APPENDIX 29
Memorandum submitted by Leslie L Kossoff
EXECUTIVE SUMMARY
The current conventional wisdom is that manufacturing
in more highly developed countries (for which, read "the
West") is now cost prohibitive. This argument is frequently
used to explain why off- and near-Shoring procurement is required
to keep corporations globally competitive.
Yet, manufacturing within the UK can only expand
if the government procurement systems are designed for
the sector to succeed. This will require changes in existing legislation,
new legislation and a more soplisticated approach to the definition,
classification and support of manufacturing enterprises.
The result will be increased competition for
the UK manufacturing industry within and outside of Government
procurement. This will lead to substantial savings in tax spending
and a simultaneous increase in tax revenues as a result of manufacturing
expansion.
The following actions are recommended:
— Opt Qut of the WTO Agreement on Government
Procurement.
— Legislate for SME Support for the
Manufacturing and Other Sectors.
— Create a UK equivalent "Small
Business Administration."
ABOUT THE
AUTHOR: LESLIE
L KOSSOFF
This document was written in collaboration with
Senior Members and Officers of the Forum of Private Business.
Leslie L Kossoff is a leading international
executive advisor providing guidance to executives in the United
States, Europe and Japan. For over 15 years, Leslie has assisted
clients ranging from Fortune 50 to small and mid-sized firms in
a broad range of industries and sectors. Some of her clients include
Fidelity Investments, Sony, TRW, Kraft Foods, 3M, US Navy, US
Immigration Service and GM/Hughes.
She has been cited by About.com as "one
of the most intelligent and perceptive voices on leadership today."
A former executive in the aerospace/defence,
pharmaceutical and entertainment industries, Leslie is a founding
Board member of the Global Women's Leadership Center at Santa
Clara University Leavey School of!usiness, serves on the Advisory
Council of the Russia Research Network, is a me ber of the Board
of Directors of the National Association of Industry-Education
Cooperation, and is included in the
Who's Who Registry of Global Leaders
and in the International Who's Who Among Professional Business
Women. She is a professor in the Graduate Business Program
of Holy Names University, the former director of the Institute
for Quality and Productivity Improvement at California State University,
Long Beach, and has been a member of the Judges Panel for the
Sterling Award for Quality in California.
The author of two award winning books and over
100 articles, Leslie is a Fellow of the Royal Society for the
Arts and a Freeman of the City of London.
OPENING UP GOVERNMENT PROCUREMENT IN THE
MANUFACTURING SECTOR:ENHANCING COMPETITION AND SAVING TAXPAYERS'
MONEY
SUBMISSION TO THE TRADE AN INDUSTRY COMMITTEE
THE FUTURE OF MANUFACTURING INDUSTRY IN THE UK
The following are recommended actions which,
should be taken by the Government. The first is time sensitive
and, if not acted upon, will adversely impact the ability of the
UK to succeed in its larger manufacturing and economic goals.
OPT OUT
OF THE
WTO AGREEMENT ON
GOVERNMENT PROCUREMENT
In 1994, the United Kingdom became Party, as
part of the EU, to the WTO Agreement on Government Procurement.
The Agreement specifies that:
The use of... measures to encourage local development...
are explicitly prohibited.
This clause contradicts the essence of the strategy
and commitment made by the UK and, then, European Community, during
the 1983 European Year of Small and Medium-sized Enterprises (EYSME).
This Agreement limits the ability of governments
to contract specifically with SMEs—thus undermining existing
and new business development in the manufacturing and other sectors.
There is currently a once-in-a-decade opportunity
to opt out of the WTO Agreement on Government Procurement. Because
the Agreement was in conflict with the US Small Business Act,
the United States opted out from the beginning. So did Japan,
Canada and South Korea.
Currently there are 15 EU countries in support
of the opt-out. The UK is not one of them. Seventeen member states
are required for Peter Mandelson to inform the WTO that the EU
will no longer participate in the Agreement.
The outcome will result in seven of the 10 largest
world economies not participating. This would create a rationale
for new Agreement enabling SME-friendly measures—while banning
national protectionism.
In-country, opting out will allow the UK government
to better support the growth and development of its internal manufacturing
sector.
Action must be taken on this immediately as
the opt-out period is only until the end of March 2007. If not
acted upon, the EU will not be able to act again until 2017.
LEGISLATE FOR
SME SUPPORT FOR
THE MANUFACTURING
AND OTHER
SECTORS
A review of existing legislation and practices
for the purpose of updated, fit-forpurpose legislation should
be pursued. Specifically, a percentage of government contracts
should be made available exclusively to SMEs from within the UK.
