Alan MacLachlan takes a look at some of the upsand- downs of special purpose vehicle procurement with a little help from a well-known expert…
Just when you thought things were settling down in the way local authorities procured their new vehicles, especially capital intensive animals such as those required for refuse collection and recycling, another set of influences is brought to bear.
Back in April 2004, the most significant change in the way in which local authorities could obtain funding other than from direct income, and freedom from the previous restrictions imposed by 'credit controls', came into force. This was the 'Prudential Capital Finance System', created under the 'Part 1' of the 'Local Government Act 2003', more generally referred to as 'The Prudential Code'.
The Prudential Code?
There is no connection with the famous book by Dan Brown bearing a similar title other than that 'The Prudential Code' also comprises a complex and confusing content for the layman to understand.
The subject was touched on briefly in the pages of LAPV a couple of years ago but was considered too complex to cover in detail and that further research would be required before offering a confident opinion.
At the time, my understanding was that a local authority is now free to negotiate credit facilities with external financiers, at realistic market rates, as long as the total credit liability incurred for all of its operations does not exceed an established minimum revenue provision (MRP).
In order that MRP could be calculated responsibly and prudently, the 'Chartered Institute of Public Finance and Accountancy (CIPFA) produced a set of 'prudence indicators' These were to be applied to specific revenue areas, by all Local Authorities, and that this became known as 'The Prudential Code'.
Implications for operating leases
As we are involved specifically with plant and vehicles here, I felt at the time that this new-found liberty would have major implications for operating lease agreements and would strengthen the argument for alternative contract hire arrangements. I will reveal more later about whether this opinion was actually borne out or not.
What is a fact, however, is that procurement processes transformed and that procurement agencies began to emerge.
So what are the other influences now affecting funding and procurement I referred to earlier?
There are principally three that I would like you to consider here. These are 'The Gershon Model', procurement agencies, and 'e-auctions'.
All three can have a questionable impact on obtaining 'best value' deals for Local Authorities in my view. Certainly, the proliferation of procurement agencies in England and Wales has been given greater impetus resulting from the adoption of 'The Gershon Efficiency Review'.
What is the Gershon Review?
A little background information for those of you who may know little or nothing at all about 'The Gershon Efficiency Review'. In September 2003, Sir Peter Gershon - a non-executive director at the Treasury and one-time chief executive of the 'Office of Government Commerce' (OCG) ' was commissioned to investigate public sector efficiency.
His subsequent report concluded that by better utilisation of resources, such as greater use of ICT, merging departments and sharing certain 'back office' functions, savings of around a staggering £20 billion could be achieved throughout England and Wales by simply increasing efficiency by a modest 2.5% across the board.
There was also the controversial suggestion that a great number of job cuts should be made.
These recommendations, despite being met with some resistance from a number of senior civil servants, were inculcated into a model for local authorities to adopt in attaining greater efficiency. And where was the focus of attention directed first?
You've guessed it -' procurement! Enter the procurement agencies charged with reducing the cost of everything from paper clips to refuse collection vehicles and everything in between.
Fallout from the CV Show
Now, I have to admit that whilst I have my own views and opinions on the way funding and procurement is heading, I needed to confirm or refute these by talking to somebody much closer to these issues.
The opportunity to do so presented itself at the recent Commercial Vehicle Show held at the NEC an April. There I had the great good fortune to run in to Russell Markstein.
Many will associate Russell with his previous employment at Specialist Fleet Services, better known as SFS. I say previous because he has taken up an invitation, after eighteen successful years with SFS, to join the board of NRG Fleet Services in the challenging new role of Development Director.
NRG is 'headed-up' by managing director Sid Sadique, late of BIFFA, and is dedicated to providing 'total fleet solutions'. Member companies include Riverside Truck Rental and recently acquired Trio Direct Hire, now known as Trio Truck Rental.
There are great number of exciting new projects and developments in the pipeline at NRG, which Russell told me about in confidence. We will bring you news of these in a future issue of LAPV just as soon as we are allowed to.
