Public AdministrationWritten supplementary evidence submitted by FSB on SMEs and procurement (PROC 30)

Introduction

This supplementary submission to the Public Administration Select Committee covers key areas of interest regarding procurement in 4 sections.

1. An overview of FSB research findings on local authority procurement.

2. The FSB’s recommendations on local authority procurement.

3. Common myths and misconceptions about procurement.

4. The FSB’s best practice model for local authorities.

The FSB’s Recommendations on Local Authority Procurement.

The survey of local authority Directors and Head of Procurement provided FSB with a range of qualitative and quantitative evidence about local government procurement practice and the relationship between local authorities and SMEs. The key findings were as follows:

Spend

34% of local authorities spend less than £50 million annually upon procuring goods and services.

The average total annual spend of local authorities upon procuring goods and services is £183 million.

Authorities spent on average 26% of their total spend upon capital activities and 74% upon revenue activities.

62% of local authorities record the amount of spend within their own local authority boundary.

On average, local authorities spend 34.8% of their total procurement spend in their own local authority boundary.

51% of local authorities record the amount of spend with SMEs.

On average, local authorities spend 49% of their total procurement spend with SMEs.

Barriers

66% of local authorities felt that SMEs face barriers in accessing procurement opportunities. Key perceived barriers were around the capacity and skills of SMEs to bid and deliver; and a lack of awareness of opportunities;

Engagement

94% of local authorities have initiatives to support SMEs in tendering; 68% of those with initiatives in place felt they were best practice initiatives. These initiatives included online tools and guides around tendering; simplified and streamlined documentation; and targeted capacity building for SMEs;

74% of local authorities adopt different processes for below EU threshold tenders.

The vast majority of local authorities use council and regional portals as a means of advertising tender opportunities.

Economic, social and environmental benefits

86% of local authorities felt their procurement strategy linked “well” or “very well” to wider corporate objectives.

The most important contemporary issue in the procurement process for local authorities is achieving cost savings.

99% of local authorities utilise buying and purchasing frameworks in their procurement processes.

Payment

93% of local authorities have in place policies for the payment of suppliers.

51% of local authorities seek to pay suppliers in less than 28 days.

49% of local authorities seek to pass on their payment terms to their main contractors.

The FSB’s Recommendations on Local Authority Procurement

The results of the survey provided a relatively positive picture in terms of the relationship between local authorities and small business when it came to tendering and purchasing. However, FSB and CLES felt that there was more that could be done to ensure procurement was not only a spending decision, but a process where consideration of economic, social and environmental benefit were embedded at all stages. This and the government’s increasing drive for more efficient and effective procurement practices shaped recommendations. These recommendations were:

1.Councils to adopt a procurement strategy that recognises the significant benefits of procuring from local small businesses when tendering for goods and services;

2.Local authority economic development strategies to take account of the needs of the existing local economy and inform procurement strategy based on a comprehensive analysis of spend;

3.Councils to consider actively how much of each procurement decision should be assigned to social value considerations;

4.All authorities to have mechanisms in place to record and analyse where and with which businesses their money is spent. This should include measuring the size of enterprise—medium, small or micro;

5.Councils to make information on spend publicly available and easily accessible, at least annually;

6.Councils to monitor and take account of the economic impact of their key spending decisions;

7.All authorities to adopt the relevant government-led, streamlined and standardised pre-qualification questionnaires (PQQ), with further effort made to ensure simplified processes are in place for smaller procurements below EU thresholds, including specific approaches for the lowest value contracts;

8.All councils in the UK to use the relevant national portal to advertise their procurement opportunities (Contracts Finder, Public Contracts Scotland, Sell2Wales, Esourcing NI);

9.Council procurement strategies to set out how they will ensure best practice is followed and how they will monitor that progress;

10.Local authorities to ensure their use of selection requirements is proportionate and based purely on the needs of the contract;

11.Councils to ensure they have initiatives to support local SMEs with the tender process and to develop the potential of their local small business supplier base;

12.Councils to provide detailed, specific and timely feedback to all businesses that tender unsuccessfully so they are better placed to bid next time;

13.Councils to break down contracts into smaller lots wherever possible;

14.Councils to put in place and monitor specific payment policies for small business suppliers, ideally following the lead of national government pledges to pay within 10 days of receipt;

15.Councils to use spending power to ensure that prime contractors pass on the council’s payments terms to their subcontracted suppliers;

16.Government to support councils in following good practice, including by issuing clear guidance and taking action to ensure it is followed if necessary.

Common Myths And Misconceptions about Procurement

Urgent action is needed to address the prevalence of unnecessary selection practices such as disproportionate turnover and insurance requirements. Procurers also need to be familiar with what is and is not permissible within the procurement procedure. Some unnecessary approaches seem to become permanently embedded in the procurement process, resulting in myths and misconceptions about what is permissible. What starts out as guidance has in some cases become ingrained so that it is treated as a public procurement rule that cannot be diverted from. This situation is compounded by the fact that many SMEs also believe these “rules” and therefore do not participate in the process. There are number of issues that the FSB believes need to be addressed and these are set out in more detail in section 7 of the report under the title, “Myths and misconceptions to dispel”. A summary of this follows.

The FSB regularly hears tales of unnecessary rules causing problems or EU Directives preventing SME-friendly procurement. It is often not the law itself that creates barriers to procuring from SMEs, but the way that it is put into practice. In particular, both procurers and small businesses may believe commonly accepted assertions that are in fact wrong. Some examples follow.

Myth 1: Procurers should use standard minimum turnover and insurance requirements, which all businesses must meet.