In concert with this edict, the government should be required
to pay SMEs in a timely manner to ensure their ongoing viability.
As well, various regulatory barriers to entry
should be identified and removed. An example is the current regulation
that SMEs must provide three years of accounts to demonstrate
their viability. This could be replaced by an equivalent of the
US Small Business Administration's "Certificate of Competency"
by which small businesses are reviewed and declared competent
for contract consideration and award.
Legislation should also address the means by
which SMEs are defined by size (see "Protection versus Protectionism"
below). The goal of the legislation is to create opportunities
for new manufacturing (and other) businesses to be established
and grow. There should be no arbitrary barriers applied that would
keep businesses from forming—or to keep their owners from
expanding beyond the 250-employee barrier. A structure such as
the US North American Industry Classification System should
be used as a basis to begin discussion and size definitions.
Finally, a review of current legislation regarding
patents should be pursued to ensure that the system is designed
to protect UK inventors in speed of application processing and
global protection of rights.
CREATE A
UK EQUIVALENT "SMALL
BUSINESS ADMINISTRATION"
The recent abolishment of the Small Business
Service is a negative indicator of the Government's real support
of small business. As any executive knows, if you measure it,
you manage it— and if you're paying for it, you expect results.
By decreasing the SBS staff size to less than
half, demoting its status to that of a policy unit within the
Department of Trade and Industry and outsourcing its responsibility
for spending its remaining annual programme budget, the Government
has unintentionally demonstrated a lack of concern for small business
growth and development. This will have an immediate and long-term
impact on the manufacturing sector.
Instead, it is recommended that a formal Small
Business Administration equivalent be established. This organization
would be responsible for overseeing that legislation is followed,
enforcement of policies is swift and sure and that resources for
everything from business establishment and development to government
contracting and global expansion are provided.
The return on investment for such an agency
will be the continuing growth of businesses across all sectors
and the certainty among the citizenry that the Government—no
matter which Party is in office—supports the dreams and
aspirations of its people.
IMPROVEMENTS THROUGH
LEGISLATION
In a recent Enterprise Brief (October 2006,
Issue 8), even the CBI—more commonly a voice for big business—stated:
Given the increasing need for rapid response
times to meet changing market conditions, a flexible, lightly
regulated business environment is key to business success. Poor
quality regulation stifles business activity and distorts decision
making.
... The government should do more to remove the
bureaucracy of bidding for public sector contracts, standardise
the process and encourage procurers to enable small businesses
to develop innovative solutions.
An improved regulatory environment and legislative-making
process is crucial: it would enable more businesses to grow an
reach their potential.
While the Brief was not discussing manufacturing,
specifically, the CBI results point out the need to change the
current legislative environment to assist SMEs—many of which
are manufacturing concerns—in being successfully awarded
a higher number of government contracts.
This is in keeping with the Government's commmitment
to SME expansion. Its stated target in 2000 was to "make
the UK the best pace in the world to start and grow a business
by 2005". Yet the legislative agenda in response has been
focused almost exclusively, as reported by the CBI, on red tape
reduction—not growth opportunities.
The recently abolished Small Business Service
in their Progress Report of December 2005, noted that:
The Government is... committed to improving access
to public sector procurement for SMEs. SME involvement improves
competition and drives innovation, and thus improves value for
money in the delivery of public services.
Yet, once again, the focus for next steps revolved
around red-tape reduction and improved information resources for
SMEs to find out about government contract opportunities.
While these actions are laudable they are not
adequate. Moreover, unless and until legislation is established
that guarantees the ability of SMEs to win government contracts,
the Government's stated goals will not be successfully achieved
on a long-term basis.
Until the appropriate legislative changes are
made and support infrastructure established, the trends of decreased
UK manufacturing competitiveness and increased tax spending will
continue.
MARKET DISTORTIONS
AND UNFAIR
ADVANTAGE
Almost immediately upon being presented the
argument that a percentage of government contracts should be available
exclusively to SMEs, big business responds by saying that that
preference will create market distortions.
Yet many of those same large corporations are
distorting the market through excess fees and favouritism resulting
from single source contracting.
According to a recent article in the Sunday
Telegraph (24 December 2006), large corporations contracting
with the government are sometimes charging—or at least profiting—twice
as much as they would otherwise. Internal documents which were
reviewed showed that EDS, a "favourite" government contractor
had average profit margins of over 29% from 2003 to 2006. Rolls-Royce
and Vodafone showed profit margins in the range of 13% during
2006.
