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MOD Versus Guy Hands – Seconds Out for the Big Fight!

After our last article featuring criticism of the UK Ministry of Defence (MOD), there has been more positive news in recent days, even if it relates to past failure. The development relates to the organisation gearing up for a legal battle with a private equity firm headed by billionaire businessman Guy Hands.

Twenty-five 25 years ago, MOD sold off houses that were used for military families. The deal was controversial at the time and has continued that way, as it became more and more obvious that it was a lousy deal for the taxpayer and indeed for many occupants of these properties. As The Guardian described it,

“In 1996, the Conservative government sold 57,400 properties in the so-called “married quarters estate” to Annington Homes, which was then bought for £1.7bn by Nomura, a Japanese investment bank that employed (Guy) Hands. He later left Nomura to found the Terra Firma private equity firm, and bought Annington for £3.2bn in 2012”.

An odd aspect of the deal was that the MOD retained responsibility for maintenance and refurbishment of the properties, whilst paying what was supposedly a discounted rent on a 200-year lease. In other government PFI-type deals of the period (including a vary large one that I was personally involved with), the buyer of the property took on full responsibility for maintenance, so at least the taxpayer was transferring a significant element of risk.  In the MOD case, the aim was to use the money raised from the sale to renovate the properties – but of course that would benefit the new owners too.  But in any case, the MOD has not done a great job of maintaining the estate in the intervening years.

The commercial naivety shown by MOD has enabled the buyers of the property to make huge profits on the back of house price inflation, with an annual return averaging over 13%, according to the National Audit Office.  That gain included Annington issuing debt last year (against the property income stream) that enabled it to pay a dividend of £794m to its parent company. Here is what I said about the deal in the Bad Buying book.

“A National Audit Office (NAO) report in January 2018 laid out failings in terms of the buying and contract management process. The Department’s own calculations suggested retaining ownership would be cheaper – but for fairly nebulous “policy benefits”, the sale went ahead anyway. It then made very cautious estimates about future house price inflation and failed to build any mechanisms into the contract to claim a share of windfall gains. Of course, house prices rose faster than MOD’s cautious model, and the rate of return for Annington and its investors has been far higher than expected.

The NAO identified other problems – for some reason, MOD retained responsibility for maintaining the property, which it hasn’t done well, and there has been little collaboration between MOD and Annington to seek further benefits. Overall, it’s an example of failure that could comfortably sit in several different chapters here, but a lack of commercial understanding and negotiation skills in MOD were certainly amongst the issues; the NAO report estimated that the Ministry of Defence would have been between £2.2 and £4.2 BILLION better off if it had retained the estate”.

But the government is now taking an interesting stance. Defence Procurement Minister Jeremy Quin is trying to take back ownership of the properties through exercising “statutory leasehold enfranchisement rights”, a somewhat obscure legal manoeuvre. The MoD has sought to take two houses initially to test whether Annington can be forced out, whilst as you might expect, Annington claims the government has no right to do so and is behaving badly.  This may end up in court; but the firm has now offered a one-off payment of £105 to contribute to refurbishment if the MOD backs off from the legal route.

So that suggests Annington knows there is some chance it might lose in court; and arguably that is already a potential £105 million “procurement benefit” for MOD. Not bad on Andrew Forzani’s end of year savings report… But maybe there is more if the Minister has the appetite for a fight.

And just to complete the story, the chair of Annington is Baroness Liddell, an ex-Labour Party MP and now a Labour peer. It’s quite amusing hearing her now justifying the unfettered capitalism that Hands has always propounded, whilst it is the Conservative Party that tries to claw money back from the billionaire’s firm …

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Dossier of Defence Waste Published – But Who has the Answers?

Our attention bandwidth has been pretty much occupied by Covid for the last two years now, with some small space left for assimilating news about trips to Barnard Castle, Downing Street parties and maybe the goats in Llandudno for a bit of light relief.

That has led to many of the usual issues that might have got more media coverage slipping through the net, including some that might have been featured here as Bad Buying cases studies. Outside pandemic-related stories, government procurement has not really hit the headlines. Yet huge sums are still being spent, including in the defence arena.

