The loss of a train construction contract overseas has left coalition ministers arguing that civil servants should hand more contracts to UK firms. Stuart Watson examines the room for manoeuvre available within EU rules.
On the 9th February Bombardier’s Derby factory received a stay of execution, as the company pledged to keep the train-making plant open until 2014 while it tries to win more work. The news that 1,600 jobs will be saved – at least for the present – will come as a relief to the ministers and civil servants who weathered a storm of protest last June after a lucrative government contract was awarded to an overseas manufacturer, putting the factory’s future at risk.
German-based Siemens’ success in securing the £1.4bn contract to provide new trains for Thameslink provoked criticism of public sector procurement regulations and practices. Business secretary Vince Cable blamed the “narrow procurement rules” of the last Labour government, under which the terms of the contract were drawn up. In September, then transport secretary Philip Hammond told the Commons transport select committee: “We need to look at how other member states seek to take into account their strategic national interests without breaching EU procurement law, and see whether there are lessons that we can learn for the way we do public procurement in the UK.”
Most public procurements of services worth more than €130,000 (£108,000) and works of more than €500,000 (£414,000) in value are governed by EU procurement law. In December the European Commission published a set of proposed changes to the regulations (see box, overleaf) designed to allow governments more flexibility to use their buying power in support of socio-economic and environmental goals. Cabinet Office minister Francis Maude has welcomed the revised directive as “a once-in-a-decade opportunity to improve the public procurement rules across Europe”.
Meanwhile, the coalition government is eager to use Whitehall procurement to support domestic economic growth. The idea of using the public sector’s buying power to support wider aims is not a new one: the Labour government issued reams of guidance designed to ensure that contracts went to small and medium-sized enterprises (SMEs) and social enterprises, and insisted that contractors demonstrate that their work would realise other objectives in fields such as environmental sustainability and diversity. The coalition, though, wants to focus single-mindedly on boosting economic growth – and Maude argues that by over-interpreting EU law and taking an unnecessarily cautious line, civil servants have adopted “an almost deliberately short-sighted approach to working with business. The result of that has been a bias against British-based firms.” John Collington, head of procurement at the Cabinet Office’s Efficiency and Reform Group, has been charged with helping UK suppliers – both by ensuring that public procurers engage more closely with suppliers, and by reducing the cost and complexity of the procurement process.
How much room for manoeuvre?
So the public procurement landscape is changing. However, the new EU rules are unlikely to be in place for at least another two years; and in the meantime, the challenge for civil servants is to give British businesses every possible opportunity within the existing legal framework, while also furthering other policy aims such as supporting SMEs, social enterprises and mutuals.
“The European procurement directives exist to promote free movement of goods, services and people across the EU,” says David Hansom, a partner and procurement specialist at law firm Veale Wasbrough Vizards. “Within that, there is flexibility. There is guidance at EU level on how to encourage SMEs, promote sustainable purchasing and target long-term unemployment through the procurement process, but there is never going to be a situation where the regulations permit ‘national buying’.” In other words, it is clearly illegal to select a contractor directly on the basis of their nationality.
However, the law does allow public procurers to select the “most economically advantageous” bid, rather than simply the cheapest. This means they can apply a wide range of criteria when selecting suppliers, as long as those criteria are proportionate and relevant. If they’re not, the buying decision can be open to legal challenge by business rivals, who may be able to claim compensation or even have the decision overturned.
Here’s the wriggle-room
That said, some allowable criteria may be applied in a way which is likely to favour smaller or domestic suppliers. Christopher Bovis, Professor of European Business Law at the University of Hull, says that the risk assessment process can open the door for the consideration of location as a relevant factor: “You can take into account security of supply; potential disruption to logistics; environmental assessments; subcontract issues, such as whether the company has a supply chain ready; and the potential for delays,” he argues.
Peter Smith, a procurement consultant and author of the spendmatters.co.uk blog, who was formerly procurement director at the then-Department for Social Security, adds: “You can focus more on innovation, service levels or account management – areas where small firms may be better.”
Conversely, going to market in an unconsidered way may discriminate against local businesses. Karel Williams, Professor of Accounting and Political Economy at the University of Manchester Business School, argues that in the Bombardier case, the bundling together of financing and train building in the same contract helped Siemens, because it had a superior credit rating and could access cheaper finance. “There was no reason in the EU regulations why they had to do that. It was stupid to bundle the contract together in a way that favoured Siemens,” he says.
Some argue that, compared to our EU partners, the UK has a narrow view of procurement. Prof Williams, for example, claims that “in this country there is a fixation on value for money.” We pick the cheapest price, he argues, even when that “corresponds to the wrong outputs and outcomes. That is because we in the UK do not have an industrial policy: a strategic policy on how public money is spent to support growth.”
Starting a conversation
In a speech to a government suppliers’ conference in November, Maude said that the UK awards three per cent of public procurement by value to foreign suppliers, compared to 1.9 per cent in Germany and 1.5 per cent in France. He suggested that this is not because Germany and France are breaking any rules, but because they work closely with their domestic firms to help them win contracts at home and abroad.
However, Smith is sceptical of this view. He argues that British buyers’ reluctance to enter dialogues with potential contractors disadvantages local and foreign suppliers equally. “There is no evidence of bias against British companies. I’m all in favour of dialogue with suppliers before entering procurement, but not doing it is not evidence of bias; it’s usually evidence of lack of time,” he says.
Steve Radley, director of policy at the Engineering Employers Federation (EEF), raises another of the problems in securing British government contracts: the UK’s weakness in predicting its future buying needs and making long-term procurement plans. “Selling into other European markets, you tend to find that the French or German government will have a much better sense of what their needs will be over 5-10 years,” he says. “If you have a more visible and consistent order flow, it makes it easier to invest and win orders. In the UK there have been periods of feast and famine, which have hindered companies like Bombardier from developing capacity.”
