4DFID suppliers and the supply chain
Market competition
54.In oral evidence, Nick Ford, Head of Procurement and Commercial Department (PCD), DFID, explained the principle that underscores the Department’s approach to the contractor market:
“If we go down a procurement or contracted route, as opposed to a multilateral or NGO route, it is around cost, transparency and competition. [ … ] We obviously follow public procurement regulations, which are all about open and fair competition and trying to create more competitive markets, using market forces.”93
Box 3: What is market competition and why is it important?
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55.In the context of DFID’s supplier market, competition is where the suppliers (contractors) compete with each other to satisfy the wants and needs of the consumer (DFID). If the market is competitive, suppliers will attempt to outdo each other by pushing prices down or increasing quality, which can lead to better value for money through greater development impact at lower costs. In a competitive market, businesses will also try to make their services different to distinguish themselves from competitors, driving innovation and offering a wider choice of suppliers that can specialise in different areas across the range of DFID programming. DAI Europe stated in written evidence “for our client, for the taxpayer, and for development as a whole, competition yields lower costs, better value, superior technical innovation, and more diverse technical choices.” This view was also summarised more broadly by Michael Grenfell, Competition and Markets Authority (CMA) Executive Director for Enforcement, in a recent speech: “Competition harnesses that desire of businesses to make money, and directs it to the public good. And that’s why competition is so valuable.”94 Therefore, the assumption that it procures from a competitive supplier market is key to DFID’s strategy in its use of contractors. |
56.Some of DFID’s major suppliers stated in evidence that there are signs of healthy competition in its supplier market. Palladium wrote that:
“Over 200 companies attended DFID’s last supplier conference, and the number increases each year. No single company accounts for a market share of greater than 10% of the UK aid expenditure delivered through contractors. DFID performs better than other donors. In Australia, three firms win 69% of contracts, in the US more than 50% of contracts are won by five companies.”95
However, much of the confirmation of market competitiveness has been from contractors themselves as well as DFID, while other sources have been less convinced.
57.One experienced development professional wrote in confidential evidence that while: “competition at the point of tendering is intense [ … ] at the same time there are structural features of the way that the market is organised that undermine competitive pressures.”96 One of these features that has been frequently raised in evidence is the access—both formal and informal, centrally and in country offices—that larger suppliers have to DFID staff. One example raised is through the Key Supplier Management (KSM) system that DFID uses to maintain strategic relationships with major suppliers. Information from the Chartered Institute of Purchasing and Supply (CIPS) states that such collaborative relationships can have benefits to the supplier, including:
- The supplier will be kept informed of the buyer’s forward plans;
- The supplier will gain a much better understanding of the buyer organisation and its needs; and
- The supplier is likely to get more business from the buyer, as a preferred supplier.97
58.DFID insists that suppliers in the KSM do not receive any preferential treatment, however confidential written evidence stated “the key supplier group by definition provides real or perceived privileged access to DFID people and information for a small group of established suppliers.”98 Another contractor wrote that these suppliers meet with DFID officials on a regular basis while others “not on the small elite list have no such access to DFID.”99 A related concern is the in-country access to DFID staff. Major contractors are able to maintain a country presence (an overhead paid for through existing contracts) and so have much more regular professional and social contact with DFID staff. We heard in evidence that “such contacts are particularly useful to build an understanding of the emphasis required in a particular proposal, which may not be immediately apparent from the published tender documents.”100
59.Concerns around the level of competition have also been raised with respect to the number of bids that DFID typically receives per contract. This may partly be related to DFID procurement reforms, with one contractor noting a significant drop in the number of bids since the implementation of the Wealth Creation Framework (WCF) (one of DFID’s key framework agreements).101 DFID were unable to confirm this as it told us that comprehensive data on the number of bids is only available from 2015–16—however it was able to say that it received an average of 2.5 bids per contract in that year.102 Figure 4 below shows the distribution of the number of bids per contract for each competitively tendered contract between the start of the 2015/16 financial year and the end of 2016. The most common number of bids was three (37 contracts), with 39% of contracts receiving two bids or less. Nick Ford told us that the 2015–16 average of 2.5 bids was “not sufficient”.103
Figure 4: Distribution of number of bids per competitively tendered contract, 2015/16 and 2016/17
Source: DFID supplementary evidence final
60.Few bids does not always mean an uncompetitive market. Nick Ford pointed out the intense competition between Boeing and Airbus in the market for aeroplanes.104 However, as has already been noted in this report (see para 36), the market for development services is of a different nature. Boeing and Airbus have clearly defined deliverables whereas DFID contractors often do not. DFID’s role is not to procure a particular good but to procure poverty reduction, and market structure is important when trying to ascertain whether it is purchasing the most effective way of delivering on non-tangible outcomes such as better governance. In oral evidence DFID stressed its efforts to expand the contractor market through its early market engagement efforts, providing examples of good progress in Pakistan and Mozambique.105 As DFID recognises, there is still some way to go in this respect.
