Wednesday, November 7, 2007

Why Big Government Encourages Corruption (cont'd)

I already posted yesterday afternoon about how big government encourages corruption, especially in our form of government, where politicians and government officials have a lot of ability to give benefits to their biggest supporters, as well as a large incentive to do so (ie, the need to get re-elected in order to do what they believe should be done). I discussed how this conflict results in a very real corruption of ideology such that the government official in many instances actually believes they are doing the right thing within the scope of their ideology. I suggested that one solution to issues of corruption in our system of government is primarily to reduce the size of government (I should point out that other systems of government may be less susceptible to corruption, which is another topic entirely, though their examples may have relevance to making improvements to our own systemic problems).

Of course, most people are unwilling to give up big government, and so they will argue that the problem isn't with the size of government but is instead the result of a lack of appropriate safeguards against corruption. My goal in this series of posts is to show how some particularly prevalent safeguards either create more corruption, legitimize the truly nefarious corruption, or simply have costs that far outweigh the problem. The primary reason for this is that these reforms treat symptoms rather than the disease, and have the effect of driving mitigating/countervailing forces from the market. This all isn't to say that good reforms don't exist short of reducing the size of government; just that most reforms do more harm than good (for instance, I have no problem with most disclosure requirements as a matter of effectiveness, though they have their own set of other concerns).

I. Bidding Requirements

The first type of reform that I will address is that of bidding requirements. For the most part, these requirements evolved as a response to bribery of both elected and unelected officials. Bribery is obviously a major and legitimate concern. It is particularly concerning because it provides a personal financial incentive to do a political favor that has nothing to do with the concern for re-election or currying favor with a public employee's superiors. So the need for reform on issues of public contracts and public expenditures was pretty clear.

The problem is that the institution of bidding requirements has at least one of several effects, depending on the relevant requirement: 1. Monopolization of government-obtained services (and in the case of most privatization, government-provided services as well); 2. Has, somewhat counterintuitively, limited competition to a relatively small slice of potential vendors; 3. Has created an illusion of a sanitized process when in fact the process is just as corrupt as it always was, or 4. Have simply added to the government's cost of doing business while having little or no effect on the actual selection of vendors.

In my experience, most bidding requirements can be summed up as the government entity being required to select one of the following methods of awarding contracts, depending on the amount and type of contract:

1. Informal oral or written quote from multiple vendors/contractors
2. Formal "catalog" bid, wherein either one vendor's catalog is selected for nearly everything or, just as commonly, any compliant bidder is awarded the "contract", permitting local officials to order from any awarded vendor at will.
3. Formal bid for specific items or services- item is awarded to lowest bidder on each item or service.
4. "Sole Source"- item or service is awarded automatically to one vendor without any competitive bid on the grounds that the item or service can only be provided by one vendor.

Trouble is, each of these "solutions" actually has its own problems that encourage, rather than discourage corruption. Worse, these "solutions" typically result in higher transaction costs for smaller contractors/vendors, making it very difficult for them to get involved in the process. (To solve this problem, the government tries to implement set-asides for small or minority businesses in most contracts- but these set-asides usually have their own set of problems, which I won't address here).

So, here are the problems:
1. Informal verbal or written quotes- in some ways, this method seems fairly straightforward, and yet it still has major problems. First, this option is usually limited to relatively low-value contracts, meaning that its benefits are limited to the types of transactions that are relatively unlikely to be the subject of bribery. Second, the relevant government official gets to choose which vendors he contacts for pricing. Once the required number of vendors have been contacted, the government official is in the clear. As a result, a corrupt official could just contact vendors he knows beforehand will be unable to compete with the bribing contractor. And this says nothing of the rather small benefit obtained by using this process as compared with the not insignificant expense of obtaining informal quotes, keeping in mind that this process is used only for smaller contracts to begin with.

2. Formal "catalog" bids- this option is almost certainly the least troubling of the methods. In this bidding system, the government advertises for bids; any vendor responding to the advertisement and complying with the terms of the bid gets awarded the bid. One problem with this method, though, is that it succeeds only in limiting the potential pool of vendors to those vendors who are fortunate enough to be aware of the advertisement for bids. Another problem is that the vendors most likely to respond are often the very vendors who would be most able and willing to engage in the corrupt activity to begin with, since those vendors will be the ones most likely to be familiar with the inner workings of the government entity. As a result, once awarded the bid, the corrupt vendors are able to engage in malfeasance almost with impunity, since their actions are less likely to raise red flags once they have the government's tacit approval to deal with whomever will deal with them within the entity. To the extent this method of government bidding represents an improvement, though, it's applicability is extremely limited to vendors providing a wide array of goods. Moreover, a corrupt official can easily influence the process by choosing advertising methods unlikely to reach potential competitors to the preferred, bribing vendor- since the process will be followed, there will be little cause for suspicion of the corrupt official, and the corrupt parties will be able to get away with things.

