Tag Archive for: UK Government

The new UK public procurement legislation has been laid out in a Bill now which is being discussed and revised in the House of Lords. Leaving aside political comments, most independent experts, particularly the procurement academics and lawyers, see it as being somewhere in the range between “mildly disappointing” and “mildly positive”.  (Read an excellent assessment from Professor Sanchez-Graells here and a useful set of proposals for improvement from the UK Anti-corruption Coalition here).

I suspect that is inevitable. Public procurement aims to meet several different objectives, but sadly these are not all congruent – we can’t have it all. Public procurement has to balance:

  • Achieving fundamental value for money in what is being purchased – getting the right blend of quality and cost that enables the taxpayer to feel their money is being spent carefully and sensibly to generate the desired policy outcomes.
  • Minimising the chances of fraud or corruption by making such actions difficult or easily detected.
  • Encouraging innovative, dynamic, competitive markets – not just to help achieve future value for money in public spend, but because that will help the wider economy too.
  • Contributing towards wider UK government and societal objectives – economic, social, environmental or, as we now see, more overtly “political” in nature. (Using public procurement to support the government’s “levelling up” agenda for example is the type of political objective we’ve never really seen before in public procurement). 
  • Doing all of this in manner that keeps the transactional cost for both buyer and supplier to acceptable levels.

The problem is that these objectives can be conflicting. Simplify processes and deregulate, and you may reduce transactional cost and stimulate markets, but it will inevitably increase the chance of fraud and corruption. Focus more on the “social value” benefits, and if you are not careful, you will jeopardise basic value for money. And so on.

So it is impossible to keep everyone happy with regulations, and this is why it is difficult to assess the long-term effects of the new Bill. It will be at least two years before we see how the different objectives are being met or not met.

Perhaps the element that has most potential for transformation, but is also a major area of uncertainty, is the freedom for contracting authorities (CAs) to design new procurement processes. Will we see innovative and effective new ideas emerging, including innovative use of technology? Or will CAs quickly default to the “recommended” standard options that Cabinet Office are going to provide?

No doubt we’ll be writing further about this topic as the Bill proceeds into law, and there are some key areas where I’m not clear yet about the likely implications. The proposals on the role of technology, and the whole transparency area both have some positive aspects, for instance, but the devil is in the detail. However, here are a few predictions to be going on with.  

  1. The Cabinet Office standard processes will look pretty similar to the previous EU procedures, but with a bit more “negotiation” added in. But there will be so many caveats and warnings about (e.g.) equal treatment for suppliers that CAs will only use negotiation very cautiously…
  2. … unless they are running a corrupt procurement, where somebody in a powerful position wants a particular supplier to win. But of course that NEVER happens in the UK(!!)  I’m afraid we will see increasing corruption in public procurement, not just because of the greater freedoms, but because moral and ethical standards in the country are eroding from the top down.  
  3. Some lawyers are getting excited about the new rules on exclusion (mainly because of their complexity) that enable buyers to ban firms from bidding. But they will prove to be largely theoretical and decorative. I can’t imagine many hard-pressed procurement directors looking at the really complicated regulations for exclusions and saying anything other than “OK, let’s forget about this”.  (See Pedro Telles on this).
  4. Within a year or two, we will see suppliers complaining that the new rules don’t seem to have simplified public procurement.  I’m not criticising the Cabinet Office policy folk here – I’m just not sure it is possible to really simplify matters whilst trying to meet all those different goals. And no, I don’t have amazing transformative ideas myself, to be honest.
  5. Many older / less flexible public procurement professionals will retire or move out of the sector. “I’ve done things this way for 10/20/30 years, I just can’t be bothered with the hassle of learning all this new stuff now”.  I’m already hearing of that issue, and we will see a staffing crisis in public procurement (unless we go into a major recession that releases private sector professionals!)
  6. Given points 1 and 5, we will see more and more use of frameworks let by collaborative buying organisations, (Crown Commercial Services, YPO, NHSSC etc).  Unfortunately this is probably not good news for supply chain resilience in general, or for local, smaller or innovative suppliers. However, the “new” central procurement unit won’t have much impact.

