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CHAPTER 5: SUSTAINABLE PROCUREMENT

Summary

5.1 This review provides an overview of both the literature and policy landscape in procurement, looking at policy and practice in both the public and private sectors, the mechanisms currently being adopted to ensure more 'ethical', 'green' or 'social' procurement, the barriers to these mechanisms and the possible tensions and conflicts between them.

Definitions and Concepts

5.2 Procurement is the process by which organisations, companies, institutions or statutory bodies procure works, supplies, services or utilities, and the contractual process required. 'Green Procurement' and 'Social Procurement' are the key terms being used to link the whole procurement process within business to more environmentally sustainable or more socially equitable practices. This has been termed 'linkage' and 'conditionality'.

Global

5.3 A new international system of procurement is currently evolving, with concepts such as linkage and the growing role of green and social procurement. Policy responses from international institutions such as the World Bank, the UN and the World Trade Organisation suggest an internationalisation of procurement, accelerated by economic liberalisation and increased global trade.

European

5.4 At a European level, there is concern that procurement is being used as a stand-alone policy instrument, given the erosion of state-level powers from international agreements and conventions. Procurement processes are being pulled in different directions by the drive for continued EU market integration, on one hand. and the need for increased environmental policy integration and regulation on the other. There is a raft of legislation.

UK

5.5 A more strategic approach to public procurement is evident in Britain, with inter-departmental co-ordination and long-term partnership relations with suppliers. The effects of the global economy on the public sector and public procurement are increasingly being felt, with large institutions like the NHS attempting to reform their procurement policies in line with more sustainable practice.

Scottish

5.6 The ability of the public sector to lead by example in sustainable procurement has been taken up positively by the Executive with guidelines for purchasers and suppliers being adopted. Specific guidelines are in place for food and catering procurement. Other public bodies, such as Communities Scotland, have also taken up the challenge of sustainable procurement. However, what appears to be lacking is systematic measurement and reporting of practice.

Global

Priorities

5.7 A new international system of public procurement is currently evolving, spurred on by international agreements, increased trade liberalisation and international institutions such as the World Bank and WTO (Arrowsmith, Linarelli and Wallace, 2000). This is balanced by the spreading influence of Corporate Social Responsibility (Ocampo, 2004), which, in turn, is complemented by the growing use of 'linkage' or conditionality with the awarding of contracts to encourage a more sustainable approach (Erridge and Greer, 2002), such as the linkage of contracts to labour rights in the South, as the take up of projects that are labour-intensive and, therefore, help employment levels is encouraged.

5.8 Contracts that build in social clauses are becoming more prominent ( ILO, 2004), with, for instance, UNICEF insisting on writing in clauses on anti-personnel mines. However, there is still a risk that the eagerness to attract foreign investment to developing countries will encourage companies more interested in low labour costs and lenient environmental legislation. On top of this is the dynamic between economic globalisation, a considerable hindrance to the promotion of linkage, and social globalisation, a potential aid.

5.9 Coupled with 'Social Procurement' is the concept of 'Green Procurement', both key to sustainable development, though not necessarily complementary. Indeed, there are problems with the inherent trade-offs between the two. Much has been written on 'Environmentally Responsible Public Procurement' ( ERPP) and its potential, coupled with an integrated life-cycle approach, to push environmental policy. The need for inter and intra-industry collaboration with the support of public policy-makers, a prominent theme throughout the topics in this review, is pertinent in sustainable procurement (Hartshorn, Maher, Crooks, Stahl and Bond, 2005).

5.10 There is an additional pressing need to introduce mechanisms whereby assessment and evaluation can be undertaken - though this is not a problem specific to Green Public Procurement - and a need to harmonize Green Procurement with trade policies ( OECD, 2003).

