Regions, Municipalities

& the Maximization of A Major Economic Tool

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Procurement’s Impact Canada is at the average of OECD countries whose

government procurement accounts for 13% of GDP (0.13*1.821 trillion = $237 billion) http://www.oecd.org/gov/ethics/PublicProcurementRev9.pdf, http://www.tradingeconomics.com/canada/gdp

Others estimate it to be as high as 23% in Canada, accounting for 21% of all wages http://www.canadianlabour.ca/action-center/municipality-

matters/procurement

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Non-Federal Governments’ ImpactCanadian non-

federal governments account for

about 85% of all government

spending

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Implications Thus, Strategic procurement should be a major tool of

regional and local government:

To enhance the (non-economic) social and environmental well-being of a region

To be used as an economic lever

To maximize jobs,

Stimulate related industries and corollary disposable spending,

Inspire business and investment to stay and build in a region

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The Private Sector Agrees An IBM global survey of 300 senior executives —

including 95 chief procurement officers (CPOs) —demonstrates the rapidly rising importance of procurement in the enterprise supply chain. According to 64 percent of respondents, enhancing procurement strategies would generate greater savings for their companies, while driving future growth and competitiveness.

Read more: http://www.itworldcanada.com/article/profiting-from-strategic-procurement-2/37451#ixzz2hzkyUoqCor visit http://www.itworldcanada.com for more Canadian IT News

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But, it’s an under-used tool in governmentThe OECD found that :

“Public procurement is still organised as an administrative rather than a strategic function of government in many countries. The review of progress made in the last four years shows that OECD countries are behind schedule in five areas:

1. Procurement is not recognised as a specific profession in a third of OECD countries.

2. Procurement is not approached as a cycle of measures to ensure efficiency and integrity, from the design of the project throughout the tender until contract management.

3. Performance-based monitoring of procurement systems is the exception to the rule.

4. Risks and opportunity costs are rarely assessed when using procurement as a policy lever to support socio-economic and environmental objectives.”

Source: OECD (2012), “Progress made in implementing the OECD Recommendation on Enhancing Integrity in Public Procurement: Report to Council”, www.oecd.org/corruption/fightingcorruptioninthepublicsector/.

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Reality in Canada: Procurement &Non-Economic Strategies Many municipalities have been including these specifications

in their tendering processes, for contract proponents to meet: Sustainability* Anti-harassment, human rights ethics Aboriginal-, minority-, and gender-equality

* “However, despite good intentions, and more than a few years of effort, actual performance of most programs (as measured in terms of purchasing products with demonstrably superior sustainability features) still has a long way to go. Granted, most programs are still relatively early in their development cycles.”

– The State of Municipal Sustainable Procurement in Canada (2012 Report) http://blog.reeveconsulting.com/resources/

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Reality in Canada: Procurement &Economic Strategies The Province of Nova Scotia has included an initiative in their procurement policy, since 2009:

Economic considerations: e.g., Life Cycle Cost, Fiscal Responsibility, Support for the Local Economy * (however, there is no mention of procurement in the NS Auditor General’s 2013 Report)

http://www.gov.ns.ca/tenders/policies-processes/procurement-policy.aspx

The Province of Ontario’s Auditor General’s Office said that it has not been directed to examine procurement practice as a Value-for-Money issue that considers local economic impact of purchasing decisions - Christine Wu, Assistant to the Auditor General

The Province of Ontario’s Economic Development, Trade and Employment Ministry does not include in its reports data from the Procurement Department of any ministry – Nathaniel D. Aguda, Ph.D., Senior Advisor, Strategic Policy Branch

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International Trade Agreements ITAs generally prohibit municipalities from exercising

strategic procurement:

NAFTA NAFTA: “The use of measures to improve socioeconomic development (offsets) for procurements covered by NAFTA is prohibited....offsets means conditions...that encourage local development ..., requirements of local content, licensing of technology, investment, counter-trade or similar requirements. https://buyandsell.gc.ca/policy-and-guidelines/supply-

manual/section/1/25/5, Article 1006: Prohibition of Offsets

WTO “The use of offsets ... are explicitly prohibited in the Agreement. Notwithstanding this, developing countries may negotiate, at the time of their accession, conditions for the use of offsets provided these are used only for the qualification to participate in the procurement process and not as criteria for awarding contracts (Article V).

CETA • Public Urban Transit: “Canada must provide full access and in particular eliminate all local content requirements for EU operators.”

• Energy: “Canada must provide a significant overall improvement to its coverage, in particular in Quebec, Ontario and Newfoundland.”

Page 3: http://www.lapresse.ca/html/1633/Document_UE_2.pdf

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Exemptions from ITAs Regional and municipal governments are usually allowed to practice strategic

procurement under minimum thresholds stipulated in International Trade Agreements:

http://www.canadainternational.gc.ca/sell2usgov-vendreaugouvusa/procurement-marches/agreement-accord.aspx?lang=eng, http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2012.EX16.2

* = Approx. 13% of the City of Toronto’s posted expenditure in Goods and Services, in 2012-3: $16.4 M

** = Approx. 73% of the City of Toronto’s posted expenditure in Construction, in 2012-3: $321 Mhttps://wx.toronto.ca/inter/pmmd/callawards.nsf/posted+awards?openview

Note: It may be possible that only very large contracts far above these minimums are the ones where impact to a municipality’s non-economic conditions, or its economy may be measurable and observable.

