Submission to Joint Committee on
Jobs, Enterprise and Innovation
Date 16th October 2014
Author Dr. Paul Davis
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Procurement within the public sector is often seen as a very traditional
tendering role whereas it is a set of activities that can contribute signifcantly
more than the tender itself. The full range of the procurement process is not
being utilized. In many cases of procurement in the public sector, engagement
with suppliers either through pre-market engagement or through ongoing
contract evaluation does not take place.
The public procurement market is a very significant market for the small and
medium sized enterprises (SME) sector. Expenditure on the procurement of
goods, works and services by public authorities in the EU represents
approximately 19% of EU GDP which equates to €2.1 trillion. In Ireland, public
procurement expenditure is estimated at between 10% and 12% of GDP. In
todays terms that equates to approximately €9.5 billion. Given the value and
variety of goods, works and services procured by public authorities, the public
procurement market provides significant opportunities for SMEs. However,
according to European Commission data, SME participation in the public
procurement market remains lower than their importance in the economy.
Access to the market is perceived by SMEs as being overly complex and
burdensome. Factors which are consistently cited as representing barriers to
SMEs’
full
participation
in
the
public
procurement
market
include
disproportionate financial criteria, the large size of contracts being tendered,
excessive paper work, over-emphasis on price, bid costs and insufficient time
to bid. One of the difficulties is looking at the SME sector is the fact that
majority of these enterprises are Micro Enterprises and the factors that apply
to companies with in excess of 50 people do not apply to companies with less
than 10 people.
The Irish public sector itself has formally moved to a more centralized
approach for procurement. Yet research shows that centralized state
procurement can lead to a stifling of innovation and a reduction in competition
and does not allow for local needs and increased participation of SME’s.
In August 2012 the Government published the Accenture Report - Capacity
and Capability Review of Central Procurement Function. Whilst I welcomed
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the main thrust of the report - that a central body should have more powers to
drive consistency of approach – I was and still am concerned that the report is
somewhat superficial, contained erroneous information, and as a result the
Government may be disappointed in level and timescale of benefits. I have
noted that this has been put forward and accepted as Government Policy but I
felt obliged to highlight the concerns that were apparent in the report and that
would ultimately lead to disappointment and perhaps unnecessary focus in
the near future on failings that could have been prevented. I am not critical of
the Government Policy but rather am concerned that the figures and
information supporting the policy may be based on inaccurate assessments.
I offer a summary of key points below.
1. some assertions are just wrong - especially those relating to UK
Government and its Government Procurement Service (GPS). The
procurement reform programme started with the first Gershon Report in
2001 and is currently in its fourth phase; the GPS existed before 1998.
2. there are no real answers about skills required in number or quality and
so capacity to accelerate change may be limited. Accenture state
that, from a global perspective they have used a benchmark of €18.9m
spend per procurement FTE – this probably works for private sector,
but experience shows that in the public sector (where public scrutiny,
need for propriety, need for ministerial reporting and the public
procurement rules add to the burden) productivity is halved
3. the report offers little evidence to support the savings claimed; current
levels of achievement are not base lined, no benchmark data is
offered. Nor is there detail on how the savings will be made. The level
of analysis is poor here and in my experience would offer little comfort
to an organisation that they are realistically achievable. This report
offers a lot with little grounding of the assertions of spend and will lead
to failure to achieve even the lowest level indicated within the report.
4. The data gathered has flaws, for example the suggestion of the
numbers of suppliers competing for public sector contracts to be in
excess of 200,000 is not based on any known data set such as e3
tenders where there is direct evidence of the number of suppliers
competing for contracts above €25,000
5. there is little evidence that the authors have acknowledged the context
of public procurement in general or of the Republic of Ireland in
particular. For example; there is no recognition that over-aggregation
can distort the market, nor is there any sensitivity about need to sustain
the Irish economy by ensuring that small business (which is important
in a small nation) are included
6. there is no recognition of the issues of logistics to remoter corners of
the Republic, nor of the direct impact of costs of centralisation of
products for delivery to remoter regions
7. insufficient time has been allowed in the proposed plans for gathering
information & running EU-compliant procurement, nor have the
contractual obligations inherent in current supply arrangements been
addressed
8. at the foot of page 43, Accenture state ‘If the State is to realise the
“substantial savings” that it hopes to deliver from its spend, then it will
need to invest in skills development, define clear career paths and
position procurement as an attractive place to work’. They do not say
that this must include addressing the pay and grading, relative to
private sector, and tenure of post.
9. no attempt has been made to indicate the cost of instituting the
changes required
10. there seems to be a disparity between the policy for the
encouragement of SME engagement in public tendering and move to
aggregation that the report suggests. This may lead to short term
savings on price, but long term losses within local economies.
While any focus on public procurement is to be welcomed, based on
experience and knowledge that has been gathered in both a professional
capacity and also a research capacity, I feel that the full adoption of the report
has and is leading to a potential embarrassment to the Government when the
savings fail to materialise in the timeframes outline. It is now two years since
the report and the savings promised have not materialised and in reality we
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are still in the process of recruitment of the OGP. In the last 24 months there
were no major policy developments from the OGP other than 10/14, to direct
how SME’s and Micro Enterprises would participate.
