Research Trends and Conclusions: Public Procurement 2010
Jessica Harvey -
When we think of contracting parties in the acquisition of goods and services, our thoughts turn to the private sector, to the doctrines of freedom and privity of contract. The government is not traditionally the consumer that springs to mind.
And yet in the UK the public sector spends over £220 billion a year on goods and services; the US federal government spends around $530 billion. In contrast, private investors looking for project funding have met increasing reluctance from the risk-averse commercial banks to provide the finance needed for project development, in favourable terms at least. With the prospect of long-term projects and the financial security of government funding, public contracts are becoming increasingly sought after. Coupled with legislative change and a myriad of regulation, public procurement is experiencing a growth in both size and scope. In an increasingly populated field of old and new competitors, this mounting awareness brings its own challenges to the international legal community. We examine the effect that this increased volume of work is having on public procurement lawyers and the changes that are shaping the industry.
Contests and Contesting
As the interest in public contracts intensifies there follows an increase in private parties competing for bids and challenging contracts that have been awarded. In the UK, the implementation of the EU Remedies Directive on 20 December 2009 has added fuel to the fire and brought an increase in litigation. Heightening both the incentive and opportunity to challenge an award, the shift that the remedies directive brings is a significant one. With the standstill provision offering a window in which an unsuccessful bidder can challenge an award, the threshold to meet is far from insurmountable. Although applicants to obtain an interim order suspending the implementation of the contract would still have to satisfy that there is a prima facie serious issue to be tried, when addressing the balance of convenience, it has been recently held that there may be circumstances in which it is not necessary to demonstrate that damages would be an inadequate remedy (Partenaire Ltd v Department of Finance and Personnel). Once the order has been granted, the aggrieved party need only serve the claim form on the awarding authority to bring a halt to proceedings. This is seen by many in the industry as shifting the balance of power to the advantage of the unsuccessful bidder. The contentious fall-out runs deep. In addition to raising litigation levels and awareness of the potential to challenge, there also follows an increasing nervousness on the part of contractors to whom the contract was awarded, and understandably so. With the remedies directive providing courts with the authority in prescribed circumstances to order the cancellation of a contract, the position of the successful bidder also comes under heavy scrutiny. This can create particular problems for large conglomerates when considering potential conflicts of interest arising from the operations of affiliated companies. Further interest in a new directive governing defence and security procurement is likely to bring further change to the industry both in the UK and on a European scale. Indeed, as Douglas Jones at Clayton Utz describes in the Australian context, “A major area of interest is in the Defence space for the commonwealth.” The Defence Directive will impact upon public sector buyers as well as contractors, suppliers and service providers seeking to supply both defence-related and security-related goods and services within the EU. As such, lawyers are increasingly required to analyse a host of potential avenues through which competing parties might bring a challenge.
With this widespread and continuing interest, however, lies the practical bind of the lack of availability of judicial resources. In the UK, without the aid of a procurement tribunal like other European member states, cases are added to the call lists in the already burdened High Court. With only a finite number of judges available compared with an ever expanding case load, lawyers and their clients face the prospect of even the most straightforward of matters taking several months to resolve. This can only add to the concerns of awarding authorities and successful bidders who face mounting litigation costs and project delays. Judicial obstacles in relation to public procurement are widespread. In Canada, developments in the common law have provided suppliers with strong contractual remedies but there remains much ambiguity as the courts implement a significant body of new decisions.
