The Government wants more public contracts to be offered to small and medium sized enterprises. But delivering this change across all public sector organisations is difficult. Graeme Young explores the procurement culture which favours the larger companies and he looks at the barriers and risks to doing things differently.
The Coalition Government has set a target to award 25% of central government contracts to small and medium-sized enterprises (SMEs) within the current Parliament. Similar initiatives have been launched across the public sector, all designed to improve SME access to public sector contracts and help kick-start the economy. There are however competing tensions both in the policies being promoted and in the practices being adopted by different authorities when tendering contracts. A common complaint both from public sector buyers and SMEs is that the rigours of the EU procurement rules make it harder for smaller businesses to win public sector work. This begs the question as to whether the EU procurement rules are part of the problem, or part of the solution?
Promoting the SME agenda
In February 2011, the Cabinet Office announced a package of measures designed to ensure that SMEs are able to compete on an equal footing for public sector contracts. The measures included developing a ‘Contracts Finder’ portal, which compiles details of:
• Low-value opportunities – ie contracts for works, supplies and services worth more than £10,000;
• High-value opportunities taken from the OJEU website – typically worth more than £100,000; and
• Sub-contracting opportunities – ie contracts for works, supplies and services from prime contractors who have won public sector contracts.
The package of measures also included the setting up of a ‘Mystery Shopper’ system through which SMEs could feedback any bad procurement practices so that it can be addressed by government.
In addition, the Cabinet Office put forward proposals to alleviate the administrative burden faced by SMEs when tendering for contracts – for example, storing certificates and other documents submitted for one PQQ, so that they do not need to be reproduced for others.
In February this year, the Cabinet Office announced that it is prohibiting the use of Pre Qualification Questionnaires (PQQs) for procurements valued at less than £100,000 and further standardising them for above-threshold contracts – the concern being that conditions for being considered for public contracts were preventing SMEs from tendering.
Similar initiatives are being promoted in Scotland, Wales and Northern Ireland. For example, the Scottish Government is promoting the use of the Public Contracts Scotland portal and has a Single Point of Enquiry service similar to the Mystery Shopper system.
One year on, the Cabinet Office issued a progress report in March this year (Making Government business more accessible to SMEs – On Year On). The report concluded that the government had made good progress and that many of the systemic and institutional barriers have been removed. It however recognised that more needed to be done to change procurement behaviours and practices.
One can easily identify the potentially competing tensions both in the policies and in procurement practices across the public sector.
At the same time as pursuing these SME friendly initiatives, the Cabinet Office and other authorities have made it clear that the over-riding imperative in procurement exercises is to ensure value for money for the public purse. This has meant the continued proliferation of collaborative purchasing strategies across the public sector, aggregating and centralising the procurement of common goods and services. It has meant developing single supply strategies to reduce spend through aggregation, standardisation and rationalisation, the favoured approach being to establish national and regional framework agreements. Clearly there are competing tensions between collaborative procurement strategies, which tend to favour the larger companies, and more localised lower-value procurements, which tend to favour SMEs.
There are also competing tensions with authorities increasingly concerned about supplier default. As a general rule SMEs are higher risk compared to larger companies with higher turnover figures and better balance sheets. Can authorities afford to run the risk of relaxing entry requirements to allow in smaller suppliers and new start-ups?
A related tension is authorities having the confidence to exercise discretion and judgment when designing tender processes and evaluating tender submissions. The current market situation has meant an increased risk of procurement challenges, with tougher competition for fewer contracts and the failure to hold on to a contract following a re-tender exercise often meaning the loss of jobs or even the threat of administration. The remedies available to unsuccessful tenderers were also significantly strengthened two years ago allowing unsuccessful tenderers to suspend contract awards simply by the issuing of court proceedings (known as ‘automatic suspension’) and introducing a new ‘ineffectiveness’ remedy, which if successful would result in concluded contracts being set aside and authorities fined for breaching the rules.
The EU procurement rules
A common complaint with the EU procurement rules is that they are overly burdensome and burocratic, both for the authorities having to apply them and for the tenderers looking to compete to win contracts.
The EU procurement rules do prescribe a set of standard contract award procedures and rules that can be difficult to apply to each and every procurement. However, the evidence appears to suggest that it is not the rules themselves that are the problem but that the main issues are around poor procurement strategies, over-engineered tender processes and an over-cautious approach to complying with the EU rules.
That view was largely supported in the responses to a consultation exercise conducted by the European Commission in 2008 when establishing a Code of Best Practice on facilitating access of SMEs to Public Procurement Contracts. The responses stressed that what was most needed was not legislative changes, but changes to ‘authorities’ procurement culture’, stakeholders reporting the main difficulties as being:
• difficulties in obtaining information;
• lack of knowledge about tender procedures;
• excessive administrative burden;
• large size of contracts;
• too little time to prepare the tenders;
• the cost of preparing the tenders (since many costs are fixed, SMEs face disproportionately high costs in comparison with larger enterprises);
• disproportionate qualification levels and certification requirements;
• excessive requirements for financial guarantees;
• discrimination against foreign tenderers / favouring of local or national enterprises;
• finding cooperation partners abroad; and
• late payments by authorities.
While the EU procurement rules are intended to ensure the opening up of markets for all economic operators, without distinction between SMEs and other types of economic operators, there are some provisions which are particularly important for SMEs, as they provide solutions for problems faced by SMEs or mainly by SMEs. These include the provisions on sub-dividing procurements into ‘lots’ and on sub-contracting.
A review of the current EU procurement rules by the European Commission in 2011 concluded that there was evidence to suggest that SMEs were finding it difficult participation in public tenders. On the one hand there was a concern as to the level of evidence that authorities were demanding from tenderers at selection (PQQ) stage. The large number of certificates that were often required at the selection phase entailed an administrative burden which was difficult for SMEs to cope with, especially in a cross-border context when the certificates have to be translated. On the other hand, the selection criteria themselves were often set so high (for example, turnover requirements or number of required reference contracts) that it was virtually impossible for SMEs to fulfil them.
The reforms proposed by the European Commission just before Christmas last year should therefore come as no surprise and should be seem – at least in principle – as entirely consistent with the policies and initiatives being promoted by the Cabinet Office and other public sector organisations up and down the country.
Among the measures proposed, the most important is said to be the obligation for authorities to accept self-declarations as a first step. Only the winning bidder must then supply the documentary evidence for the selection criteria. Documents which have already been submitted to the same authority within the past four years and which are still valid shall not have to be re-submitted. In addition, the list of possible selection criteria is made exhaustive, with a requirement that yearly turnover requirements may not exceed three times the estimated contract value. The proposals also include a provision to encourage authorities to split contracts into lots. For all contracts over €500,000, an authority will be required to justify a decision not to divide the contract into lots. Finally, the proposals also include provisions allowing governments to introduce rules on the direct payments of subcontractors, so that these subcontractors – which are often SMEs – get paid quicker and do not suffer from bad payment practice of the prime contractors.
In conclusion, it seems that the EU procurement rules are clearly part of the solution; part of the solution to improving access to public procurement markets for SMEs and kick-starting the European economy. There is however a risk that authorities’ horizons do not stretch much further than their own constituencies and that SME-friendly becomes synonymous with looking to favour local businesses and local jobs. A lot of very positive initiatives are being promoted at national, regional and local levels of government. There are always likely to be tensions around the value for money debate when taking a more strategic approach to procurement policy but provided the SME agenda does not have a protectionist element to it the initiatives and behaviours it promotes should be entirely aligned with the purpose and objectives of the EU procurement rules.
Graeme Young is a Partner in the EU and Competition team of national law firm Dundas & Wilson