This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
The now firmly entrenched prohibitions against local supplier preference and contract splitting, coupled with the administrative convenience of managing fewer suppliers and with the increasing pressure on public institutions to obtain value-for-money, increase the risk of consolidating larger and larger contracts into the hands of fewer and fewer large suppliers. This bias towards bigger contracts and bigger firms, if left unbridled, can have unintended consequences in the marketplace and can adversely impact future competition in the government procurement process by creating de facto state-sponsored monopolies.
While the biasing of specifications and evaluation criteria in favour of local suppliers has led to significant issues in public procurement in the past, recent focus has also been drawn to the issue of biasing requirements against smaller local suppliers and in favour of larger entrenched incumbent suppliers. Government institutions are facing increasing scrutiny to ensure the fairness of their specifications by avoiding scoping decisions that unnecessarily limit competition for government contracts.
For example, in its February 2015 decision in Airbus Helicopters Canada Limited v. Canada (Attorney General), the Federal Court of Canada rejected the legal challenge of a supplier who alleged that the government’s specifications were biased in favour of a competing supplier. The case dealt with a federal government tender call for a $172 million (CAD) light-lift helicopter purchase. The applicant, Airbus Helicopter Canada Ltd., brought a judicial review application after it engaged in pre-bid consultations with the government, but then refused to bid due to what it alleged were biased specifications.
As the Court noted, the case was unique when compared to most other judicial review challenges in that the complainant never actually submitted a bid in the challenged process. One of the key issues in the decision was whether the complainant had the right to initiate a legal challenge in those circumstances. The Court ultimately concluded that the applicant did have standing to bring the lawsuit since the government had engaged in pre-bid consultations regarding its requirements. The Court found that the government was under a duty to develop fair and unbiased specifications and found that the government’s market outreach created legitimate expectations that all consulted suppliers would be treated fairly during the consultation process.
Notwithstanding the right to challenge the specification-setting decision and the process that led to that decision, the Court ultimately held that the complainant failed to make its case. As the Court determined, the failure to accept a supplier’s request to change specifications in a solicitation document does not automatically equate to an unfair or biased process. In fact, in this case, the Court found no evidence that the government had overstated its technical requirements to bias the process in favour of the complainant’s competitor. Rather, the Court found that the government provided ample evidence as to the fairness and reasonableness of its technical requirements. As this case illustrates, in addition to being subject to legal challenges to its tendering processes, a public institution can also be challenged on the pre-bid technical standard-setting decisions it makes to create its tender call documents. While the complainant ultimately failed to prove its allegations of biased specifications, this decision serves as a significant precedent in the future for suppliers who seek to impugn the alleged bias of specifications established by public bodies in their bid solicitation documents.
As noted above, the unbridled open competition for larger and larger contracts involving larger and larger suppliers can have an adverse impact on smaller suppliers and, ultimately, an adverse impact on competition in the government procurement marketplace. Recent Canadian examples are explored below involving federal relocation services, ethyl alcohol acquisitions, and airport security equipment, as well a case study from New Zealand involving school bus services, and the high-profile collapse of the UK firm, Carillion, which left an adverse ripple effect across government supply chains worldwide.
In its April 2013 decision in Envoy Relocation Services Inc. v. Canada (Attorney General), the Ontario Superior Court of Justice found the government of Canada liable for unfairly favouring the incumbent service provider over competing bidders by making inaccurate disclosures of anticipated work volumes in its solicitation document. The case dealt with a Request for Proposals (RFP) issued in 2004 for the provision of relocation services, and contemplated two contract awards: the first for the Canadian Forces, and the second for the government of Canada and the Royal Canadian Mounted Police. The incumbent service provider, Royal LePage Relocation Services (RLRS) won both contract awards, valued at approximately $1 billion (CAD). A competing bidder, Envoy Relocation Services Inc., contested the outcome and brought a lost profit claim.
In its lengthy account of the relevant background facts, the Court noted that the chain of events material to the dispute over the 2004 RFP traced back to a prior 2002 RFP process for the same services. As with the 2004 process, RLRS was the incumbent service provider during the 2002 RFP process. After RLRS won the contract award resulting from the 2002 process, the government discovered irregularities relating to the conflict of interest of one of its employees who had attended a boat cruise with an RLRS official. The government also discovered that the 2002 evaluation process was flawed due to an unreasonably compressed bidding period that unduly favoured the incumbent, as well as by the use of vague threshold evaluation criteria and flawed scoring formulas that resulted in the disqualification of all bidders except the incumbent. The government decided to terminate the 2002 contract early, which resulted in the 2004 RFP process.
