This post contains the presentation and testimony provided by the Bluegrass Institute’s Visiting Policy Fellow Andrew McNeill to the 11/15/21 interim Transportation Committee meeting. A copy of the presentation can be found at this link.

Thank you Mr. Chairman & members of the Committee. I’ve worked in policy in various capacities for twenty years. My analysis of issues is based in free-markets and limited government.  Over time I’ve learned those principles often mean it is as important to apply as much scrutiny to the influence of “big business” as “big government.” In my view, the phrase “pro-business environment” should mean “a level playing field.” We need to be as aware of efforts by industry seeking favor at the expense of taxpayers as we are concerned with overreach by government. Both distort markets and hurt Kentucky’s business climate. 

Members of this Committee have been receiving monthly updates on single-bid contract awards by the Transportation Cabinet. “Single-bid” means exactly what it sounds like – only one bidder for a particular project. Single-bid contracts that “exceed the Cabinet engineer’s estimates” are contracts awarded to bidders despite the fact the price exceeds the Cabinet’s cost estimates for that project. It happens statewide and it is overwhelmingly related to asphalt paving or asphalt resurfacing contracts. So far this year, single-bid contracts exceeding the engineer’s estimate have been awarded to 18 road contractors in 62 counties in the state.

This slide provides more detail on single-bid awards in 2021. 151 single-bid contracts have been awarded based on bids that were higher than the Cabinet’s estimates. Those awards have added up to $173.8 million and will cost taxpayers $7.8 million more than the estimated price for those projects. However, one thing to stress: single-bid awards are a symptom stemming from a lack of competition. I know that is a simplistic statement. But the goal shouldn’t be to simply prevent the Cabinet from awarding single-bid contracts. That is a band-aid on the larger problem. The goal should be more competitive bidding, especially for asphalt projects. 

Why is there a lack of competition? A University of Kentucky economist examined this question. While the answer is multi-faceted, one clear illustration of the problem is in the Lexington region. Examining asphalt paving contracts from 2005-2007 the research revealed road contractors in central Kentucky appear to honor other companies’ “territories” which are defined by county lines. The quote above lays it out: the four companies would bid and win contracts in their “counties” while refraining from submitting bids across county lines if it meant competing against another company. The authors of the paper call this “tacit collusion” resulting in single-bid contracts.

This pattern of behavior is usually explained away by the industry as a function of the distance of a project from a company’s asphalt plant. The research presented a different picture. The RED DOTS represent contracts won by a contractor while BLACK CIRCLES represent projects the contractor declined to bid on. As you can see there are a large number of projects where the companies didn’t bid if it meant crossing county lines to bid against a competitor. For example, Hinkle Contracting was submitting and winning bids in Harrison and Nicholas counties – projects which were a further distance from opportunities in Clark, Fayette & Scott where Hinkle wasn’t bidding because to do so would have meant competing – and potentially inviting competition into Bourbon County. The other 3 companies appear to have followed a similar pattern.

That research was published in 2015 from data covering 2005-2007. I evaluated the Cabinet’s contract awards for the four counties from the last three years. I chose the three-year timeframe to show this isn’t a partisan exercise. This isn’t singling out the current administration. These problems have existed for decades and I’m not the first person to raise these questions. My analysis is less thorough, but it does reveal enough to suggest much of the same bidding behavior exists today. Of the 59 contracts awarded in the four counties, I found only 4 times that any of these companies submitted a bid across county lines. Each of the four companies were awarded a majority share of the single bid contracts within their respective counties. Most of the single-bid contracts awarded were for asphalt paving.

Fayette County is especially questionable where 2 out of 3 contract awards over the past 3 years have been single-bid. It is difficult to understand how this lack of competition exists in the 2nd largest county in Kentucky.

The lack of competitive bidding for asphalt paving contracts isn’t confined to the Lexington area. While Northern Kentucky and Louisville are competitive markets, the same pattern exists in most of the state. That’s why we need a thorough examination to understand why this lack of competition exists. The General Assembly is the policymaking body for the Commonwealth and should direct the Auditor’s office to examine KYTC’s bidding practices. Policymakers, taxpayers and the Cabinet itself can benefit from an objective review of KYTC’s bidding practices. A thorough audit of the bidding practices would be a road-map for reform for Secretary Gray – and with his business background he could be the best man for the job of reforming the Cabinet. 

The best way to support business is to support competitive markets. Competition will maximize the value of every dollar dedicated to investing in our infrastructure. An audit of the Transportation Cabinet’s bidding practices will improve Kentucky’s business climate and show taxpayers the General Assembly is committed to being good stewards of the tax dollars sent to Frankfort.