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SEABORNE FREIGHT: A CASE STUDY IN NON-COMPETITIVE PROCUREMENT

Grabbing the headlines in recent days has been the award of a £13.8 million ferry contract, without competition, to Seaborne Freight, a company that has no apparent assets, no trading history and – perhaps most surprising of all – no actual ferry boats. Conspiracy? Cock-up? Corruption? Or the triumph of hope over experience? Social media has certainly had a field day, with the hashtag #seabournefreight throwing up a range of colourful comments and some hilarious cartoons.

But what do we actually know about this contract beyond the headline? The contract was one of three lots for the provision of additional freight services in the event of a no-deal Brexit. The contract awards, with a total value of £105m, were published in the Official Journal on Christmas Eve, traditionally a time to slip announcements of this nature out with minimal fuss . All three were let non-competitively, the justification being the extreme urgency of putting contingency plans in place to cope with the additional congestion resulting from a no-deal Brexit.

In the circumstances, that is a legitimate reason for avoiding competition, although non-competitive contracts of that size are relatively rare. But it is not without risk of challenge from firms who claim that they were denied the opportunity to tender for the business. Such challenges may be genuine, but they can also be speculative – unscrupulous operators often assume that the public sector will settle claims to avoid the inconvenience and cost of defending a court action. A contract of this size, let in such a rush to a company with so little provenance, will have a number of legal firms smacking their lips in anticipation.

Seaborne freight’s contract, at £13.8m, is relatively modest compared with the £46.6m contract awarded to the French-owned Brittany Ferries and the £47.2m awarded to DFDS. Is it possible that part of the rationale for awarding Seaborne the third contract was to reduce criticism that only non-British companies were profiting from this major investment in contingency planning for a no-deal Brexit? Moreover, Seaborne qualifies as an SME (it appears to have no permanent staff), and there may have been an additional incentive to demonstrate progress towards the Government’s “ambition” to spend £1 in every £3 with SMEs. This was downgraded first from Francis Maude’s original “target” to an “aspiration” and then to an “ambition” last year (see Peter Smith’s excellent Yes Minister spoof in Spend Matters last autumn http://spendmatters.com/uk/government-spend-with-smes-target-aspiration-or-ambition/ ).

The contract award was based on a ratio of 80% price and 20% quality. That is more typical of what I’d expect to see in an Eastern European public procurement than in the UK where the trend in recent years has been to place additional weight on quality. Certainly, it calls into question just how much due diligence was carried out on Seaborne Freight’s (and equally the other two companies’) ability to provide an acceptable standard of service – although the Department for Transport has issued a statement that appropriate due diligence was carried out. What constitutes “appropriate” is, of course, open to interpretation.

Personally, I don’t buy the corruption argument. Government procurement officials are far too professional to stand for that, and some of the claims (such as the address of Seaborne Freight’s lawyers being also used by companies “linked” with the Tory party) are pretty far-fetched. The six degrees of separation argument comes into play here. Nor do I think that the accusations of incompetence by procurement officials are fair – the Crown Commercial Service has done much in the past decade to drive up standards for procurement across UK Government Departments and the Department of Transport procurement teams are as good and professional as any in Whitehall.

A more likely scenario is the insistence of Ministers, their special advisors, and often senior policy officials to get solutions in place urgently and dispense with due process. That pressure becomes particularly acute when dealing with an operational crisis – the temptation is always to bypass the normal process of market engagement and analysis and jump to a solution that may be based on hearsay, personal contacts or unsolicited approaches from private sector operators. The pressure on procurement teams to cut corners in the face of demands from Ministers and the Department for Exiting the EU must have been intense (especially since time constraints mean that there could be no “Plan B”). Giving in to such pressure invariably means a compromise if not a downright fudge.

The Department of Transport has also “clarified” that no payments will be made to Seaborne Freight unless they provide an effective ferry operation. The BBC reports that the same restriction does not apply to Brittany Ferries’ or DFDS’ contracts, with both of those companies standing to make money even if a Brexit deal is struck (or Brexit does not happen). I suspect that was the compromise reached over giving such a large contract to such an untried and untested company as Seaborne Freight – we won’t pay them a bean if they don’t deliver what they promise. But rigorous contract management will be necessary to hold to that commitment if the Government’s gamble does not pay off. Either way, the details that will continue to emerge about the Seaborne Freight contract and its handling make a fascinating case study on the risks attached to non-competitive procurement.