In reviewing the documents; the article stated
that Richard Bacon MP—a member of the Public Accounts Committee—thought
that it was "highly unlikely that civil servants were aware
that EDS is charging public sector clients such different rates
from those in the private sector".
This market distortion—and unnecessary
taxpayer expense— occurs as a result of the lack of legislation
requiring multiple bids. The unfair advantage accorded large businesses
occurs specifically because government procurement officers in
every department are not required to gain multiple bids nor to
give consideration to SMEs in any sector.
This policy undermines the ability of UK businesses
to compete effectively and, thus, to grow, innovate and create
new market opportunities for and beyond government.
PROTECTION VERSUS
PROTECTIONISM: THE
UNITED STATES
SMALL BUSINESS
ACT
Another argument commonly presented when set-asides
are discussed is that it will lead to protectionist practices—both
internally and internationally. These arguments are specious.
Unless the UK Government chooses to impose protectionist practices,
the problem will not occur as a result of changes in support of
SMEs in the manufacturing sector.
That being said, though, there is a need for
the UK to protect itself and its economy by creating the greatest
number and spectrum of possibilities for manufacturing growth
and expansion. This will only be accomplished by the appropriate
legislation.
A basis for consideration and comparison is
the American Small Business Act of 1953 (and as amended). In its
founding Article II, it states:
The essence of the American economic system of
private enterprise is free competition. Only through full and
free competition can free markets, free entry into business be
assured. The preservation and expansion of such competition is
basic to the economic well-being of this Nation. Such well-being
cannot be realised unless the actual and potential capacity of
small business is encouraged and developed. It is the declared
policy of th, Congress that the Government should aid, counsel,
assist, and protect, insofar as is possible, the interests of
small-business concerns in order to preserve fee competitive enterprise
and to ensure that a fair proportion of the total purchases and
contracts or subcontracts for property and services for the Governmen
be placed with small-business enterprises.
As Ambassador Vernon Weaver, Former Administrator
of the Small Business Administration stated:
"If you do not discriminate in favour of
small and medium-sized companies you automatically discriminate
against them."
In practice, this results in 23% of direct contracts
and 40% of subcontracts targeted for small businesses. Each Agency
has to measure and communicate its annual results to the Administrator
of the SBA and the President of the United States.
In contrast, according to the EU High Tech Federation,
there is a glass ceiling that prevents EU companies from being
able to compete globally. In part this is due to the restricted
definition of "small business" (ie, companies with less
than 250 employees) utilised by the EU.
By limiting the definition to one across-the-board
measure, adequate consideration is not given to the varying needs
of organisation, to succeed as a small business.
Specifically, by definition, a manufacturing
firm in the United States can have thousands of employees and
still be defined as a "small business". This is possible
as a result of US Federal Regulation Title 13, Part 121 (Small
Business Size Regulations). It states that small business size,is
determined by the:
... economic characteristics comprising the structure
of an industry, including degree of competition, average firm
size, start-up costs and entry barriers, and distribution of firms
by size. it also considers technological changes, competition
from other industries, growth trends, historical activity within
an industry, unique factors occurring in the industry which may
distinguish small firms from other firms, and the objectives of
its programs and the impact on those programs of different size
standard levels.
... As part of its review of a size standard,
SBA will investigate if any concern at or below a particular standard
would be dominant in the industry. SBA will take into consideration
market share of a concern and other appropriate factors which
may allow a concern to exercise a major controlling influence
on a national basis in which a number of business concerns are
engaged. Size standards seek to ensure that a concern that meets
a specific size standard is not dominant in its field of operation.
The result of this expanded perspective is that
more businesses can compete in the same market, there is greater
pressure for and results in innovation in both products and services,
more patents are generated and approved—which are applicable
both for Government and commercial manufacture—and, oddly
enough, big business is as protected as small business.
This last outcome—which, again, refutes
the market distortion/favouritism argument—occurs specifically
because once a small business has become dominant in its field
of operation, no matter the size, it is no longer considered a
small business. At which point, it no longer benefits from the
contracting opportunities afforded to small business.
By legislation—and the lack thereof—the
UK has adversely impacted the ability of its manufacturing enterprises
to compete globally. Because there is inadequate consideration
of manufacturing enterprises as contractors to the government—based
on the lack of legislated opportunity—the manufacturing
sector in the UK is consistently working at a disadvantage.
It has neither the support nor the infrastructure
provided by the Government to substantially increase its manufacturing
volumes, innovation, R&D or the resultant patents which would
occur.
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