Public procurement is legally accountable for its decisions.
Depending on the value of the specific purchase it will be subject to EU Procurement Directives. The existing Directives, harking back to 2006, could not be deemed to be a robust solution to effective procurement. The new Directives are complex, unproven and laden with potential bureaucracy. There are legal, governance, commercial and financial ramifications for public sector procurement strategies and policies. These considerations abound with implications for private sector organisations bidding for contracts in the future.
A selective critique and commentary follows on some highlights of the new Directives.
Where now for the EU Procurement Directives?
On the 14 January 2014 the European Parliament voted to accept the new Directives to replace Directive 2004/17 (Utilities Directive) and Directive 2004/18 (Public Sector Directive). These are likely to be implemented in the UK by the Cabinet Office during 2014. The official line is that the new EU Directive on public procurement intends to make the process of purchasing goods and services by public bodies, faster, more flexible and more effective. Time and events will tell! Those on the receiving end of public procurement processes wax lyrically about the overwhelming bureaucracy, unclear specifications, pre-qualification documents requiring a plethora of policies, unclear tender evaluation models, lack of feedback to unsuccessful bidders and timescales that are not adhered to. There is solace in the fact that the Remedies Directive remains unchanged.
We predict it will be used with more vigour when the future outcomes of public procurement decisions emerge, together with the manner in which the new Directives are applied in real life scenarios.
The final version of the “Proposal for a Directive of the European Parliament and of the Council on public procurement (Classical Directive) (First Reading)” can be found on the Council of the European Union – Institutional File: 2011/0438 (COD) – Public Sector Directive. The Utilities Directive reference is 2011/0439. The Concessions Directive reference is 2011/0437.
Commercial organisations will welcome the abolishment of the ‘Negotiated Procedure.’ This is replaced by a new process, ‘Competitive Procedure with Negotiation.’ The Negotiated Procedure has been actively discouraged by UK Public Sector policy, arguably on the basis that the ‘Competitive Dialogue’ procedure was more fitted to complex procurements. This missed the point. The private sector sees negotiation as a positive practice, engaged in by mature organisations who genuinely seek to reach a long-term solution. Negotiation will offer a challenge to those public sector buyers who lack advanced skills. The scope of negotiations could include cost models supporting the price, key contract clauses such as limits of liability, insurance, damages and the provision of accurate management information.
The National Audit Office reports are testimony to failures of the public sector to engage in meaningful clarification and negotiation.
The implementation of the ‘Competitive Procedure with Negotiation’ is likely to need extensive bedding in. The procedure has the potential to generate challenges to contract award decisions. This will prove costly for all the parties involved.
The abolition of differentiation between ‘Part A’ and ‘Part B’ services is a welcome change. Currently, Part A services are subject to the full scope of the Procurement Directives. This includes financial services, cleaning services and insurance services. Part B services have been subject only to limited regulation and it may be postulated that, in consequence, some Part B services have exposed the public sector to excessive pricing regimes from parts of the private sector.
An example, from real life, is a service provider to the private sector charging £750 per hour, whereas the same supplier was charging the public sector on a multiplier of 1.5. The immunity of some Part B service providers is, of course, now threatened.
It is optimistically held that the new Directives will be a boost for small and medium enterprises (SMEs). The Directives will encourage (our emphasis), public sector buyers to break large contracts into smaller lots and capping turnover requirements for businesses. Hence, there is only encouragement and intent. It must not be forgotten that under the current procurement regime it has always been possible to break a procurement requirement into Lots. This approach has been contrary to the public sector penchant for aggregating requirements to obtain lower prices, notably by the Office of Government Commerce and its successors.
The consequence has been SMEs actively being discouraged, if not deliberately excluded, from some procurement exercises. This has fostered the award of contracts to large UK, European and USA corporations. The concentration of public contracts by value and strategic significance has largely been swept under the carpet.
What will the future hold?
It is beguiling to believe that public sector buyers will now concentrate on advertising requirements in Lots. The main reason, we suspect, will be the danger of an avalanche of tenders from SMEs and the resources required to deal with that situation. The public sector has not adopted best practice conducting due diligence on suppliers prior to contract award. There are numerous examples of a sole source suppliers entering into administration, without the buying organisation having Plan B in place. Worse still, is the absence of risk modelling on a broader scale than just probing the financial health of contractors and vendors.
We are pessimistic for SMEs gaining a much greater share of public sector contracts.
The proof of financial capacity is materially changed in the new Directives. To encourage the participation of SMEs, the maximum yearly turnover that economic operators are required to have, shall, in future, not exceed two times the estimated contract value, except in duly justified cases, such as where there are special risks. A scrutiny of this language leaves no doubt that there will be many such duly justified cases. The role of credit agencies is not mentioned, but warrants comment here. The robustness of financial credit checks is in some cases less than robust. We are aware of one situation where the financial basis of the credit score was four years out of date.
The price of goods and services has always been a contentious matter in public sector procurement. There has been a provision to award contracts purely on a ‘price’ basis or ‘Most Economically Advantageous Tender’ (MEAT). Typically, MEAT has been evaluated on the basis of price and quality. In one situation a Local Authority gave price 90% of the evaluation weighting. The new Directives introduce the concept of life cycle costing. We confidently predict that the Remedies Directive will be used by economic operators to appeal decisions to award contracts when life cycle costing was misapplied in tender evaluations.
The draft Directives include the following statement,
“Qualitative criteria should therefore be accompanied by a cost criterion that could, at the choice of the contracting authority, be either the price or a cost-effectiveness approach such as life cycle costing.”
Therein lies the potential for future disputes over contract awards.
There is a huge difference between knowing a Lump Sum price and understanding the cost drivers behind the price. This latter approach would require declaration of labour costs, material costs, overhead recovery, contingency provision to cover the risks inherent in the purchase, profit, environmental, social, disposal of goods and/or recycling. The public sector has a track record of not developing cost models to expose all these cost drivers.
The implications for the private sector are profound. They need to acquire the skill of disclosing this layer of detail, and in future, be competent to handle strategic negotiations where the cost drivers are scrutinised.
Legal compliance and governance. In respect of legal compliance and governance, there is now a requirement for member states to take ‘appropriate measures’ to ensure that in the performance of public contracts economic operators comply with applicable obligations in the field of environmental, social and labour law established by Union law, national law, collective agreements or by the international environmental, social and labour law provisions. It may be noted that a failure to comply with these obligations will be grounds for exclusion from a tender.
Finally, the draft Directive states:
“Traceability and transparency of decision making in procurement procedures is essential for ensuring sound procedures, including efficiently fighting corruption and fraud”.
Risk modelling for procurement decisions is in its infancy. For free access, until 30 June 2014, to our risk modelling solution Procurisk® ideally suited to identifying risks in procurement and supply chain please contact Ray Gambell or call 01744 20698.
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