As the Court observed, a third critical latent defect in the 2002 process, which carried over to the 2004 process, was the government’s failure to accurately disclose the anticipated work volumes for the property management services component of the contract. Property management services were to be provided to those relocated employees who, instead of selling their homes, chose to rent them out after moving. The price evaluation formula in both 2002 and 2004 called for proponents to bid a percentage figure for performing property management services based on an assumed number of employees who would require those services. However, as the Court noted, the percentage of relocating employees who opted to rent out rather than sell their homes was far lower than what the government represented in the 2002 and 2004 RFPs. This translated into a significant unfair advantage to the incumbent, who was privy to the actual low historical numbers for property management services and bid no additional charge for those services, while the competing bidders bid a fair market value based on the volume of work set out in the RFPs. As the Court concluded, this translated into a $42 million (CAD) pricing advantage to the incumbent over the plaintiff Envoy in the 2002 RFP process, and to a $48 million (CAD) advantage over Envoy in the 2004 process. The Court concluded that Envoy was prejudiced by the misleading work volumes and that this misrepresentation had undermined the integrity of the bidding process.
The Court rejected the government’s assertions that the hidden flaws in the process did not constitute unfairness since all tenders were evaluated consistently according to the terms set out in the RFP. Rather, the Court found that the duty of fairness extends beyond the narrow scope of determining whether the evaluation was conducted in accordance with the terms of the RFP and also includes the duty to accurately disclose relevant performance and evaluation considerations upon which the bids will be evaluated.
The Court determined that Envoy would have won the two 2004 contract awards had RLRS’s zero PMS cost tender been disqualified as non-compliant. It concluded that Envoy was entitled to lost profits for the 2004 contracts, as well as to 50 percent of its lost profits for the lost extension periods under those contracts. The Court awarded Envoy over $30 million in lost profits.
In its subsequent follow-up judgment in May 2013, the Court increased the lost profit damages award by approximately $1 million based on revised lost profit calculations. It also awarded over $3 million in pre-judgment interest, as well as legal costs at the full indemnity scale (rather than at a lower partial compensation scale) which amounted to almost $4.8 million. As the Court noted, awarding legal costs at the full indemnity scale is reserved for extreme situations of defendant misconduct. The Court found that the government’s conduct in the procurement process and subsequent legal proceedings warranted this higher award of legal costs in favour of the plaintiff.
As this case illustrates, perpetuating a previously unfair RFP process by using hidden factors that unfairly favour an incumbent is a breach of a purchasing entity’s duty of fairness and can give rise to significant legal exposure when competing bidders launch legal challenges. Furthermore, engaging in inappropriate conduct to conceal those improprieties during the resulting litigation only serves to further undermine the credibility of the purchasing entity before the court and compound legal liabilities. In this instance, the total damages awarded amounted to almost $40 million, rendering a significant blow to the taxpayer and to taxpayer confidence in the government’s procurement processes.
In a follow-up audit in its Spring 2014 report, the Auditor General of Canada reviewed the subsequent 2009 procurement process conducted by the federal government after the contract awarded in the above-noted dispute was eventually retendered. By that point, the existing contract, and by extension the incumbent, had grown to such a size that there were no viable Canadian suppliers available to compete against the incumbent. In other words, through its unfair procurement practices, the federal government had succeeded in incubating a de facto state-sponsored monopoly for federal relocation services. While, as the Auditor General noted, government officials were aware of a lack of competing domestic suppliers, they still chose to proceed with the single Canada-wide contract rather than splitting the contract to encourage domestic competition. The government rationalized this approach based on operational needs and by arguing that a single large contract could attract international suppliers to compete against the incumbent.
However, as the spring 2014 Auditor General’s report ultimately concluded, while government officials took some steps to attempt to remove barriers to competition, those steps were reactive, were limited by the time constraints imposed by being behind schedule, and ultimately failed to facilitate access or encourage competition. The 2009 RFP received no responses other than from the incumbent service provider. As this case illustrates, while procurement rules may prohibit the use of contract splitting at the small end of the contract-value spectrum, at the other end of the spectrum, the failure to guard against undue contract aggregation through strategic contract splitting can also undermine open competition in the marketplace by incubating unfair de facto monopolies.
The practice of perpetuating unfair incumbent advantage has not been limited in recent years within Canada to the federal relocation services file. By way of another recent example, in its April 2014 determination in Alcohol Countermeasure Systems Corp. v. Royal Canadian Mounted Police, the Canadian International Trade Tribunal found that the Royal Canadian Mounted Police (RCMP) breached its open and fair competition duties under the trade treaties when it failed to provide historical volume usage information to competing bidders. The Tribunal found that this created an unfair advantage for the incumbent supplier. The dispute involved a Request for Standing Offer (RFSO) issued by the RCMP for the supply of ethyl alcohol to detachments across Canada. The complainant challenged the process, alleging that the pricing structure unfairly favoured the incumbent by requiring bidders to include freight charges in their financial offers without specifying the location and volume of required shipments.
