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Three critical actions for the upcoming procurement directives impacting the rail industry

Liz Wilson-Lamb, EU Services Manager at Achilles – which operates Link-up, the supplier registration and qualification scheme for the rail industry – explains how the European procurement reforms will affect rail industry companies.

Early in 2014 the European Commission is expected to unveil the biggest raft of change in almost a decade to Procurement Directives, which will affect regulated procurement sectors – including rail. The development could be something of a ‘double-edged sword’; providing real opportunities for suppliers to rail companies, but significant potential risk for rail industry buyers who are not up-to-speed on the new rules.

The main aims of the changes are to speed up and simplify procurement, to create a level playing field for SMEs supplying the rail companies, and to clarify ‘gaps’ in legislation – where, historically, experts have had to find a solution using only examples of case law or by applying the five Treaty Principles.

It is welcome news for everyone, but extra protection for suppliers means additional potential risk for buyers, which need to be observed, recognised and mitigated. For example, the time and costs involved in fighting challenges could be very significant, taking months or years to resolve and often with a bill of thousands of pounds for either compensation or out-of-court settlements.

Costs of failure to comply with EU procurement regulations amount to hundreds of millions each year. Reports suggest that irregularities with the West Coast Main Line franchise tender alone are expected to cost the UK Government £40m.

Here are Achilles’ top three tips on how buyers and suppliers in the rail industry can protect themselves and get ahead of the game on changes to EU Directives:

1.  Identify the main changes

Based on the current Directive draft, these are likely to be:

• Firstly, buyers will no longer be able to impose a minimum financial turnover requirement on suppliers greater than two times the value of the contract. At present, there are no specific guidelines, other than that it should be ‘proportionate.’

• Next will come additional clarity on preventing the situation where the scope of an awarded contract ends up being significantly different, or re-defined, from the original specification. The new directives define more closely what constitutes a substantial or material change to a contract. If a contract changes beyond that scope, then the buyer may potentially be breaching the rules. For suppliers, that means additional protection from being unnecessarily precluded from bidding for contracts. Again, suppliers should be ready to question the process an awarding organisation has followed.

• Another potential pitfall for buyers is around contract management. Procurement departments frequently set up contracts that are then managed by another department, resulting in contracts that can ‘morph’ over time. Suppliers may well challenge awards during the delivery phase unless procurement managers remain vigilant and prevent scope creep.

• Another big change will be the removal of the distinction between ‘Part A’ and ‘Part B’ services. ‘Part A’ services are those opportunities clearly covered by EU legislation, which were likely to attract interest from providers beyond the awarding member state. These opportunities, if above threshold, would have to follow the full OJEU process. ‘Part B’ services were those opportunities deemed unlikely to attract interest from providers outside the awarding nation and so it has not been mandatory to follow                 the full OJEU process. Historically, reports suggest that some awarding organisations were assigning opportunities incorrectly as  a Part B service to shortcut the more lengthy process! In future, almost all of the previously separated services will be covered by the full force of the regulations. Only a much smaller number of services will be excluded – and subject to a lighter regime, identified by specific Common Procurement Vocabulary (CPV) codes. This could broaden the scope for many businesses. Buyers in the rail industry must get to know these CPV codes, and suppliers should know their rights...

• Finally, timescales will be reduced, providing the opportunity to speed up stages along the procurement process, giving both buyers and suppliers the chance to change the dynamics of the process.

2. Understand the implications and risks

Once the new directives are published, each member state has up to 24 months to enter them into their own legislation. However, UK businesses should act quickly – the Cabinet Office has suggested its deadline will be 12-18 months. Therefore it is critical that both buyers and suppliers to the rail sector get ahead of the game and act early before they become law. 

Research undertaken by Achilles and the University of Nottingham indicated that there has been a substantial rise in the number of supplier challenges reaching the courts, since reforms to the remedies system in December 2009. The number jumped from a long-running average of two challenges a year, to 26 in 2012.

It is reasonable to assume this is just the ‘tip of the iceberg’ and that a far greater number of challenges are settled out of court and that many procurement exercises are re-started or scrapped.

3.  Take action

To reduce exposure to risk of challenge, buyers within the rail industry must take pre-emptive action now by ensuring that their procedures and contracts are ‘watertight’, in line with expected legislative requirements, well communicated and constantly monitored. Although the directives are yet to be enshrined in law, it is likely that the courts may take a view that they should be moving in the direction of expected legislation.

Rail companies will need to ensure there is no ambiguity over what is required from a supplier and they will have to check that the right procedures are in place to prevent the contract changing ‘substantially’ over time. That can be challenging; particularly when
those responsible for setting the contract, ensuring compliance and managing arrangements on an on-going basis are from different departments. Businesses in the rail sector need to take action to ensure responsibility for compliance remains firmly with the contracts department, or risk an expensive mistake.

In our experience, companies in the rail sector should review their current provision, get the right processes in place, up-skill their procurement teams and make sure that they are fully aware of all the changes and impacts by getting specialist advice and training. 

(Image: European Parliament)