Carillion – A Canary in the Coalmine for Overextended Government Contractors?
Abby Semple |18 January 2018
As the fallout from the collapse of major government contractor Carillion became clear on Monday, Cabinet Office minister David Lidington defended the decision to award contracts to the company despite a series of profit warnings and other signs of deep financial problems. Lidington said that the government had continued to award contracts to Carillion because there are "rules on the type of information that you can take into account when taking those decisions." This is true. But do the public procurement rules really require the government to award contracts to financially unstable companies? Top civil servant John Manzoni also referred directly to the EU procurement rules in his evidence to the Public Administration and Constitutional Affairs Committee on Carillion’s collapse – saying that these prohibited the government from excluding companies in its position.
There are many ways under the UK and EU procurement rules to evaluate the financial stability of a contractor, and to exclude them from bidding or end contracts where appropriate. This begins at the selection stage with the ability to assess financial and economic standing, continues through the bid evaluation stage with the obligation to identify and, in certain cases, reject abnormally low tenders, and includes an almost unlimited number of measures which can be taken at contract performance stage to ensure ongoing financial viability, and to enable termination or assignment of a contract where the contractor is in trouble or failing to deliver. I discuss these measures in more detail below. While the Carillion debacle cannot reasonably be blamed on the procurement rules, there appears to have been a failure to properly interpret and apply the relevant rules.
What went wrong
Carillion amassed £1.3 billion in debt through its rapid expansion and acquisition of other companies. While it continued to win private and public sector contracts, many of these were low-margin construction contracts and delays in delivery (such as at Liverpool’s Royal Hospital) led to serious cash flow problems. Carillion’s average margins, at 4.1%, were above many construction firms and it had also diversified into various service contracts, such as providing prison and hospital meals and buildings maintenance, including at GCHQ. Nevertheless, the strategy of piling numerous low profit contracts upon each other was a high risk one.
It seems the government adopted a strategy of hoping that Carillion could trade its way out of trouble, not an entirely unreasonable idea (Serco did something similar, although by adopting a different strategy), but riskier than extricating itself from troubled contracts and excluding Carillion from bids once its problems became clear. Contracts awarded after Carillion began issuing profit warnings in July 2017 can be seen as bailouts-by-other-means – an attempt to help Carillion maintain its cashflow despite its problems. It’s possible however that the government was genuinely under the impression that it could not legally exclude Carillion despite clear evidence of its financial instability.
Can a company be excluded if it has issued a profit warning?
The EU public procurement rules allow a company’s economic and financial standing to be evaluated at the selection stage, and provide a non-exhaustive list of considerations which can be taken into account. The Court of Justice has upheld the use of various indicators in this regard, including a requirement that bidding companies demonstrate successive periods of profitable operation.
Public bodies can also require that performance guarantees be issued by financial institutions at selection stage. Financial selection criteria should be tailored to the particular sector and the particular contract, rather than adopting a ‘one size fits all’ approach. Of equal importance to the choice of criteria is the ability to meaningfully assess the information submitted by bidders, seek clarifications where needed and to decide when a bidder should be excluded. While many contractors will seek to challenge an exclusion decision, provided the rules are clear and proportionate to the size and nature of the contract, such challenges are unlikely to succeed.
Beyond assessment of economic and financial standing, there are two exclusion grounds which may be relevant in cases where a company is carrying large amounts of debt. The first applies if the company has not kept up with tax or social security (including pension) payments. The second applies where a company withholds or seriously misrepresents any information relevant to its exclusion or selection (i.e. including information on financial matters), or where it fails to submit appropriate supporting documents. What if a profit warning or other evidence of problems appears after the qualification stage? The 2014 directives and 2015 Public Contracts Regulations are very clear that a company may be excluded at any point in a procedure where one of the grounds is found to apply.
Both Lidington and Manzoni pointed out that the major contracts awarded to Carillion (including HS2) after July 2017 were those in which it served as part of a joint venture or consortium. Does this change the situation regarding selection and exclusion? Again, the procurement rules are very clear that when a bidding company relies on other entities (whether as part of a consortium or otherwise) for the purposes of qualifying for a bid, the exclusion and selection criteria must also be applied to that entity. Where a partner on whom a consortium seeks to rely for the purposes of qualification lacks the relevant financial or other capacity, or subsequently loses it, a public client can require that partner to be replaced.
If a contractor does manage to satisfy a contracting authority of its financial stability and proceeds to the bid stage, there is still a need to evaluate the financial viability of the bid itself. The rules on abnormally low tenders require that these be investigated, with bidders being given an opportunity to explain any pricing which appears to be unsustainable. It is ultimately up to the contracting authority to decide whether such explanations are convincing or whether a real risk of non-performance or other problems remains. Where a tender is abnormally low due to a company not complying with environmental or social laws (including pension regulations and any applicable wage agreements), then it is mandatory to exclude that bid.
It’s possible that an even earlier sign of Carillion’s instability could have been acted upon by the government. According to reports in the Financial Times, hedge funds began to bet against Carillion as early as 2013 on the basis that it was taking 120 days to pay some subcontractors. The 2015 Public Contracts Regulations require contracting authorities to pay undisputed invoices within 30 days, and also require contractors to apply these same payment terms to subcontractors. Any robust public sector contract awarded since 2015 should include sanctions for contractors not applying such terms in their contracts – which it seems Carillion was not.
Sharing information between departments
One factor which seems to inhibit government departments (as well as the wider public sector) from applying selection and exclusion rules robustly is the fear that other authorities will take a different approach. This is not necessarily a bad thing – as mentioned the assessment of financial capacity should be specific to each contract and a company may be perfectly capable of performing a smaller or lower-risk contract. Companies which have been excluded from bidding on one contract should not fear being ‘blacklisted’ by the public sector as a whole; as their financial situation changes fresh assessments should be made. However given that much financial information is not in the public domain, there is some value to having common sources of information about major government contractors. In Germany, this is being addressed by development of a shared register containing information about suppliers relevant to exclusion and selection criteria. In the UK, Crown Commercial Representatives are intended to fulfil this role in a different way – however it appears this system broke down in Carillion’s case.
Contract management measures
The procurement rules have always left public bodies a wide discretion to define their contract terms. Where concerns exist about the financial stability of a company, special terms may be added to provide government with early warning of this and to take appropriate measures to minimise the risk to public services. Undoubtedly some of these terms exist in the Carillion contracts, but there is a question as to why they were not activated earlier, potentially averting the major scale of intervention which must now be taken – placing considerable stress on government resources. Again this seems perhaps to have been driven by an excessively sanguine view of Carillion’s capacity to trade out of its difficulties. It may also reflect a reluctance to activate terms which could ‘spook’ the market, thus hastening a company’s collapse. Like selection and exclusion criteria, contract terms should reflect size and risk, and provide for a range of interventions which may be appropriate for situations of varying gravity.
An in-house solution?
Other contractors are hovering over the carrion of Carillion’s contracts, ready to pick up any viable business. While it’s vital that we understand what went wrong with Carillion, those who seek to question all forms of outsourcing based on its collapse are surely off-mark. The public sector cannot and should not directly provide all of the goods, services and works which citizens expect it to deliver – that would limit both the quality and quantity of public services while undermining competitive markets. Given the number of prominent failures in outsourced contracts, it is understandable that questions are asked about the overall benefits of outsourcing. But just as the ‘market is always better’ ideology has failed to deliver on many occasions, the ‘public sector is always better’ ideology is likely to fall short.
There is no obligation under the EU procurement rules for a public body to award a contract for any service if it doesn't wish to. In-house bids can be considered either in advance or as part of competitive procurement procedures, meaning that if the public sector is in a better position to deliver a particular service directly, it should do so. Naturally private contractors are not always keen on this approach, but they have also failed to challenge it successfully. Alernatively, authorities may decide to award a contract to a connected public body without any competition, provided certain conditions are met, in particular that this doesn’t end up conveying an advantage on any private operator.
Before retreating to ideological ghettos in which the private sector is either always right or always wrong, it’s worth asking whether things could have been done differently under the existing procurement rules. These rules seek to balance the idea of fair competition with the right of the public sector to choose who it wishes to contract with, and allow government to include a wide range of economic, environmental and social considerations in these decisions.
This article has identified five separate grounds on which companies in a similar situation to Carillion may either be excluded from bidding for public contracts, have their bids rejected or have contracts terminated under the current EU and UK procurement rules:
It is therefore grossly misleading to suggest that the procurement rules required the government to continue awarding contracts to Carillion after its financial difficulties became clear. The true reasons for the government’s actions probably relate more to the extent of Carillion’s public sector business, including a number of high profile contracts, and the mistaken belief that it could trade out of its difficulties. While hindsight is a wonderful thing, Carillion may be a canary in the coalmine for poor procurement and contract management practices which extend to other major government contractors who find themselves in similar financial holes.
 In case C-218/11 Édukövízig and Hochtief Solutions
 Case C-76/16 Ingsteel and Metrostav
 Art. 57.2 Directive 2014/14/EU; Reg. 57(3) and (4) PCR 2015
 Art. 57.5 Directive 2014/14/EU; Reg. 57(9) and (10) PCR 2015
 Art. 63.1 Directive 2014/24/EU; Reg. 63(4) PCR 2015
 Ibid, see also Case C-223/16 v
 Art. 69.3 Directive 2014/14/EU; Reg. 69(5) PCR 2015
 See Montpellier Estates v Leeds City Council  EWHC 166 (QB)
 These conditions are set out in Regulation 12 of the PCR 2015.
Conflicts, errors and explaining evaluation results: European Dynamics v EUIPO
Abby Semple | 20 November 2017
Yesterday I taught a module on tender evaluation, part of the residential weekend at King’s College London for the Public Procurement Regulation in the EU postgraduate course. One of the cases we discussed was European Dynamics v European Union Intellectual Property Office (T-556/11) and the appeal by EUIPO, subject of a recent opinion from Advocate General Mengozzi (C-376/16). The original case, brought under the Financial Regulation which governs procurement by EU institutions, is notable for its detailed discussion of manifest errors of assessment, conflicts of interest, exclusion for corruption and the duty to give reasons to unsuccessful bidders. It’s also notable for being one of the few cases won by serial litigant European Dynamics/Evropaïki Dynamiki (ED), with the General Court annulling the award of contract and finding ED was entitled to damages (it had claimed over EUR 6 million).
The challenge related to a multi-operator framework agreement to provide IT services to the EUIPO, which was set up on the ‘cascade’ model (i.e. a primary provider plus two reserves). ED came fourth in the competition, despite obtaining the highest score on each of the three technical criteria. It challenged the decision on three grounds: failure to exclude the other bidders based on alleged conflicts of interests and corruption, numerous alleged manifest errors of assessment in the evaluation of the technical and financial criteria, and the level of detail provided by EUIPO regarding the scoring of its tender. As each of the issues is highly relevant to contracting authorities and entities operating under the 2014 procurement directives, it is worth examining both the General Court’s judgment and AG Mengozzi’s opinion, which relates solely to the duty to give reasons.
Conflicts of interest and corruption
The first alleged conflict of interest related to the participation of PwC Spain in one of the consortia admitted to the framework. PwC UK and PwC Belgium had been involved in drafting the tender specifications. When this was brought to EUIPO’s attention, they sought clarification from the consortium leader, who responded that i) there were no structural links between PwC Spain and the entities involved in drafting the tender specifications ii) PwC UK and PwC Belgium were bound by a confidentiality clause and had not disclosed any information related to the specifications and iii) PwC Spain had only been asked to participate in the consortium six days prior to the tender deadline and had no involvement in the preparation, drafting, pricing or sign-off of the technical tender. On the basis of this response, EUIPO concluded that no unfair advantage could have been gained. While some scepticism about the efficacy of Chinese walls within corporate groups may be natural, the existence of a specific confidentiality obligation, together with the lack of opportunity to influence the content of the tender, does seem to greatly reduce the risk of a conflict affecting a tender.
Under the 2014 directives, the duty on contracting authorities to prevent conflicts of interest is balanced against the right of a bidder to demonstrate that it could not have gained an unfair advantage. This is an issue which must be considered from the early planning stages, particularly in IT or other complex tenders where external input is often needed to prepare specifications. While contracting authorities may require companies preparing specifications to refrain from bidding for the main contract, they may not be able to bind other companies in the same corporate group – and the proportionality of this approach might in any case be questioned. The General Court found that in this case EUIPO had fulfilled its duty to investigate and there was no conflict of interest. The Court also appeared to attach significance to the fact that the consortium had scored lower on the technical criteria than European Dynamics – in my view this does not in itself mean that no unfair advantage was gained, as any such advantage may have been outweighed by other factors.
A second alleged conflict of interest arose from the fact that one of the bidders had also bid for a second framework being established by EUIPO, which would involve developing specifications for, and monitoring work carried out under, the first framework. At the time of the tender in question, no contracts had been awarded under this framework. European Dynamics itself was also eventually admitted to the second framework, leading EUIPO to argue that if the conflict of interest argument succeeded on this count ED would also have to have been excluded from the procedure and would lose its claim for damages. In the event, the Court did not consider the claim valid, as the second framework was not yet in existence at the time of the disputed tender. This raises an interesting question regarding the possibility under Art. 57.4 of Directive 2014/24/EU to apply exclusion grounds at any point when the contracting authority becomes aware of a problem. EUIPO had specifically referred to the possibility that holding a contract under the other framework might amount to a conflict of interest and result in exclusion, however as this was not the case at the time of the tender it had not excluded the second consortium.
Finally, ED alleged that Siemens, a key partner in one of the successful consortia, should have been excluded on the basis of its admissions of fraud, corruption and bribery in cases brought in Germany and the United States, and its payment of fines to settle those cases. While Siemens had not been convicted of any crime, the Court found that EUIPO had failed to seek the necessary evidence of this required under the Financial Regulation. EUIPO had not requested an ‘extract from the judicial record’ in relation to this and other grounds of exclusion as required under the Financial Regulation, instead allowing Siemens to rely on a solemn declaration. It had also only received the declaration from one of the two Siemens entities involved in the consortium. The General Court held that it had breached its duty to seek evidence in respect of the grounds of exclusion. Is this also a duty under the 2014 directives? Bidders are able to rely upon self-declarations (including the ESPD) to prove that they comply with the exclusion grounds in the first instance, but contracting authorities must seek documentary evidence in relation to the exclusion grounds prior to contract award. They may also do so at any earlier point where this is necessary for the proper conduct of the procedure. In situations where there are clear grounds to suspect a company of wrongdoing, this obligation is likely to be activated (see my previous blog below about the Rolls-Royce deferred prosecution agreement).