61.It should be noted that a perfectly competitive market is a theoretical concept, therefore we are not attributing blame to DFID for failing to create one. However, it is clear that much of the justification underlying DFID’s use of contractors relies on the assumption that the market is competitive. DFID referred to market competition as evidence to allay a number of the Committee’s concerns, including:
- Ensuring value for money;106
- Why UK companies are so dominant in the market (winning 85% of centrally issued DFID contracts);107
- How DFID ensures contractor profits are “fair but not excessive”;108 and
- Whether DFID is buying services at competitive rates.109
Therefore, given the importance of this assumption, any factors that may undermine market competition are a concern. Guidance from the Office of Fair Trading (OFT) states that “any assessment of the working of competition in a market will begin with an analysis of market structure and the implications of this structure for the conduct of the firms engaged in the market.”110 Market features identified by the OFT that may raise concerns in such analysis include concentration (the number and size distribution of firms), barriers to entry and information asymmetries, all of which have been raised in evidence to this inquiry.
62.There is some evidence to indicate that there is healthy competition in DFID’s supplier market relative to other donors. However, there are a number of factors undermining the competitive elements of the market, including unequal access to Department officials, low numbers of bids and a range of other issues including unequal information and some organisations being locked out by framework agreements. Ensuring a competitive contractor market is a central component of DFID’s commercial strategy, and while it has the potential to lower costs and deliver greater value for money, this should be balanced with greater risk management.
63.DFID should conduct market analysis, potentially with assistance from experts at the Competition and Markets Authority (CMA), to determine any issues that may be undermining market competitiveness. It should then take necessary steps to correct for these issues in order to create an increasingly level playing field for all potential bidders.
Expanding the supplier base
64.As previously mentioned, a key priority identified in DFID’s Procurement and Commercial Vision is growing the supplier base.111 In written evidence, DFID stated:
“We have taken a number of actions already to increase the number of suppliers bidding and winning DFID contracts (including for SMEs and local suppliers), through: the choice of delivery routes; improved cost transparency; and structuring programme size and design to encourage access by new entrants.”112
While Nick Ford confirmed that there had been improvement in this respect, he added that “it is still nowhere near where I want it to be.”113 There are two elements to this: expanding the base among domestic contractors and among those in developing countries.
