#PublicProcurement Promoting #PublicHealth: A New Risk for Potential Distortions of #Competition or a Fat Chance?

In their recent paper Government Purchasing to Improve Public Health: Theory Practice and Evidence, Noonan, Sell, Miller and Rubin explore how using government purchasing power to stimulate demand for healthier products provides a pathway to healthier food purchasing. At first sight, this is yet an additional instance of the use of public procurement to achieve secondary policies [see Prof. Arrowsmith's taxonomy of horizontal policies in procurement here] and, consequently, deserves some attention.

As the authors clearly stress,

The sheer amount of money government spends on procurement gives it a unique capacity to shape markets that, in turn, may affect public health. Through public procurement, government can, for example influence private companies competing for its business. Government’s influence can shape not only the types of products and services offered to government by private contractors, but markets themselves and the choices available to both corporate and individual consumers.

And, it is precisely this vast potential to shape (rectius, distort) the markets where the public buyer is active that justifies the need to take such impacts on commercial markets when designing public procurement rules and practice [as clearly emphasized recently by Prof. Yukins and Cora here, and as I have argued elsewhere]. However well-intended the 'secondary policy' promoted by the government, it may (will) come at a significant (and opaque) cost if it is not thoroughly assessed and carefully designed in view of its potential impact on the competitive dynamics of the markets concerned.

Focusing on the promotion of public health, Noonan, Sell, Miller and Rubin consider that

Although the specific elements and the aims of healthy procurement policies may vary, the key component of such initiatives is their use of government’s role as a buyer to shape the food environment in ways that promote better public health [...] Through healthy procurement, governments have an opportunity not only to improve the nutritional quality of the food they distribute or sell to the public, but by increasing the market demand for and availability of healthful products, to influence the options available to a much broader range of consumers.

Government procurement policies provide an alternative to policies where government regulates industry directly. Rather than establishing rules that require an industry to alter its products to meet certain standards, government can purchase products that already meet those standards. This approach can alleviate the administrative burden for the government; overcome political resistance often associated with traditional regulation; facilitate less adversarial relationships with private industry that places more emphasis on achieving outcomes than on punishing violations; and stimulate and promote innovation that the market, alone, may not produce (emphasis added).

The use of public procurement as a tool of industrial policy has been discussed for the best part of the last 25 years (see Geroski's seminal work in 1990). As a counter-argument to the advantages perceived by Noonan, Sell, Miller and Rubin, I think that it is clear that the use of public procurement as a regulatory tool creates significant issues of democratic and legitimacy deficit, as well as difficulties in monitoring and oversight--not to mention the potential (implicit) economic costs and losses in economic efficiency that would have otherwise been identified in the regulatory impact assessment (RIA) / cost-benefit analysis that would have preceded the adoption of the regulation now substituted with public procurement practice. Therefore, the picture is far from the ideal / neutral description provided by Noonan, Sell, Miller and Rubin.

Therefore, it should not be lightly used as the preferred 'regulatory tool' and, in any case, the implications of allowing the government to intervene in the market through the sheer use of its buying power would then need to be subjected to some kind of check and balance--which, in my view, should be competition / antitrust law and, more specifically, the rules on abuse of dominance / monopolisation [Sanchez Graells, Public Procurement and the EU Competition Rules (Oxford, Hart Publishing, 2011) ch 4].

The process diagram designed by Noonan, Sell, Miller and Rubin is interesting because it helps explain the way in which secondary policies work and the (indirect?) way in which the substitution of legislation with procurement (specifications) may affect industry structure.

Noonan, Sell, Miller and Rubin (2013: 8) circles added.

It is clear that moving public health (or any other secondary policy) from the set of legal requirements to the public procurement specifications completely alters the framework in which the public buyer operates, sets it free from significant regulatory constraints, and diminishes the transparency and predictability of the system for companies active in these sectors. On the other hand, the expected industry adjustment may not always be comprehensive, and it can generate a truncation of an economic market (eg that for foodstuffs) into two artificial (sub)markets: a 'public market for food' and a 'private market for food'. The economic consequences of such truncation are hard to predict but, in all likelihood, they are bound to be negative from a social welfare standpoint.

However, in the specific case of 'healthy procurement' discussed by Noonan, Sell, Miller and Rubin, it seems apparent that the pursuit of public health objectives is done exclusively through the setting of the 'technical' specifications of the food to be provided (in most instances, to schools). In this regard, the promotion of public health in procurement should not be seen as a 'classical' exercise of secondary policy promotion, since the government is defining what to buy and the 'healthy' component is intrinsic to the goods to be delivered. In that regard, the choice of healthy food for schools seems unobjectionable also from a competition perspective. The issue would be different if the government decided to buy from vendors that only sold 'healthy food'--an issue that, at least in the European Union, has been clearly prohibited by the Court of Justice in the Commission v Netherlands (Fair Trade) case.

