Suzanne Hardie is a partner at independent law firm, Morton Fraser and advises on procurement matters. Here she looks at how procurement regulations are seeking to make the process easier for SMEs.
- How effective are the most recent procurement regulations in levelling the playing field for SMEs?
Greater access for SMEs to public contracts was one of the policy aims sitting behind the 2014 EU Directive on Public Procurement, which has now been implemented into national legislation. The CBI’s second report on Procurement Reform (published before the latest round of legislative changes) stated that half of UK Central Government’s £40bn spend was placed with just 39 suppliers, so it is not surprising that this issue received the attention of legislatures. The main barriers to SME involvement have traditionally been seen as a lack of transparency, complexity of procurement process and the size of advertised contracts.
So, how much progress has been made since the latest round of legislative changes came into force? Before considering the effectiveness of those changes, it is useful to remind ourselves of what they were:-
- Under the new Regulations, Contracting Authorities now have to actively consider splitting larger contracts (those above the EU threshold) into smaller lots and have to justify their decisions if they choose not to do so. It is also open to Contracting Authorities to limit the number of lots that a single contractor can be appointed to, provided they do so in an objective and non-discriminatory way.
- Contracting Authorities have to evaluate bids based on the tenderer’s “capacity and ability” to perform the contract, which means that excessive requirements, not linked to the type or value of the contract, are not permissible. In particular:-
- minimum turnover requirements for bidder qualification cannot be more than twice the contract value, unless there is a justifiable reason for doing so. The previous thinking on this was for 3 times the contract value, so there has been a reduction there in favour of SMEs.
- minimum PI levels required for bidder qualification need to be objectively justifiable based on the type and value of the contract.
- The new Regulations introduced the amended qualification process, which brought in the standardised European Single Procurement Document (ESPD) and the ability for bidders to self-certify the information provided. Now only the winning bidder is required to provide the documentation supporting their statements in the ESPD. The European Commission estimated that the change in the qualification procedure would reduce the administrative burden on companies by over 80%. Scotland has introduced the new Scottish ESPD but it has not yet been implemented in any meaningful way in England, NI or Wales.
- More generally there has been a drive to further improve transparency through better record keeping and auditing of procurement processes.
As we have only been working with the new regime for a short while, Contracting Authorities, as well as bidders, are still very much in the learning process and there will, inevitably be a period of time before full compliance is achieved across the sector. The European Commission is focussing on buyer training as a means to ensure compliance.
Some of the changes are more easily implemented than others. Contracting Authorities had already been working with guidance on minimum turnover and PI requirements and the new Regulations are more of a codification of existing rules than a step change in that regard.
Other changes may take a little longer to be fully embedded. A quick review of the tender portals will, for example, show that bidders are not always given reasons for a contract not being split into lots, or if they are, the reasons are not particularly specific. It is also rare to see a limit being placed on the number of lots that a single contractor can be awarded. The reason for this could be that there is a perceived conflict in being able to demonstrate best value whilst at the same time splitting a contract so as to lose the economy of scale, or saying that a certain lot has not been awarded to the bidder who submitted the most economically advantageous tender because of a cap on the number of lots that it can be awarded.
There is little doubt, however, that the standardised approach to the qualification process through the ESPD is starting to reap benefits for bidders, from both a time and a cost perspective. This is likely to be the biggest win for SMEs from the most recent changes in legislation.
2. Is there anything more that can be done in a regulatory way to enhance the opportunity for SMEs to engage in public procurements?
It is likely that legislatures would want to give Contracting Authorities a period of time to adjust to the new Regulations, before making further changes. That said, the EU Commission is keen to make sure that buyers fully understand the new rules and use them in a way to create innovation in the economy, which can be done through greater use of SMEs. The EU Commission published a consultation on “Guidance on Public Procurement of Innovation” seeking to help buyers feel more confident in specifying more innovative ways of delivering contracts, without fear of challenge. The consultation closes this month (January) and we can expect published Guidance to follow on from that.
At the moment Contracting Authorities are being “encouraged” to design their procurement processes with SMEs in mind, but they are afforded a fairly wide discretion in how they do that. Based on their current powers under the EU Directive, there are additional measures that Member States already have in their kit bag, should they feel that the current regime is not achieving the policy aim of increasing SME involvement.
As an example, the Directive allows Member States some discretion on the implementation of the lotting rule, so that Government could at some point make it mandatory that contracts of a certain size or type be split. Government could also choose to extend these current rules so as to apply to lower value contracts, through separate national legislation.
Speed of payment in the supply chain has also raised concerns for SMEs, especially in the construction industry. The Directive makes clear that Member States should be free to provide mechanisms for direct payments to be made to sub-contractors (who are more likely to be SMEs). As an example of how this can be achieved, the Scottish Government has now instructed all Scottish organisations covered by the Public Finance Manual to use Project Bank Accounts in high value construction contracts to allow direct payments to sub-contractors. If this proves to be successful then we may see a further roll out to other industries or to lower value contracts, but this would have to be weighed against the cost of administration. There is also statutory in guidance in England & Wales about prompt payment of undisputed invoices within 30 days, with a stated aim of paying 80% of invoices within 5 working days.
The Scottish Government has also introduced the Scottish ESPD as well as standardised statements for use alongside the ESPD which Contracting Authorities must use for routine requirements in the qualification process. This further standardises the process for bidders and will ensure that the policy aims of making the ESPD a reusable document are better achieved. It may be that this is something considered by other jurisdictions.
We do have to recognise that any attempt to legislate in favour of a certain groups of providers such as SMEs, almost by definition, prejudices other providers in the sector. Government therefore has to use its powers with caution so as not to make the process anti-competitive, when the aim of the game is to run an open, transparent and fair process for all. That said, the measures that have been introduced do help to at least make sure that SMEs are given a fair opportunity to compete in the first place.