Public AdministrationWritten evidence submitted by Social Enterprise UK (PROC 16)

About Social Enterprise UK

Social Enterprise UK was established in 2002 as the national body for social enterprise in the UK. We are a membership organisation. We conduct research; develop policy; campaign; build networks; support individual social enterprises; share knowledge and understanding; support private business to become more socially enterprising; and raise awareness of social enterprise and what it can achieve.

Social enterprises are businesses driven by social or environmental objectives whose surpluses are reinvested for that purpose in the business or in the community. They operate across a wide range of industries and sectors from health and social care, to renewable energy, recycling and fair trade and at all scales, from small businesses to large international companies. They take a range of organisational forms from co-operatives and mutuals, to employee owned structures and charitable models.

Our members come from across the social enterprise movement, from local grassroots organisations to multi-million pound businesses that operate across the UK. With them we are:

creating a better environment for social enterprises to do business;

helping the social enterprise movement to grow and become stronger; and

building networks to share, learn and create business opportunities.

The UK social enterprise movement is recognised as a world leader and our members are united in their commitment to changing the world through business. The current climate presents the social enterprise movement with a unique opportunity. We know it can solve some of the UK’s most pressing problems, promote social justice and help to bring about the more diverse, bottom-up economic growth that we urgently need. In particular, social enterprises are well placed to deliver on the Government’s three priorities for civil society: empowering communities, opening up public services and promoting social action.

This Submission

Social Enterprise UK welcomes the opportunity to submit evidence to the Public Accounts Select Committee’s inquiry into public procurement, and this paper is informed by the many contributions we have received from our members working in public service delivery. Social enterprises are based on the principles of mutualism, co-production and participation. They offer a model where people, be it staff, service users or community members, are given a direct voice in running their organisation; where public assets can be locked into community ownership; and where people are empowered to transform their lives and the lives of those around them. As such, they are well placed to play a key role in the future of public services.

As an organisation we have been highly involved in shaping public service policy—we sit on the Cabinet Office’s SME panel, we are a strategic partner of the Office for Civil Society, we were a delivery partner in the National Programme for Third Sector Commissioning and were instrumental in the design of the Public Services (Social Value) Act 2012.

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

The Government has consistently encouraged the “creation and expansion of mutuals, cooperatives, charities and social enterprises” and called for “these groups to have a much greater involvement in the running of public services”. Social Enterprise UK has welcomed this support along with the Government’s commitment to ensuring a “truly level playing field between the public, private and voluntary sectors”, and we believe that the creation of a mixed market with a level playing field will ensure that the public have a greater choice between diverse, quality providers.

Alongside this, the Government has made strong commitments to develop a broad package of reforms designed to significantly open-up the public sector marketplace to Small and Medium Enterprises (SMEs), which are also relevant to social enterprises.

In order to support these commitments, a number of initiatives have been pursued by Government including improving public procurement transparency and accountability through the contracts finder and mystery shopper service; improving procurement processes by cutting red tape and bureaucracy on smaller contracts; the requirement to develop departmental strategies on SME involvement; supporting the practice of embedding social value in procurement through the Public Services (Social Value) Act; and developing training for commissioners including elements on working with voluntary and community organisations and social enterprises (VCSEs) through the Commissioning Academy and prior to this the National Programme on Third Sector Commissioning (NPTSC).

Whilst these developments are welcome and are designed to address barriers to effective procurement, and anecdotal reports suggest they have raised awareness of social enterprise, we do not believe that they do not yet go far enough.

In many public service areas (where social enterprises tend to operate) we are still seeing the increasing trend towards the aggregation of contracts is precluding more and more VCSEs from bidding. Similarly, the Government’s support for the Social Value Act has not been accompanied by sufficient awareness raising and capacity building for commissioners and procurement officials—coupled with the risk-averse culture of procurement, this has left many unaware and under-equipped to implement the Act effectively.

Indeed, there are some very contradictory messages between the Government’s commitment to Localism and SME participation and even the most recent announcement from the Ministry of Justice that offender rehabilitation contracts are likely to be separated into only 16 contract package areas, which would preclude the vast majority of smaller organisations from competing.

Social Enterprise UK has publically highlighted the barriers that social enterprises continue to encounter in procurement, in documents such as our consultation response to the government’s consultation on the Open Public Services White Paper and well as our recent report on the public services industry, the Shadow State. Crucially, we believe that if the government wishes to realise its ambitions for a mixed market of providers, it is essential to support commissioning that is cognisant of commissioners’ role as market shapers and stimulators to support market entry for diverse providers.

Our data suggests that failing to implement these recommendations will see social enterprises turning away from the public sector. Indeed, our report Fightback Britain highlighted that:

Social enterprises whose main source of income is from the public sector view the coming years with significant gloom, with markedly lower business confidence than their social enterprise peers in other sectors.

