DEFINING THE PROCUREMENT ECONOMY

The U.S. federal government is the largest single purchaser in the world, spending over $665 billion in FY 2021, and states, counties, and cities collectively outsource far more, purchasing over $1 trillion in FY 2019. Every city and metro in the U.S. has a local procurement economy, with local supply chains feeding into private and public purchasing. Public purchasers can and should leverage their supply chains to foster the development of local and diverse owned businesses, a key component to addressing racial disparities in wealth building.

In San Antonio, public purchasing is substantial. Federal, state, and local government entities collectively outsourced $9 billion in spending on goods and services in FY 2021.

• This included $4.2 billion spent across 17 local agencies^[1] and $4.8 billion obligated by federal and state agencies on contracts to firms located in Bexar County.

• An analysis of spending by 13 local agencies^[2] showed they spent only 14% and 1% on Latino- and Black-owned businesses in FY 2021, and among the top 20 largest contracts issued, only two were awarded to Latino-owned firms.

Public spending will increase thanks to the passing of a $1.2 trillion Bipartisan Infrastructure Law (BIL) and the Inflation Reduction Act. e of the The BIL directed billions in new funding to the Texas Department of Transportation for roads, bridges, and EV charging, and offered funding San Antonio International Airport, VIA Metropolitan Transit, and others for upgrades to airports, transit systems, broadband, water, and energy systems. The IRA will simultaneously increase demand for industrial, commercial, and residential clean energy projects. The City of San Antonio independently passed a 2022-2027 bond program which will fund $1.2 billion worth of local infrastructure projects.

These combined funds provide an opportunity to hire local minority firms to complete a surge of projects in San Antonio. A central challenge is that public procurement is deeply fragmented across local authorities and levels of government, generating a misalignment of practices and small business technical assistance (TA) that limit their collective ability to center end users, entrepreneurs, and lift up small businesses. Together, these systems could maximize impact by being more user-centered.

The entrepreneurial support ecosystem of TA and capital providers is largely disconnected from procurement and doesn’t act as a collective network force for unlocking opportunities for diverse suppliers. Procurement can drive economic development through strong cross-agency collaboration and close cooperation with the broader small business ecosystem.      

Procurement as a Tool to Address Ethnic and Racial Wealth Gaps

There are stark ethnic and racial disparities in business ownership in San Antonio and in the United States at-large, which underlie low contracting rates with Latino- and Black-owned businesses. It also contributes to the racial wealth gap, along with differences in average income, savings, investments, and intergenerational transfers^[3].

• In the San Antonio-New Braunfels MSA, just 19% of all employer firms are owned by Latinos, and 1% are owned by Black residents, despite comprising 56% and 7% of the population, respectively.

• The White House Council of Economic Advisors estimates that closing business ownership gaps would close the gap in average net worth between white and Black households by 22% and close the gap between Latino and white households by 17%^[4].  

A Compliance Driven Legal Landscape, and a Path Forward

Public purchasing is an imperfect tool for growing minority firms, since it is a compliance-driven process by legal necessity. Since the 1990s, public sector efforts to encourage governments to contract at higher rates with minority owned suppliers have been limited by two U.S. Supreme Court cases, the City of Richmond v. J.A. Croson (1989) and Adarand Constructors v. Peña (1995). Rulings in both cases restricted the use of race-conscious contracting preferences at the federal, state, and local levels. To enact race-conscious programs, governments and publicly funded authorities must conduct disparity studies to justify narrowly targeted goals on contracts, reinforcing the compliance nature of this system. Given the legal landscape, governments cannot simply mandate higher spending with existing minority suppliers or set quotas.

There are strategies local stakeholders in San Antonio can adopt to grow the number of minority-owned suppliers, strengthen existing minority-owned firms, and reduce bureaucratic barriers to participation for small and diverse firms within the local market. The Supply SA Procurement Playbook identifies strategies to be deployed in San Antonio, which could be instructive for communities across the country.  

A GOVERNANCE STRUCTURE FOR INCLUSIVE PROCUREMENT

Fragmentation calls for the creation of regional public-public partnerships to streamline public procurement for the benefit of local suppliers and entrepreneurs. In San Antonio, we are proposing the creation of a Procurement Innovation Council (PIC) to accelerate informal collaboration that already occurs across dozens of local purchasers, TA and capital providers, and explore new avenues for collaboration. Ideally governed by a memorandum of understanding, the PIC would serve as a dedicated delivery team to upgrade the San Antonio procurement system.

