Tag Archive for: Legal

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Huge Ship, Tiny Error, Major Problem

Picture: LPhot Alex Ceolin, UK MOD© Crown copyright 2019

You may know the expression “don’t spoil the ship for a ha’pworth of tar*”, but we have a case now where the ship most certainly has been spoiled – or at least put out of service for some considerable time – because of a tiny error in manufacturing. The impact of this has also led to a tricky contract management situation.

In August 2022, the British aircraft carrier Prince of Wales broke down just one day after departing its Portsmouth base for training exercises off the US coast. That was hugely embarrassing for the Navy given the ship had cost some £3.1 billion and this wasn’t the first problem since initial launch in 2019. This time, the issue was traced to a starboard propeller shaft fault and an installation error. Responding to a recent parliamentary question, Ben Wallace, the UK Defence Minister, said that based on “initial reports” the shaft was misaligned by 0.8 – 1 millimetre. That is a tiny mistake, but apparently caused a huge problem.

As well as the operational issues this caused, the question of who should pay for the error is also complex. Construction and delivery of the warship was carried out by a consortium of three firms under the banner of the now defunct Aircraft Carrier Alliance. BAE Systems, Babcock and Thales were all involved, which makes it complex to assess liability. Will the Ministry of Defence (MOD) end up paying or will they be able to pin the responsibility onto one or more of the firms?

A report on the “Breaking Defence” website said that the MOD “declined to comment on why the repair bill liability decision has not been made yet, nor when a decision is likely to be made”.  But MOD did say that repairs were likely to cost some £25 million, and that an investigation was looking at how to ensure the failure was not repeated. Well yes, one would hope that the same won’t happen again!

John Healey, the Labour Party’s shadow defence secretary pointed out that since the ship entered service in December 2019, it had spent 411 days in dock for repairs, compared to just 267 days at sea. A previous deployment also ended in embarrassment and a quick return to base in Portsmouth after an internal flood left the engine room and electrical cabinets submerged for 24 hours. The current repairs were supposed to be completed at the Rosyth dockyard in Scotland by February, but at time of writing (May 2023) still seem to be going on.

We could draw analogies here between our (literal) flagship and the wider state of the UK. Still pretending to be a significant global power, but incapable of actually doing anything to live up to that fantasy and all that sort of thing. But keeping to the facts, in a more mundane fashion it does highlight the importance of absolute clarity in the contract whenever you are buying from a consortium of any kind – and that doesn’t just apply in the military world of course.

Don’t assume a consortium will act as one entity if something goes wrong. It’s just as likely that each party will fight to protect their own position, which can leave the buyer in a difficult position, as we may be seeing here. So a strong and clearly written contract, including a definition of what will happen if there are issues after the formal consortium is dissolved, is essential.

And you can see why the UK Treasury (finance ministry) is not too keen on increasing the MOD’s budget for spending on more equipment, even given the present Russian threat. Cases like this (as well as high-profile failures such as the Ajax armoured vehicles) all add to a lack of confidence that such money would be spent well.

* A bit of research suggests that the expression was originally about sheep rather than ships! I didn’t know that…

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An Interesting Fraud – – Maybe Bad Supplying Rather then Bad Buying?

There are a number of very common procurement frauds; well covered of course in the Bad Buying book.  “Inside jobs” based around a corrupt employee take a number of forms but often consist of someone internal diverting spend to fake companies that they control or have a stake in, or to companies that are paying them a bribe. Fraud from outsiders often means submission of fake invoices, or diverting invoice payments away from genuine suppliers to the fraudster.  However, most frauds could be prevented by some sensible and standard policies and processes.   

So having collected examples of fraud and corruption in a fairly serious manner for over a decade now, it is rare for me to see a new variant. But a recent case in the US was quite unusual, in that it was based on buyer impersonation, which we don’t see very often. I’m sure it has happened before, but this was certainly not a common or garden case. Indeed, it was quite impressive in a way, with the fraudster showing impressive attention to detail, and a good understanding of how procurement works. And the failing was not actually with procurement policy or people; it was the suppliers who were conned and whose processes let them down.

Fatade Idowu Olamilekan,  a citizen of Nigeria, was extradited from Nigeria to the US (with good cooperation between the authorities in each county) and recently sentenced to five years in prison in the US in connection with a scheme to fraudulently obtain and attempt to obtain millions of dollars.