Russell quickly answered the question regarding the impact of 'The Prudential Code' on alternative funding methods by pointing out that contract hire with a parallel inclusive maintenance arrangement had continued to gain ground.
“When all this started, I predicted that contract hire with maintenance would probably take a more centre stage position once credit control restrictions were lifted - and it has,” said Russell Markstein.
The reason is that not only can hire fees be accounted for in a much more effective manner because ownership of the asset remains with the contract hire provider, but also that whole life costs can be predicted accurately without the threat of huge return penalties upsetting the applecart at the end of term.
Contract hire means that a Local Authority can have a totally enclosed package which shields them from risk. Operationally, all they have to do is provide a crew, the fuel and the insurance - and nothing else, he continued.
“There has been some impact on our industry from DEFRA grants to local authorities when it has been conditional to purchase vehicles outright, but this may prove to be a mixed blessing. These grants have provided the cash to buy the equipment in the first place, but not the funds to keep it maintained and repaired. This must affect whole life cost calculations and certainly removes the benefit of shielding from risk.”
The subjects of 'The Gershon Report' and 'procurement agencies' were not quite so easily disposed of. Russell began by saying; “Originally, there was a drive to ensure that procurement was undertaken strictly in accordance with EEU regulations and local authorities established internal departments to manage this.
“All sorts of conditions were set in an effort to create a 'level playing field' so to speak. These included a requirement to advertise all new contracts for tender, over a certain threshold, in The Official Journal of The European Union or OJEC as it used to be called,” he says.
“There was also a trend for independent companies to set up shop as 'procurement consultants'. They undertook to evaluate all sorts of suppliers on the behalf of a Local Authority and provide a selected list. Only companies on that list were then allowed to tender ' which is a great idea in theory. This is still the situation, and the number of companies acting as procurement 'agencies' is growing rapidly.”
LAs have substantial buying power
The Gershon Report pointed out to local authorities that they possessed substantial buying power which has accelerated the growth in number of both independent agencies and internal procurement departments.
In fact, many local authorities are combining together in various consortiums with one authority acting for several. In essence it is true that local authorities, or their agents, can impose considerable pressure on suppliers ' especially if they are buying large volumes of everyday items such as stationery for example.
When it comes to special-purpose vehicles used for refuse collection, recycling and road-sweeping, does this 'buying clout' match that of the big contract hire and rental companies such as Riverside?
After all, these companies are buying hundreds of vehicles a year not just a few dozen. In the case of Riverside Truck Rental, their own fleet numbers more than 750 units, ' the majority of which are municipal types ' and with a further £10 million worth on order, that's what I call 'buying clout'.
Russell Markstein tended to agree with this and added; “The margins on special-purpose vehicles are already so slim that there is little room for manoeuvre on the part of manufacturers. It is a fiercely competitive market, and I would argue that we obtain equal maximum discounts.
“There is just so far that a manufacturer can go and still stay in business. Where we make our profit is from the 'added value' aspects included in a contract hire agreement such as maintenance and fleet management. “It is also true that size for size some authorities, even in a consortium don't measure up when compared to the likes of us, and the 'economies of scale' will not apply.”
Suitable for operational requirements?
It puzzled me how a procurement consortium could negotiate for, say, refuse collection vehicles direct with manufacturers on the behalf of several local authority members when ' surely this would mean establishing a common make and model range for each?
And what about auxiliary equipment such as bin-lifts?
How would this fit with differing operational requirements between authorities particularly for the collection of recyclables, for example, where methods can be so diverse?
And what about replacement dates?
Does this mean that individual authorities would, by necessity, have to adjust or extend existing funding arrangements, such as operating leases, to make these co-terminate?
Russell commented: “I assume that a common specification is agreed between each authority before the negotiating process begins. And if the chosen vehicle meets the required criteria on specification and cost, who can blame them for going for it.
“The downside of this, in many cases, is that there can be little input from the people at the operational end. It's a pity that the views of crews and drivers, which were once considered an important part of the specification process, are no longer taken in to account,” he says.
