Public Procurement

Samuel Townend and Simon Taylor

One of the major and traditionally undervalued economic tools that government has available to it is the way that it spends public money. UK public procurement expenditure accounts for about £22bn a year, of which about £45bn is by government departments (the remainder being mainly health and local authorities). It affects roughly 20 per cent of UK gross domestic product.

This purchasing power can be used to maximise value for money for taxpayers. It can also be used to promote industrial policy aims, such as stimulating underperforming parts of the economy and establishing sustainable markets, but also social aims such as improving labour practices and encouraging small and medium-sized enterprises (SMEs). The use of this power is guided and constrained by the public procurement rules, which are based on European Union (EU) law.

This chapter takes stock of how the UK is doing at public procurement, looks at the causes for any shortcomings, proposes a reassessment of priorities in line with Labour values and makes some suggestions as to how best to use this valuable resource in a period of austerity. It concludes that a government procurement strategy is urgently needed to restore an efficient balance of economic purchas­ing, social progress and business growth.

Is Europe to blame?

Public procurement is fundamental to cross-border trade and investment. It is therefore regulated at EU level through a series of pro­curement directives including 2004/18/EC and 2004/17/EC. These set out detailed requirements as to the way in which contracts above certain thresholds are to be tendered by public bodies and certain utili­ties with monopoly rights. They include the manner of advertising (in the Official Journal of the European Union (OJEU)), the procedures to be followed, the basis on which bidders may be eliminated and evaluated, and rules on due process such as the debriefing of unsuc­cessful bidders and effective remedies. The EU rules are primarily aimed at ensuring the free movement of persons, goods, services and capital within the EU by outlawing discrimination between companies on grounds of nationality. They also use fair competition to drive value for money and transparency to prevent corruption.

The pursuit of other policy aims, including the environmental and social agenda, is also sanctioned by the procurement rules, provided this does not conflict with the primary aim of EU free movement. Indeed, the EU Treaty (Treaty on the Functioning of the European Union (TFEU)) enshrines in its preamble the pursuit of social as well as economic progress as a fundamental objective, and much of the worker protection legislation in the UK is based on EU law. But there is tension between these various aims which has given rise to case law.

EU procurement law is much maligned, often with apocryphal tales of Eurocrats determined to make life difficult for British busi­ness, while foreign governments cheat the system and favour their own national champions, which in turn steal British contracts and jobs. The truth is that British businesses do reasonably well out of European public procurement. Research prepared for the European Commission in 2011 showed that UK business won 17% of foreign contracts awarded across the EU (second only to Germany at 26%, with France at only 5%). That isn’t bad when you consider that foreign tenders are likely to be conducted in a foreign language and the British are not famed for their linguistic adaptability. In relation to UK procurement, only 3 per cent by value of UK public contracts were awarded to firms based in other member states (below the EU average of 3.5%, though higher than France at 1.5% and Germany at 1.7%). In any event, our membership of the EU is conditional on the procurement and other free movement rules.

Furthermore, if we didn’t have the procurement rules we would need to invent them. This is because, if done properly, regulated public procurement safeguards public value for money through competition for contracts and ensures public sector accountability through trans­parent procedures. EU procurement regulation also enables British companies to access tender opportunities in a range of major trading nations under the General Procurement Agreement umbrella (includ­ing the United States, Canada, Hong Kong, Japan and Singapore).

The EU rules are not perfect and a recently adopted directive introduces reforms that will, to a degree, create more streamlined and flexible procurement (for instance, more scope for negotiation, elec­tronic documents and more practical rules on dynamic purchasing systems). They will also confirm that procurement can be used stra­tegically to advance social aims and help smaller companies (Art. 46 on lots, Art. 67 on award criteria and Art. 70 on contract conditions), that authorities can exclude companies from tenders for a wide range of misconduct (including persistent deficient performance, collusion and fraud, Art. 57), take bidder past performance into account at selection stage (Art. 58) and that pre-tender engagement is permitted (Art. 40). In these and many other respects, the new provisions codify and (on the whole) clarify EU law. These are positive developments for which the UK negotiators at the Cabinet Office can take some credit.