The UK Labour Party recently published a “Dossier of waste in the Ministry of Defence 2010 – 2021”, a report looking at the projects that have cost the taxpayer “at least £13B in taxpayers’ money since 2010”. Many were fundamentally procurement-related and the report is a depressing litany of write-offs, overspent procurements and contract cancellations.  Often this sort of report is light on the analysis and heavy on the politics, but I must say that this one is worth reading – it appears to be thoroughly researched, using reputable source material and non-sensationalist analysis.

However, although the report covers the period starting with the election of the Tory-led coalition in 2010, the truth is that Labour has not historically had a great record on defence spending either. It has been a challenge for every government. Indeed, programme lead times are often so drawn-out, it is virtually impossible to pin the blame accurately on anyone – politician, official, consultant or supplier side.  

For example, the Nimrod maritime patrol and attack aircraft  “waste” of £3.7 Billion quoted in the report, based on 2013 MOD accounts and arising from final contract exit in that year, relates to contracts let way back in 1996 in the dying days of the John Major Tory government. But the significant issues and problems through the development phase happened under Labour, before the coalition finally (and probably sensibly) pulled the plug in 2010.

The other issue with this new report s that it is much stronger on putting numbers to the problem than it is in terms of offering solutions. The final words from John Healey, Labour’s Shadow Defence Secretary, are these;

This Government shows no serious intent to get a grip of these deep-seated problems. So as our first steps from day one, Labour in Government would:

  • Commission the NAO to conduct an across-the-board audit of MoD waste
  • Make the MoD the first department subject to our new Office for Value of Money’s tough regime on spending decisions.

Reforming the department will not be easy, but this report takes a crucial first step in revealing the unacceptable scale of waste in the MoD.

Well, he is certainly correct to say reform won’t be easy. But I’m not sure what an NAO “across the board audit” will achieve.  NAO can do little more really than verify the numbers. The organisation does on occasion also offer recommendations for performance  improvement, but has no resource to follow that through into implementation. And it is far from clear what the new Labour  “Office for Value for Money” is actually going to do that Cabinet Office, Crown Commercial Services, NAO and Treasury can’t already. (Although I am polishing up my application to be its CEO, of course).

We’ve had (and still have) some very capable procurement leaders in MOD and people such as Bernard Gray –  who had his foibles, but possessed a first-class brain – have had a go at running the totality of Defence Acquisition. They haven’t managed to improve matters much, because the issues are clearly deeply engrained in the whole of the military ecosystem. Problems go way beyond “acquisition” or “procurement” into very high level and fundamental issues such as the three services split, uniformed/civilian tension, the pressure on military leaders to lie to secure budget, arguments over domestic industry capability, and the unhealthy proximity of the buy-side and the supply-side in UK defence.

If these tough challenges aren’t addressed – and they probably won’t be given the short-term nature of British politics – then I’m afraid “waste” and “procurement failures” will continue. That applies whichever political party is in charge and whichever Defence Minister has his or her couple of years pretending to run things.

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New Public Procurement Rules – Government Takes Suggestions Onboard

In early December the UK Government Cabinet Office published its response to its consultation on proposed new UK public procurement regulations. I was hoping to see what the real experts (Arrowsmith, Telles, Sanchez-Graells etc) thought of the response before going into print, but let’s give it a shot anyway! 

These new regulations in the UK will supersede the previous EU Regs, and will define the way that over £300 billion a year is spent by public sector organisations. The rules may seem unimportant to the average citizen, but getting value for money from this huge spend (£6,000 per year for every adult in the country), and avoiding fraud and corruption are fundamental issues – they have a direct impact on how much tax we all pay, for a start!

The first point to make about the Government’s response is that those who participated in the consultation exercise weren’t wasting their time.  We’ve seen past consultations in different areas of policy where the government seemed to be just ticking the box (“we’ve consulted”) and showed no real desire to change initial proposals or listen to advice. But in this case, credit to the Cabinet Office procurement policy folk – and their political masters – for taking on board many of the most significant points raised by respondents.

That includes for instance retaining the “light touch” regime (with some improvements) for certain procurements, an approach that was seen as helpful by many local authorities and health bodies. Whilst the specific Utilities Regulations will still go, that sector will be able to continue with some of the special “flexibilities” buyers there find useful – the original proposal would have abolished those.

