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Thursday, November 24, 2011

UK's National Health Service Pilot Program Procurement Pulled

The National Health Service in the UK decided to test a plan to provide a new program for health services delivery. It is not clear to me just what the program entails, but it appears to be some kind of doctor appointments/referral system. The system was to be installed in a variety of regional centres. You can read the story and decipher for yourself at Procurement breach throws 111 pilots into disarray.

Since this was a two year test run, someone (or ones) some where (or wheres) made the decision to simply award the test sites services ("pilots") without a competitive process. At the last minute, the roll-out was cancelled and awarded pilots were cancelled. As the article explains,
Contracts for pilots covering NHS Westminster, NHS Kensington and Chelsea, NHS Hammersmith and Fulham and NHS Hillingdon were pulled after NHS North West London admitted its decision to award contracts without any tender process could be open to legal challenge.

The move has raised fears that pilots elsewhere in the country, some of which have also been awarded rather than put out to tender, could also be open to challenge – a prospect which could throw the national deployment of 111 into disarray.

Pulse understands the move has triggered anger from local GPs who had invested time and resources in planning how to integrate with the 111 pilot.

The wider impact of the decision remains unclear, amid confusion over whether NHS trusts are required to put pilots out to tender. Contracts for the full rollout of NHS 111, some of which are expected to be worth as much as £100m, will need to undergo a full competitive tender process, but the Department of Health told Pulse there was no central guidance on whether pilots should be put out to tender, and it was considered a matter for ‘local commissioners, subject to their legal advice'.

Dr Richard Vautrey, GPC deputy chair, said: ‘GPs are right to be angry about this, but it also reflects the complexities of the 111 procurement agenda and the pressures PCT clusters and CCGs are under because of the very tight timescale set by DH.'

Dr Agnelo Fernandes, the RCGP's urgent care lead and chair of Croydon Healthcare Consortium in Croydon said: ‘They are pilots so they are not covered by the same rules as full procurement but CCGs need to cover themselves by doing some kind of limited procurement, even if it is a pilot for 111.'
This is an instructive article for two purposes (at least). First, it illustrates, again, the way procurements too often get trampled in the rushed implementation of some political bright idea. Time and again this leads to unhappy endings. We should learn from these examples to get it right the first time. It's all part of the planning principle.

Second, it raises the matter of remedies for broken procurement. Here the procurement was cancelled, as were awards already made. Not all regimes allow awards to be rescinded, which I consider a moral hazard because it means if you hurry fast enough you can get away with abusing the process. Guam law also allows contracts that have been awarded by a faulty procurement process to be cancelled, as does the US federal law.

Insofar as this article raised the notion that "pilot programs" should somehow be exempt from general procurement requirements, I consider that to be a bad idea. Guam law, for instance, requires any contract by the government to be governed by the procurement process. There is a very big advantage that accrues to an incumbent contractor, and if a contractor could gain that advantage without competition, it would give the contractor an even more unfair advantage.

Thursday, November 17, 2011

"Buying local" loco buying?

Loco: "Spanish for "crazy", "insane", "mad".

Buy American, buy South African, buy local. There are calls around the world for government to spend its local tax dollars on local resources. It has a gut-level appeal.


If carried to an extreme, however, it can backfire, as excerpts from the following opinion piece from South Africa explain.

Why local procurement rules are a dead end by Jasson Urbach, an economist with the Free Market Foundation.
According to a Business Day news article by Setumo Stone (Buy-SA bid to channel billions to local companies, 1 Nov. 2011), "Business, the government and labour signed an accord on local procurement on Monday, pledging to increase their purchasing of goods and services from South African producers to an "aspirational target" of 75% in a bid to boost industrialisation and to create employment".

Proponents of the "local is lekker", "Buy South Africa" and the more recent "Proudly South African" initiatives argue, essentially, that buying local keeps the money in the economy and boosts growth and employment. It's easy to recognise the simple logic of the protectionist movement argument: if we encourage people to buy locally (mostly by pulling on patriotic sentiment) then we increase demand for domestically manufactured goods and with more goods being produced locally more South Africans will get jobs.

But is compelling people to buy local a good idea? And, surely, if 75% is good for the local economy then wouldn't inducing people to buy 100% locally be an even better option?

Let's assume that I am a successful car manufacturer. By successful I mean I run a profitable business without relying on special privileges from government at my fellow taxpayers' expense. To manufacture my make of car, I import the engine from Germany at a cost of R100,000 per unit.

Now, suppose I have a neighbour who, using South African labour, can manufacture an engine of equal quality but with a price tag of R1 million. Should I support the ‘local is lekker' drive and buy the engine from my neighbour?

if, instead of making an engine of equal quality but significantly more expensive than the German engine, my neighbour makes a really shoddy engine that doesn't work quite as well. The smart business thing for me to do would be to continue buying the engine from Germany if I want to produce my car at the best price and make enough profit to keep my workers suitably rewarded. The savings I make by importing the engine will allow me and my workers to buy a lot of other goods and services, some produced locally and some imported.

The tried and tested way to prosperity is to produce goods and services that other people actually want and at a price they can afford or are prepared to pay. I cannot be expected to buy the engine from my neighbour just because he lives in the same country as me, irrespective of the price or quality of the good he produces.

I could well decide to buy the engine from my neighbour out of compassion or because I like the guy, but this would amount to charity. If business, government and labour force me to buy from my neighbour and I receive less value for my hard earned cash, the net result is that I am simply transferring some of my wealth into my neighbour's bank account.

Individuals who choose voluntarily to help their countrymen by buying products at a higher price or of a lower quality, do so as an act of compassion and must do so at their own cost. There is no decent reason to force or compel people and businesses to do what the simple logic of proponents of the "Buy local" initiative deem is right at a cost to the country in general and the poor in particular.