Policy responses

5.11 Key international policy responses and initiatives on public procurement and their relevance to sustainable development are outlined here. In its Agreement on Government Procurement, the World Trade Organisation currently has a plurilateral system of integrating government procurement markets (Arrowsmith and Hartley, 2002), with a trend towards multi-phase tendering and electronic procurement. The WTO Agreement on Government Procurement has failed to liberalise the market, despite the success of the organisation in liberalising most other areas (Arrowsmith, 2002). Two fundamental perspectives, the first being international free trade policy and the need for value for money and the second the deterrence of corruption, have brought intense scrutiny to bear on public procurement practices in nearly every country. Paradoxically, in developed countries, a less prescriptive, more flexible approach to regulation, in which a degree of transparency is sacrificed, is becoming more prominent, conflicting with the general move for accountability expressed by international institutions (Arrowsmith and Trybus, 2002).

5.12 In 2000, the UN launched the United Nations Global Compact ( UN 2000), an international initiative to bring companies together with UN agencies, labour and civil society to promote universal social and environmental principles. Its ten principles are in the areas of human rights, labour, the environment and anti-corruption. Two years later, the Global Reporting Initiative ( GRI) - now an independent institution - was initiated by the UN as a multi-stakeholder process to develop and disseminate globally applicable Sustainability Reporting Guidelines. However, this reporting on the economic, environmental and social dimensions of member countries' activities, products and services is entirely voluntary. The UN Growing Sustainable Business initiative, which facilitates business-led enterprise solutions to poverty in advance of the Millennium Development Goals, came out of the Johannesburg Summit in 2002.

5.13 The World Bank Group addresses, in its own procurement process, vendor commitments to fair wages and benefits, safety, environmental programs, and diversity of its supply chain. Procurement in projects financed by the International Bank for Reconstruction and Development ( IBRD) and the International Development Association ( IDA) are conducted in accordance with the Bank's Articles of Agreement, requiring that proper attention is paid to efficiency and ensuring that loan proceeds are used only for the purposes for which the loan was granted (The World Bank, 2005). Political and other non-economic considerations must not influence the procurement process. The institution also has a supplier diversity programme.

5.14 There is apparent growing support for the use of Green Public Procurement programmes and policies, as expressed in the Organisation for Economic Cooperation and Development's Environmental Strategy in 2001 and endorsed by OECD Ministers for the Environment.

Possible lessons

5.15 In September 2000, IKEA launched The Ikea way on purchasing home furnishing products, containing a 'code of conduct' for its 2,000 suppliers, focusing on environmental impacts and working conditions. Good practice highlighted by Ikea's suppliers is verified by external auditors. Companies are asked by IKEA to remedy any bad practice and the code warns suppliers, "Repeated violations of IKEA's requirements will result in the termination of co-operation." After pressure from lobby groups a policy prohibiting the use of wood from intact natural forests, except those certified by the Forest Stewardship Council, was also introduced.

European

Priorities

5.16 It is argued that currently in Europe public purchase is being utilized as an instrument of governance. The procurement process has also been seen as a non-tariff barrier in Europe. The EU has in place a legal structure for procurement that is intended to harmonize with the fundamental freedoms of the common market, envisaging market integration and trade facilitation, though it remains to be seen if these changes will fit in with Environmental Policy Integration (Arrowsmith and Hartley, 2002; Arrowsmith and Hartley, eds, 2002).

5.17 In the food sector, EU procurement legislation has been criticised as prohibiting 'buy local' policies and the development of local food chains that could provide a more sustainable approach to food (Morgan and Morley, 2002).

Policy responses

5.18 The emphasis at the European level very much echoes the WTO approach, encouraging freer trade and transparency. European Union Directives on Public Procurement enact the requirement that member states should not impose quantitative restrictions, or measures with the equivalent effect, on trade between each other. These Directives also endorse certain provisions of the WTO - formerly the General Agreement on Tariff and Trade ( GATT) - on government procurement. EU Public Procurement Directives are intended to guarantee fair and non-discriminatory international competition in bidding for goods, services and works above specified threshold values.