The central governance of the new regime has been watered down after many who commented (including me) expressed concern about an over-powerful new Cabinet Office unit sitting in judgement over buyers, with the ability to intervene or effectively even take over a procurement function that stepped out of line. The new proposals pull back from that, looking instead to build on current powers, although there will be “a duty for contracting authorities to implement recommendations to address non-compliance of procurement law, where breaches have been identified”, which seems reasonable.

The proposal to cap damages where buyers break the rules and get sued by bidders has been dropped – to me, that seemed to be largely addressing a non-existent problem in any case. But the government is still looking at “other measures aimed at resolving disputes faster which would reduce the need to pay compensatory damages to losing bidders after contracts have been signed”.

Transparency is a key issue. The proposals certainly should help in some areas – for instance, by increasing disclosure when contracts are extended or varied.  Following consultation, “we intend to ensure the transparency requirements are proportionate to the procurements being carried out and are simple to implement”. That is hard to argue with, and of course focusing on the most significant contracts is understandable.

But I do still worry that the barriers provided by exemptions from Freedom of Information rules could make it difficult for spend to be properly scrutinized. The reluctance of politicians recently to tell us what went on across a whole range of pandemic-related contracts shows why this is so important. We can’t let UK public procurement slip into the morass of cronyism and corruption that many countries around the world experience, and the last two years have shown we are not immune to that threat.  

Perhaps the biggest question about the proposed changes is around the basic strategy of freeing up contracting authorities from highly structured processes, Instead, buyers will have more scope to design their own processes, within certain broad parameters around fairness and (to some extent) transparency. But that might increase the burden on suppliers if they have to cope with many different approaches and processes when they want to bid for government work, rather than just a handful of set procedures.

However, I don’t think in practice that politicians would have accepted a UK regime that was largely unchanged. “We need to show that we can do things better than the EU” would have been the (not unreasonable) objective behind the new rules. So that additional freedom was always likely to be part of the package – whether it “reduces bureaucracy” or increases it (from the supplier perspective) remains to be seen.

Similarly, we will have to see whether that freedom leads to more commercial approaches to procurement, better use of negotiation and ultimately better value for the taxpayer. Or will it mean  more corrupt procurement, with the flexibility used to give contracts to friends, relatives, cronies, attractive blond American IT experts and random pub landlords? 

That uncertainty means we won’t know for several years whether the new regulations are a success or not. And that leads to a final question – how will we know?  What are the critical success measures, the results, outputs or outcomes that would lead us to say, “yes, the new procurement regulations really have made a difference”?   I’ll leave that question for another day.

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The 2021 Bad Buying Awards – the UK Winners

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!

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The Bad Buying Awards 2021 – Part 1

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!

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Should HS2 Go Ahead At All? Business Case Now Even Weaker…

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!

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Public Procurement During Emergencies – New eBook Lays Out the Issues

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.  

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Incentivising Suppliers Properly Isn’t Easy – Doctor’s Appointments Provide a Great Example!

How do you go about incentivising suppliers within a contract to perform in the manner you REALLY want them to?

The complications tend to come in contracts for services, rather than goods. Where you can write a specification that clearly defines the item you are buying, then it is enough “incentivisation” usually to say “supply that precise thing and you will get paid”.

But if you are buying a service, particular a more complex service, such as consultancy, outsourced customer handling, software development, or even facilities management, then making sure the supplier acts in the way you really want them to can be challenging.

An example of this has been much discussed in recent weeks in the UK media.  Our GPs, the “family doctors” who are the first line of contact for most medical problems, moved most of their consultations online when the pandemic struck last year. Now they are being criticised for not getting back to in-person appointments quickly enough, and generally for making it difficult for patients to get appointments at all. But GPs are actually private contractors. Many people in the UK see them as part of the National Health Service, which they are operationally, but they actually work for the NHS under what is in effect a contract for services. They are suppliers.

In reality, there are a number of factors driving this appointments problem. This is a very stressful job, and the proportion of women working as GPs has grown dramatically in recent years. So for both their own health and for work-life balance reasons, more GPs are working part-time, so the capacity of the system is arguably not high enough. There is also a backlog of medical problems that weren’t sorted out during the worst of the pandemic, so there is more demand on the system than ever.

