Current Issues in Public Procurement: A Case for Governance in Government

Public Bodies in Europe are subject to a set of rules designed to ensure competitive tendering and to support the basic principles of the Single Market across the EU (‘the procurement rules’). They are intended to foster an open market by preventing “buy national” policies and by creating a level playing field for all Single Market participants. This is of significant importance to business in the UK, and in particular of considerable significance given existing EU/UK trade flows.

EU Member States or government bodies purchase a substantial proportion of all goods and services bought in the EU. Often Government is the largest buyer, and as such government affects competition through the impact of its activity on firms those in the affected markets.

This paper suggests that the UK should identify, adopt and ensure that best practice is applied both to its own purchasing practises and to those of all governments in the EU.

Basic Principles

The underpinning principle in the procurement rules is that government should buy according to the principle known as the ‘most economically advantageous tender’. This is known as the MEAT principle, also known as Value for Money or VFM, in order to make sure that buying is being done in a way that is economically efficient and that public funds are used objectively.

The recently released Rand Report and other studies have demonstrated the difficulty that national departmental practices can defeat these established policy objectives – and stubbornly resist the many attempts to reform the system. The effect is that current public procurement practices exclude smaller suppliers, stifle innovation, and fail to provide optimum value for money.

A common difficulty with oversight and enforcement of the rules is the lack a developed and independent system of judgement within government and a lack of the typical systems of governance that characterise the private sector. The issues and potential solutions are described below.

The Issues

The underlying problem is the practices of the authorities rather than the rules themselves. This paper reviews the results from the literature and the new research which confirm:

• Public procurement is slower, up to twice as costly and less profitable than private sector procurement; 
• Direct cross-border bidding (i.e. without using a local subsidiary) is rare and national suppliers tend to be favoured. 
• Most public sector purchases involve locally-based4 or long-standing suppliers. The result is mutual dependence between suppliers and public sector purchasers, this has a particularly damaging impact on the EU economy; when potentially more efficient and competitive suppliers are locked out of the public procurement process, and incentives to develop pan-European services are undermined. 
• Departmental practices are at the root of the problem rather than deficiencies in the rules themselves. Misunderstanding of risk, blanket apportionments of risk, and inappropriate risk apportionment between government department and supplier is frequently an issue. 
• Methodologies and processes for the development of best practices and the development of best practice between the private and public sectors is limited. 
• Current practices undermine the responsibility of officials in government and reliance on external consultants creates a cycle of mistrust. 

The result is inefficiency, which stifles competition and discriminates against innovative firms, especially small and medium sized enterprises (SMEs) and new market entrants (such as British companies outside the UK). Governments also fail to achieve true ‘Value for Money’ and are hence failing in their mission for taxpayers.

The information, communications and technology (ICT) industries have driven economic growth and are recognised to be one of the most important factors in future jobs, productivity and growth in the EU.  ICT and pan-European communications services hold the promise of improved efficiency and increased competitiveness. A recent study estimated the net present value of economic benefits to the European Union at €68bn over 7 years. Governments need to adopt ICT to improve their productivity and to become more efficient and effective in delivering their services to the public. However, the way in which public procurement is being done in practice leaves undermines this requirement and practical measures need to be taken to change the approach.

A change in approach would include a change by the public sector across Europe and a more coordinated approach by government departments within a single country.

The Solutions

The Rand Report makes a number of recommendations to change public procurement practices. Some of the key recommendations include:

1. No need for revised legislation but a pressing requirement for education on proportionality and the intelligent application of existing rules. Training and exchange of good practice among procurement professionals is vital.
2. The EU Commission, other EU institutions and government bodies of all EU Member States should take the lead by ensuring that their own procurement practices take full advantage of the opportunities present in existing frameworks. This can be accomplished through procurement officer training and certification.
3. Steps need to be taken to encourage a transformation of public procurement practices, such as: 
   • Awarding of contracts on a most economically advantageous tender basis instead of merely awarding to the lowest price conforming offer. 
   • Standard model contract terms and conditions should not be seen as compulsory; more scope should be left for negotiations in complex procurement projects. 
   • Greater use of tenders inviting variants as well as alternative tendering processes should be encouraged. 
   • Outcome-based and whole-life value approach should be the norm to encourage more innovative solutions to problems. 
   • Risk should be allocated in a way which takes into account the parties’ different ability to bear risk, ie where the parties are equally well-placed to manage risks, risks should be borne by the party best able to bear them (“Risk-neutrality”). 
   • Complexity causes multiple problems: for example, drawn out and multi party negotiations waste time, OGC standard terms are often inappropriate, and benchmarking, practical due diligence, complexity of pricing models and evaluation systems all make the system too complicated to manage with an appreciation and judgement of the true costs and the public interest benefits.
4. A Government/Industry Procurement Forum for the IT sector should be established to engage governments in a dialogue on the promotion of the public procurement profession and an active feedback mechanism from industry and government for sharing of experience and knowledge and which would act as the basis for best practice.
5. A Procurement Handbook for the IT sector and guidelines explaining how the principles of non-discrimination and equal treatment can be applied in accordance with the EU procurement rules is needed in order to encourage greater flexibility and negotiation, reduce the exclusion of key suppliers and limit reliance on rigid and non-negotiable ex ante standard contract terms.

