The procurement function is now more strategic, more collaborative, more technology-driven, and these transformational trends are ongoing. With some €90 billion in works, supplies and services to be procured in Ireland over the next five years, it is timely therefore to assess whether procurement policy in Ireland is delivering value for money.
By Dr Peter Brennan, Managing Director, EPS Consulting
The value of services, supplies and works that will be procured in Ireland over the next five years will be at least €85 billion. The market is highly competitive. As a consequence the Government should easily meet the cost saving target of €500m that has been set. However, procurement and tendering transaction costs are far too high and this suggests something should be done to reduce the potential cost of €1.6 billion falling on public sector buyers and suppliers over the next five years. This is a particular problem for low value contracts where a significant amount of tendering takes place. Another significant issue is the high level of procurement contracts that are awarded to companies based outside the State and the consequent loss in Exchequer taxation and reduced job creation opportunities. The regulatory dilemma is to how to balance the positive features of procurement, while responding to the need for better efficiency and flexibility and, in particular, providing indigenous small business with greater opportunities to win contacts below the EU value thresholds.
The Procurement Market
The contract value of public procurement in Europe is quite significant, with some €1.9 trillion in works, goods and services (excluding utilities and defence) tendered annually; or some 18.3% of EU GDP. Ireland’s share of the total EU procurement market is just 0.9%.
Based on notices published on Tenders Electronic Daily (TED), the EU procurement portal, the average distribution of contracts awarded across the EU by value is 25% for goods; 35% services; and 40% works. The corresponding figures for Ireland are quite different, as follows: 30%; 61% and 9%.
There is a dearth of data about procurement activity in Ireland. For example, there are no up-to-date published statistics about: the number of suppliers registered on eTenders by jurisdiction; the total value of supplies, services and works procured by all contracting authorities in Ireland on an annual basis; the volume and value of below EU threshold contracts and the size categories of companies that have won these low value contacts; similar statistics for above EU threshold contracts; the volume and value of all contracts won by companies outside the jurisdiction and the size category of the bidders; the numbers of tenders published by category and contracting authority, including tenders for contracts below €25,000; the number of bids submitted for all tender competitions based on the procurement procedures used; and, the number of mini-competition held under framework agreements and the value of the contracts awarded.
Having regard to the Book of Estimates and the (revised) Public Capital Programme 2017-2021 that allocated higher expenditure to capital works (€7.6 billion in 2017); the value of supplies and services procured by commercial semi-State companies (some €3 billion); and voted works to be procured annually, the total value of expenditure to be procured will rise to at least €18 billion per annum; or €90 billion over five years. Including utilities and defence contracts, with 1,279 notices published on TED, only 23% of what is currently procured represents expenditure on contracts above the EU thresholds. Therefore, national rules and policy should be driving the procurement market in Ireland.
Trends and Developments
There are a number of important trends relevant to tendering in Ireland.
Bid Management Services carried out a survey of its clients in June 2016; there were 133 responses, with 83% of respondents classified as small businesses. A summary of the key findings are as follows:
- Suppliers bid on a regular basis to both public and private buyers. Only 27% of suppliers are predominantly public sector focused.
- The public sector tendering success rate is less than 25% for almost 87% of suppliers.
- Less than 30% of suppliers have bid in a collaborative manner.
- There is a very high interest in professional training.
- 73% of suppliers do not understand the role of the OGP.
- 74% do not believe the OGP has improved the tendering system for their sector.
- Only 37% believe the OGP’s communications are clear and transparent.
- 62% feel the OGP’s guidance is not clear.
- The biggest obstacle to tendering is the resistance by buyers to providing a de-briefing (74%) followed by badly defined technical specifications (73%).
- 87% never heard about the guidance on green public procurement.
- 79% were not aware the new EU Procurement Directives came into effect in April 2016.
It is clear there is a major communications deficit between buyers and suppliers.
Aggregation techniques, i.e. centralised procurement using framework agreements, are used to improve cost savings by leveraging market power and economies of scale and efficiency of procurement by way of process improvements. At EU level nearly one in four tender competitions by value are awarded by way of a framework agreement and this reflects the fact that centralised procuring dominates the market in most Member States. In countries such as Denmark and Sweden which have well-established centralised purchasing bodies, the share of framework agreements is above 80%. In Ireland, frameworks are rarely used in works contracts (4% of all contracts) but are more frequently used for services (9%) and supplies (47%). Across the EU, competition is much fiercer when frameworks are procured with a third of buyers confirming that competition among shortlisted suppliers is higher. In Ireland (2016) some 24% of all tenders were procured using framework agreements: there are over 100 frameworks in place.
