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.

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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.

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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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