Some
city of Los Angeles
officials recently proposed an ordinance that would give preference to local
companies when the city buys some good or service. It’s a
well-intentioned, feel-good measure that’s a bad idea.
The
ordinance would give local businesses an 8 percent advantage when they bid for
city work. So in a low-bid contract scenario, a local firm’s bid of $1
million for a city contract would be considered a bid of $920,000. And in a
request-for-proposal scenario, in which bidders are assigned points, a local
business that got 100 points would be considered to have 108 points. Obviously,
that would give local companies a leg up when they’re bidding against
nonlocal companies.
"For
too long, the city of Los Angeles has awarded contracts to private companies
without considering if any of those funds will filter back into the local
economy," City Council member Bernard Parks was quoted as saying in a
city press release.
The
press release went on to explain that the city spends 84 percent of its
procurement dollars with businesses that are outside of Los Angeles. Therefore, of the $1.1 billion
allocated for government contracts, only about $180 million goes to local
businesses. If more of that money goes to local companies, it will boost L.A.’s economy, it
said.
Of
course, L.A.
businesses and business groups have every reason to like this ordinance. Who
could blame them? But let’s stop a minute and think about why this is a
bad idea.
The
main reason: This will increase city costs.
Let’s
do the math. The city’s numbers, above, imply there’s something
like $920 million in city contracts that don’t go to local businesses. If
local businesses capture all of that business by barely undercutting the
nonlocals, that means they’d be able to charge 7 percent more. That comes
out to $984 million in procurement costs.
In
simpler terms: The city would have to pay $64 million more to get the same
stuff. That’s not a good deal.
Granted,
that $64 million figure is the largest possible amount. The real world total
would probably be much less. But even if it’s, say, one-fourth as much,
that still would be an increase of $16 million in costs for the city. Not good
for a city facing huge budget deficits.
Another
problem: Under this ordinance, local companies have an incentive to raise their
bids, knowing they’ve got an 8 percent fudge factor.
The
best rationale for the ordinance? It will boost the local economy and create
jobs. For the city, that increased activity may even offset the costs of the
ordinance because of new taxes from the additional employees and sales. That
would make the ordinance "free."
Maybe,
but the problem is that the city’s income from any increased economic
activity is divorced from the cost side of the ledger. I hate to be cynical,
but you know what city elected types will do. In a year or two, they could
ignore any revenue from increased economic activity. Instead, they would point
to the increased costs.
"See
right there?" they could say. "Look at how our costs of procurement
have shot up because we’re trying to help local businesses. We need to
raise taxes."
Look,
the fundamental problem with the ordinance is that it would raise costs in Los Angeles. It would
force the city to spend more money to buy the same amount of stuff. In a macro
sense, those higher costs must be paid somehow.
A
better alternative for the city would be to focus on ways to lower costs for
businesses and residents, not raise them.