Regulaton & Policy
Forget Procurement – We’ve Got Brexit To Sort Out …

This report from three lawyers at CMS Cameron McKenna  (Graeme YoungCaroline Hobson and Ruth Derruau) on the excellent Lexology legal website, itself referring to a Financial Times article (that we missed first time around), triggered a whole series of thoughts on the issue of contract extension. We’ll come back to some of the more general points on that perhaps in a future article, but back to Lexology for today.

The original FT article quoted some UK government “procurement adviser” (which could be anyone from a very senior civil servant to a £500 a day contractor), who said that because UK government departments were so busy with Brexit planning and (at some stage) presumably execution, they just didn’t have time to worry about running procurement activities. Hence 250 contracts (which seemed a surprisingly precise number to quote) that have recently expired, are expiring now or are close to that point would simply be extended rather than new processes started. (The article was written before the UK election announcement, by the way. But that does not change the discussion).

As the FT said; “hundreds of government contracts with the private sector that are due to expire are to be automatically extended because civil servants are too busy with Brexit to focus on new and better-value tenders.”

You can understand the logic, but as the Lexology lawyers pointed out it isn’t as simple as that – or at least, it shouldn’t be as simple as that. There are UK regulations, transposed into law from the EU Directives, that cover modification of contracts during their term. You can modify legitimately:

  • where additional services (or supplies or works) are needed and cannot for ‘economic or technical reasons’ be provided by a different supplier and where engaging a different supplier ‘would cause significant inconvenience or substantial duplication of costs’ (Reg. 72(1)(b)); or
  • where the extension has been brought about ‘by circumstances which a diligent authority could not have foreseen’ and the extension does not change the overall nature of the contract (Reg. 72(1)(c)).

Even in these cases, value of the contract must not increase by more than 50% of the original contract. And the contracting authority must publish a ‘Modification Notice’ in the Official Journal of the European Union (OJEU). Because that always happens, of course … (he said, sarcastically).

It is hard to argue that a “diligent authority” could not have foreseen Brexit, so it is unlikely that a contract extension driven by the “we’re too busy” argument would be legitimate if such a decision was challenged. However, generally, even before the Brexit issue, this is one of the areas where regulations are often ignored.

While unhappy suppliers can in theory challenge, few do; in fact, it is often difficult for anyone outside the authority and the incumbent supplier to know what has happened. But even where the information  is more visible, it is rare to see a challenge. The National Audit Office reported last year that Crown Commercial Service had extended no less than 54% of the contracts due to expire in 2015/16, although we should note that some might have included extension provision when they were first put in place. But we are not aware of any challenges there.

As the Lexology article says, “Ultimately, the view of both parties may be that a limited extension of the contract is unlikely to provoke a third party challenge and is a risk worth taking (all other things considered)”.

But while the lawyers focus on the legal issues, perhaps the bigger point is that of value for money implications. Competition drives value, as we know, and extending contracts mean such competition is delayed. As the FT says, “extensions are expected to generate large profits for the contractors. Contracts tend to be more profitable towards the end of their terms once start-up costs have been absorbed and other savings made”. That’s not always true, but if the contract is not profitable, then suppliers are likely to want to negotiate some changes in their favour before agreeing to an extension anyway.

Tom Gash, a senior fellow at the Institute of Government, said in the FT, that this is a “damning sign” that Brexit is distracting government from the core job of making sure taxpayers’ money is well spent. For what it is worth, we will try and keep an eye on what is happening here. Clearly, some prioritisation will be necessary in terms of government activities, but pulling resource out of procurement should not be seen as an easy fix for politicians. It is not a cost-free option.

First Voice

  1. Digby Barker says:

    While I did see the recent Lexology piece I didn’t come across any recognition during the various debates and pronouncements in the run up to the referendum of the fact that engineering a Brexit would have significant opportunity costs although my family were probably fed up with me banging on about this particular lacuna and it’s still a bt of a ‘hobby horse’ of mine. Anyway, since then we’ve heard of the reality gradually sinking in with non Brexit-related Whitehall departments/programmes beening denuded of resources – notably their better staff – as more and more Brexit-related problems that need urgent attention are ‘discovered’. Procurement is of course an easy target here and, as you imply, it’s not as if illegal direct awards under the guise of extensions have not been a regular feature of the public procurement landscape. As for Modification Notices, there’s no reaon to suppose that compliance with the publication requirements there will be any better than the lamentable performance regarding Contract Award Notices for which the last statistics I remember seeing (some years ago, now) suggested only some 60-70% that should have been published had been. This also has adverse implications for competition and hence VfM. While evidence does indeed suggest that “a limited extension of the contract is unlikely to provoke a third party challenge” there is the cost-free (atpou) option of reporting suspected infractions to the EC for investigation using the EU website form designed for the purpose.