Manifest errors of assessment
ED also advanced a large number of claims of manifest errors of assessment, roughly half of which were upheld by the Court. In relation to the financial evaluation, ED challenged both the formula and the way in which it was applied by EUIPO. The financial evaluation consisted of two parts: 70 marks were assigned based on the average day-rate tendered (with the lowest average rate receiving full marks and other bids marked proportionately) and 30 marks were assigned based on the average efficiency ratio (based on the number of days required to carry out three hypothetical jobs, with the lowest average again receiving the highest score). ED’s challenge to this formula was rejected as they had not established either that EUIPO deviated from its published methodology or that it was unlawful. Arguably any cost evaluation formula which is divided into parts which are weighted separately is capable of giving rise to distortions (for example, if a bidder had a high average rate but was extremely efficient, they might score lower than a bidder who had a higher overall cost but a low daily rate) – however ED did not succeed in demonstrating this.
Duty to give reasons
The third claim raised by ED concerns the duty to give reasons for decisions, and specifically to explain the basis on which bidders ‘lose marks’ in technical and financial evaluations. The concept of bidders losing marks must be treated with caution in my view, as in most evaluation techniques it is not the case that each tender starts out with full marks and points are then deducted for specific shortcomings. Rather, tenders gain marks where they demonstrate performance against a qualitative award criterion; if a tender does not respond to an award criterion at all, it should score zero under that criterion. To deduct marks suggests that there is a putative ‘perfect tender’ to which each bid is being compared. While some contracting authorities do in fact use model tender answers, this can make evaluation formulaic and detract from a genuine exercise of discretion on the part of evaluators. It is also inappropriate where specifications are output- or performance-based, as there will be more than one way to gain full marks under qualitative criteria.
While ED had received its scores and the scores of each of the three successful bidders, it sought a full copy of the evaluation report and copies of the successful tenders. The General Court had previously held in a case brought by ED against the Commission (C-629/11 P) that there was no obligation to disclose all details of the analysis of each tender, the evaluation report or the successful tender(s). In TNS Dimarso (C-6/15), the Court of Justice held that disclosure of evaluation methodology was not required under the procurement directives. In this case however, the General Court found that the reasons given by EUIPO had been inadequate because they did not make clear the relationship between the evaluation of the various technical criteria and sub-criteria and the points ‘deducted’, or provide a breakdown of the points. The Court thus appeared to introduce a higher standard of disclosure than has previously been contemplated in EU case law on tender evaluation. Advocate General Mengozzi’s opinion, delivered on 28 September 2017, upheld the General Court’s approach and dismissed EUIPO’s appeal on this ground. He sought to distinguish Case C-629/11 P on the basis that in that case the weighting of sub-criteria had been clear, whereas in this case the weighting was undisclosed.
In some ways this case perhaps says less about the duty to give reasons and more about choice of evaluation method. EUIPO had adopted one of those unfortunate, but common (at least in recorded case law) evaluation methods which results in only a very small number of marks separating tenders on the technical criteria. To me this almost always indicates a failure to use the marks available to properly distinguish between bids, keeping in mind that they are being compared to each other and not to some ideal standard. Contracting authorities may be better off using intervals spread across the whole range of marks to score technical criteria. Otherwise there is effectively a distortion of the published marking scheme – as the full range of marks may be used to score cost whereas only a very limited range of marks is used to score quality. The result is that cost ends up having a heavy influence on the final result, even when there is not a large spread of tendered costs.
As so often in procurement, it is when the contracting authority itself generates detailed rules but then fails to explain or follow them that it gets into trouble. Regardless of whether the Court of Justice chooses to follow AG Mengozzi and the General Court on this point, contracting authorities are well advised to apply relatively simple scoring methods for technical criteria, explain them in the tender documents, and give tenderers a full statement of reasons which shows how they have exercised their discretion in evaluation.
Socially responsible public procurement after Brexit: Will it get easier?
Abby Semple | 6 June 2017
EU rules have often been portrayed as a barrier to including social considerations in public contracts. Undoubtedly, having rules about competition limits the scope for implementing social policies if these discriminate against non-local suppliers. But outside of such discriminatory policies, the 2014 directives offer a wide range of options to pursue socially responsible public procurement (SRPP). For example, there is an increased ability to reserve contracts for social enterprises or programmes employing disabled and disadvantaged workers. While not a derogation from competition, contracts can be reserved for organisations where at least 30% of the workforce is disabled or disadvantaged. There is also now a clear ability to address social considerations such as fair trade in award criteria, a position written into the directives following the European Court of Justice's judgment in the Dutch Coffee case (C-368/10). Bidders who have been convicted for child labour or people trafficking, as well as those who have failed to pay taxes or social security, must be excluded from tenders.
Perhaps most significantly, the 2014 directives contain a 'mandatory social clause' requiring governments to ensure that environmental, social and labour laws are observed in the performance of public contracts. This includes obligations under applicable collective agreements, and was one of the many amendments introduced by the European Parliament during the negotiation of the new directives. While England and Wales chose not to transcribe this article directly in the 2015 Public Contracts Regulations (PCR), it still has effect and is embodied in various other provisions - for example the obligation to reject tenders which are abnormally low due to non-compliance with such laws or collective agreements. Contracting authorities can also verify compliance on the part of parent companies or subcontractors where reliance is placed on these by the bidding company. Tenders which are based on illegal social dumping can therefore be rejected, even if the company has not been convicted of an offence.
While these may seem like relatively modest measures, they represent a substantial evolution from previous directives - and reflect the involvement of the ECJ and European Parliament as well as Member States. In particular, they offer substantially more support for SRPP than other international instruments concerned with procurement - including the WTO Government Procurement Agreement (GPA) and Comprehensive Economic and Trade Agreement (CETA) with Canada. In a recent paper comparing these agreements with the EU directives, I identify a number of areas in which the GPA and CETA appear to restrict social procurement measures which would be allowed under the directives. For example, neither agreement explicitly allows rejection of abnormally low tenders based on non-compliance with social or labour law, and the use of third-party labels (such as the Fair Trade mark or SA 8000) is also not endorsed. While these agreements are more general in nature than the EU directives and also less widely enforced, the lack of a clear legal basis for SRPP is a cause for concern given the vastly different social protection systems which exist in the countries which are party to them.
Turning to Brexit, the extent to which contracting authorities are able to pursue socially responsible procurement will be one of many issues to be resolved as the UK leaves the EU. It seems unlikely in the short term that the PCR or the remedies regulations will be repealed. However as noted previously on this site, public bodies may come under renewed pressure both to 'buy British' and to implement social policies such as employment skills and training via public contracts. These objectives need to be separated and careful consideration given to any proposals to change the legal framework. Any change in policy or practice is certain to come under scrutiny in the context of trade talks with the EU, and may also arise if the UK finds itself relying on WTO rules. The EU is still considering adopting a regulation on third-party access to its public procurement market, which would apply price penalties to companies from countries which do not open their own public contracts to competition. Aside from the trade implications, discriminatory procurement policies tend to undermine value for money and effectiveness in public service delivery. This is why the work done at EU level (with heavy UK input) to reconcile social protections with fair competition is so important.
One of the key areas where these two objectives have seemed to conflict is over the question of wages paid to workers on public contracts. While the Posted Workers Directive (PWD) makes clear than minimum wages set out in laws, regulations, administrative provisions and certain collective agreements can be applied, there has been greater doubt around living wage policies in public contracts. The Scottish government engaged in correspondence with the European Commission on this issue several years ago; at that time it was advised against including the living wage as a mandatory condition for award of contracts. However two developments since that time suggest a shift in EU law which may make implementation of the living wage easier. The first is the aforementioned Dutch Coffee judgment, which endorsed the use of award criteria based, inter alia, on the payment of wage premiums to workers in developing countries. This creates an arguable case for use of award criteria based on the living wage, as I have set out in a paper to be delivered in Nottingham. The second factor is the proposed change to the PWD which would allow enforcement of a broader range of pay-related conditions in host Member States, rather than just minimum wages.
Questions such as the application of a living wage in public contracts have been subject to a detailed legal and political bargaining process within the EU. The balance reflected in the procurement directives and PWD is neither final nor static - it is subject both the ECJ's ongoing interpretation and to legislative change. In this area, as many others, disentangling these bargains and cross-references to allow the UK to take an à la carte approach is far from easy. Moreover, it is not clear that the UK's constituent regions would wish to make the same choices from that menu. Divorcing the text of ex-EU legislation from the evolving body of EU law in the manner set out in the Government's March 2017 White Paper may lead to unintended consequences and risks creating a stricter, rather than more flexible, regime for UK contracting authorities. This would occur where CJEU case law is 'fossilized' in the manner set out in the White Paper, and where flexibilities introduced by the revision of the PWD, for example, do not form part of UK law. While a hard Brexit involving reversion to WTO rules might provide some additional flexibility on living wage issues, it is also likely to be accompanied by severe economic pressures which would undermine both the public and private sector's ability to pay a living wage to employees in the United Kingdom.
 In the UK, the Living Wage Foundation has since 2001 calculated the rate of pay necessary for workers to meet basic needs given prevailing prices, including a small margin for unexpected expenses. The Living Wage has typically been 20-30% higher than the national minimum wage, with the separate London Living Wage being 30-40% higher. Voluntary commitments to pay the Living Wage have been made by some 2900 private and public sector organisations in the UK. This should be distinguished from the 'National Living Wage' introduced under the National Minimum Wage (Amendment) Regulations 2016, which is the legal minimum for workers aged 25 and over (£7.50 per hour as of April 2017).
Does the UK have a Rolls-Royce Public Procurement System?
Abby Semple | 29 January 2017
I'm currently working in Ukraine, and have been reading Marina Lewycka's novels to help pass the long winter evenings. In A Short History of Tractors in Ukrainian, the narrator's elderly father marries an awful woman who demands that he buy her several cars, including a Rolls-Royce. It breaks down and sits abandoned in the front garden for much of the book; at one point a family of cats moves in. I couldn't help thinking of it as I read of the recently approved deferred prosecution agreement (DPA) between Rolls-Royce and the Serious Fraud Office (SFO). Rolls-Royce plc no longer makes cars but is one of the world's largest suppliers of civil and military aircraft engines, amongst other interests.
Under the DPA, Rolls-Royce will pay almost half a billion pounds in disgorged profits and fines. In the agreed Statement of Facts, the company admits using bribes and corrupt payments to secure contracts in India, Nigeria, Russia, China, Indonesia, Thailand, and Malaysia - the misconduct covers a period of 24 years. To the extent that Rolls-Royce had an anti-bribery system in place, it seems not only to have broken down but a family of mangy cats moved in and destroyed the upholstery. The investigation started in 2012 and was the largest ever conducted by the SFO (the US and Brazilian authorities also investigated). In his judgment approving the DPA, Lord Justice Leveson repeatedly lauds Rolls-Royce's cooperation, which he found justified a 50% discount in the fine applied. His judgment was prepared in a hurry due to the links between the SFO investigation and that of the U.S. authorities, and the potential impact on the latter of the change in presidential administration.
One of the key reasons cited by Sir Leveson for allowing the DPA is the impact which a conviction would have upon the company's ability to compete for public sector contracts:
"...a conviction would undeniably affect the ability of Rolls-Royce to trade in the world where, as I started this judgment by observing, it is a world leader and has a reputation for excellence. It is well known that many countries operate public sector procurement rules which would debar participation following conviction. ...
Debarment and exclusion would clearly have significant, and potentially business critical, effects on the financial position of Rolls-Royce. This could lead to the worst case scenario of a very negative share price impact, and, potentially, more serious impacts on shareholder confidence, future strategy, and therefore viability."
Sir Leveson also draws attention to the company's significant position as a supplier of engines for UK military and naval vessels and propulsion technology for nuclear submarines. While he denies that these factors mean the company is effectively immune from prosecution, they clearly played a role both in the decision not to prosecute and the court's acceptance of this. Ironically, the emphasis placed on avoiding debarment reinforces the mentality which lead to the bribery in the first place: lucrative government contracts must be obtained at all costs.
Even if we accept that payment of a large fine alongside substantial remedial and preventative efforts by Rolls-Royce serve the public interest as well as a conviction, questions must be raised about the characterisation of debarment as a kind of nuclear option. First of all, under both the Public Contracts Regulations 2015 (PCR) and Defence and Security Contracts Regulations 2011, a company may be excluded from tenders even where there is no conviction, on the grounds of grave professional misconduct. This is a discretionary grounds so it is up to individual public authorities to decide to apply it. If they do, under the PCR the company has a right to adduce evidence of its reliability despite previous misconduct, and the maximum period during which it could be excluded is three years from the date of the relevant misconduct. Even if there was a conviction, it would still have the same right of 'self-cleaning' and a maximum exclusionary period of five years would apply. As these rules come directly from the EU procurement directives, they also apply in each of the other 27 Member States.1 On the face of it then, the debarment provisions under the public procurement rules are relatively lenient - although it's important to note that the public authority and not the company decides whether it has effectively 'self-cleaned'.
Why do these rules exist? Debarment has a dual function: it protects the public sector from unscrupulous companies and it sends a clear message that such practices will not be tolerated. The rules on self-cleaning and maximum exclusion periods attempt to balance these policy objectives with the risk that companies will be unfairly blacklisted. Many would say that the balance unduly favours companies who have engaged in misconduct, however much depends on the approach taken by public authorities to enforcing the rules. In the UK, a string of Parliamentary questions in late 2016 revealed that the Ministry of Defence, Department for Business, Energy and Industrial Strategy, and Department for International Development have not excluded a single bidder from their tenders since the new rules came into effect. While stories of corporate wrongdoing are a near daily feature in the press, many of these companies continue to bid for and win public contracts.
One reason why public authorities may hesitate to exclude companies like Rolls-Royce from tenders (other than fear of a legal challenge) are concerns about the impact on competition - particularly in oligopolistic or monopolistic defence markets. Perhaps one of the reasons why many of the markets from which the public sector buys are dangerously concentrated is the failure to question and adequately sanction corrupt practices by 'national champions'. The specific public policy objectives met by debarment are not met by a DPA, even one accompanied by sizeable fines and requirements for corrective measures. Leveson's statement that "a DPA will likely incentivise the exposure and self-reporting of wrong doing by organisations in similar situations to Rolls-Royce" acknowledges that it is not a very onerous penalty. Debarment sends a clear message that certain types of corporate behaviour are not acceptable if a company wishes to win public contracts. It is precisely because large companies fear debarment that it would be a highly effective deterrent - if it were ever applied.