From 2018 to 2020 he obtained details of various procurement executives in the US government sector. In particular, during the pandemic, he impersonated the Chief Procurement Officer of New York State to fraudulently obtain medical equipment, including defibrillators.  He set up email addresses that were as close as possible to the correct ones for the relevant people and organisations. He then contacted suppliers, principally those already working with New York, and said he was looking for quotes for items.

After they submitted quotes, he told the suppliers that they had been successful and won the contract, and issued them with fake purchase orders (POs). The goods were to be delivered to warehouses that he nominated, and from there he shipped them to locations in the UK, Australia and Nigeria.  The payment terms on the POs was 30 days, which is pretty standard, so didn’t raise any alarms. But of course that gave him 30 days to move the goods somewhere else once they were delivered, before the supplier started looking for their money. Presumably, when their cash didn’t arrive, the supplying firm eventually got through to the real buyer, who would then explain that they knew nothing about this order.

All very clever, although getting goods rather than direct cash via a fraud leaves you with the problem of disposing of the stolen goods. Criminals rarely get anything like the real value of their ill-gotten gains (so the bloke in the pub trying to flog me a laptop said).  So that’s a downside of this type of activity. 

Whilst this wasn’t really a very hi-tech fraud, it does raise some interesting questions as we move into the AI world.  A single phone call from the supplier and conversation with a real procurement manager from New York would have put an end to this within minutes.  So as transactions and even sourcing processes become more and more automated, you can imagine a situation where a clever fraudster uses a fake AI bot to place orders, which will then be processed by the suppliers’ AI powered bots. How long would it be before the supplier bot realises it has been conned?

This is not something I’ve thought about too much, but as we enter the ChatGPT era, there’s going to be a whole new world of Bad Buying fraud and corruption to think about and look out for!

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What’s Wrong with the Auditing Market?

The consultancy group PwC was hit recently with a £7.5m fine over a string of errors while auditing the engineering company Babcock’s accounts, including creating a false record of documents for a sensitive government contract.

In one case, there was no evidence that PwC’s audit team had actually bothered to review a 30-year-contract worth up to £3bn, and in another, the team (none of whom spoke French) had failed to check a €640m (£570m) contract written entirely in French.  There was no evidence PwC tried to translate the documents to confirm the terms of the deal.  PwC’s auditors were also found to have “created a false record” of the audit evidence they had actually gathered in relation to a sensitive government contract.

Yet profit per partner for PWC last year was £920K  Are audit partners in the big firms really worth best part of a million a year? They are not entrepreneurs who have built a business, or indeed CEOs running a major organisation. And it’s not just PWC – KPMG was fined £14.4 million last year for its failings in the audit of Carillion, the construction firm that went bust in 2017. Second-tier firm Grant Thornton messed up over the Patisserie Valerie audit, after the firm collapsed because of alleged internal fraud in 2019.

Meanwhile in the US, Ernst & Young LLP (EY) EY got a massive $100 million fine from the Securities and Exchange Commission (SEC) and agreed to various measures to address ethical issues. The firm was charged for “cheating by its audit professionals on exams required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during the Division’s investigation of the matter.”

What is wrong with auditors?  You would think in a well-functioning market, firms that behaved like this would fail and be replaced by better players.   But this is an oligopoly, and the barriers to entry are huge, and perhaps insurmountable. Ironically, the more rules and governance imposed by governments on auditors, then the harder it is for new market entrants to break in – we haven’t seen a significant new player really during my entire working life. The “switching costs” are high for clients too, and the big firms build very close relationships with senior corporate executives which helps to reduce the chance of competition.

The end result is that clients are paying too much, and often not getting good work in return. Although professional procurement involvement in buying these services has increased somewhat in recent years, frankly that does not seem to have had much impact. 

Close to home for me, the Surrey Heath Council accounts for 2019/20 are still in draft form and have not been signed off by the auditor, BDO.  In an election leaflet pushed through our door the other day, the ruling Conservatives say this – “FACT: Our accounts are ready but our auditors BDO continue to miss deadlines (including for Lib Dem councils). We are working hard to find new auditors and increase transparency”.

