Local Preference Procurement Policies: The Economic Impact on Kalamazoo

Abstract

The focus of this work is to estimate how different local preference policies would have affected Kalamazoo from 1995 to 2000. These estimates, both positive and negative, may be useful for decision-makers as they consider alternative preference policy adoption. We found that under the most generous local government procurement policy, roughly 80 jobs would have been created and the earned income of city residents would have increased by $1,001,643.00 from 1995 to 2000. Clearly the most cost effective policy the city can administer is one in which local firms must match the winning bid, meaning no additional cost to the city besides administrative. The policies of 1% and 2%, which do not require the city to pay a premium, generate modest economic effect. Of the premium policies, 5% and 10%, the 5o/o option is more cost effective. This policy generates 1 job for every additional $1,900 to $2,000 premium spent by the city. In order to generate 1 job the 10% policy requires an additional $3,200 in extra local procurement spending. Here are some of the more substantial positive effects a 5% preference policy would have had on the city of Kalamazoo: 1. The policy would create 50 to 80 new jobs in the county and 35 to 60 new jobs in the city from 1995 to 2000 . 2. Local businesses would have increased the number of contracts awarded by 35 to 42, totaling $3.3 million to $5 million in additional output from 1995 to 2000 . 3. The marginal cost to the city of this policy would have been near an additional $2000 per new job created, and would have generated over $6000 in personal income for every additional $1000 spent locally as a result of the preference policy. Negative effects apparent through the analysis are: 1. Administration costs to the city of conducting a local preference policy may be significant . 2. The dilution of competition, brought on by the preference policy. Prices could increase as if local businesses become less cost-conscience and non-local businesses choose not to submit bids . 3. The 5% preference policies would have taken awards from three non-local WBE/MBE businesses, which could also lead to a loss of non-local business participation in bidding. Preference policies directly increase the amount of money being awarded to local businesses. This influence will always cause a positive effect on local businesses and the local economy, but the increase is not always enough to outweigh the costs.