Should we ‘buy South African' regardless, to preserve money and jobs domestically? No, obviously, if it means we would be buying non-operational, overpriced goods from each other.

By restricting everyone to buying from and selling their goods and services to fellow countrymen only, we limit the range of products available as well as the people we can buy from and sell to, and ultimately everyone is worse off.

I sense a bit of hyperbole in the argument, but I have to say it comes in no small part to a failure of the author to clearly state the facts here.

The claim is implied that this is a compulsory mandate, but the words used are more precatory: "pledging", "local procurement accord", "we encourage people to buy locally (mostly by pulling on patriotic sentiment)", etc.

Surely there is some level of multiplier effect locally if local money, raised through locally assessed taxes, is recycled through the local economy rather than exported. It would not be enough effect to require that all, or even a large part of purchases be made from local sources, but it does have not an insignificant effect, and it does sit better with the local populace if the community first looks to its own, giving itself the benefit of any doubt as to value for money.

Most buy government contracting local laws I have seen (but I have not done any kind of empirical research) give an edge, but only a marginal one, to local vendors. Guam's procurement law is actually one of the more extreme I've seen, giving a local business a 15% price differential advantage to a non-local vendor or service provider, assuming responsive bids or proposal. However, it has defined "local" in a way that makes it very easy to qualify as local, which dramatically reduces the discriminatory impact. For instance, there are NYSE-listed international corporations doing business "locally" on tiny Guam.

The Guam Chamber of Commerce is currently supporting a "buy local" campaign, aimed not at government contracting but the wider community. This program only hopes to encourage locals to buy 10% of their needs from local sources, including local wholesalers, most of whom acquire the bulk of their goods (if not all), from off-island. It, like the South African program is described, is an "aspirational" campaign; it has no enforcement mechanism. It makes no claim that people should buy locally if the product does not pass muster, and in doing so, by encouraging pride in local production, lifts the benchmark for quality, challenging local producers to better off-island sources. It's meant to change the habits of the modern electronic marketplace, not the tastes.

Is that such a bad thing?

Wednesday, November 16, 2011

Of bad actors and Emmys

Should a bad actor be given an Emmy award?

How about a contract award?

Read on.

Lawmakers, OMB push to ban more `bad-actor' contractors by Charles S. Clark
At a Wednesday hearing of the Senate Homeland Security and Governmental Affairs Committee, Chairman Joe Lieberman, I-Conn., expressed alarm that a series of reports from the Government Accountability Office and inspectors general have shown a reluctance of many agencies to refer unsatisfactory contractors to the Excluded Parties List System maintained by the General Services Administration.

A Pentagon report "just last month shows that over a 10-year period, DoD awarded $255 million to contractors who were convicted of criminal fraud; and almost $574 billion to contractors involved in civil fraud cases that resulted in a settlement or judgment against the contractor," Lieberman said. "Last year, the Department of Homeland Security's inspector general found 23 cases where the department had canceled a contract because of poor performance, but in none of those cases did DHS suspend or debar the contractor."

The Federal Emergency Management Agency, despite the existence of an anti-fraud task force following Hurricane Katrina in 2005, has not sent a single name to the list, Lieberman added, noting that the rarity of suspensions and debarments has been a concern of the committee as far back as 1981.

Sen. Claire McCaskill, D-Mo., regretted that proposals to require more suspensions and debarments founder because of a fear of litigation, because it's "too much trouble," some contractors are seen as "too big to fail," or "it is unclear who is accountable for a failure" to pursue that course, she said.

Dan Gordon, the departing administrator of the Office of Federal Procurement Policy, said the system's "weak link" is ensuring that a fraudulent contractor is flagged for action in a timely way. "Sometimes the referral takes too long, as historically agencies have been very bad about sharing, either because officials didn't check the list, checked it too late, or because of problems in the spelling of an entity's name."

But he expressed skepticism toward any prospective legislation making certain referrals mandatory, saying agency cultures differ and mandatory referrals that take away discretion could undermine the role of suspension and debarment officials.

Panelists agreed that the model policy is that practiced by the Air Force. Steven Shaw, deputy general counsel for contractor responsibility at the Air Force described two recent suspensions, one involving the Boeing Co.'s launch systems units and the other involving programs within L-3 Communications. Sixty-two percent of his suspensions and debarments are "fact-based," he said, meaning his team doesn't wait for the Justice Department to bring criminal charges. "We take a broad view of the type of misconduct, not just criminal fraud but as it relates to business integrity, tax issues, the Foreign Corrupt Practices Act or commercial fraud," he said.

The Air Force also uses a "carrot-and-stick approach that is aggressive at the front end" but still allows contractors to prevent fraud through risk management and ethics programs.

Ranking committee member Sen. Susan Collins, R-Maine, who as a staff director worked on the 1981 hearing chaired by then-Sen. William Cohen, R-Maine, reminded the hearing that the goal of suspension and debarment is "not to punish contractors but to protect" the taxpayer, and that allowing "bad actors" to win new contracts is "not fair or ethical to the honest contractors."

Private contract law imitating public contracting?

The case is often made, in Guam and the US anyway, that government contracting should be more like private contracting. In Canada, at least according to the following account by Paul Emanuelli, who has already featured beneficially in this blawg, it seems government contracting is providing principles either "found" in common law contracts or implied there.

In the US, it is well settled that, in government contracting, any change made to the contract terms beyond the "scope of the contract" should necessitate a new solicitation. On the other hand, I am not aware of any private law of contract case coming to any similar conclusion; the freedom of parties to contract is usually paramount. Any potential contractor bidding on a private contract does so with little safeguards: let the bidder beware.

Not so in Canada, so it seems (and this may be a good thing, no?).

Courts prohibit changes to contracts after bids are submitted by Paul Emanuelli
In its decision in Protec Installations v. Aberdeen Construction Ltd., the British Columbia Supreme Court found that the owner was not allowed to make changes to the tender call rules or negotiate material changes to the contract after the close of bidding.