At least the draft accounts report is available for public inspection, which reveals that the author does not know how to use apostrophes  (“the Council has managed to deliver substantial saving’s on interest payable …)

But if this delay is down to the auditors, surely this is gross incompetence and mismanagement from BDO?  Is this not worthy of a wider barring of the firm from public sector work?  Or (I know this is hard to believe), might a political party be publishing misleading information? I honestly don’t know the answer to that question – but seriously, if auditors are incapable of getting a council’s accounts signed off three years after the end of the year in question, then they shouldn’t be doing this sort of work at all.

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Supercomputer – Not Very Super Procurement

We started the New Year with an expensive error made in UK government procurement. Atos, the large French technology firm, were paid £25 million after the firm complained about the decision to award Microsoft the £850 million contract for a new Meteorological Office super-computer. Most of the cash was paid by the government’s Department for Business Energy and Industrial Strategy with the Met Office itself stumping up the rest.The language is often the same when this sort of case drops into the public domain. No-one is to blame. “There was no admission of liability”, said the government here.

That begs the question of course – why pay £25 million if you didn’t do anything wrong? Clearly, the government’s legal advisers must have thought there was a very high probability that Atos would have won if the case had come in front of a judge, and might have been awarded substantially more in damages.

The best description of the dispute I found is on The Register website. A fairly technical and technological issue around the specification of the computer and the solution proposed by Atos led to the French firm receiving a score of 0/5 for several evaluation questions and their bid being declared in effect “non-compliant”.  Then, as the Register reported, “It was also alleged the government was “disproportionate” in ruling its bid non-compliant without seeking further clarification on the architectural equivalence of the Atos system”.

Eliminating a serious bidder on a complex specification issue is rarely a good idea in my experience. You need to be absolutely sure the bid really does not meet your spec, and I would certainly have wanted “further clarification” from Atos before I took the drastic step of kicking them out of the competition. Poor judgement at the very least on the buy-side. Or maybe somebody just didn’t want Atos to win and was looking for an excuse to disqualify them (yes, that does happen…) 

There was then an interesting debate on Twitter about the case too. Duncan Jones, the highly respected expert who led who led the procurement practice at research firm Forrester until he “retired” last year, was rather angry about this money ending up with Atos. If a company is on the wrong end of a bad piece of procurement by a private sector firm, the disappointed bidder doesn’t get recompensed, he said. So why should it be different in the public sector, with our money going straight into the profits of Atos (and others).

It is a fair point. But my argument is that you must have some way for bidders to highlight when there has been incompetent or even corrupt public sector procurement. And if they have lost millions because of that, why shouldn’t they be able to get something back? Otherwise I do think we would see more nepotism and even criminality in public procurement, with politicians, advisers and public officials acting in their own interests rather than those of the taxpayer. If the procurement rules did not have the “teeth “ provided by bidders’ right to challenge decisions, I think we would see lots of cases that would make the UK pandemic PPE procurement experience look like a model of probity and effectiveness!  

However, I think Duncan made a fair point about how much compensation should be payable in cases like this. Working out “loss of profit” is an inexact art, and many suppliers make very low margin on big government contracts. So £25 million does sound on the generous side; but as I say, the lawyers must have felt the amount could have been a lot more if the dispute has continued.

At the early stages of development of the new UK Procurement Bill, I seem to remember that there were some major changes proposed around supplier challenges, compensation and so on. Introducing the scope for a less legalistic dispute resolution process was one idea I liked (some countries have a “procurement ombudsman” which is an interesting idea), alongside less scope for big supplier pay-outs. The proposals seemed interesting, but I believe most of those have gone now from the draft legislation, and the Bill is not going to drastically change the current situation. 

Finally though, the point to remember is this. If an unhappy potential supplier ends up being paid lots of money, it is ALWAYS because there has been a failure in the procurement process. Don’t blame the supplier – look at what went wrong on the buyer side. In the case of this Met Office supercomputer, it may have been something rather complex around the specification. But it was still a failure, another case of Bad Buying, and one that has cost us £25 million.

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Beware – Conflict of Interest Ahead!

I had the honour to speak at the Procurement Lawyer’s Association (PLA) annual dinner last week in London. 140 lawyers in a room together – actually a surprisingly lively and friendly audience, I’m pleased to say.

