Public AdministrationWritten evidence submitted by TUC (PROC 7)

Introduction and Summary

1.1 The TUC is the voice of Britain at work. Representing more than six million workers in 54 different unions, the TUC campaigns for economic and social policies that promote a better quality of working life, that further equality for all and that support trade union values.

1.2 The TUC welcomes this inquiry by the Public Administration Select Committee (PASC) into public procurement. We have taken a close interest in developments in procurement policy since the publication of the current EU directives in 2004 and their subsequent transposition into UK law in 2006.

1.3 We do not intend to comment on every question listed in this inquiry, but we wish to make the following points:

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. This failure to use procurement policy in a positive manner must be addressed going forward;

The procurement of new trains as part of the Thameslink contract, won by Siemens of Germany rather than by Bombardier, which is based in Derby, had implications for industry and jobs in the UK. This experience changed the debate on procurement policy and it is important that lessons are learned;

From a European perspective, new reformed EU procurement directives must continue to support the use of social, employment and environmental clauses in public sector contracts.

1.4 In answering questions 1, 2 and 7 as set out in the “Procurement: Issues and Questions” paper published by PASC as part of this inquiry, we will address those issues in detail.

1. How successful has the Cabinet Office been at improving public procurement policy and practice?

2.1 In answering this question, it is first important to consider what public procurement policy is and what we believe it should be. Public procurement refers to the purchasing of goods and services by the public sector. The public sector includes both central and local government, as well as agencies of government, which can be very large and involve a high degree of spend, such as the Ministry of Defence and the National Health Service. Public sector spend amounts to some £238 billion of taxpayers’ money, a third of total public sector expenditure.

“No Stone Unturned in pursuit of growth”, The Rt Hon the Lord Heseltine, October 2012, p. 88

2.2 Clearly, then, care must be taken to ensure that this money is spent wisely. Efforts must be made to minimise waste, and negotiations with suppliers, such as those to achieve economies of scale, should seek to reduce the cost to government. However, procurement policy can achieve more than simply deliver goods and services at lost cost. Thousands of private sector employees are in work as a result of contracts from the public sector and the TUC strongly believes that the way in which contracts are designed can affect both the quantity and quality of those jobs. A “Buy British” policy, apart from being undesirable, would be illegal under EU rules, but this does not mean that procurement policy cannot be used creatively to support British industry. These two issues have been central to the focus of TUC campaigning on procurement over many years.

2.3 The TUC was disappointed that the previous Labour Government failed to take the opportunity to use procurement in support of jobs and industry. This was clearly legal under EU law. For example, Recital 33 of the public sector directive said that contract performance conditions “may, in particular, be intended to favour on-site vocational training, the employment of people experiencing particular difficulty in achieving integration, the fight against unemployment or the protection of the environment.” In other words, contracts could require suppliers 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. Such actions may have involved a short-term cost, but would have left a long term benefit. Nevertheless, a primarily low-cost agenda was pursued.

2.4 The election of the Coalition Government brought technical changes to procurement policy. An early change was the abolition of the Office of Government Commerce (OGC), which had been responsible for procurement issues, and the placing of procurement policy in the Efficiency and Reform Group at the Cabinet Office. Whilst there is a logic to placing responsibility for public sector purchasing in the Cabinet Office, the OGC had been based in the Treasury. The TUC did not believe the link between procurement and economic policy had been well-enough exploited, but the basing of the OGC in the Treasury at least allowed for the potential for that to happen. Any institutional relationship between procurement issues and economic policy was now broken.

2.5 There was no immediate change in the strategic nature of procurement policy until a political controversy as a result of the Thameslink contract forced a rethink. In June 2011, Siemens plc and XL trains were awarded preferred bidder status in relation to the procurement of new rolling stock for the Thameslink programme, a through rail service from Bedford to Brighton, crossing London from north to south. Bombardier Transportation were unsuccessful, but were named as reserve bidder. Bombardier owns the UK’s last remaining train manufacturing facility, in Derby, and the DfT’s decision led to protests. 1,400 redundancies were announced at Bombardier and unions raised concerns about the company’s future in the UK, along with the sustainability of the domestic supply chain. There was also a danger that the loss of a UK train design facility would have long-term adverse consequences for the cost of the railway, because of the specific design requirements of British trains.

2.6 Politically, the Coalition Government sought to blame its Labour predecessor for the controversy, arguing that the latter had drawn up the Thameslink contract. However, in July 2011, clearly concerned to avoid such a situation being repeated, the Business Secretary, Vince Cable, and the then Transport Secretary, Philip Hammond, wrote a joint letter to the Prime Minister, expressing concern at the turn of events. The letter said: “There is a perception that other EU countries appear to manage their public procurement processes with a sharper focus on domestic supply than we have hitherto.” The letter suggested that the Government use the second phase of the Growth Review to explore more fully the opportunities to take a strategic approach to large scale public procurement.

