Put Your Spending Where Your Goals Are
Local procurement policies take money already being spent and direct it to local businesses to get more economic development benefit for the buck.
By Miriam Axel-Lute Posted on October 2, 2014
Small, locally owned businesses are the bedrock of thriving economies. They employ millions of people, they invest in their neighborhoods and cities, and they provide wealth-building opportunities for entrepreneurs. A dollar spent at a locally owned business stays in the local economy longer than a dollar spent with a company whose roots lie elsewhere, creating a greater ripple effect.
There are many programs out there designed to support these businesses directly with loans and technical assistance. But one of the most powerful ways to strengthen them is to increase the demand for their goods and services.
Many anchor institutions, such as universities, and governments are already spending billions of dollars a year on goods and services. By redirecting some of that money to local businesses through local-procurement, or buy-local, policies and programs, they strengthen their local economy and tax base without handing out subsidies or tax breaks.
But a successful local-procurement policy requires more than good intentions. It requires organization-wide commitment, and an understanding of and careful selection from a wide menu of tools and strategies. There is no one-size-fits-all approach to a buy-local program, but there are three broad categories of strategies that form the foundation of effective local procurement.
For more strategies and more examples of these strategies in use, see the Policylink Report: Buy Newark
h6.CATEGORY 1: Institute Formal Local Preferences
Formal local preferences officially establish buying local as a priority. A formal local preference is an essential ingredient of a buy-local effort, but it is not the whole recipe. It must be combined with other strategies that help local businesses overcome longstanding disadvantages. Here are some examples of formal local preferences.
h6. Give automatic bid and RFP preferences to local businesses
Many local governments in the United States have instituted automatic percentage preferences for local businesses in their bids and/or request for proposals. These policies are straightforward, explicit commitments to the local business community: We are willing to pay more to support you.
How it works: In standard bidding, the qualified bidder with the lowest bid wins. For an RFP, points are assigned for meeting certain criteria (including cost). To give a competitive advantage to local suppliers, automatic bid and RFP preferences change the rules for contracts below a certain size, often $100,000.
Commonly, the purchaser either reduces the total of the bid from a local supplier by a fixed percentage, typically 1–10 percent, just for the purposes of awarding the contract, gives the lowest local bidder a chance to match the lowest nonlocal bidder, or adds RFP points for being local.
Vendors may have to be certified as local beforehand to receive the preference, or may have to qualify for the preference with each bid or proposal. Local-supplier preferences within bids and RFPs are often combined with preferences for small, minority-owned, or women-owned firms.
Who uses it: Primarily local governments and other public agencies such as school districts. This is partly because governments benefit more immediately and directly from increased local economic activity through increased taxes, so they can better justify the potentially higher costs of some contracts.
Advantages: Formal preferences like these are automatic, so once in place they kick in routinely. They are consistent and support all local businesses, mitigating the “who-you-know” factor.
Disadvantages: Giving a fixed advantage to local businesses does not account for differences in how much local businesses return to the local economy or how much a particular business needs the help, so this may be an inefficient use of subsidy. Since these preferences contain no targets or changes to the system, by themselves they are unlikely to dramatically increase the participation of local vendors.
Automatic preferences are typically not applied to contracts over certain thresholds, and some practitioners believe that even smaller contracts will face legal challenges eventually. Many purchasing officials and their membership organizations oppose preferences on the theory that they discourage competition. Preferences may also reinforce the idea that local businesses are, by definition, not competitive.
Example: Washington, D.C., has for many years given a detailed set of advantages to local and minority-owned businesses. Businesses may get certified in any of six preference categories: Local Business Enterprise, Small Business Enterprise (local or metropolitan area), Disadvantaged Business Enterprise (doesn’t have to be local), Development Enterprise Zone, Resident Owned Business, and Longtime Resident Business. Collectively these are called “Certified Business Enterprises” or CBEs. Each category adds a maximum of 12 points to an RFP or reduces a bid by up to 12 percent of the total bid, making the cost more competitive with higher bids.
According to a 2002 evaluation, every dollar spent on a CBE preference contract generated an additional 55 cents of spending on goods and services in the District. Every two jobs created directly by a contract generated one additional indirect job. From October 1, 1999, to September 30, 2001, these contracts generated $66.5 million in direct and indirect tax revenues, including $19.4 million for the District government.
h6. Require that large suppliers work with small local businesses
As part of contract negotiations with large national suppliers, some purchasing departments require them to partner with a local business in some fashion. This is a good way to get around a shortage of local vendors with sufficient capacity.
How it works: Custom agreements are written into the contract. National brands may agree to work through a local dealer, share their wholesale discounts with a local partner, or carry out some other collaborative effort. Large contractors, whether local or not, may agree to meet certain targets for using local subcontractors.