What seems to be forgotten is that debarment targets unfair competition from those who have benefited by breaking the rules, and can create opportunities for new market entrants. Another public interest factor which is absent from the judgment is the probability that some or all of the half-billion fine will be passed back to the public sector in the form of inflated prices for contracts. What seems like a pragmatic solution may have hidden long-term costs. Any prosecution obviously brings uncertainty with it, however it seems clear that the SFO would have had a very strong case. On this basis, Rolls-Royce's cooperation and agreement to the DPA is hardly surprising and should not have been the grounds for a 50% discount in its fine. Despite its cooperation, it seems Rolls-Royce has also lobbied the UK government to weaken anti-bribery laws.
Ukraine has made rather breathtaking progress on public procurement since the Maidan revolution of 2014. Contracts are now tendered using a simple, transparent online system which has lead to savings as well as improved public perceptions of government contracting, which used to be a byword for corruption and waste. There is a lot of work still to do, but an enormous energy and ongoing internal and external pressure are behind procurement reform.The UK is obviously starting from a different point, but the direction of travel also appears to be different. Increasing pressure to 'Buy British' at all costs and to ignore the 'red tape' associated with EU rules on procurement means that competition, transparency and equal treatment no longer appear to be core values in public contracting. Helping companies to avoid exclusion may seem like a good solution in the short term, but ask any Ukrainian about the long term costs of such 'mutually beneficial' arrangements.
"Rolls-Royce" used to be a byword for high quality, now it perhaps carries other connotations. But the UK can still build a procurement system which is "Rolls-Royce" in the original sense - if it starts taking bidder exclusion seriously. At the end of A Short History of Tractors in Ukrainian, the Rolls is rehabilitated and put to good use - just as companies who have truly self-cleaned or served out the exclusionary period are eligible to tender for public contracts again. Getting to grips with these rules and their fair application is made harder, not easier, where courts reinforce the idea that debarment must be avoided at all costs.
 The Defence and Security Contracts Directive (2009/81/EC) does not currently include rules on self-cleaning, however public authorities are able to admit bidders on grounds of 'overriding requirements in the public interest' even where they have convictions.
See Corruption Watch's blog A Failure of Nerve: The SFO's Settlement with Rolls-Royce
Thoughts on Brexit - Five Predictions for Public Procurement
Abby Semple | 15 August 2016
The initial referendum dust may have settled but it's still far from clear what shape Britain's future relationship with the EU will take. Those of us who campaigned on the Remain side have gone through the initial three stages of grief: denial, anger and bargaining (in particular, over how Article 50 should be invoked). All that remains for us is depression or, eventually, acceptance. However even if we accept the political reality of Article 50 being invoked, no one can predict exactly how that process will unfold. One possibility is that a second referendum will be held on the terms negotiated for exit - although politicians will naturally be cautious about re-opening Pandora's box and there is disagreement about whether this could stop the withdrawal process. With no immediate signs of the process being initiated, the conclusion of a two-year negotiation grows closer to the end of the current Parliament, meaning an election may determine Britain's final position. Naturally other Member States will proceed according to their own political timetables and constraints.
As we draw breath before the autumn, here are some reflections on what Brexit may mean for public procurement regulation both in the UK and the EU.
1. A complete rewrite of the rule book is unlikely
Unless relations between Britain and the EU-27 deteriorate markedly in the next few years, it is hard to imagine free trade being abandoned. The terms on which this takes place, and in particular the extent of any restrictions linked to limits on free movement of people, will need to be negotiated. However even if the Canadian model is adopted (i.e. the UK is not willing or able to sign up to an EEA-style arrangement) this would encompass maintaining substantially open public procurement markets, meaning the existing rules would continue to apply. It seems unlikely that public procurement would be high on the list of laws to be rewritten in the UK, not least because the most recent overhaul reflects close UK involvement. That said, the government may come under pressure from particular sectors to remove some of the less popular rules - see the discussion on protectionism below.
A further reason why major departures from the current rules are improbable is that the WTO Government Procurement Agreement- which the UK will presumably seek to accede to in its own right - sets very similar requirements to the current EU legislation. One difference is that while the EU procurement directives (and therefore national implementations such as the Public Contracts Regulations 2015) apply generally to public contracts unless they are below threshold or subject to a specific exclusion, the GPA only applies in respect of the goods, services and works set out in the coverage schedules. As it stands, the scope of coverage for EU countries under the GPA is fairly comprehensive, however the UK could opt for more limited coverage if it wishes to protect certain industries or contracts from competition. This would result in equivalent restrictions from other GPA parties, which may not be a price worth paying.
Between the need to maintain trade with the EU and WTO members, we are unlikely to see a rewrite of the procurement rules, at least in the short term. The UK will be put in a difficult position when the next round of updates to the EU rules takes place, as it will not have a seat at the table. More immediately, the UK will lose its judges on the European Court of Justice while continuing to be subject to its interpretations of EU law, for example where British firms compete for contracts in Germany or France. Both these developments mean the UK will be a 'rule-taker' rather than a 'rule-maker' when it comes to public procurement. Far from creating more policy flexibility, Brexit is likely to entrench the existing rules until such time as others decide they should change. British input into the technical developments and harmonisation necessary to make e-procurement a reality will also be diminished.
Leaving the EU customs union would allow the UK more flexibility to negotiate deals with third countries (one of the Brexit campaign's many promised benefits) however it would also introduce a new layer of that odious red tape they assured us would vanish: in order to export to EU countries, the origin of goods and services would have to be proven. In January of this year, the Commission proposed a new regulation which would introduce price penalties on goods and services imported from countries which have not opened their public procurement markets to EU companies. While this has not yet been adopted, it is easy to see how it would form a useful backstop for the EU-27 in any negotiations on access to public contracts with the UK. Finally, remedies for breaches of the procurement rules will in the short term remain in place, although the piecemeal nature of the remedies directives mean they are long overdue for consolidation.
2. Temptations of protectionism will be hard to resist
The debate about protectionism vs. openness in public procurement is likely to become more prominent following Brexit, as the EU rules are widely perceived as the reason why some public contracts are awarded to foreign firms. As I pointed out in a previous article published in the Guardian, the number and value of contracts awarded by UK public authorities to foreign firms is tiny and the causal link between the EU rules and foreign companies winning contracts is tenuous. So which countries apply protectionist public procurement regimes and what have the effects been? Arguably the United States, with its numerous 'Buy American' initiatives and limited opening up of state procurement to outside competition, ranks high on the protectionist list. While EU countries make some €352 billion in public procurement accessible to US companies, the equivalent figure for the US is only €178 billion. This was one of the motivating factors behind TTIP, which seeks to remove state barriers in particular. As the UK may no longer be party to TTIP or its Canadian equivalent CETA, it could apply restrictions on companies from these countries accessing British public contracts, at least until such time as it can negotiate its own deals. This however sits uncomfortably with the positions taken by several pro-Brexit ministers, who support stronger trade links with the rest of the world. For further discussion of the impact of Brexit on TTIP, see Professor Chris Yukins' blog.
Identifying the precise effects of protectionist policies on quality, value-for-money, short and long-term competitiveness and other procurement desiderata is not straightforward. All too often our assumptions about the impact of protectionist policies reflect our ideological orientation: pro-trade or pro-localism. In theory, it should be possible to study the impact of individual protectionist policies (for example, a preference for British steel) in a controlled way by inviting some departments or local authorities to apply this policy and others not to. But the political and legal reality is that such policies are adopted or removed in a blanket manner, most often in response to pressure from the industries concerned or in retaliation or exchange for similar policies adopted by our trading partners. The result is a dearth of evidence about whether such policies work to achieve any of their aims.
3. Environmental and social standards may lose out
The 2014 directives saw a major reorientation of the EU public procurement regime towards environmental, social and other 'horizontal' objectives. While these remain voluntary for public authorities to apply, ECJ case law has increasingly emphasised the freedom which they enjoy to depart from market-driven or cost considerations when awarding contracts (see Case C-368/10 Commission v the Netherlands and Case C-115/14 RegioPost in particular - commentary on both cases appears below and in the analysis section). The UK's record on sustainable procurement is decidedly mixed; it lags behind the Scandinavian countries, the Netherlands and Germany when it comes to applying high environmental and social standards in public contracts. This also means that UK procurement is not as innovative or SME-friendly as it might be, due to the incessant focus on lowering costs and the tendency to focus on processes rather than outcomes. Initiatives in areas such as sustainable food and timber raised the ambition level, but energy and departmental resources for these appear to have been lost in recent years.
The 2012 Social Value Act demonstrated that domestic political will exists to further social objectives through public procurement. To build upon this, a robust approach to measuring outcomes and progressive development of the Act to provide a clearer mandate is needed. It is disappointing, if understandable, that most of the effort put into implementing it appears to champion strictly local interests to the neglect of broader environmental or social considerations. With councils under more or less severe budgetary pressures, they aim to use procurement to support local projects which might otherwise not receive funding. But if Brexit Britain is going to be truly outward looking, we need to embed policies on climate change and human rights throughout public sector activity. We will no longer be able to rely on the EU to take the sometimes unpopular decisions which protect natural resources, air, water and soil quality, workers' rights and safety standards. A reorientation of trade towards China and the Persian Gulf would also severely test these standards.
4. Competitiveness and costs
Will UK public procurement become less competitive after Brexit? This depends very much on the general economic climate, as well as any additional costs of doing business here for EU firms. Governments will do their best to maintain an attractive business environment, and this may include specific incentives for foreign businesses to locate here. Public contracts have remained more or less stubbornly resistant to direct cross-border awards; outside of the defence sector, this accounts for as little as 2% of contracts advertised in the Official Journal. Any factor which makes it riskier or more costly for EU businesses to sell to the UK public sector could send this figure lower still. Does it matter? I would argue that levels of competition for many larger public sector contracts in the UK are already dangerously low, and that this is compromising both value for money and the quality of public services. More competition is not always the answer, but faced with a choice between two or three domestic 'devils-you-know' and a wider field including a few continental contenders, I would prefer the latter.
5. Transparency and corruption - yes it can happen here too!
We are in serious trouble if political interference in the award of contracts becomes normalised. Britain prides itself on having low rates of public sector corruption and indeed compared to many countries we are very lucky. However corruption in public procurement is multifaceted - it's not just about awarding contracts to companies owned by your family members or political donors. It can also take the form of intentionally running procedures in a manner which gives an unfair advantage to certain firms, for example to an incumbent if very short tender periods are applied. Where public contracts become politicised, for example because they are highly visible or relate to core public services, they can easily become subject to pressures which are incompatible with value for money and fairness. On the other hand, lack of transparency and public knowledge about contracts can be equally dangerous - we need look no further than defence sector contracts for evidence of the impact which looser rules on procurement can have on cost and effectiveness.
Key tenets of the EU public procurement regime such as equal treatment, transparency and proportionality serve to underwrite sound procedures - so it is vital that these are safeguarded within domestic procurement law. While remedies will still be available to companies who feel they have been treated unfairly, this may need to be supplemented by an independent procurement ombudsman or authority on the model adopted by Canada and Sweden - as the European Commission will no longer play the role of neutral enforcer of the rules. I have argued that the existing remedies system in the UK is biased in favour of larger companies who can afford the high costs of litigation via the courts. While the Mystery Shopper service operated by the CCS offers some recourse to smaller operators, it does not serve as a general enforcer of procurement standards throughout the public sector. Brexit may lead to a perception that the existing rules on procurement do not have the same legal force, so the Government will need to make clear its plans for ensuring fair and transparent procedures across the public sector.
 Source: European Commission, D-G Trade COM (2016) 34 final at page 2.
Of tick boxes and time bombs
Abby Semple | 26 January 2016
Standardisation can sometimes yield considerable gains. In shipping for example, the use of intermodal freight containers in standard sizes allows for the seamless global transfer of goods. In the EU, the use of common product standards and mutual recognition of qualifications have helped the single market to develop, albeit to the detriment of bendy bananas. In procurement, standardised forms and nomenclatures (such as the Common Procurement Vocabulary) are long-established as tools of the trade, and technical specifications commonly refer to standards such as the EN and ISO families. This is particularly useful in a jurisdiction with 24 official languages.
However not all aspects of procurement are suited to standardisation. On the list of jobs most likely to be taken over by robots in the next 20 years, procurement officers rank 141st out of 366 roles, according to research by Oxford University and Deloitte. Solidly mid-table, but the same research indicates that any role which involves negotiation is unlikely to be computerised any time soon. Certain procurement tasks lend themselves to use of electronic systems, and in some cases automation - for example checking that bids have been submitted on time and are complete. Others, such as the assessment of service quality and understanding risk pricing, are likely to require human intelligence for the foreseeable future.
Where does the assessment of exclusion and selection
criteria fit into this picture? For some, it is the most bureaucratic and routine aspect of procurement, and one which they would happily avoid. This was a view put forward strongly by businesses in
the consultations preceding both the 2014 EU procurement directives and the UK's reform of below-threshold procurement in Part 4 of the Public Contracts Regulations (PCR 2015). It is also shared by some contracting authorities who
see exclusion and selection criteria as a mere formality, meaning the use of standardised forms is welcome if it expedites the process. This view makes sense if bidders are either all equally
reliable or all equally unreliable - or if it is impossible to determine their reliability prior to awarding them a contract. Contracting authorities would be better off allowing all prospective
bidders through the selection stage, or using the open procedure.
It can certainly be difficult to make the right decisions when selecting tenderers, but there are a number of reasons why contracting authorities may not wish to give up on this altogether. One is that the PCR 2015 give new scope to take important factors such as defective prior performance, compliance with environmental and labour law, supply chain management and conflicts of interest into account. These are the type of issues which create major headaches for public authorities when they arise in contracts, particularly high-value or high-profile ones. Some may argue that it is hard to elicit the type of information which allows such problems to be detected at selection stage - but this is much more difficult where excessive reliance is placed on standard forms and tick-boxes. The new rules seek to balance the right of contracting authorities to act on such information with the right of companies to 'self-clean' - but these powers can only be meaningfully exercised where both the specific expectations of the authority and the process for dealing with any apparent issues are set out in the PQQ.