But certain newspapers, and the Minister for Health, Sajid Javid, have decided that there is capital to be made by blaming the doctors themselves for being “lazy”.  Aside from the issue of whether the buyer (Javid) should be having a go at a “key supplier” (the doctors) in public, there is much  discussion around how GPs are paid and incentivised. 

An article in the Daily Mail recently suggested that instead of being paid in the main based on how many people are on the GP’s “list”, they should be paid based on how many appointments they actually carry out.

“It may be time to move from a bulk payment per patient to a per appointment funding structure, to encourage doctors to actually see patients as quickly as possible”.  That was the quote from Matthew Lesh, head of research at the Adam Smith Institute (the free-market-promoting thinktank),  who from his LinkedIn profile would seem to be a very bright young man. Yet it doesn’t take too long to see the incentivisation flaw in his argument.

A per-appointment system would encourage less scrupulous doctors to pack in as many appointments as possible. Currently most people only get ten minutes or so with the GP, but that could be squeezed further if some doctors were tempted by a direct increase in revenue from that approach. And for doctors with a conscience, who want to take the time necessary to get a diagnosis right, you are placing their ethics into direct conflict with their bank balance.

Now that’s not to say that the payment by list size is necessarily the best option., and there is no simple, magic solution here.  Arriving at an appropriate mechanism is challenging; for instance, the same size list of patients in socially and economically deprived Blackpool might generate a lot more work than the same in Wokingham. And of course throughput has to be balanced with the rigour of the doctor’s work. But we might imagine a set of KPIs (key performance indicators) which might be combined in some way to drive GP payments.

In any case, this all reinforces that getting incentivisation right is tricky. That applies whether we are talking about an outsourced customer service call centre, roads maintenance contracts (see examples of both of these services going wrong in the Bad Buying book) or getting our front-line doctors to contribute in the best possible way to the health of the nation. So beware simplistic solutions.

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Are You a “Typical” Procurement Fraudster?

I presented last week as part of an event run by CIPFA –  the Chartered Institute of Public Finance and Accountancy. As you can imagine, their live events are notorious for wild behaviour and partying, but this was online, luckily for me. (OK, just my little public sector accountancy joke there…) Anyway, I talked about Bad Buying, particularly in the public sector context and with a focus on corruption and fraud which I thought would most interest accountants.

One of the other speakers, Mohamed Hans, a lawyer and public procurement adviser, talked about the “typical” profile of a corporate fraudster. Most work within the organisation, and apparently, he – and more often than not it is a “he” – is most likely to be middle aged, with quite a few years of service, well-respected internally, and in a management position.

I guess that all makes sense. You need to have some authority generally to commit fraud – in the procurement space, it really helps if you are a budget holder or can sign off expenditure in some way. If you have been around a while in the organisation, you are more likely to understand the systems and processes, and how to get around them to commit your fraud. All of that points to someone of a certain age, seniority and length of service.

That fits with my personal experience. Probably the closest I came to a major case was when a senior procurement executive who had a “dotted” reporting line to me was prosecuted for a fraud where he appeared to be in league with some very unpleasant “Russian gangsters”, according to the police. My firm was not aware of the fraud but the police spotted odd transactions at the gangster end of things, which it emerged came from our villain signing invoices for non-existent furniture purchases, with the payments going to the gangsters. He was in his forties, in a senior role, and had been with the firm for at least a decade, so he fit that archetype perfectly!

Other cases in my Bad Buying book include a mid-level executive for Toys ‘R ‘ Us at Maidenhead in England. He was a  “typical middle-aged accountant to colleagues, living in a semi-detached house near Reading and driving an old Vauxhall car. But actually he lived a double life and was stealing millions from the firm, spending money on sports cars, prostitutes and even an estate in Nigeria for his secret mistresses! He was ordered to repay £3.6 million when he was finally caught, as well as being jailed in 2010 for seven years. (His jail term will increase if he doesn’t pay the money back.)

His fraud was simple. He created a fictitious toy manufacturer, a ‘supplier’ to the firm, and then made regular payments of £300,000 a month over more than two years to that account, which of course he controlled. When this was reported in the press, one reader’s comment was amusing: ‘so he spent £2.4 million on call girls and sports cars – and wasted the rest’!  But it’s not really funny; this was shareholders’ money, and sympathy is due to his wife and family, who knew nothing about it and did not benefit in any way”.

