News focus: Will a supplier 'blacklist' work?

1 November 2012

8 November 2012 | Adam Leach

The UK government is considering a blacklist of tax avoiders and poor-performing suppliers. Adam Leach looks at whether it is feasible.

The word from Whitehall is that the days of turning a blind eye to substandard or morally objectionable conduct from companies earning the public sector pound are coming to an end.

In the wake of the G4S debacle – where the global security contractor delivered thousands fewer guards than it was contracted to provide for the London 2012 Olympics – Labour MP Keith Vaz, who chairs the Home Affairs Select Committee, called on the government to establish a blacklist of suppliers that fail to deliver.

His committee said: “We recommend the government establish a register of high-risk providers who have a track-record of failure in the delivery of public services.”

However, a Cabinet Office spokesman says: “To be clear – there is no blacklist of suppliers. However, we are continuing to introduce unprecedented and comprehensive reforms across all areas of procurement and supplier performance management. As part of this, we intend to take past performance into account before new contracts are given.”

Liberal Democrat chief secretary to the Treasury Danny Alexander said his department and the Cabinet Office will also draw up plans to deal with companies that don’t pay acceptable levels of tax to the UK. In a speech at the party’s annual conference, he said: “If you want to work for us, you should play by our rules. Taxpayers’ money should not be funding tax dodgers.”

Boosting tax revenue

Is it simply tough talk or could the government actually clamp down on companies that fail to deliver or avoid paying the right tax?

It’s important to distinguish between tax evasion (not meeting legal tax obligations) and tax avoidance (using loopholes such as offshore accounts to reduce the amount of tax owed). Tax evasion is illegal and, as with fraud, firms found guilty can be excluded from procurement processes. Tax avoidance, while seen as morally objectionable, is legal. So if the government wants to take a hard line, it needs to decide what is and isn’t permitted.

“If they think it should be illegal, the legislation should be redrafted,” says Sam De Silva, head of outsourcing and IT at law firm Manches. “If they’re breaking the law that’s a different matter from if they’re using it to their benefit.”

However, that’s not to say procurement can’t be used to erode some of the damage caused by tax avoidance. Although the only direct way the government can give tax-dodging companies the cold shoulder is a legislative change, policy and process changes might allow government buyers to indirectly steer more tax pounds into government coffers.

According to Colin Cram, managing director of consultancy Marc1, stepping up the use of social clauses in government contracts could help. “There are things that can be done, but they can’t be discriminatory against these companies. EU procurement rules allow you to include social clauses in a contract. For instance, you can make apprenticeships or the use of local labour a contractual requirement and include it as part of the evaluation stage.”

The nature of the contracts could also be changed to engineer a higher proportion of tax finding its way into the hands of the Exchequer, such as by improving access to public sector contracts for UK SMEs, which are unlikely to have the global tax avoidance strategies employed by large multinationals. “By doing that, you’ll probably have more business going to firms that pay tax in the UK,” says Cram.

Poor performers

In the case of suppliers that fail to perform, the government may be able to take more substantial action when new EU regulations come into force next year.

Currently, the degree to which contracting authorities are able to take previous performance by a bidder into account is limited in the formal procurement process. However, article 55(3) of the proposed revisions to EU public procurement rules aims to change that. If passed into law, contractors that fail to deliver could be excluded from opportunities in future. The proposal states: “Contracting authorities will be entitled to exclude economic operators that have shown significant or persistent deficiencies in performing prior contracts.”

The full directive (see box)  stipulates that the exclusion only applies where there have been “significant or persistent deficiencies” by the contractor on a prior contract or similar contractor with the same contracting authority. This would allow government departments to exclude contractors who had previously failed to deliver on a deal.

The proposal also stipulates that to apply the exclusion, contracting authorities must provide a “method of assessing contractual performance that is based on objective and measurable criteria and applied in a systematic, consistent and transparent way”. This must be communicated to the contractor who must be given an opportunity to object and take legal action against such decisions.

Paul Henty, solicitor at Speechly Bencham, tells SM any use of the exclusion should be done carefully or else expensive legal proceedings could result. “I predict it would lead to more litigation because it ups the stakes whenever there is a termination. If I was a contractor sitting there thinking, ‘not only could I lose this job, but I could also lose all future jobs were these terminations taken into account’, you’ve sort of got no option but to go to court to try to clear your name.”

And as De Silva points out, before taking such action, the government would need to prove the failure to deliver lies entirely at the door of the contractor. “The problem for the government is can they really do it? Unless they can prove that it is the supplier’s fault, supplier’s will resist that and say, ‘you can’t make those sort of announcements because it hasn’t been proven’.”

As for whether the government will back up this tough talk with tough action, Henty believes it has shown a big enough appetite to reform procurement processes to suggest it might well follow through.

“This government has instituted changes on procurement already in the form of tighter time limits for bringing challenges. And the prime minister has made a number of comments regarding his unhappiness about procurement processes and we have seen some action.

“I wouldn’t be surprised if he followed through on the [talk], given the public statements he has made.”

So while the government’s hands are currently tied, it might be able to take more action in the near future.

The legal basis

Article 55(3) of the proposed changes to EU Public Procurement Directives says: “A contracting authority may exclude from participation in a public contract any economic operator if one of the following conditions is fulfilled…(d) where the economic operator has shown significant or persistent deficiencies in the performance of any substantive requirement under a prior contract or contracts of a similar nature with the same contracting authority.”

It goes on to say: “In order to apply the ground for exclusion referred to in point (d) of the first subparagraph, contracting authorities shall provide a method for the assessment of contractual performance that is based on objective and measurable criteria and applied in a systematic, consistent and transparent way.

“Any performance assessment shall be communicated to the contractor in question, which shall be given the opportunity to object to the findings and to obtain judicial protection.”

The proposed changes are set to be passed into law next year.

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