What Happened?
Many local governments are creating regulations that favor local businesses when finalizing municipal contracts in an effort to increase community economic activity and drive up municipal tax revenues. Many local businesses receiving the preferential treatment, however, are unable to match the low prices offered by non-local providers, and cities are still opting for the local bid rather than the lowest offer from an external bid.
The Goal
According to Strategic Partnerships, many major cities are adopting local preference ordinances that allow community-based businesses to start bidding for contracts with a 3-10 percent jump on non-local competitors. Any business outside of the local community must therefore offer a bid on average 8 percent lower than the offers from local businesses to be considered for the project.
Some cities have local preference ordinances in place to increase tax revenues, stimulate the local economy and boost job growth. The preferential treatment typically applies to city projects under a specific price point. In Indianapolis, for example, a 5 percent preference for procurement applies for projects less than $50,000 and 3 percent for programs between $50,000 and $100,000.
While local preference ordinances may attract businesses to cities and nurture growth regionally, the tactics may also end up hindering economic competition that naturally drives down price points. The Reason Foundation argues nonlocal businesses interested in procuring municipal contracts may be discouraged to even place a bid if they are placed at an 8 percent disadvantage to local providers from the start. When less businesses offer bids on a contract, there is limited pressure to drive down costs that would save cities and taxpayers money on each project.
Healthy Competition
The New York State Office of the State Comptroller recently released a local government management guide for ensuring there is a high level of competition in procurement of vendors for local government project contracts. The guide emphasized the importance of competition in procurement, and it is the duty of government officials to ensure the selection process is fair and discourages favoritism. Offering a local vendor preference, for example, may increase favoritism and reduce competition.
According to the guide, state and local officials must understand the planning process for each project, seek out competitive bids from private companies and take advantage of digital technology to expand the project’s reach while accelerating the selection process. Furthermore, local officials can save money on projects with cooperative purchasing tactics or by piggybacking on existing government contracts to benefit from previous negotiations.
While competition is key to saving taxpayer funds without sacrificing quality of service from providers, it is equally important for local officials to engage in environmentally responsible purchasing from reputable sources. Officials must understand the policies and procedures governing procurements, the ethics behind such regulations and how to avoid conflicts of interest. If a city’s current procurement policies and procedures seem out of date or do not fully embrace the competitive nature of the bidding process, officials should consider making updates for optimal outcomes.
Economic Development Best Practices
Gov1 has followed a variety of strategies to attract new local business including increased use of digital tools and community grants for economic growth.