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What To Do When A Government Contracts With Itself?

Across the globe national governments have been aiding various companies as they struggle with the major down turn in the economy. In the United States money was given to financial firms such as Citi (C) and AIG (AIG) in bids to keep the corporations viable. Money was also provided to GM (GM) and Chrysler with the Government becoming shareholders of the companies. In the United Kingdom there had to be intervention to save the Royal Bank of Scotland (RBS). This left that Government as the majority shareholder in the bank.

One of the goals of these rescues was to rebuild a viable company and get the money paid back to the taxpayer. This means that they need to function as they have had in the past. In England this has raised concerns over the award of a contract to provide search and rescue for the country. This effort is being privatized and will rely on contractors to provide, maintain and operate the helicopters used for this mission rather then Police and the Royal Air Force (RAF). Normally there would not be any real issues with this except that the RBS is a major partner of one of the teams bidding.

This raises issues of favoritism in the bid process. The Government wants the best price for the service provided but they have an obvious conflict-of-interest with RBS. It is in their best interest for RBS to get work that will help it make money and pay back the Government. At the same time they cannot be seen as favoring that bid. That would be unfair to the other companies bidding on the contract. The difficulty is if the limit what RBS can do they are then being unfair to the shareholders who at this time are mainly the citizens of Great Britain.

The same situation could arise in the United States if GM became a major bidder on a new defense contract. That is unlikely to happen as their role in defense has been very limited over the last few decades, but it could happen. The source selection authority and board would then be evaluating a bid submitted by a company owned by the government and this might lead to bias and favoritism. It also has some overtones of socialism where the government owned all the factories and would just be placing orders from them for goods.

It is clear due to delays in awarding the search and rescue contract that the British Government is aware of the problem and is working on a way to fix it. In the U.S. an award in a situation like this would probably be protested almost immediately which would lead to delays in the execution of the contract. Legally there would also have to be clear firewalls between the personnel involved in the selection and managing the company bidding. This issue is arising at a time when the U.S. Government is cracking down on Organizational Conflicts of Interest (OCI) among contractors. It is ironic that further bailouts of companies may raise OCI issues within the Government.

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