Categories  Merging & Acquisition US DoD

The distinction between “American” and “foreign” global companies is becoming irrelevant.

Broadening competition for US government contracts would save money

In most debates around the country’s looming fiscal crisis, “shared sacrifice” is the prevailing theme. But as policymakers consider the options on the table, not every potential budget cut must be painful or risk damaging the recovery. In fact, policymakers are currently overlooking an idea that could painlessly save U.S. taxpayers billions of dollars a year while at the same time promote job opportunities for Americans.

The simple idea? Broaden competition for U.S. defense and government contracting. In particular, drastically reduce the number of “sole sourced” contracts awarded without soliciting bids from multiple suppliers.

Not only does sole-sourcing encourage the federal government to over-pay, it tends to shut out global companies who would otherwise invest in and create new jobs in America. Increasingly, robust competition in the defense market comes from global companies. But because these companies often run into a strong political bias towards awarding contracts to “American” companies, companies headquartered abroad are discouraged from setting up shop and creating jobs in this country.

Some may argue that a policy which favors U.S.-headquartered companies is worth a higher price because of the benefits to American jobs. But, in reality, an “American” bias in awarding government, particularly defense, contracts can have a very un-American impact on both U.S. jobs and the federal deficit — the two concerns that are currently hamstringing the economy.

A case in point is the recent, much-publicized competition between The Boeing Company and EADS North America over a contract to replace the Air Force’s aging aerial refueling tanker planes.

While this competition was not about “buy American” legal requirements, there was clearly enormous public pressure to favor the “American” choice (in this case, Chicago-based Boeing). Some politicians even expressed serious concerns that EADS North America — a U.S. subsidiary with European roots — was allowed to bid at all.

The competition, it turned out, made for a better deal for U.S. taxpayers. Although Boeing ultimately won the contract, the final price was $32 billion — a full $16 billion less than Boeing’s original bid in 2002 when it was the only supplier being considered. Had a bid from EADS been excluded altogether, Uncle Sam would likely now be paying some $48 billion for exactly the same 179 planes that Boeing says it can now produce for two-thirds the original price.

This $16 billion in savings is the net benefit to taxpayers from a single defense contract. Imagine the effect over tens of billions of dollars in government contracts per year. While it‘s unrealistic to expect that every competition could result in bids one-third lower than they otherwise would be, this is more than scrounging pennies from the couch cushions.

In the last fiscal year, for example, more than half of the $366 billion spent on defense contracts was monopolistically awarded to companies in either “sole-source” or one-bid deals. Even a modest 10 percent savings on this amount would have garnered $36 billion — just under the amount of cuts that Congress recently agreed to (after weeks of debate) to avoid a government shutdown.

Moreover, EADS North America is hardly a “foreign” company despite its European roots. Had they won their competition with Boeing, the resulting contract would have created or supported more than 48,000 American jobs and a massive economic revitalization for America‘s Gulf Coast.
Its tankers would have been built in Alabama, with sourcing from hundreds of U.S. suppliers in more than 40 states. Its tankers not only would have been built by American workers, it would have resulted in the construction of only the second large aircraft manufacturing facility on U.S. soil in a part of the country very much in need of new industry.

Across the country, U.S. subsidiaries of global companies employ 5.6 million Americans, with an annual payroll of $408.5 billion, according to the latest government data. They also pay 17 percent of total corporate taxes, spent $187.5 billion on plant construction and new equipment, and invested $40.5 billion on R&D in the United States. And American workers at these companies produced a full 18 percent of total U.S. exports annually.

The distinction between “American” and “foreign” global companies is becoming irrelevant.

U.S. subsidiaries of global companies are eager to do their share in addressing the country‘s economic and fiscal challenges. Eliminating arbitrary barriers to their ability to compete would be an effective way to help make this happen.

Unlike other budget-cutting proposals that risk dampening the recovery through their severity, allowing full competition for government contracts is a potential win-win. Rather than “shared sacrifice” for taxpayers and American workers, the result could be shared gains.

The Hill‘s Congress Blog By Nancy McLernon – Nancy McLernon is president & CEO of the Organization for International Investment, an association representing U.S. subsidiaries of global companies.

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