SMEs need not apply

The Irish Government appears to recognise the importance of small and medium sized entities (SMEs) to the economy (despite, in my opinion, having too high a bias towards exporting businesses). This recognition is reflected in the various initiatives intended to support the sector:

  • Various tax reliefs for start-ups
  • Funding for start-ups
  • Funding and supports for established SMEs
  • Measures to allow for greater SME participation in public contracts

The Department of Finance has issued circulars and guidelines to public sector buyers to help ensure SMEs are not unduly excluded from entering competitions for public contracts. Historically, barriers to entry have been turnover levels and relevant public sector experience. When a body sets minimum turnover levels as a requirement for tenderers, EU and national guidelines require it to be set at a level that is “relevant and proportionate to the circumstances of the contract”1. The problem with this is that “relevant and proportionate” are not defined leaving room for turnover levels to set on an arbitrary basis.

I have encountered restrictive turnover practices in public tenders in various guises:

  • Minimum total turnover of the tendering firm
  • A requirement to state turnover from similar activities
  • Turnover from similar activities must be in excess of a stated amount over the previous x number of years

Some requirements are more transparent the others. For example, a stated minimum level of turnover is open and potential bidders know they don’t meet the criteria and therefore don’t enter the competition. A requirement to state turnover (without indicating a minimum requirement) could be used to rank bidders when evaluating tenders. An SME could lose points based on an arbitrary requirement which could have little or no bearing on its ability to perform the work.

Lately I have noticed another method of restricting access to SMEs based on turnover – professional indemnity insurance (PII) cover. I have seen several invitations to tender setting PII cover at €1m. The recurring nature of this suggests to me a cut-and-paste approach rather than the “relevant and proportionate” method. This is supported by the fact that the same level has applied to various bodies of differing complexities, sizes and contract requirements.

Chartered Accountants Ireland (CAI) requires member firms to have minimum PII cover of 2.5 gross fee income.

Setting PII cover at €1million could potentially exclude all firms with a turnover of less than €400,000. A recent practice comparison survey by CAI found that 78% of Irish accountancy practices have total fee income of less that €400,000 per principal or partner. Unfortunately the report does not give any further detail but it would be reasonable to assume that the majority of sole-practitioners would fall into this bracket, effectively eliminating sole-practitioner participation in public contracts. Furthermore, the same research indicates that 50% of firms had turnover of less than €200,000 per principal. Firms in this bracket would need in excess of 2 partners to generate total practice income greater than €400,000.

The people setting the terms of these contracts may not be aware that setting excessive PII cover requirements may be eliminating so many potential bidders. On the other hand they may be exactly aware of what they are doing. And this is where the cynic in me comes out!

Picture this: a public body engages a firm for 3 years to prepare its annual accounts. After 3 years the public body is so pleased with the firm that it extends the contract for another year before going to tender again. The body is happy with the service it receiving, but knows that it could probably get the same work done at a lower price. But it doesn’t want to terminate the relationship with its current provider. It knows if it goes to tender there is a good chance that a smaller firm will come in at a lower price with a comparable service level. Under procurement regulations the body must accept the most economically advantageous tender (MEAT). So what does it do? It could set the turnover level at a certain level. But recent Department of Finance guidance frowns upon this. The answer, set PII cover at a prohibitive level. The lay person reading of the tender documents may not realise that €1m PII cover is prohibitive.

A state-body recently advertised a tender on etenders.gov.ie. The PII cover requirement is €1million. I submitted a question explaining Chartered Accountants Ireland PII regulations and asking if it would be acceptable if bidders met the standards of their respective regulatory bodies, despite being less than the stated €1million. I thought it would be reasonable to apply the standards of an organisation that has been regulating the accountancy profession for over 100 years. The response:

“NO the […] require tenderers to have professional indemnity insurance cover of €1million”

If the response had been “Based on the circumstances of the contract we believe that a professional indemnity insurance cover of €1million is necessary and appropriate..” I might have accepted it. However, the response suggests that this is a standard level required by this body for all contracts. This appears to be blatant disregard for Government policy and guidance. To disregard industry norms when setting PII levels seems ludicrous to say the least, and perhaps foolish.

As I stated at the beginning, the Government has taken steps to open the public sector market to SMEs. Unfortunately, practices like those outlined above are still preventing competent and capable SMEs from entering that sector. With practices like these it is questionable whether state bodies are achieving value for money.

What needs to be done? The Government has established the National Procurement Service. One of its goals is “To integrate the whole-of-Government policies into procurement practice, e.g. sustainable procurement and encouraging participation by SME’s in public procurement”. SMEs can only be encouraged to participate in public procurement if these practices are stopped. I suggest that suppliers should be able to report suspected unfair and restrictive practices to an independent body, such as the National Procurement Service.

At present there is nothing we can do other than try and sort the requisite cover. But at what cost?

NOTES

  1. Guidance for Public Contracting Authorities: Facilitating the Participation of SMEs in Public Procurement

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