1Progress
1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Cabinet Office and its Crown Commercial Service (CCS).1 The Crown Commercial Service is responsible for leading on the Government’s commercial policies, including the Government’s small and medium-sized enterprises (SME) procurement policy.2
2.There are around 5.4 million SMEs in the UK. Most are private sector businesses but the definition includes many voluntary, community and social enterprise (VCSE) organisations. Government uses the European Commission’s definition of an SME, which defines it as an entity engaged in economic activity that: employs fewer than 250 people; has an annual turnover less than or equal to 50 million euros; or has a balance sheet total of less than or equal to 43 million euros.3
3.Each year, the Government spends around £45 billion on goods and services supplied by non-public sector organisations. The Government anticipates that increasing the proportion spent with SMEs will lead to a more diverse provider market for government contracts and best value for the public purse through increased choice, competition and innovation.4
4.In 2010, the Government therefore announced a target for 25% of government spending to go to SMEs by 2015. In August 2015, the Government increased its target to 33% by 2020. The target covers both direct contracts with SMEs and spending that reaches SMEs indirectly (where the Government’s contract is with a larger provider that subcontracts SMEs as part of its supply chain). In 2014–15, the Government reported that 27.1% (£12.1 billion) of its total procurement spending had reached SMEs: £4.9 billion through direct contracts with SMEs and a further £7.3 billion indirectly to SME subcontractors.5
The need to re-establish momentum
5.The Cabinet Office and the CCS told us that in 2010, after announcing the SME target, it focused on working out how to measure the Government’s spend with SMEs. We discuss concerns about the measurement of this target below. It also worked on identifying and addressing the generic barriers that SMEs face when trying to participate in government contracts, such as: not being able to find contract opportunities, finding the pre-qualification process too burdensome and not getting paid on time. Both the Cabinet Office and the CCS acknowledged that there is more to do. For instance, the CCS confirmed that late payment by larger contractors through the supply chain continues to be a barrier to SMEs because they are less likely to have the financial capacity to absorb payment delays, creating cash flow and workflow problems. The National Audit Office also reported that departments and providers said that prompt payment remains a significant issue within government supply chains.6
6.We recognise that since announcing its 25% target in 2010 the Government has introduced a number of initiatives to make it easier for SMEs to do business with government and drive up competition. Most initiatives were developed and led centrally by the CCS or the Cabinet Office’s Office for Civil Society and Innovation (OCSI). The National Audit Office’s report shows that many of the initiatives were started early in the last Parliament. Since then, some have stalled or stopped. For example, the Investment and Contract Readiness Fund was started in 2012 and closed in March 2015 and funding for masterclasses to build voluntary, community and social enterprise (VCSE) organisations’ commercial skills ended in May 2015. We asked what evidence had been considered when deciding to stop these initiatives. The Cabinet Office could not tell us why they were stopped. It recognised that a number of things relating to the voluntary sector area had been dropped but it assured us that it is going to reinvigorate the VCSE area, in particular the commercial masterclasses.7
7.We asked the CCS whether government initiatives have had enough of an impact on SMEs actually winning contracts directly from government. The CCS told us that it is certain that some of the actions it has taken have had a material impact over the last five years. It highlighted that it had legislated for a number of things that have never been done before: including abolishing pre-qualification questionnaires for contracts below £100,000. It said that, at the beginning of the last Parliament, the majority of government procurements used pre-qualification questionnaires and more restricted rather than open routes; including, for example, shortlisting bidders based on their previous accounts. Small firms had said that this approach excluded them from getting the chance to bid. The CCS told us that the majority of government procurements are now open and do not use pre-qualification questionnaires. The National Audit Office found that departments may include similar requirements later in the procurement process, meaning that SMEs can proceed further before discovering they do not meet departments’ requirements. However, the CCS is convinced that removing pre-qualification questionnaires for smaller contracts has helped SMEs because they now get an opportunity to bid where they previously would not have done.8
8.For feedback to assess the impact of its initiatives, the CCS told us that it uses complaint levels as a “good weather test” and as an example highlighted the reduction in complaints about central government’s use of pre-qualification questionnaires. The CCS does not record the impact of its initiatives on its objective of increasing competition. The majority (60%) of the government’s annual £12 billion estimated spending with SMEs is indirect through a larger contractor. The National Audit Office’s report notes that it is not clear that this will lead to the increased competition and innovation sought by the Government.9