In any case, given the growing attention to the promotion of public health and the prevention of obesity and its related health issues (see the World Health Organisation and its initiatives),  this new potential area of pursuit of 'secondary' / horizontal policies in public procurement deserves academic and policy-making attention.

US GAO report on streamlined use of strategic sourcing: Again, on exercising public buyer power

The US Government Accountability Office has issued the "Strategic Procurement: Improved and Expanded Use Could Save Billions in Annual Procurement Costs" report (Sept 2012, http://www.gao.gov/products/GAO-12-919), where it analyses the procurement activities of the Departments of Defense (DoD), Homeland Security (DHS), Energy, and Veterans Affairs (VA) during 2011 and finds that US Federal Agencies are not reaping the benefits of a more strategic exercise of their buyer power.

According to GAO, the federal agencies included in the report leveraged only a fraction of their buying power through strategic sourcing (a process that moves an agency away from numerous individual procurements to a broader aggregate approach) and achieved limited savings. "In fiscal year 2011, the four largest federal departments accounted for 80 percent of the $537 billion in federal procurement spending, but reported managing about 5% or $25.8 billion through strategic sourcing efforts. These agencies reported savings of $1.8 billion—less than one-half of one percent of procurement spending."

GAO considers this situation unsatisfactory because "While strategic sourcing may not be suitable for all procurement spending, leading companies strategically manage about 90 percent of their procurements and report annual savings of 10 percent or more. Further, most agencies’ efforts do not address their highest spending areas such as services, which may provide opportunities for additional savings."

Therefore, GAO issues a series of recommendations for a more strategic use of the leverage that the high volume of expenditure provides to the largest federal agencies. In particular, GAO refers to the DoD Office of the Undersecretary of Defense's 2010 "Better Buying Power" Guidelines (http://tinyurl.com/DoDBetterBuyingPower) which are designed in pro-competitive terms and indicate to procurement officials that they have to promote real competition if they truly want to achieve savings and obtain long-term superior procurement results.

I find these guidelines interesting and worth reading, particularly as regards this:

Real competition is the single most powerful tool available to the Department to drive productivity. Real competition is to be distinguished from a series of directed buys or other contrived two-source situations which do not harness the full energy of competition. Competition is not always available, but evidence suggests that the government is not availing itself of all possible competitive situations.[...]

 

Remove obstacles to competition. In recent years, the Department has achieved the highest rates of competition in its history. Having said that, the fact is that a significant fraction of those competitive procurements have involved what is termed “ineffective competition,” since only one offer to a solicitation was received even when publicized under full and open competition. This occurs in about $55 billion of Department contracts annually. One step the Department can take is to mitigate this loss of savings from the absence of competition. A common practice has been to conclude that either a bid or proposal submitted by a single offeror in response to a full and open competition met the standard for adequate price competition because the bid or proposal was submitted with the expectation of competition. As a result, no certified cost or pricing data was requested, no cost or price analysis was undertaken, and often, no negotiations were conducted with that single offeror. Henceforth I expect contracting officers to conduct negotiations with all single bid offerors and that the basis of that negotiation shall be cost or price analysis, as the case may be, using non-certified data. 

 

A more important approach is to remove obstacles to competitive bidding. For example, the Air Force’s PEO for Services reviewed the Air Force's Design and Engineering Support Program (DESP) for effective competition. She found 39 percent of the task order competitions under the Indefinite Delivery/Indefinite Quantity (IDIQ) contract resulted in one bid. The Air Force team undertook an analysis to determine why they were getting the one bid and made two changes. First, they amended their source selection methodology so that technical, cost, and past performance factors were more equally weighted. No one factor can be less than 25 percent or more than 50 percent. This served to lessen the advantage of the incumbent contractor since the technical factor could not overshadow past performance and cost. Second, the team provided a monthly report to all DESP IDIQ holders listing all known requirements in the pipeline. The report includes sufficient information to allow contractors to evaluate whether or not to bid and to start to prepare a bid package. The team has effectively added an additional 45 days to the time a requirement is made known to the potential offerors and the bid due date. These two changes have reduced the percentage of task orders receiving one bid by 50 percent. The team continues to evaluate its processes to further reduce the percentage. 