Such tests are permitted but not required by law. There are no regulatory rules on the minimum “economic and financial standing”: these standards are actually set by the contracting authority and are often tested by unnecessarily high turnover rules that exclude small companies.

Contracting authorities should avoid using a mechanistic approach, such as applying arbitrary minimum turnover levels. Any essential insurance requirements should be a condition of winning rather than of competing for a contract. EU rules actually require that any “minimum standard” must be necessary and proportionate in each case, not set at the same threshold for each procurement.

Meeting such tests is no guarantee of future results. Many businesses that cannot meet the given criteria or demonstrate a lengthy financial track record do not represent a risk. The risk depends on the nature of the contract, the type of service/good being procured and the ease with which it could be procured from an alternative supplier. Tenders should be undertaken on this basis.

Myth 2: Procurers cannot divide contracts into smaller parts to make them more accessible to small businesses

There is nothing in law that stops contracts being divided into smaller lots, so long as contracting authorities are not doing this deliberately to avoid procurement legislation. In fact, the European Code of Best Practices (EU guidance) specifically mentions subdivision into lots as a way of opening access to small firms. The current proposals for change to the Directives are looking to strengthen this to make sure it occurs more often.

Myth 3: Aggregating contracts and reducing the supplier base is the best way to achieve savings

Not necessarily. While it may be perceived as administratively easier, forcing suppliers to move down the supply chain to work through a prime contractor may actually increase costs (including the prime’s margin). This approach can also risk reducing competition, increasing reliance on a small number of suppliers and forcing out other innovative and useful businesses.

Myth 4: Procurers must fully adhere to the EU rules in all their procurements to make sure they are not in breach of any regulations

Contracting authorities must adhere to EU Treaty principles when conducting their procurements. However, there are a number of instances where the detailed provisions of the EU procurement rules do not apply, such as for contracts below the threshold value and those for Part B services. In such instances, following the detailed procedures set out in the EU procurement Directives is unnecessary and off-putting for many potential suppliers, and may simply serve to lock out smaller providers.

Procurers should carefully consider what processes are really necessary in order to achieve their commercial objectives. This will benefit both suppliers and the procurer by saving unnecessary resources and avoiding overly bureaucratic procurement processes.

Myth 5: Procurers cannot speak to potential suppliers prior to a procurement process

The rules do not prevent pre-procurement market engagement. Procurement teams are encouraged to consult freely with the market place before starting the procurement process to help them select what to buy and how best to buy it. Pre-procurement discussions are not about showing favour to a particular bidder, but rather exploring market capability. Events such as “supplier days” are an excellent way to meet small businesses as potential suppliers and see what they have to offer. It is important that all suppliers are treated equally and no one bidder is given an unfair advantage. For example, specifications must not be drawn up in such a way as to favour a particular solution.

Myth 6: Procurers are under a duty to find the cheapest price for their contracts

Public contracts should be awarded on the basis of value for money, not lowest price. Putting too much emphasis on price opens up the procurer to a range of potential problems, not least the risk that contracts are awarded to a supplier who has deliberately bid too low or is unable to deliver the contract with sufficient quality. Procurements should be approached with a sensible balance of quality and cost.

Myth 7: Procurers cannot lawfully incorporate social value such as sustainability into procurement

If social or other sustainability requirements are relevant to the subject matter or performance of the contract, they can be taken into account during the tendering process. If written into the contract specifications such considerations must be proportionate and represent value for money. Provided a sufficient number of potential suppliers are capable of delivering that requirement, the procurement can still be competitive. Bidders can then be asked to put forward proposals such as around employment creation and supply chain engagement for consideration by the contracting authority when it decides which tender is the “most economically advantageous”.

The Public Services (Social Value) Act will mean that all public bodies in England and Wales are required to consider how their services procurement might improve the economic, social and environmental wellbeing of the area.

The FSB’s best practice model for local authorities

The FSB believes that a model procurement authority:

(1)Has an SME Procurement Policy with clear and identified links to wider corporate objectives

(2)Has in place a mature supplier database that breaks suppliers down by:

(a)Number of employees (not just by SME but by micro, small and medium);

(b)Location (primary and secondary postcode);

(c)Revenue or capital spend; and

(d)Type of service/good delivered

3)Has a close working relationship between procurement and economic development, with economic development providing market intelligence on local suppliers and SMEs

4)Has a mechanism for regular monitoring and mapping of procurement spend and the outcomes achieved through that spend

5)Has an effective understanding of the barriers facing certain organisations in the procurement process and a menu of appropriate initiatives with which to respond

6)Has clear advice and guidance available for SMEs on how to supply to the council

7)Has a range of means of advertising and promoting contract opportunities according to the scale of the contract and the types of good and service on offer, including:

(a)A clearly accessible dedicated procurement section of the council website;

(b)Consistent use of online mechanisms for bidders to register their organisation’s information and interest in contract opportunities; and

(c)Use of the relevant national portal in addition to any other methods to publicise opportunities.

8)Has effective cross-departmental relations and partnership working with local business forums and networks

9)Has transparent mechanisms and a policy for the prompt payment of suppliers

10)Has standardised and simplified PQQs

11)Has a means of engaging with SMEs from market testing through to contract award

12)Provides a host of tender support activities, including training and workshops

13)Actively promotes supplier engagement policies with core contractors

14)Provides training for procurement staff in economic, social and environmental benefits

15)Provides timely and detailed feedback to unsuccessful bidders

16)Has a clear and simplified process for undertaking procurements below the EU threshold

17)Has put in place steps to ensure future procurements will comply with the relevant national government legislation and guidance

March 2013