This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
The recent controversies involving Ontario student transportation services offers a case study into how open competition can result in the disruption of small, local, incumbent suppliers. In its April 2013 decision in F.L. Ravin Ltd. v. Southwestern Ontario Student Transportation Services, the Ontario Superior Court of Justice granted an injunction against Southwestern Ontario Student Transportation Services (STS). The dispute arose over the third and final Request for Proposals (RFP) issued by STS for school bus transportation services in southwestern Ontario. The motion for the injunction was brought by two school bus operators, Ravin and Badder, who had for many years provided school bus transportation services to school boards operating within STS’s scope of operation. STS had assumed responsibility for conducting competitive bidding processes for school bus services on behalf of a group of school boards. The RFPs in question were part of a broader, provincially mandated process requiring school boards to conduct open competitive bidding processes for bus services, since province-wide spending on these services totalled $1 billion annually.
As the Court noted, this new provincially sponsored open tendering program attracted a great deal of criticism from local bus operators, who feared being run out of business by larger operators:
From the beginning of the new process, concerns were expressed from various quarters including small bus lines, Chambers of Commerce and others as to the ability of small bus lines that had historically provided bus service to students in primarily rural areas to compete under the new system. In December 2008, the then Minister of Education, Kathleen Wynne, sent a letter to the concerned parties, expressing both an acknowledgment of the concerns and a commitment to institute a process that would be fair to all.
However, as the Court observed, notwithstanding escalating concerns from small operators over the province-wide implementation of the new competitive bidding processes, STS retained the services of PPI Consulting and proceeded to fast-track its implementation of open tendering well ahead of most other school boards across the province. After being underbid, the plaintiffs questioned whether STS had properly taken into account the safety concerns initially raised by the Ministry and its external advisors:
In the fall of 2010, the Deloitte accounting firm was retained by the Ministry to carry out a review of STS and make recommendations with respect to the competitive procurement of student transportation services. Deloitte recommended, among other things, a focus on determining local market conditions and advised that in procuring appropriate and safe student bus services, price should not be the primary factor in entering into contracts for these services. After hiring PPI Consulting services to prepare an RFP, STS issued its first RFP on January 11, 2011. It is the position of the plaintiffs that this first RFP did not take into account local experience or conditions.
In March 2011, the results of the RFP were announced. Ravin lost a significant number of its bus routes as did a number of other larger companies who had been providing service to the catchment area served by STS. It is not in dispute that the winning bids accepted by STS were for rates approximately 20% below what the Deloitte study for the Ministry had set as the minimum amount for which operators could provide safe and reliable service on an ongoing basis.
The controversy over safety concerns and over the potentially detrimental impact of large-scale tendering on small, locally based suppliers led the provincial government to announce a six-month pre-election moratorium on competitive bidding of school bus services:
The experience of bus companies in the area served by STS was not unique. On June 23, 2011, then Minister of Education Dombrowsky announced a six-month moratorium on the procurement practices and established a Task Force to review the experiences to date of competitive procurement processes, expressing the view that such a review “would be beneficial to all parties.” The management of STS did not welcome this announcement, referring to it during a management meeting as a “curveball”, possibly because it might interfere with the successful completion of its five-year plan to which STS had committed in September 2010.
As the Court noted, once the moratorium was lifted, STS proceeded with a second and then a third RFP. The plaintiffs launched their last-minute injunction challenge in a final attempt to stop the evaluation of the third set of proposals.
In determining whether to grant an injunction, the Court held that the plaintiffs had established that there was a serious issue to be tried, particularly since a similar tendering process for school bus transportation services in another part of the province was already the subject of concurrent legal proceedings. The Court also determined that the plaintiffs had established that they could suffer irreparable harm if the tendering process was permitted to proceed:
The plaintiffs argue that the manner in which the current RFP is structured pre-ordains that they will be unsuccessful either in obtaining routes or obtaining routes that are economically viable. In either result, they will suffer financial ruin, impacting not only on their livelihood but on that of their employees as well. The affidavits of Ms. Ravin and Mr. Badder set out in significant detail the results of the 2011 RFP. Given that the 2013 RFP is structured in a similar way to the 2011 RFP, the plaintiffs argue that the result of the current RFP is pre-ordained. The disastrous results are more than speculative. In RJR MacDonald, the Supreme Court of Canada recognized that loss of market share can result in irreparable harm. The future of small rural bus lines and the manner in which they are tied to their individual communities has been recognized by Deloitte, the Ministry as well as The Honourable Mr. Osborne in comments in his Task Force Report.
