Local government procurement - Communities and Local Government Committee Contents

3  Delivering strategic objectives through procurement

40. At around £45 billion, the scale of spend on procurement of goods and services offers councils a key route for delivering their strategic objectives, including social, environmental, and economic aims. The Centre for Local Economic Strategies (CLES) recognised the significant potential of public procurement to tackle local economic development and alleviate poverty, and that current financial constraints meant that it was vital for councils to use this mechanism to address wider economic, social and environmental challenges.[74] Indeed government policies encourage councils to procure according to criteria other than simply the lowest price. The key legal framework enshrining this approach is the Public Services (Social Value) Act 2012 under which councils are required to consider social value in managing procurement. The Cabinet Office published guidance on using the Act's provisions setting out expectations that councils should consider overall value when reviewing service.[75] However this will need revision following announcement in January 2014 of new EU measures. After we concluded taking evidence, the EU finalised its new Directive on public procurement which is likely to increase both opportunities for, as well as obligations on, local authorities.[76] One change from previous EU rules is that public contracts must be assessed on the basis of the 'Most Economically Advantageous Tender' (MEAT) incorporating wider best value criteria such as environmental or social issues.[77] Article 68 of the new EU Directive will facilitate the inclusion of such aspects in public body procurement exercises.

41. We received evidence on a range of approaches from councils which had used procurement to pursue strategic aims, particularly in the social and economic spheres. London Councils told us that 86% of London Boroughs had changed their procurement processes in response to the 2012 Act, citing as examples of best practice the London Borough of Lambeth's checklist for councillors to identify which social and economic benefits they wished to generate from specific contracts, and the London Borough of Harrow's creation of more than 40 apprenticeships in the supply chain since adopting its Sustainable Procurement Policy.[78] Halton Borough Council told us that it used a weighted tender exercise to assess how contractors would add social value in delivering a contract, such as by engaging with the local workforce,[79] whilst Cheshire West and Chester Council also used contract specifications to increase the rate of apprenticeships and local jobs and to prioritise opportunities for local young people.[80] Essex County Council's requirement that bidders deliver at least one apprenticeship per £1 million of spend if they wished to increase their 'added value' score had secured commitments for some 270 new apprenticeships across a range of contracts. Some of the council's suppliers had gone beyond requirements to promote social employment schemes and further support local SMEs.[81]

42. On the other hand some councils were not maximising opportunities to embed social value in their procurement approaches. CIPS considered that nationally the sector's focus remained on savings and that there was little evidence that social, economic and environmental considerations were duly regarded in the award of contracts.[82] Furthermore, the Chartered Institution of Highways and Transportation told us that the balance between cost and quality was too often "heavily skewed in favour towards cost" during bid evaluations.[83] Solace, the body representing council Chief Executives, told us that clients and providers frequently expressed frustration that contracts were too focused on the "mundane" and that their impact on strategic outcomes was unclear. It criticised a lack of practical examples where councils had adopted contract specifications focussed on outcomes.[84] The National Council for Voluntary Organisations (NCVO) identified a range of barriers to delivering value for money, including a "disconnect" between those commissioning services and procurement/finance teams, a failure to involve all relevant actors (providers, commissioners, procurement and contract managers) in the design stages of commissioning, and limited engagement of procurement and finance teams directly with providers.[85]

43. We also heard evidence on the central role of procurement in delivering environmental policies such as through the procurement of green goods and services. We were not able during this inquiry to examine environmental policies specifically, but we note the range of initiatives such as the LGA's Sustainable Procurement Strategy,[86]and WRAP's sustainable procurement modules that include good practice guidelines to enable organisations to deliver cost savings, use fewer resources and send less waste to landfill.[87]

44. There is a judgment to be made by each council, and for each contract, as to the correct balance for their community between letting a contract at the lowest price and requiring contractors to deliver additional economic and social value, sometimes at an additional cost. We are clear, however, that councils can and should adopt policies which enable them to maximise their procurement spend to deliver local priorities by requiring contracts to be let on the basis of wider best value, not simply lowest price. Such approaches will best ensure procurement is conducted so as to support and improve communities' long-term economic, social and environmental well-being. Many local authorities are already successfully linking their procurement approaches to delivering such objectives but all councils should assess the potential of each procurement exercise, and of their overall procurement policies, to assist delivery of the council's corporate objectives. Furthermore, they should raise awareness of the value of this linkage through more explicit demonstration of successful approaches. All councils should present an annual report to a full Council meeting setting out the authority's strategy for incorporating economic, social and environmental value in its procurement, including employment terms and conditions, impact on local economies and small businesses, relationships between contractors and customers, and the role of councillors.

