The city of Columbia will be making needed water and sewer upgrades over the next five years to the tune of about $500 million. With this much money to be spent, City Council is wrestling with an important issue: how to make government purchases with the often conflicting goals of getting the best price for the taxpayers and spending the public money locally to help the economy.
The S.C. Small Business Chamber of Commerce first started addressing this problem in 2003. For years South Carolina’s procurement code had operated with an in-state vendor preference in an effort to help keep more tax dollars in the state. Locally owned businesses had their bids reduced by 7 percent in the competitive procurement process for comparison purposes only.
However, a report from the Budget and Control Board indicated that the program wasn’t working: 42 percent of state procurement dollars were going out of state for goods and services. That was approximately $1.3 billion of our tax dollars leaving South Carolina and not helping our small businesses and economy.
We believed that the state could do better, but we quickly discovered four impediments to our efforts:
1. Government agencies and elected officials wanted the lowest price when awarding a contract — even if they believed that buying in-state would help our economy.
2. Procurement personnel wanted to keep the selection process as objective as possible, with strict, non-arbitrary rules.
3. Lawmakers worried that other states would retaliate and adopt preferential treatment for their businesses and thus lock S.C. companies out of those markets.
4. Court rulings suggested that we could run into constitutional problems if we weren’t careful how we adjusted the in-state preference.
Our breakthrough came in 2006, when we realized that the goal should not necessarily be to award more contracts to in-state businesses but to have more procurement dollars stay in the state when purchasing goods, labor and services. Working with the Budget and Control Board, we devised a plan in which out-of-state prime contractors would be rewarded for including in their proposals substantial subcontracts with in-state businesses.
In-state vendors would still be given the 7 percent in-state preference. Out-of-state vendors could earn some of this preference by guaranteeing a significant percentage of their contract price would go to subcontracting with S.C. businesses for goods, labor or services. A 20 percent guarantee would earn them a 2 percent vendor preference; a 40 percent guarantee would earn them a 4 percent vender preference.
Procurement personnel found this proposal easy to understand and not arbitrary. It was constitutional because any business in the world could use the new rules to successfully bid on a state contract. Other states adopting the same rules would not discriminate against S.C. businesses.
And since all out-of-state contractors would include S.C. subcontractors in their proposals in order to be more competitive, contract awards should see little variation in cost compared to the current procurement system. Plus, any slight increased cost to the government would be offset by a stronger economy and additional tax revenue generated through more income and sales taxes resulting from the new subcontracting work.
This state procurement reform was enacted in 2009. It can serve as a model not only for Columbia but for all our counties and municipalities that want to grow their local economies by helping their small businesses get a bigger piece of government’s procurement dollar pie.
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