The case involved a tender call for the construction of a mall in Richmond, British Columbia. With full knowledge of the low bidders’ price, the second-lowest bidder entered into post-bidding negotiations with the owner and submitted a revised bid for $5,000 less than the low bid. That bidder was awarded the contract. The low bidder sued.

The court found that the owner was not allowed to cut the low bidder out of the process while permitting a competitor to re-negotiate the terms of the deal and re-tender its price. The court found that the low bidder was prejudiced by the post-close indulgences granted to the competing bidder and awarded the low bidder damages.

Similarly, in its decision in Health Care Developers Inc. v. Newfoundland, the Newfoundland Court of Appeal recognized that an owner’s good faith duties include the duty to avoid varying the terms of the awarded contract from the terms contained in the tender call.

The case involved a tender call for the construction of health facilities and other buildings. The Court of Appeal noted that “In respect of the decision to award a contract other than that contemplated by the tender call, the trial judge found this was also a violation of the common law principles of contract.”

The Court of Appeal agreed, finding that the need to award a contract that is consistent with the contract contained in the tender call is one of the primary implied duties that applies under the duty of fairness and good faith

As this case confirms, any post-bidding changes to the awarded contract can undermine the integrity of the formal bidding process and the equal footing upon which all bidders are entitled to compete.

Furthermore, in its June 1996 decision in Emery Construction Ltd. v. St. John’s Roman Catholic School Board, the Newfoundland Court of Appeal also found that a privilege clause does not allow an owner to award a contract that varies from the Contract B contained in the tender call.

The case involved a tender call for the construction of a new school. The low bidder was bypassed in favour of the second-lowest bidder. The low bidder sued.

The Court of Appeal stated that the school board was not permitted to use its privilege clause to apply undisclosed award criteria or vary the terms contemplated in the tender call: such clauses do not permit the owner to choose among bidders on the basis of criteria not disclosed to the bidders nor does it permit the owner to award something other than contract B.
Whilst these cases seem to be about private contracts (the first involving a shopping mall and the third involving a private Catholic school), the rationale for the holding seems, on the other hand, to be derived, as quoted from the Newfoundland case, from and for government contracting:
The doctrine of good faith is applicable in this case, the necessity for its application to government tendering to “protect the integrity of the bidding system” was expressed in Kencor and I need not state the principle more broadly than that it is a part of the law of tendering for Government contracts.
I would be interested to know for certain that the scope of contract principle is being applied to private contract bids. Given its basis in "good faith", a concept that has yet to find firm roots in US contract law generally (especially beyond the Uniform Commercial Code), I'd be skeptical about relying on it in the US.

But I would encourage pushing the envelope. If private owners truly ask private bidders to go to cost and bother of bidding on projects, at the very least, there should be some kind of promissory estoppel to prevent the kinds of injustices the Canadian cases seem to mitigate.

Tuesday, November 15, 2011

As one door closes, another opens ...

Government contracting is a double bladed sword. Matters of public governance inevitably make it a cumbersome process that frustrates the nimble creative, and creatively destructive, instincts of so-called free markets.

The following two articles popped up on my radar screen and offer competing views of the advantages and disadvantages of trading with Caesar. As usual, you are best served by reading the full article.

Why Selling To The Government Can Downgrade Your Startup
First Greece, now Spain and Italy. Across Europe, historically solvent sovereign governments are suffering from an acute case of systemic deficits. Now, more than ever, government agencies in the US and abroad are lousy startup customers.

Although government customers are not without their merits, startups should only target such bureaucracies when they can obtain a market price and avoid an extended and costly sales process. By focusing on commercial enterprises that share your adVenture’s sense of urgency and profit motive, your startup can maintain its solvency and avoid a credit rating downgrade.

an entrepreneur’s two most valuable assets are time and money. Government customers abundantly waste both of these assets by negatively impacting a startup’s cash flows while causing it to spend unnecessary time participating in laborious approval processes and elongated sales cycles.

Vendor Approval Process: In the case of the US Federal Government, the steps a company must traverse to become approved by the Government Services Administration can take years and cost a small fortune of precious startup capital – time and money most startups simply cannot afford.

Slooooooow Mover: The typical government procurement process is not driven by a sense of urgency.

Slooooooow Payer: The government is a notoriously slow payer. Officially, the Prompt Payment Act requires the US government to pay its vendors in 30-days “after receipt and acceptance of material and/or services.” In actuality, payments routinely extend beyond this threshold, with 120-days outstanding not uncommon.

Capricious: Non-government customers sometimes make irrational decisions that are difficult to predict; government customers do so on a routine basis. As the decision makers come and go with the latest election cycle, a startup can lose a government account for no reason other than the newly elected officials want to give a hearty "thank you" to a company that greased the skids for them during the election. In addition, government budgets are prone to draconian, across-the-board cuts which often have no correlation to the efficacy of specific programs or vendors’ solutions. It is frustrating to lose an account to a formidable competitor. It is downright criminal to lose a hard-fought sale because of crony capitalism.

Set Asides: Despite the controls bureaucrats create to ensure a fair procurement process, it is any but. Most startups do not have the financial wherewithal to make adequate campaign contributions to purchase government set-asides or win no-bid contracts. In most cases, startups are “set aside” to make room for Big Dumb Companies (aka Big Dumb Campaign Donors), when it comes to obtaining lucrative government contracts.

Bro Factor: An inherent advantage startups enjoy is the Bro Factor. Unfortunately, this startup weapon is difficult to deploy when dealing with governments, due to the dispassionate nature of most bureaucrats. [Does this contradict the prior two factors?]

Mitigating Downside: Unlike the private sector, in which many buyers are focused on gaining a competitive advantage, the fear of loss is often the primary criteria motivating politicians and their appointees

High Volume / Low Margin: The combination of the low profitability of competitive bid contracts, the large size of many government procurements, and extended payment terms can be deadly for a fledging startup.

