Who’s Who Legal has brought together Claire Barclay of Cliffe Dekker Hofmeyr, Anna-Marie Curran of A&L Goodbody and Peter Elliott of Bird & Bird to discuss the impact of government policies and initiatives on the sector, levels of tender litigation and the legal market in their jurisdictions.
Cliffe Dekker Hofmeyr
WWL: Global trends are indicating that economies are beginning to grow again, and fresh election promises have generally placed a renewed emphasis on procurement to deliver and drive further socio-economic recovery. To this end, how have government policy and initiatives changed the dynamics of the procurement market in the past year or so?
Claire Barclay: The South African policy environment largely reflects the global trend. Although the promotion of socio-economic upliftment to address patterns of historical disadvantage is sanctioned under the South African constitution – so-called preferential procurement – the government’s recent emphasis is less on combatting past prejudicial practices and more on using government procurement to benefit the poor. This move is in line with the government’s policies and pro-poor agenda.
The greatest challenge for government is corruption in the procurement process. There is also widespread misuse of public funds in tenders, mostly because government officials lack a deeper understanding of the procurement laws. When the hard cases present themselves, the decision inevitably goes wrong.
In an effort to clamp down on wasteful public expenditure in the tender process, in July 2012 the South African Ministry of Finance established the Office of the Chief Procurement Officer (OCPO). The OCPO is mandated not only to monitor procurement across all levels of government – to play a policeman role – but also to come up with ways in which to improve procurement practices so that government money is spent more efficiently.
The OCPO has been slow to galvanise into any real action in the first 18 months since its announced establishment; however, recent tenders by the SA National Treasury for advisers to assist in developing a mandate for the OCPO, and reviewing South Africa’s procurement legislation, are indications that the OCPO’s work is about to begin.
It is expected that the OCPO will drive much-needed changes to South Africa’s procurement system, one of which will be to place greater control on government expenditure, especially at local government level where the greatest abuse of funds occurs. A further expected change is that South Africa’s procurement laws will be harmonised with international model procurement laws such as the Agreement on Government Procurement (GPA) under the World Trade Organization and the UNCITRAL model law on public procurement (2011).
Anna-Marie Curran: In Ireland, government policy continues to be focused on facilitating access for small and medium-sized enterprises (SMEs) to public contracts given that the vast majority of Irish businesses are SMEs. The policy was first manifested in a government circular in 2010 (Circular 10/10) which was replaced in April 2014 by Circular 10/14. The key features of Circular 10/14 are as follows:
• there is a new requirement for Irish public bodies to publish contract award notices for contracts valued at over €25,000 on the national tenders website (etenders.gov.ie) with effect from 1 August 2014 (this is in addition to the current requirement to publish contract award notices for contracts above EU value thresholds);
• the open procedure must be utilised for goods and services contracts below the value of €134,000 (excluding VAT);
• any minimum financial turnover requirement should not exceed twice the estimated contract value for routine goods and services contracts; and
• contracting authorities are strongly encouraged to provide written feedback to unsuccessful bidders for contracts below EU value thresholds.
The government also intends to further facilitate SMEs by implementing the new EU Directives into national law during 2015, well ahead of the deadline for implementation in April 2016. The new Directives contain a number of initiatives aimed at improving SMEs’ access to public contracts including self-declarations for elements of the pre-qualification phase, greater emphasis on lots and a phased transition to full electronic procurement.
The government also continues to focus on green public procurement following its publication in 2012 of Green Tenders, a green public procurement action plan. The Environmental Protection Agency is currently developing practical guidance for sustainable procurement of goods and services for Irish public sector organisations.
Peter Elliott: In England, election promises of a socio-economic nature in relation to procurement focused mainly on attempts to improve the share of public procurement going to small and medium-sized enterprises. Other drivers in relation to procurement related more to increases in efficiency and spending. The other main point with an arguably socio-economic flavour at a policy level was the UK government’s mutualisation agenda (broadly speaking, the spinning-out of public services into organisations with a real element of employee or other similar control or involvement).
Perhaps unsurprisingly given the economic situation in 2010 and the Conservative party’s election promises on government spending, the UK has not used procurement as a means of increasing spending and helping drive private sector recovery that way – instead, the focus has been on increasing efficiency and reducing spending. There are, however, signs that this may soon start to change.
What this currently means in practice is, in high-level terms, as follows:
• The move towards centralised procurement and the use of frameworks and similar models has continued.
• In areas like ICT, there is a conscious drive towards greater commoditisation and the breaking down of requirements into smaller contracts, along with the procurement structure known as G-Cloud, which is meant to make it easier for suppliers to get involved and for purchasers to buy from them in a speedy and non-bureaucratic way.