9.The previous committee raised the issue of the dominance of certain providers in certain markets a number of times. We understand that the Government’s top five IT providers received 51% of government’s total spending on contracted out IT. The Cabinet Office said this is because it is “only in the early stages of disaggregating the big monolithic IT contracts.”10
A more focused approach
10.The Cabinet Office reported that government spending with SMEs met its 25% target a year early–estimating that 26% reached SMEs in 2013–14. In August 2015, the Government introduced its manifesto commitment for government spending with SMEs to reach 33% by 2020. The Cabinet Office told us that the 33% target is based on “informed judgement” but did not provide further explanation of what this entailed. Our witnesses agreed that the jump from 25% to 33% by 2020 is stretching but achievable and that government will now need to take a more targeted, sophisticated approach to achieve it. The CCS talked in broad terms about needing to have some focused activity looking at sectors and spend categories, such as consultants and facilities management, where it thinks it can make progress faster and get the most benefit from using SMEs. It also talked about being more sophisticated with the types of company that it targets.11 Sector representatives have also called for greater distinction between different sectors and types of provider in the targets the government sets. In its written submission to us, the Lloyds Bank Foundation highlighted the social welfare sector as an area for focus, given the “holistic, person-centred support” that can be offered by smaller charities in that sector.12
11.The Cabinet Office’s Government Digital Service has been quite successful at enabling more of government’s IT spending to reach SMEs through its digital purchasing platform, G-Cloud. Since it started in 2012, some 51% of the Government’s £1 billion spending that has gone through G-Cloud has been with SMEs. The Cabinet Office told us that some 89% of the suppliers on G-Cloud are SMEs. However, it acknowledged that total spend through G-Cloud represents “between 5% and 7% of the IT contracts, so there is a long way to go”.13
Measuring the amount spent with SMEs
12.The Government measures its target using direct and indirect spending with SMEs (indirect spending is where the government’s contract is actually with a larger provider, it reflects the amount subcontracted to SMEs in the larger providers’ supply chains). The CCS first reported direct spending with SMEs in 2010–11 as 6.8% of total procurement spending. It first reported indirect spending a year later, in 2011–12, at 6.5% of spending. Thereafter, the CCS reported increases in both these estimates each year.14 The CCS acknowledged that it has iteratively changed how it measures direct and indirect spending with SMEs in four of the last five years.15
13.In view of these changes, we challenged the CCS on whether it can be certain that the amount of spending going to SMEs has actually increased since 2010. It told us that direct and indirect spending measures have been stable since 2012–13 and 2013–14 respectively. The Cabinet Office also said that, in cash terms, direct spend between 2011–12 and 2014–15 had “moved forward” £438 million and indirect spend since 2013–14 has moved forward £421 million. The NAO pointed out that these numbers will also reflect the inclusion of more organisations over the period and on-going cleansing of the data to ensure SMEs are correctly classified. The NAO concluded in its report that “we cannot be certain that the amount of spending going to SMEs has increased”. The CCS said that it would continue to try to get a realistic and stable number in future so that it is easier to see what progress has been made. However, the witnesses could not explain to us how the SME spend figures demonstrate the impact of government interventions on competition between government suppliers, despite this being the Government’s stated objective.16
14.The Cabinet Office confirmed that Network Rail, which was reclassified as a public sector body in 2014, is not reflected in the latest reported SME spending figures but that it will be in the future. The Cabinet Office told us this will reduce Government’s reliance on the Ministry of Defence to meet the 33% target by 2020 because the proportion of government procurement spending managed by MoD will reduce from 44% to 38%.17
15.We asked the Cabinet Office, if the Government is to achieve the 33% by 2020, what split between direct and indirect spend with SMEs it is targeting. It said it did not know what the balance should be and was unsure as to whether it would focus more on direct spending. It also said that it did not yet know the detail necessary to inform the setting of separate targets.18 The CCS told us that it has set itself a target of 35% by 2020, within which each spend category has a different target. It said that it is seeking to break its 35% down into a direct target and an indirect target.19
1 C&AG’s Report, Government’s spending with small and medium-sized enterprises, Session 2015–16, HC 884, 9 March 2016
2 C&AG’s Report, para 3
3 C&AG’s Report, para 2
4 C&AG’s Report, paras 1, 3, 1.7
5 C&AG’s Report, paras 1, 9, 1.15
6 Qq 19, 47, 102; C&AG’s Report, para 2.15, figure 6
7 Qq 3, 17, 42, 48; C&AG’s Report, paras 2.3, 2.21, appendix three
8 Qq 42–43; C&AG’s Report, para 2.17
9 Qq 18, 31–33, 46, 70–74; C&AG’s Report, para 15
10 Q 83; Committee of Public Accounts report, The work of the Committee of Public Accounts 2010–15, Fifty-second Report of the Session 2014–15, HC 1141, 28 March 2015; Committee of Public Accounts report, Transforming contract management, Twenty-third Report of Session 2014–15, HC 585, 10 December 2014
11 Qq 29, 30, 31, 73, 102; C&AG’s Report, paras 1, 9
13 Qq 28, 156, 157; C&AG’s Report, para 3.23–3.24
14 C&AG’s Report, paras 1, 10, 1.14, Figure 3
16 Qq 31–35, 37, 70–74; C&AG’s Report, para 10, 1.16–1.20
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16 May 2015