Procurement Update – May 2014
Print newsletter15/05/2014

Improving local government procurement
On 13 March 2014 the Communities and Local Government Committee of the House of Commons […]
On 13 March 2014 the Communities and Local Government Committee of the House of Commons published its report on local government procurement. This is the result of an inquiry which the Committee launched in July 2013 to look at how effective recent procurement reforms had been in improving local government procurement approaches, and the potential for further development. The inquiry focused on procurement in its widest sense, not simply the purchase of goods but also the wider commissioning of services and the management of contracts, including outsourcing of service delivery. These are some of the findings and recommendations.
Collaboration not centralization
The inquiry looked at whether local government would benefit from using a centralised procurement system like central government’s Crown Commercial Service. The view was that local authorities needed to retain local control over procurement, in order to best meet local needs. Some national arrangements, such as for energy purchase, might be beneficial, but local authorities should be able to enter these if they choose, not to be forced to.
On the other hand, the report sees value in local authorities adopting a collaborative approach to procurement. The number of shared procurement services doubled during 2011-12 with 75 councils now in 16 formal joint purchasing arrangements. On average, collaboration is estimated to be generating savings of 10-15 per cent. There is scope for much greater collaboration and the Local Government Association (LGA) is asked to conduct a review of collaborative approaches and produce best practice guidance.
Delivering strategic objectives, including social value
Procurement is a key route for councils to deliver their strategic objectives, including social, economic and environmental aims. The report looks at whether the Public Services (Social Value) Act 2012 has helped with this. It suggests that the Act might need extending so that it applies to all procurements, not just those that are above the EU threshold, particularly as the new EU Directives will increase this threshold meaning even fewer contracts are caught by the Act.
The report acknowledges that there is a judgment to be made by each council, and for each contract, as to the correct balance between letting a contract at the lowest price and requiring contractors to deliver additional economic and social value, sometimes at an additional cost. It recommends that all councils should present an annual report to full Council setting out their strategy for incorporating economic, social and environmental value in their procurement, and that the LGA should disseminate examples of best practice case studies and updated social value guidance to reflect the new procurement directives.
Reducing costs and bureaucracy
The report quotes some alarming figures. A typical procurement exercise for an above-threshold contract costs a bidder £40-£50,000. This might be worth it for high-value contracts, but 75 per cent. of all contracts tendered in the UK are below the threshold. However, councils still tend to apply the full rules to these below-threshold contracts, to be on the safe side, when there is no need. More guidance is needed.
Another alarming figure is the example quoted by the CBI of one construction company that spent an average of £8,000 on each pre-qualification questionnaire (PQQ), which, with 200 tenders a year, added up to £1.6 million on pre-qualification alone. The report agrees with the Government’s view that there should be a single, simplified PQQ for above-threshold contracts, but does not think that PQQs should be abolished altogether for lower-value contracts, as they can be useful to limit the number of bids an authority has to evaluate.
The report also recommends that contracts should require the contractor to pay its sub-contractors promptly, right down the supply chain.
Contract management
The inquiry heard evidence of many public sector outsourcings that had failed because councils had not managed risk effectively. The report notes that “it is self-evident that outsourcing of a contract does not mean outsourcing responsibility for ensuring the quality and consistency of service to residents”, but that there were regrettable examples where complex outsourcing arrangements had failed to safeguard service delivery and quality. It recommends that councils develop and support a culture that embeds appropriate risk management across the council, not just in the procurement team, as it is often at a later stage, once the contract is operational, that standards start to slip (for example, an unreasonably low initial price that allow suppliers to drive up the price at a later date).
Governance: fraud and transparency
The report raised concerns that the level of procurement fraud risk within local government would increase as a greater proportion of services are outsourced. The Committee said “It is not sufficient for councils to ‘let and forget’ contracts: rather close monitoring of their delivery is essential to detect potential fraud”. It calls on the Government to give support and guidance on the best ways to identify and tackle fraud.
There was also evidence that the outsourcing of public services can dilute transparency and disclosure requirements on suppliers, since private sector companies delivering public services were not automatically caught by the Freedom of Information Act. The report suggests that the requirements for contractors to publish information on performance delivery and contract costs should perhaps be extended, for example by including in contracts terms that mirror the regulatory requirements on public bodies to provide information. Local authorities should make greater use of open book accounting to improve procurement transparency.
Comment
This report does not tell us anything we didn’t already know but it is clear that it sees procurement as an activity that should be at the heart of local government not on the periphery: “procurement should not be seen as a niche function conducted in silos, rather as an activity central to delivering high value, cost-effective services to communities”. It does ask a lot of both central government and the LGA in terms of supporting local authorities in procurement so we will see how they react to these demands.