• A large number of outsourcing opportunities have arisen, many with a “mutual” flavour, although the UK government will have to wait for the new procurement directive to be transposed into English law before it can reserve these for specific organisations under article 77.
• A number of other steps have been put in place to increase transparency of contract opportunities (both above and below the thresholds), to simplify and standardise aspects of the bidding process, and to increase opportunities for SMEs. The extent to which these are followed and really benefit SMEs can depend on the contracting authority involved, but there does seem to be a gradual improvement in this area.
WWL: Competition for tenders has, more often than not, caused a move towards a litigious procurement culture. Have you observed an increased desire on behalf of the bidder to review a decision? And, if so, what is the motivation behind it?
Claire Barclay: South Africa is an interesting market. On the one hand, for some time there has been a perception, at least by some local companies, that to challenge a tender award is the death knell to future public sector projects work. We are regularly told by our clients that they will not challenge government’s tender decisions as it goes against their company policy. However, as the South African market transforms and the base of multinational companies investing in local companies or opening local branches grows, the trend has shifted. With the expansion of the market, we have seen an increase in the number of procurement award challenges. This is also evident in the number of tender cases being litigated, and therefore the growing jurisprudence around public sector procurement.
A seminal decision recently handed down in South Africa’s Constitutional Court has changed the landscape on tender irregularities and, I suspect, may have the effect of attracting increased tender litigation down the line. For some time, courts have been loath to overturn government contracts, even where the procurement process leading to the contract was irregular. In these cases, the unsatisfactory consequence of having to declare a half-implemented contract invalid has clouded the courts’ ability to declare the process defective.
A recent Constitutional Court matter has ushered in a new regime where our courts are less deferential to the government’s tender mishaps, and are willing to declare a government contract void if the procurement process or tender award is unlawful, irrespective of the consequence of having first to cancel and then to unscramble the original contract. In this case, the Constitutional Court was able to separate the finding, regarding the tender process, from the remedy. This is, to my mind, a step in the right direction and sends a clear message that the government cannot act with impunity in conducting a tender process.
In all, there seems to be a correlation between the opening up of South Africa’s tender markets to foreign investors, and the development of our procurement jurisprudence.
Anna-Marie Curran: Unsuccessful bidders in Ireland frequently engage in lengthy and contentious post-contract award correspondence with contracting authorities threatening to challenge the tender process. There has been a marked increase in recent years in the number of challenges for three main reasons. First, there has been a sharp decline in government expenditure on public procurement due to the demise of the Celtic Tiger – annual public procurement spending is now in the region of €11.5 billion compared to €16 billion in 2009. Second, there has been a significant move towards centralised procurement with the new Office of Government Procurement taking responsibility for establishing a large number of centralised framework agreements which may be utilised by the entire public sector. This makes the stakes higher for bidders as losing out on a centralised framework agreement may close them out of the entire public sector market for a number of years. Third, bidders are more aware of their rights under the Remedies Regulations than ever before and are not afraid to question contracting authorities on perceived procurement law breaches.
However, in practice, few procurement challenges result in the initiation of legal proceedings in Ireland as such proceedings must be brought in the Irish High Court which is both costly and time consuming. Nevertheless, there have been two notable judgments from the High Court in 2014 - the first in Gaswise v Dublin City Council in which the applicant successfully challenged its exclusion from the tender process on the basis of a lack of transparency in the tender requirements. The second notable judgment was in OCS v Dublin Airport Authority in May 2014. In that case, the High Court ruled in favour of an unsuccessful bidder in refusing to lift the automatic suspension preventing the contracting authority from concluding the contract (the suspension automatically arose upon commencement of proceedings). The Court also decided that there was no requirement for OCS to proffer an undertaking in damages in order to continue the automatic suspension as such a requirement would be inconsistent with EU law (the judgment is currently under appeal to the Supreme Court). Both these judgments could be seen as relatively bidder-friendly and this may have some impact on the number of High Court challenges seen.
Peter Elliott: The last few years have seen a definite increase in complaints and actual challenges in England and Wales. What has driven this? Partly, it is the improvement in remedies available in this country, along with a greater confidence that challenging government will not necessarily be harmful to future prospects. As for the Republic of Ireland, however, it is also a direct result of the shrinkage in both the private and public sectors and the greater centralisation and aggregation in public sector spending, which have made every opportunity and every loss more serious.
In the last 12-18 months, however, although complaints continue to grow and increase in sophistication, our experience is that actual legal challenges are perhaps beginning to plateau, and certainly seem unlikely to get anywhere near as frequent as in countries like Germany and the Netherlands. This seems to be for three main reasons.