5.19 EU procurement rules apply to member states and to the European Economic Area (which includes Iceland, Norway and Liechtenstein). Contracts above the threshold levels affected by the rules must be advertised in the Supplement to the Official Journal of the European Communities.

5.20 Though the following directives were implemented before 2000: they still comprise the bedrock of EU legislation:

• The Works Directive 93/97/EC as amended by Directive 97/52/EC (1993)
• The Supplies Directive 93/36/EC as amended by Directive 97/52/EC (1997)
• The Services Directive 92/50/EC as amended by Directive 97/52/EC
• The Utilities Directive 93/38/EC as amended by Directive 98/4/EC (1998)
• The Public Sector Remedies Directive 89/665/EC as amended by Directive 97/52/EC (1997)
• The Utilities Remedies Directive 92/13/EC (1992)
• Compliance Directive (89/665/EEC)

The newest directives are:

• Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors.
• Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts.

Although these will not be implemented until 2006, these two directives clarify the possibilities for public purchasers to integrate environmental considerations into their respective tender documents, and are, therefore, of considerable environmental benefit (Office of Government Commerce, 2004).

Possible lessons

5.21 Norway and Sweden are good examples of joined-up policy and practice, the need for which is mentioned above, both having considerable sectoral integration. Norway, Sweden, Netherlands, the UK and Portugal are implanting regular strategic planning and green accounting, which is also having a positive effect.

UK

Priorities

5.22 In the realm of public procurement, successive administrations in the UK have aimed to develop a more strategic approach to public procurement with inter-departmental co-ordination and long-term partnership relations with suppliers. In an increasingly interdependent world, one challenge has been adapting the public sector to the demands of the global economy. This is proving a difficult task as the operating framework and culture of the public sector appear, in some regards, to be non-compliant or incompatible with aiming towards this. Partnerships between the private and public sectors have had positive and negative effects (Erridge and Greer, 2002).

5.23 There is, however, increasing evidence of environmentally and socially responsible procurement in the NHS, being the UK's biggest employer and spending £1,000 per second (Lockwood, 2005), as it responds to the need for greater sustainability in its procurement practice, as well as in areas like employment and skills, new building and facilities management.

5.24 The Sustainable Development Commission's 'Healthy Futures' programme emphasises the need for good corporate citizenship, with the public sector learning lessons from the private. This is being funded by the Department for Health with a commitment laid out in the white paper Choosing Health (Department for Health, 2004). The Chief Executive of the NHS has declared good corporate citizenship to be one of his top five priorities (Lockwood, 2005).

Policy responses

5.25 The National Audit Office publication Sustainable Procurement in Central Government provides a statement of intent from the Government, looking to embed sustainable development into spending and investment decisions, though there is considerably more focus on environmental considerations than economic or social factors ( NAO, 2005).

5.26 The Government is currently encouraging contracting authorities, be they local authorities, statutory bodies, or general public service providers, to take a more sophisticated approach to supply chain management through public procurement. As at the European level, the bedrock of procurement policy at a UK level is grounded in a number of pre-2000 regulations:

• The Public Supply Contracts Regulations SI 1995 No 201
• The Public Services Contracts Regulations SI 1993 No 3228
• The Public Works Contracts Regulations SI 1991 No 2680
• The Public Contracts (Works, Services and Supply) (Amendment) Regulations 2000 SI 2000 No 2009
• The Utilities Contracts Regulations SI 1996 No 2911
• The Utilities Contracts (Amendment) Regulations SI 2001 No 2418
• The Public Contracts (Works, Services and Supply) and Utilities Contracts (Amendment) Regulations SI 2003 No 46

5.27 The Treasury aims to provide a transparent public expenditure delivery framework, based on public service agreements ( PSAs), focusing on delivering public services in areas integral to achieving sustainable development in the UK, including unemployment and poverty. There is arguably more scope to spread this approach into other areas of the Treasury's remit.

