Value for money under the new EU procurement directives by Abby Semple

Posted on September 25, 2013 by

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Editor’s Note: Besides being delighted to welcome Abby Semple as a contributing columnist to the PI European Union Edition blog, I am also pleased to share with you this first submission, in  a 3-Part series of posts from Abby, focusing on the new directives relating to public sector and utilities procurement.  Specifically how the new directives will impact three key aspects of public procurement including; value for money, sustainability and professional skills.

New directives on public sector and utilities procurement will soon be adopted in the European Union. The directives form part of the EU’s single market policy and aim to ensure non-discrimination and transparency in the award of public contracts. Through successive generations of directives, and the case law of the European Court of Justice, the scope of the EU procurement rules has expanded to cover many different forms of contract undertaken by the broader public sector. Although there is a cost associated with compliance with the directives, there are also clear benefits in terms of increased competition and professionalization of procurement. The new generation of directives seeks to facilitate the strategic use of procurement, notably to achieve environmental and social objectives. The success of these measures will depend upon the approach taken by governments at all levels to implement them in practice.

This series of posts looks at three aspects of public procurement and asks how the new directives will affect them: value for money, sustainability and professional skills.

Value for money

Most public and private sector procurement identifies value for money (VfM) as a core objective. Procurement decisions based on VfM may be distinguished from those based on the lowest price, quality alone or decisions made on some other basis such as relationships with suppliers, political or administrative expediency. Under the current EU rules, contracts can be awarded on the basis of ‘lowest price only’ or ‘most economically advantageous tender’ (MEAT) – which implies that both cost and qualitative aspects are taken into account when bids are evaluated. Research by the Commission in 2011 indicated that lowest price was being used in approximately one-third of procedures advertised in the Official Journal, whereas MEAT was used in the remaining two-thirds.

The way in which both costs and quality are measured, and how these are then compared to each other, varies widely between organisations and individual tenders. Increasingly public procurers are asked to balance a number of competing objectives: short and long-term value, up-front purchase costs, innovation, social and environmental goals – and to do all this in a manner which complies with the procurement rules and attracts competition. In this environment, it may be difficult to ‘act quickly and get the best deal’ – a criticism often made when comparing public to private sector procurement.

However the assumption that private sector procurement is more driven by commercial considerations, and thus obtains better value for money, deserves some scrutiny. A 2011 study which analysed both public and private sector tender procedures found that despite the perception that private sector procurement is more efficient, competition and price pressure may actually be weaker.[1] In terms of transaction costs, public tender procedures did on average require more person-days – in part a reflection of the larger number of firms participating. This indicates that there may be a positive correlation between transaction costs and levels of competition or price pressure, although further research is needed to establish the overall effect which this has on value for money.

VfM may be assessed both internally within a tender – i.e. by comparing the relative scores achieved by competing bids, and externally, by comparing the outcome of the competition with other options such as in-house provision, availing of a shared service or alternative expenditure. A focus on short-term prices frequently obscures the actual cost of procurement decisions, even where those costs will be borne by the contracting authority itself. There are a number of approaches to broadening VfM assessment, including the rules on life-cycle costing (LCC) set out in the draft 2013 directives and the use of a public sector comparator (PSC) to assess the relative value of carrying out certain functions in-house.

These techniques have significant potential to improve decisions both at the planning and procurement stages if they are properly understood and applied. They are not however a substitute for intelligent budgeting and commercial acumen. The exercise of these last two functions falls outside of the EU procurement regime. Efficiency, or allocation of scarce resources in an optimal way amongst competing ends, is an on-going preoccupation of budgetary regimes – but there is no agreement across time, political wind changes and financial systems as to how efficiency in public spending should be measured. Changes in budgeting practice also affect procurement decisions, for example a move from input-based to output or performance-based budgeting will affect how contracts are designed, awarded and monitored. So while the new directives may influence the way VfM is assessed in procurement, they are only a small piece of the puzzle.

Next week’s post will focus on life-cycle costing and other approaches to sustainable procurement included in the new directives. Join me for a free webinar on energy efficient public procurement via the following link: https://www3.gotomeeting.com/register/873284214


[1] Strand, I. Ramada, P. and Canton, E. (2011) Public procurement in Europe: Cost and effectiveness PwC, London Economics and Ecorys at pages 121-123. The study analyses some 540,000 procurements advertised in the Official Journal over five years (2006-2010) from 30 countries. This data was supplemented by a survey of 7,300 authorities and firms and 150 in-depth interviews regarding different aspects of procurement procedures. Interviews were carried out with 20 large private sector construction and services firms regarding their own procurement, supplementing the survey responses from 1882 firms.

Abby Semple

Abby Semple

Abby Semple, LL.B. (Dub) is a public procurement consultant with international experience and a strong track record of delivering innovative projects. She has managed tenders on behalf of public sector clients in Ireland and the UK, and worked on the development of procurement law and policy at EU level. Her areas of expertise include the EU procurement directives, green and socially responsible procurement, life-cycle costing, framework agreements, contract design and negotiation and supplier engagement. She has developed procurement criteria, tender documents, guidance and training materials on behalf of a number of authorities at local, national and international level, including the Irish Environmental Protection Agency, European Commission and  SEAD initiative. Abby writes and speaks frequently on procurement topics (www.procurementanalysis.eu).  Amongst other roles, she is currently working with the London Fire Brigade to procure an innovative vehicle information system as part of the three-year FIRED-uP project (www.fired-up.eu).

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