Taking stock of how the UK is doing at public procurement

The real problem is not the EU procurement rules but the way in which public procurement is carried out in Britain. This was the view of the House of Commons Public Administration Select Commit­tee (PASC) in their July 2013 report on government procurement. Having heard extensive oral evidence and studied written reports from a wide range of sources, the Committee concluded that:

• UK procurement is risk-averse, process-driven and inefficient: ‘It is intolerable that UK public procurement still takes 50 per cent longer than it does in France and Germany: the Cabinet Office does not seem to know why this is the case’ .
• There is a failure to ensure proper consideration of social and eco­nomic objectives in procurement exercises.
• There is no coherent procurement strategy: ‘The government has failed to set out a clear strategy for public procurement. There remains a lack of clarity about the government’s longer term policy for the consolidation of government and wider public sector procurement.’
• There is a skills gap in government as to both procurement capa­bility and the commercial nous needed to manage contracts with
• Aspirations to support SMEs are commended, but procurement favours large companies and SMEs do not win a fair proportion of public contracts.
• There is insufficient leadership even to drive change in Whitehall, never mind the wider public sector. The Cabinet Office is com­mended for its reform initiatives but lacks the authority to make things happen. The UK Cabinet Office Minister, Francis Maude, acknowledges in his evidence the dispersed civil service reporting structures and its system of ‘silos’.

The inefficiency and lack of capability and vision in government and the wider public sector mean that the fundamental aim of ensuring value for money in procurement spend is not being met. The PASC found that despite an overseas perception that Britain has a reputation for good procurement practice, the overriding impression was one of poor execution of the procurement rules.

What goes wrong in practice?

A significant cause of the problem, which is evident from the cases that find their way into the UK courts, is the failure by public bodies to plan tenders properly. Too often procurement project plans begin with the publication of an OJEU notice and only then proceed to the consideration and preparation of the other tender documents (first the Pre-Qualification Questionnaire (PQQ), then the Invitation to Tender (ITT), and so forth). This is often driven by political urgency but is the wrong way round and stores up all sorts of risks, delays and inef­ficiencies for later on in the process.

Key decisions should be taken in advance of advertising the tender. These include:

• The strategic aim of the tender (best value only, innovation, social or environmental aims, regeneration, market-making, etc.).
• What is to be procured (the specification, duration, whether a framework, whether divided into smaller lots, how much risk transfer, etc.).
• How it is to be procured (the process – e.g. e-auction or restricted procedure, timelines, e-portal technicalities and so on).
• What types of bidders should qualify to bid (the pre-qualification of eligible and capable bidders with sufficient financial robustness to take on the risk transferred under the contract).
• How the winner will be chosen (the objective, fit for purpose award criteria – what good looks like and how to assess it).

All these decisions are interrelated and once you have started the process it is risky to change tack because that may unfairly prej­udice certain bidders (e.g. those who have already been eliminated or did not respond to the advert). But that is what often happens. The greatest flexibility for public bodies is at the planning stage and it is generally a good idea to engage with potential suppliers in the market at this stage in order to assess, for example, what they are capable of delivering. Procurement officers have traditionally shied away from doing this out of a concern that it may breach the rules. This concern is misplaced provided things are done fairly and openly.

Poor execution is often the result of poor planning. Court pro­ceedings typically begin because the debrief provided to unsuccessful bidders reveals errors or concerns over fair play. Sometimes the scores have not been added up properly or there are obvious inconsistencies. The court disclosure process then typically makes the claim stron­ger by revealing, for example, that controversial evaluation or exclu­sion decisions are not supported by an adequate paper trail or that undisclosed methodologies were used. A costly settlement or lengthy proceedings then follow.

The West Coast fiasco

There are many high-profile examples where poor planning and poor .execution have led to procurement disasters, many of which end up in the courts. When the Department for Transport’s tender for the 15-year contract to run the West Coast Main Line franchise agreement hit the buffers in 2012 following a procurement challenge brought by the incumbent Virgin Rail, the cost to the public purse was conserva­tively estimated at £40m by the government. The Laidlaw report found fundamental flaws in the evaluation of bids, a lack of transparency, inadequate planning and insufficient governance. The government dodged ministerial responsibility by a swift Cabinet reshuffle and blamed human error by civil servants, but the problems ran deeper. They included a government franchising policy predicated on conferring a 15-year monopoly on the successful bidder, the failure to design a robust tender process to deal fairly with the complex variables (such as passenger growth projections and the capital needed to cover fran­chisee insolvency) that such a long-term contract entailed, insufficient resourcing due to government austerity cuts and inadequate oversight by senior civil servants and government ministers.

