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  • Writer's pictureAbby Semple

Does the UK have a Rolls-Royce Public Procurement System?

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 approveddeferred 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 hisjudgment 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 theMinistry of Defence,Department for Business, Energy and Industrial Strategy, andDepartment for International Developmenthave 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 alsolobbied 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, transparentonline systemwhich 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.

[1] 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

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