The Tierney Of Low Expectations: Post sale, governments are typically undemanding customers, due to the lack of accountability in most bureaucratic organizations. Aggressive commercial customers help startups improve its value proposition with frank criticism, product roadmap suggestions and new use cases.

Barrier To Entry: Once you are in with a government entity, the same inertia which made it difficult for you to secure the sale will make it similarly challenging for your competitors to displace you.

Low Default Risk: Unless you are selling to Greece, Mozambique or California, the risk that you will never get paid is relatively low.

Budget Drain: Government workers are trained to drain their budgets annually to avoid being granted a smaller budget in the following year. Approved vendors who enjoy an existing relationship with the government can leverage this inclination to waste money at the end of each fiscal year by pre-selling additional products and services.

Read more: http://infochachkie.com/government/#ixzz1dnGA8e2U

Procurement Service opens global resource market
The state procurement agency [of South Korea] has unveiled its strategy to widen exports of its procurement system to about 20 countries, paving the way for local suppliers to find deals abroad.

Public procurement market has been difficult to penetrate for local companies as many authorities have placed restrictions on foreign ownership and subsidies reserved for local suppliers. But regulations favoring domestic firms are being lifted with more trade pacts, creating level-playing field for companies to bid for deals from overseas.

The Public Procurement Service, tasked to manage state-owned land and properties, has put its priority in selling Narajangteo, an electronic procurement system developed by Samsung SDS.

Narajangteo, also known as MER-Link, manages government’s contracts with private suppliers by processing electronic bidding, certification, payment settlements, document distribution and workforce planning. Roughly translated as “national marketplace,” the homemade e-system helps to integrate and standardize procurement process. It has been sold to Costa Rica and Vietnam and Mongolia are scheduled to adopt the system within a year or so. Choi is confident he can expand this to Europe and Africa.

“Export of Narajangteo lays the groundwork for local suppliers to find deals from foreign governments. Selling the system widens Seoul’s network with foreign officials, which helps us share information with local companies,” Choi said. “(Importing countries) having the same system as we do is a great advantage to Korean suppliers trying to channel resources there,” he added.
Of course, Samsung is hardly a start-up company.

Sunday, November 13, 2011

The cost of sole source pricing

Disclaimer: The article below is meant to be a jumping off point for the discussion of procurement principles that follows. The discussion does not claim to evaluate the law or facts of the matters reported in the article. As usual, the article is used and presented as if it were a hypothetical, for analytical purposes only.


Cost, need questioned in $433-million smallpox drug deal
By David Willman, Los Angeles Times
Once feared for its grotesque pustules and 30% death rate, smallpox was eradicated worldwide as of 1978 and is known to exist only in the locked freezers of a Russian scientific institute and the U.S. government. There is no credible evidence that any other country or a terrorist group possesses smallpox.

If there were an attack, the government could draw on $1 billion worth of smallpox vaccine it already owns to inoculate the entire U.S. population and quickly treat people exposed to the virus. The vaccine, which costs the government $3 per dose, can reliably prevent death when given [only] within four days of exposure.

Dr. Nicole Lurie, a presidential appointee who heads biodefense planning at Health and Human Services, cited a 2004 finding by the Bush administration that there was a "material threat" smallpox could be used as a biological weapon. "I don't put probabilities around anything in terms of imminent or not," said Lurie, a physician whose experience in public health includes government service and work with the Rand Corp. "Because what I can tell you is, in the two-plus years I've been in this job, it's the unexpected that always happens."

Worrying about worst-case scenarios is what biodefense planners do. In the case of smallpox, millions of Americans have no immunity because the vaccination of civilians ended in 1972. And there is no way to guarantee that a rogue regime such as North Korea is not holding smallpox.

Nonetheless, no such threat has been verified. The Bush administration suspected Saddam Hussein of possessing smallpox and other biological weapons, but inspectors did not find any after the U.S. invaded Iraq in 2003.

Still, pressure to move quickly and spend more has helped shape U.S. biodefense policy since the Sept. 11, 2001, terrorist attacks and the anthrax mailings that fall. Bush, in June 2004, signed Project BioShield, a 10-year, $5.6-billion initiative to fund the development and stockpiling of medications to counter bioterrorism.

Two months later, New York based Siga Technologies, Inc. purchased the rights to what became known as ST-246 from a Pennsylvania company, ViroPharma Inc., for $1 million in cash and 1 million shares of Siga's common stock. Over the next three years, the National Institute of Allergy and Infectious Diseases awarded Siga two research grants and a related contract, worth a total of $23.5 million, to develop the new drug.

From the outset, there was only one potential customer: the U.S. government. Unlike the smallpox vaccine, which remains potent for decades, Siga's drug is guaranteed for only 38 months.

Siga's controlling shareholder is billionaire Ronald O. Perelman, one of the world's richest men. Perelman and others at Siga's affiliate, MacAndrews & Forbes, have long been major political donors. They gave a total of $607,550 to federal campaigns for the 2008 and 2010 elections, according to records compiled by the Center for Responsive Politics. About 65% of that money went to Democrats. Perelman donated an additional $50,000 to President Obama's inauguration.

[At some point (whether in this administration of the prior one is unclear from the story), the federal Department of Health & Human Services began a solicitation process to acquire a smallpox biodefense drug for those who may be unable to obtain the smallpox vaccine withing the 4 day window of that drug's efficacy.]

On Oct. 13, 2010, Siga announced that the government intended to award it a contract for ST-246 worth as much as $2.8 billion.

But the federal contract required that the winning bidder be a small business, with no more than 500 employees. Chimerix Inc., a North Carolina company that had competed for the contract, protested, saying Siga was too big.

Officials at the Small Business Administration investigated and quickly agreed, finding that Siga's affiliation with MacAndrews & Forbes disqualified it.

