Kelman and the U.S. Procurement Reform

1. Kelman and the U.S. Procurement Reform Yolo Trenchev Anticorruption and Design of Institutions WS 2007/2008

2. Sources • Kelman, S. (2003), “Remaking Federal Procurement”, The John F. Kennedy School of Government Series Visions on Governance in the 21st century, Working Paper No. 3 • Lambsdorff, J. Graf, (2008): The Organizaton of Anticorruption – Getting Incentives Right!, Discussion Paper of the Economics Faculty of Passau University, No. 57-08 • Rose-Ackerman, Susan (1999), Corruption and Government. Causes, Consequences and Reform. Cambridge: Cambridge University Press. Anticorruption and Design of Institutions WS 2007/2008

3. Steven Kelman Steven Kelman is aProfessor of Public Management at Harvard University’s John F. Kennedy School of Government. In 2001, he received the Herbert Roback Memorial Award, the highest achievement award of the National Contract Management Association. From 1993 through 1997, Dr. Kelman served as administrator of the Office of Federal Procurement Policy Anticorruption and Design of Institutions WS 2007/2008

4. New Public Management • Improve the U.S. federal government’s system’s performance through a strategy of making procurement less rulebound • Spendings on contracted products and services: - Department of Defense – 46% - Department of Energy – 94% - National Aeronautics and Space Administration – 78% • Contracting management as a core competence of the organization. (1) Develop a business strategy (2) Select the right suppliers (3) Administer the contract once signed Anticorruption and Design of Institutions WS 2007/2008

5. Rules vs Discretion • Arguments on behalf of rules -> Rules as decision aids - “Rules retainknowledge and allow reuse of solutions to problems.” (March et al 2000: 186) - When a government official has decision-making authority over a person, one can say, “the rule made me do it.” -> Rules respect the demand for equality, so that people can be treated fairly Anomaly - In making job promotion decisions according to a seniority rule, the incompetent are promoted along with the competent. - Establishing voting age at 18; a 60 km/h speed limit etc. Anticorruption and Design of Institutions WS 2007/2008

6. Rules vs Discretion • Arguments for following the rules in presence of anomaly involve the distinction between „first order“ and „second order“ reasons to follow a rule - don’t lie - time pressure - danger of abuse in non-rulebased decisions - rules provide certainty about what to expect =>The negative consequences of decision anomalies in particular situations from rule-following are outweighed by broader positive consequences following the rule produces. This argument depends on two considerations: (l) how frequently following the rule produces a bad result and how serious the bad results are and (2) the strength of the second-order considerations. Anticorruption and Design of Institutions WS 2007/2008

7. Rules vs Discretion Why procurement rules may, unlike the rules discussed not typically work to produce good decisions? (1) the major justification of many rules is to prevent abuse, not to produce generally good decisions; (2) the difficulty in changing rules once adopted creates more problems in many organizational settings than in legal or moral settings; (3) rulebased decision-making more than discretion-based decisionmaking is subject to unintended negative consequences that persist Anticorruption and Design of Institutions WS 2007/2008

8. Rules vs Discretion Examples: To (1) • the rule forbidding the government from accepting proposals from bidders that are late, even by five minutes (FAR l5.208). • rules that prevented government officials from having one-on-one meetings with potential bidders once a procurement process is underway. • the informal rule forbidding use of information about the past performance of suppliers when deciding from whom to buy the next time around To (2) -> as emphasized in the lecture from last time public servants have an incentive to keep inefficient regulations. Kelman’s argumentation: • „mere exposure effect“ - simple repeated exposure to something increases a person’s liking for that something (e.g. Eiffel Tower) • Rules serve as cognitive structures Anticorruption and Design of Institutions WS 2007/2008

9. Rules vs Discretion Examples: To (3) • the government’s refusal to consider a supplier’s past performance in making new contract awards • “price reduction clause” in General Services Administration (GSA) contracts for governmentwide use. • “buy low bid” rule • rules imposing detailed cost reporting requirements on contractors under the Truth in Negotiations Act • the rule establishing “bid protests” Anticorruption and Design of Institutions WS 2007/2008

