This article is an excerpt from the 2023 edition of The Art of Tendering: A Global Due Diligence Guide.
On March 3, 2022, Ontario’s Bill 84, entitled An Act to enact two Acts and amend various other Acts, received royal assent after being rushed through the provincial legislature in just ten days. Bill 84 creates the new Building Ontario Business Initiative Act, a one-page statute referred to by the government as “BOBI”, which will require Ontario public institutions to apply preferential treatment, as mandated by future provincial cabinet regulations, to Ontario companies in future public sector contract awards. The government’s initial explanations for the new law reflect an ill-conceived scheme that would impose significant new costs, complexities, and risks on Ontario public institutions, while potentially causing more harm than benefit to Ontario businesses.
Costly Red Tape to Favour Preferred Bidders
Based on the government’s announcements, the underlying premise of BOBI is that high wages, and the regulatory burden imposed by provincial regulations, make Ontario businesses uncompetitive when bidding for Ontario public sector contracts against suppliers from other jurisdictions. The provincial government wants to offset these alleged disadvantages by mandating local preferences in favour of Ontario bidders.
BOBI, which ironically was introduced by Ontario’s Associate Minister of Small Business and Red Tape Reduction, threatens to drown public institutions in reams of new procurement regulations, while exposing Ontario businesses, including small- and medium-sized businesses, to retaliatory trade sanctions from other jurisdictions. The new law would require all Ontario taxpayers, including all Ontario businesses, to subsidize a scheme that only benefits the select group of Ontario businesses that compete for Ontario public sector contracts.
In addition to being ill-conceived in purpose, the new law is also unclear in scope. Based on the circuitous definitions in the new statute, BOBI would apply to provincial-level government ministries and agencies, as well as universities, colleges, school boards, and hospitals, but it is unclear if it will also be applied to municipalities. It is hard to tell whether the omission of municipalities is a temporary oversight or whether the provincial government wants to avoid an immediate backlash from Ontario’s municipal governments, who are likely to object to provincial cabinet overreach into local procurement.
In summary, rather than taking direct steps to help Ontario businesses, which could include a reduction in individual provincial taxes to make Ontario wages more competitive, a reduction in provincial corporate taxes for small- and medium-sized businesses, or a break on the punitive Employer Health Tax that imposes new taxes on small businesses when they enjoy modest growth, the provincial government has devised a scheme that would only benefit those Ontario suppliers who bid on government contracts at the expense of everyone else.
BOBI’s Impact Could Be Massive
The Ontario government claims that by “harnessing our immense buying power, BOBI will allow our government to build our businesses in every corner of our province and support new jobs for our workers.” However, BOBI would never help all Ontario businesses since, as noted above, it is limited in scope to only helping select Ontario businesses that compete for government contracts. Further, BOBI could end up costing Ontario jobs when Ontario businesses lose work outside of Ontario due to retaliatory sanctions imposed on them in response to these protectionist practices.
Based on the numbers provided by government ministers, the adverse impact of BOBI could be massive. In the government’s own words, the new legislation will introduce quotas that “will see the government targeting to spend at least $3 billion in contracts awarded to Ontario businesses annually by 2026”. The government also states that the new scheme “will apply to the province’s overall procurements, which amount to $29 billion in goods and services annually across all public sector organizations.” This means that a massive amount of public sector procurement contracts across Ontario could be exposed to complex protectionist preferences based on future regulations centrally mandated by the provincial cabinet.
Government Examples of Protectionist Schemes
According to the government, BOBI would mandate public institutions to pay more for Ontario products and services to subsidize the higher costs associated with, for example, fair wages, environmental disposal fees, and workplace safety standards. These broadly accepted areas of provincial regulation have now been targeted by the provincial government as a problem that needs to be solved, not by cutting taxes and streamlining regulations to make them less costly and complicated, but by creating more complex regulations that interfere with public sector contract awards through the imposition of protectionist trade practices.
In its first example, the government refers to a “tech start-up in Waterloo” that “pays its employees fair wages, which results in higher costs to develop software than some of its overseas competitors.” The government states that under BOBI, “when bidding for government procurement contracts, these extra costs are taken into consideration.” However, even if lawful, which is a live issue, this protectionist math would need to be reasonably accurate to be legally defensible when applied in a specific bidding process. How this protectionist math would work is hard to say, since the Waterloo example raises many questions but offers no coherent answers.
