DFID says contractor reforms are working, suppliers beg to differ

LONDON — The U.K. Department for International Development has said its commercial procurement reforms — introduced in 2017 following concerns about profiteering and unethical behavior by some contractors — are working, even as suppliers say they are penalizing smaller groups, stifling innovation, and driving down standards. “The excitement of working on a DFID contract is not what it once was [and] the mood in the sector is quite poor.” --— Anonymous DFID contractor DFID published its first annual procurement and commercial report last week, covering £1.2 billion ($1.5 billion) of aid spent through commercial suppliers in 2018-19. It comes after the department introduced a host of sweeping reforms to the way it works with private contractors, including a new code of conduct, fee caps, open-book accounting requirements, and measures intended to make it easier for small- and medium-sized enterprises to bid for tenders. The report assesses the impact of the changes to date and also outlines a number of further changes, including rolling out the reforms to other aid-spending departments and applying a more commercial lens to its spending through multilaterals. DFID said there is “good evidence that the commercial reforms are bedding in well and raising standards” across its supplier network. However, contractors who spoke to Devex painted a different picture and said that SMEs especially were struggling to compete as a result of the procurement changes. Others said DFID’s focus on cost was driving down standards and that morale was low among contractors, with many leaving the sector. “The excitement of working on a DFID contract is not what it once was [and] the mood in the sector is quite poor,” one said. Slow progress on SMEs In the report, DFID claims it has made it easier for small businesses to bid for contracts, even though the data shows a drop in spending — both directly and indirectly — through SMEs in 2018-19, from 43% the year before down to 39%. However, DFID is still exceeding the U.K. government target of spending 33% of procurement through SMEs by 2020. The volume of direct spending going to SMEs also fell from 33% in 2016-17 to 20% in 2018-19. This was driven by several delivery partners graduating past the SME threshold, which is a “positive sign,” according to the review. However, a number of suppliers, who spoke to Devex on the condition of anonymity to preserve business ties, said the reality of the situation is more dire and that SMEs are struggling under the financial and time costs associated with the new rules. Prime contractors are also passing the risk and compliance costs down the supply chain, they said. These issues have contributed to some SMEs going out of business, while others have been taken over by larger businesses. Meanwhile, the entry of big players such as Chemonics to the DFID market is likely to lead to greater consolidation, with large companies dominating. A senior staffer at one of DFID’s key suppliers told Devex that DFID’s “issues” with SME participation were “leading to a concentrated market where only large contractors with deep pockets can compete.” Another long-time DFID supplier with experience working for SMEs said the department did not have a clear sense of “how money is trickling down its supply chain,” and said they were surprised that the review did not disaggregate its SME spending by supplier size. Part of the problem is that the department’s definition of an SME is so broad it covers almost all development consultancy businesses, they said. DFID defines a medium-sized business as having a turnover of less than €50 million ($56.2 million) and 250 staff; a small business has a turnover of less than €10 million and fewer than 50 staff; and a microenterprise has less than €2 million and under 10 staff. “It is remarkable that DFID has no specific actions or indicators for micro and small enterprises, which is where the real development expertise lies,” the source said, adding that the department needs to engage more with contractors, especially smaller groups, instead of just “landing things on the industry.” DFID confirmed to Devex that its SME engagement data does not break down information into micro and small supply partners, but did not say why. As a result of DFID’s reforms — and their disproportionate impact on smaller firms — the sector is becoming less innovative, the supplier said. “People are moving to a model of delivering DFID’s terms and conditions, and are no longer investing in things like research and innovation because all nonbillable time is being spent on compliance. The sector is losing the thinking which used to go on in SMEs,” they claimed. Future reforms The review also talks about further planned reforms, such as the creation of a single commercial hub covering all U.K. aid spending, including NGOs receiving grants and other government departments spending official development assistance. Stephanie Draper, CEO at Bond, the U.K. network of NGOs, said she welcomed plans to streamline procurement processes across the sector — including applying the code of conduct to grants. However, she had some concerns, including that the compliance thresholds would be too high for some NGOs. “DFID’s procurement has come a long way but we still have a way to go in making the process suitable for the whole of civil society,” she said. The review also says DFID will “clarify options for commercial reform of multilaterals.” However, Devex understands that this would not mean asking organizations to compete for funding. Finally, the review mentions it is looking into a “portfolio” procurement approach, which contractors said could mean a “pretty fundamental change in contracting practice.” DFID did not supply additional detail on the plan but said it would consult suppliers as things progress.