Who uses it: This requires a fair amount of capacity to negotiate individualized contracts, so mostly private institutions and corporations, rather than governments, use this strategy.
Advantages: This approach turns what might be an obstacle to buying local into an opportunity by leveraging the fact that much of an institution’s spending is going to stay with its established larger contractors, at least for the near future. Combining the price and experience of larger contractors with the creativity and service of smaller, more local businesses can even end up saving money for the institution.
The local businesses involved not only get the immediate benefits from this agreement, but they can also use their new relationships or advantages such as volume pricing to land other big contracts and increase their capacity. This further boosts the local economy without higher costs to the buy-local institution.
Disadvantages: Can be time consuming to negotiate and monitor; requires retaining large nonlocal contracts.
Example: The University of Pennsylvania wanted to work with a local office supply store, Telrose, which did not have the capacity or pricing to handle the contract on its own. The university negotiated a three-way deal between the nationwide chain Office Depot and Telrose. In exchange for cost reductions, Penn offered an unusually long contract, benefiting both the local and national suppliers.
At first, Telrose acted more or less like a subcontractor, handling primarily delivery and service. But over time, the company moved up to the primary contractor position, handling ordering and billing, while Office Depot supplied materials only. The university ended up with a lower cost contract than it would have negotiated with the national supplier, a face-to-face relationship with a nearby vendor, and a $5 million contract with a local minority-owned company.
h6. Calculate local multipliers for bidders
The most targeted way to keep your procurement money circulating locally is to choose vendors or suppliers based on their local multiplier. A multiplier is essentially the ripple effect of a purchase—how many additional transactions that one purchase causes within the local economy. The New Economics Foundation, based in the United Kingdom, uses the image of a leaky bucket to describe the multiplier effect. The water pouring into the bucket represents cash from philanthropic institutions, spending from non-residents, commercial revenue, and federal dollars—money coming into a community. The water leaking out represents cash that leaves the community, perhaps to remote corporate headquarters or non-local contractors and vendors. A community’s bucket (economy) will be easier to fill if some of those holes are patched by picking suppliers with high local multipliers.
How it works: A local multiplier can be calculated on a per supplier basis or a per contract basis. On a supplier basis, this calculation involves gathering information about how many of a business’s owners, employees, subcontractors, and suppliers are local. A representative group of the owners, employees, and suppliers who are local would also be interviewed about their own spending practices.
On a contract basis, the purchaser asks similar questions: How and where would a potential vendor spend the money from that contract? Michael Shuman, author of Going Local and a founding board member of the Business Alliance for Local Living Economies, suggests asking for the percentage of the contract that will be spent locally, calculating the multiplier and then the tax revenues, and adjusting the bid by that amount; this gives an advantage to those bids with a greater local multiplier.
Who uses it: This approach has been used primarily in the United Kingdom, but any purchaser willing to do the research can use this tool. A tool called the LM3 (Local Multiplier 3), devised by the New Economics Foundation, can provide guidance.
Advantages: This is the only strategy that gives a concrete, relative measure of a business’s actual impact on the local economy. It also provides ways to compare locally owned businesses with each other and with non-local businesses. Finally, it is less likely to encounter legal challenges because theoretically, any business can reinvest money locally, though it is almost always the locally owned ones that actually do so.
Disadvantages: Calculating even an approximate local multiplier requires a lot of data, much of it sensitive and proprietary. This is time consuming to compile. Also, bidders may be tempted to misrepresent spending patterns, should they become a factor in assigning contracts. Purchasers have to fact-check and monitor compliance.
Examples: City officials in North Norfolk in the UK, used the LM3 tool to calculate the local impact for two contracts with similar labor and supply demands: a parking lot built by a non-local contractor and a sea wall built by a local contractor. Officials interviewed contractors in person at their offices. Of the total contract value, the local contractor spent 34 percent on local staff, 42 percent on local businesses, and 4 percent on investment purchased locally. The nonlocal contractor spent nothing on local staff and 17 percent on local businesses. City officials then surveyed the local contractor’s local staff and the two local subcontractors to determine their local reinvestment rates.
The results were eye opening. Although the nonlocal parking lot contract was significantly larger than the local sea wall contract—£120,000 compared with £72,000—the parking lot generated less money for the local economy: £147,168, compared with the sea wall’s £154,587. For every £1 spent, the sea wall contractor generated £2.15 in the local economy, while the parking lot contractor generated only £1.23. A good example of why local multipliers can be more effective than policies based solely on location comes from another municipal government in the United Kingdom, Knowsley, which found, to its surprise, that a nominally local company had a lower multiplier rating than a competing non-local company. It turned out the “local” company was a regional headquarters for a national company with national suppliers, while the “non-local” company was located just outside of Knowsley and employed many local residents.
Miriam Axel-Lute is editor of Shelterforce and associate director of the National Housing Institute. Her email is miriam at nhi dot org.