2.7 This point about economic growth is important. Whilst, as noted above, the previous Labour Government had a generally “low cost” approach to procurement policy, one notable exception was when it introduced the “Policy through Procurement Action Plan”, in the aftermath of the economic downturn. This action plan detailed how procurement policy could be used to drive economic growth.

2.8 “Policy through Procurement” set a number of key performance metrics for government. These included: the value of contracts placed with SMEs; the number of apprenticeships supported through public procurement, building towards the aim of securing 20,000 apprenticeships over a three year period; the number of young unemployed people taken into the workforce; and the absolute number of key departmental suppliers that had agreed to disclose their greenhouse gas emissions, with the aim that government would work with them to support their carbon reduction programmes.

2.9 A similar change in procurement policy was duly contained in the Autumn Statement 2011. The Autumn Statement said that, in order to help build capability in strong UK-based supply chains and support SMEs and mid-sized businesses, the Government would introduce a package of measures to deliver better value for the UK from public procurement.

2.10 Having already published procurement plans for construction, wider infrastructure, information and communication technologies and facilities management, the Government would publish medium-term plans setting out its procurement needs for other sectors by April 2012. This would give suppliers the confidence to invest for the future and compete on a level playing field. The Government would also make better use of pre-procurement dialogue with suppliers to ensure procurement processes were well designed and quickly carried out. The Government would complete all but the very biggest and most complex procurement processes within 120 working days by introducing the lean sourcing process from January 2012.

2.11 In a speech in the week before the Autumn Statement, the Cabinet Office Minister, Francis Maude, said: “The way in which we’ve done business has militated against UK interests and it’s militated against growth and jobs in this country. In the same 12 month period while British companies won £432 million of EU contracts, French firms won £911 million and German firms £3600 million. The UK awards 3% of public procurement by value to foreign suppliers, compared to 1.9% in Germany and 1.5% in France.”

2.12 In conclusion, the UK has a history of using procurement passively, simply seeking to buy the lowest cost solutions and failing to use the power of procurement to stimulate jobs, skills, inclusion and industry, as well as delivering fair pay. After a political controversy and in the light of continuing low economic growth, procurement policy has changed for the better. This is welcome, but it is too early to say how effective the change is. This policy area must, therefore, be monitored in the coming months and years.

2. What should be the strategic aim of the Government’s public procurement policy?

3.1 The Government’s procurement policy must balance value for money for the taxpayer with the use of procurement to underpin the long term strength of the British economy. Specifically, opportunities should be sought to use procurement to stimulate skills, improve employment opportunities for all, including the most disadvantaged, and to help public sector purchasers to provide “greener” goods and services. In doing so, it can help to achieve the UK’s carbon emissions targets and it can underpin a sustainable industrial strategy.

3.2 There is also a strong moral case for the government considering the use of living wage clauses in public procurement to help to raise more low paid employees out of poverty. There is evidence that employers gain personnel and reputational benefits through paying the living wage. However, many employers who could afford to pay higher wages still deliberately choose to pay rates close to the National Minimum Wage. According to the Institute for Public Policy Research (IPPR), one result is that HM Treasury currently spends £3.6 billion on tax credits and in-work benefits to workers who earn less than the living wage rates. When it comes to public sector procurement, this means that the government effectively pays a hidden subsidy when it sources from low-wage employers.

3.3 The Government has previously been somewhat sceptical about the legality of living wage clauses in public procurement, yet other countries seem able to adopt such measures without difficulty, often citing Article 38 of the public procurement directive, which makes provision for the use of social clauses.

3.4 There is significant cross-party support building up for the living wage, and indeed the Department of Work and Pensions has itself recently become a certified Living Wage Employer. Now must be a propitious time for the Government to consider again whether it can play a stronger role in fighting in-work poverty through its public procurement policy.

3.5 The TUC believes strongly in a more positive agenda for procurement, but we are not alone. In, “No Stone Unturned”, a report for the Government in October 2012, the former Deputy Prime Minister, Lord Heseltine, said the following:

“There is a tension in public procurement where it applies to sophisticated technologies and not for commodities such as A4 paper. What is it for?

