Today, our final two Bad Buying awards for 2021!

Creative Fraud:  I-Tek, its Owner and Staff

Multiple Fraud Related to Imported Goods (and more…)

This case may seem relatively small compared  to  some of the mega-waste examples we have seen this year, but what made it a worthy winner was the way it combined three distinct types of procurement fraud in one rather neat package.

Beyung S. Kim, owner of Iris Kim Inc, also known as I-Tek, and his employees, Seung Kim, Dongjin Park, Chang You, Pyongkon Pak, and Li-Ling Tu, pleaded guilty to a procurement fraud scheme involving millions of dollars in government contracts over several years, mainly supplying various US defence agencies. They were sent to prison in August 2021, after providing everything from swimming trunks for West Point cadets to spools of concertina wire. The problem was that the goods were made in China, but were illegally re-labelled to look like US-made products. That violated the terms of the contracts as well as laws that stipulate certain contracts must be fulfilled by US-made products.

The second fraud came when investigators found that an employee who was a disabled military veteran was listed as the firm’s president in some bids – but he wasn’t. That meant the firm was eligible for contracts reserved for companies owned by disabled ex-service people. (We’ve seen a number of frauds of that nature in recent years, so of which are featured in my Bad buying book).  Finally, the conspirators also submitted false documents and lied about the value of the goods imported into the U.S. to avoid higher duties and taxes.

All in all, a pretty wide-ranging procurement fraud, covering several relatively common areas of illegal behaviour, adding up to an impressive winner of the Bad Buying Creative Fraud Award.

…..

Not Really Technology Award: Greensill Capital

Not an SCF FinTech, Just a Risky Lender (and Several Very Naughty Boys)

Greensill Capital, the firm built by Aussie farmer’s son Lex Greensill, collapsed in March, and the losses to investors who backed the firm are still unquantified but may run into billions. The UK taxpayer is also on the hook for state-backed loans and perhaps even pension support for steelworkers (because of Greensill’s close links with Liberty Steel).

Greensill presented itself as offering innovative tech-backed supply chain finance (SCF) products, but (to cut a long story short), their business model turned out to involve borrowing money cheaply by presenting the investment as low risk, then actually lending it out in a VERY risky manner.

Ultimately, it was lending money to the Gupta Liberty steel empire based on the “security” of vague future revenue flows that did for Greensill. Some of those revenues were supposedly going to come from firms that weren’t even current customers of Liberty!

This was not “supply chain finance” in the sense that any off us in the supply chain world had ever heard of before. It looked very much like unsecured lending with funds coming from sources (including Credit Suisse-promoted bonds) who were unaware of just how risky that lending really was.  Greensill also talked about being a “fintech” business, which they clearly weren’t, but dropping that bit of bulls**t into the conversation gave the firm more credibility. Their lending was facilitated through other genuine fintech-type platforms such as Taulia.  

Lex Greensill himself leveraged his role as a UK government “Crown Representative”, working to promote SCF within the Cabinet Office, to wheedle his way into winning some work in the public sector. He was supported for frankly incomprehensible reasons by a number of key people, including the late Sir Jeremy Heywood, the Cabinet Secretary. The various investigations showed that some senior procurement people and politicians were not taken in, including Minister Francis Maude, but Greensill got onto a Crown Commercial Service framework, and won contracts for offering NHS payments to pharmacies as well as “salary forwarding” to some NHS staff.  

Government’s Chief Commercial Officer at the time, Bill Crothers, initially didn’t seem keen but came round to the Greensill cause, and became a director of the firm, no doubt encouraged like ex-Prime Minister David Cameron by the prospects of making millions. Cameron’s behaviour has stained his reputation – such as it was – forever. Having left office, he harassed everyone he knew in government to promote Greensill’s cause, right through to 2020 when he tried to gain advantage for Greensill under pandemic financing and lending schemes.

We can’t call what happened “fraud” yet, although investigations that might lead to criminal charges are continuing. It is hard to believe that nothing criminal went on, but we will see. However, whatever it was, it fully deserves the Bad Buying Not Really Technology Award based on the scale, innovative nature and continuing implications of Greensill’s actions.  Indeed, if we had nominated an overall winner this year, I suspect Greensill would have won that ultimate accolade…

Happy New Year and let’s hope for less Bad Buying in 2022!

Two more awards today.

