House of Commons - Government Procurement - Public Administration Committee

Government Procurement - Public Administration Committee Contents

3 Using government procurement to support the UK Economy

23. Where and how the Government spends taxpayers' money on purchasing goods, services and works has considerable wider economic impact. Lord Heseltine explained in his recent report "No Stone Unturned":

By any standard, central government's effect on the economy is overwhelming. Its impact derives not only from the scale of the expenditure involved but from the way in which the money is spent. Consider government procurement. It is not just about securing value for money. It can significantly affect the attitudes, efficiency and competitiveness of suppliers in the private sector.[33]

24. The CBI told us further that:

Government departments can do more to harness the growth potential of public procurement expenditure by engaging more effectively with the market to promote the development of new products. This is particularly beneficial in sectors where government is a major customer as it has the ability to stimulate industrial activity from the demand side through more strategic policy making. A focus on innovation can also help ensure that the focus on value for money does not revert to lowest cost as the default award criteria.[34]

25. The Trades Union Congress suggested that "at a strategic level, the UK has failed to make full use of the potential for procurement policy to support both the quantity and quality of employment, to assist economic inclusion and to underpin a modern industrial strategy".[35]

26. The Cabinet Office stated in its evidence that it had taken action to support UK industry through government procurement policy. In particular, it had published "pipelines of likely future needs: providing long-term visibility to allow UK industry to target R&D [research and development] decisions and be well prepared to bid for government contracts. To date, 17 pipelines have been published with a total value of £84 billion".[36]

27. These pipelines have been widely welcomed by business, albeit with the caveat that further information over the longer term would be still more beneficial.[37] The UK Contractors Group noted that while the Government had established an infrastructure plan, showing the pipeline of national infrastructure projects which it expected to support, the plan "actually only runs for three or four years. The pipeline goes to the end of the current Spending Review. It does not go beyond that [...] that plan needs to be much longer term".[38]

28. We endorse the efforts that the Government has made thus far to give industry greater visibility of future procurement. The Cabinet Office should work with other government departments, not least the Department of Business, Innovation and Skills to ensure the data in the procurement pipelines is as full and up to date as possible and identify what further information Government can provide to help industry to innovate and prepare to deliver future government contracts as effectively as possible.

Supporting small businesses

29. SMEs provide six out of ten private sector jobs in the UK economy and are most associated with growth and job creation, notably having increased their jobs by two million since 2002 while larger businesses have not created any more net jobs.[39] The Government has identified that facilitating SME access to government contracts is one way it can use procurement policy to support wider economic development, while diversifying the market and enabling greater competitive tension. It has set itself the "aspiration" that at least 25% of government procurement spending will flow to SMEs by the end of the Parliament in 2015. The Cabinet Office told us that direct spend had increased from 6.5% in 2009/10 to 10% in 2011/12 and that "more is being done to understand indirect spend and ensure these numbers are robust".[40]

30. To help achieve this aspiration, the Cabinet Office has introduced a number of measures to remove barriers facing SMEs seeking to win government contracts. These include a policy to remove "pre-qualification questionnaires from lower value contracts, except where security is consideration" and "the introduction of Contracts Finder" to allow "unprecedented transparency to the range of opportunities available". The Cabinet Office added that "the appointment of a Crown Representative for SMEs and voluntary bodies has ensured that the voice of both is heard at the heart of Government".[41]The Chief Operating Officer expressed confidence that significant progress against the aspiration to achieve 25% of direct and indirect spending with SMEs would be achieved: "if I come back here in two years and we have not seen significant uplift in those numbers then we will be hugely disappointed".[42]

The G Cloud/Cloudstore Framework
The G Cloud/Cloudstore framework provides an online catalogue of ICT services for the UK public sector managed centrally by the Government Procurement Service.
Sally Collier, the Deputy Chief Procurement Officer told us that: "it is a framework procurement like none we have ever seen before. It is dynamic and it is fast; suppliers come on and off. The suppliers are telling us they love it. It is a very quick accreditation process".[43]
The Government expects that CloudStore will help small and medium-sized businesses to contract directly with the public sector, as it has simplified the requirements for joining this framework.
According to a recent National Audit Office report: "Of the 250 suppliers on the first CloudStore framework, which went live in February 2012, around 75 per cent are small and medium-sized businesses. In August 2012, the Cabinet Office reported that 75 per cent of contracts let between April and July 2012, had gone to small and medium-sized businesses. In its first six months of operation, government spent £2 million in the CloudStore with 27 suppliers. The second CloudStore framework went live in October 2012, with 458 suppliers, including 201 of the original suppliers from the first framework".[44]

