Shopping for Innovation: Government as Smart Consumer

According
to corporate boosters, private business is the only real
source of technological innovation. Just get government out of
the
way, and business will unleash its creative zeal. The reality is
that government outlay also promotes innovation in a variety of
ways. Since World War II, the government has financed roughly
half
the nation's research and development budget, stimulating
advances
in aviation, electronics, computers, medical devices, and
countless
other applications.

A less appreciated and potentially more significant force for
innovation is the government's own immense market power as a
purchaser. Federal, state, and local government purchases amount
to
no less than 18 percent of GNP-everything from office equipment,
cars drugs, food, energy, paper building materials, and road
pavement-totaling nearly a trillion dollars a year. Yet
government
seldom uses this immense market leverage to stimulate technical
change.

For example, it is entirely feasible, both technologically and
economically, to develop robust new markets for recycled paper,
thereby eliminating massive streams of trash that otherwise would
clog landfills and create environmental hazards. We can do the
same
to produce safer and more fuel- efficient motor vehicles, paper
products without using chlorine (a serious environmental health
hazard), and longer lasting road pavements that reduce motor
vehicle operating costs.

In the commercial marketplace, innovators must take a gamble that
a new product will find, or create, a market. The process is
slow,
incremental, and risky. However, government purchases can
instantly
create a large market, which offers producers early economies of
scale, lower unit costs and lower risks. That, in turn, makes it
possible for producers to invest in innovations before a consumer
market exists. The resulting products then become available to a
wider public.

By mandating standards more advanced than those that characterize
off-the-shelf commercial products, government can stimulate
innovation even more aggressively. When officials spend taxpayer
money to buy office machines, batteries, paper, or thousands of
other products, they need not passively accept the choices that
industry offers. Instead, they can encourage industry to produce
more imaginatively. If properly deployed, the government's
massive
pool of organized purchasing power can jump-start the adoption of
new or dormant products and technologies to promote higher
productivity, greater human safety, and a cleaner environment.
Although procurement cannot be a substitute for established
government regulatory authority, it can produce some of the same
results and often more quickly.

Few
Americans realize that government purchasing has long been a
force for stimulating technological advances. Standardized
clothing
sizes were first introduced during the Civil War when the Union
had
to obtain uniforms for its troops, and these standards helped
develop national markets for the clothing industry. Several
decades
ago, the U.S. Army gave generic prescription drug products credi
bility in civilian markets by buying generic for its military
personnel and for Walter Reed Army Hospital, frequented by
presidents and members of Congress.

As these practices suggest, most cases in which government
facilitates new technologies and products by creating a market
have
involved the military. But there is no logical reason why only
the
Pentagon can use procurement to stimulate innovation. Civilian
government could do likewise, though it has done so
infrequently.



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For example, in 1979-80, the Environmental Protection Agency's
"Buy
Quiet" program encouraged state and local governments to issue
procurement specifications for quieter compressors and lawn care
equipment. The idea was to prod manufacturers to build quieter
products. Within two years, some thirty different communities
issued bids for quieter products, and another fifty
municipalities
intended to do likewise. Much to everyone's surprise, quieter
equipment cost no more than noisy equipment, and sometimes cost
less a dynamic that often occurs when governments collectively
demand such innovations. Even though this program was eliminated
by
early Reagan budget cuts, it showed how sophisticated government
purchasing could stimulate development of better technologies.

A more recent example of government using its consumer dollars to
jolt an obstinate industry into action is the air bag, now a
highly
popular (and prominently marketed) feature in automobiles. Even
though patents on air bag-related technology were first issued in
the 1950s and 1960s, air bags were not available, except for some
10,000 vehicles sold with them in the mid-1970s, until the late
1980s because of the auto executives' entrenched hostility to
federal safety programs.

In the 1980s, this prejudice began to crack when one of the
authors
persuaded the General Services Administration, then headed by
Gerald Carmen, to issue a federal procurement specification for
automobiles with driver- side air bags. Ford submitted the
winning
bid for 5,300 Tempos, which prompted the company to offer
optional
air bags in Tempo and Topaz models. Chrysler soon outpaced Ford
with standard driver-side air bags on several models, and other
companies followed the air bag bandwagon.

On the other hand, government has failed to use its influence to
promote more crash-resistant cars. Although the Department of
Transportation still has a National Highway Traffic Safety
Administration, that agency has done very little to protect the
traveling public since 1981. Procurement officials could demand
that the cars they purchase have a bumper that can withstand an
eight-miles-per-hour crash without damage, a body that can crash
at
forty m.p.h. without injury to occupants, and roofs that support
twice the vehicle's weight when overturned. Such purchase
specifications could move these safety features into the general
marketplace.