The RCMP argued that bidders were on a level playing field in determining the cost of the shipping since the location and quantities were equally unknown to all bidders at the time of bidding. The Tribunal did not accept the RCMP’s position, since, as the complainant maintained, historical usage information was material to predicting future usage across the various RCMP detachments, particularly since that information would indicate which RCMP detachments had already started migrating to new dry gas standards for ethyl alcohol. While the Tribunal acknowledged that all potential suppliers assume an element of risk when preparing bids, the procuring entity is under a trade treaty duty to disclose the material contract information over which it has control. In this case, the historical usage information withheld by the RCMP would have assisted bidders in making projections on future use and more accurately calculating the cost of shipping the required goods. The failure to provide this information to competing bidders gave the incumbent, who was privy to this information, an unfair advantage contrary to the trade treaties. As a remedy, the Tribunal ordered that the contract awarded pursuant to the unfair tendering process be cancelled and retendered with the required information provided to all prospective bidders.
More recently, in its April 2015 ruling in Rapiscan Systems Inc. v. Canada (Attorney General), the Federal Court of Appeal upheld a February 2014 Federal Court trial decision that set aside a contract awarded by the Canadian Air Transport Security Authority (CATSA) after finding that the contract was unlawfully awarded to an entrenched incumbent pursuant to an unfair bidding process. The dispute arose over the procurement of airport security screening equipment. The contract was awarded to the incumbent equipment provider, Smiths Detection Montreal Inc. A competing supplier of security screening equipment, Rapiscan Systems Inc., brought the legal challenge after submitting an unsuccessful bid. Rapiscan alleged that the process was unfairly biased in favour of Smiths after CATSA had previously awarded Smiths sole-source contracts for the provision of similar equipment and had relied on hidden evaluation criteria.
As the Federal Court noted, since its creation in 2002, CATSA had purchased its screening equipment exclusively from Smiths. While CATSA was criticized by the Auditor General of Canada in a December 2006 report for its sole-sourcing practices, the Court observed that in 2009, after conducting informal internal comparisons of the Smiths and Rapiscan security screening equipment, CATSA awarded another sole-source contract to Smiths. As the Court explained, CATSA officials preferred the new Smiths equipment since it was able to generate baggage images or “views” from four different vantage points. According to CATSA officials, the multiple view capture function helped expedite the screening process for security staff. The Rapiscan equipment, while considerably less expensive, was only able to capture views from two different perspectives. These technical considerations were relied on by CATSA management to obtain board approval for the $30 million (CAD) sole-source award to Smiths in 2009. Under that contract, CATSA replaced the single view equipment that had previously been provided by Smiths through a prior sole-sourced contract.
In July 2010, CATSA prepared a new plan to competitively procure additional security screening equipment at an estimated cost of $40.5 million and went to market in August 2010 with a solicitation document that it referred to as a Request for Submissions (RFS). By October 2010, CATSA officials had sought approval from the board to award a new contract to Smiths. According to the briefing note provided to the board, Smiths had been selected pursuant to a process that was designed to “obtain competitiveness, openness, fairness, transparency and value for money” and the Smiths equipment had “rated highest in each category” of evaluation. The briefing note also indicated that the Rapiscan equipment had not met the requirement of being able to generate at least three views of scanned baggage. In response to questions by the board, CATSA’s CEO provided assurances that Smith’s equipment “was currently the only technology that could meet the needs required now” and was “the highest performing technology that exists today with the most potential for improvement.” The board approved the award of a five-year standing offer to Smiths, with an option to extend for up to five additional years.
Rapiscan brought a legal challenge against this contract award, seeking a court declaration that the award decision was unlawful and unfair, and seeking that the Court direct CATSA to conduct a new procurement process that complied with CATSA’s statutory obligations and contracting procedures. The fact that CATSA’s management had run an arbitrary process that lacked the substantive elements of a genuine competition and had then misled the board into believing that they were awarding a contract based on an open and fair competition tipped the scales towards judicial intervention in order to protect the integrity of the procurement process.
CATSA appealed the decision, but lost that appeal. While the Federal Court of Appeal reversed some of the Federal Court’s findings, including the trial court’s finding of bad faith on the part of CATSA, its April 2015 ruling ultimately upheld the trial court’s decision to strike down the contract award to the incumbent due to the unfair tendering process based on hidden technical specifications that were biased in favour of the incumbent.
The failure to engage in proper procurement planning and anticipate the adverse impact of supplier concentration in government contract awards is neither new nor isolated to the Canadian federal sphere. In fact, similar concerns over the creation of state-sponsored de facto monopolies have been the cause of other past litigation in sub-federal areas, including pilot boat services and, in New Zealand, bus transportation services.