A second reason for not doing away with the selection stage altogether is that, properly run, it serves to reduce the pool of potential tenderers to a manageable number. This benefits bidders who then have a better chance of winning, and benefits contracting authorities who can evaluate bids from companies or groupings who are actually qualified to deliver the contract in question. Transaction costs on both sides are lower - because fewer unsuccessful tenders are prepared and evaluated. There is always some risk that overzealous reduction of numbers leads to good companies being excluded - thus the need to ensure that selection questions are relevant to the specific contract and that all requirements (including those related to turnover and previous experience) are proportionate.
This brings me to the recent publication of the much-awaited European Single Procurement Document (ESPD) by the European Commission this month, and to the standard Pre-qualification Questionnaire (PQQ) published by the Crown Commercial Service in 2015 and due to be updated shortly. The ESPD deals with the mandatory and discretionary exclusion grounds, selection criteria and (optionally) criteria for reducing the number of qualified candidates. The standard PQQ is also designed to cover these stages, so at the moment there is some overlap between them. Under Regulation 95 of the Public Contracts Regulations (Article 95 of Directive 2014/24/EU) contracting authorities are obliged to accept the ESPD as preliminary evidence regarding compliance with exclusion and selection criteria - however they are able to request supporting documents at any time where needed to ensure the proper conduct of the procedure. The question is how much time and effort these standardised documents will save in practice. Considerable thought and expertise has gone into the drafting of both documents - but they also have the potential to create new legal, financial and technical risks in public procurement.
The ESPD is a self-declaration which is to be completed in electronic format by companies wishing to express an interest in or submit a tender for a public contract. It is divided into six parts covering information about the contracting authority and procurement; information about the economic operator; compliance with exclusion grounds; information relating to selection criteria; information relating to criteria for reducing the number of qualified candidates; and concluding statements and signature. Notably, all six of these sections make cross-references to the procurement documents, so a new ESPD will need to be completed for each procurement. While some answers could be copied over, the company will need to check that the information is still valid and relevant at the time of submitting the ESPD. Likewise, the instructions indicate that contracting authorities cannot just state that they will accept the ESPD, but must indicate which sections are to be completed and what information is required in relation to subcontractors.
The ESPD mirrors the provisions set out in Article 57-65 of Directive 2014/24/EU (Regulations 57-65 PCR 2015), and to that extent is relatively harmless/uncontroversial. However several questions arise on perusal of the standard form and accompanying instructions. The first is whether any matters dealt with in the ESPD can also be addressed in a PQQ. This would detract from the administrative expediency which is a primary object of the ESPD, but it may be necessary to ensure transparency, equal treatment of operators, and the proportionality of selection criteria applied. Transparency may be adversely affected due to the limited ability for contracting authorities to enter information in the ESPD, meaning multiple cross-references to the procurement documents/PQQ are needed. Equal treatment is at risk due to the indication that the ESPD does not need to be filled out in its entirety where an operator is registered on an official list or national pre-qualification system. This creates a two-tier system which is likely to favour domestic operators registered on such lists - problematic given that one of the stated
objectives of the ESPD is to facilitate cross-border procurement. Equal treatment is also at risk where the ESPD is relied upon in two-stage procedures without supporting documents being checked prior to the tender stage - as an operator may be admitted to the tender stage who does not in fact meet the relevant criteria.
However perhaps the biggest challenge facing the ESPD, which is also my main criticism of the standard PQQ, is that it makes it more difficult for contracting authorities to apply exclusion and selection criteria which are relevant and proportionate to the specific contract. Attempting to rely upon a 'one-size-fits-all' document risks including certain criteria which are inappropriate. For example, the standardised PQQ only allows three previous contracts to be submitted, whereas a wider cross-section of contracts may help to demonstrate that SMEs or new entrants to a market meet the authority's requirements. On the other hand, if 'standard forms' are endlessly adaptable, they are less likely to cut down on the work which contracting authorities and economic operators need to do. For my money, I would rather spend some time developing or responding to a sensible set of questions which are specific to the contract at hand, rather than attempting to rely on imperfect standard documents. But then maybe I'm just trying to ward off the robots.
 The lack of a common format for electronic signatures is one of the bugbears afflicting the ESPD. It asks for a signature only 'where required or necessary' - which it would be in most EU countries, but not all are likely to accept the same format.
 At time of writing, the online 'ESPD service' referred to in Commission in Implementing Regulation 2016/7 remains shrouded in mystery, as does the question of whether and how this will interact with the existing (but not recently updated) e-Certis database. Article 61 of the Directive requires the use of e-Certis specifically.
Steeling credibility: Protectionism is not the same as sustainability
> Procurement policy note: Procuring steel in major projects (PPN 16/15)
Abby Semple | 22 December 2015
The contraction in the UK’s steel industry has led to big job losses this year in Redcar, Scunthorpe and Lanarkshire. Last year saw hundreds of jobs go in South Wales. As part of the Government’s effort to respond, the Crown Commercial Service published a PPN in early November, setting out the policy to be followed by central government in its procurement of steel in works contracts valued above £10 million. The PPN identifies a number of recommended steps including early market engagement and transparency regarding subcontracting opportunities; robust application of exclusion and selection criteria, including those related to health and safety and environmental compliance; the application of whole-life costing to steel purchases including the cost of emissions; and use of environmental and social award criteria.
These approaches are all possible due to the enhanced ability to take non-price considerations into account under the Public Contracts Regulations 2015. The purpose of developing these rules under the new EU procurement directives was to encourage procurement which is sustainable in the environmental, social and economic sense. However both the preamble and the timing of the PPN make it clear that the purpose of the measures is to ensure UK steel suppliers can 'compete effectively’ – or to put it another way, to reduce the proportion of foreign steel being used in public contracts. Is this a legitimate way to use the public procurement rules? Is it likely to succeed, and if so at what cost?
While the issue is sometimes simplistically put as one of Chinese versus British steel, 69% of the steel imported to the UK comes from other EU countries. The UK actually ran a small trade surplus for steel in 2014 - despite the value of the industry declining by 42% since 1990.
On the world market, there is a glut of steel due to higher production and sluggish demand, including in China. Productivity in the sector has also gone up, meaning fewer people are employed. State aid rules prevent direct subsidies to UK steel manufacturers, however there are moves to put anti-dumping measures in place at EU level against low-priced Chinese steel. The Government has also introduced a scheme to compensate the steel sector for the cost of climate change policies - effectively removing the incentive to reduce the carbon footprint of the industry.
Even if it is accepted that the Government should take measures to support the steel industry, procurement may not be the best tool to address this type of market failure. Arguably a non-competitive industry shrinking is not a market failure but a market success – although it does not feel that way to those who have lost their jobs. The Government should do everything in its power to develop alternative industries in which the UK can compete successfully, and to support the transition in skills needed to make these viable. It should not waste resources propping up industries where there is a fundamental inability to compete due to factors which it cannot meaningfully influence, or cannot influence without sacrificing other economic or social policies of equal importance.
Without citing any evidence regarding the effect of current procurement practices on UK steel companies, the PPN clearly implies that sustainability criteria will make it more difficult for foreign companies to win contracts. There is an important difference between using procurement rules in this way and using them with the actual motive of reducing greenhouse gas emissions, improving working conditions or other objectives. If the latter were the true motive of the PPN, one might expect to see some reference to how these issues arise in the steel supply chain and how they can be addressed by all suppliers.
The objective of environmental and social criteria may be partly to keep 'bad' suppliers out - but they are much more powerful where they have the ability to positively influence industry practices, for example to reduce emissions. If European and other suppliers see such criteria as a tool to keep them out of the UK market, they will be rightly cynical as to their ability to win contracts even if they do make the desired changes to their production process. The argument is sometimes made that other EU countries keep more of their public sector contract spend for national companies, so protectionist measures adopted by the UK are merely evening the score. This is not however borne out in the available figures - which show that the UK spends less than France, Italy, Poland and Spain on public contracts awarded to companies based in other Member States.
There are those who already equate sustainability considerations in public procurement with protectionism. Fortunately the legislative environment now refutes this argument, making clear that environmental and social considerations can coexist with competition and cost-effectiveness in procurement. However the hard work which went into achieving this recognition could easily be undone if Member States start using exclusion criteria and life-cycle costing with the primary purpose of favouring domestic suppliers. Interestingly, it may also not work for two reasons. First, the manner in which the exclusion criteria set out in Directive 2014/24/EU have been implemented in UK law focuses on companies which have committed offences under national law, and only secondarily under the law of other jurisdictions. This contrasts with the approach in Germany, for example, which takes a much more international view of such matters. Second, the results of life-cycle costing are difficult to predict and depend on the method and monetisation technique applied. It does not consistently favour domestically-produced goods.
If the concern about working conditions, environmental compliance and greenhouse gas emissions shown evinced by PPN 16/15 are genuine, why is there no policy requiring these factors to be taken into account in public procurement generally? Why was the decision taken not to fully implement Articles 18.2 and 57 of Directive 2014/24/EU (dealing with compliance with environmental, social and labour law and exclusion of bidders, respectively) in the Public Contracts Regulations? It looks like a very selective approach to these matters, with a short term focus. This is unlikely to solve the steel industry’s problems, and may create new ones for the public sector and society as a whole.
 Rhodes, C. and Booth, L. UK steel industry: statistics and policy House of Commons Library Briefing Paper, 26 October 2015
 Sylvest et al (2011) Cross-border procurement above EU thresholds: Final Report (Brussels: European Commission), p. 41
 See discussion of this in my submission on the draft Public Contracts Regulations 2015, availablehere.
New thresholds for OJEU advertisement published
28 November 2015
On 24 November the Commission adopted three delegated regulations setting out the thresholds for public sector and utilities procurement which will apply under Directives 2014/23/EU, 2014/24/EU and 2014/25/EU. The new thresholds will take effect on 1st January 2016 for those countries which have already implemented the directives (such as the UK, in relation to the Public Sector Directive). For other countries they will take effect at the time of implementation or, at the latest, on 18 April 2016.
The revision aligns the thresholds with the special drawing rights set out in the WTO Government Procurement Agreement, based on the exchange value of the euro. This means that the euro values have gone up slightly. However given the relative strength of sterling, the equivalent values in GBP have actually gone down. The new thresholds are shown below.
|Other public bodies||€209,000
|€209,000 (£164,176)||€5,225,000 (£4,104,394)|
|Light-touch regime public sector||€750,000
|Light-touch regime utilities||€1,000,000
RegioPost judgment: CJEU upholds minimum wage clause
Abby Semple | 20 November 2015
Ø Case C-115/14 RegioPost v Stadt Landau, Judgment of 17 November 2015
My last post looked at Advocate-General Mengozzi’s opinion in Case C-115/14 RegioPost v Stadt Landau (now available in English), which took a markedly different approach from Rüffert
to the question of whether contracting authorities may insist on the payment of a minimum wage to workers on public contracts. The CJEU has now published its judgment in RegioPost, which holds that:
i) Directive 2004/18 does not preclude legislation that requires tenderers and their subcontractors to undertake, by means of a written declaration, to pay staff performing the services a predetermined minimum wage; and
ii) A tenderer or subcontractor who refuses to provide an undertaking to pay a minimum wage required under legislation may be excluded from a procurement procedure.
For those not acquainted with Rüffert or the more recent Bundesdruckerei case, these findings might seem unsurprising. If a minimum wage is set out in legislation, surely public authorities are able to require their contractors to comply with the law? The judgment in RegioPost goes most of the way towards confirming this is the case, while leaving open some possibility for the review of minimum wage requirements against the Treaty principles of free movement and non-discrimination. The law at issue in RegioPost did not set a universal minimum wage, but applied only to public sector contracts. This much it shared with the collective agreement in dispute in Rüffertand the legislation in Bundesdruckerei. However unlike in those cases, none of the bidders for the contract was either based outside of Germany or proposing to use a workforce based elsewhere (see facts in my post below).
In considering the admissibility of the preliminary reference in RegioPost, both the Court and Advocate General found that the absence of cross-border bids did not remove the contract from the scope of EU law (paras 27-38 of opinion; paras 44-52 of judgment). The Court considered that because Article 26 of Directive 2004/18/EC allows contract performance conditions to be included in procurement procedures provided that they are compatible with Community law, review against both Article 56 of the Treaty and Directive 96/71/EC on the Posting of Workers (PWD) was appropriate. On this point, the Court differed from the Advocate General who did not consider the PWD applicable to the case (paras 51-60 of opinion). Without stating that the PWD applied based upon the facts, the Court cited a reference to the PWD in the recitals of Directive 2004/18/EC and proceeded to analyse whether the minimum wage requirement was compatible with it (paras 66-77). This may perhaps be due to the referring court's framing of its question in terms of the interpretation of Article 56 'in conjunction with' the PWD - presumably because it was concerned with the Rüffert jurisprudence. In so doing, the Court opened the door for future cases which explicitly involve a cross-border element to follow its approach in RegioPost.
The Court held that it was possible to justify a measure restricting free movement based upon the objective of protecting workers, even where the measure in question applied only to public sector contracts. It distinguished Rüffert on the basis that that case concerned conditions of employment set out in a collective agreement which had not been declared universally applicable, as required by Article 3 of the Posted Workers Directive. Article 3 refers to conditions of employment laid down by 'law, regulation or administrative provision' as well as collective agreements or arbitration awards which have been declared universally applicable. The interpretation of the term 'administrative provision' may be significant in any future challenges to living wage policies, which may for example be adopted as part of organisational standing orders or other non-legislative instruments.
Interestingly, the Court did not seek to distinguish Bundesdruckereion the basis that that case involved cross-border delivery of services, leaving open the question of whether minimum wage provisions can be enforced where bidders propose to use a workforce based in another Member State. It also did not engage in proportionality review of the German legislation, as the questions referred only asked if it was ‘precluded’ by the relevant EU law provisions. Once the Court had determined that enforcement of such legislation was possible in public contracts under the auspices of Article 26 of Directive 2004/18/EC, it turned to the question of whether a bidder could be excluded for its failure to provide a declaration that it would comply with the minimum wage. It found that given the importance ascribed to complying with mandatory conditions in tenders, including those adopted under Article 26, exclusion of a bidder was both permissible and proportionate. The fact that bidders were given an opportunity to clarify the reason for not submitting the declaration was considered relevant in this regard (para 87).
The Court notes (at para 83) that the minimum wage requirement was ‘formulated in a particularly transparent manner in the contract notice and intended to emphasise, from the outset, the importance of compliance with a mandatory rule…’ Without reading too much into this statement, it may be taken to endorse an explicit and up-front approach to the inclusion of minimum wage requirements, as opposed to one which only becomes clear to tenderers at the contract award stage, for example. This suggests a different approach to that which some contracting authorities have adopted in light of Rüffert and Bundesdruckerei, namely a ‘soft’ approach to wage issues. Given the importance of transparency as a general principle of EU law, it seems preferable for such requirements to be published and to ensure that tenderers are able to take these into account in preparing their bids. However the ongoing uncertainty regarding non-legislative living wages means that this may continue to form the subject of negotiated agreements with contractors, rather than an explicit requirement in tenders.