One final quote to end with, which perhaps sums up the Government’s approach to ‘localism’:
“Local government has a responsibility to show that it can put its own house in order. If it does not, we fear DCLG will opt for compulsion.”

Transparency in outsourced contracts
The transparency agenda has been high on the Coalition Government’s list of priorities since it […]
The transparency agenda has been high on the Coalition Government’s list of priorities since it came to power four years ago. However, in those four years there has been significant outsourcing of public functions, not all without controversy. Recently, concerns have been voiced that it is difficult to find out what has been going on in these outsourced contracts – until it is too late.
Public functions that are carried on in-house are subject to the Freedom of Information Act (FOIA), so in theory (unless an exemption applies), anyone can find out information about how those functions are carried out. When those functions are outsourced to a private company, the position is less clear. The FOIA applies to information held by a public authority or “by another person on behalf of the authority” (section 3 (2) (b). But it is not always easy to tell when a contractor is holding information on behalf of a public authority (which would be subject to the FOIA) or on its own behalf (which would not be). A recent ICO blog gives an example of a local authority contracting out the management of a leisure centre to a private company, and whether information about the number of people using the gym was the company’s information, or the authority’s. If the former, then there would be no way that a member of the public could compare usage of the gym before and after the contracting-out.
The Information Commissioner’s Office (ICO) is concerned that “if significant information about the operation and delivery of public services is no longer covered [by the FOIA], then we are witnessing a gradual reduction of the scope of FOIA”, with the risk of corresponding reductions in transparency, efficiency and public trust.
There are two obvious ways that the Government could address this. The first is to designate private contractors who provide public services under a contract with a public authority, as public authorities under section 5 FOIA. However, this seems to have been discounted as being too complicated.
The second way, and the one the Government is proceeding with, is to publish a revised code of practice to make sure that freedom of information clauses are put into all public sector outsourcing contracts. The aim is to have this in place by the end of 2014. The ICO have been asking for examples of contract terms relevant to FOIA, both good and bad, and of how public authorities are working successfully with private sector providers.
The new clauses will need to carefully define who ‘holds’ information for the purposes of FOIA and also be more consistent, promoting real partnership working rather than the often overly-cautious approach adopted to date.
Until the new clauses are published, we advise that freedom of information and transparency clauses in contracts with the private sector are carefully drafted to make clear what information is being held by the contractor on the authority’s behalf, and must therefore be disclosed in response to an FOIA request, and place the onus on the contractor to work with the authority to be as transparent as possible.

Does the in-house exemption apply to a non-profit organisation?
Case C-574/12 Centro Hospitalar v Eurest Portugal was a case referred to the ECJ by […]
Case C-574/12 Centro Hospitalar v Eurest Portugal was a case referred to the ECJ by the Portuguese court. It was a challenge by Eurest to the direct award of a five-year catering contract by Centro Hospitalar de Setúbal, a Portuguese public hospital, to the Serviço de Utilização Comum dos Hospitais (SUCH), a non-profit entity. Eurest was a competitor of SUCH and argued that the contract should have been put out to procurement. Centro Hospitalar argued it was covered by the in-house exemption that was established by the Teckal [1] case.
The Teckal exemption
The Teckal case set the rule that a contract does not need to be procured if it is awarded to an entity:
- Over which the contracting authority exercises “a control similar to that which it exercises over its own departments”
- Which has no private sector ownership or control
- Which carries out “the essential part” of its activities with the contracting authority. Subsequent case law has 90 per cent. as a rule of thumb for the essential part.
This has now been codified in the new Public Procurement Directive, Article 12 (although “the essential part” is at least 80 per cent.).
Advocate General’s opinion
The Advocate General decided that the Teckal exemption was not met because:
- 23 of the 88 participants in SUCH were private sector organisations. The twist was that they were all non-profit making and some were charities. The Advocate General decided that whether they were profit-making or not made no difference. They were still entitled to compete with commercial entities for public contracts, so awarding them a contract directly put them in a position of advantage as against their competitors.
- Even though the Centro Hospitalar had the majority of voting rights in SUCH, it did not have “control similar to that which it exercises over its own departments” due to the participation of the private entities, whose interests may not always coincide with the public interest.
- SUCH’s constitution allowed it to carry out up to 20 per cent. of its activities on the open market. The Advocate General ruled that this was in excess of what was permitted by the Teckal exemption.