Of those social enterprises who trade mainly with the public sector and anticipate growth in the future, 64% anticipate that their growth will come from diversification away from working with the public sector.

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

We believe that the explicit strategic aim of public procurement policy should be to maximise the benefit that is delivered to the public through spending from the public purse. At a time when there are considerable constraints on public spending, it is more important than ever that public spending is recognised not just as a purchasing tool but also as a public policy lever and that we address the needs of the public intelligently and in the whole to maximise efficiencies and outcomes. As such we believe that embedding a culture of social or best value should be the priority.

The Public Services (Social Value) Act currently requires commissioners to consider social value at the pre-procurement phase for public service contracts. We believe that the Act should be strengthened in the following ways:

public bodies should be obliged to include social value in its commissioning and procurement and account for how this is generated;

the Act should be extended to apply to the purchasing of goods and works and the management of assets as well as services; and

the Act should be supported with statutory guidance.

The current public service reform programme being undertaken by the Government is focussed on opening up public services market and achieving efficiencies. Behind the drive to open up public service markets has been a desire to see a mixed market of providers including VCSEs, in the belief that this plurality will lead to efficiency savings whilst driving up choice and quality.

We are not unsupportive of these aims—we share with the Government a desire to create opportunities for VCSEs to compete on a level playing field and to seek a culture of intelligent commissioning that is truly backed by the culture, policies and programmes, processes and capacity needed to deliver.

However, we believe that these should be supporting rather than strategic aims of public procurement. We also believe that at present, these aims have not been accompanied by sufficient changes to procurement policy and practice to create the conditions for success. Opening up markets is not in itself sufficient to create a mixed market of providers or indeed necessarily the route to achieving the greatest value. The structure and operation of public service markets must be conducive to organisations of different types and sizes in order to realise this ambition. Government and commissioners have a role as market makers in this regard, and must ensure that market conditions do not prohibit entry from certain kinds of providers.

3. Does the Government have the right skills and capabilities to procure effectively?

Does the civil service have the skills and capabilities required to negotiate and manage contracts effectively?

What skills do procurement authorities require in-house, what skills can be bought in and what skills can be contracted out?

What lessons can central government learn from local government on procurement?

How successful are government departments and their agencies at communicating their needs to potential suppliers?

Social Enterprise UK’s members report enormous variation in the quality of public bodies’ contract management and the communication of their requirements from existing or potential contractors. Where examples of good practice exist and where public bodies are engaging well with social enterprises as deliverers or potential deliverers of services, there are a number of common factors involved.

Often the quality of engagement will be dependent on high level buy-in for working with VCSEs as well as sector champions in commissioning and procurement positions. Given the risk-averse culture that dominates public sector procurement, such high level buy-in can be vital for giving officials the confidence to seek innovative solutions to public needs and engage with a broad and diverse supplier base.

Some of our members also report that they have more success in engaging with public bodies and departments where there is a history of procurement. On the other hand, where there have been rapid and large scale transformations, instances of immature commissioning and procurement are more common and knowledge, relationships and understanding of providers within geographies are at risk of being lost.

Similarly there are some significant gaps in knowledge when it comes to more complex processes such as open book accounting and advanced risk sharing. These skills are essential if we are to ensure that public procurement is both accountable to the public sector and transparent when it comes to fair financial rewards.

Tackling these issues requires clear leadership and improved training to give all commissioning and procurement officials the opportunity to access best practice examples and the confidence to engage in intelligent commissioning.

4. How should the civil service ensure it recruits and retains staff with the right skills to run procurements, to negotiate and manage contracts and to deliver major projects effectively?

With wide-ranging reforms a high-paced changes being implemented across public services, recruitment is only one part of the picture. Whether staff are new, have transferred across departments or organisations, or have been in place for significant periods of time, government must ensure that all staff are adequately and appropriately trained and supported to commission and procure effectively.

Many of the current reforms and new initiatives have not been accompanied by support to commissioning and procurement officials which is sufficient for them to effectively implement these new practices and contracts. For example, the Government’s support for the Social Value Act has not been accompanied by sufficient awareness raising and capacity building for commissioners and procurement officials—coupled with the risk-averse culture of procurement, this has left many unaware and under-equipped to implement the Act effectively. Similarly, skills in areas such as open book accounting and shared risk are lacking.

In order to ensure that commissioners and procurement officials are able to fulfil their responsibilities as market makers with confidence in order to deliver the Government’s vision for public service reforms and meet the needs of the public, investment in high quality professional training is essential across all service areas.

5. Does the Government have the organisational structures in place to enable it to procure effectively? (For example, how far should the Government centralise responsibility for public procurement? Do central government procurement “framework agreements” enable more effective public procurement?)

