The state competition for federal funds: some winners may end up losers

As the stimulus made its way through the House this week, there was a great deal of talk about the infrastructure component.  "Shovel ready" infrastructure spending is supposed to hit a very sweet spot, letting us spend large amounts of money on things that will boost economic growth when we finally emerge from the recession.  Much of the money is supposed to be distributed at the state level, and the states have been eagerly offering up projects that might qualify.  But looking at the initial proposals, I wonder if this race for federal largesse won't leave many of the competitors worse off.

At least as currently proposed, the states face some very rough ground and two enormous hurdles. First, they have to get their projects to the contract obligation stage within the very limited amounts of time allowed.  Then they have to get over the second hurdle of project completion within a similarly limited time frame. They only get federal funds for a project if they successfully jump both hurdles--but both jumps have to be made with considerable government process baggage weighing down the competitors.  Shedding that penalty weight may be the only way to get across the finish line in time.

The first hurdle alone is a massive barrier to clear. Most states have a well-defined process that governs how proposed projects move from being put out to bid all the way to the point of contract obligation and registration.  Only after all that is wrapped up can the successful bidder can actually go to work and put a shovel in the ground. The problem is, unless you're dealing with a declared emergency these processes aren't built for speed. These 'contract award processes' often involve bureaucratic oversight that isn't designed for volume processing. So agencies will have to go through the race to the first hurdle--advertising projects for bid, getting contractors to estimate the jobs, and getting the successful bidder to go through the entire exercise of qualification--without knowing if they will clear that first hurdle in time to then compete for the federal funds needed to pay for them.

To complicate things (and my metaphor) further, the states aren't really running one race--they're running dozens.  Running to the first hurdle is going to cost both the bidding contractors and the states considerable amounts of money, in managerial time and estimating resources. This will all happen when money and credit is scarce for all parties.  Scarce resources spent on getting one project shovel ready in time are resources that will not be available for other worthy projects.

What will states do when they see that the first hurdle is well beyond reach? Do they abandon the race for that project and send their contractors off to another race? How many projects can they cancel before everyone decides to go and play another game? The states are just as concerned about the contractors about wasting scarce estimating resources; on top of that, they have to worry about their own limited administrative capacity.  

To maximize their return, states are going to have to make extraordinary efforts to see that contractors get past the first hurdle safely. They will have to choose projects that aren't likely to have design errors, or have significant questions be raised during bidding. They will have to add staff resources and motivate oversight reviewers to process the volume of contracts more quickly than ever before. They will have to respond nearly instantly to the inevitable questions that the bidders will ask about even simple projects. And it is still not clear at what point the federal government will declare that they are home free.

And once they've gotten to the shovel-ready stage, they still have to run the arduous second leg of the race in record time, on ground that will be rougher than ever before.  There is going to be enormous federal and public scrutiny of the execution of every project that makes it to building stage. Then there's the worry about suppliers--in a credit crunch, you have to choose suppliers carefully, and spread work out between them, so that an ill-timed bankruptcy doesn't delay your project past the Federal deadline. 

This is something that many states have yet to fully consider. The credit crunch means that suppliers are finding it just as hard to maintain working capital resources as any other small business. In a deflationary environment, with orders drying up, suppliers will be trying to quote prices low enough get them a piece of the action. But the construction industry is often plagued by long lags between supplying equipment or labor, and getting paid for it; suppliers who bid too low to pay their second-tier suppliers or their workers risk putting themselves out of business. On the other hand, if they ask for cash up front, then maybe only the well-capitalized firms get to participate at enhanced profit margins, and they get shut out.

The states are going to have to scrutinize the fiscal stability and volume commitments of their supply chains in ways that they have traditionally avoided. If they do not, they risk the failure of a key supplier and the chance that they make it to completion dates that they must clear to get that federal funds prize. By the time a supplier failure actually happens, there is usually no turning back. Much of the money will already be owed to the contractors, and the communities will already be disturbed by the contract impacts. There is nothing more damaging to the fabric of a community than a troubled construction contract that just can't be finished. So this is just one more point to which the state will have to run without any assurance that the feds will help them to pay for the project.

There is one bright side. States may choose to declare all of the economic stimulus projects to fall under the emergency provisions that usually allow the most rigidly bureaucratic states to bypass the normal routines and respond like gazelles. (Perhaps our president was laying the groundwork for this when he called the recession a "disaster" on Friday.) But that then asks the most embarrassing of questions...why the normal any way? Why can't we run like gazelles all the time?