Comment
This is only an Opinion of the Advocate General and does not bind the Court of Justice of the European Union, although it may be persuasive. It has to some extent been overtaken by legislation, as the new Procurement Directive sets 20 per cent. as the limit of activities that can be carried out for third parties. It also confirms previous case law, such as Stadt Halle [2], that any participation by the private sector will fail the Teckal test. What it does do is confirm that not-for-profit and social sector organisations are also classed as private organisations. This means procurement law still needs to be carefully considered when an authority is seeking to award a contract to a not-for-profit organisation in which it has an interest.
[1] Case C-107/98 Teckal Srl v Comune de Viano
[2] Case C-26/03 Stadt Halle v TREA Leuna

Procurement round-up
The Cabinet Office has published four Procurement Policy Notes in 2013 so far. The two […]
The Cabinet Office has published four Procurement Policy Notes in 2013 so far. The two on tax compliance in procurement are covered in our separate article. The other two are on Public Procurement and the Public Sector Equality Duty (PPN 01/13) and Supplier Financial Risk Issues (PPN 02/13).
Public procurement and the public sector equality duty
This Note is to remind departments of their legal obligations under the Public Sector Equality Duty (PSED) when conducting their public procurement activities, but is not a comprehensive guide to the PSED. It summarises how the duty can be taken into account when conducting a procurement, and there is an annex that gives examples of how equality issues might be incorporated at the different stages of a procurement.
The note points out that the degree of relevance of equality will vary depending on the individual procurement and gives examples of the types of services, goods and works contract where is it likely to be more relevant, such as where there is direct contact with the public.
It also advises that a public authority should keep formal records showing how it has considered the equality duty.
See our detailed article for more on the PSED and procurement.
Supplier financial risk issues
This note is borne out of two things: issues frequently raised by suppliers through the Cabinet Office’s ‘Mystery Shopper’ scheme; and the recommendation of the Mutuals Taskforce Report that there should be guidance for commissioners setting out clear expectations in respect of the assessment of financial standing, including on the use of any requirements for performance bonds. It reminds public bodies that the financial assessment of potential providers should be done in a way that is proportionate, flexible and not overly risk averse, while protecting taxpayer value and safety and complying with relevant EU procurement law. It stresses that all potential providers should be treated fairly and no SMEs, public service mutuals or third sector organisations should be inadvertently disadvantaged by the financial assessment process.
The note gives guidance on:
- financial information required – accounts for the past two (rather than the traditional requirement of three) years of trading, with flexibility for SMEs and public service mutuals that may have been recently formed
- use of credit rating reports – these should not be used as the sole assessment tool for above-threshold procurements and are not a substitute for accounts and other documentation that a bidder might provide to confirm their financial capability
- setting contract limits by reference to turnover – this means setting the size of contract considered ‘safe’ to award to a potential provider based on a comparison of the annual contract value to the provider’s annual turnover. This might bar new businesses from bidding. Financial position, capacity, capability and dependency should all be considered, in addition to turnover
- business insurance requirements – authorities should not take a blanket approach to levels of cover but should base it on the risk inherent in the contract
- deeds of guarantee – the note explains the difference between guarantees and bonds and stresses that authorities should seek professional advice on the best choice, use and drafting of these. They should be used proportionately as they are burdensome requirements for small value contracts
- other methods to mitigate risk – as the point of doing an assessment of a potential supplier’s finances is to assess the risk to the public purse of them going out of business during the life of the contract, the Note stresses that there are other ways to ensure the supplier complies with its contractual obligations, without recourse to financial instruments, such as contract management and monitoring procedures, step-in rights and escrow arrangements
- public service mutuals and the LGPS Regulations – the final part of the Note deals with the difficulties that a newly-formed public service mutual with staff who transfer to it under TUPE might have in securing admission to the existing pension fund if it does not have the finance for an indemnity or bond. The Note sets out the greater flexibility that the Local Government Pension Scheme (Miscellaneous) Regulations 2012 give for new admission bodies to enter the LGPS, as they can now provide a guarantee where it is not possible or desirable to obtain an indemnity or bond.
The thrust of the Note is that authorities should be more flexible in what they require potential providers to show in terms of financial standing, so that SMEs and fledgling public service mutuals are not disadvantaged.