31. Many witnesses welcomed the Government's activities to support SMEs. However, they argued that obstacles to achieving this target remain. The Federation of Small Businesses argued that part of the problem was the prevalence in the public sector of unnecessary selection practices such as disproportionate turnover and insurance requirements. They said that "we would like to be seeing far more evaluation on experience and ability".[45]

32. As we argued in our report Government and IT — a recipe for rip-offs: time for a new approach , the key risk is that government procurement policy to concentrate demand into national and central contracts can make it harder for small businesses to win government contracts.[46] Peter Smith told us:

If you are going to do national contracts, however hard you try to some extent to break them up and so on, you will end up with fewer companies doing business with different bits of the public sector. I do not have an answer to that but we have to recognise that there are agendas pulling in different directions.[47]

33. As we said in our report, The Big Society, large contracts exclude most third sector providers.[48] Social Enterprise UK confirmed this, writing that: "many contracts are just too large for most [social enterprises] to compete for [...] centralisation of procurement that results in further aggregation [...] runs entirely counter to the aim of fostering a plural market of providers that includes Social Enterprises".[49]

34. The quality of Government data on how much Government spends with small business is poor.[50] Francis Maude recognised this:

We have much better data than we had, but they are far from perfect [...] I give fair warning that these numbers will do some odd things over the years ahead, because we are still only able now to start to bottom out what the numbers are going to do.[51]

35. The Chief Procurement Officer admitted that much depended on the definition of what constitutes an SME, and noted that the definition used thus far was being amended.[52]

36. In our 2011 report Government and IT— a recipe for rip-offs: time for a new approach, we noted that the way procurement currently operates favours large companies. We remain sceptical that, since then, sufficient change has been achieved. However we support reforms to improve SMEs and social enterprises' access to government contracts and note that the Government's Chief Operating Officer is confident that small business will win a much greater share of government business over the next two years.

37. We are also concerned at the apparent weaknesses in the Government's data on the level of spending with SMEs. Government must improve its data on spending with small businesses. The Cabinet Office should publish regular quarterly updates on progress towards its "aspiration" of 25% by value of government contracts being won by SMEs, giving a clear indication of how it has defined a small and medium-sized business and how reliable the data are.

Achieving social and economic objectives within the rules

38. There is a widespread view that government procurement has not been used to support the UK economy as effectively as possible, not least because of the UK public sector's tendency to take a narrow view of what is allowed under EU procurement directives. Lord Adonis made this point in discussion with Lord Heseltine at a discussion at the Institute for Government in November 2012 about his report "No Stone Unturned".[53] Lord Adonis referred to his success in bringing Hitachi to the UK to manufacture trains and to open a train manufacturing plant in North-East England.

The Thameslink Rolling Stock Procurement
This rolling stock procurement managed by the Department for Transport prompted renewed debate on whether the Government was doing enough to ensure public procurement spending achieved wider economic benefits to the UK.
The Thameslink Rolling Stock project aims to achieve the acquisition of a fleet of approximately 900 to 1300 passenger rail vehicles (making up c.110 trains) for services on Thameslink lines. In June 2011 the Department for Transport announced that Siemens plc and XL Trains had been awarded preferred bidder status.[54]
Bombardier Transportation was named as reserve bidder. Bombardier owns the UK's last remaining train manufacturing facility, at Derby, and the Department for Transport's decision prompted protest, particularly from Derbyshire MPs, business interests and trades unions amid concerns about Bombardier's future in the UK and the sustainability of the domestic supply chain.[55]
The original Invitation to Tender, published in 2008 by the previous Government, was widely criticised for not including socio-economic factors, such as the impact on employment and growth in the UK. The Department for Transport was urged to reverse its decision, if necessary by terminating the current procurement exercise and starting afresh.[56]
On 27 June 2013, the Department for Transport announced that Siemens Plc with Cross London Trains had been awarded a contract of around £1.6 billion to build 1,140 carriages for use on the Thameslink rail line. Conscious of the previous criticisms, the Department for Transport highlighted in its press release that Siemens expected the award of the rolling stock contract to create up to 2,000 jobs across the UK supply chain.[57]

