Lack of good governance rules push SMEs to merge

gmm@pkfmalta.com

The writer is a partner in PKF, an audit and business advisory firm.

This is not a trend unique to Malta, since we read about a number of takeovers in the EU among smaller firms which, due to the complexity of the market, are biting the bullet and merging with other, mega, firms – in the hope of not losing their identity and, at best, retaining a market share.

A number of mergers come to mind, particularly in the ICT, audit, legal and advisory services fields. One could ask if this was the result of an active economy galloping at a fast rate of five per cent per annum GDP increase. Definitely this merger activity warrants a business environment complimented with a better understanding of the basic rules of good governance and the recent call by the Chamber of Commerce president for improved good governance rules in public services did not come a moment too soon.

Here it is noted how Alert Communications, a respected SME in the ICT market has relocated to join a Big four audit firm. Leading consultancy firm EMCS, previously headed by Adrian Said (now elected chairman of Projects Malta) has merged with audit firm Grant Thornton. Last November, the established accountancy firm Spiteri Bailey & Co. indicated it would be merging with the member firm of RSM and Ecubed Ltd, a specialist consultancy firm managed by the well-known economist Dr Gordon Cordina (who, inter alia, carried out the feasibility study into the Gozo subsea tunnel) will join the accountancy firm Nexia BT.

Other regroupings and mergers among law firms will continue during 2016, as tougher EU directives and dispositions will be transposed into domestic law. Apart from EU tenders – which invariably ask for prefeasibility studies, audits and cost benefit analysis – a number of challenging public tenders are issued by government-controlled agencies. In theory, these tenders are usually won by quoting a lower price, provided that bidders demonstrate sufficient technical proficiency to satisfy the intricate tender conditions.

So readers may ask if this is a fair game for the SMEs that qualify to apply, but the stark reality is that there is always a fly in the ointment. It is alleged that tenders are designed to favour previous bidders who are familiar with the enterprise or its board members and because of this, they garner experience on how best to cut prices. Again, evaluation boards are always very parsimonious with the information they issue to bidders, while expecting them to be very knowledgeable – to such an extent that bidders have to pre-qualify by the submission of a detailed methodology plan on how to execute the number of deliverables. In the case of audits, bidders are not given an analysis of internal controls and are referred to outdated audited accounts, yet applicants are still expected to be evaluated on the submission of a comprehensive audit plan in advance.

Quoting a recent Eurobarometer study on the public perception of corruption in tenders, one sees a worrying trend. To start with, 81 per cent of Maltese businesses now believe that corruption is widespread on the island, although some improvement had been registered since the previous study that was carried out in 2013. The good news is that businesses were 12 per cent less likely than they were in 2013 to say that the offering of gifts in return for favours is widespread.

When considering how difficult it is becoming for an SME to compete with the mega companies, the study shows that 47 per cent of businesses said that the practice of funding political parties in exchange for public contracts or political influence is widespread. Elsewhere, 69 per cent of SMEs believe that bribery and connections are the easiest way to obtain certain public services, as 43 per cent agree that the only way to succeed in business is to have political connections. The huge figure of 49 per cent believe that corruption gets in the way of public tenders.

As stated earlier, according to the Eurobarometer the tendering game is so opaque that 65 per cent of businesses claim that public tender specifications are often tailor-made to suit particular companies while often evaluators are appointed based on political patronage and in a small community there may be conflict of interest.

SMEs with limited resources are reluctant to participate in such tenders, fearing collusive bidding. The straw that broke the camel’s back is the revelation in the Eurobarometer study that 49 per cent of businesses think public contract terms are often amended after the bidder is announced.

The proof of the pudding is in the eating and here it is appropriate to mention a number of perceived corrupt examples that have made the headlines in previous years. A classic one that was appealed against by the authorities involved a €13 million public-private partnership project awarded by St Julian’s Local Council to CareMalta (part of the Vassallo Group) to construct a home for the elderly without a call for tenders. In this instance, competitors were not given the right to appeal against the decision of the local council decision. PN leader Simon Busuttil was aware of the allegations of impropriety over the award of the tender but in a statement said he was convinced that the council had followed all the necessary procedures.

Another recent case was the public tender for construction of the coast road (partly EUfunded) which the European Court of Auditors (ECA) concluded amounted to a serious failure due to direct negotiation with one company without a prior call for competition for works. The contracting authority, Transport Malta, said in a statement that there were two public calls for the Coast Road project and the cheaper bid, amounting to €83million, was €30 million over the stipulated budget.

Another main cause of error quoted by the ECA was ineligible claims reaching €11 million being expenditure declared outside the eligible period, or overcharged salaries, plus the declaration of costs not related to the project, non-compliance with national eligibility rules, or revenue that had not been deducted from the declared costs. In its defence, the government rebutted the accusations, saying it had engaged top consultants and trusted advisers to guide it on such matters of good governance.

It is, however, an open secret that a number of legal, audit and tax advisers are directly appointed without the issuance of a public tender, as was the norm under the previous PN administration. For example, when testifying under oath in front of the Public Accounts Committee appointed to investigate how a foreign consultant was selected to manage the Individual Investor Programme, the permanent Secretary Kevin Mahoney appointed an evaluation committee to evaluate the three applications – Henley and Partners, Arton Capital and KPMG – who applied to be appointed sole concessionaires. The hand-picked members of the evaluation panel were Malta Enterprise chairman Mario Vella, Revenue Commissioner Marvin Gaerty and audit firm Nexia BT. Mr Mahoney admitted that he had not personally screened the three board members for potential conflicts of interest.

On another score it was revealed in a parliamentary question that audit firm Nexia BT is a preferred consultant which provides “advisory services on the preparation of national projects” for €48,231 a year. Again, it seems that Nexia BT is also a trusted consultant with the Environment Minister Leo Brincat which, together with RSM Malta and Idea Management Consulting Ltd, were commissioned to carry out a thorough review of WasteServ. No call for public tenders was issued.

There are instances where the contracting authority justified the appointment of a bidder by direct order even during a tendering process stating ‘emergency grounds’ as an excuse. WasteServ issued a tender to appoint an external auditor to provide statutory audit services. PKF tendered – and was the cheapest of five bidders (the criteria for selection being exclusively on price) and, after waiting for nine months, WasteServ unilaterally decided to cancel the tender. PKF appealed to the Public Contracts Review Board only to discover that, three months earlier, WasteServ had issued a direct order to appoint audit firm RSM, which was the second cheapest.

In conclusion, it is to be hoped that the New Year will bring a fresh breeze to rid us of the memories of past sins and that SMEs can thrive in the marketplace, blessed with good rules of governance – and all without having to be absorbed by larger outfits.

Remember the slogan: ‘Think small first’.

A prosperous New Year to all readers.