Finlayson Op-Ed: Toward higher costs and less competition in public-sector procurement (Vancouver Sun)

July 26, 2018

The provincial government is establishing a new framework for developing public-sector infrastructure projects. Last week, Premier John Horgan and Transportation and Infrastructure Minister Claire Trevena released an umbrella “Community Benefits Agreement” (CBA), intended to achieve several objectives:

  • Increase the use of apprentices on major public-sector infrastructure projects;
  • Encourage hiring and training of Indigenous persons and women in construction and related allied trades;
  • Address existing and future “skills gaps”;
  • Aim for “priority hiring” of individuals living in proximity to projects being built or developed with government funding;
  • Foster “wage alignment” with prevailing industry rates for all employees.

A key vehicle for implementing the policy is a new Crown Corporation, the oddly named B.C. Benefits Infrastructure Inc. (BCIB), which will act as the employer entity under the CBA. Its mandate is “to provide the labour workforce for the construction of select public-sector infrastructure, delivered in accordance with the terms and conditions of the Community Benefits Agreement.” Apparently, BCIB will operate as a kind of “hiring hall” for workers involved in provincially-funded projects undertaken through the CBA.

What are we to make of the government’s announcement?

There is value in promoting apprenticeship training, in expanding apprenticeship opportunities for Indigenous persons and women, and in tackling any “skills gaps” that exist in the construction and other sectors. Priority hiring of workers who live in proximity to publicly-funded projects may also have benefits -- if the individuals hired possess the appropriate qualifications and skills.

But other features of the government’s announcement are problematic – notably, the decision to force employers bidding on projects to recruit their workforce through a central agency, the BCIB, which will be jointly run by the government and the Building Trades unions. In future, people seeking to work on government-funded projects in B.C. will be required to join one of these unions. Thus, non-union contractors and workers, and contractors with unionized employees who aren’t part of the Building Trades, will be put at a disadvantage in competing for public sector procurement projects worth tens of billions of dollars.

There are at least two big problems with the government’s plan.

First, it is manifestly unfair to construction companies and workers who aren’t affiliated with or linked to the Building Trades unions – amounting to more than 80 per cent of the entire sector. I can think of no credible public policy justification for what the government is intending to do here.

Second, by sharply curtailing the degree of competition in public-sector contracting, the new CBA regime is almost guaranteed drive up costs for taxpayers (and infrastructure users) over time. Consider that under the government’s proposed regime, many of British Columbia’s most respected and best managed construction companies effectively will be frozen out of the market for major government-funded projects.

Parenthetically, if the province’s new policy is also intended to ensure that construction workers are paid well, there is no need for the government to worry: the industry is busy, the unemployment rate among construction occupations is near a record low, and wage levels are rising.

Academic research confirms that “restrictive tendering” by the public sector generally results in higher procurement costs. A 2017 study by University of Toronto economist Morley Gunderson and two colleagues examined public sector contracting by local governments in Ontario. The authors argue that “restrictive tendering to a select group of firms on the basis of their workers’ [union] affiliations leads to higher costs for municipalities than if they tendered their projects to all qualified bidders, with the strong possibility that municipalities will pay…substantially more.” Unfortunately, the B.C. government’s new policy for public sector construction is likely to inflate taxpayer costs by hundreds of millions of dollars over the next few years.

This result isn’t surprising. A fundamental insight of economics is that consumers benefit from competition and choice. That applies when people shop for a new vehicle, buy food or clothing, or book a vacation. Similar logic applies in the case of government procurement and public-sector project development. Indeed, competition and choice are always and everywhere the friends of consumers and taxpayers alike. Government policies that inhibit market entry, discriminate against certain suppliers for reasons unrelated to performance, and distort or restrict competition, are not. In the final analysis, it’s that simple.

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