How far can SME friendly policies go in public procurement?

I co-authored a blogpost with Albert published on Almacen de Derecho about a proposed policy by Ciudadanos to support innovative SMEs in Spain. Here's an excerpt:

Ciudadanos, one of Spain’s recently emerged nation-wide political parties, recently submitted a non-legislative proposal to the Spanish Parliament with the aim of reserving 3% of public contracts tendered in Spain to Small and Medium Enterprises (SMEs) that are ‘legally certified’ as innovative. The aim of their proposal is to develop and apply research & development and innovation (R&D&I) projects for the provision of public services. Ciudadanos is also proposing for the innovation of solutions to be evaluated in all public tenders, that contracting authorities differentiate the award of contracts concerning ‘high technological value’ solutions, and that contracting authorities retain the possibility of mandating the subcontracting of specific parts of the tendered contracts to ‘innovative SMEs’.

Many thanks to Jesus Alfaro for the kind invitation/prodding to write the post. Here's the Spanish version if you're so inclined.


Links I Liked [Public Procurement]

1. The first season of the Public Procurement Podcast is almost over and interview #19 with Stephan Litschig is now up. The final interview will go live later this week.

2. A good post mortem of the Coalition's Government "SME friendly" public procurement policy. Interesting analysis from Stephen Allot who was the Crown Representative for SMEs. Full of praise for G-Cloud and another example how moving procurement online actual makes life easier for SMEs (as I have argued for many years). On G-Cloud SMEs win 50% of the business (!).

3. 18F Launches Acquisition Innovation Pilot. Looks like (yet another) great idea by 18F and another example how procurement can be done differently in this day and age. Looks like a refined version of what I piloted back in 2011-13 with Welsh local authorities.

4. Tech trends and the future of local waste services. Plenty of scope to use data to improve wast management and thus, procurement.

5. White House Seeks Feedback on GitHub for Government-Wide Open Source Software Policy.

Links I Liked [Public Procurement]

1. Why don't Open Government Commitments get implemented? Some good points in there and relevant for public contract disclosure.

2. Pushing for open government in Africa. Open government is not a end all solution for corruption but raising the likelihood of corruption discovery certainly helps.

3. Open Data Portals are only the beginning, not the end. Good post from someone on the inside arguing the need to move forward, instead of keeping stuck on a 2008 mental framework.

4. New Horizon 2020 tender to help small companies access markets. The irony the Commission is using the SME-unfriendly competitive dialogue for this does not evade me...

5. Parla local council will include social clauses on its public contracts (Spanish only). Well, good luck with that.

Links I Liked [Public Procurement]

1. One more PPP episode is out. This time with Marta Andrecka from Aarhus University where we talk at length about framework agreements and how they are being used in the UK and Denmark. This is episode 8 of 20 and as usual, many thanks to the British Academy Rising Star Engagement Award for making it possible. By the way, the 2016 call is now open.

2. Albert fired a broadside against my arguments in favour of public contract registries. He remains unconvinced by my arguments and has provide further food for thought. I need a few days to prepare my re-rebuttal, but my argument of price arbitrage does not refer to a single price only for each good/service being acquired (which is impossible to achieve in public procurement) but to a reduction in the current arbitrage levels enabled by the lack of price transparency. In other words, whereas achieving the single price is impossible, extracting more efficiency by reducing arbitrage does not look to me as farfetched.

3. Navarra regional Government has a plan (in Spanish). To help SMEs that is. You will see nothing but good words on my part about standardisation of procedures as long as they are done by the minimum common denominator (i.e., basic) instead of full of complexity as it appears to be the traditional approach. On the negative side, Navarra claims that environmental and social policies will help SMEs and my money is on the opposite: the more complexity that is introduced into a system the more difficult life is for smaller companies.

4. Why Can't Startup Companies Get US Government Contracts? Another of my pet peeves. Great to see an outlet like VICE covering procurement. Directly connected with one my next research projects.

5. How the car industry hid its software behind the DMCA. Not directly about procurement, but ever more relevant and cautionary as more and more software permeates goods and services bought by public bodies. I partially regret having pushed so hard against IP staying in the public sector hands in the run up to Directive 2014/24/EU. Blogpost on this should follow on the next couple of days. More here.

Public Contracts Regulations 2015 - Regulation 68

Regulation 68 - Life-cycle costing

Regulation 68 brings the possibility of contracting authorities using life-cycle costing in their procurement exercises to determine the best bid. By life-cycle costing it is meant the incorporation of costs into the awarding models that are usually not included in the assessment. In other words, it means basically internalising costs that are usually externalised by not being taken into equation. As it stands it appears to be devilish difficult to use properly in practice. Albert's excellent tirade (which I mostly agree with) is here.

