Procurement controversy -- District of Columbia streetcar deal

Note: As I am wont, the following procurement controversy case study for today was cut, rearranged, and otherwise "edited". You are strongly urged to click the link to read the article in its original form if this subject tickles your interest.

The District’s streetcar deal leaves taxpayers holding the bag

IN THE market for streetcars for a planned trolley line, the District of Columbia undertook a lengthy procurement process in 2010.  Inekon, a Czech company that had built the District’s first two streetcars, a company with a proven track record in designing and manufacturing streetcars got the highest ranking in the year-long open competition. But the $8.7 million contract went to Portland, Ore.-based United Streetcar, a firm that had never produced an operational streetcar, had major problems delivering the vehicles and today no longer makes them.

When the contract was awarded to United Streetcar, Inekon protested to the Contract Appeals Board. The case was dismissed after the city acknowledged missteps and agreed to a series of corrective steps.

But instead of continuing that process, it used a provision in procurement law to buy the cars from United Streetcar through the existing contract of another jurisdiction.

I have not been a big fan of the so-called "coop purchasing" method. In my view, it is too often used as a cop out purchasing method. It outsources one jurisdiction's responsibility to another jurisdiction, leading to a large funneling of government funds to one centralized procurement agent who has no accountability back to the purchasing jurisdiction, and makes it problematic for the purchasing jurisdiction to to administer the contract. This case appears to be an example of that.

The theory behind cooperative purchasing is that bulk buying gets the lowest price possible. For instance, the federal supply schedule purchases allow any federal department to purchase from the schedule, as well as states, territories and some NGOs. The schedule acts like a cross between a catalog house, like the old Montgomery Wards or Sears Catalogs, and Amazon.

The theory is good for increasing buying power at the expense of increasing the pool of competition. We encourage competition over monopoly, but we turn around and diminish competition by monopsony.  As Steven Schooner has shown us, here and here, even a fundamental principle of procurement must be balanced against other competing procurement principles. 

Sometimes, the crush to make government contracting as convenient as private contract crowds out the governance principles. Government contracting without governance principles, like fairness and application of principles such as encouraging small or local businesses, does not create an ideal procurement system that satisfies the needs and aspirations of the political base of the purchasing government.

Somewhat related recent articles:

MPs warn over new train contracts

Taxpayers have been left with all the risk over two multibillion-pound contracts for new trains, a report by MPs has said.

The Department for Transport (DfT) decided to lead on procurements of new trains for the Intercity Express programme and for the Thameslink project "despite having no previous experience of doing so", the House of Commons Public Accounts Committee said.

The report continued: "These two major projects also demonstrate yet again that the department has limited capacity and capability to manage large-scale procurements, and that it remains overly reliant on consultants."

The committee's chairman, Margaret Hodge (Lab: Barking), said: "The department decision to buy the new trains itself has left the taxpayer bearing all the risk.

$1.2 billion contract OKd for new Muni Metro light-rail cars

When Muni bought its current fleet of light-rail cars from Italian manufacturer Breda in 1996, Haley said, it didn't buy enough cars and tinkered too much with customizing the design. Its reliability requirements also were too lax and it didn't take maintenance costs into account.

"We tried to learn the lessons from the previous procurement," he said. So the MTA plans to buy more rail cars this time, let the manufacturer handle most of the design, require better performance from the vehicles and consider the costs and time requirements of maintenance.

Procurement after the end of corruption

Kenya, Procurement laws an obstacle, protests PM

Prime Minister Raila Odinga criticized the current procurement laws, saying that were imposed by the World Bank and the International Monetary Fund to curb financial irregularities at a time when corruption was rife in the country, and hence have outlived their intended purpose.

“We need to review these procurement rules as they may not be in the interest of the country at the moment because they were introduced as conditionality to cut down on corrupt practices” he said.

Odinga was speaking during a forum on low absorption and implementation capacity among government Ministries, Departments and Agencies (MDAs).

The low utilization of budgeted funds impacted negatively on donor funded programmes and projects, he added, putting more of a burden on the government that has to repay the loans with interest. Under-absorption, he said, was being fuelled by failure of ministries to plan funds ahead of the budget, which was evident in the amount of government projects that failed to materialize within the expected timeframes.