Does government use procurement strategically?

As for policy aims, some, such as the SME agenda, are now being pursued albeit belatedly. However, in spite of the fact that 6 out of 10 private sector jobs are created by SMEs, direct spend by government to SMEs is only about 10% (in years 2011-12).” The govern­ment correctly recognises that SMEs provide the engine for economic growth and innovation, as demonstrated by Germany’s economic success. It has therefore declared the ‘aspiration’ that 25 per cent by value of all government contracts are to be won by SMEs by 2015. Yet the PASC was rightly sceptical of the government’s ability to deliver on this target. In December 2013 the government announced various initiatives to encourage public bodies to make it easier for SMEs to bid for public contracts. The PASC also collected evidence of posi­tive initiatives, such as the ‘G-Cloud Framework’, on which around 75% of suppliers are SMEs. However, it seems doubtful that the public sector will come close to achieving the stated objective without a more fundamental government-led approach, which changes the way that procurements are devised and conducted throughout the public sector. A paradigm shift is needed, not tinkering at the edges. As for social policy, the Minister for the Cabinet Office made it clear in his evidence to PASC that he doesn’t think initiatives such as that pursued by the Department for Work and Pensions (DWP) to encourage contractors to take on apprentices (which have led to 2,000 new apprentices being hired) should interfere with the pursuit of value for money. That is despite the savings to the welfare budget that would result from the ensuing reduction in youth unemployment. In our view, a more positive approach is required (and one that clearly won’t be made by the present government).

Does government manage its suppliers well?

The oral evidence on outcomes and supplier relationships provided to the Committee also makes for grim reading. The Chief Procurement Officer points to the fact that about half of central government spend is with a very small number of suppliers (between 50 and 100) – sup­pliers for whom government is likely to be their biggest customer. Yet their performance is typically worse than you might expect for their least-valued customer. One case was cited of a supplier with government contracts worth over £500111 per annum that was charg­ing government a supernormal profit well above that set out in its published accounts.

It is fair to acknowledge efforts are now being made by the Cabinet Office towards management and supervision of the biggest contracts. A review led by the Chief Procurement Officer at the Cabinet Office investigated contracts worth fs.gbn held by Serco and 648 and found that Serco had been overcharging on its electronic monitoring con­tracts. On 19 December 2013, it was announced that Serco will repay £68.5m to the Ministry of Justice. The matter has also been referred to the Serious Fraud Office for investigation.

We agree that these steps are well taken. But such contracts need to be properly managed and supervised as a matter of course, rather than exception, and more needs to be done to ensure that fraudulent companies are not given public contracts in the first place. The new EU directive makes it clear that the tools are available under EU law to exclude errant bidders. A coherent procurement strategy is required and it needs to carry sufficient weight to be effective, not only in central government but also in the wider public sector.

Our proposals for reform

Above all, a realistic but ambitious strategy is needed. Given the scale of the issues and the potential gains in getting this right, it is govern­ment that needs to act, and the current government is not doing enough. In their report to the PASC, Future Purchasing Inc. and the Henley Business School estimated that the positive initiatives of the Cabinet Office and the Government Procurement Service (recently renamed the Crown Commercial Service) currently touch only about 5 % of overall public procurement spend. They estimate that procurement-led efficiency savings could amount to £75bn over the whole public sector, which could be used to cut the deficit either directly or, as they advocate, be reinvested in growth initiatives through service delivery and infrastructure projects. As the TUC advocates in its written evi­dence that strategy should also support the quantity and quality of employment, assist economic inclusion and underpin a modern indus­trial strategy – all objectives which are consistent with EU law and have been for some time, but are largely neglected by this government. We consider that the pillars of that procurement strategy would include:

• investment in skills and capability
• structural change and leadership
• joined-up public sector procurement
• the pursuit of social and industrial aims, as well as value for money
• a stronger SME agenda
• increased focus on ensuring that fraudulent and underperforming companies do not win public tenders.