Expanding the developing country supplier base
65.DFID reports that it formally untied its aid in 2002,114 however it also wrote in written evidence that over 85% of centrally issued DFID contracts are won by British companies which it attributes to their competitiveness.115 The OECD has pointed out that even among donors who have fully untied aid formally, there is still tying in practice in the sense that procurement processes can favour domestic companies. DFID performs extremely poorly on measures of the share of contracts going to companies based in developing countries—in 2013 less than 2% of the total value of DFID contracts awarded were awarded to organisations in developing countries, compared to an average across other selected DAC members of 54%.116 In oral evidence, Joy Hutcheon gave an example where an initiative had been undertaken in Nepal to contract through local NGOs, though such efforts appear to be on a relatively small scale.117
66.Framework agreements act as a barrier to greater inclusion of overseas contractors. An independent evaluation of DAC members’ policies and practices towards untying stated that:
“Framework contracts can preclude the competition gains from untying to local and regional suppliers. Undoubtedly donors find these contracts convenient in achieving administrative efficiency savings and they may be cost effective from a perspective of managing a multi-country project portfolio. They may also be competitively tendered amongst developed country suppliers. However, at the individual project level and from the recipient perspective they appear to be a form of de facto tying that precludes local sourcing.”118
67.In evidence to this inquiry, DFID spoke at length about its use of Early Market Engagement exercises to expand the supplier base, where upcoming procurements are discussed with potential bidders and market input requested. We welcome the fact that these exercises are increasingly conducted in developing countries, with DFID reporting 65 in-country exercises in the last twelve months.119 However, we also have concerns about the way in which they are conducted and also caution against an over reliance on these as a tool to attract new suppliers. One contractor wrote in evidence:
“Early Market Engagement (EME) meetings, while welcome in principle, can be more confusing than informative. This is because they are often held prematurely—before DFID has a clear view of how it wants to procure or implement a programme. EMEs would be more effective if managed as a genuine consultation with suppliers, encouraging constructive dialogue as a way to test market response and improve design principles–which is not possible with the format currently used by DFID.”120
68.In the interests of the untying of aid, the OECD DAC also encourages donors to post notification of tenders on the Untied Aid Public Bulletin Board, which acts as a centralised notice board for private sector actors from anywhere in the world to compete for aid-funded contracts. This acts as a simple and transparent means for donors to advertise opportunities to developing country contractors which is undoubtedly cheaper than other means of engagement such as EMEs. Other major donors—including those with better track records of using developing country contractors—make use of this tool.121 It appears that the UK did post to the Bulletin Board until 2006 when it stopped doing so. When questioned as to why DFID does not make use of it Nick Ford referred to “system integration capability issues, which stop us from being able to integrate and publish to other sites.”122
69.Expanding its supplier base is another key component of DFID’s procurement and commercial strategy. While the Department has taken some steps to reach out to and include developing country contractors, these have had limited effect with only a tiny proportion of contracts still awarded to companies that are based in-country. We note that the UK Government made commitments to untying aid, both formally and in practice, yet some of DFID’s procurement practices (such as the establishment of framework agreements) can work against this commitment.
70.DFID should report on how it plans to increase its efforts, beyond what has already been stated in evidence, towards helping more developing country contractors bid for DFID work. It should ensure that the format of Early Market Engagement (EME) exercises is geared towards greater inclusion, and should report to us on whether greater use of in-country EME’s has increased the number of developing country contractor bids. DFID should also make use of the Untied Aid Public Bulletin Board and, if it continues not to do so, should clearly justify why not and describe an alternative approach to advertising contract opportunities to developing country contractors.
Expanding the domestic contractor base
71.Evidence suggests that there are also barriers to the participation of smaller, UK-based organisations. Some of the challenges for such organisations have already been discussed (such as framework agreements), but more broadly, DFID’s approach to tendering and developing the market has meant that “small and micro consultancies are squeezed to the margins and do not get a fair share of project work, or often even the chance to be full participants in the tendering process.”123 A number of concerns from the smaller organisation perspective were raised in written evidence by Public Administration International, including:
- They can only participate as sub-contractors who “rarely get a commensurate share of the paid work in implementation.”;
- The decision to bid when tenders are issued through frameworks lies with the lead contractor, and seems to be made “primarily on the basis of the interest and potential involvement of the lead consultancy itself.”;
- They are in a “Catch 22” situation. They cannot grow and enhance capabilities until they win more work and they cannot win more work until they have stronger track records and cash flows for start-up costs.124
Other concerns about the treatment of small organisations that access DFID work through sub-contracting are addressed in the following section on supply chains.