A consistent barrier to entry reported by social enterprises, which are often small, community-based organisations, is that the trend towards the aggregation of contracts precludes market entry for small and medium sized organisations. This is a concern shared by the voluntary sector as well as traditional SMEs.

At the procurement stage, small organisations are often disadvantaged by the level of resources required to participate in the processes surrounding large contracts. For example, one social enterprise with a £1million turnover reported that each tender they complete costs £50,000, which proportionally to their turnover creates an unsustainable burden.

In addition, many contracts are just too large for most VCSEs to compete for. Consortia-building initiatives have been developed in some areas and prime/sub-contracting models have been explored by others—for example, in the North West the sector has been making efforts to build consortia and engage with larger contracts through Converge, which enables medium sized local organisations to deliver collectively or find partners for collaborative bidding. However, such developments require investment and at present are unable to keep pace with the speed at which they are need due to small contracts disappearing.

Social Enterprise UK would therefore caution against any centralisation of procurement that results in further aggregation, as this runs entirely counter to the aim of fostering a plural market of providers that includes VCSEs.

However, central government retains responsibility for direction-setting across public services as an industry and in many public service markets in particular. Here, the Government’s desire for localism and devolving decision-making must be balanced against the need for guidance in relation to new initiatives and directives. As highlighted above, the Social Value Act provides a valuable example of where Government support has not been accompanied by sufficient awareness raising and capacity building for commissioners and procurement officials.

6. Does the Government collect the management information it needs to understand how public procurement is working?

Social Enterprise UK recently conducted significant research into the public services industry in the UK, the findings of which were reported in the Shadow State. The report found that neither the government nor the public had access to sufficient information about public procurement to hold practices and processes to account and, crucially, to ensure that at a macro level there is sufficient oversight of public procurement to prevent the development of oligopoly providers that are too big to fail.

In order to address this, Social Enterprise UK recommends that the following proposals are implemented:

A public right to information: The Freedom of Information (FOI) Act and the powers that support transparency urgently need reviewing. As outsourcing of public services expands, the public’s right to information is shrinking. The Act only applies to information that a public authority holds about a contract or which it can compel a contractor to supply to it, rendering the powers of the Act no longer fit for purpose. FOI powers should be extended to companies delivering public services, but these should be revised to take account of proportional cost burdens on smaller providers, appropriate timeframes for independent contractors, and clear guidelines on information that contractors are required to provide under FOI.

Preventing unfair competition: An independent contracting oversight body should be established to scrutinise contracting decisions and prevent unfair competition. It should be overseen by the National Audit Office but have sufficient weight and power to challenge and overturn departmental decisions. It should have the powers to issue penalties when organisations fail to deliver outcomes and these result in cost to the public purse.

Rolling out open book accounting: Open book accounting should be rolled out with supportive guidance for all public sector contracts worth more than £250,000. When adopted effectively, open book accounting can mitigate against excessive profiteering, increase transparency, improve the sharing of risk and promote more effective partnerships where all partners are motivated to find the most effective solutions.

Taking past performance into account: Performance under previous contracts should be explicitly weighed up as part of the decision-making process in procurement decisions. At present, when evaluating tenders public authorities rarely have information on whether bidders have previously breached their commitments in other tenders with other public authorities. Public authorities should be allowed to take into account relevant information “a priori” (during the selection phase) on bidders, including bidders’ prior track record both positive and negative. Consideration should be given to the development on “quality of work” indicators that would help public authorities in this process.

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

Across the UK, many public bodies follow the full EU procurement rules where it is not necessary to do so. Applying the full set of EU rules adds complexity and cost for organisations competing for contracts, which is both unnecessary and disadvantageous to small organisations.

Clear guidance on situations in which the full EU procurement rules apply exists—for example, Social Enterprise UK has produced a myth-busting guide to procurement which has been highly valued. Such guidance needs to be promoted to all public bodies in order to promote best practice procurement that does not disadvantage small organisations unnecessarily.

8. How should Government assess and manage risk when negotiating procurement contracts? (For example, how much risk should Government be prepared to accept and what are the limits on the transfer of risk to the private sector?)

There are a number of existing challenges when it comes to the Government’s assessment and transfer of risk. As the government remains the accountable body, it can never fully transfer risk as it will inevitably bear ultimate responsibility in cases where organisations fail to deliver adequate results or fail financially. Because of this, it is essential that procurement officials exert caution when faced with offers from providers to take on more risk in return for higher reward, as there is a limit to the extent to which this can truly happen.

In addition, there is disproportionate emphasis placed on financial risk by procurement professionals rather than the risk of delivering poor outcomes. Often this financial risk is disproportionate to the size of the contracts therefore penalising smaller organisations and often under-capitalised social enterprises. This results in public service markets being dominated by a small number of highly capitalised providers, thereby considerably reducing rather than enhancing competition. As previously stated, social enterprises have difficulty accessing capital and due to their social mission and legal and governance structures are unable to take the high levels of risk this payment system requires.

