Ethical Dilemma

WHEN LOCAL GOVERNMENT procurement policies ban companies that run afoul of the law from bidding on contracts, can the rules effectively police waste industry giants?

The problem is starkly illustrated by circumstances uncovered during the past year or so involving federal contractors: an aerospace firm and a telecommunications giant.

In June, federal officials charged two former Boeing Co., Chicago, managers with stealing Lockheed Martin, Bethesda, Md., trade secrets for an Air Force rocket program and violating the Procurement Integrity Act. Despite Boeing's illegal behavior, the company still won 19 out of 28 federal contracts in 2003 for the rocket program, and Lockheed Martin received the other nine.

“The charges against [the accused individuals] allege that they violated the fundamental rules of fair play,” U.S. Attorney Debra Yang says. “By covertly using a competitor's secret information, they caused harm not only to Lockheed Martin, but also to the Air Force and taxpayers who finance government operations.”

Elsewhere, WorldCom Inc., now known as MCI, perpetrated what The Wall Street Journal has called “the biggest accounting scam ever.” Despite undergoing intense scrutiny, MCI holds, and continues to win, major federal contracts.

Sanctioning the companies in traditional ways — suspension or debarment from government work — creates complications. Both firms are key players in their respective areas. Should they receive a relative slap on the wrist because government has a more intense need for what the companies offer than for retribution?

The federal procurement regulations require the government to award contracts only to “responsible sources” with a “satisfactory record of integrity and business ethics.” Thus, vendors and service providers that cannot meet this standard should be deemed unqualified to bid, denied an award or suspended from work on existing projects.

While states and localities vary considerably in their recordkeeping on procurement disqualifications, the federal database lists hundreds of small- and medium-sized companies and individuals who have been denied government contracts. Meanwhile, major firms somehow find a way to stay eligible.

Mergers and acquisitions in the 1990s involved many industries, including defense, telecommunications and waste management. As a result, the potential number of bidders was sharply reduced. When only two or three vendors or service providers are available, excluding one of them from the bidding process can undermine competition and drive up costs.

What's the answer? For starters, a government agency simply cannot have two sets of rules and still maintain the credibility of its procurement system. It is probably fair to say that government at all levels should not be doing business with serious wrongdoers — regardless of size. But should these firms be excluded outright?

How serious is “serious?” Should any consideration be given to a firm that may be uniquely qualified to perform and has identified and removed its bad apples? And should bidders with cleaner records receive extra points?

Certainly, government does not want active and would-be contractors running afoul of the law. The neat trick is integrating a business-ethics standard with the benefits of full competition.