Roundtable: Public Procurement 2011
The International Who's Who of Public Procurement Lawyers has brought together three of the leading practitioners in world to discuss key issues facing lawyers today.
Participants
Mark Colley
Arnold & Porter LLP
Washington, DC, USA
Clayton Utz
Australia
Pinheiro Neto Advogados
Brazil
FIRM PRACTICE
Who’s Who Legal: To what extent is public procurement an independent practice within your firm? How has the importance of public procurement expertise changed since the global financial crisis?
Mark Colley: We have a robust independent practice group specifically devoted to public procurement matters, which includes litigation related to government contracting (claims, protests and other disputes), investigations and enforcement proceedings, compliance counselling, cost and pricing issues (TINA, CAS, etc), intellectual property and data rights protection, and M&A issues unique to government contractors. This also includes subspecialties in several closely related areas such as national security, export control, political law and matters arising under the False Claims Act and the Foreign Corrupt Practices Act. We also intersect with numerous other practices that regularly confront government contractors, including IP, corporate, white-collar and healthcare, so that many of our firm’s lawyers who handle such work for commercial firms also spend a lot of time devoted to the government contracting businesses. This practice has grown in importance in recent years, even as some other business segments have struggled. While it may sometimes not be commonly thought of as a “high-flying” business area (given the competitive pressure on margins and the regulatory complexities), the government remains the single largest purchaser of most goods and services, and the demand for business support is thus generally steady. In addition, stubstantial government expenditures for economic stimulus has benefitted many of our clients in the form of new contracts or grant opportunities.
Douglas Jones: We have a national public procurement practice focused on state, federal and local government procurement. Acting for both government and the private sector, our public procurement team is located in Australian state capitals, Canberra and Hong Kong. Our work is both transactional and contentious, and covers infrastructure development, transport, defence contracting, technology acquisition and outsourcing, environmental approval and planning, and probity, and has deep expertise in government legal issues, both constitutional and process related. Our group has played key roles in most significant publicly and privately funded infrastructure projects in Australia, as well as in significant technology acquisitions and outsourcing by states and the Commonwealth.
Our public procurement practice group has grown strongly during the global financial crisis (GFC), supported by government stimulus spending, although the emphasis has changed, with more government-funded procurements than those utilising private finance, and issues with existing publicly funded projects that became stressed due to GFC-related issues. As governments moved to cope with GFC-related issues, our public procurement skills became a key factor in us winning both government and private sector work.
Our public procurement expertise has been key to the growth of our Hong Kong office, particularly given the large investments presently being made in infrastructure by both the Hong Kong and mainland Chinese governments.
Ricardo Levy: We have a team of lawyers exclusively devoted to cases involving public procurement, government contracts and other regulatory and public law matters. We act on behalf of foreign and Brazilian companies during pre-tender stage, during procurement proceedings and at the contractual stage, both in advisory capacity and in litigation. We also advise clients on cases where procurement proceedings can be waived, and defend contractors in court cases where such waivers have been challenged by the Public Prosecutors’ Office or other entities. Teaming up with other specialist groups within our firm, we assist in the formation of consortia or of SPEs engaging in complex projects for supply, services, works, public–private partnerships (PPPs) or concession of public services. We work with colleagues from our corporate law area in assisting clients forming joint ventures with public-sector companies, in M&A cases involving private concessionaires for public utility services and other contractors, as well as in project finance, securitisation of receivables under government contracts, privatisation proceedings, etc. We also assist clients concerned about possible Foreign Corrupt Practices Act (FCPA) implications related to government contracting in Brazil.
Since the global crisis, our workload relating to public procurement has increased steadily. The Brazilian government’s initial reaction to the crisis was to increase public expenditure, seeking to minimise the economic slowdown. Following Brazil’s swift transition from crisis to economic boom, government projects have been increasingly abundant.
INVESTMENT FOR THE FUTURE
Who’s Who Legal: What policies have the government in your jurisdiction taken to boost the industry? What do lawyers expect to be the next big area of procurement?
