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Public Versus Private Sector Procurement: A Research Agenda?

(This guest post comes from Dr Richard Craven from the University of Leicester Law School and Dr Luke Butler from Bristol University)

Introduction

In 2013, Peter Smith of Spend Matters wrote about findings from a survey on the differences between public sector and private sector procurement. The survey data tended to suggest, as one might expect, that public procurement is bureaucratic, inflexible and compliance-focused, whilst private sector procurement, where there are no EU procurement directives to worry about, might be seen as flexible, innovative and profit-minded (“better”?). Much, therefore, seems to come down to “regulation” – more specifically its form and extent. For many, regulation is a distinguishing feature between public procurement and private procurement. Arguably, public sector procurers are on the back foot because of it.

As legal academics working primarily in the field of public procurement, we found the above insight intriguing as it aligns with intuitions that we have had for some time about the need for systematic research of private sector procurement as a regulated field of activity. To this extent, we were heartened when Peter recently followed up the 2013 blog due to its popularity as this is an area we are keen to investigate empirically should there be sufficient appetite. (Editor’s note – our recent writing on the same topic is here, here and here).

It’s the Easter vacation, so, to compensate for our academic pedantry in a world where practice is so important, we thought we’d share just some of our ideas and questions on the topic to provoke a practice-led discussion. Our ideas are fairly rudimentary, but, in due course, we hope to develop them into a more substantial project. We’d greatly appreciate any comments and criticisms from readers (practitioner perspectives are especially welcome as empirical findings would form an important foundation for this project).

Why use legal rules to regulate procurement?

There are all sorts of reasons for using legal rules to regulate public procurement. In England & Wales, for instance, we have legal rules in place to achieve value for money (local authorities’ “Best Value” duty), market access (Public Contracts Regulations 2015 which transpose EU and WTO trade obligations), and also promotion of “horizontal” policies, e.g. industrial, social, environmental and labour policies (local authorities’ “Social Value” duty).

There appears to be no, or limited, need to regulate private procurement in the same way. Private corporations are primarily guided by profit. This should mean that they are sufficiently motivated to achieve economy through efficient procurement processes. Indeed, if a private corporation were to favour local suppliers or select based on “sustainability” for political or other reasons, the corporation’s competitiveness would likely be harmed (if it were not commercially sensible) and, ultimately, such behaviour could put it out of business. Moreover, as a basic starting point, we might feel that government has no business interfering in what, and how, private individuals/corporations buy.

Reconceptualising contract law: “Private procurement law”?

To say that private procurement is free from regulation is, of course, not accurate. There are no “Private Contracts Regulations 2015”, but the law does impose some limitations. Peter Smith sketched out some of the legal rules that constrain the private sector when procuring, such as bribery legislation and competition law. The common law of obligations, in particular, contract law, is especially relevant. In the post here, for example, David Metzger helpfully sets out important aspects of this law.

He describes how, from a legal perspective, private sector procurers should be quite wary about the drafting of tender documents and the running of bid processes given the risk of becoming subject to legal obligations that could end up in litigation. In reality, however, one would not expect businesses to get too hung up with legal infringements, other than in the most extreme cases, and so risk of legal challenge (and the importance of these legal rules) is presumably minimal. That said, it would be interesting to clarify private procurers’ awareness of and the regard had to these obligations in practice.

The legal rules governing private procurement are clearly much more limited. The legal framework discussed by Metzger, however, may not provide the full picture. The reality of private procurement regulation might be quite different: actors may be “regulated” in other ways, not just through formal legal rules, e.g., by market norms or expectations (or moral considerations), which may operate to constrain behaviour. Indeed, in some cases these may even be more effective in regulating behaviour than legal rules. The importance of trade customs are such that courts often have difficulty deciding whether or not to treat these as legally binding contractual terms in contracts.

Whilst typically this non-legal regulation may not be legally enforceable in the courts, that does not necessarily mean that non-compliant behaviour will not be subject to what can be very formal sanctions e.g. potentially even blacklisting. A fascinating example of this sort of regulatory behavior can be seen with Lisa Bernstein’s (University of Chicago Law School) work on the diamond industry:  

“The diamond industry has systematically rejected state-created law. In its place, the sophisticated traders who dominate the industry have developed an elaborate, internal set of rules, complete with distinctive institutions and sanctions, to handle disputes among industry”.

It may well be that the procurement norms referred to above have been codified. Like local authorities regulating their procurement through standing orders (though this is required under local government legislation), to what extent do corporations put in place their own rules for regulating procurement processes, i.e. self-regulation, e.g. in the form of “internal rules and policies”(as Peter Smith suggests there are)? Are there industry-wide rules in particular sectors (e.g. agreed procurement “principles”: see J&A Developments Ltd v Edina Manufacturing Ltd (2007) referring to “good tendering procedure”). Are there agreed industry or trade customs and accepted procedural models for conducting procurement etc.?

If there is such “codified” regulation, this gives rise to a number of questions that, to our knowledge, academic research has not addressed. For instance, what are the objectives of this regulation and to what extent, if at all, do these correspond with the objectives of public procurement law (e.g. sustainability objectives?). Who formulates this regulation (the “regulators”)? How is regulation formulated? How much freedom is there for procurement professionals, e.g. to what extent do they perceive themselves to be constrained by the rules? Are there potential sanctions for non-compliance and are they effective?