Investment in skills and capability

The strategy must involve investment aimed at establishing a new generation of extremely able procurement leaders throughout the public sector with responsibility for the planning and execution of tenders, as well as contract management. This will help ensure that ‘corporate knowledge’ within the civil service and wider public sector is retained by motivating and retaining a highly skilled workforce, reducing dependence on expensive short-term external consultants and recognising the value and significance of procurement as a public service function. The strategy would mark a departure from attempts to outsource responsibility for commissioning and procurement to private providers – such as the recent failed tender for a Ministry of Defence ‘government-owned, contractor-operated’ (GoCo) – and a move towards nurturing the necessary skills within the public sector.

Structural change

Urgent consideration of options is required. These could include establishing a ‘Crown Procurement Service’ with the remit and capa­bility of addressing all (or the vast majority of) public sector pro­curement. Alternatively, it could comprise a less monolithic but no less powerful structure with top-down support from a Minister for Procurement and each procurement leader’s deliverables reviewable by a Public Procurement Reform Board.

The responsible procurement body should then show leadership, not only in guiding the public sector towards better procurement but also in interpreting the rules and negotiating with Brussels. By way of example, leadership is needed to take certain ‘public sector’ bodies such as higher educational bodies, registered providers of social housing and NHS foundation trusts that operate in regulated but increasingly competitive markets outside the scope of the pro­curement rules. Another example would be support for public sector alternatives or comparators to be used when assessing the value of private bids on major tenders.

Joined-up public sector procurement

Much of the more radical and progressive procurement comes from local authorities in areas such as shared service provision and joint buying. The strategy must embrace local authorities, NHS bodies, educational bodies and other public bodies subject to the rules. Local­ism in this context has been used by the government to dodge respon­sibility. Under the Localism Act 2011, local authorities are required to share the financial burden of any penalties for poor procurement imposed on the government by Brussels. Yet after years of austerity and with their budgets cut, local authorities often do not have the expertise or resources to procure properly. Government can’t com­pletely devolve its responsibility for efficient and lawful procurement – it is too difficult and too important to the economy. It needs to step in and help.

As for the NHS, the government has restructured the sector and introduced binding sector-specific procurement rules, which add to the burden under general procurement law, and it expects clinical commissioning groups (CCGs) of GPs to make decisions as to when they are obliged to go out to tender and how to do it. It is not practi­cal or efficient for the Department of Health to cut CCGs loose, as the increasing number of disputes and challenges in the sector dem­onstrates. The same point applies to free schools or small housing associations. How can they be expected to run tenders without close support and guidance from government? The wider public sector is fending for itself over procurement in a variety of ways with differing degrees of success, but it is taxpayers’ money that is being spent and the government’s responsibility to ensure a coherent approach.

A successful strategy must require the restructured government procurement function to be far more proactive in providing training, templates, guides, advice and set procedures, as well as resources to support procuring bodies in relation to all stages of the procurement process and contract management. This need not all be centralised. There could be regional and sectoral centres of procurement excel­lence, but a full programme of help and support is required and it needs to be coordinated.

Social measures

There is considerable scope for a future Labour government to use public procurement to promote social ends. EU Directive 2004/187 EC makes it clear at Recital 33 that contract performance conditions ‘may in particular be intended to favour on-site vocational training, the employment of people experiencing particular difficulty in achiev­ing integration, the fight against unemployment or the protection of the environment.’ It is lawful to impose on contractors a contractual condition that they must employ apprentices or the long-term unem­ployed provided it does not involve any direct or indirect discrimina­tion against foreign nationals or otherwise make it more difficult for non-national tenderers to compete. Although the award criteria used to select the winning tender must be contract-related, the case law also indicates that appropriate social criteria can be used. The ability to use social criteria is now confirmed by the new public procurement directive (Art. 67(2)).

In spite of the ability to use procurement for social ends, public bodies too often shy away from doing so, either because they (like the cabinet minister) do not want anything to get in the way of best value in its narrowest sense or because they have taken an overly cautious view on their flexibility under EU law. There are notable exceptions to this. The DWP programme for introducing apprenticeships has been referred to earlier. Glasgow Housing Association (GHA) has also adopted a suite of contract and tender documents for a construction framework that introduces contractual conditions (KPIs) based on meeting training, recruitment and apprenticeship targets. The GHA applies selection and award criteria designed to evaluate contrac­tors’ ability to meet and perform such conditions. In our view, other public bodies should follow the lead set by bodies such as GHA and plan tenders in a way that can achieve economic as well as social aims to the benefit of the recipients or users of the services or works pro­cured as well as the wider community. A Labour government should endorse and promote strategic procurement of this kind.