45. We conclude that the Local Government Association should work with local authorities to disseminate best practice case studies on how to maximise the impact of procurement approaches to deliver local social, economic and environmental objectives, whilst balancing the need to secure value for money in the procurement of goods and services. A particular focus for the LGA should be the promotion of examples of best practice in using procurement to support the increase in local apprenticeships and trainee opportunities. Furthermore, the LGA should update guidance on the potential of new EU public procurement measures to allow procurement to be used to promote social value, and advise councils on what they must do to meet new obligations.

Revision of the Public Services (Social Value) Act 2012

46. CLES supported the use of the law to "shape and influence" council processes and practices to combat cultures where cost was the primary consideration.[88] NCVO considered that a weakness of the Public Services (Social Value) 2012 Act was that its provisions applied only to contracts above EU procurement thresholds.[89] Plans to increase these thresholds would therefore further weaken the Act's impact. NCVO noted that over a third of the 124 local authorities which had a contractual relationship with the voluntary sector spent less than the EU threshold in total on their contracts with the sector.[90] It therefore recommended that the Government should amend the 2012 Act to place a clear legal requirement on local government to consider social value when procuring any public service contract, irrespective of financial value, and should put in place mechanisms to support and monitor council implementation of the Act.[91] The Joseph Rowntree Foundation also recommended extending duties and powers under the Act to "all services and works procurements".[92]

47. Although we were told that 65% of local authorities in England and Wales had changed their processes and practices as a result of the 2012 Act, NCVO said that, since councils were not obliged to monitor or report implementation, it was difficult to evaluate the impact of the Act accurately. NCVO recommended that there be regular publication of an evaluation of wider social impacts of council procurement.[93] CLES criticised the lack of a standard method of assessing the wider social, economic and environmental impacts.[94] DCLG told us that it did not centrally monitor adherence to social value objectives, but used the CCS 'Mystery Shopper' scheme to investigate any complaints about the Act not being applied.[95] It added that it ran a 'Best councils to do business with' contest, with the 2013 winners having shown evidence of clear commitment to link procurement to strategic objectives.[96] Ministers further told us that their priority was to make the existing law work and be "something that people are using" rather than tinkering with the Act.[97]

48. We acknowledge Ministers' wish to ensure that the Public Services (Social Value) Act 2012 is given sufficient time to bed in and become fully effective. Nonetheless, it is clear that there are concerns that the limited range of contracts to which its provisions apply might be undermining the Act's impact. We recommend that DCLG undertakes comprehensive post-legislative analysis of the Act to ensure assessment of its effectivenessbefore the end of 2015. This assessment should consider whether provisions should be extended such that local authorities must consider the potential for a contract of any value to deliver social benefits.Such assessment must take into account the views of all interested parties, including local government and business.

Community Right to Challenge

49. The Localism Act 2011 introduced new rights and powers for communities and individuals including the right to challenge a council (whether County, District or Unitary) to take over running of certain of the authority'sservices.[98]This is known as the Community Right to Challenge (CRC).Authorities must consider the social value of expressions of interest to run such services in any procurement exercise triggered by the CRC,as well as best value, which includes economic, environmental and social value. Such value could include, for example, creating local jobs, increasing local volunteering opportunities, or improving environmental conditions.[99] Evidence from witnesses indicated that there had been very limited use made of this right to date. NCVO told us that 22 challenges had been launched formally, with only two accepted. NCVO said that it wished to see the voluntary sector taking on more services.[100] CLES noted that the voluntary sector considered there to be drawbacks with the CRC because, in highlighting a wish to deliver a local service, an organisation could open up the service to a full tender exercise that often involved large private sector organisations. This did not necessarily lead to the voluntary or community sector winning contracts. It could be more effective to develop a relationship directly with local authority commissioners.[101] Solace told us that account needed to be taken of the process's impact on the voluntary community as well as the private sector and that an extended period of dialogue and consultation would often be required before voluntary sector bodies or social enterprises would be in a position to be able to compete for a contract.[102] Nevertheless, NCVO considered that there was some evidence that the right to challenge allowed organisations to begin a conversation with a council which would not otherwise have been possible. It preferred a more informal approach which could be easier for the voluntary sector than the potentially confrontational formal process.[103]

50. Government policies to encourage communities to engage in service delivery through mechanisms such as the Community Right to Challenge do not appear to be being used to any great extent.We recommend that the Government undertake within six months a review of the barriers to its uptake, including costs to councils and would-be suppliers of entering into a full-scale procurement exercise and how these might disadvantage some sectors, in particular the voluntary and community sector.