Who would perform the complex comparative cost-of-living analysis to calculate the degree to which the wages paid to programmers in Waterloo are fairer wages than the lower wages paid to programmers working for “overseas competitors”? How many extra points would a public institution be mandated to award the Waterloo company? Would the BOBI penalty still apply against the “overseas competitor” if that bidder promised to match the wages of the Waterloo programmers, at least for its Ontario work? While these measures could conceivably help “overseas” programmers who would enjoy an “Ontario premium”–assuming their employers passed the extra payments to them instead of banking them as corporate profits–it is unclear how a BOBI subsidy to either a Waterloo bidder or its “overseas competitors” would benefit Ontario taxpayers or other Ontario businesses.
Furthermore, has the Ontario government considered that the global IT suppliers that currently service Ontario public sector institutions, as well as Ontario businesses more generally, rely on global supply chains with service centres in multiple locations across all time zones? Who will be performing the protectionist math against each tech hub around the world to determine its “fair wage” rating so that Ontario public sector institutions can apply local preference mandates against multinational IT bidders for each location where they propose to use programmers?
Finally, will the “fair wage” formula be a one-way street to sanction IT operations in “overseas” jurisdictions, but be ignored if Ontario technology companies shortchange their workers when compared to what employers pay programmers in more affluent jurisdictions? If fairness is a two-way street, would the Waterloo company be downgraded by Ontario’s centrally mandated “fair wage” formulas if it pays its programmers less than companies who employ programmers in Seattle, San Francisco, or Austin, or will lower wages be considered a valid comparative advantage when they favour Ontario companies and a problem only when they favour “overseas” suppliers?
Multinational technology companies are unlikely to welcome the Ontario cabinet’s intrusion into their global staffing practices or the random application of these “BOBI-traps” by different public sector institutions struggling to interpret and apply those central government mandates. While it may be stating the obvious, these global IT companies can afford lawyers and, historically speaking, have not been shy about using them to challenge ill-conceived government procurement schemes. These are the types of questions that lawyers are likely to ask when they inevitably bring a bid protest challenge after their clients lose a contract award because of a BOBI-trap. Ontario’s central government planners should be ready with answers and budgets to pay for the resulting legal entanglements.
Turning back to the bigger picture, if the Ontario government wants to help Waterloo start-ups so badly and genuinely wants to be in the business of picking winners and losers through state-controlled central government planning, it would be far less costly and complicated to give those Waterloo start-ups a government grant. While that type of corporate handout will have its critics, and may also be questionable under existing trade laws, it would be simpler and more effective in helping a Waterloo start-up grow its overall business, when compared to making that company dependent on winning public sector bids in a centrally rigged protectionist theatre show.
Unfortunately, the Ontario government’s Waterloo demagoguery is only the first act in its protectionist pantomime. In its second example, the government refers to a “Brampton uniform manufacturer” that “follows Ontario’s strict environmental standards when disposing of waste, which adds additional expenses compared to some competitors who pollute for free.” The government states that under BOBI, “businesses who pay to protect our environment will have a fairer chance in the bidding process.” Since it is not clear which jurisdictions allow uniform manufacturers to pollute for free, or what that even means, this would need to be defined. Will the provincial government be centrally mandating the required formulas by establishing a global waste disposal cost index that measures these costs in every jurisdiction around the world, or will that protectionist math be mandated to each Ontario public sector institution to figure out on its own when applying BOBI-pollution-index penalties to different bidders each time they tender to purchase uniforms from the global supply chain?
Further, how much of a markup should Ontario public sector institutions be required to pay to reward the Brampton uniform manufacturer for following provincial environmental rules? Would a 20 percent markup be too high or too low? Would double the cost be acceptable? Would the government’s central planning committee be making those decisions? Who will pay for the extra costs of performing all those calculations, for the additional price of the goods, and for defending the resulting lawsuits? The answer is that Ontario taxpayers would end up paying for this, including those Ontario businesses that will never benefit from the scheme since they are not among those specially selected companies who bid on public sector contracts.