Procuring the Future – The New EU Public Procurement Directive
The new Directives On 28 March 2014 there was published in the OJEU a new […]
The new Directives
On 28 March 2014 there was published in the OJEU a new Public Procurement Directive (Directive 2014/24/EU) which will form the legal framework for procurement over the coming years. Two others were published at the same time, one dealing with Concession Contracts (Directive 2014/23/EU), the other with procurement by Utilities (Directive 2014/25/EU). Each will come into force on 17 April 2014 and require to be implemented in Member States within two years. The Cabinet Office has announced that it has an ambitious timetable for implementation and is currently consulting on a range of issues that require to be settled at national level. Whilst we do not yet know the final detail of the new regime we will be working to, it does seem very likely that not only will we know but they will be implemented here well before the end of 2014.
The new rules in our view are more evolution than revolution but they do introduce some important changes and clarifications as well as codifying some of the case law which has arisen over the years. Accordingly public bodies and utilities who will procure under the new regime (not to mention businesses who will bid under the new rules) need to start considering how their procedures will need to be amended to comply with the changes and to take advantage of some of the new tools they will provide.
Abolition of Part B services
Looking at the Public Procurement Directive, amongst the most important change is that more contracts will be subject to the full regime. The distinction between Part A and Part B services has gone. Therefore all service contracts above the threshold will require full procurement. This will bring into scope a range of services which have until now been largely not subject to the full regime. Amongst those will be health and social care services. There will be a lighter touch regime for these with a higher threshold (€750,000). The Concessions Directive will also subject service concessions, up until now exempt, to procurement requirements.
Staff mutuals
The UK Government has secured a partial concession for some staff mutual spin outs. It will be possible to reserve the right to bid for certain contracts (as is currently the case with sheltered workshops) to mutuals or similar bodies that meet certain tests. As well as involving staff these could also involve users in the structure. However the contracts will still have to be procured and they will only have a maximum duration of three years.
New procedure
A new procedure, the Competitive Procedure with Negotiation, will be introduced to replace the old Negotiated Procedure with Notice. This will allow negotiation of submitted tenders, though this must be with all bidders, subject to the ability to apply the criteria part way through to reduce the number of bidders. As with Competitive Dialogue, at the end of negotiation a final tender is then submitted for evaluation. The other procedures, Open, Restricted and Competitive Dialogue, will be retained, though the grounds for using Competitive Dialogue are made less exacting.
Dynamic purchasing system
The Dynamic Purchasing System, introduced ten years ago but little used because of its complexity, has been refined and simplified. It will now potentially provide a useful tool for certain procurements. It will need to be completely electronic and appropriate software will therefore need to be available to make use of it. In essence it is very much like a framework with the very important exception that, unlike a Framework where the membership of the panel is fixed for its lifetime, in the Dynamic Purchasing System, an economic operator can apply to be admitted at any time during its life and must be if it in effect meets the relevant PQQ criteria. Other new features include the use of an electronic catalogue to assess price for particular contracts and an Innovation Partnership for use in research and development situations.
Help for SMEs
Some of the measures introduced are claimed to be to help SMEs bid for public contracts. One important measure in this respect is that an Authority will have to justify not dividing contracts into Lots. This is clearly something which needs to be built into procurement processes. There is also clarification on the ability to restrict the number of Lots which a bidder may bid for or be awarded.
Simplified PQQ
Another such measure is an attempt to simplify the PQQ process. Candidates will initially be allowed to self certify that they are not subject to exclusion, and meet the necessary financial and technical/professional standard and the selection criteria. They will not be required to submit full proof with the PQQ. Initially, this will be done using a standard document to be issued as a template by the Commission called the European Single Procurement Document. Whilst they must accept the initial self-certification, an Authority can at any stage ask candidates/bidders to submit supporting evidence and cannot let a contract unless they have received necessary proof of compliance from the intended Contractor. There will also be increased reliance on national data bases and approved lists of contractors.
Other important changes to the PQQ process include a new discretionary ground for exclusion that the Economic Operator had had significant or persistent deficiencies in the performance of a substantive requirement under a public contract. However this must have led to either termination or compensation or another sanction. On the other hand there are new limitations on the mandatory and discretionary grounds for exclusion. In particular an economic operator can avoid exclusion if they can show they have taken sufficient steps to demonstrate their reliability notwithstanding the grounds for exclusion. Further, time limits will be imposed after the elapse of which an event which otherwise would give rise to a ground for exclusion will cease to do so. In effect they will be “spent convictions” for this purpose.
Codified case law
The Directive also codifies in statute some important cases that have come before the Courts and in doing so makes them a little more precise. For example in terms of the Teckal [1] case which allowed direct award to a wholly owned subsidiary company of the Contracting Authority, the Directive specifies the level of control which the Authority must have and also specifies that it must perform 80 per cent. of its activities for the Authority. Similarly it codifies the Commission v Germany (Hamburg Waste) [2] case making it clear that true public co-operation between authorities in the public interest is not subject to procurement whilst at the same time making it clear that in a commercial transaction the fact that the Contractor is itself a public body does not exempt the arrangement from procurement. It also specifies, in line with the Pressetext [3] case that a substantial change to a contract will require procurement. And it defines what is “substantial” and also sets out some detailed exceptions.