I was looking at their website before the event and noticed a paper the PLA produced a couple of years ago, all about conflicts of interest. It has a particular focus on public sector procurement, although many of the comments and recommendations apply just as well to the private sector. It runs to 56 pages, but the “Practical Guidance” summary (page 26) gives you most of the “meat” of the report, and is sensible and thoughtful advice. 

On reflection, I should have said more on that topic in my Bad Buying book. Although it is mentioned in the section on fraud and corruption, there is more I should have said. Talking to one of the lawyers at my dinner table last week, we agreed it is a major topic that is not discussed enough. We also each had some examples that indicate different aspects around the issue.

I remember as an interim CPO having a conversation with a relatively new Chief Executive in a large government organisation. He had joined from a large consulting and services firm, who were about to bid for a very large contract with our organisation.  I needed him to make a conflict of interest declaration, but initially he didn’t see the point as “I don’t work for them any more”.

Do you still have equity in the firm, I asked? Yes, was the reply. Do you still have friends, relatives, or lovers who work there? Yes, he said (to the “friends” at least)!  To be fair, I did get through to him why this mattered, and he agreed that his involvement with the procurement would have to be pretty arm’s length.

Sometimes the conflict can be more subtle and can even veer into real corruption. I knew of one independent consultant who had a good reputation for leading procurement projects in local government for a particular service – let’s say it was catering (it wasn’t, but it was that sort of thing). Oddly, it seemed that all the procurement exercises he ran ended up with the same catering firm winning. I then discovered that between his assignments for different councils, he always went back to consulting work with the same firm!  (Who knows whether he did real work with them or just got paid for his loyalty).

My lawyer friend highlighted a somewhat similar case – an independent consultant leading a procurement exercise who suggested that an unsuccessful bidder should perhaps engage him to provide them with training in how to write better bids. That could have been genuinely well meaning of course – but the price for his training was a lot more than you might expect. The implication seemed to be that employing him might well mean the bidder would do better next time the consultant was in a key project role.

So one point from all that is to look at conflicts of interest for anyone involved with the procurement process – internal staff, consultants or yes, even lawyers! We’ve also talked about the very difficult issue of “future” potential conflicts of interest. Mathew Syed in the Times called this “retroactive inducements” and it covers those cases where someone on the buy side favours a company because they believe, hope or expect that the favoured firm will help them personally in the future, with a great job or other benefits.

We’ve seen that in the procurement world but also more widely with other senior managers and even with politicians and special advisers. George Osborne, ex-UK chancellor, got a ridiculously lucrative job with Blackrock, an investment firm he had been responsible for regulating. That struck me as an unacceptable example of exactly this problem. We’ve regularly seen civil servants and advisers involved in awarding lucrative UK government and health service contracts to consulting or IT firms, then jumping ship for senior roles in the same firm.

Anyway, take a look at the PLA paper fi you are interested in this topic. And if you are running procurement processes, before you get going, don’t be afraid to explain to your colleagues (whoever they are) why this matters and why you need to know if they are conflicted in any way.

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Supplier Collusion on the Agenda at NPI Conference

At the National Procurement Institute conference in Atlanta earlier this month, delegates (public sector, mainly from US cities) heard an interesting presentation from Zac Trotter, a Trial Attorney from the Antitrust Division at the US Department of Justice. He stressed that his comments were not representative of the Department, which I guess he has to say, but he gave a very clear and engaging explanation of his fascinating area of expertise – fighting against supplier collusion. His focus was on the mechanics of collusion, with additional comments on how procurement professionals can look out for it.

Competition is key to getting value for money, he said, something we can all agree with. But collusion does happen, and because of its secretive nature, can go on for years, or even decades, without being discovered. And public procurement is a big target for fraud of this sort because of the amounts of money involved. As a US judge recently said, “Like bears to honey, white collar fraudsters are drawn to billion-dollar federal programmes”!