Supporting local businesses and small and micro-businesses

51. Councils have the potential to use their procurement practices in order to support small and micro-businesses. A survey in 2013 by the Federation of Small Businesses (FSB) concluded that there was "much good practice" aimed at increasing SME access to public sector contract opportunities. More than 90% of responding authorities had initiatives in place to support SMEs in tendering, and 75% had introduced new initiatives in the last twelve months.[104] Intellect, a trade association for the digital technology and services sector, stated that councils were "ahead of the curve" and that local government had already readily embraced the SME agenda "at a rate much higher than that of central government" when sourcing new technology.[105] Witnesses also highlighted the potential for support for local businesses to improve local economies. The FSB survey concluded that for every £1 spent by local authorities on procuring goods and services from local firms, additional benefits of 51 pence were generated for local economies. The research found that local authorities spent on average around a third of their total procurement budget within their own boundaries, and that nearly half of the total spend was with SMEs. It further found that spend via small local firms generated more benefits than spend via large local businesses. FSB calculated that increasing spend with local firms by 5%, and with SMEs by 3%, would increase investment in local SMEs by over £964 million nationally.[106]

52. Other witnesses gave us a range of examples where local councils were working to support local businesses. The LGA identified a number which were spending high proportions of their procurement budgets with SMEs.[107] Halton Borough Council spent 89% of its procurement budget with SMEs nationally.[108] The council told us that it had increased supplier numbers by over 160% in two and a half years by using mechanisms such as advertising all contracts through an e-portal ('The Chest') and engagement exercises with local businesses.[109] The Chair of the South and East Yorkshire Region Federation of Small Businesses told us that Sheffield City Council had adopted the right approach to supporting local suppliers and had increased the number of apprentices to some 300.[110]

53. Nonetheless, some witnesses considered that concerns over compliance with EU non-discrimination requirements could undermine the delivery of local economic objectives. FSB said that:

    anecdotal evidence suggests that, while local authorities are comfortable with supporting environmental issues and apprenticeships through procurement, they may be less confident on what is permissible in support of local businesses. As such, procurement teamsuncertain of what can and cannot be done to support small local businesses through procurement should seek advice and guidance, particularly from the LGA.[111]

The Chartered Institute for Public Finance (Cipfa) noted that, although EU rules prohibited discrimination against service providers on the grounds of nationality, nonetheless there was scope for discretion. It stated that it was not for example lawful to:

    specify that food is locally produced, but it is standard practice to specify that it is fresh or seasonal; and to take into account the level of harmful emissions caused by its transportation. To this extent local government procurement has a lawful purpose unconnected with stimulating the local economy. Indiscriminate local procurement to stimulate the local economy would however be unlawful.[112]

The Joseph Rowntree Foundation agreed, noting that, provided contracts were not directly or indirectly discriminatory, EU processes allowed procurement to address social issues for example by favouring "on-site vocational training, the employment of people experiencing particular difficulty in achieving integration, the fight against unemployment or the protection of the environment".[113] The Foundation noted, however, that the contractor would be required to deliver the social benefits without discriminating against non-local suppliers.[114] The revised EU procurement rules will increase the scope for supporting local economic growth, for example through the use of training opportunities, employment of job-seekers and apprentices.[115] The new draft Directive includes a range of articles which will support SMEs through, for example, requiring use of simplified procedures, meeting a number of criticisms from witnesses concerned at the impact of current onerous procedures.[116]

54. Some businesses expressed reservations. For example, Alan Rogers, representing housing construction company KeepMoat, considered that local economic benefits were to be had by using local community contractors, but he cautioned that there were practical difficulties in using this approach such as securing contractors with the right specialist knowledge for the contract.[117] Academics also warned of potential negative impacts on wider geographical areas of approaches which favoured local communities. Dr Pedro Telles from Bangor University considered that public procurement should not be used as a "development or social engineering tool" since there was a risk that social considerations could be used as a "protectionist tool under the guise of stimulating the local economy".[118] Cipfa considered that it would be ineffective to use local procurement indiscriminately to stimulate local economies because "all authorities would start doing it, so that what any local economy gained from its own local procurement it would lose from the loss of cross-border procurement by other authorities".[119] Dr Telles endorsed this view noting that:

    when the first authority raises its barriers to external suppliers all others will be expected to do the same to protect their local supplier base. [...] one [organisation] saving is great, everyone saving leaves the economy in deep trouble. In consequence, it will become almost impossible for a supplier to win business with another local contracting authority.[120]