Governance in Government

Perhaps the biggest issue when government is compared to the private sector is the lack of certain important independent oversight functions that exist to ensure that commitments are fulfilled. 

In the private sector the business lead for a profit and loss account is often required to ensure that delivery of the mission of the firm within set profit targets. Business leaders are trusted to deliver, but the principle of ‘trust but verify’ has become widely used as successive corporate governance regimes have reformed business life. Business reviews of operational performance are a regular feature with many organisations operating on a monthly cycle. One issue with such reviews as the only method of verifying performance is the risk that an organisation will place its faith in management accurately representing the facts. ‘Can-do’ cultures and an over-enthusiastic and optimistic view of the true position may allow a company to mislead itself. In keeping with modern corporate governance such as the Turnbull principle of independent oversight, and in line with the thinking in Sarbanes Oxeley, finance functions are required to test the underlying figures and financial facts and sign off the accounts throughout the firm independently of business management.  This provides a valuable second pair of eyes to ensure transparency and its existence improves the quality of decision making.

Additionally, as a systematic matter, there are often “Three lines of defence” in the corporate governance of large companies. Management being the first, Finance being the second and the Company Secretary/General Counsel or legal function being the third line of defence. Each is accountable to shareholders and increasingly the focus is on risk assessments where the combined experience of different people into teams is brought to bear to ensure that business decisions are the best in the circumstances, and are rigorously tested and checked within a systematic process. When applied systematically the accent is in making sure that although mistakes are made, they are addressed swiftly and mitigating actions taken transparently. This enables an organisation to learn from its mistakes, and over time allows an organisation to develop a culture where best practice is habitual. 

The Chief Legal Officer is often the Company Secretary (UK practice) or General Counsel (US, and increasingly international practice), and that person plays a central role in corporate governance, both from an overall perspective being the person responsible for the Company’s formal constitution and disclosure in formal documents to shareholders, and in ensuring that documents submitted to boards are properly verified and, in making sure that business people consider the wider interests of stakeholders generally and the applicable law to the issues at hand. The function is often the holder of the corporate conscience and ensures compliance with corporate social responsibility as well as more general corporate compliance policies. It also investigates and deals with claims and is typically a key part of the team negotiating key contracts. It appears that no part of these activities applies within government, and it is of little surprise that governance in government is impaired or that decisions are not properly understood and implemented. This is no doubt an issue going beyond purchasing and striking at the heart of the rule of law in government’s decision making. The remedy would appear to be the adoption of a General Counsel’s office, similar to that which exists in the USA, or in certain continental systems of government. 

The entirety of the governance system allows good decisions to be made, based on good information and fact, and ensures a dynamic approach over time rather than a series of static or snapshot decisions or snapshot interventions by senior management in day-to-day activities. It is all too frequently the case that the attention of many organisations is applied at the contracting stage; systematic governance brings with it an emphasis on delivery and implementation, and continuous improvement. The ways in which different organisations apply the rules varies, and best practice is in many cases emerging from the corporate governance reforms of recent years. Functions range from Quality Assurance Boards that maintain focus on risk and ensure both revenue and profit over time through technical bodies that exist to ensure that actions from audit committees are discharged, through risk committees that monitor and address risks such as risks of non delivery, monitoring delivery against risk registers etc through to corporate governance in the form of board structures where the force of law applies to the decisions of board members, and where the fiduciary obligations inherently ensure that close attention is paid to issues of fact and figures and high quality decisions are made. The combination of these different functions and a systematic approach is responsible for ensuring that high quality is maintained and that commitments are fulfilled. 

There may be important lessons to learn in the public sector from the advances in thinking in these areas in the private sector in recent years.

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