Public Sector Revolution or Public Procurement Problem?


David Cameron has announced today a “transformation” of the public sector by introducing a presumption that any and all services (bar justice and national security) can and will be open to competition from the private sector; http://bit.ly/hQVhKS

Whether this is a good or a bad thing is debatable, as is whether it is a reform that is intended to improve public service or a fig leaf for an ideology of destroying it.

However, one aspect which needs to be considered is the practical impact on the policy of the EU Public Procurement regime. While the proposal is couched in terms of removing regulation and red tape, breaking unnecessary state monopolies and bringing services closer to the control of the people rather than the state as a proxy for them, the application of the procurement rules could have the very opposite effect.

In brief the procurement rules require that all moderately substantial public works, services and supply contracts must be openly advertised throughout the EU and subject to an appropriate form of competitive tendering process. The underlying rationale for this is to ensure a level playing field across the EU and access to markets by businesses in each Member State. In most EU countries, the public sector and public spending accounts for a large proportion of the national economy. It was recognised that in the absence of safeguards it would be too easy for national governments to reserve these parts of their economies to their own country’s businesses and so make the project of a single EU market that much less realistic. The procurement rules were designed to stop public bodies stitching things up.

So far, so consistent with the economic liberalism of the proposals to open up public sector markets to even wider competition.

But. The obligation to have competitive tendering gives rise to substantial compliance costs both for public authorities and for contractors. Changing the presumption opens up the entire public sector to being obliged to go through complex procurement processes for every single contract of note. More than that, it changes every single activity into a separate public contract rather than just being public services.

Why does this matter? Well, now, where a public authority carries out a function in-house, or wishes to bring a function in-house, it can benefit from an exception to the procurement rules stemming from an European Court of Justice case called Altmark and so not be required to go through the rigamarole of tendering. The introduction of a presumption that all public services are capable of being provided on a competitive market and that public sector bodies (including the in-house departments) should compete for them removes the ability to rely on the Altmark judgment. A public body would still be able to award a contract in-house, but instead of merely ensuring that the Altmark criteria had been fulfilled it would also need to take a decision that the new legal presumption of competitive provision was rebutted on the facts. A move from showing that a service could be provided by a public authority’s staff to showing why it must be.

So, in addition to the costs of running competitive procurements for every service there would be a litigation risk introduced for those cases where public authorities decided that in-house provision was most appropriate as that decision would become strongly susceptible to judicial review. The remedies provisions of the procurement rules allow for parties who might have been interested in bidding for a contract to have illegally awarded contracts set aside – what were internal decisions of public authorities to give work to their departments would become challengeable commercial decisions.

Historically contractors have had some reluctance to challenge public authorities under the procurement rules not least because of an unwillingness to bite the hand that feeds. In purely private commercial transactions it is rarely a recommended customer-care strategy to be ready to sue every customer who decides not to buy from you. Moving to a public contract presumption of competition means reversing this. Any service that stays with a public-sector provider and which you’d like to have a go at may be worth readying your lawyers on.

Ah, but of course, lawyers are expensive and litigation can be ruinously so, particularly if a claim is unsuccessful. This will, perhaps, limit the actual number of challenges. So that’s OK then? No, because the real impact will be on the compliance costs for both the public sector and those interested in bidding. Compliance costs are another way of saying “red tape” and “bureaucracy”.

Already the majority of public authorities have very complex and detailed procurement policies and processes. These can seem to gild the lily when the underlying EU rules could be complied with in less formal ways. In practice they are susceptible to leading to public authorities making the wrong choice and forcing themselves into awarding contracts to those who are the best at writing tender documents rather than those who are in fact the best at providing the service. However, when the risks and costs of getting one procurement wrong are high, the impact is for reasonable risk assessments to lead to very stringent compliance processes. More hoops for the customer and contractors to jump through to exclude the possibility that the ultimate award of the contract might be challenged.

Apart from the bid costs for public work being substantially higher than for private sector customers there’s another nasty impact. One which, ironically, is likely to make the high policy behind the proposals (taking the Big Society rhetoric uncynically) fail. Public authorities that have to focus on compliance with rules designed to make cross-border trade fair and undistorted and to minimise the risks of costly legal action from large and sophisticated businesses are going to find it very hard indeed to do this while making contracts realistically accessible to small, local undertakings. Where those service providers are voluntary groups or other Big Society favourites it will be even harder. This has already been seen in the difficulties faced in trying to open up contracting work for the 2012 Olympics to SMEs and will be orders of magnitude worse in areas where there is an obvious lack of commercialism and experience.

This would defeat the Big Society purposes of the proposals and give credibility to criticisms based on a fear that what the government really wants to do is hand over public service to large corporations.

It will be interesting to read the White Paper in a couple of weeks to see how these concerns could be addressed. I don’t believe the circle can realistically be squared.

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