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GELOSO: Why taxpayers should fear the Buy Canadian Policy

Decisions regarding public procurement have major budgetary consequences

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Each year, tens of billions of dollars — more than 13% of the Canadian economy — are spent by Canadian governments on public procurement. An increase of just a few per cent in these expenditures could amount to several billion more on taxpayers’ shoulders.

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In a context of rising American protectionism, governments are reinforcing preferential purchase clauses in public contracts. This approach is ill-advised and should be examined in light of the available economic data.

GELOSO: Why taxpayers should fear the Buy Canadian Policy Back to video

The empirical research shows that competition plays a determining role in controlling costs.

Role of competition in cost control

In transport contracts in the United States, for example, each additional bidder is associated with an average reduction in costs of 8.3%, according to a study from the National Bureau of Economic Research. An analysis of more than 1.3 billion calls for tender in Brazil between 2015 and 2018 arrived at a similar conclusion. Greater participation is correlated with a better balance between costs and social benefits.

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Conversely, preferential purchase policies are associated with measurable cost increases. In California, a 5% preference given to local firms for certain public projects led to total estimated cost increases of between 1.4% and 3.6%, according to studies published in the Journal of Public Economics and the American Economic Review.

Applied to Canada, a comparable measure would have represented an increase in spending on infrastructure from $4.8 billion to $12.2 billion, according to available data for 2021. This represents an estimated additional cost of between $124 and $320 per Canadian, for this one year alone.

Proper management of public funds

These are not just abstract numbers — they have a real impact. They represent public funds that cannot be invested elsewhere, whether in health care, in education, or in debt reduction.

It’s also a question of the proper management of public funds.

Some will say that these extra costs are compensated for by the creation of quality jobs. Yet, studies show that this is not so.

One study by the National Bureau of Economic Research estimates that the “Buy American” clauses generated a net cost of more than $111,500 per job.

In other words, even when considering the potential benefits, such as the creation or maintenance of certain jobs and the resultant tax revenues, the cost per subsidized worker is still in the six figures. This represents a steep tax bill that prevents the creation of jobs elsewhere in the economy.

The reduction of the number of bidders that accompanies public procurement protectionism also has indirect effects. A less competitive business environment reduces entrepreneurial incentives to innovate, reduce costs, and improve quality. In the long term, this reduces the international competitiveness of Canadian firms.

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Decisions regarding public procurement have major budgetary consequences. The available data show that reduced competition tends to increase costs and reduce efficiency, while more competition means lower costs and better results.

An open and transparent procurement process serves taxpayers well. Public procurement protectionism produces the opposite effect. With billions of dollars at play, the only advisable course is to maximize the efficiency of every dollar spent by the government.

— Vincent Geloso is senior economist at the Montreal Economic Institute

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