First, potential challengers are becoming more aware of the scale of legal costs. Procurement law proceedings have to take place in the High Court and legal costs can quickly mount up; when one adds in the potential liability for the authority or utility’s costs this can be a real deterrent. Second, a lot of contracting authorities are much harder nosed in dealing with complaints and challenges, making it hard to get information and showing less inclination to shy away from litigation. Third, courts in England can seem unfriendly to bidders, in particular in relation to issues such as enforcing the automatic suspension of award; this can make it seem less worthwhile challenging.
WWL: It has been observed that each jurisdiction in the procurement field requires different types of legal expertise. From your experience, do you feel that procurement work better suits large international firms, or boutiques?
Claire Barclay: My view is that procurement work is probably best accommodated in larger firms that house a number of specialist practice areas. In large infrastructure procurements, it is critical to have access to specialists from a number of practice areas, from environmental law to tax, corporate, competition, finance and so on. Most procurement lawyers have a good sense of the issues that impact a project in each of these specialised fields, however it is good practice to run any area-specific issues past the field expert, and if necessary, to draw them into a project.
Occasionally, if we are pitching for a project in which we have limited experience or capacity, we will draw on our international network, but being part of an international firm is, in my view, less of a necessity than ensuring that you have all the in-house specialist skills required to advise competently on the project.
My experience is that the boutique firms are better at taking on the discrete aspects of PPP. For example, in South Africa we find a number of boutique firms advising purely on the EPC subcontract or purely on the O&M subcontract, and they become known for work in a particular aspect of PPP.
Anna-Marie Curran: Most of the large law firms in Ireland have a procurement practice and there are also a small number of boutique firms with procurement practices. Undoubtedly, large procurement projects command large, cross-departmental resources and expertise which can readily be provided by the larger firms. However, there is a vast array of procurement work ranging from advice on low-value routine procurements to high-value, high-risk projects, and boutique and large law firms alike can pitch for work to best suit their strengths.
Peter Elliott: This depends largely on the type of work. If a client needs full legal support on a major procurement, this can require procurement law expertise, structuring and finance, contract/commercial and more specialist inputs such as planning, competition, environmental and so on. This will tend to suit medium or larger firms better. Boutique firms will tend to have to aim at smaller procurements, general procurement strategic advice or pure procurement disputes work, but even here they will face competition from the larger firms and from procurement consultants. In reality, there are very few pure procurement law boutiques in England. The real issue is perhaps less about size than real expertise as the law gets more complex in this area. One area where an international firm can have an edge (regardless of size) is in helping clients who are bidding in different jurisdictions.
WWL: A number of our respondents have noticed an increasing determination on the part of law firms and lawyers to establish a procurement practice. This is to the extent that practitioners from a broad range of backgrounds are investing more time in the procurement field, with some actively altering their practice area. Are you aware of this trend in your jurisdiction? If so, do you feel this has diluted or strengthened the legal market?
Claire Barclay: This trend is less prevalent in South Africa. There is still a general emphasis in the larger firms on developing projects teams, either as independent teams or as part of a larger finance team. In South Africa advice on procurement law falls within a public law/regulatory practice area, and projects falls within the banking and finance field. Of course, projects lawyers are required to have a good understanding of procurement laws, however most of the well-known projects lawyers come from a finance background. Similarly, those that advise on public sector procurement are generally speaking regulatory lawyers and seldom venture into advising on transactions.
Anna-Marie Curran: While most of the large law firms in Ireland already have procurement practices, there has been a notable transition of practitioners from related sectors that have been in decline in recent years (eg, construction and large infrastructural projects) into procurement. Some smaller law firms have also sought to develop procurement practices primarily through acting for unsuccessful bidders in procurement challenges. This has added to a small increase in the number of procurement challenges, some of which have resulted in seminal judgments (eg, Copymoore v The Commissioners for Public Works, where a group of SMEs successfully challenged a material change to a centralised framework agreement – the judgment is currently under appeal to the Supreme Court). In this regard and given the dearth of procurement litigation in Ireland, the entry of smaller law firms acting on behalf of unsuccessful bidders could be perceived as strengthening the legal market, particularly from the perspective of unsuccessful bidders.
Peter Elliott: This trend exists in England and Wales as well. Partly it comes about as the law gets more complex and its relevance increases, so it becomes progressively less realistic, for example, to advise on a major infrastructure procurement without real procurement law support. It can also be a natural step for lawyers who previously specialised in other areas which are now contracting or in which competition is growing. We are currently at a stage where almost all medium-sized and larger firms at least claim to have a procurement law practice, along with a number of small firms. Although levels of expertise are variable, overall the legal market (and competition) has increased in this area. Perhaps the area where this trend is least helpful to clients is when firms get involved without a core level of expertise to build on; because of a lack of understanding (in particular in terms of the likelihood of getting a meaningful remedy in many cases) they can often take a more aggressive approach on behalf of bidder clients than is really justified, which ends up causing problems both for their clients and for the contracting authorities or utilities.