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'Credit agency checks harm small firms bidding for public contracts' BUSINESSTALK STEVE HOWELL.

ASK anyone running a small business about public sector procurement and "don't get me started" will all too often be the reply.

This is unfair, of course. In more measured moments, most people recognise the important role procurement departments play in protecting the public purse.

But the problem is the process often imposes huge costs on tendering companies and includes hurdles that seem arbitrary and unfair.

Among these is the controversial - and possibly illegal - practice of relying on credit agencies for financial checks rather than information provided by the tendering companies.

To declare an interest, Freshwater has recently been excluded from two tenders on financial grounds: once by a public body in Wales and a second time by an educational institution in London.

In the former case, the report from the credit agency used (which we have now obtained) under-stated our turnover by confusing it with gross profit - a basic error because the regulations specify turnover as a measure of capacity to fulfil a contract.

In the London case, we were ruled out because the credit agency reported we had made an operating loss but did not mention this was only because of a (non-cash) goodwill write-off.

In its guidance on procurement, the Chartered Institute of Public Finance and Accountancy (CIPFA) says information from credit agencies should not be used 'as a substitute for detailed examination of a candidate's financial statements'. Had the officials concerned checked our website they would have found - because we are a public company - a 66-page audited report showing all the details, including a pre-goodwill operating profit of PS70,096 and a positive operating cash flow of PS312,489.

The cynic in me says financial checks are being used as an easy way to whittle numbers down. Why else would you set the bar, as the Welsh public body did, at a credit score of 51 plus, when 30 to 50 is defined as 'credit-worthy'.

But the use of credit scores is controversial for another reason: no-one knows how they are determined.

The rules state the tendering criteria must be disclosed at the outset to meet 'the obligation of transparency', but credit agencies will not disclose their scoring formulae because they regard it as private intellectual property.

This leaves public bodies that rely on credit scores open to legal challenge on the grounds they are using undisclosed criteria.

The justification for financial checks is the need to ensure bidders have 'the appropriate standing or ability'. Clearly, no-one wants roads to be left half built or vital services to collapse because contractors go bust.

But equally the criteria should be appropriate to the contract and the bar should not be set so high it unnecessarily excludes SMEs or particular types of companies.

Though the scoring systems of credit agencies are shrouded in secrecy, it is clear from their reports they place a lot of emphasis on 'tangible net assets'. This may be relevant in multi-million pound contracts where a public body wants assurance there are assets to claim against if things go wrong.

But the problem is it disadvantages knowledge-based or people-based businesses, which do not have the physical assets typical of traditional industries.

Worse still, ambitious knowledge-based companies that have borrowed money to fund growth are doubly penalised because the debt will often push their tangible net asset figure into negative territory.

Even leaving fairness aside, this cannot make sense. Wales needs a more diverse, knowledge-based economy, and the Welsh Government is encouraging this through its sector panels and knowledge transfer partnership.

It has also set up a review under Dylan Jones-Evans to look at how small companies can source more debt and other finance to support their growth ambitions.

Use of credit agencies wedded to net tangible asset tests undermines these very policies by disadvantaging asset-light Welsh companies with the ambition to borrow to invest in growth.

Many of my colleagues in the creative sector are understandably wary of challenging individual procurement decisions. They tend to view the whole system as a lottery and resign themselves to win some and lose some.

But this is no way to run an economy. If financial checks are worth doing, they are surely worth doing properly.

Steve Howell is chief executive of Freshwater UK, the Cardiff-based media group, and chairman of, an online business networking site. Follow him on Twitter: @stevefreshwater.
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Title Annotation:Business
Publication:Western Mail (Cardiff, Wales)
Date:Apr 15, 2013
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