How to support SMEs in the public procurement market? Let us not waste this opportunity!

Warsaw, 30 November 2022 

How to support SMEs in the public procurement market? Let us not waste this opportunity!

• The domestic public procurement market is characterised by insufficient competitiveness. It is therefore desirable – in terms of the economic conditions – to increase the participation of the SME sector in the use of public procurement. Currently, the participation of SMEs as public procurement contractors is disproportionately low in relation to their role in the domestic economy.
• There are a number of legal instruments potentially supporting the SME sector in the public procurement market. The most important of these include the possibility of submitting partial tender offers (division of a contract into lots); refraining from the formulation of conditions for participation in the procedure; non-application of optional grounds for exclusion where it is not necessary; flexible application of tender evaluation criteria; appropriate descriptions of the subject matter of the contract; the possibility to waive the requirement for a bid deposit or to set its amount at a reasonable level; creating contractor-friendly contract templates; the possibility for consortia to submit tenders; no artificial aggregation of contracts; application of Art. 30 sec. 4 of the Public Procurement Law; not reserving the obligation of personal performance of a part of the contract; answering all questions regarding the Terms of Reference; extending deadlines for the submission of tenders; using, where possible, cost estimate-based remuneration or not requiring the submission of documents where contractors’ statements are sufficient. The implementation of at least some of these opportunities could reduce the current disparities with regard to the potential of the SME sector and its participation in the public procurement market.
• Contracting authorities in the public procurement system should use the concept of local content, the essence of which is supporting SMEs (both on a national and regional level). In order to create the right conditions for their increased participation in the system, it is necessary to raise awareness of the existence of the instruments provided for in the Public Procurement Law to facilitate the participation of SMEs in tender procedures.
• It is possible and desirable for contracting authorities to apply the concept of local content to the public procurement system when it is not the primary and only objective, but a secondary objective that takes into account the specific characteristics of SMEs, such as the pursuit of environmental, innovative or social goals. The concept of local content is part of the evolutionary changes taking place in the public procurement system.
• The National Procurement Policy makes it possible to put the principle of local content into practice, as it is itself a source of secondary objectives aiming to increase the level of innovation in the national economy in line with the development of solutions of an environmental, social and health-related nature.
• The concept of local content can be applied to both domestic and EU proceedings. It should then be borne in mind that national contracting authorities must take into account the context of strategic objectives from a state perspective. Since supporting local SMEs is possible at EU level, it is therefore desirable for the domestic public procurement system – provided, however, that the process is carried out in compliance with the principles of EU public procurement law.
• The Public Procurement Law provides contracting authorities – particularly local authorities – with a number of instruments to put the concept of local content into practice. The crucial point in this respect remains the demonstration of significant correlations between the application of the chosen solution and the actual, objective needs and the goal the contracting authority wishes to achieve.

The role of SMEs in the national economy in the face of challenges in the public procurement system – untapped potential

According to European Union figures from 2020, public procurement accounts for around 19 per cent of the Community’s GDP, which translates into an annual figure of around EUR 2.3 trillion. In Poland, their share of GDP is lower, at approximately 10 per cent, which nevertheless accounts for up to PLN 200 billion per year.

Considering the scale of the functioning of the public procurement sector and its contribution to building key economic indicators, attention should be drawn to the insufficient share of micro, small and medium-sized enterprises in the percentage of bids submitted in tenders both below and above the EU thresholds. The figures for contracts awarded also look unfavourable for SMEs.

Meanwhile, according to data from Statistics Poland in 2020, of Poland’s 2.3 million non-financial enterprises, 99.8 per cent were in the SME sector. 97 per cent of the pool of said 2.3 million companies are micro-enterprises with up to nine employees – only 3.7 thousand are entities with more than 250 employees. The trend continues – between 2014 and 2020, the number of micro-enterprises in Poland increased by more than half a million according to Statistics Poland. At the same time, the number of small, medium and large companies decreased by more than 10,000. At the same time, it is the SME sector that has been hit the hardest – due to insufficient financial reserves – by the COVID-19 pandemic, causing the need for support for the sector.