Procurement outcomes can be measured on the basis of the level of competitiveness achieved (number of bids and participation from cross-border bidders); the costs incurred by buyers and suppliers (in terms of human resource inputs); and, the perception of transparency.
Number of Bids
The number of bids submitted for each tender competition is a proxy of competition within the market place. The number of tenders published across the EU has more than doubled in the past eight years, while the average size of contract has fallen to some €330,000. European Commission data suggests there are far more bids per tender competition in Ireland than in all but two other Member States. In countries such as Ireland with a higher GDP per capita and in larger countries the typical procurement process receives more bids. In Ireland, an average of 17.6 bids are received for framework tenders; the EU average is 11.4. In Ireland, the average number of bids per competition is 6.7; the fourth highest in the EU. This is a clear indicator of the degree of competition within the Irish market place.
The Cost of Bidding
The cost of running a restricted procedure is some 30% more expensive than the open procedure. Running framework agreements is the most cost effective option for both buyers and suppliers by a factor of about 20%. Works contracts are the most costly to procure as on average 58 person-days are involved per tender competition, of which 29 days are supplier days. In contrast, the labour intensity for services contracts is 38 days (16 by suppliers) and only 34 for supplies (14 by suppliers). It takes Irish buyers an average of 22 person-days to run a tender competition using the open procedure. The figure rises to 32 person-days for setting up framework agreement.
At EU level, the cost of procurement is estimated at about 1.4% of purchasing volume with tenderers’ cost representing 75% of that amount. In 2014, some 5,440 tenders were published in Ireland. Using Commission data, the average cost to the public sector to run a tender competition is €5,500. As Irish costs are 31% higher than the EU average this translates to a figure of €7,205. This implies an annual cost of procurement to the Exchequer of €39.2m, or €196m over five years. As this figure excludes low value contracts (i.e. those below €25,000) that are not published, and the cost of the OGP (€20m in 2017), the public sector’s transaction cost of procurement is potentially much higher.
It has been estimated that 83% of suppliers spend between €5,000 to €10,000 on tender submissions. Assuming an average of €7,500 per tender competition and with some 5,440 tenders published annually attracting an average of 6.7 bids per tender, this translates to an annual cost of €273m or €1.37 billion over five years. On the basis that Irish tenders to a value of €90 billion will be published over the next five years this implies that some €1.7 billion will be spent by buyers and suppliers. However, this methodology may, in fact, underestimate the procurement transaction costs in Ireland given the greater number of bids submitted per tender competition. On the other hand, with so many framework agreements in place transaction costs should fall.
These figures raise serious question about the cost efficiency of some procurement practices.
At EU level, micro-businesses win 20% of contracts procured using the open procedure; the corresponding figure for SMEs is 34%. The win rates are 19% and 29% respectively when the restricted procedure is used. This suggests that buyers who use procedures other than the open and restricted procedures are unlikely to award the contract to a small business. The value of a public contract has the greatest influence on the extent to which SMEs win above-threshold contracts.
Therefore the higher the contract value the less likely it is for a SME’s chances of winning. Similarly, once the value of a contract exceeds €100,000 the less likely it is for a small business to win. Hence, the breaking down of contracts into lots improves the prospects of small businesses getting greater access. However, a closer inspection of the data reveals that large companies still dominate contract awards in certain categories. Irish SMEs win 25% of all contracts above the EU threshold and 53% of those below the threshold; close to the EU average success rate.
The European Commission has found that Ireland’s increasing use of framework agreements is not SME-friendly given the contract values being procured. The OGP is not able to indicate the win rate of small businesses as this statistic is not captured.
Contracts Awarded to Companies in Other Member States
Cross-border procurement takes place when a public contract in a Member States is partly or fully performed by a supplier from abroad. The ‘leakage’ of procurement spend is a controversial area. The Commission’s analysis in 2011 concluded that the average direct leakage rate by volume at EU level in terms of contract awards was 3.4%. The corresponding figure in Ireland at the time was 22.8%. Larger countries tend to have fewer cross-border wins and the centralisation of procurement also contributes positively to the incidence of cross-border wins.