72.While DFID wrote that it is taking “a number of steps to stimulate and encourage competition across its supplier base”,125 including smaller organisations, It is not clear that it has a thorough enough understanding of these challenges. In written evidence, DFID mentions its strong track record of contracting through SMEs:
“The department actively contributes to the central government priority for engaging with SMEs and now has the second highest spend with SMEs across government, representing 32% of contracted spend.”126
While this is welcome, it fails to acknowledge that the definition of SMEs (which is imposed across Government due to European Commission Public Contracts Regulations) may not be appropriate for DFID procurement.127 The chart below shows that half of DFID’s top ten contractors between 2010 and 2016—with a combined contract award value of £1.5 billion—are considered SMEs. This demonstrates that the value of contracts awarded to SMEs is heavily weighted to the ‘medium’ end, and suggests that such a focus is unlikely to be inclusive of smaller organisations and expand their opportunities for DFID work.
Figure 5: DFID’s top 10 suppliers, the value of contracts awarded and SME status, 2010–2016
(£ millions)
Source: DFID Annex D (DUC0017)128
73.The movement towards Payment by Results (PbR)—a way to deliver services where all or part of the payment depends on the provider achieving specific outcomes—represents another issue for smaller organisations. In a 2015 report, the NAO suggests that Payment by Results schemes by their nature are typically let to larger contractors with the capacity to bear the financial risks and the substantial working capital required to finance large teams and operations until results can be achieved.129 DFID’s lack of understanding of the challenges faced by small organisation is demonstrated in its SME Action Plan, which refers to “output based contracts” (the principle of PbR) as “SME friendly processes”.130 Further to the findings of the NAO, one contractor wrote that such approaches “favour large and established firms, by creating pressures on cashflow which only they can withstand.”131 PbR is thus likely to further concentrate work in the hands of medium-sized contractors at the expense of small and micro enterprises.
74.Despite DFID’s stated aim to expand the supplier base and facilitate access to DFID contracts by smaller organisations, evidence suggests that it does not have sufficient understanding of the challenges faced by small organisations nor how to address these. The broad Cabinet Office definition of SME’s means that DFID’s SME Action Plan is unable to capture the needs of small and micro enterprises. However, we also recognise that the Government is bound by this definition due to European Commission regulations. We also note that the use of Payment by Results (PbR) is likely to work against the aim of DFID procurement being more inclusive.
75.DFID should be more inclusive of small and micro enterprises by disaggregating its approach to SME’s to target small and micro enterprises. This should include both collecting data on the work contracted to such enterprises and producing a strategy on how opportunities for them to bid for DFID work can be expanded. DFID should also report to the Committee on how it plans to mitigate the impacts of Payment by Results so that it does not preclude smaller organisations from bidding as evidence suggests is currently the case.
The DFID supply chain
76.DFID’s delivery model means that there are various levels through which funding cascades in order to reach programme beneficiaries. As reflected in figure 6, this is not just true in its use of contractors but also through the other delivery channels. In many cases, this can mean a complex array of suppliers at various levels throughout the supply chain. We heard from DAI Europe that in December 2015 they identified more than 550 sub-contractors or local NGOs working across 27 DFID contracts, at an average of more than 20 sub-contractors used per DFID-funded programme.132 A highly simplified model of this supply chain is represented in figure 6, which shows that there are four main groups of actors in programme delivery through contractors—DFID, lead contractors, sub-contractors and beneficiaries.