10. Rules vs Discretion • Red tape -> rules cause decision-making to become more complicated and to create enormous delays ->rules regulate most parts of a person’s job, it is natural to conclude that the job consists only of following the rules -> following the rules may take so much time and effort that it leaves little over or much else -> the rules constitute behavior that is clearly sanctioned, while behaviors the rules don’t mention lack the same clear endorsement • Minimally acceptable behaviors “Defining work responsibilities in a clear-cut manner has the advantage of letting everyone know what is expected of them. But it also lets them know what is not expected of them.” (Morgan l986: 36) Anticorruption and Design of Institutions WS 2007/2008

11. Practical Reforms As of the early l990’s two major statutes established procurement rules: -> The Competition in Contracting Act of l984 -> The Truth in Negotiations Act of l962 -> The system’s regulations were codified in the Federal Acquisition Regulation (FAR) Reinventing government initiative -> Federal Acquisition Streamlining Act (FASA) in l994 -> Federal Acquisition Reform Act in l995 -> Changes in FAR emphasizing on performance, quality and timelines Anticorruption and Design of Institutions WS 2007/2008

12. Practical Reforms • Most important changes in the procurement system in the context of the „re-inventing government“ • Streamlining • „Best value“ • Using commercial items • Partnership between government and industry Anticorruption and Design of Institutions WS 2007/2008

13. Practical Reforms • Streamlining • granting users a government-issued credit card for making small purchases of ordinary-use items (desktop PC’s software, office supplies, or simple services such as vehicle repair for a forest ranger or FBI agent in the field) FASA eliminated the seven clauses and the small business requirement for purchases under $2500, allowing use of the card for such so-called micropurchases • simplified vehicles for buying products and services at dollar amounts far larger than $2500, through expansion of GSA contracts and development of so-called “governmentwide acquisition contracts” (GWAC’s). • Elimination of price reduction clause Anticorruption and Design of Institutions WS 2007/2008

14. Practical Reforms • „best value“ instead of low bid source selection • greater room for judgement by government decision-makers • Past performance evaluation by contacting customers on similar contracts a bidder had performed or by using „report cards“ • Replacement of all or part of a bidder‘s traditional proposal with an „oral presentation“ • Elimination of the milspec food and its replacement by an entirely new way of buying food for the troops, whereby the government contracted with commercial food distributors who offered an electronic catalogue of commercial food - incentive contracting (e.g. share in savings, award term contracts) Anticorruption and Design of Institutions WS 2007/2008

15. Practical Reforms • Commercial items • directive creating a presumption against using milspecs and milstandards to buy products • provisions, adopted in FASA, dramatically to scale back the applicability of rules requiring submission of cost data when commercial items were being purchased Examples: Joined Direct Attack Munition (JDAM) and the new generation of cruise missiles (JSAAM) -> use of far cheaper ordinary commercial technology, reducing the costs by one half Anticorruption and Design of Institutions WS 2007/2008

16. Practical Reforms • Partnership between government and industry • Elimination of the rule prohibiting one-on-one meetings between the government and potential bidders during early stages of the procurement process, provided that a contracting official was present at the meeting (FAR l5.20l). • Discourage bid protests Anticorruption and Design of Institutions WS 2007/2008

17. Conclusion • “You cannot give an official power to do right without at the same time giving him power to do wrong.” Theodore Roosevelt • Kelman argues that procurement reforms in the U.S. are needed both to encourage discretion and improve incentives for good performance • Focusing on results is an excellent incentive against corruption, because making decisions based on corruption almost always means poorer performance (somebody is doing work based on something other than merit). The fight against corruption requires more results-orientation, not less. • Work in progress Contracting management as the new challenge for Obama’s Administration Anticorruption and Design of Institutions WS 2007/2008

18. Thank You Anticorruption and Design of Institutions WS 2007/2008