Not From Round Here: The Problem With Buying Local

(We're pleased to feature a Guest Post from Ross Mulkern, a business writer and analyst, who previously contributed his thoughts here on heavy metal band "Trouble"! Today he addresses a somewhat more serious subject...)

A number of local councils across the North East and Cumbria have come under scrutiny recently regarding the contractors they opt to employ. The BBC reported recently that the likes of Carlisle and Middlesbrough Town Councils were sourcing less than 50% of their contracts from within the area, in the case of Carlisle, only 37%.

The implication of the study is that focusing procurement in one’s own back yard helps to support the local economy, bolstering local firms and creating jobs within the region. It stands to reason, therefore, that in failing to award contracts to local businesses, councils are effectively urinating on their own front doorstep, as it were.

Sounds reasonable, right?

However, the reality is far less simple, and this is true wherever the principle applies.  As Free Market Foundation pundit Jasson Urbach explains in his article in the South African “politicsweb” site, pressurising authorities to focus spending within their own jurisdiction can often do more harm than good.

Certainly the equation checks out on a superficial level, supporting the local economy, spending the taxpayers’ money in a way that will directly benefit those same taxpayers and all that jazz. But what if the services available locally are simply inferior to those offered by an outside entity? Local contractors may be more expensive, or lack the appropriate standards to be charged with a civic project; in either case it is the constituents who end up lumbered with the consequences.

As Urbach puts it, “Let's assume that I am a successful car manufacturer … To manufacture my make of car, I import the engine from Germany at a cost of R100,000 per unit. Now, suppose I have a neighbour who, using South African labour, can manufacture an engine of equal quality but with a price tag of R1 million. Should I support the ‘local is lekker' drive and buy the engine from my neighbour?

This gets to the heart of the dilemma with local buying. Urbach then goes on to say that this might be better for the local supplier and his workers, but not for the manufacturer, his or her workers, or the South African economy at large!

The smart business thing for me to do would be to continue buying the engine from Germany if I want to produce my car at the best price and make enough profit to keep my workers suitably rewarded. The savings I make by importing the engine will allow me and my workers to buy a lot of other goods and services, some produced locally and some imported.”

Now admittedly, the discrepancies between a swanky BMW engine and its South African equivalent would no doubt be far greater than those between a building firm from Yorkshire and their Lancastrian counterparts, but the point remains. Yes, local procurement can be beneficial to both councils and their constituents, but there are complex underlying issues and there comes a point at which these benefits become outweighed by inferior results and inflated costs.

Certainly, up to a point, there is an argument that councils should be encouraged to implement their budgets more locally; however, if the result is that constituents pay significantly more only to suffer the consequences of a crumbly, poorly designed swimming pool instead of the allegorical Mercedes, is it really worth it? Moreover, where do we draw the line, and how much more would we be prepared to pay to have the “bought locally” seal of approval?

Voices (4)

  1. Neil Hind:

    Lots of work done on this in the NW. A number of councils are well over the 50% but it does depending on how you define local. Most councils are a bit wiser and happy to work on a sub-regional basis as benefits the wider community.

    Majority of NW councils advertise most opportunities over £30k or £50k online and use chambers of commerce to further promote. Councils also need to work within the OJEU laws and show value for money as well. A number of things to balance.

    PS. Remember that central government has a target/aspiration of 25% with SMEs. I challenge anybody to find me a local authority who is not already past that figure!

  2. John Leigh:

    Buying locally is important, as you have said. But if it means a reduction in quality that’s poor value to the taxpayer. Agree to all. The thing is, good procurement could do both. It could maintain quality and source locally. Problem is usually scale. The large contracts can only really be handled by larger firms, who are usually not local. The economic argument is ‘economy of scale’. I my experience this is untrue; larger firms have higher overheads that offset savings. Smaller firms can be of good quality and compete on price. If the buyer is prepared to break contracts down to a scale that SME local firms could handle, we might see some interesting outcomes.

  3. Dan:

    How do you define local? A firm who have their headquarters in the local area? Or who only have a regional office in the area?

    Then you get into the question as to how far away is local? Within the city limits? This would benefit the bigger cities. Is it an arbitrary number? 10 miles? 20 miles?

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