KYRAN FITZGERALD: Procurement model is failing the State

An in-depth analysis says SMEs could gain €6.8bn in extra work and corporate tax revenues could rise €2bn over five years if the State’s tendering process was changed, writes Kyran Fitzgerald

Denis Naughten has come under pressure after the withdrawal last week of Eir from the National Broadband Plan tendering process.

The decision by telecommunications company Eir to withdraw from the National Broadband Plan procurement process has sparked a strong reaction, particularly in those parts of the country that have yet to benefit from high speed broadband services.

Given that many businesses are being held back as a result of delays in the rollout of state-of-the-art telecoms services, such a reaction is understandable.

At a broader level, however, serious questions have been raised about the handling of public tenders in general. The suspicion is many smaller Irish suppliers are losing out, in part because the tender processes put in place by government bodies are excessively bureaucratic and that — as a result — larger suppliers of goods or services are favoured.

Peter Brennan, chairman of Bid Services, a consultancy which advises on tenders, estimated at the end of 2016, that the value of services and goods procured in Ireland over the following five years will amount to at least €85bn.

In a critical review of the system, he highlighted the high transaction costs, including heavy delays faced by those submitting tender proposals, and the relatively high level of leakage of business from these shores.

In 2014, 5,440 tenders were published in Ireland with an average cost per tender of €7,205. This compares with an average cost across the EU per tender competition of €5,500, according to Dr Brennan, citing EU data.

However, as this date does not cover contracts valued at below €25,000, he believes that the real cost to Irish tenderers could be a lot higher.

Delays in completing the tender process are higher here with the average time to conclude a tender at 148 days. This compares with an EU average of 107 days. The proportion of contracts awarded to suppliers based outside the Republic stands at 11% compared to an EU average of 3%.

Given the small size and openness of our economy, some differences should be expected but Dr Brennan believes that the gap is too high.

The State has sought to overhaul the system of public tenders with the aim of achieving value for money.

In 2013, the Government established the Office for Government Procurement. This move came at a time when public resources were particularly scarce and it followed revelations concerning embarrassing cost overruns on large public sector IT contracts.

A target of €500m in savings on public procurement over the following three years was set. However, the new group aims for standardisation of tender documentation and greater efficiency along with the allocation of more business to SMEs. It is clear that, at times, the goals of greater value for money in procurement and the support of smaller suppliers may be contradictory.

Ken Ume, writing recently on computerweekly.com, warned of the knock-on effects of the UK government austerity programme on the procurement of IT services. The trend towards collaboration between public entities has given the buying entity greater negotiating clout but it also requires greater economies of scale from the supplier end.

This means that smaller players face greater risks when they take on public contracts. According to Mr Ume: “Larger providers are better positioned to withstand lean up front periods.”

EU procurement law applies to public works contracts in excess of €5.548m and to supplies contracts above €144,000 to €443,000, depending on the type of contract. Detailed guidelines exist.

Originally, tenders were run either through a one stage open procedure involving multiple bids, and a two stage restricted procedure where bidders are selected on the basis of an assessment of their ability to meet purchaser requirements.

In 2004, the EU introduced a third system known as the “competitive dialogue” which applies in the case of particularly complex contracts — such as the contract for the rollout of the national broadband service in Ireland. Under this system, intensive negotiations are carried out with interested parties and the number of would-be suppliers in the process are gradually whittled down.

Open tenders account for almost three quarters of all tender announcements. They allow for the maximum number of competitors and are best suited to straightforward tenders. When many are pitching, the purchaser is more likely to get a good price. However, such tenders can be time consuming and wasteful.

Dr Brennan contends that while there is a need for greater efficiency, more should be done to assist smaller firms. He believes that while mid-sized firms, employing 50 or more people, described in tender documents as ‘SMEs’, have been doing well under the new Irish tender arrangements, small firms have been missing out. He has proposed that the Office of Government Procurement be set up as a statutory agency, thereby securing an enhanced supervisory role.

In an effort to reduce the bureaucracy associated with tenders, he suggests that the thresholds applying to public tenders here be raised to levels applied by the EU. Firms with a turnover below €10m or workforce below 50 should be allowed to use the eTender process. He also calls for process improvements aimed at assisting small firms including a re-usable self declaration form in electronic format.

To avoid Carillion-style situations, tenders deemed to be priced as abnormally low should be investigated. The key idea is that if leakage of such business overseas can be reduced and more work handed out to small, innovative firms, enterprise at local level can be boosted with a favourable end result for the exchequer.

Dr Brennan maintains a reduction in the leakage of tender work offshore to EU levels would result in €6.8bn in extra work for indigenous firms and a rise in corporate tax revenues of €2bn over a five year period. While such a goal is rather ambitious, there are clearly real opportunities on offer if the mindset of public sector purchasers can be altered.

This will require a re-evaluation of goals at the heart of government. Speaking last week, Dr Brennan confirmed that he had contacted the Department of Public Expenditure and Reform over his proposals but has yet to receive a response. However, he accepts that there has been real progress towards securing value for money in public procurement.

Almost 150 framework agreements have been put in place. For example, there are now local authority panels of lawyers and other professionals. This has resulted in considerable savings.

Nor does Dr Brennan join the chorus of criticism over the handling of the National Broadband Plan tender process, arguing that the gradual withdrawal of tendering firms should be viewed as a normal part of what is a sophisticated process.

He accepts the line put forward by the Communications Minister Denis Naughten — derided by some on the Opposition benches as “Comical Ali” after his remarks — that the withdrawal of Eir, from the process “will, if anything, accelerate the rollout.”

But, at a time when the economy could be cruising for a Brexit bruising, the task of cultivating strong relationships between Irish-owned firms and public sector purchasers of goods and services is one that must not be shirked if economic activity in the regions is not to be held back unnecessarily.

An in-depth analysis says SMEs could gain €6.8bn in extra work and corporate tax revenues could rise €2bn over five years if the State’s tendering process was changed, writes Kyran Fitzgerald



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