What does this mean in terms of competition and the likelihood of costs being passed on to contracting authorities? What about the provisions on abnormally low tenders – could a tender be deemed abnormally low if it did not comply with a living wage requirement? The 2014 directives make clear that contracting authorities may take social considerations into account in various ways when awarding contracts, including through award criteria (following from the Court's judgment in Case C-368/10 Dutch Coffee). However the ability to exclude a tenderer or subcontractor based on non-compliance with social obligations is limited to those which are i) applicable and ii) set out in EU law, national law, collective agreements or the international conventions listed in Annex X of Directive 2014/24/EU (under Articles 18.2, 56.1 and 57.4(a) of that Directive). Article 70, which replaces Article 26, is still phrased in more general terms to allow contracting authorities to lay down special conditions for the performance of contracts, including social and employment-related considerations. This must be read in light of recital 98 of the Directive:
"... requirements concerning the basic working conditions regulated in Directive 96/71/EC, such as minimum rates of pay, should remain at the level set by national legislation or by collective agreements applied in accordance with Union law in the context of that Directive."
Given the Court's approach in RegioPost, a question arises as to whether the reference to basic working conditions 'regulated' by the PWD means any minimum wage requirement, or is only relevant when the PWD actually applies. If the former, then the recital suggests that it is only national legislation or (universally applicable) collective agreements which can form the basis for minimum wage requirements in contract performance clauses, rather than administrative provisions or arbitral awards. This may, however, be an excessively literal reading of the recital.
I hope to develop these ideas into a longer article in due course, comments are welcome.
Living wages in public contracts: A chance to reconsider Rüffert
Abby Semple | 15 October 2015 PDF version
Case C-115/14 RegioPost v Stadt Landau, Opinion of Advocate General Mengozzi
I have always found the Rüffert judgment problematic. In it the CJEU held that a German public authority could not enforce the wage rates set under a collective agreement in a contract to build a prison. The case turned upon the interpretation of the Posted Workers Directive (Directive 96/71/EC) and the enforcement of minimum working conditions which were not universally applicable, because they only related to public sector contracts. The CJEU held that such conditions constituted a restriction on the freedom to provide services under the Treaty, which could not be justified by the objective of protecting workers. The case is notable for its almost complete lack of engagement with the Court's prior jurisprudence on social clauses in public procurement, including the Beentjesand Nord Pas de Calaiscases. Its effect has been to cast doubt upon the widespread practice of public authorities requiring that contractors pay fair or living wages to their employees.
More recently, the Bundesdruckereicase seemed to confirm the CJEU's approach of treating minimum wage requirements in public contracts as a restriction on trade - while acknowledging a greater scope to justify this restriction based on social factors. In outsourcing a data services contract, the City of Dortmund included a requirement for all tenderers and their subcontractors to pay at least the hourly rates set by a regional law. The applicant objected on the basis that it proposed to perform the contract using workers based in Poland. The CJEU held that imposition of a minimum wage on subcontractors based in another Member State could in principle be justified based upon the objectives of protecting employees and preventing social dumping (para 31). However it held that in the circumstances, given that the minimum wage in question applied only to public sector contracts (i.e. it was not universally applicable) and bore no relation to the cost of living in Poland, it was disproportionate. The operative part of the judgment refers only to cases where a tenderer intends to carry out a contract by having recourse 'exclusively' to workers in another Member State. The Court also considered whether the measure might be justified based upon the need to ensure the stability of social security systems, but found it could not be based on the facts of the case (para 35.)
One question emerging from Bundesdruckerei was the extent to which the restriction on a public authority specifying minimum wages would apply to a contract performed entirely domestically. This factual situation is now being considered by the CJEU in the case of RegioPost GmbH v Stadt Landau(C-115/14). Advocate General Mengozzi published his opinion in the case on 9 September 2015, finding that EU law did not prevent contracting authorities from setting conditions relating to the payment of minimum wages within public contracts. His opinion turns upon the discretion granted to contracting authorities to set special conditions for the performance of contracts under Article 26 of Directive 20014/18/EC (replaced by Article 70 of Directive 2014/24/EU). He distinguished the Rüffert case on the basis that it concerned a contract awarded prior to Directive 2004/18/EC coming into effect. He also distinguished Bundesdruckerei on the basis that, in the case at hand, all of the services would be performed in Germany. At the same time, he acknowledged the potential for the tender to attract bidders or subcontractors based in other Member States – which meant that EU law was engaged (and the question referred should not be considered outside of the CJEU’s remit.)
The facts of RegioPost are as follows: the City of Landau published an OJEU level tender in 2013 for the provision of postal services. As part of their tender, bidders were required to submit a declaration on their own behalf and on behalf of any proposed subcontractors, guaranteeing to pay employees involved in delivery of the service at least €8.70 per hour. This was in accordance with a requirement for public contracts set out in regional legislation (similar to the law which was at issue in Bundesdruckerei). At the time that the contract was tendered, no national minimum wage legislation applied in Germany - from 1 January 2015, a minimum wage of €8.50 per hour came into effect. RegioPost submitted the declaration in respect of its subcontractors, but not on its own behalf. In response to a request for clarification, RegioPost indicated that it believed the requirement to submit the declaration was contrary to public procurement law. The City of Landau then excluded RegioPost from the competition, and it challenged this decision.
AG Mengozzi’s opinion focuses both on the ability of regional or national authorities to set minimum wages and the compatibility of such requirements with the Treaty provisions on free movement and Article 26 of Directive 2004/18/EC. In his view, Article 26 clearly envisions the use of social clauses such as those relating to minimum wages [para 47]. He states:
'Member States must be empowered, in my view, to adopt legislative, regulatory or administrative measures setting working conditions, including minimum rates of pay, in the specific context of public contracts, for the benefit of workers who provide services for the delivery of those contracts.’ [Para 71 of opinion; author’s translation from French]
He does not consider the Posted Workers Directive relevant to the case, and argues that the fact that the wage agreement in question only applies to public sector contracts should not mean that it is deprived of its effect in the context of a procurement procedure. Mengozzi draws an analogy with the ability of contracting authorities to apply environmental conditions regardless of whether these apply in the private sector generally, as established in the
Concordia Buscase. He also considers the requirement applied by the City of Landau to be proportionate, inasmuch as it referred specifically to the workers to be employed on the contract at hand and not to all employees of the tenderers [para 87].
Mengozzi’s opinion will be welcomed by those who support the use of living wages in public contracts, as it creates a line of argumentation which the CJEU may adopt to distance itself from Rüffert. Although he does not mention the 2014 directives, Mengozzi’s reasoning appears to be more in line with the expanded ability to apply social considerations under the new directives, including the explicit ability to reject tenders which do not comply with applicable social or labour laws or collective agreements under Article 56.1 of Directive 2014/24/EU. I agree with the criticism (put forward by Albert Sánchez Graells in his timely blog here) that just because an authority has a competence to do something - in this case, to apply minimum wages in respect of workers on public contracts only – it does not necessarily have a commensurate ability to do that thing in the context of an EU regulated procurement.
However I disagree fundamentally with the idea that measures adopted in public contracts should be subject to the same standard of review against the free movement principles as legislative or other administrative measures. As Albert points out, public procurement is not properly seen as a regulatory tool – but the conclusion I draw from that (and which cases such as Dutch Coffeeand Concordiasupport) is that contracting authorities should have a wide discretion to specify the terms on which they wish to buy something, provided they comply with the procedural guarantees set out in the directives. The directives give effect to the relevant Treaty principles in the context of public procurement, and they explicitly authorise public authorities to apply social criteria and contract performance clauses. The caveat ‘provided these comply with EU law’ should not deprive these more specific provisions of their value, which has been hard won in the process of adopting the directives.
The Advocate General's approach in RegioPost does leave open several questions about when minimum wage requirements will be compatible with EU law, and these are of immediate interest to public authorities who are considering, or already do include, such requirements in their contracts.
Question 1 - Does it matter if the minimum wage is set out in universally-applicable legislation, a collective agreement, or adopted on a voluntary basis?
The source of a minimum wage obligation may be relevant in determining whether it can be included in public contracts. Mengozzi refers to ‘legislative, regulatory or administrative measures’ – which is the same wording used in the Posted Workers Directive. Article 18.2 of Directive 2014/24/EU and the various provisions which cross-reference it empower contracting authorities to exclude tenderers, reject tenders or require the replacement of subcontractors where, inter alia, they do not comply with applicable social or labour law obligations set down in national or EU laws or collective agreements, or with a limited list of ILO conventions. If a tender is considered abnormally low due to non-compliance with such obligations, rejection is mandatory. Presumably 'national laws' would encompass regional laws such as the ones at issue in Bundesdruckerei and RegioPost - so the focus will be on whether they are 'applicable' to a particular tenderer or subcontractor. However Article 18.2 does not refer to purely voluntary arrangements such as the living wage in the UKor fair tradecommitments.
Mengozzi’s opinion points to a somewhat wider scope for rejection of tenders which do not comply with minimum wage requirements, including where these are contained in legislation which is not universally applicable. There is no guarantee that the CJEU will follow his opinion in this regard, and even if it does the status of voluntary arrangements such as the living wage would still be in question. Interestingly however, the CJEU has already endorsed the use of the wage premium which forms part of fair trade certification as an award criterion and/or contract performance clause in the Dutch Coffeecase [para 91]. It seems both regrettable and inconsistent if the use of similar arrangements in the domestic/European context cannot be justified based on the need to protect workers and social security systems..
Question 2 – Can minimum wage requirements be applied to non-domestic undertakings, including subcontractors?
This is a difficult question which Mengozzi’s opinion somewhat elides. It seems unlikely that the CJEU will pull back from its judgment in Bundesdruckerei that the enforcement of a minimum wage for workers in other Member States was disproportionate and could not be justified based on the need to protect social security systems. If it follows the AG’s opinion in RegioPost, it will most likely restrict this to cases where the performance of the contract will take place purely in the location where the minimum wage applies. That would mean that such conditions should only apply inasmuch as a tenderer proposes to deliver a contract in that location. This may lead to objections that local/domestic tenderers are being penalised and risk losing out to competitors in lower-cost locations. However it should be borne in mind that only a small percentage of public contracts EU are currently awarded to undertakings outside of the country of award (less than 2% at last check) – and that contracting authorities can and do choose to take factors other than cost into account. The effects of lower-wage jurisdictions being able to undercut local or domestic tenderers subject to the higher wage requirements should not be exaggerated.
Regarding subcontractors, Article 71 of Directive 2014/24/EU makes clear that contracting authorities may require compliance with applicable labour and social laws and collective agreements on the part of subcontractors, and require tenderers to replace any subcontractors who do not so comply. This depends on having visibility of the supply chain, and in some cases contractors may argue that they do not have control over the conditions applied by their subcontractors. However the 2014 directives also provide an expanded ability to evaluate at selection stage the supply-chain management measures which a tenderer has in place (Article 60.1 and Annex XII, Part II (d) of Directive 2014/24/EU). Member States are also free to enforce more rigorous systems for the supervision and joint liability of subcontractors in their implementation of the directives under the terms set out in Article 71.
Question 3 - Does it matter at which stage of the procurement process a minimum wage requirement is included?
Again Mengozzi’s opinion leaves some questions unanswered in this regard, although he rejects the use of a minimum wage declaration as a selection criterion under the heading ‘financial and economic capacity’(para 96). As the CJEU’s prior case law makes clear, the directives specify the types of evidence which can be requested from bidders at selection stage. The idea is that barriers should not be put in place to participation, and that there should be some degree of uniformity in terms of selection processes. Broadly speaking, exclusion and selection criteria relate to an undertaking’s past or present status at the time of expressing an interest in the contract. They should not relate to the undertaking’s proposals for how it will perform the contract – which are properly assessed under award criteria, or in terms of compliance with specifications and contract conditions. In addition to the clear separation between these considerations in the directives, there are good reasons in terms of competition not to evaluate wage commitments on a retrospective basis. It should be possible for a company which has not previously applied a living wage to commit to applying it if it wins the contract. This is especially true where the company has not previously operated in the area where the relevant wage applies.
The Scottish Government has recently published statutory guidancewhich recommends that tenderers' working practices be taken into account as part of quality evaluation, i.e. under contract award criteria. There is much to recommend the Scottish Government’s approach in that it takes into account a range of considerations related to fair work practices, including recruitment, terms of engagement, skills utilisation and job support, and worker representation. While these considerations may be of equal importance to rates of pay in some cases, many authorities will still wish to know if they can require payment of a living wage as a contract condition, either in addition to or instead of evaluation under award criteria. The Scottish guidance says no, based on letters from former Commissioner Michel Barnier in 2012and
2014. RegioPost may yet give reason to revisit this position.
Putting aside the legal arguments for a moment, at the political level these cases go to the very heart of the debate about whether the EU internal market is a social market.Bundesdruckereiposed the question most plainly: should a German contracting authority be able to impose its higher wage expectations on a contractor performing services in Poland? Understandably the CJEU held this undermined the competitive advantage of the Polish undertaking and could not be justified by reference to the need to protect workers or ensure the integrity of social security systems, as the wage rates in question were based upon living costs in Germany, not Poland. RegioPost gives the CJEU another opportunity to bring its approach to living wages into greater sync with the approach to fair trade criteria in Dutch Coffee, by striking a balance between competition and respect for workers within the EU.
Note:At time of writing, the transcript of AG Mengozzi's opinion was not yet available in English.
Procurement to meet the needs of asylum seekers: a case for urgency
9 September 2015 | Abby Semple
The European Commission published a communication today entitled ‘Public procurement rules in connection with the current asylum crisis.’ This:
• Acknowledges the need for public authorities to act quickly to provide housing, supplies and services to meet the immediate needs of asylum seekers;
• Sets out the rules and thresholds applying to works, supplies and services contracts under both the 2004 and 2014 procurement directives;
• Identifies the existing legal possibilities to use an accelerated restricted or (if the 2014 directives have been implemented in the country in question) accelerated open procedure, or a negotiated procedure without prior publication in cases of extreme urgency;
• Provides some support for invoking the negotiated procedure without prior publication in order to meet the immediate needs of asylum seekers; for example by stating that the current events are in general unforeseeable and causally linked to the need for urgent provision.
