison purchasing contracts
For now, the move means small businesses selling everything from prison-approved Nike shoes to tins of sardines will continue to do business with individual prisons as they've done for years. Matt Brown, the chief procurement officer overseeing contracts for major state agencies, issued his ruling earlier this month, saying a number of irregularities made it necessary for a massive do-over of the bidding process.

Currently, each of the state’s prisons stocks its own canteen, working directly with a number of national and local suppliers to get items such as pallets of chocolate chip cookies, boxes of Nike shoes and cases of potato chips. Keefe Coffee and Supply Co. of St. Louis controls about 30 percent of the inmate market, with an estimated 180 companies -- many of them homegrown, Illinois businesses -- taking a share in the remaining 70 percent of the sales, according to a state study of the commissaries. Brown said the setup as outlined by the Illinois Department of Corrections could have resulted in only one company being deemed qualified to win a contract that could be worth as much as $30 million in sales.

More than a decade ago, however, Auditor General Bill Holland began raising red flags about the supply chain, saying goods being sold at the prisons were being purchased outside of the proper state bidding channels. More than three years ago, Illinois Department of Corrections officials began to draft a new plan designed to centralize commissary purchasing.

The rules that were drafted, however, enraged local suppliers, who said they wouldn't be able to compete if they had to bid on selling products to every state prison or even to a segment of the market grouped by geography. Some companies, for example, sell their wares to just one or two facilities.

Even more vexing for the local companies was a concern voiced by top prison officials that the changes wouldn't result in any savings for the state. In a September meeting with vendors, Corrections Chief of Staff Bryan Gleckler acknowledged that concern. “There may be areas where costs go up; there may be areas where costs go down,” he said during a meeting attended by a number of worried vendors.

"They know they need a new commissary program," Brown said.

At the same time, however, local prison officials say the state needs to realize that local businesses are valuable when it comes to not only prices, but service and reliability.
This is a classic case of the principle of getting bang for taxpayer buck running up against the principle Prof. Steven L. Schooner of George Washington University calls the wealth distribution principle.  I'm not entirely fond of that label since, in local preferences at least, there are macro economic principles that could well justify spending tax dollars where they are raised rather than draining them from the local economy, especially in a pretty much closed economy as on a small island in the middle of the Western Pacific like Guam.  I don't see that so much as wealth distribution as wealth conservation.  I would prefer a term like social preference, but it's his Desiderata. 

Blind adherence to lowest available cost leads to market dominance and control by one or few suppliers (monopoly or oligopoly, thus reducing competition, so-called creative capitalism, and innovation) while blind pursuit of spreading the contracting dollar around the community, such as a buy local preference, means paying higher prices than available from the big guys, greater transaction cost from multiple suppliers, and increased cost of contract administration.

Professor Schooner has written about this inherent conflict of procurement goals in his famous Desiderata: Objectives for a System of Government Contract Law available here and here

As Matt Brown, back in Illinois, tries to decide how to reconcile the various interests in his predicament, with a view to creating an improved commissary system, he may well want to consider the Desiderata:
Sometimes the most simple questions prove the most vexing. For example, what does your government hope to achieve through its government procurement law? It is possible to draft and enact a new law without answering the question, and experience demonstrates that this is often the case.  Nonetheless, it seems reasonable to attempt to describe general aspirations for a procurement system before drafting begins.

At a macro level, the author prefers to begin with three “pillars” that, in my opinion, underlie the United States procurement system: system transparency; procurement integrity; and competition. Yet, there is no universal agreement that a procurement system should be premised solely upon transparency, integrity, and competition. Other goals merit discussion.

Historically, our elected representatives have viewed our procurement system as a vehicle to distribute wealth. For example, our government has chosen to leverage its purchases to support domestic firms and, more specifically, small businesses. It is axiomatic that government spending can influence behaviour and infuse growth in communities and economic sectors.

No system can achieve all of these goals. Nor can a state expect that its objectives for its system will remain constant over time. Determining which goals are most important is a daunting, ever-evolving challenge. Because no system can achieve all of the goals here (or the many not discussed), your desiderata entails important tradeoffs."
Or, as Prof. Schooner told us here on Guam (see, Working a good man hard), "You can't have it all".

It is all about balance and priority. For most, transparency and integrity and low prices achieved through competition represent foundational, primary principles. To the extent that you must give up some degree of transparency, integrity or competition to achieve other goals, to maintain the primacy of the foundation principles, the procurement system should implement brakes or safeguards to make up for the effects of the lessened primary principles.

Thus, although it may be possible to achieve the lowest cost by dealing with one vendor under a centralized procurement regime, there may also be savings achieved through more uniformity of acquisition and transactional costs through centralization which makes the marginally higher cost of dealing with more regional suppliers palatable, without even factoring in the broader economic benefits.


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