The federal government relies on contracts to supply a wide range of goods and services. Contracts differ from other direct expenditures, such as grants, because the government directly benefits from fulfillment of the contract. For example, the government would use a contract to build housing for U.S. troops but might use a grant to build a homeless shelter. The U.S. government directly benefits when the troops are sheltered, but, no matter how desirable, does not directly benefit from the homeless being sheltered.
Under a contract, a subsidy generally occurs when the government pays more than fair market value for a good or service. Subsidies may also be provided to companies that have a preferred status in the bidding process. Government contracts have long been used as a method for subsidizing certain activities the government encourages. For instance, in the 1840s the government wanted to support the development of oceangoing steamships, a relatively new technology at the time. This resulted in Congress offering padded Post Office contracts to shipping companies if they used steamships to deliver the mail.
More often than not, however, a government contract is just a government contract and it does not have a subsidy component. In some cases it is clear that a contract does include a subsidy component. For example, federal procurement rules explicitly favor certain types of businesses, such as minority-owned businesses and certain types of goods, such as recycled paper. But in many cases it is difficult to determine when a subsidy is taking place since the fair market value may be a matter of opinion. For example, as part of a trade dispute, the European Union claims Boeing, a U.S. aircraft manufacturer, is receiving subsidies through "overpriced DoD contracts."1 Boeing argues the "payments represent the value of those services [rendered to the government]. They are not subsidies."2 It may be difficult to prove either side is correct.
Subsidyscope does not attempt to determine which contracts have a subsidy component or measure what that component may be. We do presume, however, that competed contracts – contracts that are subject to an open bidding process — generally do not have a large subsidy component, even though the bidding process may include certain preferences. Thus, we focus on those contracts that are not competed and make this information available to the public. This does not mean non-competed contracts contain a significant subsidy, only that they are more likely to do so.
The Federal Procurement Data System (FPDS) tracks information about contractual purchases of goods and services made by the federal government. It is a vast and comprehensive system, but in some ways is less relevant to Subsidyscope's mission than the data in Federal Award and Assistance Data Set.
Not every record in FPDS represents a subsidy. In many cases the records simply detail a government purchase of a good or service at the prevailing market price. Subsidyscope's advisory board agreed that it would be a mistake to classify such spending as subsidies to private industry. Instead, we focus on contracts that were not subjected to a fully open competitive bidding process. There are often good reasons for eschewing the competition process, which can be inefficient and time-consuming. But in some cases competition is avoided in order to provide a benefit to a specific bidder or class of bidders (e.g. an incumbent vendor; vendors owned members of historically disadvantaged groups). Although it is not possible to state whether a subsidy is present without a record-by-record analysis of each contract, most of the subsidies that have been intentionally inserted into the contracting process will be represented within the subset of contracts that were not fully competed.
A further complication arises when assigning FPDS transactions to a sector. Although the expenditures made under a direct assistance program like those in FAADS typically have a narrow set of purposes and recipient types, an agency may procure a wide variety of products in the course of fulfilling its mandate, from office supplies to software to raw materials — a catering charge incurred by the Department of Transportation cannot be reasonably claimed to be a subsidy to the transportation sector. For this reason we have based our analysis on two pieces of data that are available to each FPDS record. When possible we use each record's North American Industry Classification System (NAICS) code, a standard for identifying industrial activity that is often included during the bidding process for a government contract. Unfortunately, not every record in FPDS contains a NAICS code. In these cases we use the Product/Service Code (PSC) (PDF) to identify the appropriate sector for each record.