Causes of anxiety
These matters aside, are British officials simply more cautious in judging how far they can go under EU procurement rules? Lawyer Hansom suggests that, faced with complex rules, many do play safe and rely on a tried and trusted approach. “The current rules are very detailed in some parts and don’t give guidance at all in others. Innovation introduces a risk that purchasers may get it wrong, so they re-use old procurement documents,” he says.
This anxiety has been exacerbated by suppliers’ growing readiness to challenge decisions because of the recession and spending cuts: “There is less work, so the opportunities that are left are more competitively fought over,” says Hansom. “Challenges have gone up 300 per cent in the past two years, in my experience. It’s a disincentive for purchasers to be brave.”
Financial pressures may also have played a part. Smith says that SMEs struggle to compete effectively unless large contracts are broken up into their component parts – something that goes against the government’s drive to save money through seeking economies of scale. “Where procurement people aren’t always very smart is that they aggregate contracts thinking there are huge economies of scale, so they are hooked into big suppliers,” he argues. “They put in silly restrictions on turnover or experience that exclude smart, growing companies.”
Smith adds that job cuts and a consequent lack of resources makes the time-consuming business of splitting contracts less attractive to purchasers, who may end up spending almost as much time on each of a series of small procurement exercises as they would on letting a single mega-contract.
For Bovis, the obstacle isn’t a shortage of resources but “a cultural matter, endemically cultivated in the civil service of the UK: they don’t tackle issues relating to the strategic dimension.” However, he believes that the Cabinet Office is beginning to address the deficiency: “The penny has dropped in terms of the impact of strategic procurement on growth. They are going to start pushing cultural changes,” he says.
The Cabinet Office is endeavouring to shorten procurement timescales and reduce the amount of paperwork involved, but most of all it wants purchasers to enter into dialogues with suppliers before contracts are put out to tender. In November, Collington promised suppliers: “Pre-procurement market engagement will be encouraged in every single procurement. It is good practice, not unlawful practice.” As part of the new strategy, the government has begun to publish “pipelines” of potential future requirements to enable suppliers to prepare more effectively to bid for contracts.
Collington also pledged that the government would be resolute in its commitment to give more opportunities to SMEs. A scheme has been initiated under which suppliers have the opportunity to report anonymously cases where they do not feel the new procedure has been followed.
Ideas like this, Maude believes, will gradually open up public procurement to a more diverse range of organisations – and help British companies to secure more of the business that their taxes have helped create. “We want to support British businesses so that they are in the best possible position to compete for business at home and abroad,” he tells CSW. “This isn’t about EU rules or competition, it’s about taking the time to nurture your supply chain, to be transparent about the pipeline of business and to have open dialogue with suppliers.” ?
Proposed EU procurement law changes explained:
The European Commission’s proposed changes to EU procurement rules have two principal aims: to make the regulations simpler and more flexible; and to allow procurers to make better use of public procurement in support of goals such as protection of the environment and promoting innovation, employment and social inclusion. At the same time, the commission continues to stress that public procurement policy should ensure the most efficient use of public funds, and that markets must be kept open across the EU. The proposals, which run to 246 pages, were published on 20 December 2011. Member states are now considering their responses ahead of the planned tabling of legislation by the end of 2012. If approved, the regulations are unlikely to come into force until 2014 at the earliest. Key elements include:
Making procurement simpler and more flexible
Procurements for social, health and education services will be subject to a less onerous regime, which imposes only basic principles of transparency and equal treatment. There will also be a lighter regime for local and regional government. Electronic procurement will become mandatory to deliver savings, improve outcomes and reduce errors. More flexible and user-friendly procedures include clarification of the rules on modifying contracts during their term and compressed schedules to allow for quicker procurement.
Strategic use of public procurement
The proposal gives public purchasers scope to base their decisions on life-cycle costs of products, services or works. It is hoped that taking into account whole-life costs, from raw material acquisition to disposal, will allow for more environmentally-friendly purchasing. The introduction of an “innovation partnership” procurement procedure is designed
to help public procurers to buy innovative products and services to promote growth and increase efficiency.
Better access for SMEs and start-ups
Contracting authorities will be encouraged to divide contracts into smaller lots, and if they do not do so will be obliged to provide an explanation for their decision. Pre-qualification criteria will be limited to those linked to a supplier’s ability to deliver the contract, and limits will be introduced on the stipulations that a buyer can set out concerning issues such as buyers’ turnover and their track record in public procurement.
Provisions against illicit conduct and regarding conflicts of interest will be strengthened. The proposals recognise the value of pre-procurement market consultations, but also provide stronger safeguards against the possibility of some suppliers gaining an unfair advantage as a result.
Member states must designate a single national authority in charge of monitoring, implementation and control of public procurement.
The draft directive includes many of the changes advocated by the UK government. In December, Francis Maude said that “it highlights the importance of straightforward, flexible rules and demonstrates how this can be a catalyst for growth. It also recognises that we need to look at ways we can remove unnecessary, disproportionate costs on lower value procurements – an area which is very important for smaller firms.”
However, one of the coalition’s key proposals – an exemption from open procurement for employee-led, ‘mutual’ social enterprises to protect them from competition in the early years of their existence – is not included. Maude commented: “We will now continue to work with other countries across Europe and seek to influence the final proposal so that it works for British business of all types, including vital new business models such as mutuals.”
The CBI has welcomed the proposals. “The directive is a step forward for our members,” says Andy Bagnall, head of public service reform. “It will simplify processes and increase flexibility. It clarifies the rules on pre-engagement and gives public procurers the ability to split contracts where appropriate to help SMEs.”