Yes, now that corruption is solved, simply plan the budget and then spend away, and make sure you spend it all.

New guy on the block in White House Office of Federal Procurement Policy

Procurement chief seeks sharing of contract pricing data, star recruits

His three top priorities are buying smarter, creating effective relationships with government suppliers and developing the acquisition workforce.

By stressing transparency, agencies and contractors can be assured that contract awards are made on “real facts and decision criteria” while curbing waste, fraud and abuse.

“There’s also an oversight component,” he added, describing “timely enforcement against the few bad actors” by making it clear enough cops are on the beat. “Suspension and debarment should not mean flaying in the public square, but should be a deterrent that prevents” bad behavior from the outset, Jordan said.

Equally important is “getting data and aligning incentives” so that agency contracting officers don’t feel they’re being punished when they’re asked for data about whether they got the best price, he said.

His third priority, developing the acquisition workforce, means planning beyond the 36,000 contracting officers (two-thirds of them at the Pentagon) to the broader population of program managers and post-award contract officer representatives. At the White House, “we make it clear that acquisition is not an ancillary function but a core of what we do. People perk up when they see we’re talking about real money,” Jordan added.

Buying smarter means “instead of operating as 130 mid-size entities engaging vendors and one-off awards, we should amp up strategic sourcing in a thoughtful and strategic way that leverages buying power and achieve other goals such as reducing high-risk contracting,” Jordan said. The best model is the General Services Administration’s OS2 Strategic Sourcing vehicle for office supplies, which steers 76 percent of contract dollars to small businesses and is on pace to save $250 million by end of 2013, he said.

Some agencies have so little understanding of what their “sister agencies pay for commodities, it’s shocking,” said Joe Jordan, newly installed administrator of the White House Office of Federal Procurement Policy. The “paucity of pricing data” in one case involving bulk purchases of BlackBerry mobile devices meant a price variance of 100 percent, he said

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Uncooperative purchasing

Army procurement switch puts boot into Afghan dream

When it opened, inside huge white sheds that once held PVC piping machinery but is now home to high-tech German injection molding and boot-making equipment, Afghan and U.S. generals were keen to be photographed alongside a local success story.

Saffi's Milli Boot Factory, in Kabul's sprawling industrial hinterland, was a model for Afghanistan, showcasing local manufacturing while giving jobs to hundreds of people who may otherwise have picked up insurgent guns.

But a U.S. decision to hand procurement to the Afghan government has left Saffi with something of a developed world problem - local officials opted for cheaper boots made in China and Pakistan, killing off Milli's contracts after a year.

"The U.S. government told me when I started I would have contracts for five years, until at least 2014," he told Reuters. "The Afghan government gave me only three months notice of cancellation and now I have $30 million worth of raw material I can't use."

Saffi sold his leather boots, which underwent a rigorous quality testing process in the United States, for $62 a pair, while Chinese-made boots with imitation leather cost the Afghan government $22 in a contract for up to 700,000 pairs a year.

"The Afghan government is just looking for the lowest price," he said, surveying a room piled high with rolls of leather and raw material bought from Taiwan.

"They asked me to sell for $15 a pair, but the leather alone cost me $40. The Chinese boots use fake leather and quickly fall apart, but they are cheap."

NATO-led forces, who have mostly handled purchasing for the Afghan security forces in the decade-long war, have since 2010 operated under "Afghan First" rules requiring them to buy where possible from local companies, boosting the economy and employment while underpinning anti-insurgent strategies.

Contracts for Afghan businesses included 100 percent of Afghan uniforms and boots, textiles, furniture, tents, software and transformers, according to NATO data.

Those contracts spawned 15,000 jobs, while making savings on imports for combat-related spending worth $650 million - still a fraction of the estimated $200 million spent on the war a day.

U.S. military officials say the decision to hand a large slice of procurement to the Afghans was made in March, with responsibility handed over to the Defence and Interior Ministries.

Milli is not the only company to fall foul of the switch to local procurement, with several uniform and equipment suppliers either nervously eyeing soon-to-expire contracts, or having already lost orders to cross-border competitors.

