Conflicts of interest in infrastructure procurement

April 2021  | SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2021 Issue

Many procurement processes contain restrictions on conflicts of interest. This article examines the questions of what a conflict of interest is, what impacts a conflict can have on the procurement process, and how the public sector can protect itself against such impacts.

Rules against conflicts of interest can be found in most jurisdictions and in international trade agreements. For example, Article 19.4.4 of the Comprehensive Economic and Trade Agreement between Canada and the European Union provides that a procuring entity shall conduct covered procurement in a transparent ‎and impartial manner that:‎ (i) uses methods such as open ‎tendering, selective tendering and limited tendering;‎ (ii) avoids conflicts of interest; and (iii) prevents corrupt practices.‎

However, in our experience, the term ‘conflict of interest’ is usually not defined in public procurement policies, documents and trade agreements, and in practice is frequently used to describe two distinct situations. Firstly, when talking about strict conflicts of interest, the procurement documents are usually trying to identify a situation where a person or company who is advising the public sector owner in some way is also advising or participating on a bidder team. In this situation, the concern is a risk of bias on the part of the owner.

This could arise in a number of ways, for example preparing technical specifications that favour the related entity, creating procurement requirements that favour the related entity, or acting with bias in the evaluation process. It is important to note that bias will not necessarily be in favour of the bidder that the relevant entity is connected with.

For example, company A and company B may be pursuing a project together as a joint venture, while company A is also advising an owner on a separate project where company B is a bidder. In this situation, company A may have an interest in company B being unsuccessful in its bid, so that company B can dedicate its resources to the project it is pursuing jointly with company A.

Secondly, the phrase ‘conflict of interest’ is also used to address situations where one bidder may have an unfair advantage over another. This might happen, for example, where an employee on the owner team leaves and joins a bidding company midway through the procurement process. Here, there is no strict conflict of interest on the employee’s part, as they are no longer advising the owner and are now part of the bidding community. However, the knowledge that they have gained while working for the owner might provide their bidding team with an advantage over other bidding teams.

The confusion in relation to these dual uses of the term ‘conflict of interest’ likely arises because the same set of facts can give rise to both types of conflicts. An adviser who is advising government may also have relationships with companies that are bidding. This may create both a strict conflict of interest and a concern that information gained from the public sector may find its way into the private sector. This is particularly true for infrastructure procurement.

Large infrastructure projects require significant external advisers to government, both technical and commercial, as well as large bidding teams in order to bring a comprehensive set of qualifications. These teams are not fixed; engineering firms may act with one contractor on project A, act for government on project B, and act with a second contractor on project C. This variety of relationships gives rise to a complex mix of potential conflicts.

Finally, it is important to remember that it is not only an actual conflict or unfair advantage that is at issue. If there is an appearance of conflict or unfair advantage, the owner’s procurement process may be compromised. The risk is that other bidders may lose faith in the process, as they cannot be sure that the decisions taken are free from bias or that the successful bidder did not have some kind of advantage over them.

It should be noted that not every inequality between bidders is unfair. For example, when an owner is retendering a service that is currently being carried out by the private sector, the incumbent provider may seem to have an inherent advantage over others. While the owner can minimise this advantage, for example by publishing all available information on service levels and resources required, only the incumbent has the actual experience of carrying out the work. This in itself is not an unfair advantage.

There are a number of ways in which public sector owners can protect themselves against these issues. One extreme measure, taken by some owners, is to require private sector entities to agree that they will only act for the government on procurement matters and will not act as advisers to bidders. The danger with this approach is that the experience of the government-side advisers can become narrow. If a government allows advisers to act both for and against it, those advisers can bring their private sector expertise to the table in assisting government.

An alternative approach is to rely on process to minimise the risk of conflicts arising and to manage the perception of conflicts. This requires a comprehensive listing in the procurement documents of companies and individuals that are advising or have advised government on the project. This list of restricted entities gives notice to bidders that they should not engage any entity on the list, or their ex-employees, in relation to the project without the owner’s consent. Consent may be required where, for example, an employee moves from one adviser to another during the course of the procurement. The owner may need to impose conditions in giving consent. For example, the owner might require the adviser to put in place effective firewalls to prevent the individual from having any contact with the bidding team.

In addition to this listing of restricted entities, which should avoid actual conflicts of interest, the owner should require each of the participants taking part in the evaluation to identify any potential interests or connections that they have with the entities identified on the bidder side. This would, for example, identify where company A is actively working with company B on a different project. It would also identify situations where an individual’s spouse is employed by a bidding company, or where a law firm advises a bidding company on unrelated matters. The owner would then review and address each of these potential connections. If the relationship creates an issue, steps can be taken.

These steps might involve removing the individual from the evaluation team or ensuring that there are sufficient other people taking part in the evaluation so that any one person’s bias can be addressed. It may also be possible to allow for an evaluation to take place without revealing the identity of the bidding teams. While this can prove difficult, depending on the nature of the evaluation, it may be useful to allow a key evaluation individual to provide the input into the wider process, while protecting the process from bias.

Depending on the owner, it may be useful to engage a third-party adjudicator to rule on these particular issues. This has two advantages. First, it shows to the outside world that the process is fair, robust and objective, reducing the chance of there being a perception of unfairness. Second, it can be easier to enforce a third-party ruling on both bidders and advisers, as opposed to a request from an owner.

Another situation that can arise regarding potential conflicts of interest is where the owner engages a technical adviser early in the development of the project but does not retain their services into the procurement period. In this situation, it may be possible to allow this adviser to join a bidding team, provided the owner discloses any information that the adviser had access to and the full results of their advice. This in itself may be sufficient to remove any question of unfair advantage. In some cases, a further step may be necessary to ensure that the procurement is fair, namely, to extend the procurement process so that other bidders have sufficient time to analyse the relevant information and remove any advantage.

Finally, it may be that one entity has the potential to provide a major advantage to bidders. For example, on a highway project where maintenance services are carried out by the private sector, the incumbent provider may provide any bidder that engages it with an advantage over other bidders. One way to address this issue is to allow each bidder access, on a non-exclusive basis, to the incumbent. That way, each bidder has the same access to the incumbent’s information and resources.

 

Elizabeth Mayer is a partner and Alex Sibley is an associate at DLA Piper (Canada) LLP. Ms Mayer can be contacted on +1 (604) 643 6438 or by email: elizabeth.mayer@dlapiper.com. Mr Sibley can be contacted on +1 (604) 643 2951 or by email: alex.sibley@dlapiper.com.

© Financier Worldwide

BY

Elizabeth Mayer and Alex Sibley

DLA Piper (Canada) LLP

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