In Government Procurement, Buying Local Is Popular. But Is It Beneficial?

This article was originally published March 23, 2018 by Governing. 

Rita Ferguson is president and co-founder of a 37-year-old specialty concrete company, G&F Concrete Cutting Inc. Most of G&F’s work consists of providing material for public works projects in and around Orange County, California. Concrete has been good to Ferguson: Her company has been growing steadily over the years, with annual revenues between $5 million and $10 million. In 2016, she started looking for new, more spacious quarters for it.

With several available sites that seemed reasonable, the company picked a location right off Interstate 5 in Los Angeles. The deciding factor was “local preference,” a rule that gives companies located in a given city, county or state an advantage in the bidding process for contract work inside that territory. Local preference “gave Los Angeles an edge,” Ferguson says.

This idea appeals to many jurisdictions, and to many contractors as well. But there are plenty of critics who are concerned about the potential impact on the quality of the bids and the difficulties in implementing the program. Like other similar economic development efforts, including preferences for minority groups, women and the rural poor, geographic preferences are rife with trade-offs.

In Los Angeles, local preference works like this: When an L.A.-based firm submits a bid for goods or services to the city, the bid is considered as if it were 8 percent cheaper (and that much more attractive) than those submitted by nonlocal competitors.

The potential benefits of this idea were first set forth by John Maynard Keynes and other economists in the early 20th century. Keynes thought geographic preference helped a local economy by keeping money close to home. The national nonprofit known as NIGP: The Institute for Public Procurement recognizes that. “As local dollars are spent in a local economy,” the institute says, “more jobs are maintained or created and income is generated for residents.”

One thing worth noting: The federal government does not allow any locality to use local preference on projects that depend on federal dollars for their funding. That limits the use of local preference, but it hasn’t made much difference except in the field of transportation, where many roads and bridges are partially funded by the feds. Most other procurement dollars spent by cities and states do not have a federal component.

In the past year, the local preference issue has been invigorated by a separate but resonant message emanating from the Trump administration, which has been pushing the notion of “Buy America” to persuade companies in the U.S. to procure goods and services from other firms based in this country. This past January, President Trump issued a memorandum recommending that the secretary of commerce “develop a plan under which all new pipelines ... inside the borders of the United States ... use materials and equipment produced in the United States to the maximum extent possible.”

As public officials at all levels of government know, there’s a powerful political advantage to local preference. What could be more persuasive than a policy that promises to use tax dollars to help grow hometown businesses? “Mayors, in particular, want to show residents a lot of value,” says Aaron Szopinski, the policy director for the city of Milwaukee. “Policy-wise, there’s a good case for it. It’s not a hard argument to make that when we spend a lot of money, we’d like to keep as much as possible in the local economy.”

Madeline Janis, executive director of the economic policy group Jobs to Move America, makes a similar point. “The intention of local preference,” she says, “has always been around job creation. Cities want to get as much of the money in their region to their own bottom line.”

Chicago Mayor Rahm Emanuel is a true believer when it comes to local preference. Companies with headquarters in Chicago get a 2 percent advantage on bids they submit to the city. There is an additional 4 percent bonus if a majority of the employees actually live in Chicago. But that’s not all: Companies in particularly high-poverty and low-employment parts of the city can get another 6 percent shaved off their bids. About half of Chicago’s bidders are utilizing at least one of those preferences, says Chief Procurement Officer Jamie Rhee. “It’s creating jobs by creating local manufacturers. And it’s increasing our bidder pool.”

Most of those bidders are relatively small in size. If you’re looking for a vendor for, say, helicopters or other multimillion-dollar acquisitions, it’s not likely that they’ll be based in downtown Chicago. On the other hand, there’s ample competition for manufacturers of footwear in a city that’s home to the Chicago School of Shoemaking and Leather Arts.

Los Angeles adopted its local preference rules back in 2011, when political leaders noticed that many large cities had local vendors who were charging 5 percent more than their competition based in neighboring states. Given the cost of rent, utilities and insurance in L.A., that didn’t come as a surprise. But the city determined that it needed to throw in some benefits to create a level playing field for its hometown vendors. “We needed to give those businesses a preference,” says Shmel Graham, director of L.A.’s Operations Innovation Team. The number of contracts signed in the city through the local preference ordinances has varied from year to year, but between 2012 and 2016, about $272 million worth of bids for city government work utilized local preference provisions.

