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Procurement Perspectives: Why governments pay more for goods and services

0 223 Government

by Stephen Bauld

There are numerous reasons why governments pay more for goods and services than the private sector does. Among them are the following, in no particular order.
Stephen Bauld
Stephen Bauld

Since the driving rationale for government expenditure is the need to deliver some public service, rather than to earn a profit, government suppliers understand that as a customer, governments are far less price sensitive than the public sector. As a supplemental factor, the high public and political profile of many government projects, particularly the most expensive projects, makes government more susceptible to pressure to increase contract prices in order to keep work on schedule.

The public nature of the government budgetary process often means any interested supplier can determine the upset price for a proposed contract, long before bidding on that contract.

It has been said that "fair shopping" is the best protection the purchasing agent has against charges of fraud, incompetence, collusion with vendors and other malfeasance. However, the strong performance in the public sector for open competitions on the tender model leaves little or no opportunity to drive down the supplier's price. A supplier in a tender knows it must beat the prices bid by competitors. However, the price bid by the winning bidder can often be significantly above the minimum price that the supplier would be prepared to supply.

There is considerable reason to believe that in a significant number of cases, the bids for government work are rigged among competing suppliers. The fact there have been so many prosecutions of highly reputable firms across North America — many of which are continental or international in their scale of operation and have subsidiaries active in Canada — suggests the problem of bid rigging is a very serious one, posing a substantial threat to the integrity of the public procurement process.

Governments routinely ask for special rights that impose risk on the other party to the transaction, even though instances involving the actual use of such rights are exceedingly rare. For instance, governments routinely demand extended warranty coverage beyond the normal terms provided in the marketplace. Rights of this kind likely result in the inclusion of a hedge factor in every bidder's price.

Government policies in relation to supplier selection often work against a systematic and consistent approach towards procurement.

Discussions with suppliers indicate a perception that a significant number of private sector suppliers tend to view decision-making within the public sector as being irrational or at the very least unpredictable. This is no doubt an unfair assessment. While there are exceptional cases, government decision-making usually proceeds rationally within the general frame of reference within which the government works.

Another problematic area in relation to municipal and public procurement — not as common as many believe, but hardly infrequent either — is the matter of political interference in the contracting process. Whether lawful or unlawful, political interference adds uncertainty into the contract process and otherwise raises supplier costs of doing business with a municipality.

Government contracts are generally short-term, or are terminable on short notice. Contracts of this nature are unlikely to be priced aggressively by a supplier because they entail considerable risk of termination.

Occasionally, instances of actual abuse leads to significantly higher expenditure. Cases of actual abuse are rare and generally (at least in Canada) are of such small scale that they have no, little or material impact on overall municipal expenditure or the tax burden.

These concerns represented by "time, customer satisfaction, quality, and value" can be considered conveniently together. Many of the deficiencies of municipal procurement in relation to these aspects of procurement arise directly or indirectly out of the law of the tender system and the law of tender that has now come to underpin it.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com.

Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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