Goods & Services Construction

WTO, NAFTA USD $552,000 USD $7,777,000

CETA (threshold requested by

Toronto City Council, FCM)

CAD $340,600* CAD $8,500,000**

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The Lowest Price Despite some leeway to exercise consideration for local

economic and non-economic impact, many governments continue to stick to the lowest price standard because of

Its objectivity

Its relatively simple calculation or measurability

Budget constraints

Consideration of longer-term costs / impact beyond the term of the current government is not a political priority

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Example of Debate About Cost-Based Procurement

“...*P+rice *as+ the only defining criteria for contract award - this simply kills local small competitors. Locals can not produce goods in small quantities and be cheaper than multinational corporations.

My deepest belief is price as the only defining criteria is the worst thing one can do to public procurement system. Not only [does] it flushes [sic] away small businesses, but also it reduces the quality and makes public pay more frequently for buying goods, works and services. (If your roads are of cheap quality - you'll renovate them every year, if your fridge is of cheap quality - you'll buy a new one every second year, etc.) So in fact, price as the only defining criteria makes the TCO much higher for public.”Contributor to LinkedIn discussion Public Procurement ProfessionalsChief, Development Projects at International Procurement Group

“Lowest cost is indeed the deciding factor in most procurement systems BUT only after complying with all other criteria. That principle should not be changed. I do not agree that least cost selection is at the deterioration of quality unless your specifications are not good and/or not monitored. If 'green' or 'innovative' criteria are introduced in the specifications (e.g. based on life cycle cost, carbon emission, ....) the solution is already available. For large contracts SMEs are indeed often disadvantaged. Also there however, there are plenty of solutions within the existing rules (slice and packing lots for instance). Once we start evaluating goods and works as consultancy contracts (Quality and Cost based), most SMEs will be out once again and costs of public procurement will shoot up as crazy.”Contributor to LinkedIn discussion in Public Procurement ProfessionalsPublic Procurement Expert

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Threat of Litigation Deters Straying from Cost-Based Model

Municipal and regional governments tend to avoid

The expense and threat of litigation* by losing proponents who may challenge a lost bid on the basis of discrimination and not an objective measure (i.e. favouring local, an environmental consideration--not price etc.), especially if the contract was above minimum thresholds

The accusation of collusion with the winning bidder

In a letter to the Federation of Canadian Municipalities, in response to FCM's concerns about CETA and possible disputes ensuing from it, federal Minister of International Trade, Ed Fast, provided a letter that states:

“[N]othing in any of Canada's [existing] trade agreements can force countries to privatize or deregulate services. These agreements do, however, require governments at all levels to act in accordance with certain principles, such as non-discrimination... CETA will not affect the ability of municipalities to use selection criteria such as quality, price, technical requirements or relevant experience, or to consider social and environmental factors in the procurement process, so long as these are applied in a non-discriminatory manner.... [the dispute settlement process would be] gradual [and] there will likely be a non-binding mediation before the matter is referred to a dispute settlement panel...the EU would not be able to bring a case against a municipality**.” http://www.toronto.ca/legdocs/mmis/2012/ex/bgrd/backgroundfile-45054.pdf

* Lawsuits from bidding abnormalities, such as the one alleged against the City of Toronto for $228 M in the 2006 Union Station restoration case, are crippling to fight and/or lose for a municipality http://dcnonl.com/article/20060110200

**However, it is possible that the federal gov’t of Canada may be obliged to bring a case against a Canadian municipality, in order to honour its agreement with Europe.

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The Advocacy for Local Considerations

1. Harvard Business Review and Journal of Urban Economics research show that developing small local businesses is more effective at creating employment than so-called “smokestack chasing”.

2. Other benefits linked with increased activity in local small businesses, include greater community and political participation, smarter growth, greater public health, improved tourism attraction, and a stronger culture of entrepreneurship.

3. A 2013 Civic Economics study focused on B.C. retail stores and restaurants found that local businesses distributed an average of 2.6 times the amount of money locally compared to chains.

4. Dealing with many smaller companies (which would favour more local) for an area of need, such as IT or office supplies, ensures against oligopolies, price rigging and restrictive contracts, while stimulating collaboration or competition among bidding firms. http://www.computerweekly.com/blogs/editors-blog/2013/08/does-it-matter-if-government-b.html

1 Edward Glaeser, William Kerr and Giacomo Ponzetto, “Clusters of Entrepreneurship,” Journal of Urban Economics 67 (2010): 150–168; Edward Glaeser and William Kerr, “The Secret to Job Growth: Think Small,” Harvard Business Review July-Aug 2010. (Tony Pringle, MBA, Sauder School of Business, http://www.sauder.ubc.ca/Faculty/Research_Centres/ISIS/Resources/~/media/Files/ISIS/Reports/Social%20Economy%20Reports/The_Power_of_Purchasing_-_The_Economic_Impacts_of_Local_Procurement.ashx)