Mark Colley: At the federal level, US policies that have been a boost to the public procurement industry have largely been in the form of increased expenditures, both for the purposes of economic stimulus and for military or defence contracting. In addition, ever since 9/11, expenditures on various national secuity and border protection measures have also created many new and expanded business opportunities. Although budgetary pressures will undoubtedly reduce some government outlays in coming years, many areas (security, health care) will inevitably remain strong. At the state level, policies increasing reliance on private-sector support for public infrastructure development – in the form of public–private partnerships for things like roads and public facilities – is continuing to expand as a potential way of serving public needs in the face of increasing budgetary pressures.
Douglas Jones: There has been a concerted effort with stimulus spending to sustain industry during the recession. This has led to some issues regarding effective project delivery of funds, in respect of which we have been involved from a procurement and public policy perspective for government. These lessons are now being applied to major natural disaster reconstruction work arising from flood and storm devastation early in 2011.
With changes in government in Victoria and NSW, it is expected that there will be a move to urgently meet pent-up transport project demands with a need to devise new models for the injection of private-sector funds into public infrastructure development. New models for PPP delivery will be a significant public policy and industry issue. Massive road and rail projects are expected to challenge lawyers and industry.
Concerns with deficit reduction will play a key role in federal procurement policies designed to reap increases in efficiency from those contracting with government, particularly in the defence contracting space.
Ricardo Levy: Although having experienced robust economic development over the past few years, Brazil still needs to develop important infrastructure segments. The announcement of Brazil as host to both the 2014 FIFA World Cup and the 2016 Olympic Games has only contributed to a general realisation by Brazilians of the urgency of developing its infrastructure, but this would have been the case had those two events been taking place elsewhere. Most of the next big areas of procurement relate to basic infrastructure: roads, rail, ports, water and sewage. The first concession for a large Brazilian airport expansion and operation is currently being tendered, and the bid documents for other major airport concessions are expected to be published in 2012. Other next big areas of procurement include defence (which expenditures are growing, but still remain relatively small compared to the country’s GDP) and the supply of goods and services to Petrobras, the Brazilian oil company, which is the single most important contracting authority in the country.
DEALS
Who’s Who Legal: In a post-recession climate, how have the volume of deals changed? Do you expect to see more consortia and private equity houses funding large projects?
Mark Colley: During the past year or so, the volume of deals in the government contracting business area has been increasing. Private equity investors seem to recognise that government contractors are in a business area where demand is steady and the customer can be more reliable than in some other segments. They are making more strategic moves, and we have seen a number of investment groups moving to acquire and consolidate multiple smaller firms with complementary capabilities. In addition, as the US government has become increasingly stringent in guarding against organisational conflicts of interest (OCIs); a number of firms have been divesting business units providing services to the government that might prevent another business unit from competing for even more lucrative product or services contracts in a related area. This is presenting deal opportunities for both investors and companies looking for expansion opportunities.
Douglas Jones: The deal flow is likely to significantly increase in a number of areas including:
• PPPs in the transport, health, education, public housing and prison sectors;
• publicly funded transport related projects; and
• outsourcing of existing government services particularly in the transport and IT areas.
This increase in project flow should provide significant opportunities for the private sector in both financing and service provision. The deployment of superannuation funds to support private-sector investment in these projects is a key issue for Australia.
Given the size of a number of the projects, provision of both services and investment will necessarily involve establishing private-sector consortia to effectively meet governments’ needs.
Ricardo Levy: Deals involving public procurement have grown since the recent recession. Consortia have always played an important role in large complex procurement projects in Brazil. On the other hand, private equity houses are feeling more confident about funding large public projects, as the Brazilian economy in general is increasingly stable, and the Brazilian government, and contracting authorities in particular, are dedicating more and more attention to attracting and to contractually protecting private investment in large public projects.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
Who’s Who Legal: What recent legislative or regulatory developments have there been in your jurisdiction, and what effect are they having/will they have on the public procurement industry? What are the biggest challenges facing the public procurement community in your jurisdiction?