Currently there does not seem to be a need of adopting for example LM3
frameworks being adopted in the UK. Using the principles of the Local
Multiplier 31 methodology we can develop local economic benefit figures for
investment by public authorities in both small local and large local firms. This
multiplier figure relates to how small local and large local firms will re-spend in
a local economy through their own spending with their suppliers and their
labor. There are a number of stages in the approach to developing the
multiplier.
In the UK the Centre for Local Economic Strategies wider research with local
authorities has found that small firms will re-spend 49p in every £1 they
receive back in a local economy; whereas large firms will re-spend 31p in
every £1 back in a local economy. The wider research has also revealed that
26.5 per cent of supplier re-spend will be upon labor and the remaining 73.5
per cent on supplies. This difference in spend is significant when applied into
the Irish context. Furthermore there seems at a national level in Ireland to be
a move towards framework agreements focused primarily on price and not on
impact.
The approach of Irish public procurement is to deal with the tactical issues of
price and delivery and to forego the investment in strategic activities. There is
some cross over between the Jobs Strategy and the Public Procurement
Strategy. In Wales, Value Wales has developed a ‘Community Benefits’
measurement tool. This sophisticated approach is a leader within the UK in
assessing outcomes and has been used to track six early projects.
It shows that these contracts valued at £146million resulted in £56million in
salaries to Welsh citizens, and £68million was spent with Wales based
1 https://www.lm3online.com
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suppliers. In addition, the six projects created 44 apprenticeships and
supported work for 140 disadvantaged people, as well 2200 jobs being
protected or created. John McClelland in his 2012 review of Wales Public
Procurement concluded that “Over the last two years the ‘Community
Benefits’ approach has been applied to £3.4billion of contracts therefore,
there are a further fifty projects in the pipeline and, it is expected that they will
deliver similar benefits to this first six”. This meant that there was scope for
the creation and protection of an additional approximately 16,000 jobs with on
the basis of this spend in Wales. If this same methodology was applied within
the Irish Public Procurement Context whereby €6 Billion Euro is being
targeted through centralized procurement, there is an opportunity for the
creation and protection of 24,000 jobs in Ireland. In aligning the procurement
approach with the jobs policy a quarter of the jobs required in the current jobs
strategy could be generated by a more focused public procurement spend.
It is recognized that the large size of public contracts is often a disincentive for
SME participation in the procurement process. Four mechanisms have been
set out that could be considered by large contracting authorities in order to
encourage SME participation regardless of the large size of the contract
namely (i) sub-dividing contracts into lots; (ii) combinations of contractors in
order to facilitate reliance on mutual financial and technical capabilities –
setting
up
collaborative
mechanisms
and
consortia;
(iii)
framework
agreements and (iv) sub-contracting. Although these are actively encouraged
they are seldom practiced to the extent that they can be seen as being
effective at having any increased participation levels for micro- enterprises. In
the UK the use of the local multiplier (LM3) methodology and the setting of
targets of 75 % for local SME participation has forced the appliance of these
mechanisms rather than the optional adoption that is available in Ireland.
The requirements for selection criteria should be proportionate and objective.
An example of criterion, which raises issues for SMEs would be, a criterion,
which evaluates experience, acquired in dealing with the public sector only. It
is noted that such a criterion is irrelevant and limits competition. It should also
be noted that disproportionate financial guarantees (e.g. high qualification
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levels and financial requirements) constitute an obstacle to the participation of
SMEs in public procurement.
Although Circular 10/14 goes some way to
acknowledging changes to be put in place again it should be noted that this is
a guidance document and in no way ensures that practices will change as
there are no penalties to enforcement
The current Directives refers to EU measures aimed at combating late
payments and providing for a default level of interest for late payments and
recovery procedures. In Hungary the tenderer is entitled to collect the money
directly from the contracting authority’s bank account if it is not paid within 30
days following performance. In the UK, Government Departments and their
agencies must publish the proportion of bills paid within 30 days or another
agreed credit period and to consider whether staggered or interim payments
are appropriate
In the Irish Examiner recently (Monday 30th of June) it was stated that
“Credit conditions for SMEs are deteriorating, with the time it takes for
firms to receive payments getting longer, according to ISME’s latest
Credit Watch Survey.
The main findings from 826 respondents in the final week of June
include: * Average payment period for SMEs in the second quarter of
2014 deteriorated from 60 to 63 days.
* 28% are experiencing delays of three months or more; a
deterioration on the 25% in the first quarter.
* 6% are waiting over 120 days, up from 5% in the first quarter;
and a net 16% of businesses are waiting longer compared with
14% in the first quarter.
* Late interest is charged by less than 2% of micro and small
businesses, while 8% of medium-sized businesses charge it.
* Munster businesses wait longest, at 66 days, while Connaught
is best at 51.