Government as a Passive Shopper

But why are these cases the exceptions? Why are there so few
other
instances of creative government procurement when the potential
benefits are so numerous and significant? The reasons have to do
with ideological opposition, failures to set coherent and
imaginative policy, the political influence of key industries,
and
the residual bureaucratic caution that takes over in the absence
of
leadership.

Except where the military is concerned, there is a tacit
presupposition that civilian government procurement should not
attempt to influence what private industry does. (In the arms
race,
by contrast, the whole point was precisely to stimulate ever more
advanced generations of weapons). As a result of this policy
passivity, civilian government procurement tends to default to
off-the-shelf purchases. In addition, ad hoc policy goals
inserted
into legislation send procurement officers contradictory signals.
All of this interacts with, and reinforces, the bureaucracy's
usual
caution.

A good case in point is the government's generally incoherent
approach to "life cycle costing" the analysis of a purchasing
decision based on the expected useful life of the product rather
than its short-term budgetary impact. Congress, in fact, has
repeatedly mandated life-cycle costing (LCC) in energy bills, but
it has never become a government-wide practice.

For example, Charles Hulick, a career official of the General
Services Administration's Federal Supply Service, reports that
during the first federal effort to buy efficient water heaters
using life-cycle analysis in the 1970s, he had to sign the
initial
contract, although he was only an assistant branch chief. His
boss
and others refused to sign the contract, since they were not
buying
the "low bid" item and thus feared future criticism.

Without regularly using life-cycle cost analysis, it is difficult
for the government to be a smart buyer. LCC considers the initial
cost of a product, all maintenance and operating costs during its
entire useful life, and its final disposal cost. LCC encourages
the
acquisition of products that may initially cost more but save
money
over time because of reduced energy and maintenance costs. The
Energy Policy and Conservation Act requires federal agencies to
use
LCC analysis when considering all energy-related purchases, but
this is carried out only intermittently and with little support
from administration officials. Federal officials needing to learn
LCC analysis may find it difficult to obtain instruction. Classes
taught by the National Institute of Standards and Technology are
offered only four times a year to a total of 120 participants,
and
many of the students are private sector employees.

Even where LCC requirements are clearly mandated, as in energy
standards for construction of federal buildings, they are often
waived or ignored. The Department of Justice excused itself from
this requirement in a $388,883 renovation of its Washington
fitness
center completed in 1991, stating that the renovation was
"standard
construction." As a result, it did not purchase energy-efficient
lighting or heating, ventilation, and cooling systems. Similarly
in
1991, the National Institutes of Health (NIH) failed to conduct a
LCC analysis for construction in Maryland because "the research
efforts of NIH are guided by critical requirements not
encountered
in typical commercial buildings."

Yet another obstacle to energy-efficient buildings is the high
proportion of federal office space and housing that is leased.
Little attention is given to the energy efficiency of these
facilities, although there is an executive order issued by
President Reagan requiring leased premises to meet earthquake
safety standards. In contrast, New York State requirements for
energy-efficient leased buildings include window glazing,
efficient
lighting, and motion detectors to reduce unnecessary use of
lighting.

Article Continues >>

Federal Procurement Policy:
Must it be a Paper Tiger?

Paper, alas, is perhaps the government's most abundant product, and
government
is the most reliable single market for paper. If the government
has purchasing
leverage at all, it could surely use it to generate more
environmentally
conscious paper production. But all too often, government has
bowed to the
interests of the powerful paper industry lobby.

Consider some recent efforts to procure paper bleached without
chlorine.
According to Greenpeace, citing studies published by three
Canadian government
departments, chlorine produces about 1,000 different
"organochlorines," including
known carcinogens and mutagens such as dioxin. Each year, pulp
mills using
chlorine release an estimated 400 to 700 million pounds of
organochlorines into
domestic waters, where they accumulate in the food chain and pose
a health
hazard. The Greenpeace report, "The Product is the Poison," also
cites a 1988
study of water pollution in the Great Lakes linking toxic effects
in humans and
wildlife with the presence of 168 organochlorines there.