The formulas for local preference vary widely. Pasco County, the fastest-growing county in Florida, which is located in the Tampa Bay region, doesn’t actually give any percentage bonus to bids made by local firms. Its approach is much simpler. In Pasco, the advantages of local preference kick in when there’s a tie between two potential vendors.

This effort was intended to draw bids on fleet vehicles from Ford dealers outside of Pasco County, who didn’t have an advantage in bidding for county fleet purchasing contracts. But as it turned out, all the Ford dealers in the area around Pasco County had the same pricing, and Pasco’s “tie-goes-to-the-resident” rule nearly always worked to the advantage of the local bidders and the county.

There are no national statistics that show the number of places offering local preference or the amount of additional tax benefits they actually bring in from a growing base of businesses. Generally speaking, the benefits of local preference rules are still mostly taken on faith. In Los Angeles, for example, “we have not examined all the data to see the benefit of this yet,” says Graham. “We have not calculated our benefits, so we don’t know what they are. But we firmly believe it’s a good investment.”

As seductive as the idea of local preference may be, there’s another side to the story. Notable among critics is NIGP: The Institute for Public Procurement, which says that although its members could see benefits to local preference, on the whole, “the NIGP does not support the use of preference policies.”

Among NIGP’s concerns is that a move to subsidize in-town vendors will defeat efforts to get the highest quality, which may not be available locally. Other issues it raises include increased cost to the local taxpayers and government with the acceptance of subsidized local bids; a drop-off in the number of bidders; and reduced incentive for local businesses to provide the best value.

The Maine Legislature has been debating local preference laws for several years now. None has passed. One of the most significant constituencies to oppose the laws is the Associated General Contractors of Maine. The group’s chief executive officer, Matt Marks, contends that if Maine insists on a strong preference for local contractors and materials, neighboring states will make a similar move. “We enjoy that we can do work competitively in other states,” he says. “What happens when you give an advantage to in-state contracting is that other states do it, too.”

This has been one of the primary reasons why the Virginia General Assembly has rejected annual efforts to enact a local preference ordinance for the state. “One of the big risks for us is reciprocity,” says Patti Innocenti, deputy director of procurement and material management in Virginia’s Fairfax County. “If we have local preference for Virginia contractors, particularly in Fairfax, then the state of Maryland may do the same thing back, and this will just escalate.”

Marks and a number of others also point out that it is difficult to determine the source of manufactured goods in order to make sure they actually qualify for a single entity’s local preference ordinance. “Who is making the determination of what is considered a Maine good?” he asks. “Is it assembled here? Is it actually manufactured here?”

According to NIGP, in order to have a truly functional system of local preferences, it’s necessary to have “a defendable fair process to determine the definition of a local business including, but not limited to, geographic location requirements and management and ownership control.”

Raj Sharma, chair of the Public Spend Forum and a widely recognized expert on the topic of public procurement, asks what may be the crucial question: Should the procurement system in states and localities be used exclusively to get the most reasonably priced deal for every dollar spent on procurement, or should broader community benefits be considered when choosing the winner of a bidding process?

One plausible answer to Sharma’s question is that the use of local preference is inevitably going to be a balancing act -- albeit a complicated one. There is no reason, for example, why the quality of goods and services can’t be considered as equally important to or more important than the geographic location of a vendor. By the same token, there’s no genuine obstacle to formulating a clear-cut definition of the prerequisites to be considered in determining whether a bidder qualifies as local. None of the options have to be mutually exclusive.

The biggest obstacle may be the fact that procurement in general is one of the least understood parts of government management, and officials don’t have much to go on when weighing the pros and cons of local preference. There’s little question that it can be beneficial -- but only when it’s not considered in isolation. “Most policymakers don’t understand procurement or have a clue about the impacts of local preference programs on procurement goals, such as cost,” Sharma says. “They make policy decisions in isolation.”