The logic of life-cycle costing is to take into account all the costs related to the product that is being procured irrespective of that cost being borne by the contracting authority or a third party. As such, contracting authorities using life-cycle costing should, on the one hand assess the direct costs related to the acquisition, use and maintenance and disposal and on the other hand, assess the indirect costs as well with the externalities said product generates, provided their monetary value can be assessed (paragraphs 1(a)(b) and 2).

The rest of the Regulation is devoted to introduce checks and balances on how life cycle costing can be used on a non-discriminatory way, with the mandatory requirement of EU calculation methods/standards to be followed (paragraph 5), the need to inform economic operators at the start of the procedure that life cycle costing is being used and how it is being used (paragraph 4) and specific requirements that this methodology needs to follow (paragraph 3). All these seem sensible, at least until we try to apply it in practice.

I remember having a discussion with Abby Semple about life cycle costing in general a couple of years ago and although she is not (as far as I can tell) a huge fan of how life cycle costing ended up in Directive 2014/24/EU and now on the Regulations, my take was even less positive. I am all for including into the measurement exercise of what constitutes the best bid all that can be included and is reasonably standardised across different bidders. It effectively means that as long as we can boil it down to some sort of index/unit measurement structure I am fine with it. Price? Check. Quality? Check (if done well...). Fuel consumption? Check. Recycling/disposing costs? Check. Pollution? It depends...

As Albert mentioned, problems arise when we incorporate externalities that are not necessarily connected with the contract being performed as these become vaguer and vaguer and more and more difficult to measure. Let's talk about production for example. Should include only the energy spent in producing the actual good being procured? Or should we include the externalities of the machines that produced the good (and for the sake of argument) were produced in China using coal? After all these are environmental externalities that can theoretically be relevant for what is being procured. Where do we draw the line on life cycle costing? And what about we apply the same logic of life cycle costing to justify social considerations in public procurement?

My agenda in procurement has always been to make it simpler and simple as possible. Each new variable increases complexity exponentially (why was lowest price so common for so long? It was easy to use and benchmark...) Between adding options that bring complexity or not bringing those options in to reduce complexity, I tend to prefer the latter. For me that is precisely the problem with life cycle costing: it brings a lot of complexity to the process and this complexity will affect contracting authorities when i) drafting the procurement documents and ii) when trying to assess bids. For suppliers this means added complexity because they will have to know more about their products/processes and make that information available to the contracting authority.

Furthermore, I cannot really square the circle between the added complexity of life cycle costing and making procurement easier. And the more difficult procurement is, the more likely SMEs will either not take part or be unsuccessful. So between (widespread) life cycle costing  and SME participation, pick one.

At this moment in time, life cycle costing adds entropy into the system and makes life more difficult for stakeholders taking part in procurement (apart from expert consultants that is). Feel free to prove me wrong.


Links I Liked [Public Procurement]

1. More data about England's Mystery Shopper Service. I still think it should morph into a proper Procurement Ombudsman a la Canadian.

2. NESTA's 6 ideas how procurement stifles innovation. Sound about right but for me reasons 4 (incentives) and 6 (skills) are the most important. Regulation is just a red herring hiding bad practice, lack of incentives and skills. There are barely any truly national procurement regulations in the UK and for the ones following this blog the Public Contracts Regulations 2015 simply copies and paste Directive 2014/24/EU for the most of it.

3. Central Government is piloting ex post (contract award) transparency. I am huge fan of contract award transparency and the more the better. Albert will caveat this with the argument it facilitates collusion (and it does, in the right markets) but I still think we will be better off in the long run. Plus, as Gianluigi Albano argued last week during Procurement Week: all that a cartel needs to know its agreement was not enforced is looking at the names in the machinery being used in a public works.

4. Scotland allegedly owes SMEs £120M. That is a lot of lolly as my former flatmate would say

5. American Universities should look into improving their procurement practice. I would say that this is sound advice also on this side of the pond.

6. Spendmatters excellent coverage about Procurement Week. Peter Smith has been blogging about what he learned and thought about Procurement Week. After trying to get him to come since 2012 it was great to finally have him there.

Links I liked [Public Procurement]

Apologies for the momentary lapse in the running Public Contracts Regulations running commentary as I have been battling a stomach bug and spent 12 hours travelling today. Normal service resumes tomorrow. In the meanwhile enjoy the following procurement links:

- Crown Commercial Service Backs Down on Consulting Price Cuts

- Flawed framework: How bad can a framework be for SMES?

- G-Cloud founder voices procurement worries

- Short on machine guns, German army armed turrets with broomsticks

- Why public and private contracts are different: I have been making similar points for a few years.

- Some light comic relief, courtesy of #HumanitarianStarWars: