Getting value from construction $

While reducing costs can be considered a reasonable motive for awarding government contracts to foreign parties, a growing body of research suggests that the overall savings are minimal, on average. The simple reason for this is the inclusion of the fiscal multiplier, which is the amount that government spending affects income levels in the country, or in other words, the extent to which government spending generates new consumption. Usually, governments are more likely to award contracts to domestic firms in a recession to stimulate Keynesian multiplier effects in the economy. While procurement expenditures may rise in response to awarding to local contractors, governments believe the additional costs are outweighed by the support for the development, enrichment, growth, expansion and the retention of the local business community, thereby keeping any tax dollars spent on contracts, within the economy. Other advantages may include achieving local social policy goals to assist the local economy, and improving and protecting the local economy.

We in no way suggest that governments should only award contracts to locals. It merely asks that when conducting a costbenefit analysis, as is assumed was done, the potential savings to tax-payers must be pegged against loss of potential jobs, loss of potential income, repatriation of profits, and foreign currency flight.

The function of the cost-benefit analysis was to equip the government with the necessary information to fully evaluate the costs and benefits of awarding contracts and to ensure that taxpayers’ money is used in the most efficient manner. While simple cost measure comparisons are important for any type of decision, they do not reveal all the true costs and benefits associated with the decision to ultimately “outsource”.

Private entities usually base many decisions on obtaining the lowest cost and this would make sense since private entities seek to minimise their expenditure to achieve a given goal. In contrast, a government’s decisions when awarding contracts should be made with significantly different criteria. The government’s role in the economy is to pursue the public good ie the economic and other interests of its citizens. This objective of government should underline all government actions and processes, including government procurement. The government cannot act as a private entity in its approach to procurement as it must recognise the benefit that its procurement spend represents for the broader local economy and therefore it cannot ignore its broader economic objectives in its procurement policies and processes.

Government infrastructure spending has one of the highest fiscal multipliers among all types of fiscal stimulus measures – that is, an extra dollar of infrastructure spending translates into higher increase in the overall valueadded for the economy compared with most other fiscal measures. The high multiplier reflects both direct and indirect effects of infrastructure provision.

Directly, construction projects tend to be labour intensive, meaning that much of the expenditure goes directly back into the economy through wages.

Indirectly, construction activity has a very significant expenditure and employment multiplier effect which boosts activity and employment in related industries, not least in those industries supplying construction. In comparison, foreignsourced construction goods and services can safely be assumed to result in little or no flow-on expenditure or employment impacts, as materials are sourced from overseas and usually use foreign labour.

As with other areas of policy, transparency in process and outcome can go a long way to ensuring policies are working as intended and promised benefits to communities are being realised. While the economic and social benefits of an infrastructure project should be included in any cost-benefit analyses framework that assess project design and viability, there also should be an examination of the economic and social outcomes of infrastructure spending on both a macro and a community level once a project is complete. Citizens should be able to transparently see how that spend translates into social outcomes in their communities, and not simply the infrastructure project at the end.

Government expenditure involves much more than just size of expenditure. The implications of actions are complex and have ripple effects. We must not be parochial or fooled by other people’s agenda, whoever is the spokesman.