In early December, officials completed a required "justification for other than full and open competition," which said an antiviral against smallpox was needed within five years and Siga was the only company able to meet that timetable.

Because the contract was no longer to be awarded based on competition and because the only customer was the government, officials sought to assess whether the company's proposed price was "fair and reasonable," as required by federal law.

In so doing, officials looked at how much government money had already gone into developing ST-246. Public records show $115 million in federal support, not including the stockpile contract.

After reviewing Siga's costs and the prices of other drugs produced in low volumes compared with commercial products, the HHS negotiators wanted to pay about $170 for each treatment. The company argued for more based on ST-246's potential value to the nation.

A financial analyst for RBC Capital Markets reported to investors in May that the agreed-upon price per dose appeared to be $255. He arrived at that estimate by dividing the $433-million contract by the 1.7 million doses to be delivered. Siga told The Times that this would give a rough approximation of the per-treatment price.

"Siga did not derive its price based on any cost information, and, from Siga's viewpoint, such information is not relevant to determination of an appropriate price," the company's chief financial officer, Daniel J. Luckshire, wrote to Lurie's office and others on March 4.

"Siga has created extremely valuable intellectual property, embodied in ST-246, and Siga has priced ST-246 based on the value of that intellectual property," Luckshire added.

On April 6, Siga's chief executive, Dr. Eric A. Rose, emailed the government's chief negotiator, D. Andre Early, saying the two sides were "at impasse." Rose said "any further negotiation should occur with a more senior official [with] the authority to take into account the important policy issues that surround this procurement."

Negotiations over the price of the drug and Siga's profit margin were contentious. In an internal memo in March, Dr. Richard J. Hatchett, chief medical officer for HHS' biodefense preparedness unit, said Siga's projected profit at that point was 180%, which he called "outrageous."

In an email earlier the same day, a department colleague told Hatchett that no government contracting officer "would sign a 3 digit profit percentage."

In April, after Siga's chief executive, Dr. Eric A. Rose, complained in writing about the department's "approach to profit," Lurie assured him that the "most senior procurement official" would be taking over the negotiations.

On May 13, HHS announced what amounted to the second awarding of the contract, worth between $433 million and $2.8 billion, depending on whether the government exercised options to buy more of the drug in future years. Siga hailed it as a "historic event for the biodefense industry."

Siga was awarded the final contract in May through a "sole-source" procurement in which it was the only company asked to submit a proposal. The contract calls for Siga to deliver 1.7 million doses of the drug for the nation's biodefense stockpile. The price of approximately $255 per dose is well above what the government's specialists had earlier said was reasonable, according to internal documents and interviews.

The apparent procurement controversy in this acquisition, apart from the political one this story alludes to, concerns when cost (including the cost concept of "reasonable profit") is to be a determinate of price. Here, Siga argued cost is "not relevant to determination of an appropriate price"; rather, price should reflect the "extremely valuable intellectual property" embodied in the drug.

Guam law (based on ABA Model Procurement Code law), in very general terms, requires, when there is only one bid (as there always is in a sole source solicitation), that price cannot be accepted unless it is first independently determined that "the price submitted is fair and reasonable". (See, 2 GAR § 3102(c).) The regulations allow cost principles to be used to evaluate prices for sole source procurements (2 GAR § 7101(b)((1)(b)(i)), and the cost principles specified are extensive and detailed. The regulations require the use of federal government cost principles when dealing with contractors operating according to federal cost principles or when federal assistance monies are used and specified in the assistance program or instrument. (2 GAR § 7101(j).)

Federal price and cost principles are even more extensive and descriptive. The general policy of federal contracting, again, is that prices be "fair and reasonable". (FAR Subpart 15.402(a).) The full application of the FAR will not be discussed here (in deference to my limited acquaintance with it), but the general principles are set out in Subpart 15.4 ("Contract pricing").

The FAR distinguishes between price analysis and cost analysis, and describes the methodology for each analysis in detail. (See § 15.404-1 (b) and (c).) It described price analysis as "the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit." Cost analysis, on the other hand, "is the review and evaluation of the separate cost elements and profit in an offeror’s or contractor’s proposal ..., and the application of judgment to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency."

The federal approach is to avoid looking to cost to evaluate fair and reasonable value as a general rule, subject to exceptions. The admonition is to use "every means available to ascertain whether a fair and reasonable price can be determined before requesting cost or pricing data". (§ 15.402(a)(3).)

The usual exceptions to the rule of avoiding cost data are based on the concept that where there is market value data available, usually in respect of "commercial items", or other "adequate price competition", that will be sufficient to establish a fair and reasonable value. (See, § 15.403-1(b).) But when those factors are lacking, a look at cost data can be justified.

An exception is also made for a waiver of cost price determination. "The HCA may consider waiving the requirement if the price can be determined to be fair and reasonable without submission of cost or pricing data. For example, if cost or pricing data were furnished on previous production buys and the contracting officer determines such data are sufficient, when combined with updated information, a waiver may be granted." (§ 15.403-1(c)(4).) Thus, this determination must be based on relevant facts and not some vague judgment.

There is also a policy and methodology for determining the profit allowed under a fair and reasonable price. As expected, it's complicated (see § 15.404-4). Policy statements of government interest reflect the reality that undue profit squeeze is not good as an incentive for good performance, not good for quality and not good for maintaining a viable competitive marketplace for government purchasing.

However, there are many factors the government is intended to consider in evaluating a fair and reasonable profit factor, including (pertinent, it would seem to the case above), the "contractor risk" and "independent development" factors.

Under the contractor risk factor, generally speaking, the more contract risk a contractor assumes to deliver the item sought, the greater the profit factor might be. Under the independent development factor, "the contractor may be provided additional profit opportunities in recognition of independent development efforts relevant to the contract end item without Government assistance. The contracting officer should consider whether the development cost was recovered directly or indirectly from Government sources." (See, § 15.404-4(d).)