UK (Private sector): The UK Water Industry

Not spending enough money (and failed regulation…)

There were a number of long-running procurement-related scandals which continued to rumble on this year, notably the investigations into the Grenfell tower disaster, and the Horizon Post Office scandal.  Both showed appalling behaviour from various suppliers along with failures on the buy-side. Procurement weakness allowed supplier failings to translate into tragic consequences for those affected by the Grenfell fire and those who lost their livelihoods or wrongly went to prison in the case of the Fujitsu / Post Office Horizon IT system. The judges were also tempted to look into the causes behind the global shortage of chips (electronic, not potato), which affected supply of all sorts of items. But they decided that was all a bit too complicated …

So the multiple winners here are the private water and sewage companies. Research by the Financial Times showed that they slashed investment in critical infrastructure by up to a fifth in the 30 years since they were privatised.  That reduction in spending came about despite bills going up 31% in real terms – and some £372 billion has been paid out in dividend payments to parent companies and investors. In 2019, only 16 per cent of England’s rivers and seas met the minimum “good or better” ecological status as defined by the EU’s water framework directive. And 2021 saw reports of raw sewage being regularly discharged straight into rivers and the sea whenever it rained hard. My friends who swim in the Thames thought it was algae coating their skin after their river swimming this autumn … 

Of course, this is a regulated industry so we might call it a joint public / private sector award as the government must share the blame for inadequate regulation and what is in effect a market failure. But this is a case where the “bad buying” failure is in not spending enough (rather than overspending). So we will hold our proverbial noses whilst awarding the water industry the Bad Buying UK (Private Sector) Award.

…….

UK (Public sector): Covid Test and Trace Programme

Incompetence in Managing Consultants

The judging panel had a difficult task in this category, with continued overspend on HS2 (and every other rail project), and more revelations about PPE expenditure. Social care is experiencing a sort of market failure, whilst the MOD Ajax armoured vehicles programme was particularly unfortunate not to win the prize given the various elements of that particular fiasco. And the panel argued long and hard about whether the crazy regulatory structure of the energy market which ended up with dozens of firms going bust might count as “bad buying”.

But ultimately, for a clear waste of money through inappropriate procurement and even worse ongoing contract management, the UK pandemic Test and Trace programme was finally declared the narrow winner.  

The programme kicked off during the first wave of Covid in early 2021, and we could understand why initially consulting resource was needed to make things happen quickly. But for 18 months now, various officials in the Department of Health and Social Care (DHSC) have promised that the number and cost of consultants was going to be dramatically reduced. But nothing appears to have happened, as hundreds of millions have been spent with the big consulting firms.

David Williams, then the DHSC second permanent secretary, assured Parliament’s Public Accounts Committee back in January that there was a plan in place to “reduce markedly” the number of consultants from Deloitte who were working on the programme. (Williams has since become permanent secretary at the Ministry of Defence – that bodes well for sorting out waste in that area!)  But at the time he claimed there were “around 900” staff from the consultancy working on Test and Trace, who he expected were costing £1,000 a day each – meaning the daily total was close to £1 million just for one firm.  Some Deloitte staff were charged at a rate of over £6 a day too.

Dr Jenny Harries, chief executive of the UKHSA which now runs NHS Test and Trace, said in July 2021 that there was a ‘very detailed ramp-down plan’ to reduce the number of contractors. But 1,230 consultants were still employed at the end of October, figures showed. At the sort of rates paid, that was still costing over £1.3 million A DAY.

This is not “consulting” in the true sense of the word. It is “warm reasonably intelligent bodies sitting at desks / at home on their laptops”. It is staff substitution, not consulting, and those people should not be costing £1000+ a day.

DHSC has had 18 months to actually recruit people on fixed term contracts at maybe £50K a year to replace the £250K a year consultants.  The profit for Deloitte partners (and indeed those of other firms who have been involved on the programme) is enormous, all based on undeserved income from the public purse. And it is not even as if the programme has been a great success … but let’s not get into that.

Despite the tough competition we are confident that this case is a worthy winner as it represents a basic old-fashioned lack of concern for spending public money with consultants – something that is far too common, unfortunately.  So the Test and Trace programme wins the Bad Buying UK (Public Sector) Award.

Look out for the final two awards tomorrow!

Welcome everyone and yes, it is time for the inaugural Bad Buying Award Ceremony – virtual of course.  Over the next three days we will announce the six winners of these prestigious awards, given to those who have demonstrated truly Bad Buying.

Our definition of Bad Buying incorporates a number of different but linked topics. Obviously, it includes failure in procurement (poor performance on the buying side of the table). It can also relate to a contract that goes badly wrong because of supplier performance, failure or fraud that is not properly managed or mitigated by the buyer, client or customer. Or it can be a more general fraud linked to the procurement process, such as fake invoice scams or corrupt collusion between buyers and sellers.

