Wednesday, April 10, 2013

Political Manifestos And Government Waste

Here’s a thought:

Let’s imagine, just for the sake of argument, that you’re a voter in an election campaign – just hypothetically speaking of course.

One party issues a manifesto. It has a lot of bright ideas which you like, but there are some parts which aren’t very appealing to you, and you don’t know how much of the manifesto proposals are going to be implemented. You’d rather not vote for a party that puts forward policies which you don’t agree with.

Then the next party also issues its manifesto, which also has many ideas you like and are in fact similar to the first party’s. Unfortunately, there are a few proposals which you don’t like very much either, but these are quite different from the first. Nor are you sure that all these promises will be fulfilled.

So here’s the dilemma – assuming you have to vote, which party would you vote for? Each has proposals that you support, yet each also has proposals you don’t like. Both are broadly similar, yet the differences between the two are in areas that you care about. Neither can you judge which of the two parties, if elected, will actually come through with their promises.

All purely hypothetically speaking of course.

My little parable here isn’t actually about politics, the general election, or copycat manifestos. But the similarities to the situation I was actually thinking of struck me last night:

  1. Instead of political parties, substitute contractors;
  2. Instead of election manifestos, substitute tender submissions;
  3. Instead of policy proposals, substitute outrageously expensive tender items.

Procurement based on tendering procedures are designed to minimise the cost to the tender owner, and that’s true whether you’re speaking of open or closed tenders (negotiated deals are something else entirely).

Vendors and contractors know this – as much as people might say that lowest bids won’t necessarily win, cost is typically a deciding factor. So the overall price of a bid is as competitive as a vendor can make it, and they usually have a ballpark figure that they want to aim at where they think they have a good chance to win, yet provide a reasonable profit buffer.

And the reason this approach is taken is because it’s the level and scale of competition, not the cost of the goods or services to be supplied, that determines a bid price – the buyer is effectively a monopsonist, while the sellers are more or less in competition with each other.

This is essentially looking at the balance of market power between the seller and the buyers. The more buyers there are, the less market power they have relative to the buyer, and prices will be lower. The less competition there is, the more the market power of the sellers relative to the buyer. In a negotiated, one-on-one deal, buyer and seller have equal market power and the bid price would thus be higher than it would be if there was any competition at all.

Under an open or closed tender,  both buyer and seller will care mostly about the overall bid price and not so much the cost of items that go into it, because in this winner-take-all competition, its the overall bid price that will determine the award. If cost is the main criteria then the lowest bid will win, irrespective of the costing of individual components.

Sellers would follow not a cost-plus-profit-margin bid pricing model, but a revenue-less-cost bid pricing model. Under these conditions, sellers in fact have an incentive to over-quote on minor items, to bring the apparent cost price up to their preferred bid price and head off attempts to bring the bid price down further.

And that’s how you get RM15k marine binoculars, and US$1000 toilet seats.

A closed restricted tender, through providing greater competition, should have a lower winning bid price than a directly negotiated deal. By the same token, an open tender which presumably would attract more competition, would in turn be superior to a closed tender.

What none of these bidding mechanisms will do however, is totally avoid what looks like abuses to the system. That’s because these aren’t really abuses or mechanisms for kickbacks, just a natural consequence of the structure of the tendering process. Under a lowest-bid-wins approach, the winning bid would only need to undercut the overall bids from the competition, but not necessarily be competitive on individual items in the bid.

Obviously, this kind of analysis applies more to complex, multi-product/service contracts, and far less so with simple, single good tenders. But complex projects and procurement needs are where cost savings are of course most desired.

To extend the political analogy I started with, you’ll vote for the party that appeals to you the most, no matter that some of its approaches, ideologies, or policies rub you the wrong way. It’s the overall appeal that counts, not the value to you of the individual policies, even if you think one or two or more of those policies are truly bad. Lowest bid still wins.


  1. Ooh I do like me a bit of auction theory in the morning.

    I actually never viewed choice of political party as being a game theory thing (well, not until now).

    I'm not actually a really good microeconomist, but I actually thought auctions work out better if they are more participants (i.e. more contractors or in this case, more political parties).

    DISCLAIMER: My university has sorta implied i'm horrible at auction design before I graduated.

  2. On a more somber note

    Warrior 231

  3. And maybe local ethnics have cause to protest about Thatcher. Who dare says anyone have exclusive rights to racism

    Maybe Ambiga and the Chingks can raise a hue and cry....LOL

    Warrior 231

  4. great piece sir. i was doing contracting stuff earlier this morning and read plenty of M'sia political barbs after work.

  5. this is really interesting way to view an election or erection as Warrior brought up.

    Take care all.

    Zuo De

  6. Warrior, I will not stand in the way of science...real science anyway. Interesting findings by the way.