It is not the point of this post to judge whether the profit factor was properly evaluated or even if cost factors should have been considered, whether the solicitation was appropriately sourced, or whether any other claim might be made about the procurement. Rather, it is simply to point out some of the broader procurement issues that must be addressed, over and above whatever political intrigue there may be. Procurement issues, also, are usually easier to define and assess than political intrigue or influence, so tend, for my money, to be more productive in dealing with something that doesn't pass a quick smell test.

It can also be pointed out that the government is not bound to take the price offered or leave it. In fact, as Jim Nagle's book, the History of Government Contracting, points out, there have been numerous instances in the federal government's procurement experiences when the government has created competition when there wasn't any, or coerced it upon manufacturers when it has been necessary to do so. And when politics has not intervened. These are all issues lurking in this story.

Friday, November 11, 2011

Procurement controversies -- Tanzania

MPs say No to 2nd hand purchases
Members of Parliament yesterday challenged the government’s intention to approve Section 66 of the new Public Procurement Bill, 2011 which, if given the nod by the House, will allow the State to purchase used airplanes, ships, railway engines wagons.

The Bill, presented in the House by the minister for Finance and Economic Affairs, Mr Mustafa Mkulo, among other things, focuses at improving and giving more powers to the Public Procurement Regulatory Authority (PPRA) to undertake its operations effectively.

The minister said the new Bill nullifies the 2004 Public Procurement Act, and the ministry in cooperation with the Parliamentary Committee for Finance and Economic Affairs and other stakeholders has gone through the Bill and decided to present it for more efficiency and better performance of the sector.

However, the opposition Finance and Economic Affairs deputy spokesperson, Ms Christine Lissu, challenged the Bill, saying the document was not well prepared to solve the problem. According to Ms Lissu, the document has failed to identify flaws that have forced the government to prepare a new Bill.

“The government has so far failed to tell us why it decided to formulate a new Bill to replace the Act. We want to see the weaknesses of the current law and not the strengths of the new Bill,” she said

Commenting on the government intention to purchase second- hand ships, airplanes, train engines and wagons, the opposition leader said the idea was alarming as it was likely to create opportunity for corruption. He said it was better to incur high costs for brand new machines instead of second hand, which are risky.

Mr Kigoda said the committee supports the idea of second hand purchases, but care should be taken lest Tanzania becomes other countries’ dumping ground.

Mr Kigoda said the purchase of machines and other materials under emergency should be done by the government when there was a state of war, health problems, fire outbreak and other things related to national security.


Now govt defends procurement of secondhand machines
The minister for Transport, Mr Omar Nundu, told Parliament purchasing secondhand machines suited Tanzania at the moment because many countries were applying the same strategy on costly machines such as planes, train engines and ships.

According to Mr Nundu, Kenya Airways sold a plane to a Canada-based airline in 2005. Kenya Airways had bought the plane in 2001. He added that British Airways, Ethiopian Airways and many other big companies in the world have been buying used planes from each other.The minister expressed suspicion that there were deliberate plans to prevent the Bill from passing due to individual interests.

Mr Nundu said all air transport companies in the country such as Precision Air, Fly 540 were operating used planes. He wondered why the idea was perceived dangerous when the government applied it.

Parliament is expected to conclude debating the Bill on Monday.

Sounds vaguely like the recent ambulance controversy here on Guam.

Penny wise and pound wiser?

The subject matter of the following articles coming from the UK is ferreting out procurement abuse. It makes the point that "routine" fraud (basically, "cheating") is usually more petty and easily ferreted out than the larger, more cleverly contrived fraud that undermines faith and confidence in both the procurement process and government more broadly.

It suggests that, on a cost benefit basis, it pays in many ways for government to focus its resources and tighten its regulations on the big stuff, and to demand greater accountability and culpability from those involved in such shenanigans.

£185m council fraud ''tip of £2bn iceberg'
England's councils unearthed £185m worth of fraud in 2010/11, an improvement of 37 per cent on last year's figure of £135m – money that could pay for around 700 libraries or the wages of up to 11,000 care workers – but the figures are just the tip of a £2bn iceberg, according to the Audit Commission.

The 'Protecting the Public Purse' report showed that 121,000 scams were detected in 2010/11, including false benefit claims, council tax discount cheating, and unlawful use of social housing.

The Audit Commission chairman Michael O'Higgins said: "Councils are certainly acting on fraud, and it is now firmly on the government agenda. But our latest survey of detection rates shows that we may be seeing just the tip of a very large iceberg.

"Now, for the first time, we are also able to publish details of fraudsters targeting care payments to the elderly and vulnerable. Also scams involving fraudulent student council discounts and fraud that goes to the heart of councils' multi-million pound procurement budgets."

He added: "We are all victims of fraud against councils. It is heartening to see councils making inroads, and improving detection rates in areas like council tax discounts. But they need to do more to tackle housing tenancy and procurement frauds."

Facing up to fraud, an opinion piece by Chris Clements, forensic and investigations services partner at Grant Thornton
The larger frauds, which potentially account for the missing £1.8bn, are most likely to be ‘off-book’ scams – harder to trace and dealing with far larger sums. This type of fraud would usually take the form of bribery and corruption, and as such would be unrecorded in the books and records, making it incredibly hard to detect. An example of this type of fraud might be a key figure in a public procurement taking a bribe to tip off bidders with insider tips about the tender requirements and\or other bidders.

Large-scale fraud is preventable through good quality controls and particularly an effective whistle-blowing policy. The majority of this type of criminal activity is spotted not by accountants, but by fellow colleagues who have noticed and reported unusual or suspicious behaviour.
With this in mind, the checklist below can help council employees to identify a fraudster.

1 An employee who has a lifestyle above and beyond what could be reasonably expected for their position. For example expensive holidays and expensive cars. And don’t forget close relatives, family and friends.