A rival company executive, who asked not to be named because his firm fears retribution from Afghan military buyers, said, like Milli, he had invested millions of dollars into his business, but his supply contracts were now in limbo.

The Afghan First Policy backs anti-insurgency efforts by ensuring that people employed locally with better jobs and incomes aren't tempted to join the estimated 25,000 Afghan Taliban fighters in the country, often called the '$10-a-day Talib', referring to the payment offered to would-be fighters.

Workers at the factory earned between $400 and $900 a month, well over the average wage in a country where up to a third of the 30 million population live under the poverty line.

Lieutenant-General Abdul Basir Asafzari, who heads logistics and procurement in the Ministry of Defence, said only 30 percent of supply currently was coming from Afghan companies, and President Hamid Karzai had also ordered the military to choose local firms where possible.

The reason Milli had contracts cancelled was because it was importing low-quality boots from China and other countries and relabeling them, he said.

"Milli boot company did not fulfill its commitments. There were some complaints from soldiers about the quality," Asafzari said.

But Mohammad Akbar Ahmadzai, from the NGO Building Markets, which helps build jobs and investment in developing countries by supporting entrepreneurs, said Milli's boots had been genuine and met U.S.-based quality tests.

Other business experts, who would only comment anonymously, said Milli and others may have fallen foul of Afghanistan's labyrinth of bribe and patronage payments, with better-connected competitors maneuvering to kill them off.

NATO's Kakiel said Milli and others may also have misunderstood complex contract provisions which stipulated only one year of guaranteed sales.

But an audit by the U.S. government's Special Inspector General for Afghanistan Reconstruction, or SIGAR, released in January, said the Afghan First Initiative (AFI) had been marred by inadequate contract solicitation and vetting, while data on claimed employment benefits had been limited.

Read more of the story at the link for the article above.

It seems to me that there is an obvious trade-off in recycling dollars back into a local economy, and labor pool, and buying cheaper products elsewhere. Where along the cost benefit graph the lines exactly cross is unclear, but the basic pattern is too simple to dismiss out of hand.

Of course, I'm not an economist. But, as Bob Dylan sang, you don't need a weatherman to know which way the wind blows.

Procurement: Cost or Benefit analysis?

This is a tale of two contrasting news items:

First, EU procurement rules increase costs for councils

A Local Government Association survey of local authorities has found that the 2004/18 EU directive on procurement is proving a strain on their purchasing operations.

Two-thirds of councils report that procurement process costs and administrative burdens have increased as a result of the law, which was introduced in 2006.

Over half (54 per cent) of the councils said the directive has made procurement processes more complicated.

Second, Pennsylvania Auditor General Jack Wagner Says State Contracting Reform Could Save Millions of Dollars

Auditor General Jack Wagner said today that his department has uncovered systemic problems with the state's $4-billion-a-year procurement process that, if corrected, would provide hundreds of millions of dollars in sustainable savings.

"Tightening this process would create transparency and save taxpayers at least $200 million a year if we could realize savings of only 5 percent." Over four years, the savings would approach $800 million.

Wagner's analysis found that from June 2008 to December 2010 the commonwealth awarded 511 sole-source contracts and 272 emergency contracts worth more than $250 million.

"Competition is the key to American enterprise," Wagner said. "It generates new ideas and it's the best way to assure taxpayers that they are getting the best price available on goods and services."

Wagner cited several examples of structural flaws in the contracting process discovered in his audits, including:

* An October 2009 special performance audit of the Department of General Services' procurement of information technology contracts found that the state paid one company $592 million over four years through 59 contracts. The contracts were originally worth a total of $382 million, but increased by 55 percent due to change orders, sole source contracts, and emergency contracts. Of the 59 contracts, 34 were not bid competitively.

* A December 2010 special performance audit of the Pennsylvania Gaming Control Board uncovered that the Board failed to adhere to state procurement procedures and failed to comply with the Sunshine Act in the awarding of $7 million in contracts for legal and other professional services through competitive sealed bid, emergency, and sole-source contracts.

* Numerous legal contracts awarded by state government and agencies without competitive bidding.

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".