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The “Amazon Amendment” Would Effectively Hand Government Purchasing Power Over To Amazon

This week, representatives of three major internet platforms — Google, Facebook, and Twitter — are testifying before Congress about their role in facilitating Russian meddling in the 2016 election. But a fourth giant sat comfortably removed: Amazon.

Instead of getting yelled at by lawmakers, Amazon is on the verge of winning a multibillion-dollar advantage over retail rivals by taking over large swaths of federal procurement.

Language buried in Section 801 of the House-passed version of the National Defense Authorization Act, which is being hashed out in a conference committee with the Senate, would move Defense Department purchases of commercial off-the-shelf products to “online marketplaces.” Theoretically, that means any website that offers an array of options for paper clips or office furniture; in reality that signals likely dominance for Amazon Business, the company’s commercial sales platform.

Section 801 stipulates that the program should be designed “to enable Government-wide use of such marketplaces.” Scale, then, is key. Over time, this change would give platforms like Amazon access to all $53 billion in federal government commercial item purchases.

“It seems like Amazon wrote it,” said Stacy Mitchell of the Institute for Local Self-Reliance, which has written critical reports about Amazon in the past. “It will accelerate the transfer of more and more government spending to Amazon.”

The online marketplace provision, which still has to get through a House-Senate conference, coincides with a significant ramp-up for Amazon Business, which only launched in 2015. Last week, the company introduced Amazon Business Prime, a $499 membership that comes with free two-day shipping for its business-to-business products. The announcement tanked the stock prices of its main industrial supply competitors, Fastenal and W.W. Grainger.

Amazon Business has already surpassed 1 million customers and $1 billion in sales. Its business-to-business growth made up part of its 34 percent revenue increase in the last quarter. But federal procurement is the holy grail, the lucrative market to tap. Perhaps that’s why, for the head of Amazon Business’s public sector division, the company hired Anne Rung, who ran the Office of Management and Budget’s Office of Federal Procurement Policy until fall 2016. This made Rung effectively the top purchasing officer in the United States.

“She probably can’t go back and lobby [her former colleagues at OMB] based on the cooling-off period,” said Scott Amey, general counsel for the Project On Government Oversight, referring to federal ethics laws. “But nothing would prevent her from lobbying others on Amazon’s behalf.”

The idea for online marketplaces came out of the House Armed Services Committee and its chair Mac Thornberry; he initially put the proposal in a standalone bill. Currently, to acquire off-the-shelf items like bottled water or pencils, government agencies sign long-term contracts with suppliers or use the General Services Administration “schedules,” a kind of catalog which sets prices for procurement.

In its NDAA summary, the committee argues that this is too burdensome and too expensive, citing a recent inspector general report showing higher-cost IT products in the GSA schedules than on the open market. “A solution is obvious to most consumers,” concludes the summary, “allow the government to use online commercial sites like Amazon, Staples, or Grainger just as businesses do.”

The definition of an “online marketplace” merely refers to a commercial, non-government portal selling products. And GSA, under the law, must select more than one online marketplace for this purpose. But eligible platforms must offer multiple suppliers for the same product, with constantly changing selection and prices. “I don’t think Grainger does that,” said Mitchell. “Every reference implies we’re talking about a platform where third parties are selling. If that’s the case, we’re talking about Amazon, Walmart [through its e-commerce site Jet.com], and not really anybody else.”

Indeed, Section 801 has been informally dubbed the “Amazon amendment,” and experts believe only one or two companies would have the wherewithal to participate. That means monopoly or duopoly control of $53 billion in federal purchasing.

The online marketplaces, which can be given no-bid contracts, explicitly eliminate the need for government procurement officers to seek out competitive bids for commercial products. As long as they visit the marketplace, that would satisfy any rules about competition, because of the multiple sellers on that platform. But that assumes the platform is a neutral arbiter of what gets purchased.

Amazon not only hosts third-party sales, it competes against those third parties with its in-house brands. Amazon places costs and parameters on third-party sellers on its platforms that can inhibit their ability to compete. And the company has mastered the technique of driving buyers to preferred products, by adjusting search results, or controlling what gets into the “buy box,” the top option it suggests for purchases. Often those preferred suggestions cost more than rivals.

“I don’t think what’s happening on Amazon is a market,” said Mitchell. “It’s a private arena that Amazon controls.”

Even if Amazon always served up the best alternative for any product, it extracts money from third-party sellers for the privilege of using the platform, of anywhere between 15 and 20 percent. If Pentagon procurement, and potentially all federal procurement, shifts predominantly to Amazon, it would collect billions of dollars annually without doing much of anything. The online marketplaces would satisfy small business purchase requirements as well, meaning that a significant portion of what small businesses earn from government spending would leak through to Amazon. A 15 percent skim could represent as much as half of a small business profit margin.

Holding data on regularized federal spending decisions can also prove valuable. “I can imagine Amazon saying, we looked at the data and can make a lot of money selling the Defense Department chairs,” said Mitchell. “We’ll either arbitrarily or through a rule change or increase in fees induce the fiercest competitor in making chairs to leave the portal. And we’ll own that business.”

With the bill mandating dynamic pricing, Amazon can also capitalize on data. If it knows that procurement officials are less attentive buying products on a Friday afternoon, or that they always buy a certain product on a certain day of the month, Amazon can jack up prices at those moments.

This is also another troubling example of government outsourcing. The GSA schedules were created for the purpose of buying commercial items in bulk at a better price than the open market, which makes sense because the government is the nation’s largest purchaser. “There’s a thought GSA isn’t getting the best prices,” said Scott Amey of POGO. “My feeling is, I don’t want to pay what other businesses pay.” In this sense, the government would be effectively giving up its leverage to Amazon.

Technically speaking, there are safeguards in the proposal to prevent ripoffs. A marketplace cannot feature any product based on an exclusive fee; procurement officials are supposed to be able to screen for suppliers and products that have been suspended from government contracting; the GSA is supposed to get full purchase data, including comparison prices from other suppliers. “For the government, that kind of transparency and accountability would be revolutionary,” the House Armed Services Committee report states.

But by the time GSA gets the data, the purchases will already have been made. After-the-fact GSA reports might improve matters over time, but billions could be lost in the process. And Amazon doesn’t have to take fees to feature its own products; they can just blame it on the algorithm.

Amazon has targeted government purchasing at the local level. In January, the company won a contract with U.S. Communities, a coalition of 90,000 local governments. Amazon famously spent years denying the payment of sales tax to local governments; now it’s a major supplier of local government office supplies. Federal agencies also have accounts with Amazon, including at the Department of Homeland Security. “They want to be the go-to source at every level of government,” Mitchell said.

The Senate version of the NDAA, one of the few bills Congress passes every year, does not include the online marketplace provision, meaning a compromise will have to be reached. Negotiations in the conference committee began two weeks ago, and in earnest in the last week. There’s no timeline on when that might be completed.

The Coalition for Government Procurement, an assembly of federal acquisition experts, recommended last month that Section 801 be made into a pilot program, calling the proposal “the most consequential procurement policy changes in a generation.” CGP wants to test compliance with statutory requirements, impact on small business, the use of data and fees, and other unintended consequences.

“Don’t hand over all our purchasing to Amazon,” Mitchell said, referring to the conference committee. “The lack of transparency and accountability is astonishing. Whatever problems there may be with the GSA, this would only compound the same issues.”

Top photo: A view of a conveyor belt system that is under construction at a new Amazon fulfillment center on Aug. 10, 2017 in Sacramento, Calif.

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