To round out its trilogy of protectionist scenarios, the government refers to a Sault Ste. Marie office supply manufacturer who dutifully “follows Ontario law and provides a safe working environment for its employees, which comes with associated costs that some competitors do not have.” The province states that under BOBI, “these extra costs will not hinder its bid.” Rather, according to the provincial government, public institutions would presumably be mandated to apply a workplace safety cost assessment to figure out how much to subsidize Ontario office supply manufacturers as a reward for complying with workplace safety laws that are more stringent than similar laws in other jurisdictions that produce those same products. Like the other BOBI schemes, this sounds very complicated. It also sounds like another lawsuit waiting to happen. As stated above, instead of deciding through cabinet fiat which Ontario companies should be granted preferential BOBI subsidies in bidding competitions, why not just give every Ontario employee and Ontario business a tax cut so that all Ontario wages and companies are more competitive? Why entertain a fringe protectionist sideshow when mainstream alternatives are so easily available? Who, other than politicians and their specially selected favourites, gain from the politics of protectionism?
Triggering a Trade War Against Ourselves
BOBI flies in the face of well-established public procurement rules. Non-discrimination, a core global standard in public procurement, was recognized across Canada in the 1990s under the former Agreement on Internal Trade. That treaty was since replaced in 2017 with the Canadian Free Trade Agreement, which further aligns our government procurement rules with international anti-protectionist standards. Treaty enforcement mechanisms include the right of suppliers across Canada, and internationally for larger contracts under similar international treaties, to legally challenge the unlawful imposition of discriminatory barriers against open competition in public sector bidding. This means that contracts should be awarded to the best bid based on the merits of the competition, not based on the location of the bidder. This concept, referred to as “reciprocal non-discrimination”, is so core to the government procurement system that a breach of the principle is tantamount to a declaration of trade war against your trading partners.
While awarding to local suppliers may have appeal on a superficial level, jurisdictions across Canada and globally can and will retaliate by imposing their own protectionist policies against Ontario suppliers. It is unclear whether the Ontario government has done the protectionist math to figure out whether Ontario companies will end up better off or worse once the BOBI scheme instigates retaliatory measures in other jurisdictions that cost Ontario businesses existing customers and clients, as well as new ones, outside of Ontario. If that math was available, we could rationally assess whether triggering a trade war for “Team Ontario” would be worth the trouble for Ontario businesses and taxpayers. Unless the government has a rational business case to support it, BOBI is nothing more than superficial protectionist theatre that appeals to emotion over reason. This is never the basis for sound public policy.
Further, if Ontario were to start a trade war, how would we identify friends from enemies? BOBI does not explain what constitutes an “Ontario business”. The scheme could end up favouring large out-of-province companies with the wherewithal to set up a local Ontario operation to the detriment of small- and medium-sized Ontario-based businesses, who would face retaliatory sanctions from other jurisdictions where they have not set up a local presence. How would this provincially imposed friendly fire reduce red tape and help small- and medium-sized Ontario businesses?
Once Ontario’s misguided local preference train starts rolling, it could derail the entire public procurement system and cause collateral damage across the entire economy. In addition to triggering sanctions against Ontario businesses operating in other jurisdictions, Ontario’s BOBI plan would encourage Ontario municipal politicians, who already face significant populist pressure to favour local suppliers, to follow suit and start applying protectionist measures along municipal lines. Ontario businesses, especially small- and medium-sized local businesses, could quickly find themselves in the crossfire of local trade wars, encircled by protectionist barriers each time they attempt to win work outside their local city limits. This powder keg of protectionist sentiment, which is always present in the background, could quickly explode and derail decades of progress in establishing open opportunities in our public tendering system. That collateral damage would not be limited to public sector contracts. Other provincial governments, and municipal governments inside and outside Ontario, could start erecting territorial barriers to make it more difficult for all Ontario companies to perform work for their private sector customers as well.
No Preferential Treatment
In conclusion, attempting to manage large supply chain forces that are beyond the reach and control of central planners, or politically tinkering with a complex government procurement system, is a bad idea. If the government wants to make Ontario workers and businesses more competitive, employee and business tax cuts and streamlined regulations would be a far more effective and equitable means of doing so when compared to protectionist schemes designed to benefit specially selected suppliers at the expense of everyone else.