In addition, works contracts and business services contracts attract the most cross-border interest. Another interesting fact is that utilities are more likely to award contracts to bidders from other jurisdictions by a factor of nearly 50%. Another study (that looked above EU threshold contracts only) assessed the average EU level of leakage at 3.5% by value; Ireland’s rate was 8.8%. This research found that lack of experience with doing business abroad; language barriers and strong competition from local suppliers were the main obstacles to cross-border bidding. At EU level, foreign company participation in public procurement is more prevalent in smaller Member States with open economies that typically have a smaller industrial base and fewer specialised service providers. In Ireland’s case, there is a higher than EU average of import penetration and this, in part, is reflected in the procurement leakage statistics.
The latest (April 2016) estimate of procurement leakage in Ireland is 11% of total contract value. Over the next five years, one might therefore expect contracts to a value of €9.9 billion to go to companies registered outside the jurisdiction. Given we are an open economy it is unrealistic to expect there will be no leakage. However, if Ireland put policies and processes in place to deliver a procurement leakage target at the EU average (3.1% by value) then this would increase the value of contracts won by indigenous Irish companies by some €6.8 billion. Assuming 30% of this expenditure returns to the Exchequer, taxation would rise by €2 billion over five years and some 4,000 long term sustainable jobs might be created.
Proposals for Improvement
With the caveat that the current arrangements for procurement in Ireland have been assessed at EU level as being in line with best practice, the following proposals for improvement are submitted.
The OGP should be set up as a statutory agency, as in the absence of such legislation the OGP has a persuasive influence only. It should submit an annual report to the Oireachtas and have legally enforceable powers as a regulator to set procurement policy and operational guidelines for all contracting authorities, including commercial semi-State companies. The OGP should accelerate its current reform programme to drive process and operational efficiencies.
Comprehensive guidelines for buyers and suppliers should be published; nearly a year after the 2014 Procurement Directives entered into effect in Ireland no guidance about how best to interpret these complex new rules has been published. All contracting authorities with a projected (non-pay) procurement spend of over €10m on an annual basis should be required to prepare rolling three-year Procurement Plans. A comprehensive efficiency (VfM) review of procurement in Ireland with reference to benchmarks in other comparable jurisdictions should be undertaken by the Department of Public Expenditure and Reform.
Small Business Access
The threshold for publishing tenders on eTenders should be raised from €25,000 to the prevailing EU thresholds and all contracts below these thresholds should be reserved for small businesses (i.e. companies employing less than 50 persons with a turnover less than €10m) that are registered on eTenders in Ireland or for bid consortiums involving small businesses. All multi-party framework agreements should be divided into lots with the value of the lots to be as small as is practical. Routine low risk contracts under €25,000 should not be procured by the use of framework agreements. As a quid pro quo, buyers should not be required to provide de-briefings on low value tenders.
All contracting authorities should be required to use the European Single Procurement Document; a re-usable self-declaration form saved in electronic format on the eTenders website. The open procedure should become the default procurement process used. The Dynamic Purchasing System (DPS) – a low cost procurement process – should be used on a more systematic basis for all routine tenders for supplies and services as this will cut the cost of bidding to suppliers quite dramatically.
The coverage of procurements managed by SupplyGov should be expanded and then extended across the public sector; again with the aim of reducing procurement transaction costs. Tenders priced abnormally low (as defined by OGP guidelines) should be investigated as part of the evaluation process and deemed non-complaint as appropriate. As the Tender Advisory Service is of limited use to suppliers given its mandate, the OGP should provide a HelpDesk service – with a broader remit – to small businesses during business hours. OGP should also set up an independent Mediation Service to allow unsuccessful tenderers appeal contract award decisions without having to go to the High Court in the first instance.
The OGP should develop and implement a procurement sourcing strategy across Government that would reduce the current (high) level of procurement leakage to the EU average i.e. from 11% to 3%.
In consultation with construction professionals and the construction industry the current suite of guidance under the Construction Works Management Framework should be simplified, put online, and made more ‘fit for purpose’, especially for contracts below the EU value thresholds for works (€5,225,000).
There are significant issues with the availability of data in relation to procurement activity across Government that should be addressed by the OGP. Procurement is a critical part of the public sector reform programme yet one could be forgiven for thinking – based on its current poor overall profile – it is not a priority issue.
While the OGP has made great strides in recent years, it is timely for a series of improvements to be made in terms of policy and process to reduce procurement transaction costs, to prevent contracts going outside the State, and to secure a much greater share of the procurement market for indigenous small businesses.
Dr. Peter Brennan
This article is based on a paper presented to the Public Policy Advisors’ Network annual conference in November 2016