Contracting authorities must therefore establish on a case-by-case basis that urgency merits application of an accelerated or negotiated procedure –no general presumption or derogation is provided. Sadly, the risk both of procurement procedures stalling provision for asylum seekers, and some authorities or suppliers abusing the crisis mentality are all too real.
One might consider that the communication strikes the appropriate balance between these concerns (within the powers of the Commission) – if it were not for a Commission communication published in 2008 in response to the financial crisis. This provided a much simpler recognition that the use of the accelerated procedure was justified for all major public contracts awarded in 2009 and 2010 – arguably a bigger derogation from normal procedures.
It is not clear why the current situation should not merit at least the same level of relaxation of the rules. Failure to provide for asylum seekers risks lives, as opposed to just livelihoods, and the presumed level of urgency for contract awards should reflect this. This could be achieved by providing a clear justification to accelerate contract awards directly related to asylum provision, as well as support for use of the negotiated procedure without publication where strictly necessary.
Can we have evidence-based procurement policy?
30 March 2015 | Abby Semple PDF version
Measures to promote SME participation or other policy goals should be based on robust evidence of what works in public contracting - not on who shouts the loudest.
As public authorities scramble to implement the Public Contracts Regulations 2015, many questions are being asked about the new rules aimed at improving SME access to contracts. For contracts above the EU thresholds, the process of selecting bidders has been reformed in various ways, such as limiting the financial turnover which can be requested and allowing companies to rely upon an updated self-declaration of their eligibility to bid. It is also possible to limit the number of lots which any one company may win and to make provision for the direct payment of subcontractors, with undisputed invoices to be paid within 30 days. None of these measures is particularly radical, and arguably any positive impact they may have on smaller companies bidding for contracts will be outweighed by the shorter time limits which now apply in respect of all procedures - a challenge for those companies who lack a full-time bid team.
What is more radical is the ban on pre-qualification of bidders which has been adopted for contracts below the EU thresholds but valued above £10,000 for central government and £25,000 for other public bodies. This measure, set out in Regulation 111, is based upon the recommendations which Lord Young of Graffham made in his 2013 report Growing Your Business. Lord Young met with a number of businesses and their associations as well as drawing upon his own experience to develop recommendations regarding how to increase the percentage of public contracts won by SMEs. Amongst his recommendations was a ban on pre-qualification questionnaires (PQQs) below threshold and the use of a single standard PQQ for above-threshold contracts in order to “avoid gold plating with a plethora of different locally-determined objectives.” These recommendations have now been implemented via the PCR 2015 and recent guidance from the Cabinet Office regarding the use of a standard PQQ.
So will it work to get more SMEs on to the list of government contractors? This depends very much on SMEs themselves deciding to apply for contracts. There has never been any evidence of systematic discrimination against SMEs either by central or local government - the argument was that the process of pre-qualification was overly bureaucratic and sometimes included inappropriate requirements, for example relating to financial standing or previous experience. This was supported by largely anecdotal evidence and an apparent gap between the overall role of SMEs in the economy and their share of public contracts - however such figures seldom account for the particular sectors of the economy in which SMEs are active. It is possible that removing PQQs will help to boost the number of smaller companies winning contracts, but it also comes at considerable cost to both the public and private sector. By effectively mandating the use of the open procedure for all below-threshold contracts, the new rules mean that many more tenders will be prepared and evaluated - a hugely resource-intensive task on both sides. Any policy which has the potential to incur such costs should be subject to rigorous assessment before it is adopted.
The idea of using public contracts to implement various government policies is enjoying a renaissance. The new EU procurement directives specifically endorse the idea of using public contracts to further environmental, social and innovation objectives. The potential to leverage large volumes of public spending to achieve broader goals is attractive, but the problem is we have very little idea of whether it works in most cases. I have worked with many public bodies who have seen successes in their strategic use of procurement, as well as learning from their own mistakes and the experiences of others. But there is a difference between this kind of institutional learning and the type of evidence which we need to support regulation, especially if that regulation comes with clear costs and somewhat less clear benefits. If we wish to undertake major changes in procurement policy and practice, there is a role for more scientific approaches such as randomised controlled trials to test new initiatives.
Randomised controlled trials (RCTs) are already used in many areas of public policy, and are championed by the Cabinet Office's Behavioural Insights Team and the What Works Centres. The basic idea of an RCT is that to test any particular policy, you randomly select a sample to undergo an intervention and another from the same population to act as the control group. You then measure the results over time. The random part is important, as is the control group. RCTs can help to avoid expensive policy mistakes as well as to fine-tune a policy prior to rolling it out on a larger scale. They are not necessarily expensive to run, but they do require a reasonable sample size to produce reliable results, and effects may require some time to measure properly. They have been used in the UK to test interventions ranging from the use of text messages to increase payment of court fines to the use of incentives to boost recycling rates - as well as their widespread use in medicine and marketing. The growing body of data which will be disclosed on Contracts Finder provides an opportunity to apply this approach in procurement, as we will have a clearer picture of the overall contract population.
To test the effectiveness of policy interventions aimed at increasing SME participation in public tenders for example, it would be relatively easy to identify a set of similar contracts and randomly apply different interventions. NHS contracts or frameworks established by the Crown Commercial Service often have different lots, for example where they are divided on a regional basis or between different categories of similar products or services. Lots could be subject to different measures intended to boost SME participation: pre-procurement market engagement, setting a maximum contract size, allowing longer to respond, removing pre-qualification questions, et cetera. No such measures would be taken for the control group. The results of this kind of experiment are generally more valuable than selective assessments of what works based on anecdotal or expert evidence - which tend to be imbued with our prior biases and ignore null results. They do not replace the need for expertise or take policy entirely out of the realm of politics; someone needs to decide which questions to ask and how to interpret and act upon the findings.
If this approach to developing better procurement policy sounds expensive or labour-intensive think about the alternative: major changes which may actually have the opposite effect to that intended or come with unanticipated side-effects, adopted on little more than a finger in the wind. RCTs are not the only source of evidence on procurement, but together with the new sources of data about public contracts coming online, they point towards a better-informed future.
12 February 2015 | Abby Semple PDF version
The UK Government has now published the Public Contracts Regulations 2015, as well as its response to the consultation held on the draft legislation in Autumn 2014. This article highlights some of the changes made as a result of the consultation, and some remaining areas of ambiguity in the law. Future articles will look at how the new rules are likely to affect procurement practice once they come into effect on 26th February.
A number of changes have been made to Regulation 57, which sets out the mandatory and discretionary grounds for exclusion from procurement procedures. In the draft legislation, several of the grounds appeared to be narrower in scope than what is provided for in Directive 2014/24/EU. This applied in particular to Regulation 57(1)(b) regarding exclusion for corruption convictions, which in the draft referred only to ‘active corruption.’ This has now been amended to bring it into line with the Directive, which does not distinguish between active and passive corruption. Terrorism offences had also been omitted from the draft regulations and are now covered by Regulation 57(1)(f). The consultation document sought views on the list of offences to be referred to under each ground for exclusion and it appears that a number of submissions addressed these points.
A further noteworthy change is that the mandatory exclusion grounds now extend to cover equivalent offences under the law of any jurisdiction, as opposed to the restriction to EEA countries which applied under the 2006 Public Contracts Regulations and also appeared in the draft of the new regulations. This brings the UK's approach into closer alignment with Germany and other countries which have given a global interpretation to the scope of offences mandating exclusion. The importance of such an approach may grow as multilateral and bilateral trade agreements open up European public procurement markets to greater international competition.
Compliance with environmental, social and labour law
As per the draft regulations, the Government has chosen not to transpose Article 18(2), which sets out the general requirement to ensure compliance with applicable environmental, social and labour law and collective agreements in the performance of public contracts. This does not however deprive the provision of its effect, as it is embedded in the discretion of contracting authorities to exclude or refuse to award a contract to an operator found not comply with these obligations (set out in Regulations 57(8)(a) and 56(2) respectively) as well as the ability to require replacement of a subcontractor which has been shown not to comply (set out in Regulation 71(9)(b)).
The UK could have opted for stronger implementation of Article 18(2) by including non-compliance with applicable environmental, social and labour law amongst the mandatory grounds of exclusion. This may have been considered excessive - however it should be borne in mind that the mandatory grounds of exclusion are also subject to the ability of operators to demonstrate their reliability despite the existence of one or more of the grounds ('self-cleaning') and a maximum exclusionary period of five years. Again, increased international competition for public contracts may mean that verifying compliance with such laws becomes more important in practice.
Lord Young reforms
The 2015 Regulations include measures recommended by Lord Young to increase SME participation in public procurement. Despite the limited evidence that SMEs are seriously underrepresented in the award of public contracts when account is taken of the sectors of the economy in which they operate, substantial changes to the rules on below-threshold procurement are being introduced on the presumption that this will increase SME participation and success. These are set out in Regulations 109-112 and deal with the publication of contracting opportunities and award notices on Contracts Finder, as well as restrictions on the use of a pre-qualification stage.
While the increased transparency and availability of data on public contracts associated with publication on Contracts Finder is to be welcomed, the obligation to publish on that site only arises where some other form of advertisement takes place (Regulation 110). Likewise the ban on pre-qualification— defined as assessing the suitability of candidates to perform a public contract for the purpose of reducing the number of candidates to a smaller number who are to proceed to a later stage of the process— only applies to below-threshold contracts between £10,000 and £111,676 for central government and £25,000 and £172,514 for sub-central. This leaves open the possibility that contracting authorities will choose to use frameworks or other closed systems which are not subject to the new rules, counteracting the intention to provide greater accessibility to public contracts. The finalised regulations do include Chapter 7, which extends some of the same obligations to above threshold contracts, notably the requirement to publish opportunities and award notices on Contracts Finder (in addition to OJEU publication.)
Chapter 7 also indicates that contracting authorities must have regard to guidance on qualitative selection issued by the Cabinet Office, particularly on the use of questionnaires and the 'avoidance of burdensome, excessive or disproportionate questions.' Given the ban on use of pre-qualification for below-threshold contracts there is still a risk of procedures below and above threshold varying significantly - making it more difficult for SMEs to gain experience with PQQs. The use of PQQs is unlikely to die out completely as checking suitability after tender evaluation implies considerably higher public sector workloads for contracts where a large number of tenders are expected, and/or tender evaluation is complex. As discussed in a previous article, the idea of leaving checks on suitability and compliance with exclusion criteria to the end of a process also creates potential difficulties in two-stage procedures, where a candidate may argue that it has been unfairly excluded in favour of a competitor who does not actually comply with the relevant criteria.
Concessions and utility sector contracts
The Cabinet Office has not yet started consultations on the transposition of the Concessions Directive (23/2014/EU) or the Utilities Directive (25/2014/EU). While indications have been given that this will be done within 2015, this may well be after the general election. As the Public Contracts Regulations bear the ideological imprint of the current government, an interesting question arises regarding the merits of consistency between the three sets of rules, against the possible desire of a new government to transpose key provisions in a different manner.
For example, Article 18(2) and the mandatory exclusion grounds have counterparts in the Concessions and Utilities Directives, which could be used more effectively to target tax evasion and illegal environmental and labour practices. The thresholds and subject matter of these two directives also mean that contracts falling within their scope are even more likely to be subject to international competition. A Labour government in particular might be inclined to take a harder line on such practices within the regulations, in order to reduce the risk of contracts being awarded to companies with questionable records. Examples of how this can be achieved within the text of the Directives may soon be forthcoming, as other EU countries implement them in national law.
28 November 2014
PPA has been appointed to carry out a study on behalf of the European Commission (DG Environment) on the role for a European GPP network to exchange good practice. A survey was conducted in October-November 2014 to identify existing GPP networking activities taking place across Europe and the demand for EU support. A number of potential structures/areas of focus were identified, and discussed with respondents in one-to-one interviews.
In order to further develop these options and develop recommendations for the final report, a short webinar will be held on Thursday 4th December 10:00 - 11:00 GMT. Members of existing GPP networks will present their activities and discuss the preliminary results of the study. You can participate for free by web (VOIP) and no pre-registration is necessary.
Access the webinar at: https://meet31704934.adobeconnect.com/gpp-networking/
If you would like to speak please send an e-mail to firstname.lastname@example.org
6thMarch 2014 │ Abby
Semple PDF version
Many of us have been commenting on the new EU procurement directives over the 26 months which it has taken for them to pass from proposals through to adoption. During this genesis there have been wide-ranging changes to their content, reflecting the input of the Parliament and Council as well as some pertinent case law of the European Court of Justice.
What follows is an attempt to highlight, non-exhaustively, some of the key areas in which the final texts diverge from previous versions. Readers of earlier commentary (including that published on this site) may wish to note these changes. Please feel free to e-mail me with any others you have spotted which you think should be listed here. References are to the text adopted by the Council on 11 February for the public sector (PS), utilities(U) and concessions
(C) directives respectively.
1. Lots (Article 46 PS; Article 65 U)
As part of the effort to encourage greater SME participation in public procurement, the idea of mandatory division of contracts into lots was mooted in the Commission's Green Paper (COM (2011) 15). The impracticality and headaches associated with this, along with the dubious gains which it would afford to SMEs, were obvious to most people who have ever been involved in a procurement. Fortunately, the adopted text only requires an explanation to be given where contracts are not divided into lots (public sector only), while allowing contracting authorities to limit the number of lots which can be awarded to any one operator based on objective criteria (public sector and utilities.) Member States may choose to require division into lots for certain types of contract.
2. Abnormally low tenders (Article 69 PS; Article 84 U)
The Commission's original proposal (COM(2011)896) contained a formula for determining when a tender was abnormally low and thus must be subject to scrutiny. If at least five tenders had been received, a tender would be considered abnormally low if it was 50% lower than the average price or cost and 20% lower than the price or cost of the second lowest tender. It would also be possible to identify abnormally low tenders on other grounds. This formula has been removed in the final text of the public sector and utilities directives, however the obligation to seek an explanation in respect of abnormally low tenders still exists. The obligation to investigate follows from the Slovensko case (C-599/10) but in the absence of any definition or formula for identifying abnormally low tenders uncertainty remains about when this obligation will arise.