Despite such a significant share of SMEs in the total number of enterprises in Poland, the share of bids submitted by them in public procurement below the EU thresholds in 2020 in Poland was 82 per cent[1]. This is a slightly higher figure than in previous years (82 per cent in 2019, 79 per cent in 2018, 80 per cent in 2017). In 2020, construction contracts were the most sought after by the SME sector (88 per cent). In the case of bids for services and supplies, the SME participation rate was 79 per cent. The most favourable bids from the SME sector were found in 81 per cent of tenders below the EU thresholds in 2020, accounting for 85 per cent of the value of total contracts. 

The situation looks less favourable when contracts with a value above the EU thresholds are taken into account. This is where the percentage of bids submitted by SMEs amounted to just over 65 per cent of the total, with 60-62 per cent being considered the most favourable, which translated into 48 per cent of the total value of the contracts (approximately PLN 69.2 billion). The participation of SMEs as public procurement contractors is disproportionate in relation to their role in the domestic economy.

Increasing the competitiveness of the public procurement market

The Polish public procurement market is characterised by relatively low competitiveness, which is directly attributable to too few bids submitted in public procurement procedures. According to the Public Procurement Office in its Report on the Study on Low Competitiveness in Public Procurement in 2020, an average of just 2.786 bids were submitted for contracts below the EU thresholds.

The above figure represents a low percentage of companies that choose to take part in the procurement process and translates into a limitation of the possibility for the contracting authority to achieve the expected maximum efficiency in meeting the identified need. This situation also contributes to the public procurement market being dominated by the largest companies accounting for only 0.2 per cent of the Polish business market.

The reasons for the reluctance to bid for public procurement contracts can primarily be found in the limited knowledge of the instruments that the Public Procurement Law offers to the SME sector, the excessive complexity of the public procurement market and – as emphasised by entrepreneurs themselves – the hostility of the system towards small and medium-sized companies, resulting in the fear of violating public finance discipline.

There is therefore a pressing need to increase the participation of representatives of the SME sector in the public procurement market, all the more so as, given its size, any disruption to it could translate into a significant slowdown in economic growth. An additional advantage of SMEs is the opportunity to meet the needs of increasing the use of innovative solutions offered by the sector.

Meanwhile, local authorities – which are also the most important purchasers of services, supplies and construction work provided by contractors (51.8 per cent of all contracts in 2020) – are reluctant to take advantage of new opportunities to ensure that the concept of local content is implemented. The effect of this is particularly evident in the construction sector, where the most important contracts tend to be executed by the largest companies using the SME sector as subcontractors, who often have problems receiving payment for their work on time. The inability of the SME sector to bid on its own (as a result of contracting authorities not using instruments such as advance payments or splitting the contract into lots) results in SME representatives competing unnecessarily in terms of price for subcontracts with the general contractor, which translates into lower earnings and reduced profitability for these companies.

When drafting the current Public Procurement Law, the legislator recognised the problem, resulting in numerous amendments to the document, which – contrary to popular opinion – do not exclude the application of the local content principle. The current form of the Public Procurement Law gives the contracting authority a number of instruments to support SMEs both on the regional and national level.

All in the hands of the contracting authorities

Contracting authorities, particularly local authorities – based on current legislation – have a number of instruments at their disposal that potentially support the concept of local content and, at the same time, do not violate the provisions of the Public Procurement Law.

A basic instrument that could be used to increase the participation of SMEs in the public procurement market is – here the contracting authority has discretion in the application of the rules – the possibility to divide the contract into lots. The contracting authority also has the right to limit the number of lots to be awarded to one contractor. Both the Classical Public Sector Directive and the Utilities Directive gave Member States a choice regarding the introduction of an obligation to divide a contract into lots, but Poland did not make use of this option.

