Government Contracts 2015: Trends

Public procurement commands ever-increasing attention from the world’s top law firms and lawyers. This owes much to the maturing of the relatively young market and the near constant reforming of its legislation. A new host of policymaking and plurilateral agreements are looking to liberalise the market, which should ensure that its global stock will continue to rise.

Legislative reforms

Respondents have pointed to an expanding market and a number of recent factors behind this trend: ranging from legislation to economic policy and commercial expansion. However, the idea behind incentivising the procurement industry is not a new one. The WTO’s Agreement on Government Procurement (GPA), which entered into force in 1981, opened the procurement market among its parties. This has led to an estimated $1.7 trillion market for international suppliers. Yet, the original agreement was limited in its scope and it was revised and then replaced in 1994. The GPA’s newest form, which entered into force in spring of last year, took more than a decade to negotiate. It has streamlined and modernised the 1994 agreement, expanded the procurement covered by the GPA parties, as well as liberalised the ascension of developing economies to the GPA. The WTO estimates that this has already expanded the market by $80 billion to $100 billion annually. There are now 15 parties to the agreement and a further 28 observers, 10 of which are in the process of acceding to the agreement. In effect, the procurement market is currently limited to a number of mature regimes, which includes the US, EU member states, Singapore, South Korea, Japan and Israel. However, the procurement market for international suppliers promises to expand greatly under the new revised agreement, opening up the legal market along with it. For example, respondents have cited lucrative advisory work for Chinese clients, whose government is in the process of acceding.

In addition, last year three new EU directives addressing different aspects of procurement law came into effect, giving member states until 2016 to implement the changes. They include provisions that make procurement more efficient and strategically orientated, simplifying its laws and ushering in greater transparency in the tender process. The UK is the first member state to implement some of the changes, seeing the new directives as a great improvement on the previous regime for procurers and suppliers. A year after its ratification, the country implemented the public sector procurement directive (Directive 2014/24/EU) through the Public Contracts Regulations 2015 – which came into force on 26 February. It provides a more innovative and accessible framework, ushering in greater transparency and publicity of tender processes and public contracts. Moreover, the regulations now cover a wider spectrum of services that brings practically all public sector procurement under full advertising and competitive tendering obligations. Arguably the biggest change comes in the form of “innovative partnerships”, a European-wide scheme that will enable the procurement of services, goods or works previously unavailable under the old mechanism. The partnership will allow public authorities to launch tender bids with an incomplete design, leaving room for the authority and the successful supplier to commercialise a new product or service. Ultimately, the UK reforms represent a wider precedent in the European market that looks to benefit suppliers and contracting authorities alike. To take full advantage of any opportunities and any future changes to regulations, informed legal counsel will be as crucial as ever. Indeed, respondents have noted an increased demand for regulatory and compliance advice from both public sector bodies and private sector companies.

A further goal of the new EU directives is to help SMEs take up a greater share of the market, which the European Commission views as being too uneven. The difficulties that SMEs face are well charted, including complex and ridged contracts, a lack of knowledge towards tender processes, high qualification levels and disproportionately high costs. Simpler and more transparent processes should go a long way to creating a more egalitarian marketplace. The simpler processes should also save SMEs up to 60 per cent of bidding process costs, according to European Commission estimates. The new regulations will further benefit SMEs by encouraging buyers to break large contracts down and capping turnover requirements for businesses. Setting an example, the UK government pledged that 25 per cent of its procurement expenditure will be with SMEs by 2015. If smaller suppliers begin to feel more comfortable entering the European procurement market this should have a positive effect on law firms that can be more cost-sensitive.

Plurilateral and central government reform is only one side of the coin. Both local government and suppliers are also looking to streamline processes to accommodate the contemporary economic and legislative environment. Contracting authorities are more actively seeking compliance and general advice, and this has created as much work for private practice legal teams as the private sector. Significantly, a greater push towards compliance is due in great part to the current tendency to challenge the awarding of contracts.

The growth of procurement challenges

The contentious side of the market generally remains as strong as we noted in our last few editions, although jurisdictions do vary – European civil law jurisdictions with administrative law courts naturally experience more litigation than their common law counterparts, which use the costly high courts for such disputes. Nevertheless, there remains a high turnover of contentious work in most jurisdictions relative to their court systems and respondents pointed to an array of different reasons behind this phenomenon.