Mark Colley: Several developments are taking place simultaneously in connection with US government procurement that likely will have major impact on companies doing business in this area. First, the US government is presently evaluating its policies regarding OCIs – situations where a contractor provides services for the government that may conflict with that same contractor’s ability to compete for other related government business. This will have increasing influence on contractor decisions about what business opportunities to pursue, as well as how to organise their firms. Second, there is a move at the federal level to reassess the extent to which government agencies have turned various tasks over to contractors that had previously been undertaken only by government employees. Calls to reverse what has been a deliberate effort to “outsource” many government activities to contractors has led to a reconsideration of whether that trend has gone too far, and which activities should be “insourced” because they are inherently governmental (or nearly so). This may restructure some aspects of the business opportunities available to contractors that have been providing such services to the government. Finally, a debate is brewing, particularly in connection with defence contracting, over the extent of intellectual property rights that the government acquires in the non-commercial technology it acquires, particularly in situations where the contractor has contributed critical aspects of the technology that it developed with non-government funds. Even the determination of what funds qualify as “non-government” is in play. How this debate is resolved may affect the way government contractors organise themselves to compete for some government work, and which contracting opportunities they are willing to pursue.
Douglas Jones: There have been legislative developments in most states and the Commonwealth in the “freedom of information” space that has emphasised the requirements for transparency in dealings between the public and private sectors.
The stressed character of a number of PPPs has raised the level of debate regarding the appropriate level of risk to be shared between the public and private sectors in such transactions, particularly relating to traffic risk in toll road projects. This has not, however, slowed PPP deal closure with the Legacy Way toll road in Brisbane being contracted (albeit on a publicly funded basis) and the Royal Adelaide Hospital (at over $2 billion, the largest hospital PPP ever undertaken in Australia) reaching a financial close.
With the continued consolidation of the Australian construction industry (Bovis Lend Lease has purchased the Abigroup and Baulderstone construction businesses from Bilfinger Berger), issues of probity and effective competition will remain a heightened concern for governments who are actively encouraging new entrants into the Australian market.
With massive resource projects underway in Queensland and Western Australia, there is a looming shortage of human resources for the procurement of public infrastructure in the other states. This is likely to lead to the expansion of collaborative contracting models such as alliancing, which has been subject to criticism by state treasuries for failing to deliver as much value for money as other delivery models.
In defence contracting, the key issues going forward are how to limit cost and time overruns, and the sensible preservation for government of IP necessary for competitive maintenance and upgrade of platforms. These will be the subject of much debate in the coming year.
Ricardo Levy: In December 2010, Congress passed the “Buy Brazilian Act”, which provides for a margin of preference in the procurement of goods and services developed, manufactured or rendered in Brazil. This margin of preference, which has to be set on a case-by-case basis, enables Brazilian contracting authorities to pay up to 25 per cent more for goods or services that have been developed, manufactured or rendered in Brazil (regardless of the nationality of the contractor), when competing against imported ones. This law is still subject to further regulation before entering into force; however, many contractors are already considering transferring some of their production or R&D activities to Brazil to maintain their competitive edge.
Another law enacted in 2010 regulates the contracting of advertising services by Brazilian public-sector entities. This is a multi-billion dollar market, which has been historically tarnished by rigged procurement scandals. Congress decided that procurement of advertising services deserved its own set of rules of conduct and procedure, with a view to catering to the specificities of those services and to ensuring greater transparency.
The biggest challenge in Brazilian procurement remains finding the optimum balance between efficiency on the one hand, and formality (and transparency, equality, etc) on the other. Under the current Public Procurement Law of 1993 – and under the previous one of 1986 – the balance has been clearly tilted towards formality. Significant efficiency has been gained by the procurement of off-the-shelf goods and services, with legislative amendments enacted over the past 10 years or so providing for reverse auctions and for electronic procurement (of which Brazil has been a pioneer). However, efficiency in the procurement of works and of complex goods and services remains a challenge.