Response to UK Cabinet Office consultation on 'Social Value in Government Contracts'

The UK Cabinet Office is currently consulting on its draft policy on ‘Social Value in Government Contracts’ and will be receiving submissions until 10 June 2019. Below is my contribution to the public consultation, which will probably make more sense if read after the consultation paper. Comments and feedback most welcome.

Launch of the Procuring for Growth Balanced Scorecard - Some Initial Thoughts

The UK's Crown Commercial Service and Cabinet Office have launched a new scorecard system to "use its huge purchasing power to help support economic growth" (emphasis added). Ultimately, the UK Government considers that it "can play an important role in supporting economic growth by helping to level the playing field through the way it buys public goods, works and services. It can maximise the economic benefit of what it spends through public procurement, directly through the outcomes of major investments or by playing a catalytic role in the development of supply market capabilities and competitiveness through the way it designs its procurement and requirements" (emphasis added). Quite frankly, and already from the outset, I struggle to understand the reference to levelling the playing field in any terms that do not hint at protectionism of the local industry as a means of promoting (domestic / local) economic growth (which is also a claim open to contention).

In very similar lines, they also indicate that the aim of this policy is "to maximise the value of taxpayers’ money through public procurement in a way that supports economic growth by ensuring that full value for money is taken into account. The Public Contracts Regulations 2015 provide greater clarity on how broader policy considerations, such as social and environmental factors, may be integrated into procurements. Taking account of relevant broader policy considerations will help to ensure value for money is fully considered and reflected in the procurement process where appropriate, contributing to economic growth in the UK" (emphasis added). Thus, there seems to be a rather strong link between the aim of promoting economic growth in the UK and the inclusion of social and environmental considerations. Certainly, smart procurement can contribute to economic growth (for example, by investing in infrastructure that enables the emergence of new economic activity) but this is an issue on decisions of what to invest in / what to buy, rather than decisions on how to buy it / who to buy it from. In my view, the whole policy seems to focus more clearly on the second type of questions, which should raise some flags concerning its compatibility with EU law.

In that regard, a maybe cynical remark is that the policy comes with an excusatio non petita when it stresses that "On 23 June, the EU referendum took place and the people of the United Kingdom voted to leave the European Union. Until exit negotiations are concluded, the UK remains a full member of the European Union and all the rights and obligations of EU membership remain in force. During this period the Government will continue to negotiate, implement and apply EU legislation". This was not necessary at all. It could be seen as a hint that the Government is trying to already implement "Brexit-aligned policies" (whatever that means) within the (recognised?) constraints of EU law. Two points here. One, if everything in this policy is EU compliant, what is the point of mentioning Brexit? And two, if everything that the policy aims to do is EU compliant, then is there any reason to believe that the Government will change its procurement policy in any meaningful way after Brexit actually takes place?

Regardless of those more general ideas, overall, it seems necessary to assess the new scorecard together with the also very recent CCS Guidance on social and environmental aspects of public procurement (Guidance on S&E aspects, criticised here), and, more generally, in view of the economic analysis of the effects that exercising such buyer power can create. 

Scorecard, Guidance on S&E aspects and EU procurement law

According to the press release

The new scorecard system has been designed to help ensure that major government procurements have a positive impact on economic growth, as well as achieving best value for the taxpayer.
The guidance ... introduces a balanced scorecard approach, which government departments should use in designing major works, infrastructure and capital investment procurements where the value is more than £10 million.
The scorecard helps procurers to consider the project requirements and needs, with criteria such as cost balanced against social, economic and environmental considerations.
By using this method, government departments can clearly set out how priority policy themes such as workforce skills development, small business engagement and sustainability may be integrated into their procurement activities.
This underlines to suppliers the overall impact that the department wants to achieve and signals how this will be assessed when considering individual tenders.
Each department should produce a project-specific balanced scorecard to be published with their procurement documentation.