5.28 The Sustainable Public Procurement Task Force is charged with drawing up an action plan by April 2006 to bring about a step-change in sustainable public procurement so that the UK is among the leaders in the EU by 2009 ( HM Government, 1999). The Government has pledged itself to take a comprehensive approach to value for money and whole life costs of goods and services, building relevant sustainability issues into the procurement process as early as possible. This is reflected in English Partnerships procurement policy, with the number of tenders required depending on the amount of expenditure and where there is also an emphasis on value for money and under no circumstances may expenditure be disaggregated to allow movement between the particular brackets.

Possible lessons

5.29 Suffolk County Council Direct Tender Selection for the South Lowestoft Relief Road: tenders were assessed first on quality, with bidders required to outline their approach to innovation and the use of in-situ recycling and local materials, before the qualifying tenders were compared on price.

5.30 The Environment Agency's procurement strategy 'Constructing a better environment', based on the 'Achieving Excellence' principles of the Office of Government Commerce and the Framework agreements. The Agency aims to deliver a 15% cost saving over five years setting requirements for materials recycling, initially at 50% recycled material, now increased to 60%. Experience has led the Agency to believe that the use of recycled materials can often deliver cost savings (Environment Agency, 2005).

Scottish

Priorities

5.31 The first action-point in Scotland the Sustainable? 10 Action Points for the Scottish Parliament (Secretary of State for Scotland's Advisory Group in Sustainable Development, AGSD, 1999) was that the Scottish Parliament and Executive should show committed leadership in relation to sustainable development. That report recommended, "The Scottish Executive should use its ability to direct public resources to support sustainable development in local government and voluntary agencies", an element of which would be through sustainable procurement.

5.32 Whole-life costing is seen as a key mechanism for securing sustainable procurement and specifications for goods and services should address sustainable development objectives (Scottish Executive, undated). In terms of food and catering procurement, it is also recognised that local sourcing can be used to support rural communities and fair trade ( DTZ Pieda, 2005). It is unclear whether there has been any evaluation of the success of the Executive's policies in this field although there has certainly been some relevant research evaluating public procurement in the area of food (Morgan and Morley, 2002).

Policy responses

5.33 Procurement, including sustainable procurement, is a devolved responsibility, although clearly there are constraints on the extent to which Scotland can take a different course because of EU Public Procurement Directives.

5.34 The Scottish Procurement Directorate ( SPD) formulates policy on behalf of the Executive, providing guidelines for purchasers and suppliers in relation to sustainable development in public sector procurement. The policies apply to the Executive, Executive Agencies and associated departments. The Guidelines for Purchasers (Scottish Executive, undated) indicate that while it is essential that best value is secured for the taxpayer's money, nonetheless public purchasers can make a significant contribution towards meeting the Executive's wider objectives on sustainable development.

5.35 Whole life costing is a central requirement of the Scottish Executive's procurement policy: only by taking account of all aspects of cost, including running and disposal costs, as well as the initial purchase price, can genuine value for money can be achieved. Examples of the factors that need to be considered in assessing whole-life costs include:

• running costs such as the energy or water consumed by the product over its lifetime;
• indirect costs caused by, for example, less energy-efficient equipment or plant administrative costs (created, for instance, when the use of staff must spend time ensuring compliance with regulations applying to the use of hazardous substances);
• investing to save revenue costs ('spend to save' measures);
• not insisting on new items when refurbished parts or products could be used;
• recyclability - for instance,. purchasers can create markets for their own waste by buying products containing recycled materials;
• and, furthermore, a recycled product, may cost less than a new one.

Purchasers should, however, look to waste reduction and re-use as well as recycling and the cost of disposal arrangements.