Other changes
Amongst other items introduced are requirements for dealing with staff conflicts of interest, removing any unfairness form prior involvement of a bidder, dealing with abnormally low tenders and a number of further measures to allow social environmental and labour law issues to be built into the procurement
Conclusion
To sum up, whilst the regime under the new Procurement Directive will still bear a strong resemblance to the process and procedures used for the past ten years and more, there are a lot of refinements. Authorities will need therefore to carry out a thorough review of their processes, procedures and documentation to ensure that they will be compliant when it is enacted into UK law. Moreover, on this occasion we may not have anything like the two years we had last time, so the review needs to start with some urgency.
[1] Teckal Srl v Comune de Viano and Azienda Gas-Acqua Consorziale (AGAC) di Reggio Emilia (C-107/98) [1999] ECR I-8121.
[2] Commission v Germany (C-480/06)
[3] Pressetext Nachrichtenagentur GmbH v Republik Österreich (Bund) Case C-454/06

The big case of 2013: Covanta v Merseyside Waste Disposal Authority
The High Court’s decision [1] in October to grant Covanta an injunction suspending the procurement […]
The High Court’s decision [1] in October to grant Covanta an injunction suspending the procurement of a long-term high-value waste disposal contract could mark a turning point for procurement challenges in the UK. Up until now, the courts have been loathe to grant injunctions, instead preferring to award damages to the unsuccessful bidder. The Covanta case may signify a change in approach, or it may be a one-off decision dependant on its particular facts.
The facts were not that unusual. In 2006 Merseyside Waste Disposal Authority (MWDA) began a procurement process for a new waste disposal facility. The contract is expected to last 30-35 years and cost over £1 billion. Seven years of competitive dialogue later, MWDA appointed SITA as its preferred bidder. Covanta, the unsuccessful bidder, were surprised to find out that, despite over six years of competitive dialogue, MWDA had given two out of the five key elements of Covanta’s tender zero marks and described them as “fundamentally unacceptable”. Covanta claimed that there were manifest errors in the procurement process and sought an injunction to prevent MWDA entering into the contract with SITA.
The procurement had been going on so long that the applicable rules were not Regulation 47G of the Public Contracts Regulations 2006 (as amended) (the automatic suspension remedy), but the usual American Cyanamid principles (named after the case that first set them out) for granting an injunction. In reality, the two sets of rules are similar so the same test applies. Under the general American Cyanamid principles, when deciding whether or not to grant an injunction the court must consider:
- If there is a real issue to be tried (normally there will be, but of course remember there is a very short time period to bring a claim – 30 days from when the claimant knew or ought to have known of the relevant breach of the procurement rules)
- If damages are an adequate remedy
- Whether the balance of convenience lays in favour of granting or refusing the injunction.
The first limb was satisfied but the second two were not. The court decided that damages were not an adequate remedy for either party, but particularly not for Covanta, as it was too difficult to quantify Covanta’s loss due to the numerous breaches that Covanta were alleging.
The balance of convenience lay in favour of granting the injunction, because the procurement was a major contract involving a large sum of money and it was in the public interest to make sure that public authorities comply with procurement legislation. In this case, a further delay of seven to nine months (which is the expected timescale for an expedited hearing of the case to take place) would have a “modest” impact in the context of a seven-year procurement process and the fact that the contract was for 30-35 years. Interestingly, the court also said that if it did not grant an injunction, so that the contract was awarded to SITA, but Covanta successfully challenged the award at trial, MWDA would not have the resources to meet Covanta’s claim, putting more burden on tax payers.
So, in this case, a long, complex, procurement and a high-value contract meant that an injunction was granted. This might be the exception to the rule, but Covanta took a gamble and it paid off. They have now reached a confidential settlement with MWDA.
This case is a warning for local authorities embroiled in long and complex procurements that the appointment of a preferred bidder might not be the end of the process and that the risk of an injunction being granted may now be higher. The moral of the story is, as ever, to be as transparent as possible about the evaluation process so that any potential claims can be flushed out at the earliest stage, avoiding the authority being held to ransom over the threat of an injunction from an unsuccessful bidder.
[1] Covanta Energy Ltd v Merseyside Waste Disposal Authority [2013] EWHC 2922 (TCC) (Covanta)