For example, its January 1995 decision in Northeast Marine Services Ltd. v. Atlantic Pilotage Authority, the Canadian Federal Court of Appeal found that the purchasing entity was entitled to reject a bidder due to concerns over conflict of interest and the potential creation of a monopoly. The case involved a tender call issued by the Atlantic Pilotage Authority for pilot boat services for the Strait of Canso. The Authority was concerned that it would potentially create a conflict of interest and monopoly situation if it awarded the contract to the plaintiff. The Court of Appeal found that the Authority’s concerns were valid reasons to reject the tender and that the bidder should have disclosed any actual or potential monopoly in its tender. While the case was ultimately decided in favour of the purchasing institution, the litigation could have been avoided with a more measured and proactive approach to the allocation of government contract awards across a supplier base to avoid situations where a single bidding process can create a de facto monopoly.
By way of a more recent example, in its December 2012 decision in Bayline Group Ltd v. Secretary of Education, the High Court of New Zealand rejected a bid challenge for lack of public interest after finding that the government’s low bid bypass was made for valid commercial reasons. The case dealt with a tender call for school bus services. The plaintiff low bidder was rejected after the government determined that the competing incumbent bidder could abandon the marketplace and undermine future competition if it was denied the contract award. The low bidder launched a legal challenge, claiming that it had been treated unfairly and maintaining that if the published criteria were followed, they would have been successful. The Court ultimately concluded that the government had bypassed the low bidder for valid reasons, with a view to sustaining future market competition for an upcoming, nationally tendered contract by keeping “more players in the market.” The legal challenge was therefore rejected. However, as this case illustrates, public bodies remain subject to review by the courts for their tendering decisions and should therefore ensure that the factors they rely on can be justified on fairness grounds in case of legal challenge. As with the prior decision, proactive planning in anticipation of creating de facto state-sponsored monopolies is a far better alternative to engaging in extreme measures to deny a bidder a contract award after market conditions have been allowed to devolve into near monopolies.
The high-profile collapse in 2018 of the multi-national UK firm, Carillion Plc, serves as compelling evidence of what can happen when governments become overly reliant on fewer and fewer larger and larger firms and create de facto government monopolies. In this instance a firm that was viewed as “too big to fail” accumulated more and more government contract awards before collapsing and leaving public institutions across multiple jurisdictions scrambling to fill in gaps in the delivery of critical services. As summarized in the United Kingdom’s National Audit Office June 2018 report Investigation into the government’s handling of the collapse of Carillion, the impact of this collapse was felt beyond the UK, with effects reaching government institutions across Canada and the Middle East:
On 15 January 2018 the Carillion group of companies (Carillion) declared insolvency and the Official Receiver, an employee of the Insolvency Service, started to liquidate its assets and contracts. Carillion was a British multinational company that provided facilities management and construction services. It operated in the UK, Canada and the Middle East and employed around 45,000 people. At the time of liquidation it employed around 18,200 people in the UK.
At the point of liquidation Carillion had around 420 contracts with the UK public sector including direct contracts, sub-contracts and special purpose vehicles to deliver private finance schemes.1 These included services for hospitals, schools, the armed forces, prisons and transport. Some of these contracts were joint ventures with other companies.
The Cabinet Office asked the Insolvency Service to continue to operate Carillion’s service contracts through the Official Receiver to ensure continuity of public services. In return, it gave the Official Receiver £150 million of initial liquidity. The Insolvency Service told us that this was the first example of a public limited company continuing to trade while being wound up.
Carillion’s collapse has triggered several Parliamentary investigations and inquiries by: the Work & Pensions and Business, Energy & Industrial Strategy Select Committees, focusing on Carillion’s corporate governance and the consequences for its pensions schemes; the Public Administration and Constitutional Affairs Select Committee and Committee of Public Accounts, focusing on the lessons for government outsourcing more generally; and a hearing of the Liaison Committee.
As this case study illustrates, government institutions should think twice before uncritically concluding that bigger suppliers will bring better outcomes and provide the most stable strategy for long-term service delivery.
By implementing proactive and strategic measures, public institutions can establish better frameworks for open and fair competition and enable smaller suppliers to compete within the government procurement marketplace. Public institutions can engage smaller local suppliers in a treaty-compliant manner by: (i) centralizing and aggregating procurement in areas where contract awards are currently fragmented; (ii) reducing barriers to competition by streamlining and standardizing prequalification processes; and (iii) maintaining competition by establishing protocols for simplified second-stage competitions to award work under framework agreements. The mechanisms for enabling smaller suppliers are readily available within the government procurement system. Public institutions must now find the will to implement those measures before unbridled trade treaty competition eviscerates local supplier ecosystems and undermines long-term competition in the government procurement marketplace.