Figure 6: The DFID supply chain
Some of the advantages of this contracting model were presented in evidence to this inquiry. Options wrote that, in order for DFID programming to have maximum impact, it is vital that the right kinds of organisation are deployed for the roles for which they are best suited.133 Mott MacDonald added that “the complexity and size of many DFID programmes requires both large contractors like ours to lead and manage them and small contractors to deliver niche inputs to achieve specific results. It is not a case of either or, but both.”134 Coffey wrote that lead contractors play an important role in connecting DFID with small, local organisations that have experience and knowledge on the ground. Delivery through lead contractors:
“enables these NGOs to learn about DFID’s priorities without requiring them to invest resources in building that relationship. DFID, in turn, benefits from the managing contractor providing the programmatic oversight that ensures partner NGOs’ activities on a given programme are aligned with the department’s aims.”135
77.While there are certain benefits of the current approach for DFID programme delivery, there are also a number of risks. Saferworld focused on some of these risks in written evidence:
“This model is susceptible to creating distance between the contractor from the actors and realities on the ground. Equally, the further along the chain, the more removed the sub-contractor will be from the overall project budget, aims and structure. The contractors, in some cases, keep the subcontractors in anonymity so they do not know the identity or deliverables of the other subcontracted organisations. This can lead to the duplication of activities or subcontractors working in the same location without being able to create synergies to strengthen the coherence of the programme and the potential impact.”136
Many of the concerns presented to the Committee focus on two core areas: DFID’s understanding of contractors’ supply chains and how DFID ensures fair treatment of sub-contractors.
DFID’s understanding of contractors’ supply chains
78.In written evidence, Dr James Morton said “DFID does not, in my view, take sufficient interest in properly understanding this complex network and in ensuring robust financial control at the lower levels.”137 A recent ICAI report on DFID’s approach to managing fiduciary risk noted that DFID’s approach “[ … ] reduces DFID’s direct interaction with local civil society organisations and businesses and the possibility of increasing the capacity of these organisations to manage risk, it also distances DFID staff from some of the practical risks and challenges that emerge during programme implementation.”138 A thorough understanding of supply chains is a key factor with respect to ensuring value for money—if DFID is unable to trace funds down through to beneficiaries, it is unable to say whether it is achieving value for money. When questioned on this, it was not clear whether DFID is able to do this for all its programmes.139
79.A lack of understanding of its partnerships was also raised by Contractor A, who referred to a programme that experienced serious performance problems due to a lack of understanding of the intra-firm contracting relationship. While the contract was won by a UK-based firm, the delivery was sub-contracted to its affiliate in another country. There were tensions between the two entities that had a serious impact on programme performance, with the evidence stating that “the main sticking point for the separate companies was not how to deliver a DFID programme effectively, but was obsessed with how they divide up the profit in the contract.”140 The fact that these issues were not anticipated in the procurement process demonstrates that DFID had an incomplete understanding of the delivery chain with implications for programme delivery.
80.However, in her December 2016 letter to suppliers, the Secretary of State made it clear that supply chain mapping will be a key focus of DFID’s future work with contractors. There will be an increased focus on due diligence throughout the supply chain and mandatory provision of a full supply chain map at the bidding stage.141 DFID announced a number of other welcome measures in written evidence, including the introduction of a new online tool so that supply chains can be mapped in a consistent format to facilitate aggregation and analysis of the information and a greater focus on delivery chain mapping in key training courses.142
Treatment of sub-contractors
81.DFID’s lack of oversight of both the supply chain and delivery has also reduced its ability to ensure that sub-contractors are being treated fairly. Seriously concerning reports have emerged to suggest that sub-contractors are occasionally mistreated, which Bond attributes to “[ … ] a lack of contractual disincentives for such behaviours in DFID’s engagement of contractors.”143 We stress that these behaviours are by no means representative of all contractors, and that this issue is related to the conduct of a select few (which will be further addressed in chapter 5). Though we also note that, by DFID’s own admission, it has relied on “self-declaration” of adherence to its expectations and principles.144
82.Bond described one way in which sub-contractors are mistreated in written evidence:
“There are repeatedly documented accounts of NGOs being included at the bid/design stage only for them to be dropped or disengaged when the prime bidder has won the contract. This practice (which has led to the emergence of the term ‘bid candy’) means that DFID does not get what it paid for.”145
Contractor A reported that the choice of sub-contractor can be a key factor in helping the lead contractor win the contract (due to their expertise), but after it is won there is little incentive to keep them on and a great deal of incentive to drop them to increase profit margins.146 DFID stressed in written evidence that “no changes or substitutions of key supplier personnel as identified in the contract can be made without DFID’s prior written consent.”147 While DFID provided an example in Sierra Leone of where the lead supplier had lost the contract as results of this,148 the dropping of sub-contractors still appears to be a feature of lead contractors’ behaviour under DFID contracting.