The full scorecard paper provides additional details. It stresses that "A balanced scorecard (BSC) approach is a way of developing a procurement (e.g. the requirements and evaluation criteria) so that more straightforward matters such as cost, are balanced against more complex issues such as social and wider economic considerations" (emphasis added). This may seem to indicate that the BSC is actually a new method that aims to operationalise social and wider economic considerations in a way that makes them compatible with cost-based and legal requirements. 

However, an crucially, the document clearly sets out that "It is important to remember that nothing within the [BSC] guidance ... should be interpreted in a way that overrides or conflicts with departments’ obligations to comply with the PCR 2015, in particular departments’ obligations to determine whether potential requirements would be linked to the subject matter of the contract and proportionate to apply" (emphasis added). 

Thus, obviously, the scorecard cannot be seen to create more space for broader economic, social or environmental considerations than the applicable rules themselves. However, this raises the practical questions (a) why, if the BSC is nothing else than a method that needs to be assessed against regulatory requirements for the inclusion of social, environmental and broader economic considerations, it has been adopted separately from the Guidance on S&E aspects, and (b) to what extent the BSC is actually a useful tool for contracting entities beyond the mere formal aspect of formalising their tender / contract design analysis.

Moreover, the full scorecard paper runs the risk of misrepresenting regulatory requirements in the way that it pushes for the creation of discretionary space for the application of the BSC. Indeed, it stresses that

The EU Directive and the PCRS 2015 make clear that the award of contracts should be on the basis of the most economically advantageous tender (MEAT). The price or cost assessment part of the evaluation of bids must be on a whole life cost basis, and, as set out in the PCRs 2015, the entire cost-effectiveness of the project should be examined, not just the initial price. Cost-effectiveness can include the assessment of the cost of transport, insurance, assembly and disposal as well as costs over the life-cycle of a product, service or works, including: costs of use, such as consumption of energy and other resources, and maintenance costs; and costs associated with environmental impacts, including the cost of emissions (emphasis added).

In my view, this is problematic because Art 67 Dir 2014/24/EU and reg.67 PCR2015 do not actually impose an obligation to assess the price or cost on a "whole life cost basis" but simply allow contracting authorities to do so. This is recognised in technically more accurate terms in a separate piece of Guidance on awarding contracts also published by CCS in October 2016, where it is stated that "When a contracting authority uses cost as an award criterion, it should do so on the basis of a cost effectiveness approach. Life cycle costing (LCC) is an example of this approach, but contracting authorities are free to use other approaches" (emphasis added). 

Indeed, Art 67(2) Dir 2014/24 establishes that "The most economically advantageous tender from the point of view of the contracting authority shall be identified on the basis of the price or cost, using a cost-effectiveness approach, such as life-cycle costing in accordance with Article 68, and may include the best price-quality ratio, which shall be assessed on the basis of criteria, including qualitative, environmental and/or social aspects, linked to the subject-matter of the public contract in question" (emphasis added).

This requires that cost or price (ie cost-effectiveness) forms part of the award criteria (which is nothing new), and simply opens up the opportunity of adopting a life-cycle method, always provided that is in compliance with Art 68 Dir 2014/24, which in turn establishes that "Where contracting authorities assess the costs using a life-cycle costing approach, they shall indicate in the procurement documents the data to be provided by the tenderers and the method which the contracting authority will use to determine the life-cycle costs on the basis of those data." And additionally requires, amongst other issues, for that method to be "based on objectively verifiable and non-discriminatory criteria. In particular, where it has not been established for repeated or continuous application, it shall not unduly favour or disadvantage certain economic operators" (emphases added).

Therefore, unless contracting authorities have a pre-defined (and pre-published) methodology for the assessment of life-cycle costing (which they generally do not, at least currently), the award of contracts on the basis of "whole life cost" analysis is subjected to the double requirement that it focuses on requirements linked to the subject matter of the contract and is also not such as to unduly favour or disadvantage certain economic operators. In my view, this may be sufficient to disincentivise contracting authorities from aiming to actually award contracts on the basis of "self-made" life-cycle costing methods and the BSC may only be effective if such method was developed by the CCS itself for general use.