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* Distribution businesses wait on average 69 days while
construction is shortest at 55 days.
* 84% of SMEs favour a statutory 30-day payments regime, with
no opt-out.
ISME chief executive Mark Fielding said: “This Government is forever
spinning the yarn that they are ‘SME-focused’ while their inaction on
late payments would state the opposite.
“They allow big business and Government agencies to continue to
abuse their dominant position to contract out of the legislation. The
figures prove it. The average credit period prior to legislation was 52
days; today it has deteriorated to 63 days.” “
As previously mentioned there is an overemphasis on price with many of the
procurement practices. There is a need for the public sector to work closely
with industry to develop total cost of ownership models. Market engagement
should not involve the use of tenders to gain market knowledge but rather to
enhance the opportunity for innovative products / services to be delivered.
Public procurement should enable market access for local indigenous
companies and SMEs, both manufacturers/developers and suppliers.
The recent circular 10/2014 while encouraging in promoting the setting of
relevant and proportionate financial capacity, turnover and insurance levels
for tendering firms and the sub-dividing larger contracts into lots, where
possible, to enable SMEs to bid for these opportunities, does not go far
enough as it does not recognize that over 50 % of companies bidding for
contracts are Micro-Enterprises and not SME’s and need much more targeted
interventions. Furthermore the direct Transposition of the New Directives will
do nothing to change the risk adverse culture of the public procurer but rather
increase the level of legal training being taken. Rather the development of a
regulatory framework for procurement below EU threshold would be of more
use as it would give greater clarity to organizations in engaging with the
Market.
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In July 2008, the Department of Enterprise, Trade & Employment established
the Procurement Innovation Group comprising representatives of industry,
academia, government departments and State agencies. The Group’s
objectives were to (a) raise awareness of the benefits of using public
procurement to stimulate research and innovation; (b) identify obstacles or
problems in the current procurement process which impede opportunities for
innovation;(c) examine the potential of the Public Procurement Directives to
ensure a level playing field for all innovative companies wishing to participate
in public tendering; (d) create an environment in which the potential of
innovation for public procurement can be realized; and (e) make
recommendations on how objectives may be achieved. The work of the Group
culminated in the publication of Using Public Procurement to Stimulate
Innovation and SME Access to Public Contracts (July 2009) and The 10 Step
Guide to SMART Procurement and SME Access to Public Contracts (2009)2.
The Guide outlined the importance of the SME sector in the Irish economy as
follows:“The SME sector plays a fundamental role in contributing to economic
growth and employment in Ireland. The public sector is a particularly
important market for small businesses, so improving our public
procurement practices by removing obstacles and boosting the
involvement of SMEs is a key priority.
Developing a more SME-friendly approach to public procurement will
allow SMEs to make the most of their potential for job creation, growth
and innovation. An increased involvement of SMEs into public
purchasing will also result in higher competition for public contracts,
leading to better value for money and efficiencies for contracting
authorities.”
The Guide reflects a large number of the initiatives and mechanisms outlined
in the European Code of Best Practices facilitating Access By SMEs to Public
2
All the Guidance Notes are available on www.etenders.gov.ie
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Procurement Contracts.
In a recent review carried out for Enterprise Ireland I noted that there has
been no follow up to this policy implementation nor have there been any KPI’s
included in any recent procurement policies to ensure that any of the practices
to date can be measured. This is surely wrong.
In the Program for Public Sector Reform published in January 2014, there is
less than one paragraph out of four pages of text on public procurement that
refers to SME participation. In that paragraph it states that the Office of
Government Procurement will only address policy – to date this is the circular
10/14, which means nothing else need be actioned before the end of 2016 –
the end of the reform plan.
In the review for Enterprise Ireland I made the following recommendations
All future policy aimed at suppliers should be mindful of the significant
differences that exist within the SME population.
Micro-enterprises should be treated as distinct from the SME group.
Clear KPI’s for SME participation should be set for all public procurers.
Clarity needs to be provided from a government perspective as to what
exactly is the intended outcome from any policies or guidelines
produced and how exactly these are to be implemented.
The OGP should set out clear rules and roles outlining how
collaborations might occur and what might be involved.
Procurers should be required to set targets related to their collaborative
efforts at the outset of each procurement being undertaken.
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Training on the issues surrounding consortium building should be
provided to all interested SMEs. T
The OGP should include a description and discussion on the topic in a
new updated guidance booklet, which should be made available to all
public procurers and potential suppliers alike.
Procurers should be required to set targets related to market
intelligence gathering at the outset of each procurement being
undertaken.
The OGP should provide a formal definition of what precisely
constitutes feedback.
Specific training must be provided to all public procurers to enhance
their skills in procuring for innovation.
The OGP should organise in conjunction with DJEI a budgetary
system, which specifically allows for ring-fenced monies to be assigned
directly to procurements of innovation.
I believe firmly that a focus by the OGP on support for a wider policy agenda
rather than the narrow interpretation from the Accenture report would have far
greater economic and social benefits than simple price / cost reductions.
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