2 Troy Blanchard, Charles Tolbert and Charles Mencken, “The Health and Wealth of US Counties: How the Small Business Environment Impacts Alternative Measures of Development,” Cambridge Journal of Regions Economy and Society 6 (Dec. 2011), doi:10.1093/cjres/rsr034; S. Goetz and A. Rupasingha, “Walmart and Social Capital,” American Journal of Agricultural Economics 88(5) (Dec. 2006): 1304-1310; C. M. Tolbert, “Minding Our Own Business: Local Retail Establishments and the Future of Southern Civic Community,” Social Forces 83(4) (2005): 1309-1328; T. A. Lyson, “Big Business and Community Welfare,” American Journal of Economics and Sociology 65 (2006): 1001–1023, doi: 10.1111/j.1536-7150.2006.00489. (Tony Pringle, MBA, Sauder School of Business, http://www.sauder.ubc.ca/Faculty/Research_Centres/ISIS/Resources/~/media/Files/ISIS/Reports/Social%20Economy%20Reports/The_Power_of_Purchasing_-_The_Economic_Impacts_of_Local_Procurement.ashx)

3 Civic Economics and CUPE–BC, Independent BC: Small Businesses and the British Columbia Economy(Feb. 2013). (Tony Pringle, MBA, Sauder School of Business, http://www.sauder.ubc.ca/Faculty/Research_Centres/ISIS/Resources/~/media/Files/ISIS/Reports/Social%20Economy%20Reports/The_Power_of_Purchasing_-_The_Economic_Impacts_of_Local_Procurement.ashx) 14

The Advocacy for Local ConsiderationsIf a city does not protect local businesses, it is thought that the Comparative Advantage principle of a competitive market will eventually favour the stronger business in a given area:

“Canada currently imports much more from the EU than it exports in both goods and services, and Canadian exports are weighted towards raw materials. If the relaxation of trade restrictions amplifies these patterns, then resource producers stand to gain while it could become more difficult for companies in advanced goods and service sectors to compete with European counterparts domestically... The degree to which Canadian companies will be able to take advantage of these markets is not certain and should not be taken for granted.” - Joe Pennachetti on Comparative Advantages in CETA, City of Toronto, City Manager http://www.toronto.ca/legdocs/mmis/2012/ex/bgrd/backgroundfile-45054.pdf

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Advocacy for Competitive Bidding (i.e. Opening up to foreign MNEs) Economies-of-scale enable multinational enterprises (MNEs) to often

provide competitive products and services at a lower cost. MNEs have the budget and R&D capacity to invest in changing their

factories or products to be environmentally sustainable. The scale can induce industry-wide changes in standards. http://www.rtcc.org/2013/09/12/how-are-multinational-

corporations-tackling-climate-change/

Altomonte and Resmin (2001) confirmed in a study about Poland and Western Europe, that MNEs entering Poland created linkages and “spillover” knowledge among local suppliers, and introduced superior technology and marketing and management skills, which resulted in higher productivity and technical efficiency. There was the potential to stimulate local rivals to a higher rate of innovation and to continue the flow of foreign investment, but that depended on further and sustained policy action. http://www.econ.kuleuven.be/licos/publications/dp/dp97.pdf

The OECD recommends policies to prepare for SME-MNE integration: http://www.oecd.org/daf/inv/mne/encouraginglinkagesbetweensmallandmedium-sizedcompaniesandmultinationalenterprises.htm

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Conclusions There is (diminishing) leeway for regions and municipalities (under minimum thresholds in Trade

Agreements) to practice strategic procurement for non-economic and economic objectives. However, municipalities and regions in Canada have not documented the practice nor effects of strategic

procurement within their allowable thresholds. (Therefore, the further restrictions under new Trade Agreements pose an added difficulty to a strategy not yet executed.)

Furthermore, it is possible to set non-economic objectives in the tendering process under “specifications”, but monitoring their fulfillment is key. A 2012 report on the State of Municipal Sustainable Procurement in Canada shows that there is a “long way

to go” in being able to show that these specifications have been monitored to match expected performance or benchmarks.

The OECD reports that monitoring is largely not done in many of the 31 countries.

According to the Minister of International Trade, Ed Fast, “non-discrimination” is the main point of compliance that all 3 levels of government should have in procurement under Trade Agreements (above minimum thresholds). Yet, there is the perception that the only way to be compliant and avoid litigation is to stick to the objective

cost-based measure in contract tendering.

Losers in cost-based procurement are thought to be local bidders (who don’t have economies of scale), quality of service and the ability of municipalities to control local economic and non-economic impact.

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Moving Forward1. Canadian municipalities need to actively take advantage

of and monitor specifications and strategies that are allowable within their control. Creative solutions such as slicing formerly larger contracts can be explored.

2. The cost-based calculation of tax-revenue from all the local jobs created, purchase of goods, services and property estimated to result from very large bids may legitimately be factored into the calculation of net costs.

3. In order to champion the local economy and the competitiveness of local bidders above ITA thresholds (something inherently good for all 3 levels of taxation), policies need to come from non-procurement departments.

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