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Do EU procurement rules prevent SMEs from accessing tenders from local government?

Do EU procurement rules stop SMEs winning local government tenders?

20th June 2016

Councillor Daniel Moylan has suggested that the EU rules for procurement in local government, a European directive that all forms of local councils across the country must adhere to, favours large corporations and excludes SMEs.

The former Deputy Chairman of Transport for London, and current representative of the Queen’s Gate Ward on Kensington and Chelsea council believes that added cost, inflexibility, inefficiency in the operation of the public sector and exclusion of small enterprises are among the failings of the current processes.

The purpose of the EU procurement rules, according to government documentation, is to open up the public procurement market, ensuring free movement of supplies, services and work within the EU.

Pre-qualification requirements, which take place before the tendering process has even begun, are however, believed to be the main culprits of the exclusion of small to medium size businesses.

So what factors must SMEs overcome?

A ranking system is in place which dictates the quality of a supplier and its ability to bid for a public contract. This system, Councillor Moylan believes, has a clear preference for long-established, usually larger businesses and organisations. This is due to the fact they tick the boxes required by EU rules, such as having a sound financial standing and low risk of bankruptcy.

Clearly, going bankrupt half way through a contract is something the procurement function should be protecting buyers from. However, many start-ups and SMEs are unlikely to be able to compete with the financial stability of larger corporations, yet they may have potential to provide better value to the public purse.

Councillor Moylan adds: “Notices are placed in the Official Journal of the European Union (this is mandatory) and interested parties are invited to complete a Pre-Questionnaire. This is already a powerful disincentive to smaller enterprises, because the cost of bidding rapidly mounts up as a result of this lawyerly bureaucracy and many are deterred. But the system discriminates further against smaller bidders by usually including as a pre-requisite requirement, the financial standing of the bidder, something that favours larger firms.”

It should be noted however, that there is a specific section in the EU public contracts directive stating: “contracting authorities are encouraged to break contracts into lots to facilitate SME participation.”

For local government, it serves the best interest of its community and the taxpayers making up that constituency to support local businesses wherever possible. With over £230 billion per year spent on goods and services across the whole public sector, procurement has the potential to generate significant business growth for SMEs. To facilitate this, a turnover cap was introduced in 2014 to facilitate SME participation.

The cap has encouraged flexibility within the tendering process and encouraged collaboration between SMEs. By allowing SMEs to form a joint application when pitching for a tender, without incorporating a legal entity of forming a joint venture, they can combine their strengths to compete against larger corporations.

The ESPD states: “Contracting authorities will not be able to set company turnover requirements at more than two times contract value except where there is a specific justification.”

So, do EU procurement rules help or hinder local government’s support of SMEs?

The ‘In’ or ‘Out’ argument has dominated headlines across Britain in recent months. For this section of the argument, we must ask, would removing Britain from these European regulations benefit or hinder SMEs’ participation in local government procurement?

Councillor Moylan’s main argument is that the EU’s one-size-fits-all model does not work when blanketed across its 28 countries, as the problems faced day-to-day are not “common to all”.

2011 was the last time there was a reform in EU rules for public contract directives – a directive that sets out the legal framework for public procurement.

Five years on, when we look back at the changes implemented, they read: “Outdated and superfluous constraints have been removed, and many new features have been added to streamline and modernise public procurement. For contracting authorities, this means being able to run procurement exercises faster, with less red tape, and more focus on getting the right supplier and the best tender. And for suppliers, the process of bidding for public contracts should be quicker, less costly, and less bureaucratic, enabling suppliers to compete more efficiently.”

“Sounds like exactly what we need!” I hear you shout. Five years can be a lifetime in terms of innovation and advancement – and regular updates are often required throughout this timescale. The use of taxpayer’s money and how it is used, should be something journalists and we, as the voting public, should hold those in power accountable for. Therefore, these systems should be kept up-to-date, contemporary and if possible, at the cutting edge of technology to ensure the best value.