Perhaps most significantly, the economic downturn led to wide-ranging procurement cutbacks, which in turn put serious pressure on suppliers to challenge the tender process if they were unsuccessful. The Eurozone crisis has further renewed the vigour with which governments are committed to austerity measures. For instance, during 2013/14, the UK’s Government Procurement Service proudly announced that £3.8 billion was saved from the yearly procurement bill. Similarly, it has been reported that the US government has pursued bigger and less frequent purchases, leaving suppliers more inclined to seek litigation as a last resort. As a result, the taboo of challenging government authorities has evaporated during this time and in its place a culture of seeking remedies has become more the norm. In emerging markets, local companies have tended to avoid litigation seeing it as damaging to future procurement project work. However, as tender markets have begun to open up to foreign investors the mentality towards challenging is changing along with it, which has led to a number of seminal decisions being handed down in court systems across the world.

Other factors of note include a continued drive towards transparent procurement processes, which allow suppliers to find a greater basis to challenge; this, coupled with a greater understanding of bidder’s rights, has led to increased confidence when challenging contracting authorities. On the other hand, sources report that a number of pre-litigation proceedings are instigated while suppliers try to develop enough of a case to challenge – ultimately a huge majority of cases never reach trial. The lucrative nature of procurement litigation has drawn in lawyers and law firms less experienced in procurement, who are all too eager to take on this work. However, as one lawyer warned: “Being overly aggressive in seeking a remedy may well end up being a waste of time and money.” In sum, there seems to be no shortage of dissatisfied suppliers and legal teams ready to take on government entities. One continental lawyer echoed market sentiment by stating that we should see “the higher rate of procurement litigation as the new benchmark going forward”. Law firms have been shoring up their strength in this area. In cases where firms do not have a dedicated procurement team, it is desirable for litigation departments to have expertise and experience in procurement challenges.

Law firms and the legal market

Developments in the field have had an impact on the make-up of law firms practising procurement law. In established regimes, national markets are generally competitive and law firms are at pains to recruit and retain lawyers at both the junior and senior grades. We are now at a stage where most medium-sized to large firms at least claim to have procurement expertise, since it is increasingly difficult to take on large-scale projects without procurement law support.

Contributors have also noted that law firms are increasing their capacity to offer a one-stop shop. A law firm that can offer advice throughout the tender process, including bidding strategies, compliance and bid protests, has an advantage over its rivals. However, firms have to make sure that expertise and depth is balanced with cost-sensitive billing, since a majority of public sector and SMEs have tight budgets. Larger international firms have been able to capture the increasing number of high-profile procurement contracts, which have given city firms the ability to maintain a strong team in this area. On the other hand, we can see that local and regional firms have been successful advising on the myriad of issues that smaller-scale suppliers and local authorities are unable to handle themselves.

An interesting aspect of procurement law is the multi-talented legal base of its practitioners. Many lawyers have grown into it from related practice areas. Indeed, 35 per cent of the lawyers in this publication are listed in at least one other Who’s Who Legal practice area guide. It is perhaps unsurprising that 29 lawyers are listed in both Competition and this edition, given that procurement and competition law are both important fields of EU law and policy – demanding similar skills and knowledge from its practitioners. Meanwhile, the fact that 50 lawyers are also listed in Project Finance and 27 in Construction is symptomatic of the need for both transactional and regulatory expertise in major public infrastructure and PPP projects. Although this might not be possible in more sophisticated procurement regimes, in the emerging markets there are a number of lawyers who are well-regarded for both.

Despite the growth of procurement law in the last decade, there are still relatively few jurisdictions that can sustain a large and competitive legal market. Not only is the number of lawyers per law firm fewer than most other practice area publications in our series, this edition also features a relatively small number of countries. The greatest body of listed lawyers are from GPA nations (fig. 1). Nevertheless, positive legislative changes, at both central and local government level, should create a more open and lucrative international market, while also making tender processes and public contracts more open and dynamic. Both international law firms and independent firms stand to gain from these developments.

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