“The simple answer is to secure value for money for the public purse. Who can argue with that? The problem is that it is often equated with short term, lowest cost procurement which ignores the issue about the country’s industrial base—the exploitation of R&D, the skills we need and the creation of jobs. It also ignores international practice. No country of which I have any knowledge takes so simple a view. Although crucial in major policy areas such as defence or aerospace, the same issues are everyday challenges for ministers whether they are placing contracts for high speed trains or new IT systems. We are concerned about the destiny of our manufacturing sector but we do not spend enough time exploring the ways government can work to support it.”.

“No Stone Unturned in pursuit of growth”, The Rt Hon the Lord Heseltine, October 2012, p. 92-93

3.6 Lord Heseltine recommended that the long-term impact of technological advantage and the UK industrial base are taken into account in the procurement of specialist technologies. The TUC agrees, but we would like more detail of how the UK industrial base might be supported by procurement to be written into government policy. In our view, as stated above, this should certainly include skills training and the development of environmentally friendly manufacturing. We believe procurement could support inclusive employment policy and fair wages as well.

3. How should government ensure that European directives on public procurement do not inhibit public bodies’ ability to procure effectively?

4.1 Key to this question, of course, is the definition of “effective” procurement. For some, low cost procurement is the most effective form and those supporting this view will wish to see European directives watered down as much as possible. For those of us who believe in a proactive role for procurement, the key issue is to ensure that EU directives continue to support the pursuit of social, employment and environmental objectives through procurement policy. As noted above, it is clear that the 2004 directives allowed the pursuit of such objectives, but those directives are currently being reviewed and it is essential that the directives replacing them do not pursue a low cost approach to procurement, on the basis of arguments about so-called “burdens on business”.

4.2 There are reasons for encouragement that the new directive will indeed be positive. The explanatory memorandum of the directive puts its objective in the context of the wider Europe 2020 strategy for smart, sustainable and inclusive growth. This, according to the memorandum, “is based on three interlocking and mutually reinforcing priorities: developing an economy based on knowledge and innovation; promoting a low-carbon, resource-efficient and competitive economy; and fostering a high-employment economy delivering social and territorial cohesion.” The TUC believes much greater emphasis should be placed on knowledge and innovation, low carbon growth and high employment, rather than the current obsession, in the UK and in Europe, with austerity. Moreover, it would be hard to understand how the new directive could support those Europe 2020 objectives if it does not allow for positive procurement practices.

4.3 Recital 17 of the draft directive states:

“Research and innovation, including eco-innovation and social innovation, are among the main drivers of future growth and have been put at the centre of the Europe 2020 strategy for smart, sustainable and inclusive growth… This directive should contribute to facilitating public procurement of innovation and help Member States in achieving Innovation Union targets. A specific procurement procedure should therefore be provided for which allows contracting authorities to establish a long-term innovation partnership for the development and subsequent purchase of a new, innovative product, service or works provided it can be delivered to agreed performance levels and costs. The partnership should be structured in such a way that it can provide the necessary “market-pull”, incentivising the development of an innovative solution without foreclosing the market.”

4.4 Needless to say, the TUC strongly supports this recital.

4.5 Recital 43 is a similar, but slightly amended, version of the much quoted Recital 33 from the previous directive, which this one replaces (ie 2004/18/EC). Recital 43 states:

“Contract performance conditions are compatible with this Directive provided that they are not directly or indirectly discriminatory, are linked to the subject matter of the contract and are indicated in the contract notice, the prior information notice used as a means of calling for competition in the procurement documents. They may, in particular, be intended to favour on-site vocational training, the employment of people experiencing difficulty in achieving integration, the fight against unemployment, protection of the environment or animal welfare. For instance, mention may be made, amongst other things, of the requirements—applicable during the performance of the contract—to recruit long-term jobseekers or to implement training measures for the unemployed or young persons, to comply in substance with fundamental International Labour Organisation (ILO) Conventions, even where such Conventions have not been implemented in national law, and to recruit more disadvantaged persons than are required under national legislation.”

4.6 The TUC strongly supports Recital 43. However, we raise one concern, which is that there has been some dispute in the past about the legal status of recitals. The articles of the directive are those that give it legal force, while the recitals exist for explanatory purposes. This has led some to argue that recitals we have quoted are of little legal interest. We disagree: if the recitals explain what the directive is supposed to be achieving (they are written in less legalistic language) then surely they are of value. Nevertheless, for the avoidance of this dispute in the future, we wish to see Recital 17 and the new Recital 43 codified into the legal text of the directive when this is published.

4.7 Regarding progress, the revised directives have completed their committee stage in the European Parliament and will be voted on at a plenary session of the Parliament in March 2013. They must also be adopted by the European Council, so there is still time to strengthen them. Following their adoption into European law, they must be transposed into UK law by June 2014.

January 2013

Prepared 18th July 2013