The CEOs of local agencies, the Mayor of San Antonio, Bexar County Judge, and local elected representatives would sit on the PIC, as well as procurement officers from local agencies, representatives from local small business advocacy organizations and small and mid-size business owners.

The goal of the PIC would be to serve as a steering committee to both upgrade agency practices relating to supplier diversity (solution #1 below), and guide efforts on solutions #2-6, detailed below.

The PIC would meet monthly to establish priorities, set goals, and monitor progress —through an Accountability Council — to tackle key challenges to upgrade the San Antonio procurement system. It includes three sub-committees, led by chairs: (1) Committee on Procurement Practices Transformation, (2) Supplier Development Committee, and (3) Capital & Bonding Innovations Committee.  

REIMAGINING BUSINESS DIVERSITY & CENTERING ENTREPRENEURS

1. Addressing Fragmentation in San Antonio

A Call for New Public-Public Partnerships

Public contracting is fragmented across the federal, state and local levels, and is particularly fragmented within and across metros, which include dozens of public entities and public authorities with different sets of purchasing rules, processes, and practices. This fragmentation is a burden on small and diverse suppliers. In recent years, most efforts to promote supplier diversity have arisen in the private sector as locally-oriented public-private partnerships, including Birmingham’s Inclusive Procurement Council, Chicago Anchors for a Strong Economy, Philadelphia Anchors for Growth and Equity, the Health Care Anchors Network, and the DC Community Anchor Partnership. The South Central Texas Regional Certification Agency offers a local model of how similar efforts can succeed in the public realm, with public authorities acting with a unified front to ease the process for diverse suppliers. This is a model that can and should be expanded beyond certification to other agency practices, entrepreneurial support services, business groups and universities.

The Committee on Procurement Practices Transformation will scale up local successful agency practices and explore the creation of a San Antonio Common Vendor Portal, to diminish the burden for firms and create a common vendor list for outreach efforts. The Procurement Service Center will centralize and coordinate existing TA support, lenders, and access to individual agencies that all play a role within the entrepreneurial and procurement support ecosystem.  

The field of best practices on how individual agencies can lower barriers to participation for diverse firms is growing.[5] Implementation of these practices is currently being championed by the Equity in Infrastructure Project. The main challenge is implementing promising practices at scale. This Committee would be designed to facilitate this locally and regionally. Promising practices include: unbundling contracts to increase prime contracting opportunities for small and diverse firms; issuing long-term purchasing forecasts to reduce information asymmetry among suppliers; standardizing data collection and reporting practices; ensuring prompt payment systems are in place to reduce cash flow challenges for small firms and subcontractors; reducing bonding or insurance requirements on task-order contracts and building new partnerships to reduce financial barriers for small firms; limit projects under certain dollar thresholds to bidding exclusively by firms falling within particular size standards, simplifying RFP language, and more.  

The support services system is already vast, with the City and County governments, CDFIs, local entrepreneurial support organizations, federally-funded centers and universities already providing some sort of technical assistance. A key challenge is that, similar to public purchasers themselves, entrepreneurial support services and small business technical assistance programs are extremely fragmented. The entrepreneurial support ecosystem of TA and capital providers is also largely disconnected from procurement and doesn’t act as a collective force for unlocking opportunities for diverse suppliers.  

2. Supplier Diversity as Economic Development

Shifting the Focus from Supplier Diversity to Supplier Development

Ethnic and racial disparities in business ownership demand a heightened focus on supplier development in the sectors from which public agencies regularly buy, including construction, maintenance services, and professional services. The support services system is already vast. A key challenge is that entrepreneurial support services and small business technical assistance programs are extremely single-minded. Procurement is not treated as economic development: only 3 agencies have a vendor development program, and TA concentrates on standard services for early stage firms. There is little focus on developing and scaling minority-owned firms, few programs are sector or industry specific, and bond readiness education and coaching for second stage firms is not widely available but very much needed for large construction projects that the Bipartisan Infrastructure Law will facilitate.

The Supplier Development Committee will guide the creation of a Procurement Academy to fill the existing gaps, specifically highly customized services for second stage firms, and a Procurement Fellowship, to help second stage firms take on larger contracts, among other supplier development efforts.