“There is also the danger of course, particularly with independent agencies, that the people adjudicating a tender are solely concerned with conformity to specification and disregard factors that can increase whole life costs.
“As for replacement timing, I am sure that an acceptable timeframe would be agreed with the supplier. When we prepare a tender, we always try and build in flexibility with regard to vehicle make, type and specification to avoid this 'onesize- fits-all' scenario.”
The funding conundrum
Another area that puzzled me about both independent procurement agencies and Local Authority consortiums is how are they funded?
In the case of the independent they must be operating at a profit, and Local Athorities must be absorbing the wage and facility costs somehow. Does this not impinge on the efficiency required by 'The Gershon Model' and erode any cost savings achieved?
I put this apparent paradox to Russell and he answered: “This is a very good point and one with which I have some concerns myself. Nobody would argue that obtaining the best possible deal is the first priority for a Local Authority and to the benefit of everyone.
“But at what price? I've already covered the thorny issue of manufacturers' discounts which are readily understood. However, one area I have difficulty in coming to terms with is the commission, if that is the right word,imposed on successful tendering suppliers by purchasing organisations which can be in the region of 1.5% of the total tender value. No doubt this is charged to defray costs,” says Russell.
“This additional charge levied is almost certainly going to push up the tendered price by the same amount because it can't be contained by additional supplier discount. My point is that if suppliers were not forced to go this route there would undoubtedly be a cost advantage.
“The imposition of any form of supplementary charge is completely counterproductive and contrary to the Gershon ethos. You must remember that when we submit a tender, whether it be direct or through an agency, we want to win that business ' and so we always put forward our best price. Regrettably, this best price may be 'loaded' to account for commission in some cases, so is the Local Authority getting the best deal in the end?”
What about e-auctions?
Finally as we came to the subject of e-auctions Russell looked despairingly. His response was emphatic: “They simply do not work and are a thoroughly unprofessional way to conduct procurement. You simply cannot acquire special purpose vehicles in this way. Just take a look at how e-auctions are supposed to work?
“A tender specification is issued to selected suppliers along with a notification that if you wish to 'bid' for this business an auction will take place on a certain date at a certain time. So out comes the calculator followed by the pencil sharpener and you work out your lowest price.
Then, come the day, you and all your competitors, go online and huddle in front of the PC at the appropriate time and cast your bid. It's a bit like 'e-bay' except that the lowest bidder wins and it's all over in about half an hour. “Now, I ask you ' how can you possibly tender for contract hire, or any other special purpose vehicle related service, on that basis?
There are so many factors to consider ' annual mileages, landfill working, maintenance facilities, special handling equipment - the list goes on and on. Almost invariably a site visit is required and some pretty detailed discussion are required with frontline people to get the complete picture. In my view, e-auctions are a joke and neither we nor any of our competitors would wish to be associated with them!” Message received and understood. At this point it was 'audience over' and Russell hurried off to another appointment.
So what conclusions can be drawn? The Prudential Code has allowed a greater freedom of funding choice for local authorities. The Gershon Model will be helpful in achieving significant financial savings but has, perhaps, encouraged the growth of procurement agencies whose activities could be seen as counterproductive.
Group purchasing of special purpose commercial vehicle contract hire and rental is extremely difficult if not impossible. And e-auctions are not even on the horizon as far as professional suppliers are concerned.
What happened to good, oldfashioned, free-enterprise? Why is it that we are constantly subjected to more and more bureaucracy when it comes to making some quite straightforward decisions? Why have these buying decision been placed in the hands of people who, in a lot of cases, think that a 'hydraulic ram' is a 'mechanical sheep' and a 'rave' is somewhere to go on a Saturday night? Why can't common sense prevail? Is this progress?
Russell Markstein greeted me with a quote from Mark Twain, so perhaps I should end with one from Rudyard Kipling who once said: “If you don't get what you want, it's a sign either that you seriously did not want it, or that you tried to bargain over the price.”