39. Lord Heseltine made this point forcefully when he gave evidence to our 2012 inquiry on strategic thinking in Government:

If you look at procurement on the continent, they have exactly the same European Directives governing them as we do, but they do not seem to have a problem, in practice. The question has to be asked: why is there no complaint on the continent of Europe in the way that there is vociferous complaint here? There could be two reasons. One is that they are cheating, which is the common allegation. The other is that we may have screwed it up.[58]

40. Peter Smith told us that using procurement to support particular local economic or social objectives could be "a difficult and complicated area".[59] He said that:

[...] it is an area where the public sector has been risk averse, I think. I am not sure it is driven by any philosophical love of free trade; I think it is more often driven by the lawyers or the procurement people saying, 'You cannot do that, because we might get challenged by someone from another country.'[60]

41. A number of witnesses felt that the Directives could be applied more cleverly in the UK. Tim Heywood noted that: "I think we do generally miss a trick sometimes in the way we specify what we want to buy".[61] Peter Smith elaborated on this explaining how procurements could be pragmatically designed to ensure that procuring authorities could give some consideration in their evaluation to whether the bidder is based in the UK:

There are things you can do; for instance, you cannot stipulate that it has to be a British firm, but you can have a criterion in the evaluation that says, 'Tell me how you will provide support within 30 minutes' or 'We want to be able to meet your managing director at eight hours' notice. Tell us how you will achieve that', which might just favour local firms rather than somebody from the other side of Europe.[62]

42. Other witnesses told us however that there was in fact significant scope within the existing Directives to allow local social and economic objectives to be taken into account. Professor Bovis of Hull University explained:

France, Germany and Italy use procurement for specific purposes, without breaking the laws. In Germany every Land has specific laws designated for the promotion of SMEs. In France, there is a specific overarching umbrella legal principle concerning economic development, which means tremendous flexibility and discretion in the hands of contracting authorities to award public contracts [...] We have seen that quite often in Europe. The Court of Justice has recognised on a number of occasions over the last 40 years the ability of Governments to procure and deliver public services in the way they see fit, provided they preserve some elements of competition.[63]

43. Analysis undertaken for the European Commission on cross-border procurements in 2011 suggests that there is a general tendency for each country's public sector to award contracts to bidders from that country.[64] The data also suggests that the UK public sector behaves similarly to the rest of the EU with the proportion of UK public sector contracts awarded to firms based in other Member States close to the average for the rest of the EU, and similar to the levels in both France and Germany.[65]

Table 1: Cross-border procurement above thresholds within the EU

Awards by number Awards by contract value

Contracting authority's home state Direct Cross Border Indirect cross border Direct Cross Border Indirect cross border

UK 1.5% 16.5% 3% 13.8%

France 0.9% 14.8% 1.5% 19.3%

Germany 1.5% 8.1% 1.7% 9.6%

Ireland 15.4% 9.0% 8.8% 0.5%

EU - Average 1.6% 11.4% 3.5% 13.4%

Source: European Commission[66]

44. Reforms to European Directives currently being considered by the European Parliament are intended to encourage public bodies to use procurement for wider social and environmental purposes. The relevant Committee of the European Parliament has said:

Instead of simply accepting the lowest bid, public authorities should go for the 'most economically advantageous tender' (MEAT) which could also include environmental considerations such as sustainability and life cycle costs or social objectives such as buying from firms with a particular social profile.[67]

45. To some extent anticipating the EU reform proposals, the Government has also supported the introduction of a Private Member's bill—the Public Services (Social Value) Bill—which received Royal Assent in March 2012 and came into force in January 2013. The resulting Public Services (Social Value) Act 2012 requires public bodies commissioning public services to consider social value before undertaking the procurement process. Evidence we received welcomed the Act and applauded its intentions but felt that it did not go far enough in ensuring public procurement maximised social benefit.[68] Social Enterprise UK suggested that "the Act should be strengthened" so that "public bodies should be obliged to include social value in their commissioning and procurement and account for how this is generated" and extended so that it "applies to the purchasing of goods and works and the management of assets as well as services".[69]

46. The Minister for the Cabinet Office told us that the Government had no plans to promote the Social Value Act, explaining "[it] is a permissive rather than a mandatory regime, so it is very much for public contracting authorities themselves to see how they want to use this, rather than for us to require it".[70] He went on to explain that:

[...] my predilection generally is that you should not load procurement with values and requirements other than getting what you want at the best price. There is always a temptation to use procurement to deliver other desirable objectives. My preference always is to keep it as stripped down and limited as it can be.[71]

He clarified further that "our primary—not the sole—objective that we are serving through procurement is buying the goods and services that are needed for the citizen at the best price".[72] He accepted however that "where it does not interfere with good value for money, it makes every kind of good sense".[73]

47. While Bombardier in Derby was not successful in securing the contract for Thameslink trains, for example, French and German suppliers have for a long time been more successful in securing contracts for domestic producers, to the benefit of their national economies. We welcome the EU reform proposals which encourage public bodies to use procurement for wider social and environmental purposes. These reforms alongside the Public Services (Social Value) Act 2012, allow the public sector to take a much more considered approach to procurement which seeks to maximise the positive impact of public spending in ways which are already used by other EU Member States. We understand however the Minister for the Cabinet Office's concerns about "loading procurements with values and requirements other than getting what you want at the best price." The Cabinet Office should bring forward proposals as to how it can ensure that proper consideration is given to the potential to promote the UK economy in all government procurement exercises, without losing sight of the fundamental purpose of procurement regulation: to get best value for the taxpayer.

48. One potential means of ensuring government procurement spending is used to support wider social and economic objectives, while remaining compliant with EU Directives, was highlighted by the Trades Union Congress. EU Directives specifically indicate that terms may be included in contracts requiring the contractor to meet certain performance requirements while providing the good or service procured.[74] The Trades Union Congress notes for example that this clause allows public bodies to include contract performance conditions requiring contractors to "introduce apprenticeships, or to stipulate that some under-represented workers, such as those with disabilities or who endure long-term unemployment for other reasons must be employed".[75] The Department of Work and Pensions has already introduced an "Apprenticeship and Skills Requirements" contract schedule into its standard model terms and conditions for services contracts to enable its procurement spending to be used to support the creation of apprenticeships. The schedule requires that contractors, and in turn their subcontractors, "take all reasonable steps to ensure that 5% of their employees are on a formal apprenticeship programme".[76]

Crossrail rolling stock procurement
In the Crossrail rolling stock procurement, the Government has attempted to learn the lessons from the controversy surrounding the Thameslink rolling stock procurement and ensure that wider social and economic impacts are considered as part of the procurement process.
In March 2011 Crossrail Ltd, the private public partnership delivering Crossrail on behalf of the Department announced its intention to put out an Invitation to Tender by the end of 2011, to award the contract to build the Crossrail train fleet in late 2013.[77] However, following the political fallout of the decision to award the Thameslink contract to Siemens in June 2011 (see box above), the Government decided to delay the procurement process.[78]
In February 2012, Crossrail Ltd announced that four bidders; Bombardier Transportation (UK) Ltd.; CAF; Hitachi Rail Europe Limited; and Siemens plc had received an Invitation to Negotiate. The then Secretary of State for Transport, the Rt Hon Justine Greening, welcomed the announcement and highlighted that the Invitation to Negotiate included requirements for "responsible procurement", stating that "this means that bidders are required to set out how they will engage with the wider supply chain and provide opportunities for training, apprenticeships, and small and medium-size businesses within their procurement strategy. Bidders are also required to establish an appropriate local presence to manage the delivery of the contract." She also announced that "Bidders are being asked, in the Invitation to Negotiate, to specify from where each element of the contract will be sourced. This is not an assessment criterion in the decision process however the successful bidder will be required to report against their proposed estimates."[79]
The contract is expected to be awarded in Spring 2014.

49. Setting wider contract performance measures—such as the creation of apprenticeships—is one means of ensuring procurement spending achieves additional social or economic impact which could be employed more widely across Government. The Cabinet Office should provide guidance to government departments on how to use the scope within the existing EU procurement directives to maximise value for the UK economy, for example through greater use of appropriate contract performance measures.

33 Lord Heseltine, No Stone Unturned, October 2012, p.62 Back

34 Ev w87 Back

35 Ev w147 Back

36 Ev w75 Back

37 Qq 52-57; Ev w17 Back

38 Q 68 Back

39 Department for Business, Innovation and Skills, Business population estimates for the UK and regions, October 2012 Back

40 Ev w75 Back

41 Ev w75 Back

42 Q 519 Back

43 Q 512 Back

44 National Audit Office, The impact of government's ICT savings initiatives, HC 887 Session 2012-13, 23 January 2013 Back