83.Other concerns relate to whether sub-contractors get a fair deal even when they are kept on throughout implementation. Public Administration International wrote “while the names and capabilities of consortium members are included in tender documents as sub-contractors, sub-contractors find that they rarely get a commensurate share of the paid work in implementation. This is largely completed by staff of the lead consultancy in the bid.”149 Contractor B reported two instances where lead contractors reneged on their pre-bid agreements and unilaterally cut the sub-contractor’s share of the payment in the bid. We were told:
“In one case, there was a rate cut of 25% imposed about four days before the bid submission, on the inputs by the subcontractor. In the other case, the bid was submitted and [ … ] despite there being a pre bid agreement on consultation, saying, “We did not have time to review with you. We submitted the bid. We cut your inputs by 25%. Take it or leave it.””150
84.A thorough understanding of DFID supply chains is essential to ensuring value for money and development impact in DFID programming. While we welcome DFID’s increased effort to map and better understand these supply chains, we are concerned that this is a feature of the delivery model that has been overlooked up to this point. While we recognise that DFID is not responsible for cases of mistreatment of sub-contractors, we stress that it is responsible for enforcing certain standards of conduct, and that a lack of enforcement and an over reliance on self-declaration of adherence to these standards has contributed to these behaviours.
85.In order to facilitate better engagement between DFID and the sub-contractors that deliver its programmes, DFID should establish a dedicated ‘sub-contractors unit’ within its Procurement and Commercial Department. Much like the Key Suppliers Management (KSM) system for larger contractors, this would act as the main access point for sub-contractors and offer them a more consistent pipeline of information on future opportunities, provide a channel for raising grievances and allow DFID to better understand the challenges they face and how it can help overcome them.
94 Michael Grenfell, What has competition ever done for us? (Speech at the Institute of Customer Service annual conference, 7 March 2017)
96 Confidential written evidence (DUC0004) para 12
97 CIPS, Presentation on ‘Collaborative Relationships’ (accessed 14 March 2017)
98 Confidential written evidence (DUC0004) para 13
99 Confidential written evidence (DUC0015) p3
100 Confidential written evidence (DUC0004) para 16
101 Confidential written evidence (DUC0015) p3
110 Office of Fair Trading, Market investigation references: Guidance about the making of references under Part 4 of the Enterprise Act (March 2006) para 5.1
111 DFID, DFID’s Procurement & Commercial Vision (April 2016)
114 DFID defines this as “removing the legal and regulatory barriers to open competition for aid funded procurement – generally increases aid effectiveness by reducing transaction costs and improving the ability of recipient countries to set their own course. It also allows donors to take greater care in aligning their aid programmes with the objectives and financial management systems of recipient countries.”
116 OECD DAC, Aid Untying: 2015 Progress Report (November 2015) p12
118 OECD, Untying Aid: Is it working? (December 2009) p50
120 Confidential written evidence (DUC0004) para 19
121 OECD, Untying aid: Official development assistance contract opportunities (accessed 14 March 2017)
127 The EU defines SMEs as organisations with annual turnover of less than (or equal to) €50 million. For more information on SME definitions see ‘European Commission: What is an SME?’
128 IMA World Health is a non-profit DFID supplier
129 NAO, “Outcome-based payment schemes: government’s use of payment by results” (June 2015)
130 DFID, SME Action Plan (November 2016) p7
131 Confidential written evidence (DUC0004) para 15
132 DAI Europe (See Annex 2)
138 ICAI, “DFID’s approach to managing fiduciary risk in conflict-affected environments” (August 2016) p iii
140 Confidential written evidence (CON0007) para 20
141 DFID, Secretary of State letter to DFID suppliers (December 2016)
146 Confidential written evidence (CON0007) para 20
150 Q22 (See Annex 1)
6 April 2017