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Procurement Perspectives: Single sourcing can create municipal procurement problems

Stephen Bauld
Procurement Perspectives: Single sourcing can create municipal procurement problems

The archetype of non-competitive procurement is single sourcing.

Where this method is employed, a municipality purchases on the basis of an offer made by a single source of supply with no effort to determine whether there are competitors who might be prepared to supply the same goods or services at a cheaper price.

For obvious reasons, this is a controversial method of procurement. It is most frequently invoked only where there is a perceived emergency. When you take a close look at the reasons for emergency purchases, you will often find that they could have been avoided by better planning on the part of the using department.

For most types of products, the goods offered by one manufacturer can be differentiated in some way from goods manufactured by another. Absent government regulations, markets tend naturally towards product differentiation, because, as the economist E.H. Chamberlain observed as long ago as 1933, by so doing a supplier is able to escape at least partly from the price constraints of a competitive marketplace and exact at least some form of monopoly rent.

Indeed, the benefits to a supplier arising from product differentiation are so great that suppliers even try to engage in such differentiation when selling a product, the essentials of which are all government regulated.

In a true tender, a customer selects a supplier almost entirely on the basis of price. However, for many kinds of supply, the goods and services offered by one supplier are neither perfect nor near-perfect substitutes. Instead, the goods and services of each supplier are of a unique grade or quality.

To deal with goods and services of this nature, an alternative form of competitive procurement, the RFP, should be used.

When RFPs are properly structured, a prospective customer declares it requires goods or services to meet a particular kind of need. The suppliers then submit proposals as to how their goods and services can address that need. Each proposal is then scored under some previously disclosed system of evaluation and the winning proposal is the one that best addresses the need.

Most municipalities have identified the particular risks that are associated with single sourcing. However, the sophistication of the responses taken varies widely.

Some limit the controls to a reporting requirement to council. Since this measure effectively applies on an after-the-fact basis, its effectiveness may be reasonably questioned.

Further controls are imposed in the case of higher value contracts.

While there is merit in some cases of single and sole sourcing, the system fails to recognize that this process requires an effective negotiation technique. It is not appropriate to treat contractual dealings with what is in effect a monopoly supplier as if they were an analogue to the award of a contract through a competitive process.

In a single source situation where a negotiation approach is adopted, the contract should be concluded following a closed process of direct negotiation with one or more potential suppliers. At least some effort should be made to drive down price, or at least to confirm that more favourable pricing is not advisable.

Given the prevailing concerns for transparency in the award of public contracts, such a method is suitable for a municipality in only a relatively narrow band of cases.

A key requirement of good corporate governance is the importance of a process of critical review into decision-making.

To the extent that a lone section or division manager has the authority to override the normal requirement for an open competitive process, there is little opportunity for a critical review of that decision.

It poses an interesting question as to just in what circumstances a municipality would allow the use of single source purchases.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com.

Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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