Since a handful of municipalities in each province control the lion’s share of municipal procurement, one might naturally assume that consortium purchasing would be the rule rather than the exception.
By using this strategy, municipalities might obtain a significant degree of collective purchasing power in at least certain markets (e.g., the purchasing of fire trucks and buses). Yet, the surprising reality is that the strategy is not widely deployed. Indeed, in the United States, some states are subject to a statutory against entering into co-operative purchasing arrangements with other states. A number of possible reasons may be advanced to explain this paradox, including:
- The adoption of a consortium approach may be inconsistent with other more important local municipal policies, such as local preference in purchasing.
- Needs and cash flow do not coincide to a sufficient extent to allow this method of procurement.
- The diseconomies of scale resulting from the use of the consortia approach may outweigh the benefits derived.
Three particular diseconomies immediately come to mind:
- The use of consortia may be impartial, due to timing differences in the demand for the products that municipalities may require.
- Unique requirements (or perceived requirements) which vary at the local level may not be satisfied if the consortia approach is adopted. This hypothesis may explain the relatively low utilization of consortium purchasing where tailor-made products are to be purchased, but can hardly explain the lack of such use where the intent is to purchase products or services of an off-shelf or fungible nature.
- Cost-savings through the use of a consortium may be negated by the cost incurred in organizing the consortium.
Those municipalities which organize such consortia may not believe that they are sufficiently rewarded (in terms of the distribution of the cost-savings among participants) to justify the effort that they put into the process. Complaints of free riding are common.
Local purchasing officers may not feel that it is in their personal best interest to utilize a consortium approach. Delegation to a consortium reduces the importance of the local purchasing officer to his or her municipality. This possibility is essentially an outgrowth of the principal-agent problem, which is pervasive across all levels of collective activity. Where an economic actor (the “principal” — in this case a municipality) must act through another person (the “agent” — here the purchasing officer), there is always a risk that the agent will put his or her own interest ahead of the principal.
Inter-municipality rivalry may discourage the use of a consortium. Presumably, because of the greater resources to which they can devote to the procurement process, and their proportionate share of aggregate expenditure, larger municipalities would tend to donate consortium purchases. Given the local focus of municipal politics, smaller municipalities may well have an incentive to avoid participation in an arrangement that would effectively place control over expenditure in the hands of outsiders. Unfortunately, this hypothesis does not explain why municipalities of roughly the same size do not participate more frequently in consortium arrangements.
Co-operative purchasing arrangements require strong leadership, which can serve as the basis for trust among the participants. Securing that trust involves not only integrity and mutual confidence in the corporate control mechanisms employed to ensure integrity, but also confidence that all participants will remain in the program until its conclusion, and commit adequate resources to the procurement process.
Objectives must be seen to be compatible. Intended outcomes must be clearly defined and agreed to by the participants. Similarly, the operating principles and procedures to be followed must also be agreed to. A lengthy delay in working out a co-operative purchase agreement adds to the transaction costs of procurement, and this may be sufficient to cancel out any perceived benefit of such an approach.
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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