3. Formal bids for specific items or services- this is the method that the public traditionally associates with government bidding. The concept is very simple- whoever bids the lowest price for the relevant good or service gets the contract for that good or service. It sounds great on paper, of course, but as usual there are major trade-offs involved, and there are plenty of loopholes and ways around the lowest-bidder concept.

First off, when it comes to goods, this is an extremely time-consuming and expensive process; there is almost no possible way that the amount saved by soliciting competitive bids will in many cases be greater than the administrative costs of issuing, reviewing, and awarding the bid. The process of issuing a bid alone requires the purchasing official (who often has little or no understanding of the technical value of the relevant product or service) to obtain information from the relevant government agency as to which products it wishes to procure; in some cases, this may involve questioning dozens of different officials within an agency.

The official then must draft a description for each of usually dozens of products- often, this involves naming a specific product line or even a specific vendor with no appreciation for whether the vendor is the actual manufacturer of the product. When a vendor is named as a manufacturer, that vendor may often have a leg-up on the competition because a corrupt official can simply claim that they didn't think competitors' products met the specifications of the bid- even though the competitor's product is identical in every respect including manufacturer. Moreover, product descriptions are often vague, resulting in a situation where only one bidder (the intended awardee) has sufficient information to actually bid on the product. But even in the ordinary circumstance where a bid for goods is done completely ethically, the government official still has to go through the additional steps of reviewing each line of each bid, comparing each such line to the equivalent line on all other bids; additionally, the government official must then research whether the lowest bid on a given line item actually complies with the bid's specifications. Once this has been done, the official may need to factor in any discounts that bidders have offered should the bidder be awarded all the items they have bid. And all this says nothing of the fact that the official must first review the formalities of each bid to make sure those formalities have been met.

Finally, once an award has been decided, the official must prepare a notification for each bidder indicating what, if any, lines they have been awarded. But this doesn't end the process, necessarily- in some cases, a disgruntled vendor may then choose to protest the bid award, requiring a full-on legal proceeding of some sort. In more common cases, a disgruntled vendor may just seek additional information as to why they were not awarded a line item or as to why someone else was. Point is, this is a much more convoluted process than the average person may perceive, and yet it still leaves plenty of areas for corrupt activity. Indeed, this corrupt activity may be worse than it otherwise would be in some cases, since the size of the contracts awarded are often much larger than they would be if the contracts were awarded on an as-needed basis in which individual officials could easily switch between vendors from one project to the next rather than having to operate under a blanket contract award; moreover, contracts like this (when they are for goods, at least) are usually coordinated by a separate government entity on behalf of multiple other government entities, meaning that the awarded contractor gets monopoly power to deal with multiple agencies, rather than having to negotiate with each agency individually.

As for service contracts- and particularly construction service contracts- the low-bidder formula creates its own set of problem. Specifically, it assumes that any contractor can do just as good a job as any other contractor, so quality of work becomes irrelevant, and the winning bidder is probably nearly as likely to be the winner because of a willingness to cut corners as he is to be the winner because he's just more talented and efficient than the other bidders.

Also- and here is where I probably differ from many conservatives and libertarians- it is somewhat silly to assume that a private company awarded a contract to provide government services, and which is monitored by a bureacracy will be more cost-effective than if the government bureacracy were to provide the service on its own. In other words, competitive bidding out of privatization contracts often creates more, not less, bureacracy. Also worth remembering is that the awarded vendor's customer isn't the taxpayer- it's the government official or agency who awarded the contract, and the interests between the taxpayer and the government official are not necessarily mutual. This isn't to say I'm opposed to privatization per se- just that I'm opposed to privatization where the government is paying the private company to provide the service, rather than the private company paying the government for the privilege of providing the service.

4. Sole Source- ahh, now we come to the worst of the group. The concept behind sole source bidding is simple and common sense- why waste valuable resources on bidding a contract out competitively if there is only one vendor who can provide it? Trouble is that it turns out it's pretty easy for a government official to claim a product or- especially - a service can only be provided by one contractor/vendor. Indeed, "sole-sourcing" can be met in many cases merely by providing a letter stating that no one else provides the vendor's services in exactly the way the vendor does. Since any company wishing to succeed must distinguish itself from its competitors to begin with, you can imagine that it's not very difficult to meet the "sole source" test. It's pretty easy to imagine a situation where a company makes a payoff to a corrupt official so that the official signs off that the company's services qualify as "sole source." Indeed, the existence of the sole source requirement represents a tremendously easy avenue around any restrictions placed by the first three types of government bidding. But the sole source exception pretty much needs to exist. As I think I showed in the previous points, a "sole source" exception effectively exists even if competitive bidding is required, since the government will always get to define the parameters of the item or service sought in a way that either limits or maximizes competition.

The end result of all these bidding requirements is that they only create an appearance that contract awards are immune from corrupting influences. In fact, the bidding requirements may provide additional avenues for corrupting influences; worse, the very existence of the requirements results in less scrutiny and oversight, as long as the requirements were ostensibly followed.