55. We recognise that council policies which disproportionately favour localor smaller firms are not in communities'longer-term interests since these approaches could exclude cost-effective options offered by non-local or larger businesses, as well as ultimately weakening rather than strengthening local economies or regional economies as a whole. However, carefully framed policies that give local and smaller firms the same opportunities as larger firms to compete for contracts have had benefits for local economies.We support targeted council approaches which effectively balance support for local businesses whilst not precluding value for money or undermining the effective operation of markets. We conclude that the Local Government Association should work with local authorities to disseminate best practice case studies on how to integrate procurement and support for smaller businesses. The Cabinet Office, working with the LGA, should produce guidance on how councils can apply the provisions of the new EU Directive on public procurement to better support smaller businesses and local economies.We address in the next chapter the approaches which should underpin these policies.

74   Centre for Local Economic Strategies (LGP 19) para 4.1 Back

75   Cabinet Office, Procurement Policy Note: The Public Services (Social Value) Act 2012-advice for commissioners and procurers, September 2012 Back

76   Directive 04/18/EC will be repealed following adoption of the new Directive/2014/../EU of the European Parliament and of the Council on public procurement Back

77   MEAT entails using a cost-effective approach such as life-cycle costing and may include the best price quality ratio. This ratio should be assessed on the basis of a range of criteria including qualitative, environmental and/or social aspects related to the contract's subject matter. Back

78   London Councils and the London Procurement Strategy Board (LGP 31) paras 22 and23 Back

79   Q36 [Lorraine Cox] Back

80   Q36 [Julie Gill] Back

81   Essex County Council (LGP 18) Back

82   Chartered Institute of Purchasing and Supply (LGP 39) Back

83   Chartered Institution of Highways and Transportation (LGP 64) para 1.3 Back

84   Solace (LGP 42) Back

85   National Council for Voluntary Organisations (LGP 29) para 2 Back

86   Local Government Association, Sustainable procurement strategy,30 November 2007 Back

87   See WRAP sustainable procurement webpages, www.wrap.org.uk Back

88   Centre for Local Economic Strategies, Responding to the Public Services (Social Value) Act 2012,p1, 13 February 2013 Back

89   See Chapter 4 on process below for details on EU thresholds. The Public Services (Social Value) Act 2012 is also referred to as the Social Value Act for brevity Back

90   The threshold is currently set at £173,934  Back

91   National Council for Voluntary Organisations (LGP 29);Section 1(13) of the Public Services (Social Value) Act 2012 refers Back

92   Joseph Rowntree Foundation (LGP 20) para 4.1 Back

93   Q357 [Oliver Henman] Back

94   Q342 [Matthew Jackson] Back

95   The Mystery Shopper is a web-site operated by the Crown Commercial Service where suppliers and potential suppliers can complain if they believe that they are being unfairly treated by a public body.See Mystery Shopper results Back

96   Department for Communities and Local Government (LGP 63) Back

97   Q455 Back

98   Localism Act 2011 Back

99   Department for Communities and Local Government, MyCommunityRights webpages www.mycommunityrights.org.uk/ Back

100   Q361 [Oliver Henman] Back

101   Q361 [Matthew Jackson] Back

102   Solace (LGP 42) Back

103   Q361 [Oliver Henman] Back

104   Federation of Small Businesses (LGP 30) Back

105   Intellect (LGP 32) Back

106   Federation of Small Businesses (LGP 30) Back

107   Local Government Association (LGP 17) Back

108   Q2 [Lorraine Cox] Back

109   Qq 26,27 All contracts between £1000 and the EU threshold Back

110   Q282 [Gordon Millward] Back

111   Federation of Small Businesses (LGP 30) Back

112   Chartered Institute of Public Finance and Accountancy Commissioning Joint Committee (LGP 07) paras 14 and 15 Back

113   Joseph Rowntree Foundation (LGP 20) Back

114   As above Back

115   Directive 04/18/EC will be repealed following adoption of the new Directive/2014/../EU of the European Parliament and of the Council on public procurement Back

116   Directive 04/18/EC will be repealed following adoption of the new Directive/2014/../EU of the European Parliament and of the Council on public procurement (Articles 22, 51, 34, 36, 56 of the draft Directive refer) Back

117   Q163 Back

118   Dr Pedro Telles (LGP 23) Back

119   Chartered Institute of Public Finance and Accountancy Commissioning Joint Committee (LGP 07) para 15 Back

120   Dr Pedro Telles (LGP 23) Back

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Prepared 13 March 2014