There are alternatives. Hydrogen peroxide, oxygen, and ozone work
as substitutes,
and are already replacing chlorine in New Zealand and across
Europe. But the
American Paper Institute (API), the industry lobby, has fought to
stymie any
similar conversion here. When the General Services Administration
(GSA) decided
to survey all paper mills in an attempt to gauge the industry's
capacity to
produce paper without chlorine, API tried to block the survey.
When that effort
failed the survey went out, anyway API resorted directly to its
membership. In
a July 1992 memo, an API official offered some not-so-subtle
advice: "It is
important for you to know that YOU ARE NOT REQUIRED to respond to
this
questionnaire in total or in part. The GSA HAS NO GOVERNMENT
MANDATE requiring
this information. You may want to review the questionnaire and
then determine
which path is best for your company." (Emphasis in the original).
Not
surprisingly, GSA is receiving few responses.

API has also been instrumental in blocking initiatives
to increase the
"post-consumer" content of writing, printing, and copying paper
the government
purchases. Post-consumer paper is any paper that is used and then
discarded the
paper millions of Americans dump in recycling bins at home,
school, or work every
day. But post-consumer paper is not always part of the "waste
paper" used in
recycled paper products. Instead, recycled paper often includes
mostly
"pre-consumer" paper paper produced in the printing and
production process but
never actually used, such as printers' overruns or errors. Since
this paper has
always been exported or recycled within the industry, its
increased use in
recycled paper products represents no real decrease in the
domestic solid waste
stream.

By specifically requiring post-consumer content in the recycled
paper it uses,
the government could reduce the use of virgin paper. But it has
not done so. In
1988, the EPA's federal content guidelines for recycled paper
products initially
applied to all paper products except printing, writing,
and copying
papers those which the government uses most. And in 1989, the EPA
finally
announced recommendations requiring recycled printing, writing,
and copying paper
to contain at least 50 percent "waste paper." But the EPA
included no requirement
that the waste paper include post-consumer content. And some
government agencies
are continuing to use virgin paper.

Meanwhile, the Joint Committee on Printing which functions as a
board of
directors for the Government Printing Office (GPO) has proven
similarly slow to
act. Until this past March, the GPO had insisted post-consumer
content wouldn't
work in copy machines, even though California and Maryland have
used it for ten
years.

Once again, the paper industry lobby emerges as the likely
culprit. API does not
want government telling it what to include in its recycled paper
products; it
wants to make recycled paper without distinguishing between pre-
and
post-consumer content.

The federal government does not even use LCC analysis for energy
efficiency when purchasing office equipment, such as
photocopiers,
even though it pays $115-150 million annually for electricity to
power office equipment. Their use also adds significantly to
building cooling requirements. And office equipment is the
fastest
growing energy load in commercial buildings, with computers alone
accounting for 5 percent of commercial energy consumption. The
federal government purchases 6 percent of all U.S. computers. By
using LCC analysis and requiring purchase of available efficient
machines, the federal government could have a significant impact
in
promoting energy efficiency in office equipment throughout the
country. According to studies by Competitek, an energy research
institute, new technologies and management techniques could
reduce
total energy use in office equipment by 70 percent in the short
term and 90 percent in the long term.

The federal government and all states would benefit from
Washington
State's example. All new schools constructed in Washington are
required to complete an "Energy Conservation Report," which
details
energy-using systems that have the lowest life-cycle cost. The
Washington State Energy Office reviews all the proposed designs.
Designers must either recommend a design option within 10 percent
of the lowest life-cycle cost or have the school board vote to
use
a less efficient option. New Mexico Governor Bruce King has pro-

posed as part of his energy program that a LCC analysis fee be
included along with the architectural and engineering fee for all
new state building projects.

Federal buying decisions rarely incorporate environmental and
societal "externalities" costs and benefits not contained in the
purchase price of a product or service, such as the pollution an
item produces or prevents. F. Paul Blend, writing in a 1986 issue
of Harvard Environmental Law Review, observes, "A decision
not to consider external costs in itself quantifies them by
setting
their value at zero." Considering these externalities would set
an
example for the private sector, advance statutory environmental
and
health goals, and best serve the public interest. The
environmental
impacts of fossil fuels acid rain, oil spills, greenhouse
gasses exact a severe economic price. According to the American
Solar Society, the pollution associated with fossil fuels is
responsible for $3 to $8 billion in annual crop losses. While
recycled paper may cost more, included in the price are the
external benefits of reducing solid waste and using less water
and
energy in making the paper, thus producing less pollution. Since
the costs of the externalities are paid by taxpayers at some
point,
it is time to consider them when making procurement decisions.