In US law, the Sherman Act of 1890 (Section 1) defines the attributes of the collusion offence as:

  • Agreement or conspiracy to restrain trade (that is subject to interpretation and clarification as it is a very broad definition)
  • Participants knowingly joined – and intended to agree (as conspirators)
  • Interstate or foreign commerce (a “technical” provision)
  • Statute of limitations is 5 years

Prosecutors need to establish agreement between two or more people for a case. Interestingly, juries are more inclined to convict if there is evidence that conspirators knew what they were doing is wrong. But there doesn’t always need to be “hard” documented agreement to collude. A “course of conduct” can show guilt – for instance, if one firm always bids low, whilst two bid high but become sub-contractors to the winner. If that keeps happening, it might provide strong circumstantial evidence for prosecution. For buyers, consistent high bidding from the same firm should be a “red flag” for procurement – why would the firm bother if they keep losing, unless there was something else in it for them?

The three types of collusive behaviour were described by Trotter as;

  1. Allocation agreements
  2. Bid rigging agreements
  3. Price fixing agreements

Allocation agreements mean suppliers colluding to “divide the pie” in a particular manner. That might be based on splitting business by markets,  geography, customer (big, small), or products. Watch out for when a supplier doesn’t bid when you might expect them to. (e.g. they bid for a men’s uniform contract but not for  women’s uniforms). Or perhaps a competitor pulls out of a market for no obvious reason.

Bid rigging – here, suppliers raise the price of products or services above a true “market” value, effectively setting an artificial price. There may also be pre-determined winners and losers of contracts. Bid rotation is a technique where suppliers agree to a defined pattern of different firms winning work, or divided up in other ways (clearly, this is linked to the ”allocation” technique). Then we see “cover bids”, where suppliers submit deliberately expensive bids to make it look like there is competition, or “bid suppression”, where suppliers refuse to bid in order to reduce competition. So buyers should watch out for firms saying, “we’re too busy to bid”.

Price fixing – means the customer has no genuine way to negotiate, as firms fix or otherwise determine the price at which products are sold. That might mean coordinating price increases, or setting price floors, or a new surcharge that everyone in the industry implements together.  

There are big penalties now in the US for this behaviour. Participants can go to jail and there are potentially very large fines. Penalties of up to $100m have been imposed fairly recently on sectors  from canned tuna to cancer treatments. The courts can also award “restitutions” to those affected, suppliers can be barred from government contracts and there have been civil lawsuits too. Nevertheless, collusion continues in many industries.

(Part 2 to follow)

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Fairness in Procurement

Most people see government buying as something rather dull and bureaucratic, but get it wrong and it can cost the taxpayer a fortune.  So everyone should be interested in the new Procurement Bill published last week, which will define the regulations for UK public procurement.  We will have more on that here when I’ve read it properly and also considered what people smarter than me think of it!

One of the key principles of the new regulations is to give buyers more flexibility and freedom. But I do have a fear that could lead to more corruption if it allows crooks (whether politicians or public servants) to run dodgy procurement processes to favour their preferred supplier. However, the new approach will I believe still require contracting authorities to consider basic issues such as “fairness”. That is where a lot of the biggest failures in the past have arisen – such as described in the following extract from the Bad Buying book, describing a particualr case that cost the taxpayer over £100 million because of obvious bias and unfairness in the procurement process.  

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“The case involved a 2016 legal challenge by Energy Solutions Ltd., the incumbent supplier for a huge contract to clean up de-commissioned UK nuclear power stations. They lost the tender, run by contracting authority the Nuclear Decommissioning Authority (NDA) in 2014, to a Babcock Fluor consortium (CFP).  But there were a number of mistakes made during the procurement process.

One related to “pass / fail thresholds”; areas where the NDA defined up-front that failure to meet certain conditions would lead to instant disqualification for the bidder. However, once bids were scored, it became clear that one supplier had failed to meet the threshold. But instead of chucking them out of the competition, the NDA decided to let them stay. Now this may all seem a little technical, but it is clearly unfair; and public procurement regulations really don’t like unfair buying processes.

As the judge said in his statement, you cant change your mind about the rules once you get into the buying process.  After a bidder has failed to meet a defined threshold, you can’t ask “was that threshold Requirement really that important?”, arrive at the conclusion that it was not, and then use that conclusion to justify increasing the score to a higher one than the content merited (or to justify failing to disqualify that bidder)”.

To disguise the failure of that firm, the NDA team also adjusted original scores given to the bidders during the marking process. But they failed to provide any audit trail or justification for these changes, a fact that became obvious through the trial. The NDA announced that CFP had won – which promoted the legal challenge. There were other issues too, and the final outcome saw the judge finding in favour of Energy Solutions, and the NDA agreeing to pay the firm (and their consortium partners Bechtel) almost £100 million to settle the legal claim for their loss of profit on the contract.

