Cronyism and the potential pitfalls of procurement

The spectre of crony capitalism has raised its ugly head again. In February, a High Court judge ruled that the health secretary had acted unlawfully by not publishing award notices for the contracts his department had agreed during the Covid pandemic within the required 30-day period. 

During the hearing, the Court heard of the £0.5m contract awarded to a polling company on the recommendation of the then senior adviser to the Prime Minister, Dominic Cummings. In a written submission Cummings declared that although he was friends with the founding directors of the company, which was awarded the contract without competition, he had not recommended them for that reason.  However, he did state that although he was not allowed to ‘direct’ civil servants, he did expect the company to be awarded the contract ‘as a result of my suggestion’.  

This case neatly encapsulates the difficulties created in government when friends or close contacts are hired in an environment of extreme urgency. We should be in no doubt about what damage crony capitalism, real or perceived, can do. 

Conflicts and competition 

In purely economic terms, keeping contracts to an inner circle is bound to inhibit the efficient allocation of resources. Barriers to entry appear insurmountable to outsiders resulting in a smaller supplier base. This lack of competition can lead to governments paying prices at oligopolistic rather than competitive levels. But perhaps most seriously, a widespread belief that jobs go to pals can seriously erode public trust in government, not just in politicians but in the objectivity of the civil service. 

In November last year, the National Audit Office (NAO) published a report on government procurement during the Covid 19 pandemic.  The report recognised that exceptional actions were needed in exceptional times and that current regulation allowed for direct contract awards under certain conditions. Where it did have significant concerns, however, was not with the awarding of contracts non-competitively, but with some of the ways this was done. 

This included a lack of transparency in justifying and documenting the awards, procurements being carried out before the necessary due diligence was completed and failure in some to address ostensible conflicts of interest. In the media, much attention was also paid to eye-watering profit margins enjoyed by suppliers of PPE who were not only middlemen but were quite often brokering products which they had never traded before.   

A particularly unusual channel for bidding was a ‘high-priority lane’ for assessing and processing potential PPE leads from government officials, ministers, MPs and members of the House of Lords, senior NHS staff and other health professionals. Bidders in this lane went through the same processes as the others but whereas 10 percent of the “VIP lane” bidders were successful, only 0.7% were successful in the ordinary lane.  

Best practice 

GoodCorporation would never claim that private sector solutions can automatically be applied to public sector problems.  But it is worth looking at some common approaches used by the best managed businesses to address similar challenges.  

Companies have crises too, often carrying high safety or environmental risks. They can also experience a lack of supplier choice when and where they have an urgent need. Board members, senior managers and technical specialists will often have their favourite suppliers and may have close connections with them. But the best managed companies are very cautious about conflicts of interest and scrutinise the reliability of such recommendations. Going back to the recommended polling company, the UK has a large and sophisticated market research industry; the idea that one company is uniquely qualified in focus group research, let alone when the recommender’s experience with them is four years old, rather stretches credulity. 

Due Diligence 

Due diligence on would-be suppliers would also be carried out thoroughly by the best managed companies. Particular attention would also be paid to those acting as agents, to provide assurances that the products are reliably sourced, from both a technical and ethical point of view. 

Pricing, when there are single bidders, is another aspect in need of close analysis. With no competition most companies will insist on open-book pricing where margins are transparent and a view on their reasonableness can be taken given wider market experience. Urgency and short supply will tend to inflate margins but there are limits beyond which it starts to look far too cosy. 

Some of this might sound far too time-consuming for the perilous situation we were in. But in fact, with well-practised systems in place, they can be carried out quite expeditiously with the right level of cooperation of the prospective suppliers, who should be all too willing.