Failing to consider life-cycle costs results in systematic
discrimination against one very promising technology solar
energy.
For example, while the initial cost of a diesel-powered generator
may be lower, maintenance and fuel costs account for a
significant
portion of the life-cycle costs. Solar photovoltaic systems, on
the
other hand, have a relatively high initial cost, but require
little
maintenance and no fuel.

Solar
energy is a prime example of a technology that has been
retarded by government's failure to take advantage of its
purchasing power. Solar cells exist, but they are still too
initially expensive to compete with conventional power sources
for
most applications. Eventually, as the technology matures,
photovoltaic cells will be more cost-effective. But they will not
receive the necessary investment until industry has assurance of
a
market. A good analogy is the semiconductor, which rapidly
coasted
down the cost curve thanks to large purchases by the Pentagon.

As Subhendu Guha of Energy Conversion Devices, Inc., observes,
"It
is a chicken and egg story. If you want to compete with
conventional sources, you have to bring down the cost to less
than
$2.00 a watt. If you want to bring down the cost to less than
$2.00
a watt, you have to have large volume production. Who is going to
buy such a large volume of production before the price comes
down?"

Since the 1970s, Barry Commoner has urged the government to seed
markets for solar power. Government purchases of solar
photovoltaic
panels would make solar energy cost-competitive with conventional
fuels by speeding up the "learning curve," enabling producers to
learn and economies of scale to grow. Unfortunately, Commoner's
thesis was never adequately tested. For a 1991 report, Commoner
studied the federal government's annual purchases for the last
six
years of dry cell batteries for appliances and found expenditures
of about $123 million per year in 1990 dollars. If photovoltaics
were used to recharge batteries for these appliances, 49.7 watts
of
photovoltaic capacity would be needed at a cost of $86 million,
and
the annual costs of operation would be $15 million. This would
represent a considerable savings from the current spendings for
dry
cell batteries, and once again an opportunity to speed up the
learning curve and make photovoltaics more cost-effective.

There are countless other uses of solar energy that are already
cost-competitive or very close to it. Installing on all
interstate
highways emergency cellular telephones with a battery recharged
by
a photovoltaic array, for example, is cost-effective and would
require over one million watts of photovoltaic capacity,
providing
another mass market and another opportunity to reduce
photovoltaic
costs. In California, the state has already installed 8,000 such
phones on its freeways.


Legislative and Burearucratic Confusion

The absence of coherent technology policy goals for federal
procurement leaves actual policies a contradictory stew of
congressional mandates and agency agendas. For example, in the
military construction appropriations bill for 1991, Congress
sought
to stimulate renewable energy by requiring the Department of
Defense (DOD) to develop a plan for installing renewable energy
capacity of a minimum of 100 megawatts by 1997. The sponsors of
the
law were evidently eager to have the Pentagon promote
photovoltaic
energy systems. Yet the DOD already has that much renewable
energy
capacity, in the form mostly of geothermal power. At this
writing,
the appropriation is being used for large-scale photovoltaic
projects.

Some laws are enacted and then ignored. A 1982 law mandated the
Pentagon procure renewable energy systems where cost-effective. A
1986 survey identified 21,000 small-scale solar applications in
the
Navy, which would save $175 million a year. The estimated cost of
installing all applications was about $100 million. No similar
survey was done for the other military branches, however. Nor
were
such surveys performed by other federal agencies where numerous
cost-effective solar applications exist, such as the Park and
Forest Services, the Bureau of Land Management, and the Bureau of
Indian Affairs.

Even at the Navy, despite the explicit mandate, fewer than 1,000
of
these applications had been implemented four years later.
According
to one Navy official, this slow pace stems from the fact that two
different bureaucracies are responsible for capital equipment and
maintenance at naval installations. The capital team is resistant
to spend funds on equipment that would reduce only the
maintenance
group's costs.

However, a 1989 change helps solar energy projects to compete for
limited funds by allowing reduced maintenance costs to be
considered in energy project applications. Much of solar
electricity's savings come from reduced maintenance costs (for
example, no refueling). This change, along with lower system
costs
and shrinking budgets, has led to increased purchases of solar
devices in the military.

The
political power of an industry, through its financial
contributions and grass-roots lobbying, can also be a major
impediment to smart procurement decisions. Consider the case of
road pavement. Despite disbursements for roads by all units of
government totaling $70.9 billion in 1990, roads are
deteriorating
faster than they can be repaired.