For public procurement law academics and policy-makers, investigation into private procurement regulation, and a robust consideration of similarities and differences between public and private procurement regulation, could prove highly valuable. For example, though one might expect to see procedures that are broadly familiar even in private procurement – e.g. the UNCITRAL Model Law on Public Procurement provides a wide-ranging procedural toolkit – differences, even slight differences in the way in which procedures are operated, and the reasons for such differences can inform the development of public procurement regulation.

The extent, if any, to which public procurement law (which – taking EU procurement law as an example – in places makes commercial sense) has, and is, informing private procurement regulation is also of interest. For example, what, if anything, is the private sector lifting from public procurement law (regulatory innovations like competitive dialogue?), and, if this is the case, is the regulation tweaked to make it more commercial?

Concluding thoughts

In this blog we have provided a glimpse (there was no time to consider privatized utilities, for example) at a potentially quite fruitful area of research, and we are very grateful to Public Spend Forum and  Spend Matters for allowing us to articulate our thoughts. No doubt, procurement professionals rooted in one sector or moving between sectors will have many insights to share. We very much look forward to receiving your views.









Voices (4)

  1. Digby Barker says:

    The Private Sector is generally more concerned with ‘what’ rather than ‘how’; the Public Sector – traditionally, at least – is equally concerned with both. In the Public Procurement context there is consequently more emphasis on reducing the risk of behaviour being influenced by (non-political) practitioner self-interest. Such practitioners are spending ‘our’ money. While those in the Private Sector are spending Shareholders’ money, those Shareholders generally have a much greater/more direct ‘say’ in who the practitioners are and how they should go about their jobs than ‘we’ do in respect of the Public Sector practitioners. It is for these reasons that I for one want Public Sector procurement to be Regulated by Law. Shareholders have the authority and – at least collectively – the power to Regulate Private Sector procurement as far as value for money aspects (in the widest sense) are concerned. Personally as a Shareholder for the economc arguments alluded to in the article, I would want those spending my money to adhere to the principles of Transparency, Equality of Treatment and non-(inappropriate) discrimination.

  2. Luke Butler says:

    Digby, if we may, thank you kindly for your post. It provokes interesting discussion about just how major the differences you point out are. Firstly, the risks of self-interested, “political” influence/behaviour that you point out as relevant to public sector procurement may similarly be relevant to private sector procurement. These risks may be prevalent to a much lesser extent and it may necessitate fewer safeguards of the kind we see in public sector regulation but we would be interested to know the extent of such differences. To what extent does the private sector seek to mitigate these sorts of risks and do they, in effect, seek to regulate these risks?

    The different roles of the taxpayer (or even say their elected representatives) in the public sector and the shareholder (or others in general corporate governance positions) in the private sector is an interesting comparison. There is likely considerable variance across sectors and between companies, but we would be very interested to know just “who” has power as “stakeholders” in procurement undertaken in the private sector: this may be shareholders (as you suggest), but also what about industry consultants, lawyers etc?

  3. Digby Barker says:

    Luke: I wasn’t intending to imply that your research agenda wasn’t worthwhile pursuing. I was just trying to point out that ‘regulation’ (in the general rather than just the legal sense) is not a “distinguishing feature” between public procurement and private procurement. What differs is the source and authority of the respective regulatory regimes. If “public sector procurers are on the back foot” it’s not because of regulation but because of ill-informed comparisons with private procurement and your research may well help here. Regarding your last sentence, I would argue that “industry consultants, lawyers etc” may well have some influence but it is Shareholders who have the ultimate power, although this is usually delegated on a day-to-day basis to Directors and management. And of course Directors are themselves regulated by Law in terms for example of their duty to act in the best interests of the company which could be argued to include ensuring that procurement is ‘regulated’ such that VfM is maximised. And as that is also the avowed objective in Public Procurement, I think an interesting question to consider is “how can private procurment regulation [be allowed to] differ from public procurement regulation (remembering that ‘Value’ in VfM includes everything i.e. one can’t say “Option X represents best VfM but there are some other considerations….”) ? !

  4. Luke Butler says:

    Digby, many thanks for your response. We certainly don’t presume the research agenda is worthwhile, which is the point of our scoping exercise. To that extent, any and all views expressed are invaluable. We entirely understand your point re: regulation. We share the same sense that the comparisons are not necessarily sufficiently well-informed. Yet, if the private sector assimilates to/borrows from public sector procurement regulation in certain respects (and the public sector borrows from the private sector), there are attempts to “regulate” on the basis of comparisons about which we know little. Further, from a legal (theory) perspective, we would suggest that the sources and authority of the respective regulatory regimes in both the public and private sectors is also significant and intriguing from our perspective (hence we thought it merited a reply). In our view, we are keen to explore sources of, and authority for, regulation in private sector procurement because these provide the foundations of “legitimacy” for the rules/principles/policies/practices etc.

    Further, thank you for your thought-provoking observations on the role of specific actors within corporate structures. We do wonder to what extent procurement (or “purchasing”) is really considered to be a strategic policy objective at the Director/shareholder/management level or whether it is seen more as an administrative, instrumental function that is in every sense delegated. Comparison with the public sector – who the players are, what executive (setting policy), “legislative” (drawing up the rules and principles and applying them) and even “judicial” (ensuring accountability and dealing with disputes) functions they exercise – might be very interesting. It also brings in an important dimension to the research, namely, issues such as corporate governance and responsibility on which you posit an interesting question of/for Directors. Certainly food for thought indeed. Many thanks.

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