New York City’s government is so vast and expansive, it sometimes seems there are few things in which it does not involve itself. Seven years ago, for example, it became the only municipal government in the country to attempt to control the price of concrete.
The cost of concrete is higher in New York than anywhere else in the country. In the early Eighties, at the height of Manhattan’s building boom, contractors paid close to $90 per cubic yard for concrete, compared with about $50 in Boston and Philadelphia. Real estate developers, fearing the price would reach $100, saw themselves as victims of a Mafia-controlled price-fixing conspiracy. They argued that organized crime controlled the concrete trade, rigging prices and discouraging competition. Developers convinced the Koch administration that if the city failed to act and prices continued to escalate, commercial construction would become prohibitively expensive, jeopardizing the city’s real estate tax base.
In response, the Mayor’s Office of Construction, an oversight agency that monitors city construction spending, decided to establish a private-sector supplier that would furnish all the concrete the city needed at a negotiated price, presumably lower than the prevailing market rate. Contractors working for the city would be required to buy their concrete from the city-sponsored supplier, which would also be free to sell its wares at the same price to private contractors not working for the city. In theory, the fixed price would serve as a “yardstick” that could measure whether other suppliers overcharged and pressure them to keep prices down.
But today, the city, locked into a contract with the company it created, is paying $71.50 per cubic yard for the concrete it uses in street and sidewalk work. This is not only more than the current market average of about $65, but more than the $59 the city’s Department of General Services was paying in the mid-Eighties. (The city has always been able to buy concrete more cheaply than building contractors, because the material it uses for highway and sidewalk construction work does not to have the strength required for high-rise buildings, and delivery is less time-consuming.)
These results demonstrate that city officials did not understand the concrete business. In early 1986, the city put out word that it was looking for a concrete manufacturer. It excluded existing local suppliers from consideration because of their presumed Mafia ties. More than two years later, after several fits and starts, the city-sponsored plant began operating. The city was eventually forced to fall back on a local industry veteran to make the operation work. Meanwhile, as the building boom went bust, concrete prices plummeted.
The problems began soon after the city began its search for a concrete company. Ten companies responded to the city’s initial request for proposals, but when existing producers and curiosity seekers were eliminated, the list was quickly winnowed down to two. One of the remaining contenders, a New Jersey firm, dropped its bid, leaving only Mustapha Ally, a self-proclaimed tycoon from Guyana who said that he would finance his proposal with a half-ton of gold he owned.
Ally had an impressive résumé: five-term mayor of a Guyanese district with 250,000 people, former landowner, master builder, rice miller, cattle rancher, and warehouse operator. He had sold all his assets, he said, for 15,700 ounces of gold worth roughly $6 million.
Although city officials were unable to verify three of the four U.S. bank accounts Ally claimed to hold, the Board of Estimate approved a five-year contract after a city background check revealed “no substantial derogatory information.” Under the agreement, signed in August 1986, Ally agreed to build a concrete plant on a city-owned pier at 57th Street and to furnish a fleet of twenty mixer trucks for delivery. In return, Ally would be designated the city’s sole concrete supplier, at a price to be determined when the plant was ready to produce. Mayor Koch announced the agreement at a highly publicized city hall ceremony, hailing it as a breakthrough in the city’s war against organized crime that would reduce concrete prices in the bargain.
From the start, however, Ally ran into trouble. Existing suppliers declared war on him, and filed a spate of lawsuits (all ultimately unsuccessful) that scared off the potential bank lenders to whom he was forced to turn when Guyana refused to let him export any of the gold he claimed to own.
Then the Daily News published an investigative report about Ally, revealing that he had grossly exaggerated his qualifications. The population of the district where Ally had been mayor was closer to twenty thousand than the quarter-million he claimed. He was merely a minor subcontractor on a bridge project he claimed to have built from start to finish. He had been arrested at least three times, twice in Guyana and once in Maryland on a bad-check charge. The newspaper also raised doubts about the size of his gold stockpile, and questioned whether it existed at all. “If Mr. Ally does hold this gold, he holds it illegally,” a Guyanese official told the Daily News, citing a regulation that all such holdings must be sold to the government.
The city’s original proposal had called for brand-new equipment: a mixing plant and truck fleet capable of producing and delivering as much as five hundred cubic yards of concrete per hour. Instead, Ally shipped in a used portable plant capable of producing only 125 cubic yards per hour. His trucks, too, were second-hand, with wheelbases too long and mixing drums too small for high-volume work in the close quarters of midtown Manhattan. Ally claimed his total investment was $7.3 million, but a survey of the used equipment market suggests he could not have spent more than $4 million.
Because of credit problems Ally missed his March 1987 deadline for opening the plant. The summer passed, and finally in September he persuaded the city to allow him to sell his company to the F.E.D. Concrete Company, owned by former Brooklyn Congressman Francis E. Dorn and a man named Phillip Elghenian. Dorn died shortly after RE.D. took over the contract, and Elghenian changed the company’s name to the West 57th Street Concrete Corporation. In May 1988, the new company went into production—just as the real estate boom was ending and demand for concrete sagging.
Elghenian sold the city 13,000 cubic yards of concrete in 1988, far below his break-even point. The company again posted large losses in 1989 and 1990. To save his company, Elghenian turned to Gene de Pasquale, a 43-year career veteran of the construction business. De Pasquale took over the flagging operation in late 1990, forming the West 57th Street Management Corporation and, in effect, replaced Elghenian as subcontractor.
De Pasquale seems to be turning the company around. Last year, the plant produced 85,000 cubic yards of concrete for the city, making it one of the three top producers in Manhattan. The operation is not yet making money, but de Pasquale says that if the city renews its contract, he plans to replace the makeshift plant and truck fleet with new equipment.
The building slump has left other concrete companies in bad financial shape, and their ineligibility for city projects has aggravated the situation further. The city’s efforts to control the cost of concrete may increase prices for everyone in the long run, by driving producers out of business and reducing competition in the industry.
The city’s experiment in controlling concrete prices was a failure because its original premise—that the Mafia controls the price of concrete—is questionable at best. True, in 1988 the Manhattan District Attorney’s office won bid-rigging and other racketeering convictions against eight men, including Anthony (Fat Tony) Salerno, boss of the Genovese crime family, and Edward J. (Biff) Halloran, who had been New York’s major concrete supplier. But these convictions were overturned by a federal appeals court last year. Moreover, the decline in concrete prices that resulted from the end of the building boom, and the intense competition that now exists among the remaining suppliers, demonstrate that the market is stronger than the Mob. And the Mafia’s tentacles presumably extend to Boston and Philadelphia, cities where concrete is still far cheaper than in New York.
What, then, accounts for the high prices here? Primarily logistical factors: a supplier’s profit margin depends on how much concrete he can deliver each day with his fleet of trucks. Manhattan’s congested streets mean fewer trips per day, so prices must be higher to cover the supplier’s expenses. Had the city understood these basic dynamics, it might never have wasted its time and money trying to control the price of concrete.
Ironically, there is a lesson here for city officials now thinking about privatizing some services long provided by municipal agencies: It is a mistake to create a private-sector monopoly in the supply of an essential material. Privatization can be efficient and cost-effective only if competition—both among private companies and between the government and the private sector—is allowed to thrive.