3. Public-public cooperation: Teckal and Hamburg (Article 12 PS; Article 28 U; Article 17 C)
The percentage of activities which a controlled entity (Teckalcompany) must carry out for its controlling authority or authorities has been reduced from 90% to 80%. Where public authorities cooperate to carry out a particular function (Hamburgcooperation), the percentage of the relevant activities which the authorities can carry out on the open market is 20%. There is no longer a requirement to demonstrate that any financial transfers under such arrangements correspond only to actual costs. The other conditions relating to establishing control and cooperation still apply, and are identical under the public sector, utilities and concession directives. Unlike in earlier drafts of the directives, guidance is now given on how to calculate the 80% and 20% for both established and newly set up entities.
4. Concessions Directive: Scope and thresholds (Article 8 C)
The threshold for application of the Concessions Directive is €5,186,000 for both services and works concessions. An earlier draft of had contained an intermediate threshold of €2.5 million for service concessions - with certain limited responsibilities such as publication of an award notice required for contracts valued between this and the full threshold. This has now been removed. Concessions related to the supply of drinking water and associated engineering or sewage treatment works and services have been excluded from the scope of the directive. This follows from a European Citizens Initiative calling upon the European Commission to recognise the provision of water and sanitation as essential public services and exclude them from liberalisation or the application of internal market rules.
5. Social enterprises/employee-led mutuals (Article 77 PS; Article 94 U)
Following submissions by the UK, a provision has been included in the new directives allowing certain contracts for health, social and cultural services to be reserved for competition by social enterprises. Social enterprises are defined with reference to their objectives, treatment of profits and management or ownership structures. An organisation can only benefit from this reservation if it has not been awarded a contract for the services concerned by the same contracting authority within the past three years, and contracts awarded under this provision cannot exceed three years. The provision will be reviewed by the Commission within five years to assess its effects.
6. MEAT vs. Lowest price (Article 67 PS; 82 U)
The amendments tabled by the European Parliament aimed to remove lowest price as an award criterion. On first glance, this appears to have been adopted in the final directives - but the change is cosmetic only. All that has been done is to expand the scope of 'most economically advantageous tender' to include the award of contracts on lowest price or cost only. While it is not allowed to exclude cost from the award decision, there is no similar restriction on excluding quality considerations. Member States may however decide to forbid the use of lowest-price award, or to limit its use for certain categories of contract or authority. The change in terminology is likely to cause some confusion, especially as the information to be included in OJEU notices (Annex V, Part C of the public sector directive) suggests that if no award criteria are listed in the notice or tender documents, lowest price applies.
7. Social criteria (Articles 42/67 PS; Articles 60/82 U)
Article 42 on technical specifications clarifies that these may relate to production processes and methods or a specific process for another stage of the life-cycle provided these are "linked to the subject-matter of the contract and proportionate to its value and its objectives." This confirms the ability to specify electricity from renewable sources or food from organic agriculture, for example. The Commission's earlier position that such processes must 'alter the material substance' of the finished product, service or work has been officially abandoned. At award stage, Article 67 states that award criteria may include "social, environmental and innovative characteristics and trading and its conditions" following the decision of the Court of Justice in the Dutch Coffee case (C-368/10).
8. Innovation Partnership (Article 31 PS; Article 49 U)
In the Commission's original proposal, Member States were given the choice of whether to implement the new Innovation Partnership procedure in national law, whereas now this is mandatory for the public sector - the option of implementation remains for the utilities sector. Several changes have been made to the structure of the procedure itself, notably removing the requirement that payments to private partners afford them an 'adequate profit' and the treatment of intellectual property. Further guidance on innovation procurement under the 2014 directives is available here.
Five myths of the new procurement directives
20th January 2014│Abby Semple PDF version
The European Parliament's vote on January 15th to adopt the new procurement directives marks the end of a long and labour-intensive process. It started before the Commission's publication of its proposals for new directives over two years ago, and will continue as Member States work to implement the rules in national law by early 2016. The debate and vote in Strasbourg mean a key juncture has been reached: there is no going back and the texts will not be changed. But as with the 2004 directives, we will have to wait for some time to see the practical effect of the changes and can expect applications to the Court of Justice to resolve various questions on their scope. If it is difficult to reach conclusions on the overall impact of the revision process, it is somewhat easier to identify what it hasn't done. Five urban legends about the new directives can be identified at this stage.
1. This is a simplification
With three directives and two weighing in at over 200 pages each, some scepticism about the objective of simplification is understandable. This was voiced by several speakers during the
Strasbourg debate, including those supportive of the changes. Not only are the two main directives covering the classic and utilities sectors longer, they are now complemented by a third directive regulating the award of concession contracts for both sectors. While the total bulk still compares favourably to the some 2000 pages of the U.S. Federal Acquisition Regulation, for example, this is hardly the light-touch regime some had called for.
In defence of the 'simplification' attempt, part of the additional bulk of the new directives reflects the incorporation of ECJ jurisprudence in areas such as public-public cooperation, modifications to contracts and abnormally low tenders. In theory, having these points covered in legislation does make them easier to identify and apply - however the provisions leave a number of ambiguities unresolved - such as the definition of a 'materially different contract' or 'abnormally low tender.' In terms of procedures, one has been added (innovation partnership), and two revised and made more generally available (competitive dialogue and the competitive procedure with negotiation, which replaces the old negotiated procedure with prior publication.)The choice for contracting authorities is thus wider, contributing to flexibility but not to simplicity.
2. How to buy, not what to buy
By tradition and Treaty basis the EU procurement directives regulate the 'how' but not the 'what' of procurement: decisions about what to buy are left up to individual contracting authorities provided they follow the procedures and principles designed to ensure free movement of goods and services. However this has always been a somewhat tenuous distinction to maintain. Rules on the formulation of technical specifications, going back to the earliest procurement directives, have effectively told contracting authorities that they cannot buy 'Irish meat' or 'French cheese.' As purchasing strategies have become more sophisticated, so too have the EU rules; thus the latest iterations govern the use of framework agreements more closely and stipulate that contract performance conditions must be linked to the subject matter of the contract - potentially ruling out terms which require investment or activities beyond what is being purchased. While contracting authorities remain free to decide whether to buy, once they have made the decision to purchase something which falls within the scope of the directives they do not have full discretion over how that thing is defined.
3. No more lowest-price awards
Those reading the European Parliament's press release on the new directives could be forgiven for thinking that awarding contracts based on lowest-price or lowest-cost only will no longer be possible. This is not the case - all that has been done is to expand the scope of 'most economically advantageous tender' to include the award of contracts on price or cost only. While it is not allowed to exclude cost from the award decision altogether, there is no similar restriction on excluding quality considerations. Member States may however decide to forbid the use of lowest-price award, or to limit its use for certain categories of contract or authority. The change in terminology is likely to cause some confusion, especially as the information to be included in OJEU notices (Annex V, Part C of the public sector directive) suggests that if no award criteria are listed in the notice, lowest price applies. This appears to be the result of a compromise between the Commission, Council and Parliament, but one which detracts from clarity in this key area.
4. A mandate for sustainable procurement
Despite the inclusion of a number of welcome provisions on environmental and social matters, these are almost all voluntary in nature. Life-cycle costing, specifying or awarding more marks for sustainable production processes or fair trade, requesting eco-labels or environmental management measures and even the decision to exclude candidates for violations of environmental and labour law are all left up to Member States or individual authorities. Obligations do exist regarding exclusion of candidates for child labour and human trafficking or non-payment of taxes, as well as a duty to seek explanation of abnormally low tenders. Although a voluntary approach reflects the 'how, not what' ethos and the subsidiarity principle, authorities who do wish to procure sustainably may find they are not greatly assisted by the new provisions. For example, references to eco-labels and the use of life-cycle costing are now more tightly regulated than they were under the 2004 directives. The possibility to apply these rules constructively exists, but it is far from being the default position.
5. SMEs will win
The desire to facilitate greater SME participation in public procurement was one of the reform's key ambitions. Measures introduced under this heading include the European Single Procurement Document and move to mandatory e-procurement (although this also targets more general gains); a restriction on the maximum level of turnover which can be requested relative to contract value; a requirement to provide an explanation where contracts are not divided into lots; and a provision allowing subcontractors to request payment directly from contracting authorities. Of these, I would hazard a guess that e-procurement, aided by intelligent design of applications, has the greatest potential to increase the number of SMEs competing for public contracts.
The others, while targeting specific areas which have aroused the ire of smaller businesses (or, more accurately, their associations) seem to miss the mark. Turnover requirements are limited to two times the value of the contract - but this is expressed as the total rather than annual value. Far from being a requirement to divide contracts into lots (which would have been unduly meddlesome), the 'divide-or-explain' rule is unlikely to provide any real encouragement for this practice. Direct payment of subcontractors likewise remains strictly optional for Member States to implement and subject to the right of the main contractor to object to any undue payments.
The European Single Procurement Document (ESPD) is a concept with great appeal to SMEs and contracting authorities alike. The idea is that instead of tiresome re-submission of documents, a standard electronic form of self-declaration regarding matters such as tax clearance, financial standing and technical qualifications will suffice in the first instance. Verification need only be carried out at the preferred bidder stage, unless the authority has some reason to doubt the declaration. However this creates a risk in two-stage procedures: what if the preferred bidder fails to satisfy one of the exclusion or selection criteria when documents are checked?
Presumably the authority would turn to the next highest scoring bidder who does comply. But what about those candidates who have not been invited to tender, falling just below the cut-off point for selection? They have lost their place on the tender list to an unqualified candidate, and may well argue that they should be given the opportunity to tender. In practice then, the ESPD is of limited use for two-stage procedures. It is already common practice for many authorities using the open procedure to check eligibility after substantive evaluation of tenders, so the gains here may also be limited.
The above assessment is not intended to give an overly gloomy view of the new directives or to underrate the very real progress which has been made in some areas. But as governments across Europe implement the legislation they should be aware that a large part of the work to make it deliver against its objectives remains to be done at national, regional and local level. Only close attention to the possibilities under the new directives, together with the will to make them work, will yield the gains which the revision process set out to achieve.
Procurement in the headlines, but only for the wrong reasons
24 December 2013 Abby Semple
While it is gratifying to see a procurement story make the New York Times top headline, its content is nothing to celebrate ("US Flouts Its Own Advice in Procuring Overseas Clothing.") The article focuses on the ongoing lack of transparency regarding conditions in factories used by contractors to fulfil clothing orders on behalf of the U.S. military and other major government purchasers. Child labour, workers soiling themselves due to lack of bathroom breaks and padlocked fire exits are amongst the conditions widely reported at developing country factories which fill orders for western governments. Without factory-level information the good intentions associated with various open government contracting initiatives remain inadequate to detect such conditions, including those which lead to the death of 1,129 workers when the Rana Plaza garment factory collapsed in Bangladesh last April.
The collapsed Rana Plaza building in Dhaka, Bangladesh.
That tragedy, not the first of its kind but particularly devastating in its death toll, highlighted again the perils of unscrupulous subcontracting arrangements with little attention paid to safe working conditions. There is plenty of blame to go around, from factory owners to consumers demanding ever-lower prices, but the role of inspectors stands out as a particularly weak link in the chain - one which needs to be fixed if future tragedies are to be averted. Auditors or inspectors are trusted by western buyers to report upon conditions in factories, but the incentives which these organisations face and the resources available to them can often make a mockery of their role. There are some parallels with the role which ratings agencies played in the 2008 financial crisis: responsible and objective reporting loses out to conflicts of interest and the profit motive, unless regulatory oversight is strong. It seems to be a big ask from governments whether in developed or developing countries.
The press, NGOs and individual whistleblowers can all help to bring dangerous or exploitative conditions to light, but the sheer volume of commercial production together with political power structures which discourage scrutiny and action make effective monitoring a gargantuan task. The fear of business fleeing to rival producer countries has also undermined efforts to improve standards which might push costs up - even when these could easily be absorbed by public and private buyers in rich countries. Public purchasers should insist on independent audits of factories against accepted international standards such as SA8000. Private retailers have already taken steps to improve standards in the factories they use in Bangladesh and to help pay for these improvements, despite the potential excuses of greater price-pressure and quicker time-to-market demanded in their sector. Surely uniforms and other garments produced for public sector workers can be procured responsibly while still meeting value for money expectations? The French Navy, for one, has proven that they can be.
The scale of inspections and investments to be undertaken in countries like Bangladesh to bring standards up to acceptable levels is huge, but the cost per unit of procured clothing remains small. European procurers will soon have a clearer mandate under the forthcoming 2014 EU procurement directives to include social considerations such as compliance with International Labour Organisation standards in their tenders. This may be done both as part of contract clauses and in contract award criteria - meaning that factory conditions and inspection procedures can be assessed directly along with cost and quality in procurement decisions. The 2014 directives also emphasise the role of independent social and environmental labels in verifying performance, and confirm that production processes can be taken into account in technical specifications. It is up to public authorities to apply these provisions, and to national governments to implement the directives in a way which encourages use of social criteria. If these responsibilities are taken seriously, public procurement could start to make the headlines for better reasons.
Why did the Commons Public Administration Committee avoid talking to public procurers as part of its inquiry?
30 July 2013 Abby Semple [An edited version of this article appears on Guardian Public Leaders]
The PASC Report on Government Procurement contains some sound recommendations, although few which haven't been made before. It calls for clear public procurement strategy backed by comprehensive data. There is undoubtedly scope to reduce the time taken to award many contracts, and to further centralise procurement in some categories while still encouraging participation by SMEs and social enterprises. However the evidence considered by the Committee, and the analysis contained in the report, is both incomplete and weighted towards the supplier perspective. It is all too easy to blame the EU Directives and inefficient civil servants for the UK's procurement shortcomings. It is more difficult - but ultimately more instructive - to consider how procurement strategy interacts with the realities faced by frontline procurers, and to involve them (as well as suppliers and the third sector) in the development of policy.
PASC took evidence from representatives of business, small and medium-sized enterprises (SMEs), the third sector, procurement and commercial advisors, commentators, academics, Cabinet Office minister Francis Maude and senior Cabinet Office staff. It did not take evidence from those who conduct procurement procedures on a daily basis, either at individual departments or the National Procurement Service. This means a key perspective is missing from the report, and one which is essential to implement any real changes to the way procurement is conducted in the UK.
The report criticises 'unnecessarily strict adherence to process' and laments that the EU Remedies Directive has encouraged this. It is unclear what the Committee recommends as an alternative to adherence to process - ad hoc or unplanned procurement? Rules that change as the procedure goes along? As several of those giving evidence to the inquiry pointed out, the EU Directives have encouraged a more professional approach to procurement and, if they didn't exist, a plethora of organisational, regional and national procedures would prevail - creating a bureaucratic jungle for suppliers and procurers.
