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The Problem with Preferential Bids for Women, Minorities

Giving preference to women- or minority-owned businesses is a widely acceptable social policy that can run into management problems.

It’s a fairly common practice: When they purchase goods or services, states and cities offer preferential bidding treatment to businesses that are in whole or in part owned by women or minority group members. Leaving aside any political issues revolving around this process, it’s a field in which a widely acceptable social policy can run head on into management problems. It’s a “meeting point of legal considerations, practical considerations, and the need to have good data for both justifying public policy and for implementing it as well,” says professor Maureen Berner of the School of Government at the University of North Carolina.

The first big problem goes to the very core of this policy: Are the businesses actually owned by women or members of minority groups? Or are they just Potemkin companies that look one way on the outside and another on the inside?

Here’s a case in point. A Philadelphia prison contractor received nearly $200 million from the city, which believed it was handing 40 percent of a contract over to a female-owned business. It turned out that the prison contractor had only paid a subcontractor for the use of its name and then, according to The Philadelphia Inquirer, “gave the work to companies that do not meet the city’s standards for minority-, female- or disabled-owned vendors.”

This kind of activity, which is probably a “national problem,” according to Amy Kurland, Philadelphia’s inspector general, represents the kind of loophole that’s easy for businesses to climb through. The general contractor is happy because it is likelier to get the business from the city or state. The minority business also likes it because it’s getting money for nothing. Neither one is really an injured party.

That doesn’t mean there isn’t one. “The victim,” says Kurland, “is the unidentified minority- or women-owned business that didn’t get the job.”

Also harmed are taxpayers who may not see their tax dollars used for the best contractor -- but rather for the one that stretched the law in order to camouflage itself as a woman- or a minority-owned company. In Philadelphia, for example, the prison contractor issue cost the city some $400,000.

It wouldn’t seem tricky to figure out if a company meets the local definition of a woman- or minority-owned business. But as it turns out, it is. For one thing, some cities and states accept certification from other cities or states, which may or may not have similar laws in place to govern the selection of eligible firms. Philadelphia and others don’t do their own certification; they rely on other entities. “That in and of itself is a problem,” Kurland says. “We don’t know what kind of research goes into seeing if it really is a woman-owned company, but you can’t do everything.”

There’s even a wrinkle that seems to echo a Gertrude Stein-like take on government management: “When is a business really a business?” If a company uses a minority-owned subcontractor exclusively as a pass-through -- to purchase inventory and then hand it over to the parent firm, for example -- then is the subcontractor really the kind of integral part of the business to which these laws apply?

Ultimately, nobody likes to decertify a company. It’s messy work at best, and can allow for the perception -- if not the reality -- that a city or state is trying to maintain a status quo of hiring too few women- and minority-owned businesses -- exactly the problem that these programs were put in place to avoid.

In the wake of past problems, Washington state is tightening up its certification process, in part by having more central control. The steps the state is taking include making sure that it is following the right regulations, collecting the correct evidence, ensuring that one person is not making that decision and putting an appeal process in place, says Chris Liu, the director of the state’s Office of Minority and Women’s Business.

Naturally, governments need a great deal of data to be effective in running a program aimed at helping women and minorities in this way. Unfortunately, this can sometimes be like building a sailboat without a sail. Local governments frequently don’t have enough staff, time, money or computer systems. For example, some simply rely on the “expected” percentage of women- and minority-owned participation in projects, rather than the actual figures. According to a recent audit in Pittsburgh, the city doesn’t actually look at anything beyond predictions of those percentages and doesn’t examine whether the goals are met.

The lack of clear, legal definitions as to how these programs need to be structured is another fly in the ointment. In a seminal 1989 U.S. Supreme Court case, Richmond, Va.’s existing system for allocating bids to women- and minority-owned businesses was shuttered. The court said the city couldn’t demonstrate that its program met “compelling interests” in controlling discrimination. That’s a reasonable standard. Unfortunately, the legal requirements the courts have laid out, which could help Richmond and other cities meet that standard, can often be burdensome and vague.

When it comes to determining discrimination and appropriate remedies, explains Berner of the University of North Carolina, “There are no consistent definitions because there is no consistent, well established system.”

Caroline Cournoyer is GOVERNING's senior web editor.
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