The contracting authority – according to the latest formulation of the Public Procurement Law – has also gained the full right – without violating the provisions of the Law – to decide not to formulate the conditions for participation in the procedure. This gives representatives of the SME sector the chance not to submit full documentation and declarations when it is not necessary. De-bureaucratising this element of the procedure – assuming that contracting authorities make use of this privilege – could have a huge impact on increasing the competitiveness of the public procurement market and the role of SMEs in it. The contracting authority may also choose not to apply the optional grounds for exclusion, provided that this decision does not violate the principles of competitiveness and does not create a risk of inadequate performance of the subject matter of the contract. The use of optional grounds for exclusion must always be associated with a clearly defined objective.

Some opportunities for implementing the local content concept are also provided by the bid evaluation criteria. In this case, although the contracting authority may not directly promote SMEs, nothing prevents it from using criteria whose implementation will be simpler from the SME’s point of view – such as, for example, the employment by these entities of staff living in close proximity to the place where the subject of the contract is to be performed, which may translate into a higher efficiency of its performance.

An opportunity for the SME sector to increase its participation in the public procurement market is also provided by the fact that there is no obligation to establish a requirement to pay a bid deposit, regardless of the value of the contract, the type of contract and the mode of the procedure conducted. This is new in relation to the 2004 Public Procurement Law. Given the optional nature of the deposit, any waiver of it by the contracting authority increases the competitiveness of the procedure.

In financial matters sensu stricto, the provision of Art. 442 of the Public Procurement Law, which provides for the possibility for the contracting authority to make an advance payment – under certain conditions – is also of paramount importance. This is a nod to representatives of the SME sector, who usually have less financial capacity than the country’s largest companies. Advance payments fully comply with EU law and increase the competitiveness of the public procurement market in all cases.

Contractors also have the option of submitting a bid as a consortium. This has a positive impact on increasing the potential of contractors to meet the conditions imposed by the contracting authority in the procedure. However, the contracting authority has the option of limiting the freedom of contractors in terms of the fulfilment of individual conditions for participation in the procedure. In order to increase the chances of SMEs to submit the most well-prepared bid, contracting authorities may use the privilege of extending the deadline for the submission of bids – but this must then be consistent with the possibility of properly and fully preparing the bid. Extending the deadlines for submitting bids is one way of putting the concept of local content into practice – longer timeframes mean more realistic opportunities for SMEs, which do not usually have specialised units responsible for quickly preparing a full bid and completing the necessary documentation. Contracting authorities – in order to stimulate SMEs in the field of public procurement – may also use the formula of cost estimate-based remuneration, which, unlike lump-sum remuneration, offers relative certainty about receiving a higher remuneration from the contracting authority in a situation in which the contractor incurs additional costs. Cost estimate-based remuneration is a formula that directly encourages SME contractors to increase their participation in the public procurement market.

Contracting authorities can also implement the local content concept using a number of other instruments provided by the Public Procurement Law. These include the creation of contract templates that are as transparent as possible, the appropriate descriptions of the objects of the contracts, the departure from the popular practice of artificially aggregating contracts, the provision of answers that are as concise as possible regarding the contract specifications or the careful reservation of the obligation for the contractor to perform part of the contract personally.

Conclusions

Local authorities and other contracting authorities, in accordance with the Public Procurement Law, have the opportunity to implement the concept of local content when carrying out both national and EU procurement, which effectively increases the chances of the most numerous group of enterprises in Poland, i.e. the SME sector, to participate in the public procurement market. The use of the aforementioned instruments increases the competitiveness of the public procurement sector and wards off the prospect of the market being dominated almost exclusively by the largest companies.

On the one hand, cooperation between the public and private sectors, based on the principles of partnership and dialogue, can encourage more entrepreneurs – with particular emphasis on entrepreneurs from the SME sector – to participate in procurement procedures. On the other hand, a wider range of companies submitting bids is also an opportunity for contracting authorities to choose the most favourable offer in terms of primary and secondary objectives.

For this to happen, however, there must be a real change in the mentality of the contracting authorities, which must be followed by the willingness – based on real tangible benefits – of contractors, including representatives of the small and medium-sized enterprise sector.

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[1] Data based on the Report of the President of the Public Procurement Office on the Functioning of the Public Procurement System in 2020.