Suppliers like to complain about procedures when they don't turn out well for them, and the media and parliamentary committees like to draw attention to those that fail or take too long. The many procurement successes of the Olympics, for example, were overshadowed by the G4S debacle. It is right that poor procedures and outcomes should be criticised. But critics should bear in mind that public procurement is an administrative as well as commercial function. The imperative to move quickly and get the best deal must be balanced against the imperative to demonstrably spend public money in a responsible, transparent and fair manner. The EU Directives largely leave the commercial side up to individual Member States, while creating minimum standards for administration and the right for suppliers to challenge procedures which do not live up to these standards.
More disturbing is the report's implication that other EU countries such as France and Germany are better both at conducting efficient procedures and in awarding contracts to domestic suppliers. The evidence for the second point is extremely tenuous, drawing heavily on the much-lamented fact that Bombardier did not win the Thameslink Rolling Stock contract. Bombardier did not win the Thameslink contract because it did not submit the best bid. That this example has been used over and over to criticise the way procurement is conducted in the UK seems ridiculous. The idea that other EU Member States award more contracts to domestic suppliers simply isn't supported by the figures.
The most recent comprehensive study of cross-border contract awards in the EU (covering contract awards published in the Official Journal between 2007 and 2009) shows that the UK spent less than France, Italy and Spain on contracts awarded to companies based in other Member States. The UK ranks very near the average for all EU countries, with 3.0% of the analysed contract spend going directly cross-border and another 13.8% indirectly through affiliates. Meanwhile UK companies are amongst the most successful in winning cross-border contracts, ranking second after Germany with 17% of all direct awards in the sample studied.
In terms of the length of time which is taken to conduct procurement, the UK does come in at the longer end of this scale: an average of 161 days from publication of a contract notice to award, compared to an EU average of 108. Greater use of multi-stage procedures such as the restricted or competitive dialogue accounts for a large part of this: the average duration of a restricted procedure across all Member States is 160 days, and 245 days for a competitive dialogue. Choice of procedure is undoubtedly important, however reducing the time taken to award contracts must not become the sole factor influencing this decision. Attaining real value for money demands that procedures be suited to the specific requirement and market: a one-size-fits-all approach will not deliver this.
While the report praises the adoption of LEAN principles which have been actively promoted by the Cabinet Office, LEAN primarily targets factors which are within the control of procurers.
Delays due to external factors over which procurers have no control - such as budget uncertainties, poor quality legal advice and political interference - need to be addressed outside of this framework. The Committee does not appear to have considered any evidence regarding the extent to which these factors may contribute to the UK's relatively long procurement timelines.
The report highlights that only one of 17 departments has met the Cabinet Office's targets for transferring procurement spend to the GPS. There are probably good reasons for this in some cases and less good reasons in others. Rather than viewing efforts to centralise procurement in isolation, it would make sense to compare other attempts to share departmental services, such as property management or training. In order for such arrangements to work, the benefits of cooperation must outweigh the costs both for individual departments and Government as a whole. This requires an understanding of what is really meant by value for money, and the fitness for purpose of goods, services or works procured centrally will be a key factor.
Finally, it is regrettable that the report focuses solely on central government departments, which account for £45 billion of the UK's annual £227 billion procurement spend. Comparison with procedures and outcomes in local government, the NHS and devolved administrations would have helped to identify which challenges are particular to Whitehall, and which are shared across the UK public sector.
The upcoming changes to the EU directives afford an opportunity for all EU countries to refocus procurement strategy. The Cabinet Office's efforts mean that the UK has a running start on this, but no one would argue that the job is done yet. Rather than yet another one-sided report or policy which is doomed to go nowhere, why not start talking to government procurers directly? It is they who will determine the ultimate success or failure of strategy.
Financial Sustainability in Procurement: Risk, Fairness and Tax Avoidance
21 March 2013
This article is one of a series which looks at initiatives targeting tax avoidance by government suppliers and analyses their potential to contribute to the broader objectives of financial sustainability and fairness in public procurement. I argue that in many cases the existing rules and principles are appropriate to address financial sustainability considerations, but that more comprehensive enforcement and guidance is needed.
The question of how to assess the financial standing of candidates in a tender competition has come into the spotlight recently. At a time when the UK, like many other European countries, has had its own credit rating downgraded, reminders of the need to be tough but fair when judging financial or economic credentials are everywhere. On tax avoidance, the Cabinet Office and HMRC published a draft policy on targeting tax avoidance in public procurement, due to take effect from 1st April. However in a document issued on 20th March HMRC has weakened the policy by limiting it to contracts valued above £5 million and restricting its scope in other ways. The Cabinet Office also recently published an information note on supplier financial risk issues, many of which are addressed in the proposed revision of the EU Procurement Directives.
Targeting tax avoidance
The current EU Procurement Directives and 2006 Public Contract Regulations allow candidates to be excluded where they have not fulfilled obligations related to the payment of taxes. The wording in the Directives is somewhat broader than that in the PCR, allowing exclusion where an operator has not fulfilled legal obligations either in the country where it is established or in the country of the contracting authority. In contrast, Regulation 23.4 (g) only allows exclusion for non-fulfilment of tax obligations in the UK, other EU Member States, Norway, Iceland and Liechtenstein. This means that if an operator is established in Switzerland, for example, under Regulation 23 it could not be excluded for non-compliance with tax obligations in that jurisdiction.The new UK policy targeting tax avoidance in public procurement does not alter the grounds on which an operator can be excluded, and may actually weaken tax compliance measures as it stipulates that explanatory or mitigating factors for non-compliance should be taken into account. Following a very brief consultation period, the scope of the policy now appears to have been curtailed significantly.
The draft policy was set out in documents published by HMRC and the Cabinet Office on 14 February. These propose that, from 1st April, candidates in above-threshold procurement procedures will have to self-certify at selection stage that they have not had any ‘occasions of non-compliance.’ Occasions of non-compliance are defined to mean any tax return being found to be incorrect as a consequence of HMRC successfully taking action under the General Anti-Abuse Rule,Targeted Anti-Avoidance rules or Halifax abuse principle, or because a scheme which was or ought to have been notified under the Disclosure of Tax Avoidance Scheme rules has failed. Convictions for tax-related offences or penalties for civil fraud or evasion must also be disclosed. This is to form the basis of a new pass/fail question to be incorporated into standard PQQs, accompanied by contract terms requiring ongoing compliance and specifying remedies up to and including termination. The Cabinet Office information note suggests that while disclosure of an occasion of non-compliance without an explanatory statement would be a ‘fail’, mitigating factors such as a change in management or tax practices should be taken into account.
The draft policy was open for consultation from 14th-28th February and some 50 responses were received ‘from a wide range of stakeholders, including accountants, law firms, suppliers and representative bodies.’ – submissions from public authorities are not mentioned. The respondents seem to have been primarily concerned with restricting the scope of the policy, in which aim they have been successful. According to a document published by HMRC on 20 March, the self-certification requirement will now only apply to contracts valued over £5 million and to occasions of non-compliance which arise after the introduction of the policy. HMRC originally proposed a look-back period of ten years for the policy, but following the consultation this is likely to be reduced to six years, or possibly even shorter. Targeted Anti-Avoidance rules are now excluded from the scope of disclosure.
This represents a remarkable curtailment of the scope of the policy as originally drafted. What is missing from both the original and revised policy is any consideration of how many cases of tax avoidance might fall within the policy, based upon the value of contracts and historical period to which it applies. Given that the definition of tax avoidance is based on cases actively pursued by HMRC, these figures should be available.
The changes as well as the original drafting of the policy make it doubtful that it will effectively target tax avoidance amongst government suppliers. It does not appear to go beyond current practices regarding tax compliance in public procurement, and may in fact limit these practices.The definition of ‘occasions of non-compliance’ refers only to practices which have been the subject of action by HMRC and found to contravene one of the listed rules. This limited definition of tax avoidance is narrowed further by the shortened look-back period. As outlined above, the existing rules already allow exclusion where an operator has not fulfilled tax obligations, and this does not (yet) come with a time limit or requirement that mitigating factors be considered. So while the policy introduces a new requirement to provide information, it also introduces new ways of avoiding the consequences of that information. The net result may be more work for candidates (the majority of whom will be tax compliant) and procurers, with no increase in detection of tax avoidance or decrease in the number of public contracts awarded to tax avoiders.
One of the problems seems to be the gap between requesting information and being able to act upon it. A starting point would be to revise the Public Contracts Regulations to reflect the full scope of the discretionary exclusion set out in the EU Directives, i.e. including non-compliance with tax obligations in countries outside of the EU or EEA. This would also help address the concern that any new tax avoidance measures will affect UK operators disproportionately. Beyond this, the selection stage may not be the most effective point in procurement procedures to target tax avoidance, as the Directives prescribe an exhaustive list of matters which can be taken into account. Contracting authorities enjoy greater discretion over award criteria and contract performance clauses, provided these are related to the subject matter of the contract (i.e. do not target general corporate practices.) Awarding marks based on the transparency of the proposed financial reporting and audit procedures for a specific contract may be possible, and contract clauses which enforce such commitments are certainly permissible. Taking a more pro-active approach to enforcement of the existing Article 23.4 exclusion grounds would help counter tax avoidance which involves a breach of legal obligations. The added value of the new policy relative to these measures is not clear.
PPN on Supplier Financial Requirements
PPN 02/2013 focuses on a number of points which have been raised by suppliers under the Cabinet Office 'Mystery Shopper' scheme. It does not establish any new requirements but offers advice on how some of the matters raised can be addressed by contracting authorities. Most of the recommendations aim to allow greater flexibility for suppliers to establish their financial standing, not least in order to facilitate participation by public service mutuals. Requesting two years' accounts instead of the more traditional three and accepting alternative evidence where appropriate are amongst the PPN's recommendations. Reliance on credit rating reports or turnover ratios to the exclusion of other indicators is cautioned against. Required levels of insurance should reflect the specific contractual risk rather than being based on a blanket approach. All of these counsels seem wise and perhaps a bit obvious - which is not to say that contrary approaches are not found in many procurement procedures. The question is whether removing or lightening financial standing requirements can be undertaken confidently in the current environment.
The PPN identifies other methods of mitigating risk - through contract monitoring and management, step-in rights and escrow agreements. While much lawyers' and contract managers' time is taken up with these arrangements, for many types of contract they are rarely invoked. Like insurance policies, this makes it difficult to determine their value and effectiveness compared to other approaches of mitigating contractual risk such as bonds and guarantees. Further objective research in this area could help contracting authorities to choose approaches which achieve a good balance between protecting public funds and removing any unnecessary barriers to competition. Without such evidence contracting authorities may be reluctant to abandon more traditional approaches to mitigating contractual risk, even where these present greater upfront difficulties for suppliers.
What is financial sustainability?
While environmental and social criteria have advanced in public procurement, it sometimes seems as if approaches to the third pillar of sustainability – the financial or economic – lag behind. This is not to say that financial matters are not assessed, but that the view taken does not always reflect long-term thinking. The ill-fated West Coast Main Line tender is an example of how failing to adequately assess the economic risks of a contract can stop procurement in its tracks. Assessing the economic robustness of proposals sometimes plays second fiddle to the financial checks carried out at selection or due diligence stage – whereas all three are essential and interlinked components of financial sustainability. At a minimum, the following considerations will normally be relevant:
In order to assess each of these factors with reference to the entire duration of the contract, some assumptions must be made about future events. Sophisticated financial models will define multiple scenarios and tolerable risk thresholds. However even lower value/lower risk procurement may need to consider the effect of changes in key variables such as interest rates, exchange rates and input prices. Financial sustainability implies not only that these factors have been taken into account, but that clear contractual remedies exist in the event of default by the contractor.
Given the scope of factors which can influence financial sustainability, a number of different tests may be applied prior to contract award. Turnover, profitability and credit rating are typically assessed at selection stage. Insurances and the availability of a bond or guarantee may also be queried at this stage, although they will not need to be in place until contract award. While it is important not to assess the same thing twice, in many cases it is necessary to revisit financial matters in light of the content of tenders or the passage of time between selection and award stages. A proposed change to the EU Procurement Directives would allow financial standing to be evaluated after tenders are submitted as well as before. Clearer rules on the treatment of abnormally low tenders are also proposed, although these may still prove difficult to apply.
Fairness in financial assessments
The Treaty principles of transparency and equal treatment are fundamental in the process of evaluating financial standing, as is the principle of proportionality. Transparency implies that criteria are clearly set out in the contract notice and/or documents such as the pre-qualification questionnaire (PQQ). It also implies that the results of the assessment will be communicated to each candidate in a manner which allows them to avail of their rights under the Remedies Directives. Equal treatment requires that similar situations are not treated differently, and different situations are not treated in the same way, unless such treatment is objectively justified. This means, for example, that if two candidates present accounts in slightly different formats, but which contain all of the essential information requested, they should both be assessed. Proportionality is relevant both in setting and evaluating financial standing criteria. Setting a turnover requirement of £5 million for a contract worth £500 000 is an obvious example of a disproportionate requirement.
These three principles go a long way towards establishing fairness in financial standing assessments. However they cannot act as a substitute for judgment and common sense. These are important regardless of the method used to evaluate financial standing - whether done through a database or supplier qualification system, via a framework or PQQ. The obligation to fulfil these duties ultimately rests with the contracting authority, as do the risks of legal challenge or financial problems with the contract. It is thus in the interests of contracting authorities to look carefully at the criteria applied, to ask whether they are likely to give a comprehensive, accurate and appropriate indication of financial standing. Making suppliers jump through unnecessary hoops or requesting information which will not in fact be assessed or acted upon is counterproductive for all parties. At the same time, many public authorities are now looking for ways to target issues such as tax avoidance which have not been addressed by traditional selection procedures.
The recent UK policy initiatives on tax avoidance and supplier financial requirements fall short of what is needed to realise financial sustainability in procurement. This arises in part from a lack of evidence regarding the actual practices of public authorities and the effect of the contemplated changes, as well as insufficient appreciation of the possibilities under the EU Procurement Directives. Future articles in this series will follow developments in these policies and the ongoing revision of the EU Directives. Comments or suggestions for topics to be addressed here are welcome.
Article 45.2 (f) of Directive 2004/18/EC and Article 54.4 of Directive 2004/17/EC
 This is due to the definition of 'a relevant State' in Section 4.4/Schedule 4 of the Regulations. As Switzerland is party to the WTO Government Procurement Agreement, the contracting authority would be obliged to consider its tender.
Proposed for inclusion in the Finance Act 2013
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