After determining that the situation met the necessary elements of the injunction test, the Court granted the plaintiff’s motion and ordered STS to cease its tendering process until, at minimum, the conclusion of the parallel legal proceedings that were initiated against a similar process in another region of the province. As this case illustrates, while instances where the courts will at common law grant an injunction to stop a government tendering process are rare, they are not unprecedented. Furthermore, when successful, such injunctions can have a significant impact on government operations. In this case, the injunction had the impact of effectively suspending competitive bidding for school bus transportation services across the entire province of Ontario.
In the aftermath of the court injunction, which saw the escalation of a number of parallel legal proceedings and widespread criticism from smaller local school bus service providers across Ontario, a Student Transportation Review Team consisting of The Hon. Colin L. Campbell (Chair), Paul Emanuelli, and Leo Gotlieb was appointed by The Hon. Liz Sandals, Minister of Education for the Province of Ontario, in the fall of 2014, with the mandate to review competitive procurement practices in recent student transportation services RFPs. The resulting Student Transportation Competitive Procurement Review Report identified problems with a “one-size-fits-all” approach to scoping government contracts and found that this approach had an adverse impact on smaller local suppliers:
FINDINGS AND OBSERVATIONS
The Problem with Generalizations
Ontario is a geographically large and diverse province. These attributes, among others, impact on many government services at the present time but are particularly important with respect to school transportation.
In the north of the province, including both east and west, the distances are large and the populations often small and diminishing, as well as scattered. Poor driving weather, particularly in winter, is a very important factor in the delivery of school bus services.
The middle section of the province has its own unique features and populations. From the windy shores of Lake Huron through to Barrie and on to the Ottawa Valley, there are a variety of rural, suburban and urban landscapes, each with a distinct population and needs.
The Greater Toronto Area (GTA) has the urban crowding that brings its own specific challenges to school busing.
The north and center of the Province have been served by a large number of small and medium-sized operators, of which many have been family-run businesses for generations.
The GTA and other major urban areas tend to be served by large, often multinational companies with large fleets, some into the many hundreds of buses.
The comment we heard from many sources, which is one of the conclusions of our review, will not be news to anyone familiar with student transportation, namely ONE SIZE DOES NOT FIT ALL.
In the days before the consortia were developed and after school busing was largely outsourced, those in charge of transportation (or local boards) dealt with a variety of operators whom they knew and could count on. Contracts were negotiated often between the operators as a group and a board, based on a consensus reached locally.
As many of these contracts were not established through open competition, they did not comply with the requirements introduced by the AIT and subsequently the BPSPD.
The challenge for the industry, for which we hope the following recommendations may assist, is to assure a competitive framework in a viable marketplace compliant with all statutory requirements and directions. (pp. 3-4)
As the Review Team report noted, the strongest opposition to open competitive procurement practices came from smaller, local operators who were, in many cases, most impacted from these open tendering practices:
Unintended Consequences
The strongest voice in opposition to what they regard as the disruption created by the RFP model comes from the small operators and their association.
We have received detailed descriptions from a very large number of these operators, whose families have been in the school bus business often for two or more generations, of the problems they have faced since introduction of RFPs.
Many of those responding complained that the RFP process has put them at a disadvantage in terms of both assets at risk and lack of resources, such that many of the family-owned bus operations have ceased, either because they have been forced to sell due to loss of routes or because they did not have the assets to compete at a price that would be above their cost.
We think it safe to say and as the Osborne Task Force concluded, school busing is to some extent an “artificial market” in that there is only one buyer – the board or consortia – with many sellers of service. The intention of the competitive solicitation process should be to enhance, not inhibit, competition, as is the risk as the numbers of operators decreases.
Unlike the supply of other goods or services to a consortium for school transportation, many sellers (the small operators) have only one market in which to sell. They are unable to bid or shift their operations to another region if unsuccessful in their home region. Most were unprepared for the loss of a substantial portion or the totality of their business.
Small Operators
There are many voices among what may be regarded as small operators. There is no easy definition of what might be regarded as a small operator. In some regions this will be operators with fewer than 10 buses, and in other regions those with fewer than 50 buses.
Competitive procurement changes the way in which these operators conduct business, in many cases in ways for which they were not or still are not prepared for.
Of those who were used to dealing with school board officials directly with very simple negotiated contracts, many were unprepared to complete what they regarded as daunting and overwhelming RFP processes (upward of 100 pages), even with the limited assistance and training available to them.