Finally, there are metrics that will prove whether these predictions come to pass. If they do, we will see more single tender procurement exercises (only one bidder or a “direct award”).  We’ll see further growth of the buying aggregators. There will be a very low number of exclusions.

If I am wrong, we will see happy suppliers, more bidders per contract, fewer single supplier tenders, growth in contracts to local, smaller suppliers, social enterprises and so on. There will be fewer Private Eye-type scandal and corruption stories, and a decent number of dodgy suppliers excluded … So I hope I am just being a grumpy old pessimist! 

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!

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.

(But a Government procurement leader joining a supplier while still working as a civil servant is!)

In my last article about fraud related to supply chain finance (which came to mind because of the emerging Greensill / Gupta developments), I said that I hadn’t come across that type of fraud previously. There are plenty of other variants on invoice-related fraud in my book, however.

That brought a call from a friend. He told me of a case he had seen where a business created fake invoices to “clients” and used those invoices to obtain funding from their supply chain finance (SCF) provider. The amusing angle was that the finance provider was a major bank, and the fake invoices included a number that were supposedly issued to the same bank!

So the finance was provided by a bank on the basis of non-existent delivery of goods or services to the same bank … you might have thought that someone would have spotted this or checked to see if the supposed supplier was in their AP system. But perhaps they did, given the fraud was discovered eventually! You also wonder whether the fraudster was stupid, secretly wanted to be caught or was just having a laugh at the expense of the bank itself.

Exploring this theme further, it is clear that supply chain finance related fraud is not new. Just last year, a major scandal in Singapore saw the Him Leong oil trading company collapse. Part of that was down to false invoicing and over stating of receivables, which enabled the firm to obtain financing based on these invoices.

As the spglobal website reported, “financial statements for the year ended 31 October 2019 grossly overstated the value of assets by “an astonishing amount of at least $3 billion” comprising $2.23 billion in accounts receivables which had no prospect of recovery and $0.8 billion in inventory shortfalls”.

There are also cases that are not overtly “fraudulent” but are misleading. When leading UK construction and facilities management firm Carillion collapsed in 2017, the use of supply chain finance was one of the ways it concealed its problems until the final reckoning.  Carillion worked with Santander bank to offer its suppliers payment earlier than its ridiculous 120-day standard payment terms (in return for a fee, of course). Santander then retained the money it owed for the full period.

Globalconstructionnews website reported that “Carillion tucked the cash managed through reverse factoring into the box labelled “trade and other payables”, to which it had added “other creditors”. This, believes S&P, allowed it to show a modest increase in working capital from 2012 to 2016, because “working capital” does not usually include trade payables.  After 2012, the growth in money owed under trade payables ballooned from £263m that year to £761m in 2016. Reverse factoring, said S&P, allowed Carillion to “hide a substantial part of its debt from view”.

To widen the discussion to fraud generally, I believe that Boards, CFOs and CPOs should regularly ask themselves, “how would I defraud this organisation if I was an evil criminal genius”? Or maybe employ an actual evil criminal genius consultant to do that for them (I’m available at very reasonable evil genius rates). Read most of the cases I quote in the Bad Buying book, and you realise that any intelligent insider could have spotted the flaw in process that allowed the fraud, if only they had spent some time thinking about that.

However, the problem with much SCF related fraud or dubious practice is that it is almost always an internally generated fraud. It might involve third parties, innocent or not so innocent, but it is often driven by very senior people in the business, or even owners and founders. So there would not have been much point asking the Board of Carillion to look at the use of SCF if they were complicit in the  bad practice. If it is found that the Gupta companies did issue fake invoices to generate SCF funding  from Greensill, then no doubt that will have originated at a pretty high level in the business.

Meanwhile, back to other aspects of the Greensill affair, and yesterday we saw newspaper revelations that Bill Crothers actually joined Greensill two or three months before he left the civil service, while he was still Chief Commercial Officer for the UK government. Such a move seems very odd but it was all signed off within the Cabinet Office, apparently.  That seems to show very poor judgement at best from Crothers, and perhaps the judgment of the experienced top-level civil servants who approved this was even more suspect. More to come on all this, I’m sure.