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September 15, 2021 Feature

Contracting in a New World Requires New Tools

Jarrod D. Blue and Rita McNeil Danish

The year 2020 was one that many of us would not like to repeat. Despite the many challenges that the year has brought, it has forced governments at all levels, private businesses, and non-profits to evaluate how contracts are formed and to evaluate how new business ventures may be achieved. These organizations must evaluate new business ventures in a world that is very different—with a new White House administration, a dynamic economic environment with shifts in demand and supply, the variable impacts of the coronavirus pandemic on the world, and a social justice awakening reverberating across the United States. Businesses and governments are now tasked with pursuing new projects that balance the changing economic and social climate of the United States.

In the case of procurement lawyers, it is essential to make certain that the best contracting tools are utilized to tackle new business opportunities. Popular contracting tools like public-private partnerships and tax incrementing financing (TIFs) have their place in the public contracting sphere, but they are subject to scrutiny in a new economic and social world.

A public-private partnership involves a long-term contract between a public entity and a private entity for the delivery of public services, or the development of infrastructure (e.g., roads, buildings, etc.), where the private party assumes substantial financial, technical, and operational risk in the project.1 Public-private partnerships offer the opportunity to take advantage of the strengths of either entity for an economic or technical benefit. Specifically, public-private partnerships provide the benefit of shared cost, increased project speed, risk-sharing, and accounts for maintenance cost.2 However, a disadvantage of public-private partnerships is the potential to stymie the participation of small- and medium-sized businesses, and lead to a lack of competition.3 The complexity of public-private partnerships results from the bundling of various project phases. The bundling of project phases does not allow for small and minority business owners to engage in the procurement process as they may have only been available to take part in smaller-valued contracts. As a result, public-private partnerships do not always allow for small and minority-owned businesses to appear on the radar of large contractors pursuing large deals.

Another tool that is beneficial to procurement lawyers is the use of TIFs.4 TIFs serve to stimulate private investment in economically deprived areas that are in need of economic revitalization.5 The completion of a TIF-funded project has the potential to create the value of surrounding real estate, which ultimately generates added tax revenue or increased sales tax revenue as businesses create jobs in these newly revitalized areas.6 There are many examples of TIFs used by cities, like the $28 million TIF for Amazon HQ2 infrastructure upgrades in Arlington, VA, and the $250 million TIF by Detroit’s Downtown Development Authority for the Red Wings hockey stadium.7 Despite the touted economic benefits of TIFs, they can lead to favoritism for politically connected developers and exclude businesses that do not have the benefit of well-placed connections.

Public-private partnerships and TIFs have been trusted tools for procurement lawyers within state and local governments for decades and serve a beneficial economic purpose in many instances. However, our world has been forever changed by the events of 2020 and new tools should be considered for community economic prosperity. In particular, the increasing recognition of racial and socioeconomic inequality demands that procurement lawyers consider tools that will allow for all groups to have equal economic opportunities.

Economic inclusion is a key component of an overarching goal of building a prosperous economy. Economic inclusion tools have achieved significant gains for low-income communities and multicultural communities. Too often, economic inclusion, as a strategy, is only developed as an add-on to an already fully developed economic development strategy. In addition to general economic strategies, economic inclusion tools need to be developed, implemented, and integrated into large-scale job creation, economic development, and public investment strategies to connect women- and minority-owned businesses to economic and business opportunities. For example, Cincinnati, OH, has created a licensing and bidding tool to create opportunities for minority- and women-owned businesses to contract with the city.8

Economic inclusion tools have achieved significant gains for low-income communities and multicultural communities. Through assisting diverse entrepreneurs in launching businesses and expanding their existing operations, they establish proven opportunities for inclusive job creation. Studies have shown that entrepreneurs of color are more likely to hire people of color and locate their firms in communities of color and, therefore, their growth leads directly to more job opportunities for the groups that need them the most.9 Further, these businesses will ultimately revitalize communities and bring tax revenues into the local economy. Minority-owned firms are also twice as likely to export, indicating that more diverse business ownership could help the nation connect to global markets and meet its goals to increase exports.10

Local governments and utilities can change their economic development models to encourage growth for minority- and women-owned businesses and create jobs. An important item in the tool box for inclusive economic development is the disparity study. A disparity study is methodology used to advance the dialogue regarding the inequities and inform the development of new and innovative solutions for all involved.11 Government agencies at the federal, state, and local levels typically can commission disparity studies to examine the extent to which minority and women contractors are underutilized in public procurement. For example, Cook County, IL, has commissioned a disparity study to determine if women and minority contractors are being underutilized by the county as contractors for public projects.12 Well-conducted disparity studies present information on actual contracting disparities experienced by minority- and women-owned businesses in a particular industry and geographic region, and facilitate an investigation into the extent to which there is discrimination in the marketplace.