There are existing examples of robust supplier development programs for small and diverse firms in the infrastructure space to draw from, including the City of San Antonio’s Capacity Building and Bonding Assistance Program. Examples of supplier development programs outside San Antonio include Hire360 in Chicago, the Birmingham Business Alliance’s Team Up Program and Supplier Scale Program, Merriwether & Williams’ Contractor Development and Bonding Program, Chicago Transit Authority’s Building Small Business Program, and the Cincinnati Regional Chamber’s Minority Business Accelerator.

Supplier development programs tend to be bespoke, and are the exception rather than the norm, but they exist to compensate for the reality that federally funded small business and procurement TA is not fit to purpose. There are 14 federally funded specialty small business support programs in San Antonio alone, including a Procurement Technical Assistance Center (PTAC), Minority Business Development Agency Business Center, a Small Business Development Center (SBDC), an SBA District Office, and 10 other specialty centers, funded by four different federal agencies, including the Department of Defense, Commerce Department, the Small Business Administration, and U.S. DOT. These programs have separate staff and separate mandates.

The ideal supplier development program would include the following components: a rigorous selection process for identifying participating firms, established as a collaboration among local governments, prime contractors, insurance and surety services, and business coaching experts; and a focus on capacity building over back-office functions, and helping firms operationalize to take on larger contracts.  

3. Capital Integration & Innovation

Exploring Supply Chain Finance and Bonding Support Programs

To move small and minority-owned firms from subcontractors to prime contractors, they need the financial capacity to bid on and execute increasingly larger contracts, including in the construction sector most relevant to execution of the Bipartisan Infrastructure Law.

SWMBEs across all sectors struggle to access low-interest, timely and non-predatory working capital in the form of grants, loans or lines of credit. Bad credit scores caused by the use of personal funds to get a business off the ground can cause higher interest rates or rejected loan applications, limiting the ability of small firms to competitively bid on larger projects, even when they have the necessary skills.

Bonding, prevalent in construction, also requires minimum asset or collateral thresholds that are often too large for SWMBEs when aiming to take on larger contracts. Innovative financing models to address these challenges include supply chain financing (also referred to as contract financing), bond guarantee programs, and bond collateral pools. 

The Capital & Bonding Innovations Committee will explore the creation of a cross-agency Bond Collateral Pool, to reduce asset thresholds for bonding capacity in construction, as well as workable SCF product models.  

Too often, lenders, insurance firms, and surety firms issuing bonds are separate and apart from small business development programs and procurement technical assistance programs, despite the essential role financing plays in winning a contract and contract execution. Supplier development programs must integrate direct links to capital and bonding in their programming. Two examples which should be scaled in San Antonio and elsewhere include:

1. Merriwether & Williams Insurance Services in California is the premier national example. Their Contractor Development & Bonding Programs offers contract financing to participants who successfully bid on projects with partner agencies, including Alameda County, the City and County of San Francisco, LA Metro, and the City and County of Los Angeles. Contract financing uses contracts as collateral for lending. M&W partners with four local CDFIs to support this effort.

2. At the local level, the City of San Antonio’s Capacity Building & Bonding Assistance Program sets the stage to help increase the number of eligible minority businesses who are actively bidding on City construction contracts. Their new $500,000 bond collateral pool, launched in FY 2022, offers participants the opportunity to receive direct bonding collateral support if they successfully win a contract with the City. This could lay the foundation for the development of a regional program that could support diverse and local vendors across all local public authorities and at all levels of government.

ROADMAP FOR IMPLEMENTATION

To achieve the success of the mentioned activities, goals have been identified for the next 90, 180 and 360 days.

[1] The 17 agencies included the City of San Antonio, Bexar County, CPS Energy, San Antonio Water System, University Health, Brooks, VIA Metropolitan Transit, Opportunity Home San Antonio, the San Antonio River Authority, Port San Antonio, Alamo Colleges District, University of Texas San Antonio, Texas A&M San Antonio, San Antonio International Airport, and three school districts.

[2] The analysis included the same agencies listed above, with the exception of the airport and local school districts.

[3] Aliprantis, Dionissi and Daniel R. Carroll, “What is Behind the Persistence of the Racial Wealth Gap?,” Federal Reserve Bank of Cleveland, February 2019.

[4] The Benefits of Increased Equity in Federal Contracting, The White House, December 1, 2021.

[5] The research of Government Performance Lab, Open Contracting Partnership, Living Cities, Next Street, and PolicyLink have laid the groundwork for best practices in supplier diversity.