5.36 The SPD Guidelines stress that purchasers and end-users must be familiar with, and take full account of, relevant sustainable development objectives when buying goods and services. Key objectives are:

• conserving resources;
• reducing (and avoiding wherever possible) waste;
• phasing out of ozone-depleting substances and minimising the release of greenhouse gases, and other substances damaging to health and the environment;
• encouraging manufacturers, suppliers and contractors through specifications to develop environmentally preferable goods and services at competitive prices;
• ensuring that any products derived from wildlife are from sustainable sources, and comply with EC and international trading rules such as CITES;
• encouraging contractors to improve environmental performance;
• and meeting all relevant current and foreseen statutory regulations and official codes of practice and specifying contractors do the same when working on departmental premises.

5.37 Perhaps the most significant contribution that public purchasers and consumers can make, alongside the reduction of consumption and waste, is by ensuring that specifications for goods and services take full account of sustainable development objectives.

5.38 Another important policy initiative has been the production of guidance on the integration of sustainable development into the procurement of food and catering services (Scottish Executive, 2004a). This guidance advises that purchasers should take account of relevant sustainable development and healthy eating objectives when awarding contracts for food and catering services. Value for money, probity and compliance with procurement law remain paramount considerations, but buyers should take advantage of the possibilities for legitimately pursuing a sustainable food policy including the encouragement of fair trade. Whilst recognising that, in the main, sustainability impacts in food supply may be in processing, packaging or distribution and not just at the stage of producing raw materials, the guidance also encompasses the need to meet appropriate assurance standards and to operate in a way that takes account of sustainable development priorities across a range of Executive policy areas.

5.39 The guidance also acknowledges that local sourcing can contribute to the development of rural economies - the maintenance of economic growth and employment being a key objective of sustainable development. While it is not possible to discriminate in favour of local suppliers, public sector buyers can support local sourcing by considering and removing obstacles to tendering by local suppliers, especially as this may help to achieve value for money. Small local producers and suppliers should be encouraged to collaborate on organising collective responses to demand, recognising that many small producers miss out on large government supply contracts because they are not generally organised to work collectively. Furthermore, the guidance suggests the specification of fresh, seasonal produce that can be grown in the UK or EU and fewer exotic fruit and vegetables that local growers are unable to produce, where such requirements meet users' needs. Where purchasing is decentralised (for instance in health trusts and education authorities and schools) the guidance suggests structuring contracts in relatively small sizes where this is consistent with value for money and reducing barriers to local agriculture and horticulture, for example, by: facilitating the inclusion by large contract holders of smaller growers and producers as second and third tier suppliers; promoting the use of lots during the tendering process, to allow small and medium sized enterprises to bid for certain parts of supply contracts; and tendering more frequently for smaller quantities and establishing more flexible specifications (all where this is consistent with EU rules).

5.40 Although there are positive developments in the food procurement field nonetheless they are fairly tightly constrained by the need to achieve best value (although this term could be more widely interpreted) and the EU framework generally ( DTZ Pieda, 2005). Currently, the procurement of supplies to schools is decentralised, 23 authorities are organised into six purchasing consortia, and the remaining nine act individually.

5.41 The Executive has been accredited under the ISO 14001 regime since 1998 and has reported - albeit in a non-systematic way - on improving its environmental performance, in part through sustainable procurement (Scottish Executive, 2002: 28). SPD Guidelines for Suppliers also set out the ways in which the Executive intends to take account of environmental issues in its procurement of goods, works and services.

5.42 There are also positive developments amongst other public bodies such as Communities Scotland which has adopted a new approach to the construction, repair and maintenance of social housing known as "Rethinking Procurement" which builds on the UK Government's Rethinking Construction ( EGAN) Initiative (Scottish Executive, 2002). A key outcome is intended to be the more effective use of resources and waste minimisation.

Possible lessons

5.43 The Canny Buyer Initiative (2005), managed by Aberdeen City Council and funded by the Scottish Executive Sustainable Action Grant, encourages organisations and companies to practice more sustainable procurement. Case-study organisations have included Edinburgh University and Shell Expro.

5.44 Communities Scotland's "Rethinking Procurement" initiative, noted above, may also offer useful lessons beyond the organisation.

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