Just to show it isn’t only men, the (female) interim director of operations at Ealing Hospital NHS Trust stole more than £200K back in 2008 to pay for (among other things) horse semen, needed for her stud-farm business. She fraudulently signed off payments, which went into her own bank accounts rather than to genuine suppliers. The judge said that she was, ‘a woman of very great ability and up to this point of very high character. The difficulty and sadness of cases such as this is only people of high ability could get themselves in a position where they can defraud people and the NHS of the amount of money you took.’

However, in most cases, fraud can be prevented quite simply. The most basic advice includes that no single person should be able to “create” a new supplier, and onboarding checks must be made. Then again, no one individual should be able to authorise a payment (e.g. by signing off an invoice) to any supplier, without some sort of check from another person.  It is not unknown for two or more people to collude in frauds, but in my experience establishing that sort of basic control reduces the probability of fraud by a significant factor. Carrying out a fraud alone is one thing; asking another person to collude with you brings another level of risk for the fraudster.

And don’t assume someone couldn’t possibly be a fraudster because they are respected, have worked in the organisation for years, are senior, go to church, are kind to animals …. Criminals come in all sorts of shapes, sizes and disguises!

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Blood Tubes – Is This the Latest NHS Bad Buying Case Study?

Last year, Personal Protective Equipment (PPE) hit the headlines when shortages threatened the lives of health workers and patients in the early months of the pandemic. That demonstrated how a spend category that was traditionally seen as low risk and suitable for “leverage” type approaches to procurement could become highly strategic, critical and even politically sensitive.

We now have another example with a similar change in perception for what seems like a pretty standard item, a simple ”commodity” even.  GPs (“family doctors”) in the UK National Health Service have been told to stop performing most blood tests until mid-September. Hospitals have also been instructed to cut their number of tests by 25%, all due to a shortage of blood tubes (sometimes known as sample bottles).

NHS England wrote to doctors and hospital leaders, telling them that “the supply position remains constrained and is forecasted to become even more constrained over the coming weeks.  While it is anticipated that the position will improve from the middle of September, overall supply is likely to remain challenging for a significant period.”  That is thought to mean months rather than weeks.

The shortage has arisen apparently because Becton Dickinson (BD), the main supplier of blood collection tubes to the health service, just has not been able to keep up with demand.

This is obviously a hugely concerning issue. Blood tests help determine whether patients have particular conditions or illnesses, provide warning signs and monitor overall health. A reduction in capacity here will almost certainly cost lives. 

So what has caused this problem? There appears to have been an increase in demand, perhaps because of the pent-up health issues now being exposed as people go back to doctors surgeries after avoiding them for many months because of COVID. But the company also said it was facing issues transporting the tubes, for example, challenges at the UK border. That has been picked up by some as an example of post-Brexit supply chain issues around customs, tariffs and so on, issues that are affecting many businesses.

But with our Bad Buying perspective, might this also be a case where the procurement strategy is partly to blame for the problem?  Is BD the only supplier of this product?  That seems unlikely, but it is possible that the NHS has taken an aggregation and leverage approach to this item, as it did to many others, including PPE prior to the pandemic. Is BD a sole supplier because they offered a great deal for the whole NHS volume?

Maybe that is not the case, but you do wonder why other suppliers are not being mentioned, although the NHS has said new providers will come on stream soon. But it may be this is another example of over-aggregation creating unhealthy dependence on one supplier.  It doesn’t even always add to better prices, too. Here is a short extract from Bad Buying (the book) where I talk about the risks of supplier dependence and how it is created by poorly considered procurement approaches.

“Buyers aggressively aggregate their own spend, believing they’ll get better deals if they offer bigger contracts – until in some industries only the largest can meet your needs. Buyers might insist that suppliers must service every office or factory across the US, or Europe. Smaller firms and start-ups, which often offer real innovation, flexibility and service, are shut out of the market.

Buyers assume economies of scale, that ‘bigger is better ‘and bigger deals mean lower prices. But that is not necessarily true; the price curve may flatten after a certain volume, with further increases in volume not generating any further price reduction. There are even cases where you see dis-economies of scale– the buyer pays more as the they spend more…”

In this case, it would be fascinating to know just how the NHS has ended up with shortages of such a fundamental item. But in the meantime, just hope that you don’t need a blood test anytime soon!

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