The Perils of Procurement

Why things are not so simple in the world of government purchasing
June 20, 2017 AT 11:00 AM
Public procurement laws are there for a reason. While it’s a worthwhile cause to want to aid small and disadvantaged businesses, it’s not always as simple as it seems. David Kidd
By Ron Littlefield  |  Senior Fellow
Ron Littlefield, a former mayor of Chattanooga, Tenn., is a senior fellow with the Governing Institute and its lead analyst on the City Accelerator initiative. A city planner by career, he also consults to government through Littlefield Associates.

Almost everything government does involves acquiring goods or services, or both.  That makes the work of the new City Accelerator initiative on procurement vital to getting things done – with integrity and equity.

During my time in government, the question would sometimes arise as to which administrators were considered most valuable. I always said the individuals in personnel and purchasing. They work within the disciplines of public service that, if not carefully, scrupulously, legally and ethically managed, are most likely to land a chief official in court or (in the worst case) jail. And when it comes down to it, the director of purchasing – the gatekeeper of the public’s money -- is in my opinion the most important advisor in the staff of any chief public official.

So, here is one of those things that sounds so simple but isn't.

The government spends a lot of money and buys a lot of goods and services. Then, within any community there are people and businesses -- entrepreneurs, contractors and small enterprises -- all wanting a piece of the government pie. Why not just have the government do more business with those up-and-comers that are hoping to build a better life for themselves and their government?

It seems so obvious. It's not a new idea. And it's not a bad idea, but it's not as simple as it seems.

In my four decades in public service I've seen several officials, both elected and appointed, marched off to white collar jail for reasons associated with procurement -- fraud, bribery, misappropriation, malfeasance, bid rigging, insider trading and the list goes on.

It's an unfortunate fact of life that is almost as old as government itself. The American Civil War was rife with stories of misuse of public funds for goods and services needed in the war effort. There is an often-retold story involving Simon Cameron who served early in Abraham Lincoln's cabinet: 

Mr. Lincoln reportedly asked Thaddeus Stevens about Cameron’s honesty and was told that “I do not believe he would steal a red hot stove.” When the President repeated the story, Cameron was offended and a retraction from Stevens was demanded. The crusty Republican congressman replied that he could have been wrong and thus suggesting that perhaps Cameron might steal a red hot stove.

In the 1980s and 90s, Chattanooga was a slowly deflating and declining city facing the necessity of embracing a major structural transformation -- changing from a local economy largely reliant on heavy manufacturing to a more balanced mix of blue collar, white collar and service jobs. Like most southern communities, Chattanooga up until that time had been pursuing a large industry recruitment strategy with very limited results. Assessing our options, we quickly pivoted toward a strategy focused on local entrepreneurship and growing our own small businesses.

The prevailing economic mix resulted in a local population that was either wealthy or poor -- with a large income gap in between. Inspired by the success of our near-neighbor Atlanta that had achieved a more balanced population, we also saw an opportunity to fill the ranks of our largely missing middle class -- especially for disadvantaged groups. At the same time, we decided to employ the power of city procurement.

Setting off with deliberate speed and determination, we brought in great minds like Professor Michael Porter of Harvard, urban developer James Rouse and others to inspire and guide our efforts. We created what is still (more than 30 years later) one of the largest and most successful business incubators in the nation. Special legal and financial measures were implemented, including the designation of an array of tax and benefit districts to appeal to new prospects and a wide diversity of investment opportunities.

Most notably, we created new financial resources such as a number of neighborhood-based local development corporations and a minority enterprise small business investment company (MESBIC) to work with a group of entrepreneurs that might have been overlooked or underserved in previous economic development efforts. Specialized new training programs were provided to raise up the next generation of contractors and suppliers. Slowly but perceptively things changed for the better, but we stepped very carefully and learned from the missteps of others. And we kept a close watch on the sometimes-fuzzy line between wise and unwise pathways to progress. We looked for examples -- ideas to steal and pitfalls to avoid.

Perhaps the most notorious and high-profile example in the 1980s of what might have started out with good intentions but ultimately went very bad was a manufacturing company in New York City. Wedtech was a small machine shop in the Bronx -- a very diverse and depressed neighborhood in desperate need of jobs and financial investment. The owner managed to qualify the struggling business as a minority enterprise. He attracted the attention of powerful political players at both the local and national levels and became a major employer of people who would otherwise be on relief or on the street. As things progressed, Wedtech began to compete for government contracts at an ever-increasing scale. It was a classic rags-to-riches story with and urban development twist.  Very quickly, Wedtech attracted national attention and anyone involved became instant celebrities. 

I vividly recall being in the audience at national economic development gatherings in the 1980s when principals of Wedtech -- including key elected officials -- paraded across the stage like rock stars, waving their hands in victory and basking in the applause of their the seemingly successful program. It's a long and painful story that can be accessed here and here. Unfortunately, it all came crashing down in a financial collapse that cost over $300 million plus the fortunes of legitimate investors, the livelihoods of innocent workers and the careers of not-so-innocent players. Several prominent politicians -- including a U.S. Congressman -- went to prison.

When pursuing something that seems so worthwhile as distributing public business in a way that aids struggling small and disadvantaged businesses, it's always tempting to take shortcuts -- after all, it's for a good cause. But the laws that govern public procurement are there for a reason.

First of all, steps must be taken to assure the goods and services meet a desired standard. No matter the supplier or contractor, the public deserves to get its money's worth. Secondly, the provider must be fully vetted and confirmed to be a truly disadvantaged entity that fits the desired purpose -- and not a shadow or shell created to qualify for a special benefit program. Thirdly, the disadvantaged entity must be able to work within the basic financial requirements and restrictions of government concerning necessary paper work and payment. I have had experienced representatives of more than a few disadvantaged businesses showing up at my door needing instant payment immediately after delivering goods or services. They did not have a sufficient cushion that would permit them to wait a customary 60, 30 or sometimes even 10 days. One such special enterprise arrangement that we nursed along for years with streamlined paperwork and hurried payments ultimately ended badly when one of the owners took a shortcut on a private demolition job and attempted to get by without removing asbestos. He went to prison and all our investment in attempting to make his company viable was lost.

Over the years and decades since the 1980s, we have seen numerous good and bad examples of local economic development efforts aimed at disadvantaged populations. There have been many less prominent but similar "little Wedtechs" that expose the dark side of good intentions. Sadly, I have seen scandals involving officials of local governments that might have started well but ended with jail. It's a tough and treacherous business.

Yet, it remains a worthwhile undertaking and the successes should always overshadow the failures -- even the dramatic ones. But it's always best to be very careful and never forget:

It's not a new idea. And it's not a bad idea, but it's not as simple as it seems.

Be part of the campaign for civic innovation at the City Accelerator, presented by Citi Foundation.