A Game of Two Halves
While public procurement activity has undoubtedly seen an increase as a result of the economic crisis, there follows a symbiotic tension between government’s need to spend money to stimulate the economy and its need to save money with spending cuts. Whereas, as many of the leading lawyers we spoke to identified, there has been greater government involvement in projects that would have previously been handled by the private sector. With a limited pool of resources, this cannot last and the tide has already started to turn. In Australia, an economy that has fared relatively well through the downturn, lawyers describe how the financial crisis has constrained government procurement activity. The cancellation of the criticised Sydney CBD metro project by the New South Wales government has had, as Doug Jones at Clayton Utz describes “a significant impact on public procurement markets, leaving only rail and road projects in Victoria, Western Australia and Queensland” creating pent-up demand for the future in public transport infrastructure in NSW. In Greek Cyprus, the IMF has urged bold action by the island to cut public spending. This fiscal conservationism can be seen in Germany, Spain and Ireland. In the UK, the change of government and the advent of the Efficiency and Reform Group to cut public spending by £6.2 billion is driving a heavy axe through public spending. The outlined blueprint by the Cabinet Office sees former key growth sectors such as construction, information and communications technology, professional services (including consultants and accountants), and facilities management facing the cull. The Ministry of Justice has also been urged by government watchdogs to cut its shopping list. Projects already in progress are also subject to the Treasury tightening its belt with value for money a primary driver of the procurement process and cash at an all-time premium. As the government looks to save £1.7 billion from stopping, delaying or negotiating cost reductions from suppliers, lawyers are being required to navigate increasingly thorny issues. In May, a damning report by the National Audit Office and the Audit Commission encouraged public sector bodies to pool their buying power. For lawyers, in addition to a continued interest in contesting bids outlined above, there follows the additional prospect of having to coordinate bigger projects in conjunction with competitors at other firms in the regions. With government agencies looking towards pricing consistency, legal billing is also likely to come under increasing scrutiny with lawyers too having to prove their value for money.
For many, the secret will lie in being able to offer to clients an “internationally seamless practice”. But the demands of the public sector are different from those of the private sector. In the EU, with competition major consideration in virtually all procurements, a strong regulatory practice is at the heart of a successful procurement team. Public procurement lawyers also need to be able to call on their own hybrid skills-set, particularly in the field of infrastructure development where the lines have become blurred, as one prominent sources describes: “It is essential to have a good feel for construction and how it works, coupled with an understanding of how lenders think and a strong grasp for finance. Construction clients have had to become familiar with the world of the financier, just as lenders have had to become familiar with construction.” The result is that lawyers will need to have a strong expertise in a range of sectors in order to appeal to an increasingly sophisticated client base.
The strings attached to government money create a further challenge for contractors and their legal advisers. In the US, the obligation to disclose to the government whenever there is “credible evidence” of a violation of the law places a heavy legal and administrative burden on contractors. Lawyers are increasingly helping clients to put together systems and protocols for gathering the information creating, as John Chierichella at Sheppard Mullin Richter & Hampton LLP describes, “a new dimension of corporate governance”. With the Obama administration maintaining its focus on accountability, this scrutiny on contractors is set to continue, owing to the Department of Energy’s tax credits and stimulus programme (the American Recovery and Reinvestment Act 2009) which is generating particular interest in the finance of clean technologies projects.
Facing Forward
As governments strive for efficient purchasing and the demands on in-house counsel increase, innovative contracting in major industries such as construction and ICT is likely to bring an evolution to an industry considered an increasingly important policy domain. Loyens & Loeff NV’s Gert-Wim van de Meent notes the substantial growth that has been and continues to be seen in the Netherlands: “Public procurement is a continually expanding field of law. About ten years ago, the number of legal specialists, including in-house counsel, was fairly limited. This has changed significantly over the years. Smaller and mid-sized law firms are seizing opportunities to become active in the market.” His sentiments are echoed throughout the legal community. In South Africa, lawyers describe how previous government reluctance towards privatisation that is turning with public-private partnerships becoming an increasing trend. In Brazil it is estimated that over 300 billion reais will be spent in the next six years on energy, transportation, telecommunication, sport infrastructure and real estate projects, bringing significant opportunity for lawyers in the region. In the Middle East, the public-private partnership model is becoming an increasing feature with power and university projects in Abu Dhabi set to bring more work. Similar activity can be seen in India where lawyers in the region describe an increasing interest in infrastructure projects from private equity funds.
With a continuing drive towards accountability and transparency, there follows a further emerging trend – law firms are being increasingly instructed as a means of political protection against any future criticism of a contract award. Governments are then able to argue that a law firm of repute undertook the work. This cautious approach is pervasive and directly linked to the continuing rise in litigation. As one prominent source reflects “The compliance culture is more nervous. There is a greater air that litigation will result if things go wrong.” Governments are required to demonstrate an increasing clarity in their processes, creating a frontloading of information and adding to the administrative burden. The need for public procurement expertise is set to continue; and legal advisers can expect a very busy time sheet as a result.