Further, when the government is contracting by results, the balance of interest should be aligned through joint governance arrangements, such as the creation of a community interest joint venture or the inclusion of community-appointed, non-executive directors. This allows for the protection of public funds through appropriate governance, which aligns incentives between taxpayer, providers and service users, thereby reducing complexity, transaction cost and perverse incentives.

Additionally, past failure to deliver results is currently not considered in risk assessments. We support the idea that performance under previous contracts should be explicitly weighed up as part of the decision-making process in procurement decisions. At present, when evaluating tenders public authorities rarely have information on whether bidders have previously breached their commitments in other tenders with other public authorities. We firmly believe that public authorities should be allowed and supported to take into account relevant information “a priori” (during the selection phase) on bidders, including bidders’ prior track record, both positive and negative. Consideration should also be given to the development on “quality of work” indicators that would help public authorities in this process.

Similarly, there is little oversight of risk across different public bodies. For example, Serco operates public transport services such as the Docklands Light Railway and Barclays Cycle Hire Scheme. It manages laboratories including the National Nuclear Laboratory. It runs prisons and young offenders institutions, provides a range of security services to the National Borders Agency and other clients, such as accommodation and detention services for asylum seekers; it also supplies electronic tagging systems. It provides maintenance services for missile defence systems and military bases; it provides air traffic control services, facilities and management for hospitals, as well as pathology services. It manages leisure services, administers government websites including Business Link, provides a range of IT services, and operates waste collection services for local councils. It also manages education authorities on behalf of local governments. Its failure would cause extreme turbulence in public services.

Additionally, we see very little in the way of innovative commissioning where services providers, service users and commissioners are able to co-design and procure services. Service providers and frontline professionals are specialists in understanding the services they deliver, their clients’ needs and the communities in which they work, and are therefore well placed to offer innovative solutions to entrenched public service issues. However, immature commissioning capabilities often result in very risk-averse commissioning behaviour and an over-reliance on the procurement process, rather than intelligent commissioning, to protect against risk.

In order to utilise the knowledge and expertise that professional service deliverers have and foster innovation, government must counter unconfident commissioners resorting to what is perceived as “safe commissioning” rather than commissioning for outcomes that can truly transform people’s lives, to ensure that new entrants with innovative solutions are able to enter the market.

Best practice commissioning should be sufficiently flexible within service specifications to allow for innovation and should develop mechanisms to share risk rather than rely on heavy procurement. It should further engage with social enterprises and civil society organisations at the service design stage to access their specialist knowledge of local communities and service users, as well as incorporating service users’ feedback in evaluation processes.

In line with this, a culture change is required which moves public procurement beyond viewing risk as a purely financial matter. Risk calculations must be broadened to take delivery outcomes and market plurality issues into account in order to ensure that maximum benefits are delivered to the public.

9. What is the best role for “prime contractors” and what are the advantages and disadvantages of relying on “prime contractors”?

Social Enterprise UK’s members have reported mixed experiences of the prime and sub-contracting model across different service areas. Examples of good practice have included primes supporting their VCSE subcontractors to build their capacity, and in some area where prime contracts are suitably sized, social enterprises have succeeded in winning prime contracts which have enabled them to draw on their in-depth local knowledge to ensure a diverse VCSE delivery network that meets the needs of local people.

The diversity of experiences with the prime contracting model has been attributed in part to differences in the scale of the contract and the geography it covers, which can determine whether social enterprises or a diversity of providers participate. For example, one organisation reported that “primes covering large areas often don’t have the local knowledge of providers in a particular geography and so don’t procure a diverse range of services”.

In other areas, members have reported strategic issues with the Work Programme as a prime model, including restrictions on transparency and the reporting of outcomes and performance data. For example, sub-contractors can find themselves operating without knowledge of their prime’s targets, which makes managing their own performance far more complex.

Often these contracts work best where the prime is responsible for contract management but is not a front line delivery organisation themselves. This allows for greater transparency in how cases are aligned, and more equal partnerships between primes and subs. Tensions and unfairness arise when both the prime and sub-contractors deliver the services as in these situations the prime prioritise their own service delivery functions only passing through complex and costly cases to the sub-contractors.

More structurally, the concern raised by many and highlighted in our report the Shadow State, is that in some service areas such as the Work Programme, prime contracts are so large that only a few organisations are large enough to compete for contracts. In addition, mergers are taking place between some of the prime contractors, resulting in even fewer organisations managing these contracts. As a result, we are in danger of creating an oligopoly market where a handful of providers become too big to fail.

Social Enterprise UK therefore believes that prime contractor models are most suitable when operated at a level where contracts are small and local enough to attract competition from a wide and diverse pool of potential providers.

January 2013

Prepared 18th July 2013