Tuesday 10 November 2015

Preferential costs

There was much to like in Andrew Little's speech to Labour's conference, and especially around moves to liberalise restrictions on urban land use so that more housing can be built.

But requiring government to make job creation an objective of government procurement policy is a terrible idea. Here's Little:
The government spends $40 billion a year purchasing goods and services.

That’s huge buying power but, currently, government bodies only consider their own bottom line when they make purchasing decisions. Not the country’s bottom line, just their own.

They buy ‘cheaper’ options, often from overseas, regardless of the impact on New Zealand, even if it means Kiwis will lose work.

That’s the kind of dangerously short sighted thinking that has been behind some of the biggest government botch ups in the last few years.
  • the Hillside workshop closure in Dunedin and asbestos in imported rail wagons;
  • The Novopay debacle
  • Kiwi businesses shut out of the $1.9 billion IRD computer system contract.
At a time when our economy is stalled and our regions are struggling, there is a better way. So today I’m announcing the first part of our jobs plan. We’ll use the government’s buying power to create jobs here at home instead of sending them off overseas. We will make job creation and the overall benefit to New Zealand a priority in how the government chooses its suppliers.
If the government wants to run a make-work scheme, it should at least be honest about it: set it up as a separate thing so it can be evaluated on its own merits. Bundling local preference into government contracting means taxpayers wind up paying too much for the goods and services provided by government, making taxes higher than otherwise or cutting back on services provided. And that's costly.

When Mercatus looked at the costs of these kinds of local preference policies in the United States, they found:
Using data from the National Association of State Procurement Officials and state procurement offices, the study categorizes the states into three buckets: (1) No Policy; (2) Selective/Weak Preference Policy; and (3) Broad/Strict Preference Policy. The data yield the following observations:
  • Capital expenditures in states with broad preference policies are $158 higher per capita on capital projects than in states without any preference policy. The average household in a state with a broad policy will pay $408 more per year for government services than a similar household in a state with no policy. Overall, this translates to $664 million more in capital expenditures for the median state.
  • Construction costs in states with broad preference policies are $148 higher per person in the state, or $382 higher per household. Overall, this translates to $622 million in additional construction costs for the median state.
  • Broad preference policies damage the economy by raising the costs of government services. These costs are passed on to citizens through higher taxes.
The government does consider the country's bottom line when it awards contracts to the bidder who provides the most cost-effective solution. Anything else comes at a cost of other government services not provided or dollars not available for taxpayers to do with as they see fit. Those both matter.

I also wonder whether giving preference to local supplier just because local winds up contravening any of our trade agreements. Would we want NZ firms shut out of contracting for foreign government work because they'd employ people here to do it?

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