Currently there are few consequences for companies that subvert public procurement through corruption and fraud. And with government departments often highly dependent on a few large strategic suppliers, there are real risks of moral hazard, where suppliers behave badly because they know the government won’t act. But with the UK reforming its procurement rules post-Brexit, Sue Hawley, Executive Director of Spotlight on Corruption argues that this presents a great opportunity to introduce an effective debarment regime.
Public procurement is widely recognised everywhere in the world as high risk for corruption and fraud. The UK is no exception. The UK loses up to £22.6 billion at central government level to “fraud and error” annually, with procurement fraud the dominant type of fraud detected, and up to £2.7 billion at local government according to recent government estimates.
Losses from procurement fraud are not confined to the public sector. In 2019, analytics company SAS described the UK as a ‘procurement fraud capital’ after finding that 40% of UK businesses had lost between €150-400,000 a year to fraud compared with an average of 16% for the rest of Europe, Middle East and Africa (EMEA). Alarmingly, the same report found that only 29% of UK businesses held regular audits to detect fraud compared with an average of 46% across EMEA.
Why does it matter?
Corruption and fraud in public procurement not only increase costs for government which are ultimately born by the taxpayer, they also undermine confidence in, and pose real reputational risks for government. Unregulated conflicts of interest in procurement likewise increase perceptions of corruption and destroy trust in decision-making around public expenditure.
One of the problems with tackling corruption and fraud in public procurement is the dangerous lack of consequences for those, particularly companies, that engage in it. This problem can be exacerbated where the government departments are highly dependent upon a few large strategic suppliers – a phenomenon that the current UK Prime Minister’s chief advisor has characterised as corporate looting. In this context, these suppliers become too big to fail or to hold to account. This creates real risks of moral hazard, where suppliers behave badly because they know there is nothing the government can do about it.
Having a regime to incentivise and reward ethical behaviour in public contracting, and to penalise those who undermine fair procurement processes, is essential to protect the public purse, create a level playing field and build confidence in the public procurement system. This is where debarment (also known as exclusion) from public procurement comes in.
Debarment is increasingly recognised globally as an effective tool to protect the integrity of public contracting and prevent corruption and fraud.
New rules post Brexit
Up to now the UK’s procurement regime has been based on EU rules which have allowed for companies to be excluded from procurement where they’ve faced a conviction for corruption, fraud and money laundering. These rules have rarely been used in the EU, and to our knowledge, never in the UK (though lack of procurement data on this make it almost impossible to find out).
This is in part because of serious limitations with the EU rules themselves, and recent EU case law interpreting them which makes them hard for public authorities to use.
As the UK leaves the EU and reformulates its procurement rules, it has a real opportunity to revisit these rules and introduce an effective debarment regime. We’ve identified seven key components to an effective debarment regime in our new paper for the Centre for the Study of Corruption, which we believe the UK government should consider in rewriting its procurement rules.
- Establishing clear policy goals for the regime, including ensuring the regime supports the government’s objectives on tackling economic crime
- Requiring effective internal controls from companies as a condition of contracting
- Ensuring that contractors can be suspended or debarred where there is sufficient evidence of corruption and fraud, not just where they have been convicted, subject to due process safeguards
- Centralising decision-making and guidance to ensure consistency and ensuring that properly trained officials, of senior rank, are empowered to take debarment decisions
- Creating a central database of qualification and performance information on contractors, including companies excluded
- Enhancing detection by establishing a procurement-specific anonymous reporting tool for whistle-blowers and competitors
- Using complementary tools to encourage compliance such as administrative agreements and independent monitors appointed by government bodies where misconduct has occurred.
Several of these recommendations have also been put forward in a recent excellent paper by Professor Sue Arrowsmith, one of the country’s leading procurement experts. Arrowsmith argues that a properly resourced and centralised approach to exclusion is essential to make it work and that exclusion should not be limited to situations where a formal judgement against a company has been made.
Free trade – creating the ground rules for debarment
As the UK seeks Free Trade Agreements (FTAs) around the world, access to the UK’s £284 billion a year public procurement market will be one of the carrots dangled in negotiations. Understanding who will gain access to UK public contracts from countries with whom FTAs have been concluded, and their track record on corruption and fraud, will be essential to protecting the integrity of UK public procurement.
Yet a recent trial by government found that it was very hard currently for procurement officials to find out information about whether a company tendering for a contract has been convicted abroad. At the moment, they are entirely reliant on self-declarations to ascertain that information.
That makes it essential that the UK ensures that there are strong debarment provisions in the Free Trade Agreements it negotiates which include information sharing provisions – something for which we are also calling. It also means having a central database on the track records of suppliers, and ensuring free trade partners also have such databases, so that information about performance and past convictions or regulatory findings can be easily shared.
Meanwhile, it’s worth noting, given the UK’s prioritisation of a Free Trade Agreement with the United States, that the US has one of the most advanced debarment regimes in the world, and many US free trade agreements contain just such debarment provisions. Showing that the UK is serious about having an equivalent regime might not just be a negotiating advantage but might also become a requirement in any deal with Washington.