It is impossible to know what went on behind the scenes in cases like this.  Was it sheer ignorance of the rules? Was someone very senior determined a particular supplier should or should not win the contract? With other failures in previous chapters, a lack of understanding or knowledge caused the problem, but I’m left somewhat baffled here.

Certainly, a number of basic buying principles seemed to be forgotten. Treating bidders fairly is a good principle, whether you work for a government body that must do that legally, or for a private firm. Keeping sensible documentation to explain your decision is vital. That’s so you can explain to bidders why they won, or didn’t, but it is also a basic precaution against corruption and fraud, one that all organisations should take. If no-one can explain logically why my firm won a particular contract, then maybe it was because of the bulging brown envelope I was seen handing over to the senior buyer”.

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Camelot Challenges UK Lottery Decision – Highlights Key Issue of “Confidence”

Over the weekend, we saw reports that Camelot, the current operator of the UK National Lottery, is going to challenge the government’s decision to award the contract for management of the Lottery to a different firm, Allwyn, headed by a Czech tycoon. That decision follows a lengthy and no doubt exhaustive “procurement” process. This is from The Times (behind the paywall unfortunately).

The Czech bid, led by Sir Keith Mills, the man behind the London 2012 Olympics, and the former J Sainsbury boss Justin King, was deemed to have had an inferior business plan but managed to pip Camelot at the post by promising to deliver a much higher sum for good causes. There are suggestions that Allwyn’s bid was based on a forecast that it would raise £38 billion over the ten-year licence, which starts in 2024. This is believed to be a much higher figure than the forecast included by Camelot … Bidders were asked to supply a detailed forecast of how much they expected to raise, but with no obligation to achieve it or any form of penalty for failing to do so.

So this may come down to an issue that sits behind one of the common causes of “Bad Buying”.  In my book of that title it has its own chapter – “Believing the Supplier”.

That can relate to suppliers actually lying or deliberately misleading the buyer. It’s the tech firm that says they can develop and install the new software for you in six months, when they know its going to be more like 18.  Or the consulting firm that tells you they have lots of experience running M&A studies in Spain, when in fact they have one junior analyst in the London office who has a girlfriend in Madrid.

But more often it is suppliers whose intentions are good, but make promises and offers that they can’t really deliver on. They really do believe that software will be ready in six months; but they don’t actually have the experience or expertise to make it happen.

This leads to a particular issue in public sector procurement. Because that relies on formal tendering processes (for larger contracts anyway), we see a real difficulty for buyers in assessing two different aspects of the proposals received. They have to evaluate the apparent value of the solution proposed, which is what the legal procurement framework focuses on. But they should also assess the credibility of the proposal – the confidence the buyer can have in its actual delivery.

You might remember the “scandal” back in 2008 when the UK’s Qualifications and Curriculum Authority (QCA), which managed the school ‘national curriculum’ and associated testing process, terminated a contract it had put in place with ETS Europe to deliver tests for schoolchildren.  ETS failed to meet agreed timescales and the whole thing was a bit of a shambles.

The case illustrated a central challenge in many buying situations – how the buyer can assess whether proposals can actually be delivered by a potential supplier, even if they sound credible. It is relatively easy to write a convincing proposal to carry out services-type work or even to deliver certain physical items. I might tell you in beautifully written prose that my firm can supply you with the finest cocoa beans, or handle your outsourced pension administration absolutely brilliantly. Or even build a nuclear submarine … But how do you know I can actually do it? Here is an extract from Bad Buying that explains what went wrong with ETS, following an independent review into the case. 

“The Sutherland Review found that in many ways the procurement (buying) process in this case wasn’t run badly– the authors called it ‘sound’. ETS won with the lowest price, but also scored better than the alternative bidder on non-cost factors. The ‘Gateway reviews’ undertaken by the Office of Government Commerce were in general positive, too. However, the contract and the supplier clearly failed to deliver what was required. Why was that?

Issues were identified by the report around governance, the contract- management approach, some legal issues in the contract and specifications. But the report suggests that the weakness in the selection process came from two key factors. First, the QCA and the consultants running the process did not fully check out the history of previous contracts delivered by ETS. That might have picked up warning signals, as there had been issues with contracts in the United States. Basic financial health checks were done, but not an extensive reputational and performance due diligence.