One positive result of such social measures in procurement is that they are likely to have local benefits. It is no coincidence that coun­tries with a more progressive social policy agenda, such as France and Germany, award more public contracts to national companies who are no doubt better able to meet social conditions in tenders than their foreign competitors. This is not cheating the system, but simply clev­erer application of the rules.

The other means of using procurement to promote industrial development is to plan and specify tenders in a more strategic way. It is not difficult to see how this can be arranged. If, taking another example in the rail industry, there were a choice between a disag­gregated programme of smaller train rolling stock contracts (possi­bly tendered together as separate lots or in a framework, or tendered sequentially) and one very large one-off contract which would meet government needs for the foreseeable future, the two options may present different risks for a UK-based train design and manufacturing base and UK jobs. The small contract option may give rise to a more diverse, sustainable production market. The large contract option may (or may not) give rise to a short-term cost advantage, but limit the future market to fewer suppliers and result in a ‘winner takes all’ tender. The loser may need to close its factory gates (unless, that is, it can mount a successful procurement challenge).

Sadly, such strategic considerations seem to have been absent when, in June 2013, the government awarded a £i.6bn contract to Siemens to build 1,140 carriages for the Thameslink rail line, leading Bombardier to shed about half its UK workers. The ensuing public outcry has, according to press reports, led the Department for Trans­port to incorporate socio-economic conditions in their £1bn tender for Crossrail rolling stock.

So government and other public bodies can and should think through at the procurement planning stage how social ends can law­fully be protected or encouraged. It is fair to acknowledge that the Public Services (Social Value) Act 2012 now requires public bodies, prior to commencing a procurement, to consider how what is to be procured might improve the economic, social and environmental well-being of the relevant area. There is little evidence, however, that the Act has made any substantive difference.

We think that a future Labour government needs to act strategi­cally to ensure that the opportunities in procurement to drive favour­able socio-economic outcomes are not missed. We propose:

• Positive and active help from government encouraging the incor­poration of legitimate social aims and advice on how to do this lawfully and effectively.
• The systematic inclusion of contract performance conditions requiring contractors to introduce apprenticeships and address other socio-economic concerns, with social criteria being intro­duced where appropriate and contract-related.

Promoting SMEs

SMEs are the engine of innovation, growth and job creation, and strong economies are built on a strong SME sector. In our view, government can and must do more to secure greater participation by SMEs in public contracts.

The way in which tenders and selection criteria are structured will have a direct impact on the ability of SMEs to qualify for and win public contracts. SMEs are having a difficult time with the banks unwilling to lend and the tendency of the public sector to procure ever larger contracts. We think that public bodies can do a great deal to foster local business by simply making it easier for SMEs to compete for public contracts. We noted earlier that the government is now taking steps to smooth the procurement processes for low-value contracts. However, nothing in the proposed measures encourages authorities themselves to procure with smaller contracts to effect real change. If contracts can be broken down into more accessible lots this will attract SMEs and no doubt result in a more diverse and inno­vative tender competition. If training days and other help and guid­ance are offered to SMEs to help them put their best foot forward, as well as simplifying the process, this will both encourage participation and improve their performance. Mechanisms such as frameworks and dynamic purchasing systems (which are to be made more flexible under the new directive) must be used to make procurement more nimble and responsive to the SME market. We therefore propose that a concerted public sector effort takes place to increase SME partici­pation in public tenders, with effective leadership from government.

Eligibility issues – excluding fraudulent companies

Most public procurement involves two distinct stages – pre-qualification and award. The pre-qualification stage is when the con­tracting authority determines whether the potential bidder is eligible and suitable. The authority may reject bidders who lack the finan­cial robustness or technical capability to perform the contract. The authority must reject bidders where it has actual knowledge that the company, or its director(s), or other person with ‘powers of representation, decision or control’, has been convicted of a number of serious listed offences including bribery, fraud, conspiracy to defraud, cheating HMRC, theft, fraudulent trading, money launder­ing and drug trafficking. The UK practice is to ‘box tick’ and accept self-certification. The government should be able to demonstrate how it ensures that companies found guilty of fraud, companies whose directors have been found guilty of fraud and unrepentant companies with a demonstrable record of grave misconduct do not win public contracts.