2 An employee who frequently circumvents controls. For example avoiding authorisation limits by processing one large payment as two separate payments. In local government we have seen this with people trying to circumvent procurement rules, including, in one case an attempt to employ a forensic accountant!

3 An employee who displays erratic behaviour. For example overly aggressive with colleagues, members of the public or suppliers.

4 The use of extreme disorder and confusion to cover up fraud. We have had examples of where the fraud started out as incompetence, but, once the member of staff realised that the incompetence could conceal extractive fraud, they continued using it as a technique to get away with thousands of pounds. The corollary of this is the control freak who wants to keep control of all transactions and never take holidays.

5 Frequent complaints from suppliers/others in the department/ members of the public. For example, suppliers complaining that they haven’t been paid whilst the accounting information indicates payment has been made. Members of the public insisting they have paid whilst the accounting information indicates that no payment has been received.

6 A refusal by a member of staff to delegate key tasks. For example doing the banking, performing control account reconciliations etc.

7 The frequent changing of supplier details, in particular bank details. Or duplicate bank details for multiple suppliers. This is a particularly common fraud at the moment and we have seen a number of public sector bodies defrauded out of amounts that have run into the millions.

Of course any one of the above, on its own, may not be a definitive indication of fraud, but they should be seen as red flags if combined with other concerns.

Wednesday, November 9, 2011

A look at the difficulties in writing specifications for services

Until the most recent very few decades, government purchasing was pretty much concerned with acquiring things, not services. Indeed, for the US, acquiring things was often a question of build or buy, and building was common from the earliest days of the pre-Revolution Union, particularly as regards arms and heavy equipment and transportation networks.

As an aside, the nation's use of its own armories to manufacture arms and create the machine tools for doing so, according to James F. Nagle, underwrote the industrialization of America. In his epic overview of the "History of Government Contracting", Nagle makes the point that the phrase "close enough for government work" began as a form of high praise, rather than derision as it is now used, because the government set the highest standards for precise manufacture of interchangeable parts. It's a truly enlightening book and a must read for any student of procurement.

But back to the story here, the trouble with much contracting has been in writing sufficiently detailed specifications to obtain what the government needs without unduly limiting the sources from which it can obtain it. (As Nagle pointed out, we have come a long way from the three page contract awarded to the Wright Brothers to produce the Army's first airplane.)

The problem with drafting effective specifications has been compounded by the recent trend towards a preponderance of contracting for services. As hard as it is to write effective specifications for things that can be measured for physical characteristics as well as performance qualities, the problem with writing specifications for services is almost vague by definition due to inability to objectively identify, quantify, measure and reward the subjectivity of service criteria. History shows that wherever subjective criteria are relied upon, favoritism creeps in.

Which brings me to the following economic study, which tries to bring some economic objectivity to an evaluation of municipal government contracting for services vs privatization, in-house vs outsourcing services. I get the sense that the study started with a bias toward privatization, but it is nevertheless instructive for its findings that show correlation, if not causation, between certain characteristics associated with build vs buy. It is also useful for showing how the relative difficulty in drafting specifications (and administering contracts based on them) affects decisions related to service (or supply, by extension) delivery mechanisms.

Given that the article discussed below focuses on municipal government contracting, it should have particular relevance for places like Guam and for places, again like Guam, which have adopted the ABA Model Procurement Code, a procurement model particularly intended for state and local procurement regimes.

The paper is "CONTRACTING FOR GOVERNMENT SERVICES: THEORY AND EVIDENCE FROM U.S. CITIES" by Jonathan Levin and Steven Tadelis, in THE JOURNAL OF INDUSTRIAL ECONOMICS. The authors are affiliated with Standford University and the University of California, Berkeley. Excerpts from the Introduction to the paper follow (footnotes omitted; refer to the article for more detail and explanation):
The debate [whether the private sector can provide a variety of public services more effectively than the government] has touched on services ranging from education, healthcare and transportation to trash collection and street repair. In addition to the normative question of what role government should assume in providing services [see, e.g., the discussion on "inherently government services" in this post], it has also raised the positive question of what determines government privatization decisions in practice.

We start with a simple model of procurement in which a government must arrange delivery of a service from an agent. The government can write a contract that specifies the time the agent must spend on the job and a set of performance requirements. Assume that specifying and enforcing a time requirement has minimal cost, but there are non-trivial costs to establishing and maintaining a set of performance requirements. Provided the government cares only about what is actually delivered, we show that an optimal contract must take one of two forms. The government either pays the agent for meeting a minimal time requirement or for meeting a performance requirement, but not both. These forms of contracting capture, in a rough way, the two most common ways that governments provide services: inhouse provision using salaried city employees and performance requirements contracts with private sector firms.

In our model, inhouse provision suffers from productive inefficiency due to the weak incentives of employees, but enjoys low contracting costs. In contrast, the productive efficiency of performance contracts comes at the cost of specifying and implementing performance requirements. This leads to predictions about how privatization decisions will vary across services. Services for which it is harder to write, monitor or adjust performance standards are more likely to be provided inhouse. The same will be true of services for which city administrators are more sensitive to the ultimate quality provided.

For obvious reasons, we cannot approximate a large-scale randomized research design that would allow us to quantify precisely how changes in contracting costs or city characteristics affect contracting practices. Rather what we can do is document broad patterns in contracting practices and relate them to our model and other ideas proposed in the theoretical literature.

Of course, a central prediction of efficiency based theories is that difficulties in specifying and administering performance requirements are likely to reduce privatization. To quantify these difficulties, we surveyed a set of city administrators, asking them to assess twenty-nine city services along a number of salient dimensions.1 We use this data to construct a measure of performance contracting difficulty.2

Our main empirical findings can be summarized as follows. First, services for which it is harder to write and administer performance contracts are less likely to be privatized. The effect is substantial. A one standard deviation change in contracting difficulty is associated with a change in the probability of being privatized of eight percentage points – that is, a forty percent reduction in the likelihood of privatization.