A properly functioning debarment regime would bring both economic and social benefits for the UK. It will help reduce fraud and corruption in public procurement, create a level playing field for companies that abide by the rules, and boost the UK’s international reputation for integrity. The only people set to lose are the corrupt and fraudsters.
Here is an example of collusive corruption taking place on taxpayer-funded contracts in the UK right now – all because the government in not applying its own competition policy.
To spread prosperity & opportunity around, it is the policy of this government to widen the participation of small and medium-sized businesses in the market in goods and services for which the government is the main customer – specifically, the government has committed itself to spending 33% of the central government procurement budget on SMEs by 2022, either directly or indirectly via its top-tier contractors. The target for the Ministry of Defence, which spends about £15bn a year on procuring new military equipment, is a modest 25%.
The clear message behind the government’s defence procurement policy is that equipment for the UK Armed Forces is to be purchased through open and fair competition – the only exceptions being off-the-shelf purchases and single-source development contracts, the latter to be handed out on a preferential basis (to the Select Few).
Indeed, in its most recent policy statement on defence procurement expressed in the Defence Industrial Policy* published in December 2017, the government says (on page 23):
“We strive to provide our Armed Forces with the capabilities they need at the best value for money, obtaining this through open competition in the global market, wherever possible. Competitive tension is the greatest driver for innovation, productivity and earning power in any economy.”
Yet, in the very next sentence, the government comes clean and acknowledges that 42% of new MoD contracts by value were placed via open competition in 2016/17, down from 64% in 2010/11 – which leads one to conclude that the trend is towards more of the same.
By handing out taxpayer-funded contracts in this way, MoD has shown leadership and set an example by inadvertently directing prime contractors to adopt the same method of hand picking their first-tier supply chain partners, for each dissected workshare part of their evolving technical solutions.
But unlike MoD, which has been disbursing such contracts on national security grounds, prime contractors have been using the tried-and-tested old boys’ network to choose their first-tier subcontractors, usually during a gathering at the 19th Hole limited to the great-and-the-good from subsidiary companies wholly-owned by the prime contractor, or some other favoured, old school-tie chums – which has allowed corrupt activities, characterised by artificially inflated subcontract prices and the obligatory kickbacks that go with them to flourish. It is the stupid act of disclosing the budgeted expenditure figure in the invitation to tender that has given prime contractors the opportunity to “divvy up” this money in the same way as they dissected the technical solution into its workshare parts, thereby offering leeway for discretionary payments.
By its very nature, this type of clandestine activity in the defence industrial supply chain is very difficult to unearth, because the extremely small number of people right at the top who benefit from it will go out of their way to keep it under wraps, citing the excuse of commercial confidentiality whilst skilfully covering their tracks.
It is truly a bizarre situation, where the buyer tells the seller (confidentially) the price level at which he should pitch at, so that they can both profit. A scenario which can only occur on government-funded contracts – because public servants are asleep at the wheel!
But what is especially disturbing about this epic story of bribery and corruption is that, it is instigated and perpetuated by people who were previously in the pay of the State – given that the workforce on defence contractors’ premises, large or small, is made-up entirely of former public servants who came across in overwhelming numbers, via the ‘revolving door’ to pursue a second career in the private sector.
Whatever happened to the much-vaunted principles of selflessness, integrity, objectivity, accountability, openness, honesty and leadership which was supposed to define these people?
What’s more, MoD’s green lighting of this practice has prompted first-tier subcontractors to also select their lower-tier suppliers in the same manner, paving the way for the entire defence industrial supply chain to be corrupted, right down to the lowest level of piece-part & component manufacturers.
But the real tragedy about this whole sorry saga is that agile and innovative engineering businesses from adjacent sectors, who have not previously engaged with MoD, have been shut-out from the opportunity to act as subcontractors to these defence prime contractors, which would explain why it has failed so miserably to comply with the government’s own policy of spreading prosperity & opportunity around, by increasing the proportion of MoD spend with small and medium-sized enterprises to 25%. The actual figure for financial year 2017/2018 was just 16.5%.
Additionally, not using the market-based instrument of open and fair competition to select first-tier subcontractors has the effect of protecting these defence SMEs from being exposed to the full rigours of the free market, that is to say, shielding them from “feeling the heat” of competitive market forces, which has in turn, led to them becoming notoriously inefficient, because they are simply being gifted a steady stream of uncontested subcontracts which they expect to receive in perpetuity – cultivating an entitlements culture.
It is also the reason why engineered products manufactured by indigenous prime contractors cost substantially more than equivalent items in the non-defence sector – which would explain why they have become seriously uncompetitive both, in the domestic market and in export markets.
It is a mystery why the government would want to tolerate this sort of criminal behaviour on taxpayer-funded contracts, given the intense focus of attention on the dubious habits of the private sector right now, and the uncertainty surrounding the continuance of free market capitalism in its present form in the UK.
* Defence Industrial Policy document entitled “Industry for Defence and a Prosperous Britain: Refreshing Defence Industrial Policy”, published by UK Ministry of Defence, December 2017, PDF file (1.28 MB) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/669958/DefenceIndustrialPolicy_Web.pdf