So today, we will start with our two international awards.  

International (Private Sector): Kraft Heinz

Awarded for Creative Use of Supplier Contracts

Food giant Kraft Heinz (KH) was charged by the US Securities and Exchange Commission (SEC) with mis-stating its accounts following the merger of Kraft and Heinz in 2015. The firms said the deal would deliver cost savings of $1.5bn a year, and procurement savings-related targets were set for staff. But after 2017, savings proved hard to find,  As the SEC said, management “pushed procurement division employees to come up with ideas to generate additional immediate, same-year savings”.

The dodgy accounting practices were then based around manipulation of supplier-related payments. For instance, buyers negotiated “prebates” (!!) – a sugar supplier gave KH $2 million up front in return for a 3-year contract, with the agreement that the money would be recovered by the supplier through the contract. Or  suppliers might reduce prices in the short term in return for a longer-term increase. These schemes when recorded as current-year “savings” and added immediate profit, rather than being accounted for properly.

Kraft Heinz had to restate its accounts, correcting a total of $208m in wrongly-recognised cost savings. The CPO, Klaus Hoffman and the COO Eduardo Pelleissone were accused of violating anti-fraud provisions, failure to provide accurate information to accountants and violating accounting controls.

Without admitting or denying the allegations, in September Pelleissone agreed to pay a civil penalty of $300,000.  Rather than addressing risks after being made aware of issues, “he pressured the procurement division to deliver unrealistic savings targets”. Hofmann agreed to pay $100,000 and was barred from serving as director or officer of a public company for five years. KH agreed to a penalty of $62m, also without admitting or denying the findings.

This was a very interesting and unusual case, which demonstrated approaches that the judging panel had not previously seen in their many years of procurement service. Given that creative application of supplier negotiation and contractual mechanisms, this was a very worthy winner of the Bad Buying International (Private Sector) Award.

………

International (Public sector): Balfour Beatty Plc

Awarded for Over-invoicing of US Defence Clients

In December 2021, the US housing management subsidiary of UK engineering and services firm Balfour Beatty agreed to pay fines and restitution of $65 million after admitting over-charging US defence clients for some years. Under the terms of the plea agreement, Balfour Beatty Communities agreed to make the payment  after a federal investigation into its scheme to claim performance bonuses by submitting false information to various clients. 

The issues came to light when living conditions at US Air Force bases were found to be unsatisfactory. The company’s homes did not meet fire safety codes and had mould, rodents, pests, radon gas, and other defects. An investigation then found that the firm maintained two sets of maintenance records at some bases. One included the issues of mould, asbestos, and leaks that were not promptly fixed, whilst the other showed fake quick repairs that allowed the company to claim contractual bonuses from the Pentagon.  As always in these cases, the company blamed a few rogue individuals who have presumably now left.  It also appears that the firm is still engaged on the contract which seems a little surprising.

In cases like this, it is arguably not so much “bad buying” as a “bad supplier”. However, where the issue runs for some time, it usually indicates a failure of contract management, as well as bad behaviour by the supplier. At least the client did eventually identify the issue and take action – but it is an interesting case study in supplier behaviour, and on that basis, Balfour Beatty and its affected clients win the Bad Buying International (Public Sector) Award.

Two more prize winners tomorrow!

I got a phone call a couple of weeks ago from a BBC Northern Ireland producer, who wanted to interview me for a programme about procurement of PPE (personal protective equipment) during the pandemic first wave last year.

I did a few smilar media appearances last year on Zoom, so said “yes – when do you want to do it”?

“When can you come into London so we can film you?”, he asked.

So not Zoom, but real life! Which was how I came to be filmed in a Pall Mall hotel meeting room – just me and a charming cameraman, whose wife works in procurement, strangely enough.  The interviewer asked the questions remotely via Facetime on a phone perched on a tripod a few feet in front of me which was rather strange.  I spent 45 minutes on the interview and another 15 being filmed “reading papers”… all for about one minute of screen time! And why they have to show those close-ups where you can verify my need for a better skin-care regime, I really don’t know.

The end result was a very good Spotlight documentary, broadcast first in Northern Ireland but shown on the BBC News Channel several times this week. It is the story of how a confectionery firm in Antrim, Clandeboye Agencies, landed orders worth over £100 million for PPE, and the confusion over whether the products supplied were actually fit for purpose. Were they “gowns” or “aprons”? And what did that  mean for the safety of those using the equipment?  

The journalists also tracked down some of the stock that was never used in the NHS and found it could be bought now for a fraction of the price paid originally by the government. It’s well worth 25 minutes of your time, although if you have followed the PPE story there won’t be much to surprise you, I suspect, other than that public availability of stock at cut prices now.

I have written several articles previously about PPE, so I won’t go through all the issues again. I did explain on camera that huge price rises were not unexpected when demand suddenly went up ten-fold or more. But just to re-state the problems, these are the broad topics I would be looking at if I ever do write the Bad Buying Book of PPE!

  1. The NHS stockpile of PPE provided to be unsuitable for Covid, and was very badly managed in terms of stock control, expiry dates, easy accessibility… etc.
  2. The early forecasts for PPE demand proved to be way out, which led to major over-buying – which is why we ended up with containers sitting around for months, suppliers being paid to NOT deliver, stock sold off cheaply, etc.
  3. Whilst the situation was desperately urgent, more attention and effort should have gone into getting the specifications right before hundreds of millions of pounds was wasted on equipment that proved unfit for purpose.
  4. Proper due diligence took a while to set up, so some early contracts went to firms who should not really have been considered as suppliers.
  5. The “VIP route” should have been much more transparent, and firms with an existing track record of PPE supply should have gone to the top of the list for consideration rather than those recommended by an MP, senior  civil servant etc.
  6. Buyers should have insisted on getting a breakdown of costs to avoid profiteering by middlemen and agents.

Anyway, you can see the programme here on iPlayer for the next 11 months.

So the eastern arm of the high-speed rail programme HS2 from London up to Leeds, has been cancelled. Well, what a surprise. The biggest money pit dug in the UK for a long, long time has become too deep even for this spendthrift government. As Construction News reported,

“The eastern leg of HS2 phase 2b between Birmingham and Leeds has been scrapped by the government as part of its Integrated Rail Plan (IRP) for the Midlands and the North. The cost-cutting on HS2, which the government estimates will save around £18bn, was unveiled … by transport secretary Grant Shapps alongside pledges to upgrade local and intercity rail links in the regions. The £96bn investment package will cut journey times between many towns and cities, and increase the capacity of the rail network, Shapps said”.

I wrote here and here about HS2, with some thoughts on why huge programmes fail and how it sometimes seems that everyone involved with such programmes has an incentive to mislead the public – and often some of the decision makers – about the true costs. 

Most of the press commentary about the recent decision has focused on the “betrayal” of the north of England and what this means to the Prime Ministers supposed “levelling up” agenda, which is aimed at spreading wealth from the south of England to the north.  But surely a bigger question is whether the rest of HS2 should be going ahead, given the costs and a business case that look weaker and weaker as time goes by.  I pointed out a year ago that the initial business case was, in effect, a fiddle or a fix, designed to justify the programme.  As I said then:

“The business case for HS2 was always highly questionable. It relied on ascribing a value to the extra 20 minutes or so the passengers would have because of their somewhat faster journey from London to Birmingham. It assumed that the journey time was “wasted” from a benefit point of view, which is clearly not true (have they never heard of smartphones or laptops?), and also assumed that passengers wouldn’t use the extra 20 minutes by staying in bed a little longer!”

Now the new issue of Private Eye magazine has pointed out that the initial business case also made it clear that the whole programme would only offer value for money if it was all completed. The full benefits of “Northern Powerhouse Rail”, some of which is still going ahead, were also conditional on the HS2 leg to Leeds.

Private Eye also points out that economic growth in the UK has been slower than the figures used in the 2015 business case, which reduces the return further. And of course, the pandemic has driven a major drop in rail usage, and it is far from clear at the moment whether pre-Covid traffic levels will return, given what appears to be a seismic change in working habits and the growth of hybrid home /office working patterns. 

So we are now in the crazy situation where the government is subsidising existing rail companies and lines by billons a year because of the lower levels of usage, whilst spending £60+ billion on the western arm of HS2. Think what that money could do to improve the creaking railway system in the north of England, the trans-Pennine routes, commuter services into Manchester, Liverpool or Leeds, getting Sunderland connected properly… I am not anti-rail, I should say, but I do not believe HS2 is a good use of public money in such huge quantities.

I also have doubts about the HS2 programme’s ability to avoid Bad Buying in terms of how it spends money with suppliers, but that’s another issue altogether!

Thanks to Supply Management website for drawing my attention to a new e-book, which is a  collection of chapters from different academics and researchers, all around the theme of public procurement in times of emergency.