Second, the buying process did not check that the assumptions about capacity made by ETS in their bid were realistic and accurate. The firm should have been challenged more strongly on its staffing plans. There were also concerns about the ‘end-to-end’ solution proposed and whether the firm really understood how different elements needed to fit together. Those issues appear to have been at the heart of subsequent problems.”

So it is this “confidence in the supplier’s ability to deliver” that has to be assessed somehow, and whether the supplier’s assumptions and plans are “realistic and accurate”. It is not just their conformance to the specification, the elegance of their proposed solution, or indeed the apparent financial benefits they might be offering.  

Going back to where we started, it is this issue that may come to the fore in the UK National Lottery case, assuming the decision is challenged. More on that in part 2.

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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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Why Doing Public Procurement Properly Matters

The court found this week that Michael Gove, Cabinet Office Minister, broke procurement law when a contract was awarded without competition to Public First, a research and communications agency. As the BBC reported, “The government acted unlawfully when it awarded a £560,000 contract to a firm run by former colleagues of Michael Gove and the PM’s adviser Dominic Cummings, the High Court has ruled”.

This goes back to the Dominic Cummings era in the initial pandemic days of early 202. Some will feel that speed was everything at that point – but it is not like contracting for a series of market research focus groups was a matter of urgent life and death, unlike maybe PPE or ventilator procurement.

But in this case, the court found the contract award appeared to show favouritism as Public First had worked with Gove and Cummings previously, and the judge said this; “The defendant’s failure to consider any other research agency, by reference to experience, expertise, availability or capacity, would lead a fair-minded and informed observer to conclude that there was a real possibility, or a real danger, that the decision-maker was biased.”

One founder of Public First formerly worked as an adviser to Mr Gove and for Mr Cummings, and co-wrote the Conservatives’ 2019 general election manifesto. The other had worked alongside both men in the Department of Education. However, the judge rejected two other claims – that the direct award of the contract was “unnecessary” and that the 6-month contract length was disproportionate. So both sides can claim victory here.

Cummings thinks procurement rules are ridiculous and damaging.  Indeed, many senior people – official, special advisers and politicians – feel that they are bureaucratic and can slow down necessary actions.  There is some truth in that, and some of these people also genuinely believe that their own judgment is quite enough to make decisions on which suppliers can best carry out work.

The problem is that this approach shows at best a considerable degree of arrogance, quite a large degree in some cases. And it would be helpful if everyone understood better exactly why we have rules in public procurement. There are three good reasons.

  • The most obvious perhaps is the danger of fraud and corruption. I doubt very much whether anyone received brown paper envelopes stuffed with cash in this case. But if we don’t have processes, with openness and transparency, then the dangers of that becoming more common will rise.
  • Public procurement processes are also designed to help achieve the best possible outcome for the citizen and taxpayer. Competition is the key driver of that.  We will never know if other firms could have done as good a job as Public First for half or a tenth of the price – or a much better job for the same cost. When you don’t have competition, you can’t look at alternatives and you don’t have competitive pressure in terms of value. Even if the requirement is urgent, some competition, even if limited and rapid, is much better than none.
  • The final point is the least understood driver for proper public procurement – that it encourages healthy markets and successful economies. If firms know they will always have a chance of winning public sector contracts, they are encouraged to invest, to innovate, to provide better service. But if public markets are closed, or corrupt, or based on who you know rather than what you can do, then what is the point of trying to be better? Don’t spend a million in improving your product – spend it on getting an ex-Minister as a “consultant” to open doors, or on “research trips” to California for officials and advisers, or simply on bribes.

The last point is very evident in the countries that have the greatest corruption problems. Why would any start-up bother trying to win public sector work fairly in Venezuela, Somalia or Yemen (choosing three of the back-markers in the Transparency International Corruption Perception index)? You invest in corrupt practices to succeed.

We may think that the UK, US and other developed nations don’t have similar problems, but that would be naïve (read Bad Buying for a few examples…)  So whilst many will dismiss the Public First case as a storm in a £500K teacup, we need to hold politicians and others to account, and continue to emphasise that there are very good reasons for doing public procurement properly.

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