SEABORNE FREIGHT PART 2: Chris Grayling speaks

Chris Grayling’s interview on the Today programme on 2 January about the Seaborne Freight contract (2.19 into the podcast) bears out my previous analysis. Four quotes stand out.
“I make no apologies for supporting a new British business”. I applaud government efforts to support start-up businesses through public contracts – all too often SMEs are excluded in favour of big “safe” companies and miss out on the agility, ow overheads and creativity that go with making a small enterprise thrive. The key difference here is the scale – a £14m contract with a three-month delivery window from a standing start with no trading track record and no assets is a pretty tall order by any standard.
“It has been looked at very carefully by a team of civil servants who have done due diligence on the company and reached a view that they [Seaborne Freight] can deliver.” This positions Ministers in the traditional position of blaming officials if it all goes wrong. The unanswered question is how much pressure was put on the procurement teams to find a way of giving Seaborne Freight a contract.
“This was an invitation to tender they bid for. They were one of three companies who successfully bid to deliver services for us”. Technically this is correct. But it’s misleading since it implies that there was a degree of competition involved. The unanswered question is how many other companies (and how many other British based companies) did the Department of Transport approach before inviting Seaborne Freight to submit a bid…..or was the approach made by Seaborne Freight themselves?
“We put in place a different contract to the other two operators who are big and established to make sure they can deliver”. That suggests that the risk of failure was recognised by the Department of Transport procurement team but without seeing the detail of the contract it’s impossible to say how much comfort the taxpayer can draw from this. I’d be very surprised if Seaborne Freight didn’t at least insist on some mechanism for reimbursing costs they had incurred, not least because that will affect their ability to raise the cash necessary e.g. for the dredging operations that are due to start later this week.

SEABORNE FREIGHT PART 3 – PANTOMIME SEASON?

The storm over Seaborne Freight’s contract shows no sign of abating. The latest in the Seaborne Freight Saga is the revelation on the BBC the terms and conditions on the company’s website were cut and pasted from a fast food delivery company….you couldn’t make it up! In fairness, the “takeaway terms and conditions” relate to the use of Seaborne Freight’s website rather than the contract that the Government gave to them (I’m really looking forward to seeing those), but it does make you wonder about the quality of the due diligence that the unnamed “highly reputable independent third party organisations” carried out if something so basic gets overlooked. Channel 4 followed this up with a hard-hitting report which includes uncovering allegations that one of Seaborne Freight’s Directors was involved in a slightly shady sounding company that collapsed owing significant sums to creditors – allegations which, it has to be said, the individual denies. That in itself would not preclude a company from bidding successfully for a public contract, but it does again call into question the absence of any competition in what looks increasingly like a cobbled-together fudge.

The Government continues to insist that it is unapologetic about giving contracts to innovative British start-up companies. But this is missing the point. The only justifications for letting a contract non-competitively are (a) that the amounts involved are too small to make competition worthwhile from a value for money point of view; (b) that the goods or services provided are so unique that only one supplier can possibly provide them; and (c) cases of extreme operational urgency.

Only the last of these – operational urgency – is relevant in the case of the ferries contract. £13.8 million is hardly small by any stretch of the imagination. “Uniqueness” tends to be defensible only in specialist high-tech areas – a ferry is, at the end of the day, a ferry. So the only justification is that off-the-shelf freight services have to be purchased in short order. But that justification only holds water if the company selected has a solid track record of demonstrable performance. With no staff, no trading record, no apparent capital and above all no boats, it’s hard to see how Seaborne Freight matches up. This pantomime looks set to run for some while yet.

Quite apart from the implications for Brexit contingency planning though, the damaging consequence for procurement – that is overlooked through all the political point scoring and amusing cartoons – is likely to be that it will become even harder for genuinely innovative dynamic and creative small start-ups to benefit from public procurement opportunities in the future. That is in no one’s interest.

Alastair Merrill was the Scottish Government’s Commercial Director and Chief Procurement Officer from 2009-2015

Alastair Merril

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