Across Canada, at the federal, provincial and municipal level, many government contracts are reserved for non-profit corporations and charitable entities (e.g., in the public housing market), in the belief that by dealing with the not-for-profit sector, governments avoid the hidden cost imposed by the “profit” motive to which business is subject.
What this ignores is the fact non-profit business is usually poorly capitalized and therefore represents a higher credit risk to lenders. Thus, the non-profit sector tends to face higher financing costs and they often cannot raise sufficient financing to cover government work unless the government guarantees their debt.
In addition, unpaid directors and volunteer “employees” who are so common in the not-for-profit sector have little incentive to invest the same level of time commitment as workers in private sector enterprise.
Corporate governance in the not-for-profit sector often proceeds with a laxity that would never be tolerated in the business world. As always, there are extreme instances which, although atypical, afford an excellent illustration of the range of problems that can be encountered when dealing with them.
For instance, at one Ontario not-for-profit housing corporation, it was discovered the corporation had not held an annual meeting for well over a decade. The board of directors was less than half the size of a quorum and there was no record of the election or appointment of several of its members. Not surprisingly, there were no current financial statements for the corporation nor had any been produced in recent years.
Such problems are usually not encountered where a large number of genuine enthusiasts stand behind a not-for-profit entity. However, over time the number of such people is likely to decline as the original enthusiasts move on to other priorities or interests. As a result, a not-for-profit enterprise tries to struggle by with a smaller staff than a corresponding private sector business.
Usually, the not-for-profit enterprise has older “hand-me-down” equipment, none of which is in sufficient supply, which further slows the performance of service. To address problems of this nature, it is not uncommon for governments to provide extraordinary support to their not-for-profit supplier that no one would consider for private enterprise.
Support includes the provisions of basic training in proper service delivery, the provision of funding to buy basic capital equipment needed to meet minimum government reporting requirements (e.g., up-to-date computers and accounting software) and to provide transfer payments in amounts tied to the organization’s need, rather than to award a contract to the lowest price bidder in a more or less open competition.
All of these measures cost money, which often pushes the cost of dealing with the not-for-profit sector well beyond the cost of dealing with the private sector.
Along the same lines, very frequently competing government policies result in reduced or no competition contract awards to favour particular sectors of the economy.
Where only a handful of businesses have the ability to meet the government’s need – at least on a regular basis – the public service is often caught between hiring a supplier who does not qualify for such reserved business or not being able to meet government program and service delivery requirements imposed by law.
For instance, according to one widely circulated report, U.S. government agencies made at least $5 billion in mistakes in their recent reports of contracts awarded to small business, with many claiming credit for awards to companies that long ago outgrew the designation or never qualified in the first place.
The Washington Post examined a sampling of the $89 billion in contracts the agencies classified as small-business awards, which help them satisfy a Congressional mandate to award nearly one-quarter of all government work to small firms.
In government, as in all other lines of enterprise, efficient delivery of government services requires efficient service suppliers.
Stephen Bauld is a government procurement expert and can be reached at [email protected]. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