A disparity study is a comprehensive effort that analyzes a wealth of data pertaining to the legal, legislative, and contracting environment women- and minority-owned businesses face in a particular jurisdiction or when procuring contracts from a specific federal, state, or municipal agency. Disparity studies typically include an overview of the legal precedent that influences key methodologies, computations, and evidence necessary to justify or support existing or proposed contracting programs, including those that are race-conscious. In addition to the legal review, disparity studies typically include an overview of the rules, regulations, and ordinances that govern public contracting for a particular agency. In order to determine the extent to which disparities exist amongst different racial and ethnic groups and women, disparity studies compute numerical disparity ratios using agency procurement data, information on winning bidders, and a comprehensive analysis of actual and potential bidders to determine which firms are ready, willing, and able to bid on contracts. This information is used to determine utilization and availability, the two inputs of the disparity ratio calculation.

As local and state governments begin the process of evaluating the lessons learned from the events of 2020, this should not be a time for governments to lean solely on the tools that have served them well in the past. Governments and their attorneys should consider utilizing items, like disparity studies and economic inclusion tools, that have the potential to serve the need of the public for economic equality for all.

Endnotes

1. Jens K. Roehrich, Michael A. Lewis, & Gerard George, Are Public Private Partnerships a Healthy Option? A Systematic Literature Review. Social Science & Medicine, 113, 110-119 (2014).

2. Grame A. Hodge and Carsten Greve (2007), Public–Private Partnerships: An International Performance Review, Public Administration Review, 2007, Vol. 67(3), pp. 545–558.

3. Adam Burroughs, Why useful public/private partnerships often go undiscovered, May 26, 2020, https://www.sbnonline.com/article/why-useful-public-private-partnerships-go-undiscovered/.

4. Kelo v. City of New London, 545 U.S. 469 (2005). The Court held that a governmental taking of property from one private owner to give to another in furtherance of economic development is a permissible “public use” under the Fifth Amendment. The Court ruling moved forward that only a rational relation to a legitimate purpose is needed for economic development takings.

5. Currently, every state except Arizona allows for some form of TIFs and is considered one of the most popular economic incentive tools. Schneider, Benjamin, “CityLab University: Tax Increment Financing”, Bloomberg City Lab October 24, 2019.

6. Id.

7. Reuters Staff, Factbox: Amazon to get billions in breaks for HQ2 development, Reuters, November 13, 2018, https://www.reuters.com/article/us-amazon-com-headquarters-factbox/factbox-amazon-to-get-billions-in-breaks-for-hq2-development-idUKKCN1NI2KR; John Gallagher, How downtown Detroit’s taxes work and who really pays them, Detroit Free Press, June 4, 2019, https://www.freep.com/story/money/business/john-gallagher/2019/06/04/downtown-detroit-property-taxes/3626319002/.

8. “Department of Economic Inclusion,” City of Cincinnati, accessed July 6, 2021, https://www.cincinnati-oh.gov/inclusion/registration-certification/business-enterprise-certification/.

9. See https://www.nmsdc.org/wp-content/uploads/Economic_Impact_Report_FINAL.pdf; https://gazelleindex.com/2012/04/13/black-business-hiring-can-reduce-black-unemployment/; https://gazelleindex.com/2012/04/13/black-business-hiring-can-reduce-black-unemployment/; https://gazelleindex.com/2012/08/15/minority-businesses-support-minority-communities/; https://www.latimes.com/archives/la-xpm-1999-sep-18-fi-11575-story.html.

10. Minority Business Development Agency, Minority-Owned Businesses are Exporting, accessed July 10 2021, https://archive.mbda.gov/news/news-and-announcements/2012/04/minority-owned-businesses-are-exporting.html.

11. According to the Minority Business Development Agency, “a disparity study is a comprehensive effort that analyzes a wealth of data pertaining to the legal, legislative, and contracting environment facing MBEs in a particular jurisdiction or when procuring contracts from a specific federal, state or municipal agency.” Minority Business Development Agency, Executive Summary - Contracting Barriers and Factors Affecting Minority Business Enterprises A Review of Existing Disparity Studies, accessed July 10, 2021, https://archive.mbda.gov/news/news-and-announcements/2017/01/executive-summary-contracting-barriers-and-factors-affecting.html.

12. “Cook County Disparity Study”, Cook County, Illinois, accessed July 6, 2021, http://cookcounty.disparity-study.com/.

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Jarrod D. Blue and Rita McNeil Danish

Jarrod D. Blue is a Strategic Partnership Agreements Administrator at Oak Ridge (TN) National Laboratory,. He is Co-Chair of the Membership Committee of the ABA’s Public Contract Law Section. Rita McNeil Danish is a Partner at the law firm of Taft, Stettinius & Hollister in Columbus, OH, as well as the Principal of the Columbus-area JD2 Strategists LLC. She is the Chair of Public Contracting Section of the ABA Section of State and Local Government Law.