In contrast, while European roads cost 40 percent more, they last
twice as long. A 1990 study tour of six European countries,
sponsored by the American Association of State Highway and
Transportation Officials, Federal Highway Administration,
National
Asphalt Pavement Association and others, found European roads to
be
far superior to ours. The study tour's report stated: "The
Europeans invest more in research, development, and deployment of
new pavement technology. They build their pavement foundations
better....And, the Europeans maintain their pavements to get the
maximum life out of them....Contracts require contractors to
offer
guarantees or warranties that extend 1 to 5 years after the work
is
completed."

There are also indirect costs of poor quality pavement increased
fuel consumption, emissions, accidents, and motor vehicle
deterioration as well as inconvenience and delay to travelers.
However, the investment in poor quality pavement does insure the
need for frequent future repairs and rebuilding, which provide
business for contractors and companies selling materials and
equipment.

Democratic Congressman Anthony C. Beilensen offered an amendment
to
the Transportation Act of 1991 that would have allowed interstate
contracts to hold construction companies responsible for the
quality of the roads. The amendment passed 400 to 29, but intense
lobbying by road contractors caused it to be removed in the
conference committee from the final bill.

Frederic A. Lang, a former DuPont engineer, proposes a
"rent-a-road" option that eliminates the need for guarantee
language in highway contracts. Under his system, a contractor
builds a road on government-owned land to meet the lane, traffic
volume, and axle weight specifications and rideability criteria.
The contractor selects the design and pavement. Rent is paid to
the
contractor as long as the road is open and meets the specified
rideability criteria. Closing a lane for repairs or maintenance
at
any time results in less rent being paid; daytime closings cause
a
greater reduction in rent than night closings.


How Government Can Buy Smart

Unleashing government purchasing as a force for market innovation
will require executive and congressional recognition of its vast
potential power. We need either a presidential commission or a
set
of coordinated congressional hearings on the leveraging potential
of the 8 percent share of the gross national product represented
by
federal purchasing. Environmental and consumer groups could
present
problems that need redressing, and entrepreneurs, including small
businesses, could present new products, technologies, and designs
to replace the wasteful, environmentally destructive ones
currently
used. Representatives from our national laboratories could
discuss
their research and explain how guaranteed government markets
could
move innovation rapidly into the marketplace. Procurement
officials not just top officials, but representatives from all
levels could disclose impediments to innovative procurement.

Congress and the president could then make technology-advancing
procurement a part of the mission of all federal agencies.
Agencies
embodying national missions, such as EPA and the National Highway
Transportation Safety Agency (NHTSA), can actively influence
government procurement at the federal, state, and local levels by
making their knowledge and expertise available whenever products
within their purview are being purchased. For instance, in every
state as well as in the federal government, there is an office
responsible for the purchase of motor vehicles. That office
should
regularly receive from NHTSA information on safety features,
beyond
the present minimum standards, that can be purchased for their
new
vehicles. In this manner, government procurement can push the
edge
of the envelope and obtain safety features not yet routinely
available. Top-level administrators and members of Congress
should
be models of initiative, using the most environmentally sound
paper
products, energy-efficient lighting, and safer, fuel-efficient
motor vehicles.

Legislation is needed containing specific procurement quotas and
compliance deadlines. Sufficient training and funding for using
LCC
analysis on all projects and renovations over a certain size must
be enforced. Currently, enforcement of such requirements is rare,
even after the occasional questions from congressional oversight
committees. It is time to give taxpayers the persons ultimately
responsible for paying these bills some voice in these matters.
They should be given explicit standing to sue those government
executives whose agencies do not follow laws in these areas.

The national laboratories and procuring agencies must cooperate
more. Better efforts must be made to inform government agencies
of
the laboratories' work and how they can use such discoveries.
Agencies should track and report on their progress in promoting
and
using innovative technologies. Outstanding procurement personnel
should receive recognition to stimulate the use of procurement to
benefit taxpayers, consumers, and the environment. Procurement
education programs offered by universities and by relevant
professional associations can focus on developing the skills
necessary for more creative and prompt procurement decisions.

Exploiting the purchasing power of government would not only
induce
industry to use its imagination to make safer, more ingenious,
efficient, and environmentally-friendly products. It would also
create higher quality markets with reduced secondary or external
costs to firms, the economy, consumers and taxpayers. Sound
procurement policies represent change agents unburdened by
ideological baggage or the resistance to command regulations. It
is
the big marketplace consumer saying to the marketplace sellers:
here is what we want to buy take it or leave it. Purchasing
savoir
faire of this scope may even restore citizens' confidence that
their tax dollars are buying products that benefit them in more
than one way.



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