Andrew Millross 09 April 2018

Brexit and public procurement - a lost opportunity

Within local government procurement circles, there has always been scepticism over whether Brexit will really lead to freedom from the public procurement rules. As time passes it is becoming increasingly clear that, in order for the UK to continue to trade with Europe, and, in fact, the rest of the world, we will have to follow the same public procurement rules and processes that currently apply, or something pretty similar to them.

Despite Theresa May's upbeat Brexit rhetoric assuring the nation that the UK would be 'rule makers and not 'rule takers', the reality of the recent draft Brexit agreement paints a very different picture. The Government’s acceptance that the EU public procurement rules will still apply 'lock stock and barrel' until the end of the transitional period on 31 December 2020 does not suggest that sweeping changes are likely post Brexit.

The 2014 revision

In 2014 these EU public procurement rules underwent a comprehensive overhaul. Several provisions were changed to try to make it easier for smaller organisations to tender for public contracts. Some of these changes are helpful; seeking to simplify the process by which bidders provide the same information to every public authority to which they tender for contracts.

However, this commendable desire to simplify and standardise has actually hamstrung public purchasers in their ability to carry out proper financial due diligence over potential contractors. It has also magnified the risks for a public authority that wants to reject a potential contractor because of concerns over their technical competence, experience or reliability.

For example, it is these regulations that the Government followed to assess Carillion’s financial strength to deliver public contracts just before its collapse, and that Kensington and Chelsea used to assess the competency of Grenfell Tower's contractors.

Financial due diligence

The public procurement rules have always specified the kinds of financial information that contractors and suppliers tendering for public contracts can be asked to provide, such as annual accounts and insurance details. However, before the 2014 rule changes (adopted in the UK in 2015) it was possible to ask for 'supplementary information'. This meant that where annual accounts were published several months before the tender process, it was possible to ask for management accounts setting out the current position.

Under the post-2014 rules, 'alternative' information can only be asked for where the specified information is 'not appropriate'. There is no scope to ask for 'additional' information.

When evaluating a crucial supply chain partner, any prudent purchaser will want to check both the latest published accounts and up-to-date management accounts (as well as cashflow statements and details of material adverse changes to their business since the last published accounts).

The rules are not even clear as to whether public sector purchasers can carry out any credit reference checks. Some procurement specialists say that they’re not allowed at all because the rules credit reference agencies use to assess suppliers are not open and transparent. The Crown Commercial Service (CCS) Guidance suggests that they can be obtained, but not used as the sole grounds of excluding a potential supplier. This begs the question as to how they can be used since, if a supplier can be excluded on other grounds, it wouldn’t be necessary to rely on a credit reference check to exclude them.

Technical due diligence

The picture is slightly better regarding being able to assess the skills and experience of potential suppliers. The questionnaire used to assess contractors, particularly about health and safety is actually quite rigorous. However, where the system falls down is that these questions are now intended to be answered on a self-assessment basis, with only the answers of the successful tenderer being checked.

By the time a public purchaser has identified concerns about a particular contractor, that contractor will have gone through the tender process. They will, therefore, know they have won the contract if they are not excluded. This definitely ups the stakes for the public sector. They know that they are likely to face a procurement challenge if they exclude the contractor at this stage. If this challenge is successful, and they have already let the contract to another contractor, they could end up effectively paying for the contract twice.

The impact of Brexit

This analysis highlights a number of flaws in the approach currently being taken to assessing the financial strength and technical expertise of organisations tendering for public contracts. These flaws are rooted in the current EU procurement rules, but they have been exacerbated by the application of those rules in the UK.

One of the tragedies of Brexit will be Britain’s lost opportunity to influence the EU to rethink these rules in the light of the collapse of Carillion and the heightened importance of being able to exclude contractors where there are doubts about their technical ability.

Small changes to these rules, for example: allowing public authorities to carry out much greater financial due diligence using both published accounts and up-to-date financial information; and giving clear authority to use credit-checking agencies; would make a huge difference to the confidence that public sector purchasers can have in the financial strength of their contractors.

Restoring the position to that before the 2014 changes, when public authorities were able to check the technical expertise of all bidders before inviting them to tender, would lead to greater confidence that all tenderers had the technical competence to deliver contracts. This would remove the dilemma for public purchasers over whether or not to risk a procurement challenge if they are not confident in the technical skills of a bidder.

Post Brexit

So what of the future? Will effective Brexit on 1 January 2020 be the dawn of a new age where Britain can set its own rules for public procurement? Post Brexit, even if Britain decides to 'go it alone' without access to the single market, we will need to look for trading partners elsewhere in the world, as well as trying to negotiate a potentially more limited trade deal with the EU. The kinds of trade deals that have been held up as examples of the kinds of trade deals that Britain might want to strike, such as the Comprehensive Economic and Trade Agreement (CETA) with Canada and the Trade in Services Agreement (TiSA) with the USA, all include public procurement principles that are strikingly similar to the EU procurement rules.

Even if we just sign up to the World Trade Organisation’s Government Procurement Agreement (GPA), which we have applied to do already, on exactly the terms that apply now through our membership of the EU, public procurement will still be regulated. If Britain does not continue to be a signatory to the GPA, UK companies will face the risk of exclusion from Government markets worldwide. The GPA brings with it controls over public procurement processes. When the public procurement Directives were being revised in 2014, some proposed changes were rejected as non-compliant with the GPA.

The GPA would allow limited scope for relaxation of the rules. It doesn’t require the same detailed micro-management of procurement processes that the EU Directives involve. Given this, it might be possible for the UK Government to carry out a forensic examination of the current procurement rules to identify which rules they can ditch and which they need to keep.

A post-Brexit government is likely to have much more urgent priorities, though. They are much more likely to keep the rules as they are than to spend the considerable time and civil service resource needed to change them.

It is only if there are further insolvencies of high-profile Government contractors or community concerns over the technical competence of public contractors that a post-Brexit government is likely to consider making these important changes to the procurement rules.

Andrew Millross is a partner and procurement specialist at Anthony Collins Solicitors.

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