 

Each service component and agency has a competition advocate. I am directing each competition advocate to develop a plan to improve both the overall rate of competition and the rate of effective competition. Those plans should establish an improvement rate of at least 2 percent per year for overall competition and an improvement rate of at least 10 percent per year for effective competition. Those plans are to be approved by the CAEs. The Department’s competition advocate shall brief me on the overall progress being made to achieve those goals.

Even if some of the recommendations are hinting towards potential exploitation of suppliers (such as the mandate to negotiate when a single offer is received), the particularities of the defense industry (where supplier concentration is high and increasing over time) may justify them as an exercise of countervailing seller and buyer power. In any case, in my view, the importance of the message particularly lies in the need to find creative ways of lifting barriers to effective participation (particularly by revising tender requirements) and the existence and key role of the competition advocates within each of the federal agencies conducting major procurement activities. 

In my opinion, the creation of a similar position within main domestic procurement agencies would be desirable [see Sanchez Graells, Public Procurement and the EU Competition Rules (Oxford, Hart Publishing, 2011) 387-388], but this is an issue that, unfortunately, has not found space in the current revision of the EU public procurement Directives (where the more general proposal to create oversight bodies under Art 87 of the 2011 Proposal has been scrapped from the July 2012 Compromise text, most likely due to lack of funding and/or to concerns about the Member States organisational autonomy). 

However, in view of the evidence reported at the other side of the Atlantic, maybe we will at some point realize the relevance of having dedicated officials overseeing the competitiveness of public procurement processes (whether we call them competition advocates, auditors or something else is a discussion for another day). As GAO points out, the potential economic benefits should act as a strong incentive to move in that direction. Particularly in times of economic crisis, it seems clear that you need to invest (in human capital) if you want to save and, ultimately, to grow.

Do we need a clearer message?: Distorting competition is not only wrong, it is socially empoverishing

The OECD has recently released its report ‘Promoting Compliance with Competition Law’ [DAF/COMP(2011)20, http://tinyurl.com/OECDCompliance2011]. In this policy roundtable report, the OECD Competition Committee analyses the reasons behind the current relatively low level of development of competition compliance programs, as well as best practices to try to promote their adoption by a broader base of companies across jurisdictions and sectors of economic activity.

According to the report, one of the causes for the relatively low compliance efforts made by companies seems to be that:

companies may be more inclined to commit resources to those areas of law that are associated with the strongest moral condemnation. In other words, the choice to promote compliance with a law is influenced by the degree to which society accepts the idea that the behaviour prohibited by that law should be illegal. For this reason, competition compliance may sometimes slip down the list of priorities behind other areas such as bribery and fraud. Some commentators have emphasised that for companies to take competition compliance more seriously, the immoral aspect of competition violations should be communicated more strongly. Competition authorities should therefore consider more actively engaging with the media and increasing advocacy efforts to promote the idea that competition law infringements are not only illegal, but immoral.

In my view, this may be a step in the wrong direction but it may also not work in societies where certain levels of illegal collaboration between competitors are actually not seen as an immoral practice. However, in this day and economic scenario, we may have an even more appealing argument than morality: simply and plainly, economic efficiency. 

If we truly want to help our economies recover, we need a thriving competition environment (free from opportunistic 'crisis cartels' to begin with). Along these lines, yesterday's speech by Commissioner Almunia at the European Competition Day is a rather good reminder:

Competition control helps Europe’s economy become more competitive. Competition authorities create better conditions for economic growth – and Europe needs them more than ever [...]

Nothing can boost a sustainable growth pattern more than turning the Single Market into a reality for innovative entrepreneurs, efficient businesses, and 500 million consumers. The work of the EU competition authority has two main effects in this context. First, in the knowledge economy, a growing part of our enforcement involves industries where information is key, such as financial services, telecoms, and the digital economy – and these are crucial markets for growth. In doing so, we do not shy away from taking on corporations with a global reach. Second, our investigations and decisions help Europe keep its edge over its global competitors by promoting competition across the whole Single Market [...]

These are some of the ways in which competition policy can promote growth in Europe. Our action can contribute to keep the business environment in Europe more efficient; it can effectively foster our process of integration; and it can give lower prices and a wider choice to consumers. For that purpose, we must fight against business practices and certain government decisions that slow down the economy; harm competitiveness and innovation; and taint economic relations with an element of injustice.

Hopefully, if this is well understood, it will be sufficient to stress that anticompetitive practices constitute a barrier to economic growth and to recovery from the current crisis. Given the current climate of awareness of the relevance of boosting economic growth to avoid further cuts in social services (amongst other things), it should be sufficient to stress clearly and to disseminate the message that anticompetitive practices are socially empoverishing. In the end, it's the economy ...