Procurement in focus – Rules, Discretion and Emergencies is published by the Centre for Economic Policy Research (CEPR), a network of over 1600 research economists based mainly in European universities, and it is edited by Oriana Bandiera, Erica Bosio and Giancarlo Spagnolo. It can be downloaded here (free of charge).

It is somewhat academic in nature, as you might expect, but it has interesting and useful commentary on issues related to emergencies and corruption – and indeed more general insight into public procurement issues. The chapter on procurement competence, for instance, applies more widely than simply during a crisis.

The authors start by defining this “problem” with public procurement.

The procurement of public goods and services is a textbook example of moral hazard: an agent buys goods that he does not use with money he does not own. The agent’s goal is typically set to achieve ‘value for money’ for the taxpayer, but value for money is hard to measure and often not entirely under the control of the agent. The latter makes the contract between the state and its procurement agents incomplete and, for economists, very interesting.

This issue of moral hazard and “agency” leads to a fundamental issue with public procurement. As the authors say:

The core theme that runs through the book is the fundamental tension between rules and discretion. Rules limit agents’ ability to pursue their private interests at the expense of the taxpayers, but discretion allows them to use their knowledge of the context and react quickly to unforeseen changes. 

During the pandemic, and at other times of disaster or emergency, procurement regulations are often suspended or more flexible approaches are allowed. That increases the speed and flexibility with which important procurement activities can be delivered, but it also increases the chance of fraud, corruption and waste. How to balance those two aspects is tricky, to say the least, as the furore in the UK over PPE procurement last year has shown.

There is no doubt that buyers had to move quickly to save lives; but did that speed and lack of process regulation allow corruption or at best “cronyism” to thrive? It certainly did cost the UK taxpayer billions, as more PPE than was really needed was bought, at hugely inflated prices compared to those that were usual in the steady-state market.   

From a Bad Buying viewpoint, corruption is often hard to identify and therefore hard to measure in an academically rigorous way.  So researchers generally use “proxy measures” – for example, looking at the number of contracts awarded without competition, single bidding situations, or very short deadlines for bids. Clearly, we saw more of this behaviour during the first emergency period of the pandemic. However, in some cases, emergency procedures are still in place, and the book questions why this continued higher risk of corruption is being allowed to continue now, given that in most cases, supply is no longer quite so emergency in nature.

The chapter by Mihaly Fazekas, Shrey Nishchal and Tina Soreide, titled “Public procurement under and after emergencies” is particularly relevant to what we have seen in the last 18 months or so. It acknowledges that procurement must be handled differently in times of emergency, and makes these sensible recommendations:

  • Preparations for emergency situations should include defining crisis-ready contracting procedures, outlining fundamental principles of crisis response, putting in place effective ex post controls and setting out a risk-based sanctions framework. Controls should be targeted at high-risk procurement without disruptive, wide ranging monitoring frameworks.
  • Monitoring and controls are best reoriented towards outputs and results rather than procedural correctness because deviations from standard open tendering processes (e.g. short advertisements) are unavoidable in times of crisis (Fazekas and Sanchez 2021).
  • Strengthening non-bureaucratic controls of public procurement outcomes may counter-balance loosened ex ante procedural checks. For example, greater attention from civil society and the media may contribute to stronger political accountability, which is likely to increase the cost of corruption in emergency spending.
  • While many of the corruption risks in emergency procurement are hard to avoid and control, ringfencing emergency rules both in time and by market is crucial. Obviously, if emergency spending is needed in healthcare, there is little justification for relaxing the rules for building football stadiums, for instance.

Much of the book is well worth reading for anyone interested in the fundamental principles and issues of public procurement. It is also very relevant at a time when the UK is putting together its new post-EU public procurement regulations – and we hope to feature more discussion around that here shortly too.  

Emergencies | Regulations | Academic

It is now just over a year since Bad Buying was published and it has sold literally millions thousands of copies all over the world.  Thanks to everyone who has bought the book and all who have commented on and reviewed it on Amazon and elsewhere –  that is much appreciated.

The book has been translated into Polish, and I’m delighted to say that this month it won the Coup de Coeur du Jury Prize at the Plumes des Achats procurement book awards in Paris. This contest is run by four leading procurement association (ACA, ADRA, Club des Acheteurs IT and X-Achats). The “reading committee” is made up of around 30 practitioners, academics and researcher in the field and books in both French and English are considered.

Unfortunately I could not go to Paris for the dinner and awards, but I’m very grateful to everyone involved – it was a very unexpected honour to receive the news! Well done also to the other prize-winners. The list is here with more details about the event and the associations involved.