Several of those associated with consortia recognized that in a number of cases, lack of ability to complete a complex RFP – rather than negotiating price – led to loss of business for many small operations. Each of the members of the Review Team concluded that many RFPs were confusing and vague.
Many operators assert that the RFP process does not adequately take into account, if at all, their local service to the community above and beyond the transportation of students to and from school.
A review of the many operators’ submissions highlights the concern of distinguishing between those legitimate elements of local service (such as providing back-up for other operators) that may be part of the competitive environment, and those that, while admirable from the viewpoint of community support, do not form part of a competitive contracting process.
Time and again small operators and even their association urged that this Review Team recommend a policy exemption for school busing, urging that such an exemption could find authorization in both in the AIT and in the BPSPD.
Early on in our deliberations, we concluded that a policy exemption for the entire school bus sector would not achieve the purposes of the BPSPD and would promote neither competition nor transparency in this sector that costs Ontario taxpayers $1 billion per year.
We recognize that in many of the more remote and rural areas of the province, consistency and availability of service are necessary in circumstances quite different than in the urbanized southern portions of the province. Open competition may not be realistic in some rural areas.
There are small operators other than those located in rural areas, and in our view consortia will have to be mindful of the effects on overall competition should the small operators be eliminated from their markets as a result of an inflexible RFP process. The idea of competitive procurement should be to enhance, not deter, competition.
Competitive procurement of school bus transportation service is not only complex given its inherent need for flexibility, it is quite different from the purchase of other assets in a competitive process.
When a supplier bids for the sale of a particular piece of equipment to a government entity, in most instances that supplier will find other markets in which to participate if it is not successful in its tender.
Many school bus operators are only equipped to participate in their local area. If they are unsuccessful in a tender process, their assets may well be stranded. This is why many small operators have not been able to continue and have been forced to sell their assets or businesses at distressed values. (pp. 4-6)
The Review Team report made a series of recommendations relevant to smaller operators, recognizing the need to maintain a sustainable, competitive base of suppliers for future government procurement processes by implementing the following measures:
- allowing joint venture bids from smaller suppliers;
- avoiding the aggregation or bundling of routes in a manner that excludes smaller suppliers from bidding on those bus routes;
- eliminating any arbitrary application of average fleet-age requirements that were not connected to safety standards;
- staggering competitions across different years, so that not all routes were put to tender at the same time, since such aggregation has the potential to favour larger suppliers and place smaller, incumbent suppliers in catastrophic loss situations if they lose a single tendering process;
- avoiding blanket prohibitions against contract assignment and, provided that service delivery continuity was maintained, allowing smaller suppliers to sell their businesses or transfer some contractual obligations without unnecessary restrictions;
- aligning contract duration to the age of the assets to minimize stranded, unused school buses at the end of a contract term;
- avoiding unbalanced contractual provisions that put undue hardship on smaller suppliers, including unilateral termination and contract amendment rights, and commercially unreasonable overhead obligations; such as “deadhead” provisions that do not allow contractors to charge for distances travelled to and from the starting point and ending point of a particular bus route;
- providing cost-of-living adjustments to recognize the increase in small supplier operating costs and avoiding evaluation strategies that put pressure on operators to drive down supplier wages to unsustainable levels;
- phasing in market caps to limit the number and size of contract awards that went to large suppliers, or to any single supplier, as a means of promoting long-term competition through the allocation of contract awards to a blend of small, medium, and large firms;
- streamlining and standardizing procedures and criteria for establishing basic qualifications through centralized processes that reduce duplication by eliminating the need to re-qualify for each contract assignment;
- limiting mandatory pre-bid meetings to only those projects where it was essential to have bidders conduct inspections in order to understand the scope of work, and otherwise using technology to conduct remote pre-bid meetings, where required;
- in cases where overhead costs (such as fuel for bus transportation) would otherwise form a disproportionate amount of the total contract, excluding those overhead costs from the bid price and treating them as pass-through costs instead, since smaller suppliers are disproportionately impacted by high overhead costs;
- avoiding unnecessarily lengthy and complex solicitation documents and processes, which act as a disproportionate barrier to entry to smaller suppliers;
- developing training programs for small suppliers to familiarize them with government procurement processes and with the specific requirements of their specialized areas; and
- establishing industry committees to give voice to smaller suppliers in areas requiring a high volume of goods and services by the government, and establishing parallel dispute resolution processes to address systemic issues in the government procurement process.
While the Review Team’s specific recommendations were aimed at the school bus transportation services sector in Ontario, many of those recommendations are worthy of broader application as a means of addressing ongoing systemic barriers to small suppliers in the government procurement system.