Further, it seems difficult to square the fact that, on the one hand, the guidance stresses that the BSC must be tailor-made to each procurement process (which would result in evaluation methods not designed for repeated or continuous application), while in that case the contracting authority must not only develop its own life-cycle costing methodology but also ensure that it does not result in an undue advantage of specific economic operators--which pretty much neutralises the incentive effects that the use of the BSC may be intended to create.

The detail of the BSC is also not helpful in that regard because it does include criteria that are discriminatory, such as "Number of UK jobs created or sustained by new government contracts" in terms of employment impacts; or the assessment of community benefits and legacy, which are more likely to advantage domestic contractors. In my view, contracting authorities will be in a difficult position when trying to translate these general criteria into legally-compliant and useful evaluation criteria that are not discriminatory.

 

More generally, on (ab)use of public buying power

The second perspective that is worth considering is that of the long-term effects of the Government's attempt to "use its huge purchasing power to help support economic growth". This reopens yet again the discussion on the desirability of the instrumentalisation of public procurement for extraneous policy goals. Suffice it to say here that (a) the inclusion of social, environmental or wider (community) requirements does not come free because it either raises bidders' costs or reduces competition, or both and (b) that the long term effects can be very significant in terms of reduced dynamic competition. This is an issue I have repeatedly raised (see here, for example) and a more structured analysis is available here

Public sector reform in the UK: A procurement battlefield in the horizon?

With is forthcoming announcement of a new wave of privatisation, the Cabinet Office is envisaging a significant redesign of the public sector and the provision of public services in the UK

In broad strokes, the Ministers are preparing to spin off a significant number of state-owned services into independent companies that will be owned by the Government, private investors (with a share of up to 50%) and workers (up to 25%), and to which the Government will then guarantee contracts for a number of years – with the businesses free to sell their services in the market.

Such a strategy will reshape the UK public sector, but it will also have a very significant impact on competition in services markets (since the Cabinet Office is focusing on IT, personnel and legal functions, which could be provided by existing private suppliers in the markets concerned).

This is a strategy that deserves close scrutiny by the competition watchdog--as anticipated by the OFT in its 2013-14 Annual Plan, where it stresses that it "may focus on IT and local government issues in particular and work with government partners on a range of issues relating to the public sector reform agenda to ensure that government interventions maintain competitive markets. In addition to advocacy and influencing, [the OFT] will consider using the full range of tools at our disposal to tackle any breaches of competition law identified in public service markets." Maintaining competitive neutrality will be a major issue, as indicated by the OECD recently.

Importantly, the public sector reform will need monitoring from the public procurement perspective. Depending on how the privatisation and contracting out strategy is carried out, the Cabinet Office will create a complex scenario by running auctions  to acquire 'minority' stakes in the spin-off companies and (simultaneously?) running (open?) tenders or directly awarding the contracts to the newly created companies. 

If these procedures are not structured and timed in the proper manner, the UK government could easily fall foul of the relevant rules and exceptions to the current EU public procurement Directives--including, to name the most relevant ones, the 'public-public' cooperation exception, the 'in-house' provision exception, and the direct award of contracts on the basis of exclusive rights (which abuse determines the ineffectiveness of the contracts). 

It is worth noting that the current proposals for the reform of the EU procurement rules include some potential changes that could contribute to further legal complication, depending on the final calendar for the transposition of the new EU rules.

Moreover, the rules on State aid to services of general economic interest will also be relevant, particularly once the spin-off companies start competing in the market and incumbents or new entrants raise claims that public participation and public contracts allow them to cross-subsidise activities and compete unfairly for public and private business.

Given the multiple competition, public procurement and State aid implications of the new wave of public sector reform in the UK, this sector deserves close monitoring and will provide a myriad of opportunities for legal and economic analysis and research. Moreover, given that this is not the only strategy for public sector reform (since, at local level, aggregation of demand and pure public-public cooperation schemes are being developed), this promises to be an interesting battlefield.