Privatization & Government Reform Newsletter

Are Local Vendor Preferences a Good Thing?

Policies can reduce competition, increase costs to taxpayers

In a recent article, Strategic Partnerships, Inc. CEO Mary Scott Nabers discussed an emerging trend of municipal governments adopting ordinances that give preferential treatment to local businesses in procurements, often via requirements that non-local bidders come in 3-10% lower on their pricing relative to their locally-based competitors. Elected officials often argue that such local preferences benefit cities by boosting local businesses and economic activity and increase municipal tax revenues. But is preferential treatment for local businesses a good thing in municipal contracting?

While in some cases there may be marginal benefits that could result from the existence of local preferences, in my opinion, they are on balance a counterproductive policy if the goal is to maximize competition in procurements and leverage that competition to drive down costs.

With regard to competitive procurements, giving local bidders an 8% leg up on pricing (as Los Angeles does) is effectively giving them an 8% head start on their non-local competitors. And seen from the non-local vendor’s viewpoint, that might as well be an 8% penalty selectively applied to them because of where their headquarters happens to fall on a map. Some non-local vendors will (rightfully, in my estimation) see this as an anti-competitive and unfair policy designed to put them at a disadvantage, so would they bother to even bid in the first place? If enough firms take this view, then cities will have effectively shot themselves in the foot through local preferences, because they will keep firms from bidding that otherwise might submit bids in the absence of anti-competitive preference policies.

What’s the practical impact of reduced competition in procurements? Less competitive pricing, and potentially higher costs for taxpayers. One way to interpret a local preference is that local officials are willing to pay up to 8% more, using the Los Angeles example, on a contract than is otherwise necessary in the interest of “buying local.” I’ve not seen empirical research suggesting that the potential tax and local economic benefits of local preferences would outweigh the potential higher associated costs to taxpayers, but I have a hard time believing that the benefits would outweigh the costs. In fact, the higher costs might even outweigh the local economic benefits, rendering such policies a good example of well-intentioned fiscal folly.

While local vendor preferences may score political points for local elected officials, they seem to me to be the local equivalent of “Buy American” policies—they make for feel-good politics, but the reality often reveals them to be costly. Taken to their logical extreme, if Target or WalMart, for example, were to stop selling goods made in China and other foreign countries, the prices of goods would skyrocket, hitting consumers in their pocketbooks where it hurts.

Municipal officials may be tempted to pursue similar “buy local” policies when it comes to local government procurement, but a more productive approach would be to focus on removing onerous development, permitting and business regulations, creating competitive tax climates, and making it easier for entrepreneurs to start and nurture local businesses in order to create an environment that’s good for business overall. It’s better to have a healthy mix of local businesses that can compete furiously for municipal contracts on an even playing field, rather than using public policy to pick winners and losers based on a company’s zip code.

Leonard Gilroy is director of government reform at Reason Foundation and is the editor of the Privatization & Government Reform Newsletter, available here.

Leonard Gilroy is Director of Government Reform