We also find that services ranking lower in terms of resident sensitivity to quality are more likely to be privatized.

Overall, our results indicate that a transaction cost view of privatization provides a useful framework for explaining local government contracting patterns. Notably, however, our results do not allow us to distinguish very clearly between the distinct sources of transaction costs that have been suggested in the theoretical literature. When we try to separate out problems with performance measurement, the potential for holdup, and the desire for control and flexibility, we find our survey measures of these problems to be so highly correlated across services as to be essentially impossible to disentangle.

In light of this, our view is that decomposing specific sources of transaction costs is likely to require more detailed data, most likely on contracting outcomes as well as choices.

The bulk of our analysis focuses on identifying city and service characteristics that are associated with privatization. We document that, controlling for the mix of services that cities provide, cities that do more private sector contracting spend notably less per capita.
The authors qualify that last observation with the following statement, which hopefully speaks more to their methodology than bias:
Though it is difficult to infer causality given the available data, the result is consistent with our modeling approach and suggests possibilities for future research.

Monday, November 7, 2011

"A case of no one asking the question of where the money went"

From Singapore:

How did 9 men con $1.2m despite rules and safeguards?
Finance Minister Tharman Shanmugaratnam told Parliament in November last year that the root cause was human error and not the public sector procurement guidelines and rules, which were fundamentally sound, reported The Business Times. "There was human failure first in supervision, and second in audit," Mr Tharman had said.

And good supervision requires not just knowing the rules and procedures, but also continual vigilance.

Nine men, one government agency and a cool $12.2 million.

At the centre of it all were Koh Seah Wee, 41, and Lim Chai Meng, 38, who ran rings around the rules meant to safeguard the IT procurement system at the Singapore Land Authority (SLA).

an SLA spokesman said detection was difficult as the fraudulent transactions were supported by "invoices" from "vendors" who were conspiring business entities, and approvals were given by Koh, the authorised officer in line with approved procurement procedures then. In all, 282 contracts were awarded to 11 "vendors", which were shell companies operated by their accomplices.

Such scams can be difficult to ferret out, said Associate Professor Mak Yuen Teen, a corporate governance expert at the National University of Singapore (NUS) Business School. "When there is collusion, it is a bit more difficult to uncover such fraud," he told The New Paper.

He said that although this case involved significant IT software-related procurement, "which is more difficult to verify receipt of goods compared to physical equipment, I think this is a case of no one asking the question of where the money went to".

In passing sentence, Justice Tay Yong Kwang said that organisations may put in place the best systems. But if those entrusted with operating the systems, especially those at the higher levels, choose to be dishonest, fraud can still happen.

Since the offences were uncovered, measures have been taken to strengthen internal controls, systems and offences, an Intellectual Property of Singapore (Ipos) spokesman told The New Paper yesterday.

"These (measures) include strengthening internal audit structures and processes, centralising the procurement process, and ensuring that the purchasing officer and the receiving officer (who verifies the receipt of goods and services) are different individuals," said the spokesman.

Thursday, November 3, 2011

A leg up, then a hand out?

I'm not sure how to categorize this post, whether it is an issue of incumbency effect or another peril of starting down the road of using procurement to enhance social policy objectives. Either way, this article below from the WSJ rubbed me a bit roughly, and I am tempted to award this week's chutzpa award to this quote from the article.
"The government, perhaps inadvertently, has created a system that penalizes companies for being successful."
"Penalizes"??

Contractors Find Gains Hard to Hold
After winning government contracts designated for small firms, most will expand and many become so big that they no longer qualify for the small-business contracts that enabled them to grow in the first place. [The article refers to this as a "Catch-22".]

Under a 1977 law, many federal agencies are required to set aside work for small businesses as a means of awarding 23% of all federal contracting dollars to them. Of course, the set-asides were not intended to be a permanent crutch for small companies. But making the competitive jump to medium-sized company from protected, small business has proven hard for many.

For instance, Deepak Hathiramani, founder of Vistronix Inc., a Reston, Va., technology support services company, was so unprepared for the challenges of a mid-tier contractor that his company stumbled after growing to $30 million in annual revenue.

A growing number of the businesses that provide professional services to the U.S. government say they struggle to compete against much bigger rivals once they successfully become mid-sized firms. Indeed, firms above the small-business designation but which still had less than $3 billion in annual revenue got 34% of government professional-services contracts in 2010, compared to about 40% in 1995, according to a report from the Center for Strategic and International Studies in Washington, D.C., to be released this month.

Mid-Tier Advocacy, a Washington, D.C.-based lobbying group formed early last year to advocate for businesses that have outgrown the small-business size standards, hopes to make the transition easier. "There is no category or recognition of mid-sized firms," says Tonya M. Speed, the group's executive director. Many inevitably surpass the size limits, she adds, and consequently, "they are competing with companies that are sometimes more than 30 or 40 times their size."

"The government, perhaps inadvertently, has created a system that pnalizes companies for being successful," says Robert Burton, a former deputy administrator of the Office of Federal Procurement Policy under the Bush administration, who is now a Washington, D.C., lawyer in private practice.

Rep. Gerald Connolly (D-Va.) recently proposed legislation that would give mid-size firms with less than 1,500 employees an opportunity to compete for select contracts before the competition is open to larger companies.

But several small-business groups oppose such changes. "Instead of creating a new program, take care of the problems we know exist today" such as meeting the 23% contracting goal for small firms, says Margot Dorfman, chief executive of the Washington, D.C.-based Women's Chamber of Commerce.

Related posts:
The perils of preference

Small steps taken to boost small business

One pill makes you larger, and one pill makes you small

When preference turns to privilege

It all depends on how you describe "small" -- and "business" -- and why

Related other:
SBA contract errors are result of deception