We think that a future Labour government should put in place more robust measures to ensure that self-certifications provided by bidders in public tenders are collected centrally, substantiated by evidence and regularly verified so as to ensure that they are correct. Similar steps are provided for in the new EU directive.

There is a second tier of elimination factors that may be treated by a public authority as rendering a company ineligible. These include bankruptcy, a failure to pay taxes and where the company has com­mitted an act of ‘grave misconduct’ in the course of its business or profession. Under the new directive the list has been extended to encompass a number of examples of unacceptable behaviour, includ­ing anti-competitive conduct and serious misrepresentation to the ten­dering authority.

The ongoing investigations of Serco and G4S illustrate the con­sequences if the integrity of government suppliers is not tested. We think the government ought to provide a strategic lead in rooting out contractors who are guilty of fraud or other unacceptable miscon­duct, using available legal tools to ensure that they are excluded from tenders where appropriate.

The Welsh government has introduced a policy on blacklisting in the construction industry, which is a good example of how govern­ment intervention can help give effect to these rules. Blacklisting is the specific activity by which construction companies draw up lists of active trade unionists or whistleblowers on health and safety issues and use the list to block their employment opportunities. This is an unlawful practice. The practice was investigated by the Information Commissioner in 2009, who identified over 40 construction compa­nies that had used the lists. The issue arose whether the blacklisting amounted to grave misconduct and whether public bodies could or should exclude the companies involved from public tenders.

The Welsh government issued a Policy Advice Note in September 2013 confirming that blacklisting could amount to grave misconduct but that exclusion from tenders must be proportionate and considered on a case-by-case basis. Exclusion must be justified by evidence and should not be used as a punishment, but rather as a means of putting right past misconduct. By way of example, companies should not be excluded if they can show that they have taken steps to ‘self-clean’ through clarification of their actions, repair of the damage caused (for instance, compensation of victims) and personnel and structural mea­sures to avoid recurrence.

At selection stage, there is scope to vet contractor capability against prior performance on similar contracts. Measures to encour­age this practice in Whitehall have been introduced by the Office of Government Commerce but a public sector wide approach is needed.

We propose that:

• Government act to provide leadership to ensure that grave miscon­duct is investigated and taken into account at the pre-qualification stage on government contracts. This would act as a real deterrent to unacceptable corporate activity and ensure that public money is directed towards companies with better governance.
• Government should provide guidance as to how public procurers are to assess companies that are under investigation for fraudu­lent activity or other grave misconduct. Some form of suspension pending the outcome of investigations may be appropriate.
• There should be an effective, coherent and transparent approach to the enforcement by public bodies of the eligibility rules.
• Contractor past performance should be fully assessed by all public sector bodies at selection stage.

Conclusion

British public procurement is in need of improvement. That much is clear from the PASC findings if it wasn’t evident before that. We can’t blame Brussels, and the government must take responsibility. The potential gains in terms of cost efficiency and socio-economic benefits far outweigh the investment of time and money needed to sort out the problems. It will require a shift in thinking from short to medium term, greater confidence from public procurers and, above all, strategic leadership from policy makers. If this government won’t act, the next Labour government should embrace the task.

Summary of principal recommendations

• To invest in and nurture a new generation of able procure­ment leaders within and throughout the public sector and reduce the dependency on expensive, short-term, external consultants.
• To provide top-down leadership and support for all public sector procurement instead of leaving local public sector bodies to fend for themselves.
• To foster strategic public procurement, including the use of contract performance conditions and award criteria designed to meet social needs.
• To promote SMEs by facilitating access to public contracts, including breaking down contracts into more accessible lots and the use of dynamic purchasing and other flexible procurement.
• To strengthen the ability of public procurers to exclude fraudulent suppliers from public tenders and ensure that past performance is fully assessed by all public sector bodies.

This article first appeared in Law Reform 2015, published by the Society of Labour Lawyers, and is reproduced by kind permission of the authors.